<PAGE>
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1996
                                                      REGISTRATION NO. 33-
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                ---------------
                                   FORM S-3
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                                ---------------
                            J. RAY MCDERMOTT, S.A.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                ---------------
          REPUBLIC OF PANAMA                         72-1278896
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
                                   
                              1450 POYDRAS STREET
                       NEW ORLEANS, LOUISIANA 70112-6050
                                (504) 587-5300
   (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                 OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                                ---------------
                              RICHARD R. FOREMAN
             EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
                            J. RAY MCDERMOTT, S.A.
                              1450 POYDRAS STREET
                       NEW ORLEANS, LOUISIANA 70112-6050
                                (504) 587-5300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
                                ---------------
                                  Copies to:
            WALTER J. SMITH                      GERARD M. MEISTRELL
         BAKER & BOTTS, L.L.P.                 CAHILL GORDON & REINDEL
         3000 ONE SHELL PLAZA                      80 PINE STREET
       HOUSTON, TEXAS 77002-4995              NEW YORK, NEW YORK 10005
            (713) 229-1234                         (212) 701-3000
                                ---------------
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
  If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
                        CALCULATION OF REGISTRATION FEE
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<TABLE>
<S>                                <C>              <C>            <C>               <C>
                                                       PROPOSED        PROPOSED
                                                       MAXIMUM          MAXIMUM
     TITLE OF EACH CLASS OF           AMOUNT TO     OFFERING PRICE     AGGREGATE        AMOUNT OF
   SECURITIES TO BE REGISTERED     BE REGISTERED(1)  PER UNIT(2)   OFFERING PRICE(2) REGISTRATION FEE
-----------------------------------------------------------------------------------------------------
 % Senior Subordinated Notes due
 2006............................    $250,000,000        100%        $250,000,000        $86,207
</TABLE>
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(1) If any of such securities are issued at an original issue discount, such
    greater amount as will result in the initial offering prices aggregating a
    maximum of $250,000,000.
(2) Estimated solely for the purpose of determining the registration fee and
    exclusive of accrued interest, if any.
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                             SUBJECT TO COMPLETION
PROSPECTUS        PRELIMINARY PROSPECTUS DATED MARCH 26, 1996    [LOGO OF J. RAY
                                  $250,000,000                    MCDERMOTT
                             J. RAY MCDERMOTT, S.A.               APPEARS HERE]
                      % SENIOR SUBORDINATED NOTES DUE 2006
 
                                  -----------
 
  Interest on the    % Senior Subordinated Notes due 2006 (the "Notes") of J.
Ray McDermott, S.A. (the "Company") will be payable semi-annually on
            and               of each year, commencing             , 1996. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after                , 2001 at the redemption prices set forth
herein, together with accrued and unpaid interest, if any, to the date of
redemption. Upon a Change of Control (as defined herein), each holder of the
Notes will have the right to require the Company to purchase all or a portion
of such holder's Notes at a purchase price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase. See "Description of the Notes."
                                                                             
   The Notes represent unsecured senior subordinated obligations of the Company
and will be subordinated to all existing and future Senior Indebtedness (as
defined herein). The Notes will also be structurally subordinated to all
indebtedness of the Company's consolidated subsidiaries and joint ventures and
unconsolidated joint ventures. As of December 31, 1995, on a pro forma basis,
after giving effect to the Vessel Sales (as defined herein) and the sale of the
Notes offered hereby (the "Offering"), and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds," the aggregate amount
of outstanding Senior Indebtedness would have been approximately $105.1 million
(all of which would be Indebtedness of the Company's consolidated and
unconsolidated subsidiaries and joint ventures that the Company would have
guaranteed), in addition to certain bid and performance bonds outstanding, and
the aggregate amount of Indebtedness (as defined herein) of the Company's
consolidated subsidiaries and joint ventures (excluding Indebtedness that the
Company would have guaranteed) would have been approximately $126.9 million. In
addition, certain of the Company's unconsolidated joint ventures have
significant amounts of outstanding Indebtedness that the Company has not
guaranteed. See "Risk Factors--Subordination; Company Structure,"
"Capitalization" and "Description of the Notes."
 
  The Notes will be represented by a Global Certificate registered in the name
of the nominee of The Depository Trust Company ("DTC") or other successor
depository appointed by the Company (DTC or such other depository is herein
referred to as the "Depository"). Beneficial interests in the Global
Certificate will be shown on, and transfers thereof will be effected only
through, records maintained by the Depository and its participants. Except as
described herein, Notes in definitive form will not be issued. See "Description
of the Notes--Book-Entry Delivery and Form."
 
  Application will be made to list the Notes on the New York Stock Exchange.
The Company's common stock is listed on the New York Stock Exchange under the
symbol "JRM."
 
  SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT
IN THE NOTES.
 
                                  -----------
 
THESE SECURITIES  HAVE NOT BEEN APPROVED  OR DISAPPROVED BY THE  SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE  SECURITIES
AND EXCHANGE  COMMISSION OR ANY  STATE SECURITIES COMMISSION PASSED  UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE  CONTRARY
IS A CRIMINAL OFFENSE.
 
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<TABLE>
<S>                                       <C>         <C>          <C>
                                           PRICE TO   UNDERWRITING PROCEEDS TO
                                           PUBLIC(1)  DISCOUNT(2)  COMPANY(3)
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Per Note.................................         %           %            %
------------------------------------------------------------------------------
Total.................................... $           $            $
</TABLE>
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(1) Plus accrued interest, if any, from             , 1996.
(2) The Company has agreed to indemnify the Underwriter (as defined herein)
    against certain liabilities, including liabilities under the Securities Act
    of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $         .
 
                                  -----------
 
  The Notes are being offered by the Underwriter, subject to prior sale, when,
as and if issued to and accepted by the Underwriter, subject to approval of
certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Global Certificate will be made through the book-entry
facilities of the Depository on or about             , 1996.
 
                                  -----------
 
                              MERRILL LYNCH & CO.
 
                                  -----------
 
              The date of this Prospectus is               , 1996.
<PAGE>
 
 
 
 
                              [Inside Front Cover]
                                [Photos To Come]
 
 
 
 
  IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
                                       2
<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus or in the documents incorporated by reference in
this Prospectus. Unless the context otherwise requires, (i) references in this
Prospectus to the "Company" refer to J. Ray McDermott, S.A. and its
consolidated subsidiaries viewed as a single entity and include its
predecessors and (ii) references in this Prospectus to the Company's "joint
ventures" include majority-owned subsidiaries that are consolidated with the
financial results of the Company, as well as unconsolidated investees in which
the Company, directly or indirectly, owns an interest and which the Company
reports on the equity method.
 
                                  THE COMPANY
 
BUSINESS OVERVIEW
 
  The Company, together with its joint ventures, operates the world's largest
fully integrated marine construction business, including the largest fleet of
major marine construction vessels in the world. With its fleet of major marine
construction vessels and its geographically dispersed fabrication yards, the
Company supplies a full range of construction services on a worldwide basis to
the offshore oil and gas exploration and production and hydrocarbon
transportation industries. The Company's services include the basic and
detailed design, engineering, fabrication and installation of offshore drilling
and production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. The Company also provides
comprehensive project management services, feasibility studies, engineering
services, subsea trenching services, diving services, and removal, salvage and
refurbishment services for offshore fixed platforms. The Company and its joint
ventures operate throughout the world in all major offshore oil and gas
producing regions, including the Gulf of Mexico, the North Sea, West Africa,
South America, the Middle East, India and the Far East. For the 12-month period
ended December 31, 1995, the Company had consolidated revenues and EBITDA of
approximately $1.26 billion and $141.1 million, respectively, and at December
31, 1995, the Company's backlog was approximately $734.3 million. In addition,
the EBITDA of the Company's unconsolidated joint ventures for the 12-month
period ended December 31, 1995 was approximately $70.3 million, and the backlog
of such joint ventures at December 31, 1995 was approximately $1.24 billion.
 
  The Company was formed in connection with the January 1995 combination of
substantially all the marine construction services business of McDermott
International, Inc. ("McDermott International") with Offshore Pipelines, Inc.
("OPI") through a series of transactions including the Merger (as defined
herein). The Merger was completed for the purposes of improving the ability of
the combined businesses to compete effectively in markets worldwide and
allowing the elimination of duplicative facilities and general and
administrative expenses, thereby giving the combined business a greater ability
to realize profits than would exist for either business as a separate company.
McDermott International was a pioneer in the marine construction services
business, with its marine operations dating back to 1947, when its predecessor,
J. Ray McDermott & Co., Inc., installed the first offshore platform in the Gulf
of Mexico. Over the years, McDermott International's marine construction
services business became established as an industry leader, providing a full
range of marine construction services on a worldwide basis, with significant
capabilities suited for the deepwater and high-end segments of the offshore
exploration and production industry. OPI was organized in 1984 as a marine
construction contractor primarily focused on the offshore installation of
underwater pipelines and other marine construction services, principally to the
middle-market segment of the offshore exploration and production industry. The
Company is a majority-owned subsidiary of McDermott International, which
currently owns approximately 64% of the Company's voting stock.
 
                                       3
<PAGE>
 
 
  The Company conducts operations both directly and through its participation
in joint ventures, some of which it manages and others of which are managed by
other marine construction contractors. The Company's joint ventures have
resulted in greater utilization of assets through geographic diversification,
expansion of its significant market presence as a fully integrated contractor
in new markets, greater access to specialized facilities and equipment,
participation in markets that require minimum levels of local ownership, and
cooperative development of advanced technologies. The Company's joint venture
interests include 50% ownership of the HeereMac joint venture, formed with
Heerema Offshore Construction Group, Inc. ("Heerema"), to provide heavy-lift
marine installation services on a worldwide basis. The Company is also engaged
in a joint venture (the "ETPM joint venture") with ETPM S.A., a French
contractor ("ETPM"), primarily consisting of a series of joint venture
operating companies, most of which are majority-owned and controlled by the
Company. The ETPM joint venture operates one pipelaying vessel and nine
combination derrick-pipelaying vessels in the North Sea, West Africa, South
America, the Middle East, India and the Far East. See "Business--Joint Venture
Operations."
 
COMPANY STRENGTHS
 
  Established name as industry leader. The Company has one of the oldest and
best-known names in the marine construction business, with its operations
dating back to the inception of the offshore oil and gas exploration and
development industry in the Gulf of Mexico. The Company was also among the
first to fabricate structures and facilities for offshore production in the
Middle East, West Africa, Alaska and the North Sea. Today, the Company believes
it is an industry leader because of its experience, size and global presence,
the full range of its service capabilities, its technically advanced equipment
and personnel, its reliability, and its safety record. The Company has
maintained its reputation as a pioneer in the industry through the development
of numerous technological advancements that have significantly impacted the
industry.
 
  Position as the only fully integrated marine construction company providing
services on a worldwide basis. The Company believes that its ability to provide
a full range of marine construction services on a global basis affords the
Company greater opportunities through the expansion of historical relationships
with customers who operate in multiple geographic regions. The Company's
integrated services complement one another and provide opportunities to build
upon. For example, the Company believes that its knowledge and experience
gained in its platform structure and deck module fabrication operations provide
it with significant advantages in the competition for potentially higher-margin
transportation and installation projects.
 
  Position to benefit from the trend towards bundled services. Providing fully
integrated services gives the Company the ability to meet the demands of the
increasing number of customers who seek single-source solutions to their marine
construction requirements. The Company believes that certain of the larger
customers in the marine construction market are trending towards more
integrated service projects in which a single contractor is responsible, often
in conjunction with several subcontractors, for the complete project scope,
including initial design, engineering, procurement, installation and
commissioning. The Company provides single-source turnkey project
responsibility for large, complex and geographically remote projects around the
world. The Company believes that its size, global presence and range of
operating assets position it as one of the strongest competitors in the
integrated services market.
 
  Position to benefit from possible increases in market activity. The Company
generally focuses on projects in deepwater (200 feet to 1,000 feet) and very
deep water (1,000 feet or deeper), which generally are more complex, require
larger marine construction vessels with greater lifting capacity, require more
sophisticated technology and experienced personnel, and provide greater
operating margins than shallow water projects. The Company believes it is well
positioned to benefit from any increases in major marine construction activity
that would result from decisions by oil and gas producers to pursue significant
projects currently under
 
                                       4
<PAGE>
 
evaluation in different parts of the world, including additional deepwater and
very deep water projects in the North Sea, the North Atlantic and the Gulf of
Mexico and natural gas production projects in the South China Sea.
 
  Capabilities of equipment, personnel and other resources; position as a
technological leader. Through the operation of its fleet of some of the
largest, most capable marine construction equipment in the world and its
strategically located fabrication facilities, the Company has demonstrated
significant capabilities in all aspects of major marine construction. These
capabilities, combined with the Company's expertise and worldwide presence,
have resulted in the Company's selection as a contractor for some of the
largest and most innovative offshore projects in the world. The most recent of
these projects include three successive record-setting projects for Shell Oil
Company in the deep waters of the Gulf of Mexico, utilizing tension-leg
platforms, and an innovative spar platform for Oryx Energy. The Company is also
providing integrated services and project management for the first phase of
British Petroleum's Foinaven development in the North Atlantic, west of the
Shetland Islands, one of the highest profile offshore development projects
currently underway. In addition, many of the deepwater and very deep water
projects under development today have become possible as a result of recent
advancements in subsea completion technology. The Company has recently expanded
its capabilities in the subsea market through the acquisition of Northern Ocean
Services Limited, a subsea installation and pipelay contractor ("NOS"), and
Mentor Engineering Consultants Ltd., a subsea engineering firm ("Mentor").
 
BUSINESS STRATEGY
 
  Capitalize on geographic diversity. The Company's ability to operate in
geographically diverse markets is important to the Company's success. The
Company's customers include many large energy producers operating in various
parts of the world that generate demand for the full range of services provided
by the Company. The ability to provide these services on a global basis
enhances the Company's relationships with these customers and affords the
Company greater opportunities. In addition, geographic diversity permits the
Company to improve the utilization rates for its assets, particularly its major
marine construction vessels. By dispersing these vessels in significant
hydrocarbon producing regions around the world, the Company achieves greater
utilization by reducing the aggregate amount of mobilization time required
between construction sites. Geographic diversity also reduces the Company's
exposure to regional conditions that may adversely affect the market for marine
construction services within a specific operating area.
 
  Focus on projects requiring technologically advanced solutions. The Company
utilizes its superior capabilities, equipment and other resources to provide
high-end, technologically advanced solutions for its customers. Through its
subsidiaries and joint ventures, the Company has developed several proprietary
technologies that provide an advantage in competing for work on more
technologically challenging projects, which have greater revenue generating
potential. These include advanced technologies used in compliant-tower platform
structures and modifications to spar platform technology that have resulted in
the first spar platform (which is currently being constructed) ever to be built
for the offshore drilling and production of oil and gas.
 
  Develop leadership in the deepwater and subsea markets. As a result of the
combination of several technological advancements in recent years, including
the development of new seismic technologies and improvements in subsea
completion technologies and production systems, there has recently been a
significant amount of new exploration and development activity in deepwater and
very deep water areas, such as the North Sea, the North Atlantic and the
deepwater regions of the Gulf of Mexico. As technology continues to advance,
the Company expects significant new opportunities to develop in these markets.
The Company's leadership role in deepwater marine construction led to the
Company's being selected as a major contractor for several of Shell Oil
Company's deepwater projects in the Gulf of Mexico, British Petroleum's
Foinaven
 
                                       5
<PAGE>
 
project in the North Atlantic and Shell's Teal Guillemot project in the North
Sea. The Company intends to capitalize on its recognition as a leader in the
deepwater markets and extend its leadership role to the very deep water and
subsea markets. With the recent acquisitions of NOS and Mentor, together with
the Company's experience base in deepwater environments, the Company believes
it is well positioned to actively participate in the future growth in these
markets.
 
  Utilize joint ventures. The Company believes that its joint venture
operations enhance its ability to compete effectively. The Company's joint
ventures have resulted in greater utilization of assets through geographic
diversification, the development of a significant market presence as a fully
integrated contractor in a greater number of markets, the participation in
markets that require minimum levels of local ownership, and the cooperative
development of advanced technologies. The Company and ETPM have recently
restructured the ETPM joint venture in a transaction pursuant to which the
Company increased its participation in the joint venture by expanding the joint
venture's scope geographically to include, among other areas, the Far East and
to pursue subsea contracting work on a worldwide basis. The Company intends to
continue reviewing additional joint venture opportunities.
 
  Provide turnkey services; partner with customers. The Company intends to
pursue the developing market for turnkey marine construction contracts, which
generally provide for a single contractor to be responsible for the complete
project scope, including engineering, procurement, installation and
commissioning (commonly referred to as "EPIC" contracts). With its position as
the only marine construction company with the capability of providing fully
integrated services on a worldwide basis, the Company is well positioned to
compete for these integrated services contracts. In addition, the Company plans
to continue developing partnering and alliance arrangements with customers for
the management of projects, as appropriate.
 
  Continue to exploit benefits of cost reductions and synergies resulting from
the Merger. With the Merger, the Company solidified its position as the world's
largest fully integrated marine construction company and expanded the Company's
operations into complementary markets. The Merger also created significant
opportunities for cost reductions and operating efficiencies. The Company has
taken several significant actions to rationalize the combined operations of its
predecessors and to eliminate substantial duplicate administrative costs and
operating expenses. These measures include the closing of OPI's headquarters
office in Houston, Texas; the elimination of duplicate facilities and redundant
administration worldwide; and the disposal of surplus equipment, either through
scrapping or through sales to third parties. While the Company's results of
operations have been positively impacted by the cost reduction actions taken to
date, the Company is still in the process of rationalizing the combined
operations, has developed plans for additional consolidation of administrative
functions and is continuing to dispose of surplus assets resulting from the
Merger. The Company will continue to exploit the additional market
opportunities created by the Merger.
 
RECENT EVENTS
 
  The Company and Heerema are finalizing a transaction pursuant to which each
of them will, through their respective subsidiaries, sell to companies included
within the HeereMac joint venture the major marine vessels they are currently
chartering to the joint venture (the Company's DB 101 and DB 102 and Heerema's
Hermod and Balder) (collectively, the "Vessel Sales"). The Vessel Sales
transaction is being entered into for the primary purpose of more permanently
committing these highly specialized heavy-lift vessels to the HeereMac joint
venture, thereby ensuring long-term maximum utilization of these vessels
through continued coordination of their operations.
 
  Under the proposed terms of the transaction, the Company's vessels will be
purchased for $210.0 million (consisting of cash of $105.0 million and a
promissory note for $105.0 million), and all of the outstanding stock of the
two Heerema subsidiaries that own the Heerema vessels will be purchased for
$210.0 million
 
                                       6
<PAGE>
 
(consisting of cash of $105.0 million and a promissory note of $105.0 million).
Substantially all of the cash portion of the combined purchase price will be
funded through a $200.0 million stand-alone credit arrangement being obtained
by the HeereMac joint venture, which will have an initial term of five years.
In addition, certain other equipment could be sold by the Company to the joint
venture for cash consideration of $30.0 million.
 
  The Company expects the Vessel Sales to close in March 1996, as a result of
which the Company will record a deferred gain of approximately $103.0 million,
which it will amortize over 12 years. The Company intends to use approximately
$20.5 million of the cash proceeds it will receive from the Vessel Sales to
repay a floating rate demand note issued to McDermott International in
connection with the Merger (the "Floating Rate Note"), and to use the remaining
cash proceeds to repay borrowings under the Credit Facility (as defined herein)
and for other general corporate purposes, including working capital
requirements for, among other things, projects reflected in the Company's
backlog.
 
                                       7
<PAGE>
 
 
                                  THE OFFERING
 
Securities Offered........  $250,000,000 principal amount of    % Senior
                            Subordinated Notes due 2006.
 
Maturity Date.............                , 2006.
 
Interest Payment Dates....  Interest on the Notes will be payable semi-annually
                            in arrears on              and              of each
                            year, commencing           , 1996.
 
Optional Redemption.......  The Notes are redeemable at the option of the
                            Company, in whole or in part, at any time on or
                            after          , 2001 at the redemption prices set
                            forth herein, together with accrued and unpaid
                            interest, if any, to the date of redemption. See
                            "Description of the Notes--Optional Redemption."
 
Tax Redemption............  In the event of certain changes affecting
                            withholding taxes applicable to certain payments on
                            the Notes, subject to certain limitations, the
                            Notes will be redeemable, in whole but not in part,
                            at the option of the Company, at 100% of the
                            principal amount thereof, plus accrued and unpaid
                            interest, if any, to the date of redemption.
 
Change of Control.........  Upon a Change of Control, each holder of the Notes
                            will have the right to require the Company to
                            purchase all or a portion of such holder's Notes at
                            a purchase price equal to 101% of the principal
                            amount thereof, together with accrued and unpaid
                            interest, if any, to the date of purchase. See
                            "Description of the Notes--Certain Covenants--
                            Change of Control."
 
Ranking...................  The Notes represent unsecured senior subordinated
                            obligations of the Company and will be subordinated
                            to all existing and future Senior Indebtedness and
                            will be effectively subordinated to all
                            indebtedness and other liabilities of the Company's
                            consolidated subsidiaries and joint ventures and
                            unconsolidated joint ventures. As of December 31,
                            1995, on a pro forma basis, after giving effect to
                            the Vessel Sales and the Offering, and the
                            application of the net proceeds therefrom, the
                            aggregate amount of outstanding Senior Indebtedness
                            would have been approximately $105.1 million (all
                            of which would be Indebtedness of the Company's
                            consolidated and unconsolidated subsidiaries and
                            joint ventures that the Company would have
                            guaranteed), in addition to certain bid and
                            performance bonds (or letters of credit in respect
                            of bids or performance obligations) outstanding
                            ($170.0 million at December 31, 1995), and the
                            aggregate amount of Indebtedness of the Company's
                            consolidated subsidiaries and joint ventures
                            (excluding Indebtedness that the Company would have
                            guaranteed) would have been approximately $126.9
                            million. The foregoing amounts do not include the
                            undrawn portions under the Company's (or its
                            consolidated subsidiaries' or joint ventures')
                            existing credit arrangements which are substantial.
                            In addition, certain of the Company's
 
                                       8
<PAGE>
 
                            unconsolidated joint ventures have significant
                            amounts of outstanding Indebtedness that the
                            Company has not guaranteed, as well as undrawn but
                            available credit facilities. See "Risk Factors--
                            Subordination; Company Structure," "Capitalization"
                            and "Description of the Notes."
 
Certain Covenants.........  The Indenture (as defined herein) pursuant to which
                            the Notes will be issued will contain certain
                            covenants, including, but not limited to, covenants
                            with respect to the following matters: (i)
                            limitation on additional indebtedness, (ii)
                            limitation on restricted payments, (iii) limitation
                            on liens, (iv) limitation on sale-leaseback
                            transactions, (v) limitation on disposition of
                            proceeds of asset sales, (vi) limitation on
                            issuance and sale of preferred stock by restricted
                            subsidiaries, (vii) limitation on transactions with
                            affiliates, (viii) limitation on dividends and
                            other payment restrictions affecting restricted
                            subsidiaries, (ix) limitation on other senior
                            subordinated indebtedness, (x) limitation on
                            designation of unrestricted subsidiaries, (xi)
                            provision of financial statements and (xii)
                            restrictions on consolidations, merger or sale of
                            assets. These covenants will be subject to various
                            qualifications and exceptions. The Indenture does
                            not limit the incurrence of Indebtedness by the
                            Company's joint ventures and does not limit the
                            Company's investment in joint ventures. See
                            "Description of the Notes--Certain Covenants."
 
Use of Proceeds...........  The net proceeds to the Company from the sale of
                            the Notes will be used (i) to repurchase all of the
                            Company's 9% Senior Subordinated Notes due 2001
                            (the "9% Notes") and (ii) for general corporate
                            purposes, which may include temporary reductions in
                            borrowings outstanding under the Company's
                            principal revolving credit facility (the "Credit
                            Facility"). See "Use of Proceeds," "Capitalization"
                            and "Management's Discussion and Analysis of
                            Financial Condition and Results of Operations."
 
Listing...................  Application will be made to list the Notes on the
                            New York Stock Exchange. See "Underwriting."
 
                                  RISK FACTORS
 
  Prospective purchasers of the Notes should consider all of the information
contained in this Prospectus before making an investment in the Notes. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."
 
                                       9
<PAGE>
 
                SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
 
  The following summary historical consolidated financial data for the three
fiscal years ended March 31, 1993, 1994 and 1995 are derived from the audited
consolidated financial statements of the Company. The following historical
financial data for the nine months ended December 31, 1994 and 1995 are derived
from unaudited consolidated financial statements of the Company, which include
all adjustments that the Company considers necessary for a fair presentation of
the financial position and results of operations for these periods. Operating
results for the nine months ended December 31, 1995 are not necessarily
indicative of the results that may be expected for the entire year ending March
31, 1996. The following pro forma financial data for the fiscal year ended
March 31, 1995 and the nine months ended December 31, 1994 and 1995 are derived
from the unaudited pro forma consolidated financial statements of the Company.
The unaudited pro forma Income Statement and Other Financial Data and Ratios
give effect to (i) with respect to the year ended March 31, 1995 and the nine
months ended December 31, 1994, the contribution by McDermott International of
substantially all of its marine construction services business to the Company
and the acquisition of OPI, as described under "Certain Transactions and
Relationships--Transactions with McDermott International in Connection with the
Merger," and (ii) with respect to each period presented, (a) the completion of
the Vessel Sales and the application of the proceeds therefrom, as described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Developments" and (b) the completion of the Offering and
the application of the estimated net proceeds therefrom, as described under
"Use of Proceeds," in each case, as if each such transaction had occurred as of
April 1 for each pro forma period presented. The unaudited pro forma Balance
Sheet Data assume that the Offering (and the application of the estimated
proceeds therefrom) and the Vessel Sales were consummated as of December 31,
1995. The information presented below should be read in conjunction with the
historical and pro forma financial statements and related notes and other
financial information of the Company presented elsewhere in this Prospectus.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of actual results of operations and financial
position that would have been achieved had the transactions been consummated on
such dates, and is not necessarily indicative of future results of operations
or financial position.
<TABLE>
<CAPTION>
                                                                                    NINE MONTHS ENDED
                                     YEAR ENDED MARCH 31,                             DECEMBER 31,
                          ----------------------------------------------  ----------------------------------------
                                     HISTORICAL               PRO FORMA      HISTORICAL            PRO FORMA
                          ----------------------------------  ----------  ------------------  --------------------
                             1993        1994        1995        1995       1994      1995       1994       1995
                          ----------  ----------  ----------  ----------  --------  --------  ----------  --------
                                                       (DOLLARS IN THOUSANDS)
<S>                       <C>         <C>         <C>         <C>         <C>       <C>       <C>         <C>
INCOME STATEMENT DATA:
Revenues................  $1,601,060  $1,193,881  $1,127,320  $1,411,625  $805,558  $939,996  $1,077,179  $913,890
Costs and expenses:
 Cost of operations
  (excluding
  depreciation and
  amortization).........   1,344,115     976,636     887,223   1,146,019   605,449   752,450     839,201   752,450
 Depreciation and
  amortization .........      80,856      53,627      70,372      93,192    52,094    66,045      71,794    54,648
 Selling, general and
  administrative
  expenses..............     115,480     115,428     114,165     142,132    90,508    85,107     115,323    85,107
                          ----------  ----------  ----------  ----------  --------  --------  ----------  --------
                           1,540,451   1,145,691   1,071,760   1,381,343   748,051   903,602   1,026,318   892,205
                          ----------  ----------  ----------  ----------  --------  --------  ----------  --------
Operating income before
 equity in income of
 investees..............      60,609      48,190      55,560      30,282    57,507    36,394      50,861    21,685
Equity in income of
 investees(a)...........      84,973     106,593      22,857      34,875    22,844     9,845      38,315    20,774
                          ----------  ----------  ----------  ----------  --------  --------  ----------  --------
Operating income........     145,582     154,783      78,417      65,157    80,351    46,239      89,176    42,459
Interest income.........       2,773       3,483       9,298       9,174     8,114     3,339       7,550     9,245
Interest expense........      22,569      20,076      25,158      39,210    17,173    33,494      29,512    32,218
Provision for income
 taxes..................      42,760      28,050       8,885       8,609    15,030     3,979      20,873     4,501
Income before cumulative
 effect of accounting
 changes................      95,756     119,137      60,700      35,972    61,690    18,476      53,782    21,356
Net income(b)...........      37,011     119,137      59,374      34,646    60,364    18,476      52,456    21,356
OTHER FINANCIAL DATA AND
 RATIOS:
EBITDA(c)...............  $  241,941  $  220,890  $  165,115  $  176,983  $145,987  $121,994  $  175,961  $112,723
Capital expenditures(d).      35,576      18,898      46,793      64,293    30,124    26,583      51,634    26,583
Ratio of EBITDA to
 interest expense.......       10.72x      11.00x       6.56x       4.51x     8.50x     3.64x       5.96x     3.50x
Ratio of total debt to
 EBITDA.................        1.06        1.37        2.55
Ratio of earnings to
 fixed charges (e)......        2.36        3.10        2.41        1.86      2.96      1.34        2.51      1.40
</TABLE>
                                             (table continued on following page)
 
                                       10
<PAGE>
 
 
<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED
                            YEAR ENDED MARCH 31,            DECEMBER 31,
                         --------------------------- ---------------------------
                                 HISTORICAL             HISTORICAL     PRO FORMA
                         --------------------------- ----------------- ---------
                          1993     1994      1995     1994     1995      1995
                         ------- --------- --------- ------- --------- ---------
                                         (DOLLARS IN THOUSANDS)
<S>                      <C>     <C>       <C>       <C>     <C>       <C>
BALANCE SHEET DATA (AT
 END OF PERIOD):
Cash and cash
 equivalents (f)........ $26,994 $  53,343 $  52,224 $28,655 $  79,454 $ 124,811
Net property, plant and
 equipment.............. 444,962   481,807   594,162 462,337   543,199   435,165
Investment in
 unconsolidated
 affiliates (g).........  46,364    90,370   105,283  66,450    88,231    81,265
Total assets............ 932,528 1,007,609 1,482,262 970,334 1,644,490 1,581,847
Total debt (including
 current
 maturities)(f)(h)...... 256,949   303,457   420,516 306,047   520,039   457,396
Total equity............ 169,623   253,021   559,471 287,169   575,066   575,066
</TABLE>
--------
(a) The accounts of all of the Company's controlled subsidiaries and joint
    ventures are consolidated with the accounts of the Company. Investments in
    joint ventures and other entities that the Company does not control
    (including the HeereMac joint venture and McDermott-ETPM West, Inc. ("ETPM
    West")) are accounted for on the equity method. Accordingly, the revenues
    and operating expenses of those joint ventures are not included in the
    Company's consolidated revenues and operating expenses.
(b) Includes the cumulative effect of the change resulting from the adoption of
    Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
    for Income Taxes," and SFAS No. 106, "Employers' Accounting for
    Postretirement Benefits other than Pensions," in the fiscal year ended
    March 31, 1993; and the cumulative effect of the change resulting from the
    adoption of SFAS No. 112, "Employers' Accounting for Postretirement
    Benefits," in the nine months ended December 31, 1994 and the fiscal year
    ended March 31, 1995.
(c) Reflects income before cumulative effect of accounting change plus
    depreciation and amortization, interest expense and provision for taxes.
    EBITDA is not intended to represent cash flow and does not represent the
    measure of cash available to the Company. EBITDA is not a generally
    accepted accounting principle measure, but provides additional information
    for evaluating the Company's ability to make payments in respect of the
    Notes. EBITDA is not intended as an alternative to income from continuing
    operations or net income.
(d) Excludes $26.5 million during the nine months ended December 31, 1995 for
    the conversion of a vessel to a floating production unit, which has been
    leased to a third party.
(e) For the purpose of determining the ratio of earnings to fixed charges,
    earnings consist of earnings before provision for income taxes and
    cumulative effect of accounting changes (adjusted for equity in
    undistributed earnings of investees) plus fixed charges (adjusted to
    include capitalized interest). Fixed charges consist of interest on
    indebtedness plus one-third of rental expense, which is considered
    representative of the interest factor.
(f) On a pro forma basis, the cash and cash equivalents and total debt balances
    do not reflect the repayment of approximately $80.0 million of indebtedness
    relating to the Company's work on the Foinaven project. That indebtedness
    will be repaid upon completion of the Foinaven project (which is currently
    anticipated to be completed by December 31, 1996), and until such time
    provides the Company with certain tax benefits.
(g) Amount shown on a pro forma basis for the nine months ended December 31,
    1995 includes a note receivable of $105.0 million to be received as part of
    the Vessel Sales, net of a deferred gain of $102.0 million to be recorded
    in connection with the Vessel Sales.
(h) Includes notes payable to McDermott International of $254.3 million, $298.0
    million and $270.8 million at March 31, 1993, 1994 and 1995, respectively,
    and $292.1 million and $251.5 million at December 31, 1994 and 1995,
    respectively.
 
                                       11
<PAGE>
 
                                  RISK FACTORS
 
  The following factors should be considered carefully together with the
information provided elsewhere in this Prospectus and the documents
incorporated by reference herein, including the financial statements and the
notes thereto, in evaluating an investment in the Notes offered hereby.
 
DEPENDENCE ON OIL AND GAS INDUSTRY
 
  The demand for marine construction services has traditionally been cyclical,
depending primarily on the capital expenditures of oil and gas companies for
developmental construction. These capital expenditures are influenced by such
factors as prevailing oil and gas prices, expectations about future prices, the
cost of exploring for, producing and delivering oil and gas, the sale and
expiration dates of available offshore leases, the discovery rate of new oil
and gas reserves in offshore areas, local and international political and
economic conditions, technological advances, and the ability of oil and gas
companies to generate funds for capital expenditures. In recent periods, the
market for marine construction services has been relatively weak. This lower
market activity is reflected in the decrease in the Company's backlog at
December 31, 1995 (approximately $734.3 million) compared to March 31, 1995
(approximately $1.0 billion). While the Company believes the market is showing
some signs of improvement, the Company cannot, at this time, predict the timing
or extent of any improvement in the industry or the future level of demand for
the Company's marine construction services. Moreover, there can be no assurance
that any future downturns in the oil and gas industry will not be severe or
that any such downturn will not have a material adverse effect on the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
 
SUBSTANTIAL LIQUIDITY REQUIREMENTS; LEVERAGE
 
  The Company's operations (and the operations of its joint ventures) require
significant amounts of working capital for acquisitions of and improvements to
significant amounts of heavy-duty equipment and for the procurement of
materials for contracts to be performed over relatively long periods of time.
In addition, the Company's contract arrangements with customers frequently
require the Company to provide letters of credit or bid and performance bonds
to partially secure the Company's obligations under its bids and/or contracts.
The Company conducts most of its operations through its subsidiaries and joint
ventures. Accordingly, a substantial amount of the Company's consolidated
assets are held by, and a substantial part of the Company's consolidated cash
flows are attributable to, the Company's subsidiaries and joint ventures. As a
result, the Company's liquidity is (and its ability to service the indebtedness
represented by the Notes will be) substantially dependent upon its ability to
obtain a flow of funds from such subsidiaries and joint ventures. Certain of
the Company's subsidiaries and joint ventures have substantial indebtedness
owing to third parties, some of which is outstanding pursuant to arrangements
that restrict the ability of the Company to obtain funds from the applicable
subsidiaries and/or joint ventures. In addition, the agreements governing
certain of the Company's joint ventures require approval of the other parties
to those joint ventures before distributions can be made to the parties. As a
result of these restrictions, the Company's liquidity could, in the future,
become constrained and, as a result, its ability to secure future financings
could be adversely affected. See "--Risks of Joint Venture Operations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness."
 
  As of December 31, 1995, on a pro forma basis after giving effect to the
Vessel Sales and the Offering, and the application of the net proceeds
therefrom, the Company will have total long-term debt equal to approximately
39% of its total capitalization. In addition, certain of the Company's
unconsolidated joint ventures are highly leveraged. The indebtedness of the
Company and its unconsolidated joint ventures may pose a risk to the holders of
the Notes, including the risks that sufficient cash flow might not be generated
to service the indebtedness represented by the Notes, that the Company's
ability to secure future financings
 
                                       12
<PAGE>
 
could become substantially limited, and that the financial capacity of the
Company and its unconsolidated joint ventures to respond to cyclical changes
in the demand for their services or extraordinary capital needs could be
restricted. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
SUBORDINATION; COMPANY STRUCTURE
 
  The Notes will be subordinated in right of payment to all Senior
Indebtedness, including the principal of and interest on and all other amounts
due on or payable under the Credit Facility, whether currently existing or
created in the future. Generally, the Company may not pay principal of or
interest on or acquire Notes (including any repurchase at the option of the
holders of Notes after a Change of Control or certain asset sales) if a
default on Senior Indebtedness has occurred and is continuing or if a default
would occur as a result of such payment. In addition, upon the occurrence of
any other event of default entitling the holders of Designated Senior
Indebtedness (as defined herein) to accelerate the maturity thereof and
receipt by the Trustee of written notice of such occurrence, the holders of
Designated Senior Indebtedness will be able to block payment on the Notes for
specified periods of time. By reason of the subordination of the Notes, in the
event of the insolvency, bankruptcy, liquidation, reorganization, dissolution
or other winding-up of the Company or upon a default in payment with respect
to any Senior Indebtedness or any event of default with respect to Senior
Indebtedness resulting in the acceleration thereof, the assets of the Company
will be available to pay the amounts due on the Notes only after all Senior
Indebtedness has been paid in full. In addition, the Notes will be
structurally subordinated to all of the creditors of the Company's
subsidiaries and joint ventures, including trade creditors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of the Notes--Subordination."
 
  As of December 31, 1995, on a pro forma basis, after giving effect to the
Vessel Sales and the sale of the Notes, and the application of the proceeds
therefrom, the aggregate amount of outstanding Senior Indebtedness would have
been approximately $105.1 million (all of which would be Indebtedness of the
Company's consolidated and unconsolidated subsidiaries and joint ventures that
the Company would have guaranteed), in addition to certain bid and performance
bonds (or letters of credit in respect of bids or performance obligations)
outstanding ($170.0 million at December 31, 1995), and the aggregate amount of
Indebtedness of the Company's consolidated subsidiaries and joint ventures
(excluding Indebtedness that the Company would have guaranteed) would have
been approximately $126.9 million. The foregoing amounts do not include the
undrawn portions under the Company's (or its consolidated subsidiaries' or
joint ventures') existing credit arrangements ($119.4 million at December 31,
1995, without giving pro forma effect to the application of the proceeds from
the Vessel Sales). In addition, certain of the Company's unconsolidated joint
ventures have significant amounts of outstanding Indebtedness that the Company
has not guaranteed, as well as undrawn but available credit facilities ($114.1
million at December 31, 1995, without giving pro forma effect to the
Indebtedness to be incurred in connection with the Vessel Sales). See "Use of
Proceeds," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
HIGHLY COMPETITIVE INDUSTRY
 
  The marine construction services business is highly competitive and in
recent years has been characterized by overcapacity, which has resulted in
substantial pressure on pricing and operating margins (as is generally
reflected in the downward trend in the Company's earnings in the current and
immediately preceding fiscal years). The Company expects the overcapacity in
the industry to continue for the foreseeable future. Contracts for marine
construction services are usually awarded on a competitive bid basis. Although
the Company believes customers consider, among other things, the availability
and technical capabilities of equipment and personnel, efficiency, condition
of equipment, safety record and reputation, price competition is currently a
primary factor in determining which qualified contractor with available
equipment is awarded a contract. Major marine
 
                                      13
<PAGE>
 
construction vessels have few alternative uses and, because of their nature
and the environment in which they work, have relatively high maintenance costs
whether or not operating. Because these costs are essentially fixed, and in
order to avoid additional expenses associated with temporarily idling or
"stacking" its vessels, the Company may from time to time be required to bid
its vessels out for hire at less than attractive rates, depending on the
prevailing contractual rates in a given region. See "Business--Competition."
 
RISKS ASSOCIATED WITH CONTRACTUAL PRICING IN THE OFFSHORE CONSTRUCTION
INDUSTRY
 
  Because of the nature of the offshore marine construction industry, a
substantial number of the Company's projects are currently performed on a
fixed-price basis, although some projects are performed on a cost-plus or day-
rate basis or some combination of the foregoing. The Company attempts to cover
increased costs of anticipated charges in labor, material and service costs of
long-term contracts, either through an estimation of such charges, which is
reflected in the original price, or through price escalation clauses. Despite
these attempts, however, the revenue, cost and gross profit realized on a
fixed-price contract will often vary from the estimated amounts because of
changes in job conditions and variations in labor and equipment productivity
over the term of the contract. These variations and the risks generally
inherent in the marine construction industry may result in gross profits
realized by the Company being different from those originally estimated and
may result in the Company experiencing reduced profitability or losses on
projects. Depending on the size of a project, these variations from estimated
contract performance could have a significant effect on the Company's
operating results for any particular fiscal quarter or year. In general,
turnkey contracts to be performed on a fixed-price basis involve an increased
risk of significant variations, as a result of the long-term nature of such
contracts (and the inherent difficulties in estimating costs) and the
interrelationship of the integrated services to be provided under such
contracts (where unanticipated costs or delays in performing part of the
contract could have compounding effects by increasing costs of performing
other parts of the contract). As a result, in connection with its work for
more complex, very deep water installations involving long-term commitments,
the Company generally seeks to negotiate contract terms such that the Company
is not at risk for cost overruns.
 
  In addition, the Company's contract revenues are recognized on a percentage
of completion basis. Accordingly, contract price and cost estimates are
reviewed periodically as the work progresses, and adjustments proportionate to
the percentage of completion are reflected in income in the period when such
estimates are revised. To the extent that these adjustments result in a
reduction or elimination of previously reported profits with respect to a
project, the Company would recognize a charge against current earnings, which
could be material. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Results of Operations" and "Business--
Customers."
 
SEASONALITY
 
  The activity in the marine construction industry is highly seasonal in
certain geographic regions and is affected by adverse weather conditions in
those regions during particular times of the year. Historically, a
disproportionate amount of the Company's contract revenues and net income has
been earned during the first three quarters of its fiscal year and the Company
has frequently incurred losses during the fourth quarter of its fiscal year.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations" and "Business--Backlog; Seasonality."
 
RISKS OF JOINT VENTURE OPERATIONS
 
  The Company conducts a significant portion of its operations through
subsidiaries and joint ventures, some of which the Company manages and some of
which are managed by others. Most of the Company's consolidated revenues and
EBITDA are derived from its subsidiaries and joint ventures. Even in those
joint ventures managed by the Company, the Company may be required to consider
the interests of its joint venture partners in connection with decisions
concerning the operations of the joint ventures. In addition, the
 
                                      14
<PAGE>
 
Company may be dependent, from time to time, on its ability to obtain funds
from its subsidiaries and joint ventures in order to service its indebtedness,
including the Notes. Certain financing arrangements involving the Company's
subsidiaries and joint ventures impose restrictions on the ability of the
Company to gain access to the cash flow or assets of its subsidiaries and joint
ventures. In addition, the Company's foreign subsidiaries and joint ventures
may face governmentally imposed restrictions, from time to time, on their
ability to transfer funds to the Company. See "--Substantial Liquidity
Requirements; Leverage" and "Business."
 
OPERATING RISKS
 
  The Company's operations are subject to the inherent risks of operations at
sea, including accidents resulting in the loss of life or property, pollution
or other environmental mishaps, adverse weather conditions, mechanical
failures, collisions, property losses to the Company's vessels, business
interruption due to political action in foreign countries, and labor stoppages.
Litigation arising from any such event may result in the Company being named as
a defendant in lawsuits asserting large claims. The Company maintains insurance
for such amounts and against such risks that it deems prudent. However, certain
risks are either not insurable or insurance is available only at rates that the
Company considers uneconomical. Among such risks are war and confiscation of
property in certain areas of the world and pollution liability in excess of
relatively low limits. Depending on competitive conditions and other factors,
the Company endeavors to obtain contractual protection against uninsured risks
from its customers. When obtained, such contractual indemnification protection
may not in all cases be supported by adequate insurance maintained by the
customer. There is no assurance that such insurance or contractual indemnity
protection will be sufficient or effective under all circumstances or against
all hazards to which the Company may be subject. The occurrence of a
significant event not fully insured or indemnified against or the failure of a
customer to meet its indemnification obligations could materially and adversely
affect the Company's results of operations and financial condition. Moreover,
there can be no assurance that the Company will be able to maintain adequate
insurance in the future at commercially reasonable rates or on acceptable
terms. See "Business--Legal Proceedings and Insurance."
 
RISKS OF INTERNATIONAL OPERATIONS
 
  The international operations of the Company are subject to certain political,
economic and other uncertainties not encountered in domestic operations,
including, among others, risks of war, expropriation or nationalization of
assets, renegotiation or nullification of existing contracts, changing
political conditions, changing laws and policies affecting trade and
investment, overlap of different tax structures, and the general hazards
associated with the assertion of foreign sovereignty over certain areas in
which operations are conducted. Because the Company's major marine vessels
typically require relatively long periods of time to mobilize over long
distances, the Company may be particularly susceptible to regional conditions
that may adversely affect its operations. Additionally, various foreign
jurisdictions have laws limiting the right and ability of foreign subsidiaries
and joint ventures to pay dividends and remit earnings to affiliated companies,
unless specified conditions precedent are met.
 
  The Company's foreign operations sometimes face the additional risks of
fluctuating currency values, hard currency shortages and controls of foreign
currency exchange. The Company attempts to limit its exposure to foreign
currency fluctuations by attempting to match anticipated foreign currency
contract receipts with anticipated like foreign currency disbursements during
contract negotiations. To the extent that it is unable to match the anticipated
foreign currency receipts and disbursements related to its contracts, the
Company enters into forward exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with its committed
exposures. Because the Company generally does not hedge beyond its contract
exposure, the Company believes this practice minimizes the impact of foreign
exchange rate movements on the Company's operating results. See "Business--
Foreign Operations."
 
                                       15
<PAGE>
 
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
 
  Many aspects of the Company's operations and properties are affected by
political developments and are subject to both domestic and foreign
governmental regulation, including those relating to the construction and
equipping of production platforms and other marine facilities, vessel safety,
currency conversions and repatriation, oil exploration and development,
taxation of foreign earnings and earnings of expatriate personnel, and use of
local employees and suppliers by foreign contractors. In addition, the Company
depends on the demand for its services from the oil and gas industry and,
therefore, is affected by changing taxes, price controls and other laws and
regulations relating to the oil and gas industry generally. The adoption of
laws and regulations curtailing exploration and development drilling for oil
and gas for economic and other policy reasons would adversely affect the
Company's operations by limiting demand for marine construction services. The
Company cannot determine to what extent future operations and earnings of the
Company may be affected by new legislation, new regulations or changes in
existing regulations.
 
  The Company's operations and properties are also affected by numerous
foreign, federal, state and local environmental protection laws and
regulations. The technical requirements of these laws and regulations are
becoming increasingly expensive, complex and stringent. These laws may provide
for "strict liability" for damages to natural resources or threats to public
health and safety, rendering a party liable for the environmental damage
without regard to negligence or fault on the part of such party. Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. Certain
environmental laws provide for strict, joint and several liability for
remediation of spills and other releases of hazardous substances. In addition,
companies may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances. Such laws and
regulations may also expose the Company to liability for the conduct of or
conditions caused by others, or for acts of the Company that were in compliance
with all applicable laws at the time such acts were performed. See "Business--
Governmental Regulation."
 
CONTROL OF THE COMPANY BY MCDERMOTT INTERNATIONAL; RELATED PARTY TRANSACTIONS
 
  McDermott International currently owns approximately 64% of the Company's
outstanding voting stock. As a result, McDermott International is in a position
to control actions that require the consent of a majority of the Company's
outstanding voting stock, including the election of directors, to control
decisions relating to acquisitions or divestitures or merger transactions
involving the Company, and to otherwise direct the business policies of the
Company. The Company and McDermott International or its affiliates may enter
into material transactions and agreements. Any such transactions or agreements,
however, will be subject to the restrictions and limitations contained in the
Indenture with respect to transactions with affiliates. See "Description of the
Notes--Certain Covenants--Limitation on Transactions with Affiliates." In
addition, pursuant to an agreement entered into in connection with the Merger
(the "Letter Agreement"), the Company is restricted from entering into certain
transactions with McDermott International, or taking certain other actions that
may be for the benefit of McDermott International, without the approval of a
committee of independent directors of the Company (the "Independent Committee")
established pursuant to such agreement, including the following: (i) the
repurchase, redemption or prepayment of the 9% Notes or the Company's Series A
$2.25 Cumulative Convertible Preferred Stock ("Series A Preferred Stock"), (ii)
the repurchase of any shares of common stock, par value $0.01 per share, of the
Company ("Common Stock") owned by McDermott International or certain of its
affiliates, and (iii) the lease, sale or other provision of certain goods or
services to, or lease or purchase of certain goods or services from, McDermott
International or certain of its affiliates (other than pursuant to certain
services agreements entered into in connection with the Merger) involving
aggregate payments in excess of $5.0 million, generally through January 31,
1998. The repurchase of the 9% Notes with a part of the proceeds from the
Offering has been approved by the Independent Committee, as well as the
Company's Board of Directors. See "Certain Transactions and Relationships--
Transactions with McDermott International in Connection with the Merger."
 
                                       16
<PAGE>
 
ABSENCE OF PUBLIC MARKET FOR THE NOTES
 
  There is no existing market for the Notes and there can be no assurance as to
the liquidity of any markets that may develop for the Notes, the ability of
holders of the Notes to sell their Notes or the price at which holders would be
able to sell their Notes. Future trading prices of the Notes will depend on
many factors, including, among other things, prevailing interest rates, the
Company's operating results and the market for similar securities. The Company
has been advised by Merrill Lynch, Pierce, Fenner & Smith Incorporated that,
subject to applicable laws and regulations, such firm currently intends to make
a market in the Notes after the consummation of the Offering, although it is
not obligated to do so and may discontinue any market-making activities with
respect to the Notes at any time without notice. The Company intends to apply
for listing of the Notes on the New York Stock Exchange. See "Underwriting."
 
                                       17
<PAGE>
 
                                  THE COMPANY
 
  The Company, together with its joint ventures, operates the world's largest
fully integrated marine construction business, including the largest fleet of
major marine construction vessels in the world. With its fleet of major marine
construction vessels and its geographically dispersed fabrication yards, the
Company supplies a full range of construction services on a worldwide basis to
the offshore oil and gas exploration and production and hydrocarbon
transportation industries. The Company's services include the basic and
detailed design, engineering, fabrication and installation of offshore drilling
and production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. The Company also provides
comprehensive project management services, feasibility studies, engineering
services, subsea trenching services, diving services, and removal, salvage and
refurbishment services for offshore fixed platforms. The Company and its joint
ventures operate throughout the world in all major offshore oil and gas
producing regions, including the Gulf of Mexico, the North Sea, West Africa,
South America, the Middle East, India and the Far East.
 
  The Company was formed in connection with the January 1995 combination of
substantially all the marine construction services business of McDermott
International with OPI through a series of transactions including the Company's
acquisition of OPI in a merger transaction (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of June 2, 1994, as amended (the "Merger
Agreement"). McDermott International was a pioneer in the marine construction
services business, with its marine operations dating back to 1947, when its
predecessor, J. Ray McDermott & Co., Inc., installed the first offshore
platform in the Gulf of Mexico. Over the years, McDermott International's
marine construction services business became established as an industry leader,
providing a full range of marine construction services on a worldwide basis,
with significant capabilities suited for the deepwater and high-end segments of
the offshore exploration and production industry. OPI was organized in 1984 as
a marine construction contractor primarily focused on the offshore installation
of underwater pipelines and other marine construction services, principally to
the middle-market segment of the offshore exploration and production industry.
The Company is a majority-owned subsidiary of McDermott International, which
currently owns approximately 64% of the Company's voting stock.
 
  The Company's principal executive offices are located at 1450 Poydras Street,
New Orleans, Louisiana 70112-6050, and its telephone number at such address is
(504) 587-5300.
 
 
                                       18
<PAGE>
 
                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the Notes offered hereby are
estimated to be approximately $    million. The Company intends to use such net
proceeds (i) to repurchase all the outstanding 9% Notes ($231.0 million
aggregate principal amount plus accrued interest of approximately $
as of the date of this Prospectus) and (ii) for general corporate purposes,
which may include temporary reductions in borrowings outstanding under the
Credit Facility. See "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
 
  The 9% Notes bear interest at the rate of 9% per annum and are scheduled to
mature on September 15, 2001. The 9% Notes were issued to McDermott
International on January 31, 1995 as partial consideration for the contribution
of certain assets by McDermott International to the Company in connection with
the Merger. The 9% Notes may be redeemed, in whole or in part, at the option of
the Company at any time on or after September 15, 1997, at an initial
redemption price equal to 105% of the principal amount being redeemed
(declining to par at the rate of 1.25% per year over a four-year period).
Following negotiations between the Company and McDermott International, the
parties have agreed that the Company shall repurchase the 9% Notes at their
face value, without any premium, with a part of the proceeds from the Offering.
Such repurchase has been approved by the Independent Committee, in accordance
with the provisions of the Letter Agreement, as well as by the Company's Board
of Directors. See "Certain Transactions and Relationships--Transactions with
McDermott International in Connection with the Merger."
 
  As of December 31, 1995, $60.0 million was outstanding under the Credit
Facility, all of which was incurred for working capital purposes. Such
borrowings bear interest at the London Interbank Offered Rate ("LIBOR") plus a
margin of 0.5% per annum (approximately 6.3% at December 31, 1995). The Credit
Facility has an initial term expiring June 8, 1998. For a further description
of the terms of the Credit Facility, see "Description of Certain Indebtedness--
Credit Facility."
 
 
                                       19
<PAGE>
 
                                 CAPITALIZATION
 
  The following table sets forth the consolidated cash and cash equivalents,
short-term debt and capitalization of the Company as of December 31, 1995 (i)
on a historical basis and (ii) as adjusted to give effect to (a) the issuance
of the Notes offered hereby and (b) the Vessel Sales. Completion of the Vessel
Sales will result in an increase in cash and cash equivalents, which the
Company intends to use primarily to repay the Floating Rate Note (classified
as short-term debt) and repay borrowings outstanding under the Credit
Facility. The as-adjusted balances for cash and cash equivalents and short-
term debt shown below do not reflect the repayment of approximately $80.0
million of indebtedness relating to the Company's work on the Foinaven
project. That indebtedness will be repaid upon completion of the Foinaven
project (which is currently anticipated to be completed by December 31, 1996),
and until such time provides the Company with certain tax benefits. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Recent Events."
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31, 1995(A)
                                                          ---------------------
                                                           ACTUAL   AS ADJUSTED
                                                          --------  -----------
                                                              (DOLLARS IN
                                                               THOUSANDS)
<S>                                                       <C>       <C>
Cash and cash equivalents................................ $ 79,454   $124,811
                                                          ========   ========
Short-term debt, including current maturities of long-
 term debt............................................... $165,681   $ 84,038
                                                          ========   ========
Long-term debt:
  12 7/8% Notes.......................................... $ 74,593   $ 74,593
  9% Notes...............................................  231,000         --
  Notes offered hereby...................................       --    250,000
  Other notes payable....................................   34,662     34,662
  Capital leases.........................................   14,103     14,103
                                                          --------   --------
    Total long-term debt.................................  354,358    373,358
Stockholders' equity:
  Preferred Stock, par value $0.01 per share, 10,000,000
   shares authorized:
    Series A $2.25 cumulative convertible, 3,200,000
     shares outstanding (liquidation preference
     $160,000,000).......................................       32         32
  Common Stock, par value $0.01 per share, 60,000,000
   shares authorized; 40,180,333 shares outstanding(b)...      402        402
  Capital in excess of par value.........................  584,432    584,432
  Retained earnings......................................    5,462      5,462
  Currency translation adjustments.......................  (15,262)   (15,262)
                                                          --------   --------
    Total stockholders' equity...........................  575,066    575,066
                                                          --------   --------
      Total capitalization............................... $929,424   $948,424
                                                          ========   ========
</TABLE>
--------
(a) The accounts of all of the Company's controlled subsidiaries and joint
    ventures are consolidated with the accounts of the Company. Investments in
    joint ventures and other entities that the Company does not control
    (including the HeereMac joint venture and ETPM West) are accounted for on
    the equity method. Accordingly, the cash and cash equivalents and
    indebtedness of those joint ventures are not included in the Company's
    consolidated statement of financial position. At December 31, 1995, those
    joint ventures had combined cash and cash equivalents of $173.9 million,
    short-term debt (including current maturities of long-term debt) of $86.5
    million (including $11.9 million owed to the Company) and long-term debt
    of $32.6 million (including $8.4 million owed to the Company). On an as-
    adjusted basis after giving effect to the Vessel Sales, those joint
    ventures would have had combined cash and cash equivalents and long-term
    debt at December 31, 1995 of $143.9 million and $442.6 million (including
    $105.0 million owed to the Company), respectively.
(b) Does not include 776,394 shares reserved for issuance upon exercise of
    outstanding stock options, 4,119,070 shares available for future option
    grants under the Company's stock plans or 5,740,800 shares initially
    issuable upon conversion of the Company's Series A Preferred Stock.
 
                                       20
<PAGE>
 
                      SELECTED HISTORICAL FINANCIAL DATA
 
  The following selected consolidated financial data for the four fiscal years
ended March 31, 1992, 1993, 1994 and 1995 are derived from the audited
consolidated financial statements of the Company. The financial data for the
nine months ended December 31, 1994 and 1995 and the fiscal year ended March
31, 1991 are derived from unaudited consolidated financial statements of the
Company, which include all adjustments that the Company considers necessary for
a fair presentation of the financial position and results of operations for
these periods. Operating results for the nine months ended December 31, 1995
are not necessarily indicative of the results that may be expected for the
entire year ending March 31, 1996. The data should read in conjunction with the
consolidated financial statements, related notes and other financial
information included herein.
 
<TABLE>
<CAPTION>
                                                                                         NINE MONTHS ENDED
                                                 YEAR ENDED MARCH 31,                       DECEMBER 31,
                                -------------------------------------------------------- ------------------
                                   1991        1992        1993       1994       1995      1994     1995
                                ----------  ----------  ---------- ---------- ---------- -------- ---------
                                                         (DOLLARS IN THOUSANDS)
 <S>                            <C>         <C>         <C>        <C>        <C>        <C>      <C>
 INCOME STATEMENT DATA:
 Revenues....................   $1,331,861  $1,903,281  $1,601,060 $1,193,881 $1,127,320 $805,558 $ 939,996
 Costs and expenses:
  Cost of operations
   (excluding depreciation
   and amortization).........    1,197,510   1,647,336   1,344,115    976,636    887,223  605,449   752,450
  Depreciation and
   amortization..............       62,585      89,307      80,856     53,627     70,372   52,094    66,045
  Selling, general and
   administrative expenses...      118,621     142,382     115,480    115,428    114,165   90,508    85,107
                                ----------  ----------  ---------- ---------- ---------- -------- ---------
                                 1,378,716   1,879,025   1,540,451  1,145,691  1,071,760  748,051   903,602
                                ----------  ----------  ---------- ---------- ---------- -------- ---------
 Operating income (loss)
  before equity in income
  (loss) of investees........      (46,855)     24,256      60,609     48,190     55,560   57,507    36,394
 Equity in income (loss) of
  investees(a)...............      (29,786)     (6,622)     84,973    106,593     22,857   22,844     9,845
                                ----------  ----------  ---------- ---------- ---------- -------- ---------
 Operating income (loss).....      (76,641)     17,634     145,582    154,783     78,417   80,351    46,239

 Interest income.............        4,155       3,960       2,773      3,483      9,298    8,114     3,339
 Interest expense............       28,683      25,175      22,569     20,076     25,158   17,173    33,494
 Provision for income taxes..       17,634      19,672      42,760     28,050      8,885   15,030     3,979
 Income (loss) before
  cumulative effect of
  accounting changes.........      (86,985)     (2,874)     95,756    119,137     60,700   61,690    18,476
 Net income (loss)(b)(c).....      (86,985)     (2,874)     37,011    119,137     59,374   60,364    18,476
 OTHER FINANCIAL DATA:
 Ratio of earnings to fixed
  charges(d).................           --       1.27x       2.36x      3.10x      2.41x    2.96x     1.34x
 BALANCE SHEET DATA (AT END
  OF PERIOD):
 Cash and cash equivalents...   $   13,785  $   18,191  $   26,994 $   53,343 $   52,224 $ 28,655 $  79,454
 Net property, plant and
  equipment..................      600,604     511,572     444,962    481,807    594,162  462,337   543,199
 Investment in unconsolidated
  affiliates.................        2,555      20,894      46,364     90,370    105,283   66,450    88,231
 Total assets................    1,127,121     984,063     932,528  1,007,609  1,482,262  970,334 1,644,490
 Total debt (including
  current maturities)(e).....      340,818     302,874     256,949    303,457    420,516  306,047   520,039
 Total equity................      163,299     195,187     169,623    253,021    559,471  287,169   575,066
</TABLE>
--------
(a) The accounts of all of the Company's controlled subsidiaries and joint
    ventures are consolidated with the accounts of the Company. Investments in
    joint ventures and other entities that the Company does not control
    (including the HeereMac joint venture and ETPM West) are accounted for on
    the equity method. Accordingly, the revenues and operating expenses of
    those joint ventures are not included in the Company's consolidated
    revenues and operating expenses.
(b) Includes the cumulative effect of the change resulting from the adoption of
    SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 106, "Employers'
    Accounting for Postretirement Benefits other than Pensions," in the fiscal
    year ended March 31, 1993; and the cumulative effect of the change
    resulting from the adoption of SFAS No. 112, "Employers' Accounting for
    Postretirement Benefits," in the nine months ended December 31, 1994 and
    the fiscal year ended March 31, 1995.
 
                                         (footnotes continued on following page)
 
 
 
                                      21
<PAGE>
 
(c) Net income applicable to Common Stock (after preferred stock dividend
    requirements) was $12.6 million for the nine months ended December 31,
    1995. For all other periods presented, the Company was not a separate
    entity with its own capital structure.
 
(d) For the year ended March 31, 1991, earnings were inadequate to cover fixed
    charges by $90.0 million. For the purpose of determining the ratio to
    fixed charges, earnings consist of earnings before provision of income
    taxes and cumulative effect of accounting changes (adjusted for equity in
    undistributed earnings of investees) plus fixed charges (adjusted to
    include capitalized interest). Fixed charges consist of interest on
    indebtedness plus one-third of rental expense, which is considered
    representative of the interest factor.
 
(e) Includes notes payable to McDermott International of $310.4 million,
    $285.1 million, $254.3 million, $298.0 million and $270.8 million at March
    31, 1991, 1992, 1993, 1994 and 1995, respectively, and $292.1 million and
    $251.5 million at December 31, 1994 and 1995, respectively.
 
 
                                      22
<PAGE>
 
             UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
  The following unaudited pro forma consolidated balance sheet and unaudited
pro forma consolidated statements of income include certain adjustments to the
historical consolidated financial statements of the Company.  Such adjustments
are separated into two categories: (i) the adjustments relating to the
contribution by McDermott International of substantially all of its marine
construction services business to the Company and the adjustments relating to
the Merger (the "Contribution and Merger Adjustments") and (ii) the adjustments
related to the Vessel Sales and the sale of the Notes offered hereby and the
use of the proceeds therefrom (the "Offering and Other Adjustments").
 
  The adjustments to the unaudited pro forma consolidated balance sheet
relating to the Offering and Other Adjustments are based on the assumption that
such transactions had occurred as of December 31, 1995. The adjustments to the
unaudited pro forma statements of income for the year ended March 31, 1995 and
the nine months ended December 31, 1994 relating to the Contribution and Merger
Adjustments and the Offering and Other Adjustments are based on the assumption
that such transactions had occurred as of April 1, 1994. The adjustments to the
unaudited pro forma statement of income for the nine months ended December 31,
1995 relating to the Offering and Other Adjustments are based on the assumption
that the transactions had occurred as of April 1, 1995.
 
  The pro forma information is not necessarily indicative of the actual
financial position of the Company at any date or the results that would have
actually occurred had the transactions occurred on such dates or that may occur
in the future. These statements should be read in conjunction with the
historical financial statements and notes thereto included elsewhere herein or
incorporated by reference herein.
 
 
                                       23
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                DECEMBER 31, 1995
                                        ----------------------------------------
                                                    OFFERING
                                                    AND OTHER
                                        HISTORICAL ADJUSTMENTS        PRO FORMA
                                        ---------- -----------       -----------
                ASSETS
                ------                        (DOLLARS IN THOUSANDS)
<S>                                     <C>        <C>               <C>
Current assets:
  Cash and cash equivalents..............  $   79,454  $  12,000 (a) $   124,811
                                                          23,357 (b)
                                                          10,000 (c)
  Accounts and notes receivable..........     332,846         --         332,846
  Contracts in progress..................     174,953         --         174,953
  Other currents assets..................      16,134         --          16,134
                                           ----------  ---------     -----------
    Total current assets.................     603,387     45,357         648,744
                                           ----------  ---------     -----------
Property, plant and equipment--at cost:..   1,474,473   (246,983)(b)   1,227,490
  Less accumulated depreciation and
   amortization..........................     931,274   (138,949)(b)     792,325
                                           ----------  ---------     -----------
Net property, plant and equipment........     543,199   (108,034)        435,165
                                           ----------  ---------     -----------
Excess of cost over fair value of net
 assets of purchased businesses..........     322,750         --         322,750
                                           ----------  ---------     -----------
Investment in unconsolidated affiliates..      88,231      3,034 (b)      81,265
                                                         (10,000)(c)
                                           ----------  ---------     -----------
Other assets.............................      86,923      7,000 (a)      93,923
                                           ----------  ---------     -----------
    TOTAL................................  $1,644,490  $ (62,643)     $1,581,847
                                           ==========  =========     ===========
  LIABILITIES AND STOCKHOLDERS' EQUITY
  ------------------------------------
Current liabilities:
  Notes and accounts payable and current
   maturities of long-term debt..........  $  354,250  $ (81,643)(b) $   272,607
  Advance billings on contracts..........      50,071         --          50,071
  U.S. and foreign income taxes..........      26,240         --          26,240
  Other current liabilities..............     163,013         --         163,013
                                           ----------  ---------     -----------
    Total current liabilities............     593,574    (81,643)        511,931
                                           ----------  ---------     -----------
Long-term debt...........................     123,358    250,000 (a)     373,358
                                           ----------  ---------     -----------
Deferred and non-current income taxes....      55,101         --          55,101
                                           ----------  ---------     -----------
Notes payable to McDermott International.     231,000   (231,000)(a)          --
                                           ----------  ---------     -----------
Other liabilities........................      66,391         --          66,391
                                           ----------  ---------     -----------
Stockholders' equity:
  Preferred stock........................          32         --              32
  Common stock...........................         402         --             402
  Other stockholders' equity.............     574,632         --         574,632
                                           ----------  ---------     -----------
    Total stockholders' equity...........     575,066         --         575,066
                                           ----------  ---------     -----------
    TOTAL................................  $1,644,490  $ (62,643)    $ 1,581,847
                                           ==========  =========     ===========
</TABLE>
 
   See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
 
                                       24
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
 
  The pro forma consolidated balance sheet adjustments assume the issuance of
the Notes offered hereby for $250.0 million from which the proceeds will be
used to repurchase all of the outstanding 9% Notes payable to McDermott
International of $231.0 million, and for general corporate purposes, including
working capital requirements. The adjustments also assume that the Company sold
two major marine vessels to the HeereMac joint venture in the Vessel Sales
transaction for (i) $105.0 million in cash, which will be used to repay the
Floating Rate Note, repay borrowings outstanding under the Credit Facility, and
fund working capital requirements, and (ii) a note in principal amount of
$105.0 million. The following is a summary of the adjustments required to
reflect the issuance of the Notes and the Vessel Sales.
 
<TABLE>
<CAPTION>
                                                              ADJUSTMENTS
                                                             DEBIT (CREDIT)
                                                         ----------------------
                                                         (DOLLARS IN THOUSANDS)
      <C> <S>                                            <C>
      (a) ISSUANCE OF THE NOTES
          Cash and cash equivalents...................         $  12,000
          Other assets--deferred debt issuance costs..             7,000
          Notes payable to McDermott International....           231,000
          Long-term debt--the Notes...................          (250,000)
                                                               ---------
                                                               $      --
                                                               =========
      (b) SALE OF MARINE VESSELS TO HEEREMAC
          Cash and cash equivalents...................         $  23,357
          Property, plant and equipment--at cost......          (246,983)
          Accumulated depreciation and amortization...           138,949
          Investments in and note receivable from
           unconsolidated affiliates (net of deferred
           gain of $101,966)..........................             3,034
          Notes and accounts payable and current
           maturities of long-term debt--retire short-
           term debt..................................            81,643
                                                               ---------
                                                               $      --
                                                               =========
      (c) NET DISTRIBUTION FROM HEEREMAC
          Cash and cash equivalents...................         $  10,000
          Investments in unconsolidated affiliates....           (10,000)
                                                               ---------
                                                               $      --
                                                               =========
</TABLE>
 
                                       25
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
              UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED MARCH 31, 1995
                          -----------------------------------------------------------------------------
                               HISTORICAL                            PRO FORMA
                          ---------------------- ------------------------------------------------------
                                                                  COMBINED
                                                                   AFTER                     COMBINED
                                                                   GIVING                      AFTER
                                                                 EFFECT TO                    GIVING
                            J. RAY     OFFSHORE  CONTRIBUTION   CONTRIBUTION  OFFERING        EFFECT
                          MCDERMOTT,  PIPELINES,  AND MERGER     AND MERGER   AND OTHER       TO ALL
                             S.A.       INC. *   ADJUSTMENTS    ADJUSTMENTS  ADJUSTMENTS    ADJUSTMENTS
                          ----------  ---------- ------------   ------------ -----------    -----------
                                                  (DOLLARS IN THOUSANDS)
<S>                       <C>         <C>        <C>            <C>          <C>            <C>
Revenues................  $1,127,320   $346,461    $(31,087)(a)  $1,442,694   $(31,069)(l)  $1,411,625
Costs and expenses:
 Cost of operations
  (excluding
  depreciation and
  amortization).........     887,223    290,001     (32,740)(a)   1,146,019         --       1,146,019
                                                      1,535 (b)
 Depreciation and
  amortization..........      70,372     15,725      (2,175)(b)     104,349    (11,157)(l)      93,192
                                                     18,083 (e)
                                                       (333)(f)
                                                      2,677 (g)
Selling, general and
 administrative
 expenses...............     114,165     28,937        (970)(a)     142,132         --         142,132
                          ----------   --------    --------      ----------   --------      ----------
                           1,071,760    334,663     (13,923)      1,392,500    (11,157)      1,381,343
                          ----------   --------    --------      ----------   --------      ----------
Operating income before
 equity in income (loss)
 of investees...........      55,560     11,798     (17,164)         50,194    (19,912)         30,282
Equity in income (loss)
 of investees...........      22,857        (80)     (3,846)(a)      23,149      3,229 (m)      34,875
                                                      4,218 (f)                  8,497 (1)
                          ----------   --------    --------      ----------   --------      ----------
Operating income........      78,417     11,718     (16,792)         73,343     (8,186)         65,157
Interest income.........       9,298      1,006         (16)(a)       1,299      7,875 (l)       9,174
                                                     (8,989)(c)
Interest expense........     (25,158)    (9,168)       (300)(a)     (37,261)    (1,949)(n)     (39,210)
                                                     16,824 (d)
                                                       (208)(g)
                                                        538 (h)
                                                    (17,325)(i)
                                                     (2,464)(j)
Other--net..............       7,028      2,362          70 (a)       9,460         --           9,460
                          ----------   --------    --------      ----------   --------      ----------
Income before provision
 for income taxes and
 cumulative effect of
 accounting change......      69,585      5,918     (28,662)         46,841     (2,260)         44,581
Provision for income
 taxes..................       8,885        664      (1,469)(a)       8,609         --           8,609
                                                        224 (b)
                                                        117 (f)
                                                        188 (h)
                          ----------   --------    --------      ----------   --------      ----------
Income before cumulative
 effect of accounting
 change.................      60,700      5,254     (27,722)         38,232     (2,260)         35,972
Preferred stock
 dividends..............       1,117      2,329       4,786 (k)       8,232         --           8,232
                          ----------   --------    --------      ----------   --------      ----------
Income before cumulative
 effect of accounting
 change applicable to
 Common Stock...........  $   59,583   $  2,925    $(32,508)     $   30,000   $ (2,260)     $   27,740
                          ==========   ========    ========      ==========   ========      ==========
</TABLE>
--------
*  Historical amounts for OPI represent activity for the ten months ended
   January 31, 1995.
 
    See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
                                    Income.
 
                                       26
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
              UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                             NINE MONTHS ENDED DECEMBER 31,
                                                          1995
                                            -----------------------------------
                                                        OFFERING
                                                        AND OTHER
                                            HISTORICAL ADJUSTMENTS    PRO FORMA
                                            ---------- -----------    ---------
                                                 (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>            <C>
Revenues...................................  $939,996   $(26,106)(l)  $913,890
Costs and expenses:
  Cost of operations (excluding
   depreciation and amortization...........   752,450         --       752,450
  Depreciation and amortization............    66,045    (11,397)(l)    54,648
  Selling, general and administrative
   expenses................................    85,107         --        85,107
                                             --------   --------      --------
                                              903,602    (11,397)      892,205
                                             --------   --------      --------
Operating income before equity in
 income of investees.......................    36,394    (14,709)       21,685
Equity in income of investees..............     9,845      4,556 (m)    20,774
                                                           6,373 (l)
                                             --------   --------      --------
Operating income...........................    46,239     (3,780)       42,459
Interest income............................     3,339      5,906 (l)     9,245
Interest expense...........................   (33,494)     1,276 (n)   (32,218)
Other--net.................................     6,371         --         6,371
                                             --------   --------      --------
Income before provision for income
 taxes.....................................    22,455      3,402        25,857
Provision for income taxes.................     3,979        522 (m)     4,501
                                             --------   --------      --------
Net income.................................    18,476      2,880        21,356
Preferred stock dividends..................     5,911         --         5,911
                                             --------   --------      --------
Net income applicable to Common Stock......  $ 12,565   $  2,880      $ 15,445
                                             ========   ========      ========
</TABLE>
 
 
    See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
                                    Income.
 
                                       27
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
              UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                             NINE MONTHS ENDED DECEMBER 31, 1994
                          -------------------------------------------------------------------------------
                               HISTORICAL                            PRO FORMA
                          --------------------- ---------------------------------------------------------
                                                                 COMBINED
                                                                   AFTER
                                                               GIVING EFFECT                  COMBINED
                                                                    TO                          AFTER
                            J. RAY    OFFSHORE  CONTRIBUTION   CONTRIBUTION   OFFERING      GIVING EFFECT
                          MCDERMOTT, PIPELINES,  AND MERGER     AND MERGER    AND OTHER        TO ALL
                             S.A.      INC. *   ADJUSTMENTS     ADJUSTMENTS  ADJUSTMENTS     ADJUSTMENTS
                          ---------- ---------- ------------   ------------- -----------    -------------
                                                    (DOLLARS IN THOUSANDS)
<S>                       <C>        <C>        <C>            <C>           <C>            <C>
Revenues................   $805,558   $328,332    $(33,138)(a)  $1,100,752    $(23,573)(l)   $1,077,179
Costs and expenses:
 Cost of operations
  (excluding
  depreciation and
  amortization).........    605,449    264,179     (35,497)(a)     839,201          --          839,201
                                                     2,728 (b)
                                                     2,342 (f)
 Depreciation and
  amortization..........     52,094     13,469      (3,029)(b)      81,194      (9,400)(l)       71,794
                                                    16,500 (e)
                                                      (300)(f)
                                                     2,460 (g)
Selling, general and
 administrative
 expenses...............     90,508     26,003        (953)(a)     115,323          --          115,323
                                                      (235)(f)
                           --------   --------    --------      ----------    --------       ----------
                            748,051    303,651     (15,984)      1,035,718      (9,400)       1,026,318
                           --------   --------    --------      ----------    --------       ----------
Operating income before
 equity in income (loss)
 of investees...........     57,507     24,681     (17,154)         65,034     (14,173)          50,861
Equity in income (loss)
 of investees...........     22,844      5,616      (4,692)(a)      29,379       2,563 (m)       38,315
                                                     5,611 (f)                   6,373 (l)
                           --------   --------    --------      ----------    --------       ----------
Operating income........     80,351     30,297     (16,235)         94,413      (5,237)          89,176
Interest income.........      8,114        851         (20)(a)       1,644       5,906 (l)        7,550
                                                    (7,301)(c)
Interest expense........    (17,173)    (7,981)        315 (a)     (28,050)     (1,462)(n)      (29,512)
                                                    14,991 (d)
                                                      (190)(g)
                                                       981 (h)
                                                   (15,593)(i)
                                                    (3,400)(j)
Other--net..............      5,428      2,828          79 (a)       7,441          --            7,441
                                                      (894)(f)
                           --------   --------    --------      ----------    --------       ----------
Income before provision
 for income taxes and
 cumulative effect of
 accounting change......     76,720     25,995     (27,267)         75,448        (793)          74,655
Provision for income
 taxes..................     15,030      7,346      (1,006)(a)      20,873          --           20,873
                                                       105 (b)
                                                      (945)(f)
                                                       343 (h)
                           --------   --------    --------      ----------    --------       ----------
Income before cumulative
 effect of accounting
 change.................     61,690     18,649     (25,764)         54,575        (793)          53,782
Preferred stock
 dividends..............         --      2,329       5,400 (k)       7,729          --            7,729
                           --------   --------    --------      ----------    --------       ----------
Income before cumulative
 effect of accounting
 change applicable to
 Common Stock...........   $ 61,690   $ 16,320    $(31,164)     $   46,846    $   (793)      $   46,053
                           ========   ========    ========      ==========    ========       ==========
</TABLE>
--------
*  Historical amounts for OPI represent activity for the nine months ended
   October 31, 1994.
 
    See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
                                    Income.
 
                                       28
<PAGE>
 
         NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
 
  The pro forma combined statements of earnings give effect to the following
adjustments:
 
    (a) Adjustment to conform OPI's proportionate consolidation method to the
  Company's accounting policies.
 
    (b) Adjustment to conform OPI's drydock and depreciation method to the
  Company's accounting policies.
 
ADJUSTMENTS TO REFLECT THE CONTRIBUTION FROM MCDERMOTT INTERNATIONAL AND THE
MERGER:
 
    (c) To adjust interest income for Other Assets (notes receivable from
  affiliates that are excluded from the contribution of substantially all of
  McDermott International's marine construction services business in
  accordance with the terms of the Merger Agreement) and accounts and notes
  receivable (interest income recognized on claims that are excluded from the
  contribution from McDermott International).
 
    (d) To adjust interest expense on long-term debt (notes payable to
  affiliates that are excluded in accordance with the terms of the Merger
  Agreement).
 
    (e) To amortize over 15 years the costs in excess of net assets acquired.
 
    (f) To record additional depreciation on write-up of OPI's property,
  plant and equipment based on the estimated remaining life thereof, which is
  assumed to be twelve years, and to reflect the impact of other purchase
  accounting adjustments.
 
    (g) To amortize covenants-not-to-compete over a period of five years per
  the terms of the agreements.
 
    (h) To amortize premium recognized on write-up of OPI debt.
 
    (i) To record interest expense on the 9% Notes.
 
    (j) To record interest expense on the Floating Rate Note, which was
  issued to McDermott International in connection with the contribution
  transaction referred to in Note (c), above.
 
    (k) To reflect dividends on the Series A Preferred Stock.
 
OFFERING AND OTHER ADJUSTMENTS:
 
    (l) To record the reduction in revenues and depreciation expense relating
  to the sale of the Company's vessels, and the amortization of the deferred
  gain recorded on the sale.
 
    (m) To record the Company's share of the net impact of the Vessel Sales
  on the HeereMac joint venture due to lower operating expenses and increased
  interest expense on loans payable to a bank, Heerema and the Company issued
  in conjunction with the transaction.
 
    (n) To record net change in interest expense due to the issuance of the
  Notes and the retirement of the 9% Notes, borrowings outstanding with the
  Credit Facility and the Floating Rate Note payable to McDermott
  International, which was issued to McDermott International in connection
  with the contribution transaction referred to in Note (c), above.
 
 
                                       29
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
 
OVERVIEW
 
  The Company was formed in connection with the January 1995 combination of
substantially all of the marine construction services business of McDermott
International with OPI. The Merger was completed for the purposes of improving
the ability of the combined businesses to compete effectively in markets
worldwide and allowing the elimination of duplicative facilities and general
and administrative expenses, thereby giving the combined business a greater
ability to realize profits than would exist for either business as a separate
company. McDermott International was a pioneer in the marine construction
services business, with its marine operations dating back to 1947. OPI was
organized in 1984 as a marine construction contractor primarily focused on the
offshore installation of underwater pipelines and other marine construction
services. The Company is a majority-owned subsidiary of McDermott
International, which currently owns approximately 64% of the Company's voting
stock. The Company and its joint ventures operate throughout the world in all
major offshore oil and gas producing regions, including the Gulf of Mexico, the
North Sea, West Africa, South America, the Middle East, India and the Far East.
 
  The Company's customers include major and independent oil and gas exploration
and development companies, foreign government-owned energy companies, and
hydrocarbon transportation companies. Projects performed by the Company can
range in size from as small as $0.5 million to as large as $500.0 million or
more and can take up to 48 months to complete. The Company obtains business
through competitive bidding and through direct negotiations with customers. A
significant percentage of the Company's contracts is performed on a fixed-price
basis, although other contract terms that limit or share construction risk are
common, particularly in connection with more complex projects and projects
involving long-term commitments. Although the Company does not generally
provide construction financing or deferred billing for its customers, it does
at times commit significant amounts of working capital on projects in advance
of collecting from customers with respect to such projects. In general, the
Company's contract revenues are recognized on a percentage of completion basis.
Contract price and cost estimates are reviewed periodically as the work
progresses, and adjustments proportionate to the percentage of completion are
reflected in income in the period when such estimates are revised. To the
extent that these adjustments result in a reduction or elimination of
previously reported profits with respect to a project, the Company would
recognize a charge against current earnings, which could be material. Most
long-term contracts have provisions for progress payments. See "Business--
Customers."
 
  In recent periods, the market for marine construction services has been
relatively weak. This lower level of market activity, combined with the
overcapacity in the industry, has resulted in substantial pressure on pricing
and operating margins. These effects are generally reflected in the decrease in
the Company's backlog from $1,002,968,000 at March 31, 1995 to $734,254,000 at
December 31, 1995. The Company's business tends to follow the overall capital
expenditure cycles of the oil and gas industry. The recent focus in the
offshore segment of the oil and gas industry has been on expanding exploration
and development activity in deepwater and very deep water regions, such as the
North Sea, the North Atlantic and the deepwater regions of the Gulf of Mexico.
While this activity has not yet begun to generate significant demand for marine
construction services, it has resulted in a recent increase in the demand for
offshore drilling rigs, which historically has been a leading indicator for an
upturn in the demand cycle for marine construction services.
 
  In general, the Company's performance is a function of the level of oil and
gas development activity in the world's major hydrocarbon producing regions. As
a result, the Company's revenues and profitability reflect some variability
associated with the timing of the completion of significant development
projects and the commencement of others as to which the Company has contracts,
as well as the worldwide volume of projects and their geographic distribution.
The Company's recent operating results have been adversely
 
                                       30
<PAGE>
 
impacted by a substantial decline in the number of projects generating demand
for marine construction services in the Southeast Asia market. The Company
believes this decline is only temporary and is largely due to project timing.
This decline has had an adverse effect on other markets as a result of the
migration of equipment and other resources previously allocated to the
Southeast Asia market to other markets and the resultant pressure on pricing in
those markets caused by the increased capacity. Based on its ongoing dialogue
with existing customers with respect to possible future projects, the Company
expects improvement in certain of its significant markets, including Southeast
Asia and the Gulf of Mexico. The Company believes that some level of
improvement in market activity is reflected in an increase in the backlog
relating to contracts to be performed by the Company's unconsolidated joint
ventures from $922,000,000 at March 31, 1995 to $1,240,000,000 at December 31,
1995. Notwithstanding these signs of improvement, the Company cannot, at this
time, predict the timing or extent of any improvement in the industry or the
future level of demand for the Company's services. See "Business--Industry
Overview."
 
  The foregoing statements regarding the Company's markets and the other
statements in this "Overview" discussion are forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertanties,
including but not limited to the uncertainties relating to offshore development
decisions to be made by oil and gas exploration and development companies and
the risks and uncertainties described in "Risk Factors" under the captions
"Dependence on Oil and Gas Industry," "Highly Competitive Industry," "Risks
Associated with Contractual Pricing in the Offshore Construction Industry,"
"Seasonality," "Risks of Joint Venture Operations," "Operating Risks," "Risk of
International Operations," and "Governmental Regulation and Environmental
Matters."
 
  The Company's services include the basic and detailed design, engineering,
fabrication and installation of offshore drilling and production platforms and
other specialized structures, related modular facilities, marine pipelines and
subsea production systems. While the Company often provides its services on an
integrated basis, projects performed by the Company can generally be divided
into two broad categories: fabrication projects and marine installation
projects. Fabrication projects generally entail the initial design, engineering
and onshore fabrication of structures and modular facilities. Installation
projects include the transportation and installation of completed structures
and facilities at offshore sites, as well as the offshore installation of
marine pipelines and subsea production systems. The fabrication market is
highly fragmented, with a large number of essentially regional participants. No
single competitor dominates this market on a worldwide basis, although the
Company believes it has the largest share of the worldwide fabrication market.
The Company owns or operates major fabrication facilities on the U.S. Gulf
coast and in Scotland, West Africa, the Middle East and the Far East. While
margins in the fabrication business are difficult to generalize, because in
many cases these services are bundled with other services in a single contract,
they are generally lower than in the installation business because of the
relatively higher variable costs associated with material procurement. In
contrast, installation projects generally achieve relatively higher margins, as
a result of their greater service orientation and the high degree of skill and
experience involved in providing those services. The marine installation market
includes both marine pipelay and heavy-lift operations and is somewhat more
concentrated than the fabrication business. The Company, together with its
joint ventures, has a more dominant position in this business worldwide, as
measured by both the size of the Company's fleet of major marine construction
vessels and the Company's share of contracted vessel days.
 
  In addition to facilities and vessels directly owned and operated by the
Company, the Company conducts a significant portion of its operations through a
number of joint ventures around the world. Some of these joint ventures are
operated by the Company and some are operated by other marine construction
contractors. Some of the Company's joint ventures are consolidated with the
Company's accounts for financial reporting purposes while others (including the
HeereMac joint venture and ETPM West) are accounted for using the equity
method. The Company's joint ventures are largely financed through their own
resources, including, in some cases, stand-alone borrowing arrangements.
Historically, the Company has obtained funds from its joint ventures through
chartering arrangements, whereby the Company charters vessels to the joint
ventures for use in joint venture operations, as well as through distributions
from the joint ventures. While the Company
 
                                       31
<PAGE>
 
and the other parties to the joint venture arrangements generally must agree on
the amount of cash flow to be distributed, the joint ventures have historically
distributed to their respective owners cash in excess of estimated working
capital requirements, based on the owners' relative ownership percentages.
 
  The Company believes that the joint ventures provide significant benefits for
the Company. These arrangements have enabled the Company to improve asset
utilization, gain access to specialized facilities and equipment, enter
otherwise protected markets, and benefit from cooperative development of
advanced technologies. Most of the Company's joint ventures are contractually
restricted to operating within certain geographic areas. Although it is
possible for certain joint ventures to compete against the Company, as a
practical matter such competition is minimal due to a lack of overlap of
operations in the geographic areas in which the joint ventures focus their
operations. The Company intends to continue evaluating and pursuing other
strategic joint venture opportunities.
 
  A significant portion of the Company's revenues and operating results is
derived from its foreign operations. As a result, the Company's operations and
financial results could be significantly affected by international factors. See
"Business--Foreign Operations." In addition, the activity in the marine
construction industry is highly seasonal in certain geographic regions and is
affected by adverse weather conditions in those regions during particular times
of the year. Historically, a disproportionate amount of the Company's contract
revenues and net income has been earned during the first three quarters of its
fiscal year and the Company has frequently incurred losses during the fourth
quarter of its fiscal year. See "Business--Backlog; Seasonality."
 
  The Merger created significant opportunities for reduced costs and improved
efficiencies. The Company has taken several significant actions to rationalize
the combined operations of its predecessors and to eliminate substantial
duplicate administrative costs and operating expenses. These actions include
the closing of OPI's headquarters in Houston, Texas, the elimination of
duplicate facilities and redundant administration worldwide, and the disposal
of surplus equipment, either through scrapping or through sales to third
parties. While the Company's results of operations have been positively
impacted by the cost reduction actions taken to date, the Company is still in
the process of consolidating the combined operations, including the development
of plans for additional consolidation of administrative functions and is
evaluating the potential disposition of certain assets deemed to be surplus.
The Company expects to complete these actions in the fiscal year ended March
31, 1997 ("fiscal 1997").
 
RESULTS OF OPERATIONS
 
  The following discussion presents the results of operations of the Company
for the periods indicated and includes the accounts of the subsidiaries,
divisions and controlled joint ventures that McDermott International
contributed to the Company prior to the Merger. For the periods after the
Merger, the discussion includes the accounts and operations of the Company on a
stand-alone basis (including the contribution from OPI's operations from
January 31, 1995). For fiscal years ended March 31, 1993 and 1994, and through
the date of the Merger, certain expenses included in the consolidated financial
statements include charges from McDermott International for direct costs,
allocation of corporate overhead and interest on intercompany debt. Management
believes that the allocation methods were reasonable, and that the allocations
were representative of what costs would have been on a stand-alone basis.
However, the assets, liabilities and capital structure of the Company after the
Merger differ significantly from the assets, liabilities and capital structure
of the Company prior to the Merger (which reflected substantially all of
McDermott International's marine construction services business).
 
 Fiscal Years Ended March 31, 1995 and 1994
 
  During the fiscal year ended March 31, 1995 ("fiscal 1995"), the Company's
revenues decreased by $66,561,000 to $1,127,320,000 compared to $1,193,881,000
for the fiscal year ended March 31, 1994 ("fiscal 1994"), primarily due to
lower volume in worldwide marine and domestic fabrication operations. This
 
                                       32
<PAGE>
 
decrease was partially offset by the inclusion of revenues as a result of the
acquisition of OPI (approximately $44,000,000) on January 31, 1995 and NOS
(which has been renamed as McDermott Subsea Constructors Limited) ($59,644,000
for the full fiscal year) in February 1994, and higher volume in foreign
fabrication and procured materials. See Note 3 to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
 
  The Company's operating income (before general and allocated corporate
expenses of $22,623,000 and equity in income of investees of $22,857,000)
increased $8,753,000 to $78,183,000 from $69,430,000 (before allocated general
corporate expenses of $21,240,000 and equity in income of investees of
$106,593,000) primarily due to improved margins in foreign marine operations,
inclusion of the operating results of NOS for the full fiscal year, and higher
volume in foreign fabrication and procured materials. These increases were
partially offset by higher operating expenses.
 
  The Company's equity in income of investees decreased $83,736,000 to
$22,857,000. Both the HeereMac joint venture and ETPM West performed at lower
levels than in the previous year, as several large contracts were completed in
fiscal 1994. The revenues of these two joint ventures declined from
$895,666,000 to $656,490,000. Most of the HeereMac decline was in the North
Sea. ETPM West also declined in the North Sea but this was partially offset by
increased volume in West Africa. The equity income from these two investees
declined from $106,783,000 to $24,759,000. HeereMac's equity income decreased
as a result of the reduced volume and reduced margins. ETPM West's equity
income also decreased as a result of the reduced volume, but the decrease was
not as severe. ETPM West also had a loss provision of approximately $7,500,000
on a major North Sea contract. Together these two significant joint ventures
accounted for 108% of equity in earnings of investees. No other venture
contributed significantly to the decline. Both joint ventures are expected to
remain at low levels in fiscal 1996 and 1997.
 
  Backlog for the Company at March 31, 1995 and 1994 was $1,097,468,000
(including approximately $46,000,000 from the acquisition of OPI) and
$803,358,000, respectively. Not included in the Company's backlog at March 31,
1995 and 1994 was backlog relating to contracts to be performed by its
unconsolidated joint ventures of approximately $922,000,000 and $700,000,000,
respectively.
 
  The activity of the Company (including its significant investees) depends
mainly on the capital expenditures of oil and gas companies and foreign
governments for developmental construction. These expenditures are influenced
by the selling price of oil and gas along with the cost of production and
delivery, the terms and conditions of offshore leases, the discovery rates of
new reserves offshore, the ability of the oil and gas industry to raise
capital, and local and international political and economic conditions.
 
  Oil company exploration and production budgets in calendar 1995 were
moderately higher than 1994 expenditures. World oil prices in calendar 1994
were below those in 1993. This had a negative impact on near-term marine
construction activities. The composite spot price for natural gas in the United
States was substantially lower in calendar 1994 than in 1993 and has continued
to decline. The Company's markets are expected to be at relatively low levels,
and during fiscal 1996, the overcapacity of marine equipment will continue to
result in a competitive environment and put pressure on profit margins,
including those of the two significant investees.
 
  Interest income increased $5,815,000 to $9,298,000, primarily due to
settlement of claims for interest relating to foreign tax refunds and contract
claims.
 
  Interest expense increased $5,082,000 to $25,158,000, primarily due to
increases in debt obligations (resulting from debt incurred or assumed in
connection with the Merger) and interest rates prevailing thereon.
 
  Other-net income decreased $1,969,000 to $7,028,000, primarily due to
minority shareholder participation in the improved results of the McDermott-
ETPM East, Inc. (one of the operating entities in the ETPM joint venture that
is controlled by the Company ("ETPM East")) partially offset by lower foreign
currency transaction losses.
 
                                       33
<PAGE>
 
  The provision for income taxes decreased $19,165,000 to $8,885,000 while
income before provision for income taxes and cumulative effect of accounting
changes decreased $77,602,000 to $69,585,000. The decrease in the provision for
income taxes is primarily due to a decrease in income from operations. In
addition, the Company operates in many different tax jurisdictions. Within
these jurisdictions, tax provisions vary because of nominal rates, allowability
of deductions, credits and other benefits, and even tax basis (for example,
revenue versus income). These variances, along with variances in the mix of
income within jurisdictions, are often responsible for shifts in the effective
tax rate. During the period, these factors reduced the Company's effective tax
rate to 13% from 19%.
 
  Net income decreased $59,763,000 to $59,374,000. This decrease included the
cumulative effect of the adoption of SFAS No. 112 "Employers' Accounting for
Postemployment Benefits" of $1,326,000, in addition to other items described
above.
 
 Fiscal Years Ended March 31, 1994 and 1993
 
  During fiscal 1994, the Company's revenues decreased by $407,179,000 to
$1,193,881,000 compared to $1,601,060,000 for the fiscal year ended March 31,
1993 ("fiscal 1993"), primarily due to lower volume in worldwide fabrication,
foreign marine operations and procured materials. This decrease reflects a
reduction in the level of capital expenditures by oil and gas companies
resulting from weak worldwide oil and gas prices.
 
  The Company's operating income (before allocated general corporate expenses
of $21,240,000 and equity in income of investees of $106,593,000) decreased
$13,533,000 to $69,430,000 from $82,963,000 (before allocated general corporate
expenses of $22,354,000 and equity in income of investees of $84,973,000),
primarily due to lower volume in worldwide fabrication and engineering
operations and lower volume in procured materials. These decreases were
partially offset by higher margins in foreign marine operations, the
accelerated depreciation and write-off of certain fabrication facilities and
marine construction equipment in the prior year, and reduced operating costs.
 
  The Company's equity in income of investees increased $21,620,000 to
$106,593,000. Improved results of the HeereMac joint venture were partially
offset by lower results of ETPM West. HeereMac's equity income increased
significantly based on improved margins resulting from decreased project and
operating expenses. ETPM West's equity income declined based primarily on
reduced volume in the North Sea and West Africa. Together, these two
significant joint ventures accounted for 100% of equity in earnings of
investees. No other venture significantly contributed to the increase.
 
  Other-net income decreased $3,733,000 to $8,997,000. This decrease was
primarily due to a foreign marine asset casualty gain and gains on the sale of
nineteen tugboats in the prior period. This decrease was partially offset by
minority shareholder participation in the losses of ETPM East in fiscal 1994.
 
  Provision for income taxes decreased $14,710,000 to $28,050,000, while income
before provision for income taxes and cumulative effect of accounting changes
increased $8,671,000 to $147,187,000. The decrease in the provision for income
taxes is primarily due to a reduction in a provision for taxes of $10,000,000
due to a settlement of outstanding issues and higher non-taxable earnings. In
addition, the Company operates in many different tax jurisdictions. Within
these jurisdictions, tax provisions vary because of nominal rates, allowability
of deductions, credits and other benefits, and even tax basis (for example,
revenues versus income). These variances, along with variances in the mix of
income within jurisdictions, are responsible for shifts in the effective tax
rate. During this period, these factors reduced the effective tax rate to 19%
from 31%.
 
  Net income increased $82,126,000 to $119,137,000 reflecting the cumulative
effect of the adoption of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," of $58,745,000 in the prior year,
in addition to other items described above.
 
                                       34
<PAGE>
 
 Nine Months Ended December 31, 1995 and 1994
 
  Revenues increased $134,438,000 to $939,996,000, primarily due to higher
purchased engineered equipment and subcontract activities in the North Sea
related to British Petroleum's Foinaven development program west of the
Shetlands in the North Atlantic, and higher revenues in North America. These
increases were partially offset by lower revenues in the Far East.
 
  Operating income by geographic area decreased $24,339,000 to $42,769,000
primarily due to lower margins because of the completion of higher profit
margin contracts in the Far East and the Middle East in the prior period, and
lower operating income on marine activities in North America due to weather
downtime and margins on certain contracts. These decreases were partially
offset by higher volume and margins on North American fabrication activities,
higher volume and margins on North Sea offshore activities and improved margins
from engineering activities in the current period, and operating losses
associated with the fabrication yard in Scotland (which is now operated by the
Brown & Root McDermott Fabricators Limited joint venture, which was formed in
the last quarter of the prior year and is now reported on the equity method)
and the accelerated depreciation of $4,314,000 on certain marine equipment in
the Far East in the prior period. Other geographic operating income (loss)
includes the amortization of goodwill and covenants-not-to-compete, and higher
employee benefits expenses in the current period which occurred due to the
acquisition of OPI.
 
  Equity in income of investees decreased $12,999,000 to $9,845,000. Both the
HeereMac joint venture and ETPM West performed at lower levels than in the
previous year. The revenues of these two joint ventures declined from
$560,171,000 to $435,488,000, primarily in the U.S. Gulf, the Far East and in
the North Sea, partially offset by increased volume in West Africa. The equity
income from these two joint ventures declined from $22,993,000 to $8,706,000 as
a result of reduced volume and reduced margins. While both joint ventures
performed at low levels during fiscal 1996, worldwide demand for offshore
drilling rigs has increased and has resulted in an increase in the backlog of
these joint ventures. Equity in income of investees also increased due to
income from the Brown & Root McDermott Fabricators Limited joint venture.
 
  Interest income decreased $4,775,000 to $3,339,000 primarily due to the
settlement of claims for interest relating to foreign tax refunds and contract
claims of $4,396,000 in the prior period.
 
  Interest expense increased $16,321,000 to $33,494,000, primarily due to
interest on the notes which were issued to International in connection with its
contribution to the Company, and changes in other debt obligations and interest
rates prevailing thereon.
 
  The provision for income taxes decreased $11,051,000 to $3,979,000 while
income before the provision for income taxes and cumulative effect of
accounting change decreased $54,265,000 to $22,455,000. The decrease in the
provision for income taxes was in part due to a decrease in income and a
reappraisal of liabilities in certain foreign tax jurisdictions. In addition,
the Company operates in many different tax jurisdictions. Within these
jurisdictions, tax provisions vary because of nominal rates, allowability of
deductions, credits and other benefits, and tax basis (for example, revenue
versus income). These variances, along with variances in the mix of income
within jurisdictions, are often responsible for shifts in the effective tax
rate. As a result of these factors, the provision for income taxes was 18% of
pretax income for the nine months ended December 31, 1995 compared to a
provision of income taxes of 20% of pretax income for the nine months ended
December 31, 1994.
 
  Net income decreased $41,888,000 to $18,476,000 reflecting the cumulative
effect of the adoption of SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," of $1,326,000 in the prior year, in addition to the
other items mentioned above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Historically, the Company's cash requirements have been met primarily through
cash generated from operations (including distributions from the Company's
unconsolidated joint ventures), short-term borrowings, and proceeds from asset
sales.
 
                                       35
<PAGE>
 
  In addition to cash flow from consolidated operations, the Company's
liquidity is also partially affected by its ability to obtain a flow of funds
from its unconsolidated joint ventures. Certain of these joint ventures have
substantial indebtedness owing to third parties, some of which is outstanding
pursuant to arrangements that restrict the ability of the Company to obtain
funds from the joint venture.
 
  In general, the Company's working capital position is, to a large extent, a
function of (i) the terms of payment on major contracts entered into with
customers that provide for performance over long periods of time and (ii) the
Company's ability to enter into contracts with subcontractors (who perform
certain specialized functions) and material and equipment suppliers that
contain payment terms that are similar to (or more favorable to the Company
than) the payment terms contained in the major contracts with customers. Work
performed on a contract that has not yet been invoiced to the customer is
generally reflected in contracts in progress, and advances received from
customers for work on contracts not yet performed are generally reflected in
advanced billings on contracts.
 
  At December 31, 1995, the Company had positive working capital of $9,813,000,
an increase of $36,401,000 compared to a working capital deficit of $26,588,000
at March 31, 1995. This increase primarily reflects increases in cash and cash
equivalents and contracts in progress (together with a decrease in advance
billings on contracts), partially offset by increases in short-term debt and
accounts payable.
 
  During the nine months ended December 31, 1995, the Company's cash and cash
equivalents increased by $27,230,000 to $79,454,000 and total debt (including
current maturities) increased by $99,523,000 to $520,039,000, primarily due to
short-term borrowings of $92,413,000 during such period. During this period,
the Company used cash of $65,288,000 in operating activities, $26,583,000 for
additions to property, plant and equipment, $26,518,000 for investment in an
asset held for lease, and $5,911,000 for cash dividends on preferred stock.
 
  The Company's contracts in progress at December 31, 1995 were $174,953,000,
an increase of $120,006,000 from the March 31, 1995 balance of $54,947,000,
while the Company's advanced billings on contracts at December 31, 1995 were
$50,071,000, a decrease of $12,424,000 from the March 31, 1995 balance of
$62,495,000. The Company's accounts payable at December 31, 1995 were
$188,569,000, or $47,193,000 greater than the March 31, 1995 balance of
$141,376,000. The increase in net contracts in progress and advanced billings
on contracts was primarily related to the Company's work on British Petroleum's
Foinaven development project and the timing of billings on contracts performed
in the Far East. The increase in accounts payable was also primarily related to
activities associated with the Foinaven project.
 
  Expenditures for property, plant and equipment decreased $3,541,000 to
$26,583,000 for the nine months ended December 31, 1995 as compared with the
corresponding period last year. These expenditures included $8,669,000 for
installation of a new pipe reel system on a marine construction vessel. In
addition to expenditures for property, plant and equipment, the Company
expended $26,518,000 in the nine months ended December 31, 1995 for the
conversion of a vessel to a floating production unit, which is now leased to a
third party. The vessel conversion was financed by $21,700,000 in loan
facilities, of which $20,674,000 was outstanding at December 31, 1995.
 
  The Company has committed to make capital expenditures of approximately
$9,200,000 and $15,500,000 during the remainder of fiscal 1996 and during
fiscal 1997, respectively. These expenditures will primarily relate to the
purchase of submarine cable lay and maintenance marine equipment. The Company
continues to evaluate its level of capital spending throughout the year based
upon, among other things, cash flow from operations and conditions affecting
the industry. The Company has annual dividend requirements of $7,200,000 on its
Series A Preferred Stock, all of which is held by McDermott International. In
the first nine months of fiscal 1996, all the outstanding shares of Series B
$2.25 Cumulative Convertible Exchangeable Preferred Stock of the Company
("Series B Preferred Stock") were either converted into shares of Common Stock
or redeemed for cash.
 
                                       36
<PAGE>
 
  During the remainder of fiscal 1996 and during fiscal 1997, the Company
expects to obtain funds to meet working capital, capital expenditure, debt
maturity and Series A Preferred Stock dividend requirements from operating
activities and additional asset sales. See "--Recent Events." Leasing
agreements for equipment, which are short-term in nature, are not expected to
impact the Company's liquidity or capital resources.
 
  At December 31, 1995 and March 31, 1995, the Company had available to it
various uncommitted short-term lines of credit from banks totaling $112,302,000
and $119,581,000, respectively. Borrowings by the Company against these lines
of credit at December 31, 1995 and March 31, 1995 were $81,626,000 and
$24,750,000, respectively. The Company also has available borrowing capacity of
up to $150,000,000 under the Credit Facility, of which $60,000,000 was
outstanding at December 31, 1995. The Company is restricted, as a result of the
consolidated tangible net worth covenant in the Credit Facility, in its ability
to transfer funds to McDermott International and its subsidiaries through cash
dividends or through unsecured loans or investments. At December 31, 1995,
approximately $18,000,000 of its net assets was not subject to this
restriction. Accordingly, this restriction is not expected to impact the
Company's ability to make preferred dividend payments for the forseeable
future. See "Description of Certain Indebtedness--Credit Facility."
 
  The Company's unconsolidated joint ventures are largely financed through
their own resources, including, in some cases, stand-alone borrowing
arrangements (although the Company and its joint venture partners have provided
or facilitated additional funding by contributing or lending cash to the joint
ventures or providing guarantees of bank borrowings by the joint ventures). As
of December 31, 1995, the Company's unconsolidated joint ventures had combined
cash and cash equivalents of $173,872,000, short-term debt (including current
maturities of long-term debt) of $86,480,000 (including $11,913,000 owed to the
Company), and long-term debt of $32,573,000 (including $8,379,000 owed to the
Company). Of the debt owed to third parties, approximately $24,600,000 was
guaranteed by the Company. For a discussion of certain borrowing arrangements
to be entered into by the HeereMac joint venture subsequent to December 31,
1995, see "--Recent Events."
 
  The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This standard requires, among other things,
recognition of future tax benefits, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement and income
tax basis of assets and liabilities and to tax net operating loss and foreign
tax credit carryforwards to the extent that realization of such benefits is
more likely than not. The Company has provided a valuation allowance
($41,761,000 at December 31, 1995) for deferred tax assets that cannot be
realized through carrybacks and future reversals of existing taxable temporary
differences. Management believes that remaining deferred tax assets
($17,768,000 at December 31, 1995) are realizable through carrybacks and future
reversals of existing taxable temporary differences. Management will continue
to assess the adequacy of the valuation allowance on a quarterly basis.
 
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
  In March 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," effective for fiscal years beginning after
December 15, 1995. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 also applies
to similar assets that are held for disposal, except for the assets of a
discontinued operation. The Company has not yet finalized its review of the
impact of this statement, but it is not expected to have a material effect on
the Company's consolidated financial statements.
 
  In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Company has not yet finalized its
review of the provisions of this statement, and accordingly, has not yet
determined whether it will adopt
 
                                       37
<PAGE>
 
SFAS No. 123 for expense recognition purposes, or continue to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and make the pro forma information disclosures required under the new standard.
 
EFFECT OF INFLATION AND CHANGING PRICES
 
  Due to the relatively low levels of inflation experienced in fiscal 1993,
1994 and 1995, inflation did not have a significant effect on the Company's
results in such years. In order to minimize the negative impact of inflation on
its operations, the Company attempts to cover the increased cost of anticipated
changes in labor, material and service costs, either through an estimate of
such changes, which is reflected in an original price, or through price
escalation clauses in its contracts. See "Business--Customers."
 
RECENT EVENTS
 
  The Company and Heerema are finalizing the Vessel Sales transaction pursuant
to which each of them will, through their respective subsidiaries, sell to
companies included in the HeereMac joint venture the major marine vessels they
are currently chartering to the joint venture (the Company's DB 101 and DB 102
and Heerema's Hermod and Balder). The Vessel Sales transaction is being entered
into for the primary purpose of more permanently committing these highly
specialized heavy-lift vessels to the HeereMac joint venture, thereby ensuring
long-term maximum utilization of these vessels through continued coordination
of their operations.
 
  Under the proposed terms of the transaction, the Company's vessels will be
purchased for $210.0 million (consisting of cash of $105.0 million and a
promissory note in the principal amount of $105.0 million), and all of the
outstanding stock of the two Heerema subsidiaries that own the Heerema vessels
will be purchased for $210.0 million (consisting of cash of $105.0 million and
a promissory note in the principal amount of $105.0 million). Substantially all
of the cash portion of the combined purchase price will be funded through a
$200.0 million stand-alone credit arrangement being obtained by the HeereMac
joint venture (the "HeereMac Credit Agreement"), which will have an initial
term of five years. In addition, certain other equipment could be sold by the
Company to the joint venture for cash consideration of $30.0 million. The
promissory notes to be received by the Company and Heerema in the Vessel Sales
transaction will be subordinated to all indebtedness outstanding pursuant to
the HeereMac Credit Agreement, will bear interest from the date of issue at the
rate of 7.5% per annum, and will be scheduled to mature on March 31, 2003.
Interest accrued and not paid on such notes will be added to the principal. The
notes will be unsecured and will not contain any financial covenants or cross-
default or cross-acceleration provisions.
 
  The Company expects the Vessel Sales to close in March 1996, as a result of
which the Company will record a deferred gain of approximately $103.0 million,
which it will amortize over 12 years. The Company intends to use approximately
$20.5 million of the cash proceeds it will receive from the Vessel Sales to
repay the Floating Rate Note, and to use the remaining cash proceeds to repay
borrowings under the Credit Facility and for other general corporate purposes,
including working capital requirements for, among other things, projects
reflected in the Company's backlog.
 
                                       38
<PAGE>
 
                                    BUSINESS
 
GENERAL
 
  The Company, together with its joint ventures, operates the world's largest
fully integrated marine construction business, including the largest fleet of
major marine construction vessels in the world. With its fleet of major marine
construction vessels and its geographically dispersed fabrication yards, the
Company supplies a full range of construction services on a worldwide basis to
the offshore oil and gas exploration and production and hydrocarbon
transportation industries. The Company's services include the basic and
detailed design, engineering, fabrication and installation of offshore drilling
and production platforms and other specialized structures, modular facilities,
marine pipelines and subsea production systems. The Company also provides
comprehensive project management services, feasibility studies, engineering
services, subsea trenching services, diving services, and removal, salvage and
refurbishment services for offshore fixed platforms. The Company and its joint
ventures operate throughout the world in all major offshore oil and gas
producing regions, including the Gulf of Mexico, the North Sea, West Africa,
South America, the Middle East, India and the Far East.
 
  The Company was formed in connection with the January 1995 combination of
substantially all the marine construction services business of McDermott
International with OPI through a series of transactions including the Merger.
The Merger was completed for the purposes of improving the ability of the
combined businesses to compete effectively in markets worldwide and allowing
the elimination of duplicative facilities and general and administrative
expenses, thereby giving the combined business a greater ability to realize
profits than would exist for either business as a separate company. McDermott
International was a pioneer in the marine construction services business, with
its marine operations dating back to 1947, when its predecessor, J. Ray
McDermott & Co., Inc., installed the first offshore platform in the Gulf of
Mexico. Over the years, McDermott International's marine construction services
business became established as an industry leader, providing a full range of
marine construction services on a worldwide basis, with significant
capabilities suited for the deepwater and high-end segments of the offshore
exploration and production industry. OPI was organized in 1984 as a marine
construction contractor primarily focused on the offshore installation of
underwater pipelines and other marine construction services, principally to the
middle-market segment of the offshore exploration and production industry. The
Company is a majority-owned subsidiary of McDermott International, which
currently owns approximately 64% of the Company's voting stock.
 
  The typical configuration of marine vessels at an offshore construction site
(usually referred to as a "construction spread") is centered around either a
large derrick vessel, pipelaying vessel, combination derrick-pipelaying vessel
or pipe burying vessel capable of offshore operations for an extended period of
time in remote locations. The Company owns or, through its ownership interests
in joint ventures has interests in, 14 derrick vessels, six pipelaying vessels,
16 combination derrick-pipelaying vessels and three pipe burying vessels
(collectively, the "Combined Fleet"). The lifting capacities of the derrick and
combination derrick-pipelaying vessels in the Combined Fleet range from 250 to
13,200 tons. These vessels range in length from approximately 400 to 660 feet
and are fully equipped with stiff leg or revolving cranes, auxiliary cranes,
welding equipment, pile-driving hammers, anchor winches and a variety of
additional gear. Some of these vessels hold various records for heavy lifts and
installations of deepwater pipelines in different regions of the world. The
largest vessels in the Combined Fleet are the derrick barge DB 102, which is
one of the world's largest semisubmersible derrick vessels in both size and
lifting capacity and provides quarters for approximately 750 workers, and the
LB 200, a semisubmersible pipelaying vessel capable of laying 60-inch diameter
pipe (including concrete coating) and operating in water depths of up to 2,000
feet. To support the operations of these major marine construction vessels, the
Company and its joint ventures also own or lease a substantial number of other
vessels, such as tugboats, utility boats, launch barges and cargo barges.
 
  In addition to its offshore fleet, the Company owns or operates six
fabrication facilities throughout the world. The Company's principal U.S.
fabrication yard is located on 1,114 acres near Morgan City, Louisiana. The
Company also owns or operates fabrication facilities near Corpus Christi,
Texas, near Inverness,
 
                                       39
<PAGE>
 
Scotland, in Indonesia on Batam Island, in Jebel Ali, U.A.E. and in Warri,
Nigeria. The Company's fabrication facilities are equipped with a wide variety
of heavy-duty construction and fabrication equipment, including cranes, welding
equipment, machine tools and robotic and other automated equipment. The Company
has the capability to fabricate a full range of offshore structures, from the
conventional jacket-type fixed platform to deepwater platform configurations
employing compliant-tower, tension leg, floating production platform and spar
technology. The Company also fabricates platform deck structures and modular
components, including complete production processing systems, hydrocarbon
separation and treatment systems, pressure and flow control systems and
personnel quarters.
 
  The Company conducts operations both directly and through its participation
in joint ventures, some of which it manages and others of which are managed by
other marine construction contractors. The Company's joint ventures have
resulted in greater utilization of assets through geographic diversification,
expansion of its significant market presence as a fully integrated contractor
in new markets, greater access to specialized equipment and facilities,
participation in markets that require minimum levels of local ownership, and
cooperative development of advanced technologies. The Company's joint venture
interests include 50% ownership of the HeereMac joint venture, formed with
Heerema, to provide heavy-lift marine installation services on a worldwide
basis. The Company also is engaged in a joint venture with ETPM, a French
contractor, primarily consisting of a series of joint venture operating
companies, most of which are majority-owned and controlled by the Company. The
ETPM joint venture operates one pipelaying vessel and nine combination derrick-
pipelaying vessels in the North Sea, West Africa, South America, the Middle
East, India and the Far East.
 
INDUSTRY OVERVIEW
 
  The Company competes in the marine construction services industry, which
provides design, engineering, fabrication and installation services to the oil
and gas exploration and production and hydrocarbon transportation industries in
connection with the offshore exploration and development of oil and gas. The
industry is comprised of both integrated and specialized marine construction
companies that provide a wide array of services in connection with the
construction and installation of offshore drilling and production platforms and
other specialized structures, related modular facilities, marine pipelines and
subsea production systems. Industry participants include engineering firms,
fabrication yards, subsea equipment manufacturers, pipelaying companies,
shipbuilders and ship and offshore drilling unit owners.
 
  The primary customers in the marine construction services industry are major
and independent oil and gas exploration and production companies, foreign
government-owned energy companies, and hydrocarbon transportation companies.
Consequently, the level of activity in the industry depends primarily on the
capital expenditures of these customers in connection with developmental
construction. These capital expenditures are influenced by such factors as
prevailing oil and gas prices, expectations about future prices, the cost of
exploring for, producing and delivering oil and gas, the sale and expiration
dates of available offshore leases, the discovery rate of new oil and gas
reserves in offshore areas, local and international political and economic
conditions, technological advances, and the ability of oil and gas companies to
generate funds for capital expenditures.
 
  The Company categorizes the market for offshore construction services into
three segments: shallow water (less than 200 feet), deepwater (200 feet to
1,000 feet) and very deep water (1,000 feet or deeper). The Company generally
focuses on projects in deepwater and very deep water, which generally are more
complex, require larger marine construction vessels with greater lifting
capacity, more sophisticated technology and experienced personnel, and which
generally provide greater operating margins than shallow water projects.
Because of the relatively low levels of complexity and capital costs involved
in shallow water marine construction activities, there are a number of
companies with one or more derrick or pipelaying barges capable of operating in
shallow waters. For projects in very deep water or that involve a higher degree
of complexity, competition is more limited.
 
                                       40
<PAGE>
 
  In recent periods, the market for marine construction services has been
relatively weak. This lower level of market activity, combined with the
overcapacity in the industry, has resulted in substantial pressure on pricing
and operating margins. The marine construction business tends to follow the
overall capital expenditure cycles of the oil and gas industry. As a result,
the demand for marine construction services has historically been cyclical.
Moreover, the demand for marine construction services generated by individual
offshore oil and gas development projects is itself cyclical in nature. With
regard to new development projects, the demand for the Company's services
generally follows the exploratory drilling and, in some cases, initial
developmental drilling activities. Based on the results of these activities and
evaluations of field economics, customers determine whether to install new
platforms and new infrastructure, such as gathering lines and pipelines. With
regard to existing development projects, demand for the Company's services is
generated by decisions to, among other things, expand development operations in
existing fields and expand existing infrastructure.
 
  The Company believes, based on industry sources, that calendar year 1996 oil
and gas exploration and production companies' budgets for capital expenditures
relating to deepwater and very deep water projects are, in general, moderately
higher than in 1995. The recent focus in the offshore segment of the oil and
gas industry has been on expanding exploration and development activity in
deepwater and very deep water regions, such as the North Sea, the North
Atlantic and the deepwater regions of the Gulf of Mexico. The increase in
planned exploration and development activities in deepwater and very deep water
regions is primarily attributable to recent improvements in seismic
technologies and subsea completion technologies and production systems and, in
the case of some of the increased activity in the North Sea, recent changes in
the U.K. tax law applicable to offshore exploration and development. These
developments have generally reduced finding costs associated with deepwater and
very deep water reserves and reduced the costs of developing those reserves and
bringing them to market. As technology continues to advance, the Company
expects oil and gas producers to increase their focus in the deepwater and very
deep water regions of the world.
 
COMPANY STRENGTHS
 
  Established name as industry leader. The Company has one of the oldest and
best-known names in the marine construction business, with its operations
dating back to the inception of the offshore oil and gas exploration and
development industry in the Gulf of Mexico. The Company was also among the
first to fabricate structures and facilities for offshore production in the
Middle East, West Africa, Alaska and the North Sea. Today, the Company believes
it is an industry leader because of its experience, size and global presence,
the full range of its service capabilities, its technically advanced equipment
and personnel, its reliability, and its safety record. The Company has
maintained its reputation as a pioneer in the industry through the development
of numerous technological advancements that have significantly impacted the
industry.
 
  Position as the only fully integrated marine construction company providing
services on a worldwide basis. The Company believes that its ability to provide
a full range of marine construction services on a global basis affords the
Company greater opportunities through the expansion of historical relationships
with customers who operate in multiple geographic regions. The Company's
integrated services complement one another and provide opportunities to build
upon. For example, the Company believes that its knowledge and experience
gained in its platform structure and deck module fabrication operations provide
it with significant advantages in the competition for potentially higher-margin
transportation and installation projects.
 
  Position to benefit from the trend towards bundled services. Providing fully
integrated services also gives the Company the ability to meet the demands of
the increasing number of customers who seek single-source solutions to their
marine construction requirements. The Company believes that certain of the
larger customers in the marine construction market are trending towards more
integrated service projects in which a single contractor is responsible, often
in conjunction with several subcontractors, for the complete project scope,
including initial design, engineering, procurement, installation and
commissioning. The Company
 
                                       41
<PAGE>
 
provides single-source turnkey project responsibility for large, complex and
geographically remote projects around the world. The Company believes that its
size, global presence and range of operating assets position it as one of the
strongest competitors in the integrated services market. The Company's
abilities in providing integrated services are demonstrated by the following
recent projects:
 
  .  Shell Oil Company's Auger tension-leg platform project in the deep
     waters of the Gulf of Mexico, for which the Company fabricated the deck
     and topside modules, installed the platform (through the HeereMac joint
     venture) in approximately 2,860 feet of water, and laid the pipe for
     both oil and gas production from the approximately 20 wells being
     produced from the platform.
 
  .  Shell Oil Company's Mars and Ram-Powell projects, two new Gulf of Mexico
     development projects utilizing tension-leg platforms to be installed in
     water depths of over 2,900 feet and 3,200 feet, respectively, for which
     the Company is providing integrated fabrication and installation
     services.
 
  .  British Petroleum's Foinaven development project, for which the Company
     won one of the largest integrated marine construction services contracts
     recently awarded. This project will produce oil from subsea wells into a
     floating production facility. The oil will be offloaded to two tankers
     that will shuttle back and forth between the facility and a terminal.
     The Company fabricated the large turret system for the vessel being
     converted into the floating production facility and has responsibility
     for project management, engineering and all installation work to be
     performed at the project site.
 
  Position to benefit from possible increases in market activity. The Company
generally focuses on projects in deepwater (200 feet to 1,000 feet) and very
deep water (1,000 feet or deeper), which generally are more complex, require
larger marine construction vessels with greater lifting capacity, require more
sophisticated technology and experienced personnel, and provide greater
operating margins than shallow water projects. The Company believes it is well
positioned to benefit from any increases in major marine construction activity
that would result from decisions by oil and gas producers to pursue significant
projects currently under evaluation in different parts of the world, including
additional deepwater and very deep water projects in the North Sea, the North
Atlantic and the Gulf of Mexico and natural gas production projects in the
South China Sea.
 
  Capabilities of equipment, personnel and other resources; position as a
technological leader. Through the operation of its fleet of some of the
largest, most capable marine construction equipment in the world and its
strategically located fabrication facilities, the Company has demonstrated
significant capabilities in all aspects of major marine construction. These
capabilities, combined with the Company's expertise and worldwide presence,
have resulted in the Company's selection as a contractor for some of the
largest and most innovative offshore projects in the world. The most recent of
these projects include three successive record-setting projects for Shell Oil
Company in the deep waters of the Gulf of Mexico, utilizing tension-leg
platforms, and an innovative spar platform for Oryx Energy. The Company is also
providing integrated services and project management for the first phase of
British Petroleum's Foinaven development in the North Atlantic, west of the
Shetland Islands, one of the highest profile offshore development projects
currently underway. In addition, many of the deepwater and very deep water
projects under development today have become possible as a result of recent
advancements in subsea completion technology. The Company has recently expanded
its capabilities in the subsea market through the acquisition of NOS, a subsea
installation and pipelay contractor, and Mentor, a subsea engineering firm.
 
BUSINESS STRATEGY
 
  Capitalize on geographic diversity. The Company's ability to operate in
geographically diverse markets is important to the Company's success. The
Company's customers include many large energy producers operating in various
parts of the world that generate demand for the full range of services provided
by the Company. The ability to provide these services on a global basis
enhances the Company's relationships with these customers and affords the
Company greater opportunities. In addition, geographic diversity permits the
Company to improve the utilization rates for its assets, particularly its major
marine construction vessels.
 
                                       42
<PAGE>
 
By dispersing these vessels in significant hydrocarbon producing regions around
the world, the Company achieves greater utilization by reducing the aggregate
amount of mobilization time required between construction sites. Geographic
diversity also reduces the Company's exposure to regional conditions that may
adversely affect the market for marine construction services within a specific
operating area.
 
  Focus on projects requiring technologically advanced solutions. The Company
utilizes its superior capabilities, equipment and other resources to provide
high-end, technologically advanced solutions for its customers. Through its
subsidiaries and joint ventures, the Company has developed several proprietary
technologies that provide an advantage in competing for work on more
technologically challenging projects, which have greater revenue generating
potential. These include advanced technologies used in compliant-tower platform
structures and modifications to spar platform technology that have resulted in
the first spar platform (which is currently being constructed) ever to be built
for the offshore drilling and production of oil and gas.
 
  Develop leadership in the deepwater and subsea markets. As a result of the
combination of several technological advancements in recent years, including
the development of new seismic technologies and improvements in subsea
completion technologies and production systems, there has recently been a
significant amount of new exploration and development activity in deepwater and
very deep water areas, such as the North Sea, the North Atlantic and the
deepwater regions of the Gulf of Mexico. As technology continues to advance,
the Company expects significant new opportunities to develop in these markets.
The Company's leadership role in deepwater marine construction led to the
Company's being selected as a major contractor for several of Shell Oil
Company's deepwater projects in the Gulf of Mexico, British Petroleum's
Foinaven project in the North Atlantic and Shell's Teal Guillemot project in
the North Sea. The Company intends to capitalize on its recognition as a leader
in the deepwater markets and extend its leadership role to the very deep water
and subsea markets. With the recent acquisitions of NOS and Mentor, together
with the Company's experience base in deepwater environments, the Company
believes it is well positioned to actively participate in the future growth in
these markets.
 
  Utilize joint ventures. The Company believes that its joint venture
operations enhance its ability to compete effectively. The Company's joint
ventures have resulted in greater utilization of assets through geographic
diversification, the development of a significant market presence as a fully
integrated contractor in a greater number of markets, the participation in
markets that require minimum levels of local ownership, and the cooperative
development of advanced technologies. The Company and ETPM have recently
restructured the ETPM joint venture in a transaction pursuant to which the
Company increased its participation in the joint venture by expanding the joint
venture's scope geographically to include, among other areas, the Far East and
to pursue subsea contracting work on a worldwide basis. The Company intends to
continue reviewing additional joint venture opportunities.
 
  Provide turnkey services; partner with customers. The Company intends to
pursue the developing market for turnkey marine construction contracts, which
generally provide for a single contractor to be responsible for the complete
project scope, including engineering, procurement, installation and
commissioning (commonly referred to as "EPIC" contracts). With its position as
the only marine construction company with the capability of providing fully
integrated services on a worldwide basis, the Company is well positioned to
compete for these integrated services contracts. In addition, the Company plans
to continue developing partnering and alliance arrangements with customers for
the management of projects, as appropriate.
 
  Continue to exploit benefits of cost reductions and synergies resulting from
the Merger. With the Merger, the Company solidified its position as the world's
largest fully integrated marine construction company and expanded the Company's
operations into complementary markets. The Merger also created significant
opportunities for cost reductions and operating efficiencies. The Company has
taken several significant actions to rationalize the combined operations of its
predecessors and to eliminate substantial duplicate administrative costs and
operating expenses. These measures include the closing of OPI's headquarters
office in Houston, Texas; the elimination of duplicate facilities and redundant
administration worldwide; and the
 
                                       43
<PAGE>
 
disposal of surplus equipment, either through scrapping or through sales to
third parties. While the Company's results of operations have been positively
impacted by the cost reduction actions taken to date, the Company is still in
the process of rationalizing the combined operations, has developed plans for
additional consolidation of administrative functions and is continuing to
dispose of surplus assets resulting from the Merger. The Company will continue
to exploit the additional market opportunities created by the Merger.
 
DESCRIPTION OF OPERATIONS
 
  The Company's services include the basic and detailed design, engineering,
fabrication and installation of offshore drilling and production platforms and
other specialized structures, modular facilities, marine pipelines and subsea
production systems. The Company also provides comprehensive project management
services, feasibility studies, engineering services, subsea trenching services,
diving services, and removal, salvage and refurbishment services for offshore
fixed platforms.
 
 Design, Construction and Installation of Offshore Platforms
 
  There are two basic types of offshore platforms: fixed and floating. Most
fixed platforms currently in use are of the traditional jacket-type design.
Modern technologies have created a new generation of compliant-tower platforms
for development in very deep waters. Floating platforms are of three basic
types: tension-leg platforms, spar platforms and floating production
facilities. The Company provides design engineering, fabrication and
installation services for each of these types of offshore platforms. The
Company also designs and installs subsea production systems, which are systems
that contain primary well control equipment and rest directly on the ocean
floor.
 
  The selection of the type of offshore platform for a given project (as well
as the specific engineering and design characteristics for the platform)
depends on a number of factors, including the type of hydrocarbons to be
produced, whether additional drilling operations will be conducted
simultaneously with production, estimated production levels, the location of
the field, the depth of the water, weather conditions, characteristics of the
sea floor, earthquake potential and deck load requirements.
 
  Fixed Platforms. A fixed platform is the traditional type of platform used
for the offshore development and production of oil and gas. As of December 31,
1995, approximately 3,830 fixed platforms were installed in the Gulf of Mexico
alone. Most fixed platforms being built today are built to accommodate both
drilling and production operations. These combination platforms are large and
generally more costly than single-purpose structures. Because directional
drilling techniques permit 50 or more wells to be drilled from a single
platform, however, and because drilling and production can take place
simultaneously, these platforms are often more efficient.
 
  The most common type of fixed platform consists of a tubular steel, trussed
structure extending from the mudline on the ocean floor to a point above the
water surface. This structure, commonly referred to as a jacket, is supported
on tubular piling driven deep into the seabed which, in turn, supports the deck
structure located above the level of storm waves. These platforms can be
designed to accommodate multiple functions (including development, production,
separating, gathering, pumping, compression, well support and quartering). They
can be joined by bridges to form complexes of platforms for very large
developments or to improve safety by dividing functions among specialized
platforms. Jacket-type platforms are generally the most viable solution for
water depths of 1,300 feet or less. In general, the construction time for a
jacket can range between eight weeks and 18 months. These structures are
generally sold for between $0.5 million and $100.0 million, depending on their
design, size and other characteristics.
 
  The Company has been an innovator in the design, fabrication and installation
of jacket-type platforms. The Company fabricated and installed the first jacket
over 300 meters tall. Most of the steel for jackets arrives at the Company's
fabrication at the Company's fabrication yards as steel plate. The plate is cut
and rolled
 
                                       44
<PAGE>
 
into tubular sections at rolling mills in the fabrication yards. The tubular
sections (which vary in diameter, sometimes approaching 20 feet) are welded
together in long straight tubes to become legs or into shorter tubes to become
part of the network of bracing that supports the legs. The various cuts in the
fabrication process are made by computer-controlled equipment that receives
instruction from data developed during the design of the structure.
 
  Jackets are built on skidways (which are long parallel rails along which the
jacket will slide when it is transferred to a barge for towing out to sea) and
are generally built in sections so that as much of their fabrication as
possible is done flat on the ground. As each section of legs and bracing is
complete, large crawler cranes (sometimes as many as 30) pick up an entire side
and "roll up" the section, which is then joined to another uprighted section.
When a jacket is complete and ready for launch, it is pulled along the skidway
onto a launch barge, which is gradually deballasted to compensate for the
weight of the structure as more of it moves aboard the barge. With the aid of
ocean-going tugs, the barge and jacket are transported to the installation
site. At the site, the jacket is launched into the sea and turned upright
through controlled flooding of the hollow jacket structure. Then, with the aid
of large derrick barges, the jacket is carefully set into place on the ocean
bottom. With the base of the jacket resting on the bottom and its top
protruding above the surface, a pile driver attached to a derrick barge crane
hammers piles through the hollow jacket legs deep into the sea floor. A portion
of the jacket and pilings extends above the water line to support the deck.
Decks are generally built in modules and installed piece by piece on the
platform with the aid of derrick barges. The composition and quantity of
petroleum in the well stream generally determines the makeup of the production
deck on a processing platform. Typical equipment includes crude oil pumps, gas
and oil separators and gas compressors.
 
  In addition to large amounts of heavy-duty construction equipment,
fabrication of jackets requires facilities that meet certain minimum size and
other physical requirements. Approximately 100 acres of yard area adjacent to a
navigable waterway is needed to build a jacket approximately 1,500 feet long.
Because of the combined weight of the structure and the cranes and the
construction equipment, the entire area must have a minimum load-bearing
capacity of approximately 10,000 pounds per square foot. In addition, the
channel at dockside must be deep enough to match the elevations of the launch
barge and the skidway when the structure is being loaded for transport to its
installation site.
 
  While jacket-type platforms are the most common offshore platforms, their
economical range is generally limited to maximum water depths of between 1,300
and 1,600 feet. A new generation of fixed platforms, known as compliant towers,
is being developed for greater water depths (generally between 1,200 and 3,000
feet). Unlike the traditional fixed platforms, compliant towers are designed to
flex with the forces of waves, wind and current. While there are various
designs for compliant towers (some of which employ technology proprietary to
the Company), these structures will generally use less steel than fixed
platforms of equal size and should therefore be more economical to build. The
Company is a leader in the development of compliant towers. The Company has
bids outstanding for several very deep water development projects that would
involve the fabrication and installation of the first compliant towers in the
industry. The Company will be able to fabricate and install compliant tower
structures utilizing the Company's existing facilities and equipment.
 
  Floating Platforms. Floating platforms provide the capability for development
in very deep waters beyond the limitations of fixed platforms. In addition,
because they are mobile (and can therefore be reused), floating platforms are
sometimes used in water depths that could accommodate fixed platforms,
particularly where the petroleum reservoir has a relatively short production
life.
 
  A tension leg platform ("TLP") consists of a deck that sits atop four or more
separate column-shaped semisubmersible hulls, which are positioned on site with
vertical tendons (pipes) that run from the columns to the sea floor. The
tendons hold the columns partially submerged and are highly tensioned using the
buoyancy of the hulls. This system develops a restoring force against wave,
wind and current actions in proportion to the lateral displacement of the
vessel. Wells for a TLP are often predrilled through a subsea
 
                                       45
<PAGE>
 
template. Long, flexible production risers, which carry the petroleum to the
deck of the TLP, are supported in tension by mechanical tensioner machines on
the platform's deck and are directly subject to wave, wind and current forces.
The Company believes there are five TLPs operating in the world today.
 
  The Company has been a leader in the design, fabrication and installation of
TLPs. The Company fabricated the deck for the first TLP. The latest TLP to be
installed, Shell Oil Company's Auger TLP, was installed in the Gulf of Mexico
in 2,860 feet of water. The Company fabricated the topsides for this platform,
performed the hull-to-topsides mating and installed the platform offshore. The
Company is currently fabricating the topside modules for Shell's Mars and Ram-
Powell TLPs, which are scheduled to be installed at even greater depths in the
Gulf of Mexico in early 1996 and mid-1997, respectively.
 
  A spar platform consists of a vertically floating, large-diameter cylinder
supporting a relatively conventional offshore drilling and production deck. The
structure is positioned at the site with mooring systems that use either piling
or anchors. Wells can be either predrilled or drilled from the platform. The
well risers are supported in tension by individual buoyancy tanks located
inside the hull so that both the risers and the tanks are protected from
waveload forces. The hull of a spar platform can be configured for significant
oil storage, which can be advantageous in locations that lack oilfield
infrastructure. The spar platform concept has historically been used for
auxiliary structures, such as mooring and loading tankers. Recent exploration
successes in very deep waters have led to the design of spar platforms capable
of drilling and production operations in water depths between 1,500 and 6,000
feet. The first of these platforms is currently being constructed for Oryx
Energy, utilizing proprietary technology developed by a joint venture between
the Company and an engineering firm. The Company is fabricating the topside
modules for the Oryx spar, and will be responsible for the installation of the
platform and the related pipeline.
 
  A floating production facility ("FPF") consists of a ship or semisubmersible
vessel upon which drilling and production equipment is mounted. In most cases,
the hull is a converted tanker (often referred to as a floating, production,
storage and offloading ("FPSO") unit), although there have been some situations
in which a semisubmersible drilling unit has been converted or a new hull has
been purpose-built for an FPF. For harsh weather locations, FPFs are designed
with a mooring system that provides weathervaning capability so that the FPF
can be rotated on location to minimize the effects of wave, wind and current
actions. The production risers in these FPFs are connected to the hull through
a swivel or turret system that also accommodates the mooring system. Spread
mooring systems are used in FPFs designed for milder environmental conditions.
FPFs generally utilize subsea completion technology. The hull of an FPF is
typically used for on-board oil storage, which is an important feature for
remote locations where export pipelines are not available and oil storage
availability is limited or nonexistent. The Company's work on British
Petroleum's Foinaven development project demonstrates some of the Company's
capabilities in projects utilizing FPFs. This project will produce oil from
subsea wells into an FPSO. The FPSO will have on-board storage capacity for
310,000 barrels of oil. The oil will be offloaded to two tankers that will
shuttle back and forth between the facility and a terminal. The Company
fabricated the turret system for the vessel being converted into the floating
production facility and has responsibility for project management, engineering
and all installation work to be performed at the project site.
 
  Subsea Completions. Subsea systems provide a means of producing hydrocarbons
with the primary well control equipment located on the sea floor. These systems
are connected to various forms of surface facilities (such as fixed platforms,
TLPs or FPFs), which support the hydrocarbon processing and transportation
operations. Accordingly, these systems are not independent; rather, they must
operate within the limitations imposed by the supporting surface facilities. As
a result of improvements in subsea technologies in recent years, a number of
recent offshore development projects have used subsea completions as the
primary development scheme. This technology has resulted in a significant
amount of recent exploration and development activity in the North Sea. As the
search for oil and gas becomes further expanded into very deep water and into
areas subject to severe weather conditions, and as oil and gas companies seek
to extend the development radius of the existing infrastructure, the Company
expects further technological improvements to subsea systems to develop,
resulting in subsea systems becoming more prevalent.
 
                                       46
<PAGE>
 
  Subsea installations can generally be categorized into one of three types of
completions: single step-outs, templates and clusters. Single step-outs involve
the installation of a single well some distance from a host platform or other
surface facility. Several of these step-out wells may exist, each connected by
its own flowline to the surface facility. Templates are structures that are
installed on the seabed before development drilling begins. A number of wells
are then drilled through the template. The template structure gives positive
location and ensures appropriate geometric layout for post-drilling
installation of a predetermined set of equipment, usually consisting of
christmas trees, manifolds, control modules and chokes and sometimes process
equipment and booster pumps. Templates are particularly suited to, but are not
limited to, locations where it is impractical to use divers to install or
maintain equipment. A cluster is a series of wells drilled in close proximity
to each other without the use of a template. These wells are completed with
individual christmas trees and are connected to a central gathering spot or
manifold. Interconnection of subsea components is accomplished through
flowlines, control umbilicals and power umbilicals. Interconnection between
subsea systems and surface facilities is accomplished through various riser
configurations designed to accommodate installation and operational
requirements of the production systems.
 
  In addition to installing the pipelines and flowlines used in connection with
subsea systems, the Company also installs templates, production risers and
various hardware packages for subsea completions, including wellhead control
pods, manifolds, umbilicals and well protection structures.
 
 Offshore Pipeline Installation
 
  The efficient development of an offshore field frequently involves the
addition or extension of an infrastructure of gathering lines and pipelines. In
those environments where they are feasible, offshore pipelines are generally
the safest and most efficient way to bring oil and gas to shore. Some offshore
pipelines lead to offshore gathering stations where the hydrocarbons are
separated and treated, put back into a pipeline, and routed to shore for
further processing. Other lines terminate onshore at tank farms where liquid
hydrocarbons are stored for distribution to refineries. With its fleet of
pipelaying, combination derrick-pipelaying and pipe burying vessels, the
Company is a leading provider of offshore pipeline installation services.
 
  The Company's pipelaying vessels and combination derrick-pipelaying vessels
are highly specialized vessels, capable of installing pipelines of various
diameters using different pipelaying methods. Some of the Company's pipelaying
vessels employ conventional S-lay technology, while others employ more advanced
J-lay or reel-lay technologies. The Company's pipe burying vessels are used to
bury the pipe beneath the ocean floor in locations where applicable
environmental regulations require it or where it is necessary to protect the
pipe from potential damage from anchors. These services are particularly
important in the United States markets, where regulations of the United States
Department of Interior--Minerals Management Service (the "MMS") require all
offshore oil and gas pipelines greater than 8.75 inches in diameter located in
water depths of 200 feet or less to be buried three feet below the sea floor.
 
  S-Lay, or conventional pipeline installation, involves the sequential
assembly of pipeline joints through an assembly line of welding stations that
runs the length of the pipelaying vessel and goes off the stern and into the
water via a ramp that is referred to as a stinger. The stinger supports the
pipe to some distance under the water and prevents over-stressing as it curves
from a horizontal position downward toward the sea floor. The suspended pipe
forms an elongated "S" shape as it undergoes a second bend above the contact
point on the sea floor. As the pipelaying vessel moves forward, it pulls a plow
that digs a trench along the sea floor, into which the pipeline settles. During
the pipelaying process, divers regularly inspect the pipeline to ensure that
there are no obstructions on the sea floor, that the stinger is providing
proper support and that the pipeline is settling correctly. The S-lay method is
generally considered a shallow-water pipeline construction method, although the
Company has employed this method in water depths of up to 2,400 feet (and the
Company believes this method could be used in up to 3,000 feet of water).
Twenty-three of the Company's pipelaying vessels and combination derrick-
pipelaying vessels use the S-lay method.
 
                                       47
<PAGE>
 
  The J-lay technique involves the assembly of pipeline joints in a near-
vertical position, eliminating the initial bend in the pipeline and thereby
substantially reducing the bending stresses on the pipeline as it is lowered to
the sea floor. This method is more suited to deeper water depths than the S-lay
method. However, because it involves the use of only one workstation for
welding, weld testing and joint coating, the J-lay technique is generally
slower than the S-lay method. In order to maximize productivity in its J-lay
operations, the Company's vessels employing this technique use "long joints" of
pipe of 50 or more meters, together with automated pipe-handling equipment. The
J-lay system is modular and can be moved from one vessel to another as
operational demands may require. The Company has two modular J-lay units.
 
  The reel-lay technique involves the onshore assembly of long pipeline
segments that are wound onto a large reel. The loaded reel is transported to
the installation site, and the coiled pipeline segment is unwound from the
reel, straightened and lowered to the seabed at a high lay rate. The reel-lay
method reduces labor costs by permitting much of the welding, x-raying, coating
and testing to be accomplished onshore, where labor costs are generally lower
than comparable labor costs offshore. This technique is used in both shallow
and deepwater installations, but is generally restricted to installations, such
as gas gathering systems, using small pipe diameters (up to approximately 12
inches). One of the Company's pipelaying vessels is a specialized vessel,
exclusively designed to employ the reel-lay method. The Company has two other
modular reel-laying units that it can use on different vessels.
 
 Maintenance and Removal of Platforms.
 
  The Company is actively involved in setting platform drilling units for
offshore workovers and other maintenance activities, as well as platform
removal, salvage and refurbishment operations. Over the course of the producing
life of an offshore field, the field may require workover operations and the
field's platform structures will require periodic maintenance, which may
involve upgrading equipment and adding to facilities as new technology
develops. At the end of a field's productive life, the platform structures
installed in the field must be removed, generally in order to comply with
applicable environmental laws. The Company expects an increase in the demand
for its derrick vessels in removal operations throughout the world
(particularly in the Gulf of Mexico), as long-producing fields reach their
maturity.
 
  In fixed platform removal operations, derrick barges are used to remove
equipment and deck sections, which are typically off-loaded to barges and
transported back to shore. The platform's piles are cut (usually below the
ocean floor), and the platform is lifted onto a barge for towing to shore or to
a suitable site where it may be sunk in order to form an artificial reef and a
habitat for marine life. A recovered platform may be salvaged for its steel or
refurbished and re-installed in another field.
 
JOINT VENTURE OPERATIONS
 
  The Company conducts significant operations through joint ventures with other
marine construction contractors. The Company believes that its joint venture
operations enhance its ability to compete effectively. The Company's joint
ventures have resulted in greater utilization of assets through geographic
diversification, the development of a significant market presence as a fully
integrated contractor in a greater number of markets, the participation in
markets that require minimum levels of local ownership, and the cooperative
development of advanced technologies. The Company's most significant joint
ventures include the HeereMac joint venture and the ETPM joint venture.
 
  The HeereMac joint venture was formed with Heerema in January 1989 in order
to consolidate and more efficiently utilize the specialized, heavy-lift marine
construction vessels owned by the two parties and operated in different parts
of the world. Each party has a 50% interest in the joint venture, and Heerema
has responsibility for its day-to-day operations (although significant
decisions relating to the joint venture generally require the approval of the
Company). Each party to the joint venture is currently chartering two
semisubmersible derrick vessels to the joint venture, with the largest being
the Company's DB 102, which has a lift capacity of 13,200 tons. In addition,
during March 1995, the Company sold the derrick barge DB 51
 
                                       48
<PAGE>
 
for $9.1 million in cash and effectively contributed the semisubmersible vessel
DB 100 to the joint venture. The Company and Heerema are finalizing a
transaction pursuant to which each of them will sell to the joint venture the
vessels they are currently chartering to the joint venture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Recent Events."
 
  The Company's initial joint venture with ETPM was formed in April 1989 to
provide general marine construction services to the petroleum industry in West
Africa, South America, the Middle East and India and offshore pipelaying
services in the North Sea. With the addition of two new joint venture operating
companies in March 1995, the Company and ETPM have expanded the ETPM joint
venture's operations to include the Far East region and to begin jointly
pursuing subsea contracting work on a worldwide basis. Most of the operating
companies in the ETPM joint venture are majority-owned and controlled by the
Company. However, the operations of ETPM West, which conducts operations in the
North Sea, South America and West Africa, are controlled by ETPM. ETPM has
dedicated all of its marine construction assets to the joint ventures with the
Company, including three combination derrick-pipelaying vessels and fabrication
yards in Sharjah, U.A.E. and Tchengue, Gabon. The Company currently charters
six combination derrick-pipelaying vessels and one pipelaying vessel to the
joint ventures and provides the use of its facilities in Jebel Ali and Ras-al-
Khaimah in the U.A.E., Batam Island, Indonesia and Warri, Nigeria.
 
  The Company has announced the formation of a new equally owned joint venture
(the "Engineering Joint Venture") with McDermott International (to be effective
April 1, 1996), which will perform engineering, procurement and project
development services for the Company, McDermott International and third
parties. Under the new arrangement, substantially all of the employees of
McDermott International's construction engineering subsidiary, Delta Hudson
Engineering Corporation, will become employees of the Company and will work on
projects undertaken by the Engineering Joint Venture. It is expected that the
Engineering Joint Venture will be the preferred engineering contractor to the
Delta Hudson International subsidiaries of McDermott International for onshore-
related work and to the Company for offshore-related work.
 
  The Company participates in numerous other joint ventures (including 49%-
owned joint ventures in Mexico and Malaysia) involving operations in foreign
countries that require majority-ownership by local interests. Through a
subsidiary, the Company also participates in an equally owned joint venture
with the Brown & Root Energy Services unit of Halliburton Company ("Brown &
Root"), which was formed in February 1995 to coordinate the operations of the
Company's and Brown & Root's fabrication facilities in Scotland and to improve
their efficiency.
 
  Historically, the Company has obtained funds from its joint ventures through
chartering arrangements, whereby the Company charters vessels to the joint
ventures for use in joint venture operations, as well as through distributions
from the joint ventures. While the Company and the other parties to the joint
venture arrangements generally must agree on the amount of cash flow to be
distributed, the joint ventures have historically distributed to their
respective owners cash in excess of estimated working capital requirements,
based on the owners' relative ownership percentages.
 
  The joint ventures are largely financed through their own resources,
including, in some cases, stand-alone borrowing arrangements. Occasionally, the
Company and the other joint venturers have provided or facilitated additional
funding by contributing or lending cash to the joint ventures or providing
guarantees of bank borrowings by the joint ventures. In addition, the Company
frequently provides guarantees to customers of the joint ventures relating to
work to be performed on joint venture projects. To date, none of these
performance guarantees has ever been acted upon. As of December 31, 1995, the
Company's unconsolidated joint ventures had combined outstanding borrowings
under their respective credit arrangements of approximately $114.1 million,
including approximately $20.3 million owed to the Company and the other joint
venturers, respectively. Of the borrowings from third parties, approximately
$24.6 million was guaranteed by the Company. In addition, the HeereMac joint
venture will enter into the HeereMac Credit
 
                                       49
<PAGE>
 
Agreement in late March 1996, pursuant to which the joint venture will borrow
$200.0 million to finance substantially all of the combined purchase price
under the Vessel Sales transaction. Such borrowings will not be guaranteed by
the Company, but will be secured by the vessels included in the Vessel Sales
transaction and certain other assets of the HeereMac joint venture. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Events."
 
  The Company's various joint venture arrangements provide for differing
treatment in the allocation of work between the Company and the joint ventures.
For example, the HeereMac joint venture has worldwide operations and the joint
venture agreement does not contain any mechanism for allocating work between
the Company and the joint venture. Consequently, in some circumstances, the
Company may compete directly against the HeereMac joint venture in bids for the
same contract. By contrast, operations of the ETPM joint venture are generally
restricted to operating within geographic regions, and, under the agreements
relating to the joint venture, each of the Company and ETPM has generally
committed to confine its operations in those regions to work completed through
the joint venture's operating companies. Taken as a whole, the Company believes
its joint venture operations enhance its ability to compete effectively, and
the Company intends to continue reviewing additional joint venture
opportunities.
 
MARINE CONSTRUCTION VESSELS AND PROPERTIES
 
  The following table sets forth certain information with respect to the major
marine construction vessels utilized to conduct the Company's marine
construction business, including their location at March 31, 1996 (except where
otherwise noted, each of the vessels is owned and operated by the Company):
 
<TABLE>
<CAPTION>
                                                                                 MAXIMUM
       LOCATION                                              YEAR     MAXIMUM      PIPE
         AND                                                ENTERED DERRICK LIFT DIAMETER
     VESSEL NAME          FLAG           VESSEL TYPE        SERVICE    (TONS)    (INCHES)
---------------------- ----------- ------------------------ ------- ------------ --------
<S>                    <C>         <C>                      <C>     <C>          <C>
UNITED STATES
  DB 50 (a)            Panama      Derrick                   1988       4,000       --
  DB 28                U.S.A.      Pipelay/Derrick           1969         860       40
  LB 280 (b)           U.S.A.      Pipelay                   1973          --       48
  DB 16 (c)            U.S.A.      Derrick                   1967         860       --
  DB 23                U.S.A.      Derrick                   1969         750       --
  SLC 5000             U.S.A.      Shearleg Crane            1976       5,000       --
  OPI 2500 (d)         U.S.A.      Shearleg Crane            1966       1,600       --
  BB 356               U.S.A.      Pipe Bury                 1974          --       --
  Ocean Builder (e)    Vanuatu     Derrick                   1975       2,000       --
  BB 316 (b)           U.S.A.      Pipe Bury                 1974          --       --
  Balder (f)           Panama      Semi-Submersible Derrick  1978       7,000       --
  LB 30                U.S.A.      Pipelay                   1975          --       60
EUROPE
  DB 101 (g)           Panama      Semi-Submersible Derrick  1978       3,500       --
  DB 102 (a)(g)        Panama      Semi-Submersible Derrick  1985      13,200       --
  LB 200 (h)           Panama      Semi-Submersible Pipelay  1975          --       60
  MV Norlift (a)       Bermuda     Pipelay                   1977          --       10
  MV Northern Explorer
   (a)                 Cayman Isl. Pipe Bury                 1984          --       --
  ETPM 1601 (i)        France      Pipelay/Derrick           1974       2,000       60
WEST AFRICA
  DLB 1 (b)            Vanuatu     Pipelay/Derrick           1956         250       24
  LB Pipeliner 6       Vanuatu     Pipelay                   1969          --       16
  Polaris (i)          Panama      Pipelay/Derrick           1979       1,300       60
</TABLE>
                                             (Table continued on following page)
 
                                       50
<PAGE>
 
<TABLE>
<CAPTION>
                                                                             MAXIMUM
      LOCATION                                           YEAR     MAXIMUM      PIPE
        AND                                             ENTERED DERRICK LIFT DIAMETER
    VESSEL NAME        FLAG          VESSEL TYPE        SERVICE    (TONS)    (INCHES)
-------------------- --------- ------------------------ ------- ------------ --------
<S>                  <C>       <C>                      <C>     <C>          <C>
MEXICO
  DB 15              Indonesia Pipelay/Derrick           1966        860        40
  DB II (j)          Vanuatu   Derrick                   1966        600        --
  Mixteco (k)        Mexico    Pipelay/Derrick           1972        800        --
  Huasteco (k)       Mexico    Pipelay/Derrick           1976      2,000        48
  Olmeca II (k)      Mexico    Pipelay                   1969         --        --
  Sara Maria (j)     Mexico    Derrick                   1965        550        --
MIDDLE EAST
  DB 27 (h)          U.S.A.    Pipelay/Derrick           1974      2,400        60
  ETPM 801 (i)       Panama    Pipelay/Derrick           1978        900        56
FAR EAST
  Hermod (f)         Panama    Semi-Submersible Derrick  1978      5,000        --
  DLB KP1 (b)(h)     Vanuatu   Pipelay/Derrick           1974        800        60
  DB 26 (h)          Panama    Pipelay/Derrick           1975        900        60
  DB 17 (h)          Panama    Pipelay/Derrick           1969        860        60
  Teknik Pada (h)    Malaysia  Pipelay/Derrick           1966      1,100        60
  Teknik Perdana (h) Malaysia  Pipelay/Derrick           1971        925        60
  DB 51 (l)          Panama    Derrick                   1976      3,000        --
  DB 100 (l)         Panama    Semi-Submersible Derrick  1979      2,000        --
  DLB 423            U.S.A.    Pipelay/Derrick           1974        750        60
SOUTH AMERICA
  DB 21              Panama    Pipelay/Derrick           1969      1,000        40
</TABLE>
--------
(a) Vessel with dynamic positioning capability.
(b) Vessels subject to minimum value maintenance requirements under the 12 7/8%
    Guaranteed Senior Notes due 2002 issued by one of the Company's
    subsidiaries.
(c) Owned by the Company and operated for the Company's benefit by McDermott
    International's joint venture (the "CMM Joint Venture") with
    Constructucciones Maritimas Mexicanas, S.A. de D.V. ("CMM") pursuant to
    short-term charter.
(d) This vessel has suffered irreparable damage to its crane boom; its shearleg
    and equipment are intact.
(e) Chartered by the Company with an option to purchase the vessel at the end
    of the five-year charter term (February 24, 1999).
(f) Owned by Heerema and operated by the HeereMac joint venture pursuant to a
    charter. These vessels are to be transferred to the HeereMac joint venture
    as part of the Vessel Sales transaction.
(g) Owned by the Company and operated by the HeereMac joint venture pursuant to
    a charter. These vessels are to be transferred to the HeereMac joint
    venture as part of the Vessel Sales transaction.
(h) Owned by the Company and operated by the ETPM joint venture pursuant to a
    charter.
(i) Owned by ETPM and operated by the ETPM joint venture pursuant to a charter.
(j) Owned by the Company and chartered to the Company's joint venture with
    Grupo Consorcio de Fabricaciones y Construcciones pursuant to a short-term
    charter.
(k) Owned by CMM and operated by the CMM Joint Venture.
(l) Owned and operated by the HeereMac joint venture.
 
                                       51
<PAGE>
 
  The Company also owns or leases a substantial number of other vessels, such
as tugboats, utility boats and cargo barges to support its major marine
vessels. In connection with its construction and pipelaying activities, the
Company conducts diving operations which, because of the water depths involved,
require sophisticated equipment, including saturation diving systems and an
underwater habitat.
 
  Under applicable governmental regulations, the Company's insurance policies
and certain of the Company's financing arrangements, the Company is required to
maintain its vessels in accordance with standards of seaworthiness and safety
set by government regulations or classification organizations. The Company
maintains its fleet to the standards for seaworthiness, safety and health set
by the American Bureau of Shipping, Net Norske Veritas and other world-
recognized classification societies.
 
  In addition to its offshore fleet, the Company owns or operates six
fabrication facilities throughout the world. The Company's principal U.S.
fabrication yard is located on approximately 1,114 acres of leased property
near Morgan City, Louisiana. The Company also owns fabrication facilities on
approximately 218 acres of land near Corpus Christi, Texas and on approximately
817 acres of land in Scotland, near Inverness. In addition, the Company
operates fabrication facilities in Indonesia on Batam Island and at Jebel Ali,
U.A.E. The fabrication facility in Scotland is operated by Brown & Root
McDermott Fabricators Limited, an equally owned joint venture company formed by
the Company and Brown & Root. Brown & Root's fabrication yard at Nigg, Scotland
is also operated by this joint venture. Through the ETPM joint venture,
additional fabrication facilities in the U.A.E. and West Africa are available
to meet the Company's needs.
 
  The Company's fabrication facilities are equipped with a wide variety of
heavy-duty construction and fabrication equipment, including cranes, welding
equipment, machine tools and robotic and other automated equipment. Operations
at the Company's fabrication facilities in Morgan City, Louisiana, Inverness,
Scotland, Jebel Ali, U.A.E. and Batam Island, Indonesia have been awarded ISO
9000 certification. ISO 9000 is an internationally recognized verification
system for quality management.
 
  The following table sets forth the expiration dates, including renewal
options, of the leases covering land (together with the amount of acreage) for
the Company's leased fabrication facilities.
 
<TABLE>
<CAPTION>
                                                                      EXPIRATION
                             FACILITY                         ACREAGE    DATE
                             --------                         ------- ----------
      <S>                                                     <C>     <C>
      Morgan City, Louisiana.................................  1,114  2001-2032
      Jebel Ali, U.A.E.......................................   130      2005
      Batam Island, Indonesia................................   129      2008
      Warri, Nigeria.........................................   50       2065
</TABLE>
 
  The Company also occupies office space in New Orleans, Louisiana and Houston,
Texas under an arrangement with McDermott International (see "Certain
Transactions and Relationships--Other Transactions with McDermott
International") and leases office space in London, England, which serve as the
Company's executive offices and as bases for coordination of all of the
Company's operational activities.
 
COMPETITION
 
  The marine construction services business is highly competitive and in recent
years has been characterized by overcapacity, which has resulted in substantial
pressure on pricing and operating margins (as is generally reflected in the
downward trend in the Company's earnings in the current and immediately
preceding fiscal years). The Company expects the overcapacity in the industry
to continue for the foreseeable future. Contracts for marine construction
services are usually awarded on a competitive bid basis. Although the Company
believes customers consider, among other things, the availability and technical
capabilities of equipment and personnel, efficiency, condition of equipment,
safety record and reputation, price competition
 
                                       52
<PAGE>
 
is currently a primary factor in determining which qualified contractor with
available equipment is awarded a contract. Major marine construction vessels
have few alternative uses and, because of their nature and the environment in
which they work, have relatively high maintenance costs whether or not
operating. Because these costs are essentially fixed, and in order to avoid
additional expenses associated with temporarily idling, or "stacking," its
vessels, the Company may from time to time be required to bid its vessels out
for hire at less than attractive rates, depending on the prevailing contractual
rates in a given region.
 
  The Company believes it is the only marine construction contractor capable of
providing the full range of marine construction services in all major offshore
oil and gas producing regions of the world. The Company believes that the
substantial capital costs involved in becoming a full-service marine
construction contractor create a significant barrier to entry into the market
as a global, fully integrated competitor. The Company does, however, face
substantial competition from regional competitors and less integrated providers
of marine construction services, such as engineering firms, fabrication yards,
pipelaying companies, shipbuilders and ship and offshore drilling unit owners.
 
CUSTOMERS
 
  The Company's customers are primarily major and independent oil and gas
exploration and production companies, foreign government-owned energy
companies, and hydrocarbon transportation companies. The following is a list
(in alphabetical order) of the Company's ten largest customers during fiscal
1995:
 
  Britoil Plc
  Conoco, Inc.
  Enserch Exploration Inc.
  Exxon Corporation
  Golar Nor a/s
  Marathon Oil Company
  Qatar Liquefied Gas Co.
  Shell Oil Company
  Total Exploration & Production
  Woodside Offshore Petroleum Pty. Ltd.
 
  The Company is not dependent on any one customer. Different customers have
been the Company's largest customer for each of the last three fiscal years in
the period ending March 31, 1995, and no single customer has accounted for
greater than 10% of the Company's annual consolidated revenues more than once
during such three-year period. The level of construction services required by
any one customer depends upon the amount of that customer's capital expenditure
budget devoted to construction in any single year. Consequently, customers that
account for a significant portion of revenues in one fiscal year may represent
an immaterial portion of revenues in subsequent fiscal years.
 
  Because of the nature of the offshore marine construction industry, a
substantial number of the Company's projects are currently performed on a
fixed-price basis, although some projects are performed on a cost-plus or day-
rate basis or some combination of the foregoing. The Company attempts to cover
increased costs of anticipated charges in labor, material and service costs of
long-term contracts, either through an estimate of such charges, which is
reflected in the original price, or through price escalation clauses. Despite
these attempts, however, the revenue, cost and gross profit realized on a
fixed-price contract will often vary from the estimated amounts because of
changes in job conditions and variations in labor and equipment productivity
over the term of the contract. These variations and the risks generally
inherent in the marine construction industry may result in gross profits
realized by the Company being different from those originally estimated and may
result in the Company experiencing reduced profitability or losses on projects.
Depending on the size of a project, these variations from estimated contract
performance could have a significant effect on the Company's operating results
for any particular fiscal quarter or year.  In general, turnkey contracts to be
performed on a fixed-price basis involve an increased risk of significant
variations, as a result of the long-
 
                                       53
<PAGE>
 
term nature of such contracts (and the inherent difficulties in estimating
costs) and the interrelationship of the integrated services to be provided
under such contracts (where unanticipated costs or delays in performing part of
the contract could have compounding effects by increasing costs of performing
other parts of the contract). As a result, in connection with its work for more
complex, very deep water installations involving long-term commitments, the
Company generally seeks to negotiate contract terms such that the Company is
not at risk for cost overruns.
 
  The Company's contract revenues are recognized on a percentage of completion
basis. Accordingly, contract price and cost estimates are reviewed periodically
as the work progesses, and adjustments proportionate to the percentage of
completion are reflected in income in the period when such estimates are
revised. To the extent that these adjustments result in a reduction or
elimination of previously reported profits with respect to a project, the
Company would recognize a charge against current earnings, which could be
material.  Most long-term contracts have provisions for progress payments.
 
  The Company's arrangements with customers frequently require the Company to
provide letters of credit or bid and performance bonds to secure bids or
performance under contracts for marine construction services. While these
letters of credit and bonds may involve significant dollar amounts,
historically there have been no material payments to the Company's customers
under these arrangements. These arrangements are typical in the industry and
generally do not involve significant cost to obtain.
 
RAW MATERIALS
 
  The raw materials used by the Company in its operations, such as carbon and
alloy steel in various forms, welding gases, concrete, fuel oil and gasoline,
are available from many sources and the Company is not dependent upon any
single supplier or source. Although shortages of certain of these raw materials
and fuels have existed from time to time, no serious shortage exists at the
present time.
 
FOREIGN OPERATIONS
 
  The Company has substantial operations outside the United States, both
directly and through its joint ventures. For information regarding revenues,
operating income and identifiable assets in the different geographic regions in
which the Company operates, see Note 14 to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
 
  The Company's operations in some parts of the world are subject to certain
political, economic and other uncertainties not encountered in domestic
operations, including, among others, risks of war, expropriation or
nationalization of assets, renegotiation or nullification of existing
contracts, changing political conditions, changing laws and policies affecting
trade and investment, overlap of different tax structures, and the general
hazards associated with the assertion of foreign sovereignty over certain areas
in which operations are conducted. Because the Company's major marine vessels
typically require relatively long periods of time to mobilize over long
distances, the Company may be particularly susceptible to regional conditions
that may adversely affect its operations. The Company's foreign operations
sometimes face the additional risks of fluctuating currency values, hard
currency shortages and controls of foreign currency exchange. The Company
attempts to limit its exposure to foreign currency fluctuations by attempting
to match anticipated foreign currency contract receipts with anticipated like
foreign currency disbursements during contract negotiations. To the extent that
it is unable to match the anticipated foreign currency receipts and
disbursements related to its contracts, the Company enters into forward
exchange contracts to hedge foreign currency transactions on a continuing basis
for periods consistent with its committed exposures. Because the Company
generally does not hedge beyond its contract exposure, the Company believes
this practice minimizes the impact of foreign exchange rate movements on the
Company's operating results.
 
                                       54
<PAGE>
 
BACKLOG; SEASONALITY
 
  As of December 31, 1995, the Company's backlog amounted to approximately
$734.3 million. It is expected that approximately $245.5 million of this
backlog will be recognized in revenues in fiscal 1996, $433.2 million in fiscal
1997 and $55.6 million thereafter. The following table sets forth detail
relating to the Company's backlog as of March 31, and December 31, 1995 by
geographic region:
 
<TABLE>
<CAPTION>
                                                           12/31/95   3/31/95
                                                           --------  ----------
                                                             (IN THOUSANDS)
      <S>                                                  <C>       <C>
      North and South America............................. $300,243  $  218,661
      North Sea and West Africa...........................  204,422     420,810
      Middle East and India...............................   71,359      99,698
      Far East............................................  159,636     225,031
      Other...............................................   (1,406)     38,768
                                                           --------  ----------
        Total backlog..................................... $734,254  $1,002,968
                                                           ========  ==========
</TABLE>
 
  Not included in the Company's backlog at December 31, 1995 and March 31, 1995
was backlog relating to contracts to be performed by its unconsolidated foreign
joint ventures of approximately $1.24 billion and $922.0 million, respectively.
 
  While fabrication projects are typically awarded substantially in advance of
performance as a result of required lead time for procurement, the marine
construction industry is highly seasonal in certain geographic regions. Because
of the more conducive weather conditions, most installation operations are
conducted in the warmer months of the year in those areas, and many of these
contracts are awarded with only a short period of time before the desired time
of project performance. As a result, a disproportionate amount of the Company's
contract revenues and net income has been earned during the first three
quarters of its fiscal year and the Company has frequently incurred losses
during the fourth quarter of its fiscal year.
 
PATENTS
 
  The Company owns or has exclusive rights to use, for marine construction
purposes, a number of patents relating to offshore platform design, fabrication
and installation and pipelaying operations. Although in the aggregate these
patents are important to the Company, the Company does not consider any single
patent to be of a critical or essential nature. In general, the Company depends
on its technological capabilities and the application of know-how rather than
patents in the conduct of its business.
 
GOVERNMENTAL REGULATION
 
 General
 
  Many aspects of the Company's operations and properties are affected by
domestic and foreign political developments and are subject to both domestic
and foreign governmental regulations, including those relating to the
construction, operation and equipping of production platforms and other marine
facilities, vessel and worker safety, currency conversions and repatriation,
oil exploration and development, taxation of foreign earnings and earnings of
expatriate personnel, use of local employees and suppliers by foreign
contractors and the protection of the environment. In addition, the Company
depends on the demand for its services from the oil and gas industry and,
therefore, is affected by changing taxes, price controls and other laws and
regulations relating to the oil and gas industry generally. The ability of the
Organization of Petroleum Exporting Countries to meet and maintain production
targets also influences the demand for the Company's services. The adoption of
laws and regulations curtailing exploration and development drilling for oil
and gas for economic and other policy reasons would adversely affect the
Company's operations by limiting demand for marine construction services. The
Company cannot determine to what extent future operations and earnings of the
Company may be affected by new legislation, new regulations or changes in
existing regulations.
 
                                       55
<PAGE>
 
  The Company is required by various other governmental and quasi-governmental
agencies to obtain certain permits, licenses and certificates with respect to
its operations. The kinds of permits, licenses and certificates required in the
Company's operations depend upon a number of factors. The Company believes that
it has or can obtain all permits, licenses and certificates necessary for the
conduct of its business.
 
  The exploration and development of oil and gas properties on the continental
shelf of the United States is regulated primarily under the Outer Continental
Shelf Lands Act and regulations promulgated thereunder. These laws require the
construction, operation and removal of offshore production facilities located
on the Outer Continental Shelf of the United States to meet stringent
engineering and construction specifications. Similar regulations govern the
plugging and abandoning of wells located on the Outer Continental Shelf of the
United States and the removal of all production facilities. Violations of
regulations issued pursuant to the Outer Continental Shelf Lands Act and
related laws can result in substantial civil and criminal penalties as well as
injunctions curtailing operations. The Company believes that its operations are
in material compliance with these and all other regulations affecting the
conduct of its business on the Outer Continental Shelf of the United States.
 
 Environmental
 
  The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent foreign, federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes, the
remediation of soil and groundwater contaminated by hazardous substances and
the health and safety of employees. Sanctions for noncompliance may include
revocation of permits, corrective action orders, administrative or civil
penalties, and criminal prosecution. Certain environmental laws provide for
strict, joint and several liability for remediation of spills and other
releases of hazardous substances, as well as damage to natural resources. In
addition, companies may be subject to claims alleging personal injury or
property damage as a result of alleged exposure to hazardous substances. Such
laws and regulations may also expose the Company to liability for the conduct
of or conditions caused by others, or for acts of the Company that were in
compliance with all applicable laws at the time such acts were performed.
 
  The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know
Act, each as amended, and similar foreign, state or local counterparts to these
federal laws, regulate air emissions, water discharges, hazardous substances
and wastes, and require public disclosure related to the use of various
hazardous substances. The Company's operations are also governed by laws and
regulations relating to workplace safety and worker health, primarily the
Occupational Safety and Health Act and regulations promulgated thereunder.
Compliance with such environmental laws and regulations may require the
acquisition of permits or other authorizations for certain activities and
compliance with various standards or procedural requirements. The Company
believes that its facilities are in substantial compliance with current
regulatory standards.
 
  Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal year 1995 were not material. Based on the
Company's experience to date, the Company does not currently anticipate any
material adverse effect on its business or consolidated financial position as a
result of future compliance with existing environmental laws and regulations
controlling the discharge of materials into the environment. However, future
events, such as changes in existing laws and regulations or their
interpretation, more vigorous enforcement policies of regulatory agencies, or
stricter or different interpretations of existing laws and regulations, may
require additional expenditures by the Company which may be material.
Accordingly, there can be no assurance that the Company will not incur
significant environmental compliance costs in the future. In addition, offshore
construction and drilling in certain areas have been opposed by
 
                                       56
<PAGE>
 
environmental groups and, in certain areas, has been restricted. To the extent
laws are enacted or other governmental actions are taken that prohibit or
restrict offshore construction and drilling or impose environmental protection
requirements that result in increased costs to the oil and gas industry in
general and the offshore construction industry in particular, the business and
prospects of the Company could be adversely affected.
 
EMPLOYEES
 
  As of December 31, 1995, the Company had approximately 6,330 hourly and 2,650
salaried employees. The Company is not a party to any collective bargaining
agreements in the United States. From time to time, the Company operates in
countries that require operating under industry-wide collective bargaining
agreements. The Company considers its relationship with its employees to be
satisfactory.
 
  The Company does not consider the possibility of a shortage of qualified
personnel currently to be a factor in its business. If demand for marine
construction services were to increase rapidly, retention of qualified people
might become more difficult without significant increases in compensation.
 
LEGAL PROCEEDINGS AND INSURANCE
 
  On January 11, 1996, Hyundai Heavy Industries Co., Ltd. ("Hyundai")
instituted a proceeding in the High Court of the Republic of Singapore (the
"Court") seeking an interim injunction against Offshore Pipelines International
Ltd., a subsidiary of the Company ("OPIL"), the Company and McDermott
International, based on alleged breaches of certain provisions of the Joint
Venture Agreement between Hyundai and OPIL dated as of September 9, 1992 (the
"Joint Venture Agreement"). The Joint Venture Agreement contains provisions
that attempt to avoid competition between the parties in certain geographical
areas by purporting to grant each party a preference in the submission of bids
for, and performance of, contracts for marine construction projects requiring
installation services in certain designated territories. In that connection,
the Joint Venture Agreement purports to grant Hyundai the right, during the
term of the agreement (ten years), to decide whether any such projects to be
performed in the territorial waters of India and China are to be bid by a
member of the Hyundai Group (defined to mean Hyundai and each of its
affiliates), a member of the OPI Group (defined to mean OPIL and each of its
affiliates) or the joint venture. The Joint Venture Agreement provides that, in
pursuing any such project (and utilizing vessels with respect thereto), Hyundai
shall give preference, in the following order, to vessels owned by or available
on an exclusive basis to the Hyundai Group, the joint venture and the OPI
Group. In its application for the interim injunction, Hyundai claimed that, as
a result of the Merger, the Company and McDermott International became
affiliates of OPIL (and, therefore, became members of the OPI Group) and that,
as a result, any offshore installation operations by the Company or McDermott
International in the territorial waters of India or China would be subject to
Hyundai's preferential right under the Joint Venture Agreement. The Court
entered the requested interim injunction on the same day that Hyundai filed its
application. The interim injunction arguably purports to bar the Company and
its controlled joint ventures from submitting any bids for projects requiring
installation services, taking actions in furtherance of any such bids already
submitted, and accepting any awards of contracts for projects requiring
installation services, in each case in the territorial waters of India and
China. The Company's attempts to have the interim injunction set aside by the
Court were unsuccessful, although the Company was successful in obtaining an
order permitting one of its controlled joint ventures to accept a contract
offshore India that was awarded after the initiation of the proceeding. The
Company has been granted an expedited hearing on its appeal of the Court's
decision, which hearing is scheduled for the week of April 22, 1996. The
Company believes that Hyundai's claim in this matter is without merit and
intends to defend against it vigorously. While the ability to perform
installation operations in the areas offshore India and China is important to
maintaining the Company's global capabilities, the Company does not believe
that the outcome of this dispute will result in a material adverse effect on
its operating results in the future.
 
                                       57
<PAGE>
 
  The Company is also named as a defendant in numerous lawsuits arising in the
ordinary course of business, some of which involve substantial damage claims.
While the outcome of these lawsuits cannot be predicted with certainty,
management does not expect these matters to have a material adverse effect on
the consolidated financial position of the Company.
 
  The Company's operations are subject to the inherent risks of operations at
sea, including accidents resulting in the loss of life or property, pollution
or other environmental mishaps, adverse weather conditions, mechanical
failures, collisions, property losses to the Company's vessels, business
interruption due to political action in foreign countries, and labor stoppages.
Litigation arising from any such event may result in the Company being named as
a defendant in lawsuits asserting large claims. The Company maintains insurance
for such amounts and against such risks that it deems prudent. However, certain
risks are either not insurable or insurance is available only at rates that the
Company considers uneconomical. Among such risks are war and confiscation of
property in certain areas of the world and pollution liability in excess of
relatively low limits. Depending on competitive conditions and other factors,
the Company endeavors to obtain contractual protection against uninsured risks
from its customers. When obtained, such contractual indemnification protection
may not in all cases be supported by adequate insurance maintained by the
customer. There is no assurance that such insurance or contractual indemnity
protection will be sufficient or effective under all circumstances or against
all hazards to which the Company may be subject. The occurrence of a
significant event not fully insured or indemnified against or the failure of a
customer to meet its indemnification obligations could materially and adversely
affect the Company's results of operations and financial condition. Moreover,
there can be no assurance that the Company will be able to maintain adequate
insurance in the future at commercially reasonable rates or on acceptable
terms.
 
                                       58
<PAGE>
 
                                   MANAGEMENT
 
  The following table sets forth certain information regarding the directors
and executive officers of the Company (ages are as of March 31, 1996):
 
<TABLE>
<CAPTION>
                                                                    DIRECTOR'S
                NAME                AGE          POSITION           TERM ENDING
                ----                ---          --------           -----------
 <C>                                <C> <S>                         <C>
 Robert E. Howson.................   63 Chairman of the Board and      1998
                                         Chief
                                         Executive Officer
 Frank C. Wade....................   49 Vice Chairman of the
                                         Board of Directors            1998
 Michael H. Lam...................   49 President, Marine
                                         Construction Services
                                         and Director                  1998
 James J. Wildasin................   61 President, Europe and
                                         Subsea Development and
                                         Director                      1996
 Richard R. Foreman...............   48 Executive Vice President
                                         and Chief Financial
                                         Officer                         --
 L.E. Walker......................   50 Senior Vice President,
                                         Business Development and
                                         Strategic Initiatives           --
 Richard E. Woolbert..............   62 Executive Vice President
                                         and Chief Administrative
                                         Officer                         --
 Daniel R. Gaubert................   47 Vice President, Finance          --
 J. Howard Macdonald..............   67 Director                       1996
 Rick L. Burdick..................   44 Director                       1996
 Brock A. Hattox..................   48 Director                       1997
 John F. Bookout..................   72 Director                       1997
 Cedric E. Ritchie................   67 Director                       1997
 Thomas P. Tatham.................   50 Director                       1997
 Lodwrick M. Cook.................   68 Director                       1996
</TABLE>
 
  As indicated above, the Company's Board of Directors is divided into three
classes, with the term for each class expiring on the date of the third annual
stockholders' meeting for the election of directors following the most recent
election of directors for such class. Each director holds office until the next
annual meeting of stockholders for the election of directors of his class and
until his successor has been duly elected and qualified. Executive officers
serve at the discretion of the Board of Directors.
 
  Robert E. Howson has been the Chairman of the Board and Chief Executive
Officer of the Company since January 31, 1995 and Chairman of the Board and
Chief Executive Officer of McDermott International and McDermott Incorporated
since August 1988. Prior to assuming these positions, he was President and
Chief Operating Officer of McDermott International and McDermott Incorporated
from August 1987. He is also a director of McDermott International, McDermott
Incorporated, The Louisiana Land and Exploration Company and Whitney Holding
Corporation.
 
  Frank C. Wade has been the Vice Chairman of the Board of Directors of the
Company since January 31, 1995. Prior to assuming this position, he was the
Chairman of the Board of Directors and Chief Executive Officer of OPI from
December 1988.
 
  Michael H. Lam has been the President, Marine Construction Services of the
Company since September 1995. From October 1992 through the completion of the
Merger on January 31, 1995, he served as the Vice Chairman of the Board of
Directors and Chief Operating Officer of OPI, prior to which he was Executive
Vice President--Worldwide Operations of OPI from April 1990. He is also a
director of DeepTech International Inc.
 
  James J. Wildasin has been the President, Europe and Subsea Development of
the Company since September 1995. Prior thereto, he served as the President and
Chief Operating Officer of the Company since
 
                                       59
<PAGE>
 
January 31, 1995. Prior to assuming this position, he was President and Chief
Operating Officer of McDermott International's Marine Construction Services
Business from February 1993; Senior Vice President and Group Executive, North
Sea, Middle East and West Africa Operations of McDermott International from
February 1992; Vice President and Group Executive, North Sea, Middle East and
West Africa Operations of McDermott International from July 1991; Vice
President and General Manager, London Engineering of McDermott International
from March 1991; and, prior to that, President and Co-Chief Executive Officer
of McDermott-ETPM, Inc.
 
  Richard R. Foreman has been the Executive Vice President and Chief Financial
Officer of the Company since January 31, 1995. During the past five years and
before assuming his present position, Mr. Foreman was President and Chief
Financial Officer of OPI from October 1992. Prior thereto, he served as
President and Chief Operating Officer of OPI from December 1989.
 
  L.E. Walker has been the Senior Vice President, Business Development and
Strategic Initiatives of the Company since February 1995. Before assuming this
position, Mr. Walker served as President of Offshore Pipelines International,
Ltd., OPI's primary international operating subsidiary, from December 1991 and
as Executive Vice President-International Operations of OPI from October 1990
until December 1991. He has over 20 years of experience in the offshore
construction industry, including serving from 1980 until 1988 as a Vice
President and General Manager for McDermott International.
 
  Richard E. Woolbert has been the Executive Vice President and Chief
Administrative Officer of the Company since February 1995. He has also been the
Executive Vice President and Chief Administrative Officer of McDermott
International and McDermott Incorporated since February 1995. Before assuming
his current positions, Mr. Woolbert was Senior Vice President and Chief
Administrative Officer of McDermott International and McDermott Incorporated
from August 1991. Prior thereto, he served as Vice President and Chief
Administrative Officer of McDermott International and McDermott Incorporated
from November 1988.
 
  Daniel R. Gaubert has been the Vice President, Finance of the Company since
August 1995. Prior thereto, he was acting Controller of the Company from
February 1995. Mr. Gaubert is also the Vice President, Finance and Controller
of McDermott International and McDermott, Incorporated, and has served in those
capacities since February 1995. Prior thereto, he was Vice President and
Controller of McDermott International and McDermott, Incorporated from February
1992; corporate Controller of McDermott International and McDermott,
Incorporated from July 1991; and prior to that, Group Controller, Power
Generation Group, of Babcock & Wilcox Investment Company and The Babcock &
Wilcox Company, which are subsidiaries of McDermott International.
 
  J. Howard Macdonald served as the Chairman and Chief Executive Officer of
NatWest Investment Bank from January 1989 until his retirement in April 1991.
He is also a director of McDermott International, The BOC Group plc and The
Weir Group plc.
 
  Rick L. Burdick has been the sole shareholder of a professional corporation
that has served as a partner in the law firm of Akin, Gump, Strauss, Hauer &
Feld, L.L.P., a limited liability partnership including professional
corporations, since 1988. He is also a director of Republic Industries, Inc.
 
  Brock A. Hattox has been the Executive Vice President and Chief Financial
Officer of McDermott International, and Executive Vice President and Chief
Financial Officer, and President of the Engineering and Construction Group, of
McDermott Incorporated since February 1995. Prior to assuming these positions,
he was Senior Vice President and Chief Financial Officer of McDermott
International and McDermott Incorporated from March 1991. Prior thereto, he
served as Vice President, Controller and Planning, of the Eaton Corporation (a
manufacturer of engineered products for automotive, industrial, commercial and
defense markets). He is also a director of McDermott International and
McDermott Incorporated.
 
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<PAGE>
 
  John F. Bookout has been the Chairman of Contour Production Company L.L.C.
since September 1993 and Chairman of the Board, President and Chief Executive
Officer of Kelley Oil & Gas Corporation since February 1996. Until his
retirement in June 1988, Mr. Bookout was President and Chief Executive Officer
of Shell Oil Company and served on the Supervisory Board of Directors of Royal
Dutch Shell in The Netherlands. He is also a director of The Investment Company
of America and McDermott International.
 
  Cedric E. Ritchie has been the Chairman of the Executive Committee of the
Board of The Bank of Nova Scotia since January 1995. Prior to assuming this
position, he was Chairman of the Board and Chairman of the Executive Committee
of the Board of The Bank of Nova Scotia from January 1993. Prior thereto, he
was Chairman of the Board and Chief Executive Officer of The Bank of Nova
Scotia from December 1979. He is also a director of Ingersoll-Rand Company,
MacMillan Bloedel Limited, Minorco, Moore Corporation Limited and NOVA
Corporation of Alberta.
 
  Thomas P. Tatham has been Chairman of the Board, Chief Executive Officer and
a director of DeepTech International Inc. ("DeepTech International") since
October 1989 and Chairman of the Board and a director of Leviathan Gas Pipeline
Company ("Leviathan"), which is the general partner of Leviathan Gas Pipeline
Partners, L.P., a publicly traded master limited partnership, since February
1989. Mr. Tatham also served as Chief Executive Officer of Leviathan from
February 1989 through June 1995. Mr. Tatham has also been Chairman of the Board
and a director of Tatham Offshore, Inc. ("Tatham Offshore") since its inception
in 1988 and has served as its Chief Executive Officer since November 1995.
 
  Lodwrick M. Cook has been a director of Atlantic Richfield Company ("ARCO")
since 1980 and served as Chairman of the Board from January 1986 to June 1995,
at which time Mr. Cook was named chairman emeritus. Mr. Cook was also ARCO's
Chief Executive Officer from October 1985 to June 1994, and Chairman of the
Board of ARCO Chemical Company from 1987 until May 1995. Mr. Cook is also a
director of Castle & Cooke, Inc., H.F. Ahmanson & Company and its subsidiary,
Home Savings of America, and Lockheed-Martin Corporation.
 
                     CERTAIN TRANSACTIONS AND RELATIONSHIPS
 
TRANSACTIONS WITH MCDERMOTT INTERNATIONAL IN CONNECTION WITH THE MERGER
 
  Contribution and Merger Transactions. On January 31, 1995 (the "Effective
Time"), McDermott International contributed (the "Contribution") substantially
all of its marine construction services business to the Company and the Company
acquired OPI in the Merger. McDermott International did not contribute certain
operations historically included in its marine construction services segment,
including its interests in certain interests (similar to oil and gas working
interests) relating to exploration and development projects offshore Sakhalin
Island, Russian Federation and in the Caspian Sea. In connection with the
Contribution and Merger transactions, (i) McDermott International received
24,668,297 shares of Common Stock, 3,200,000 shares of Series A Preferred
Stock, the $231.0 million aggregate principal amount of 9% Notes, and certain
other consideration, including the Floating Rate Note, and (ii) the investors
in OPI received 13,867,946 shares of Common Stock, options to acquire 897,818
shares of Common Stock, and 458,632 shares of Series B Preferred Stock, in
exchange for all the outstanding common stock, common stock options and
preferred stock of OPI. The current outstanding balance of the Floating Rate
Note, as adjusted for the sale and transfer of a shipyard business by the
Company to McDermott International, payments subsequent to the Effective Time
and certain post-closing contribution adjustments, is approximately $20.5
million. Such balance will be repaid with proceeds from the Vessel Sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Events" and "--Other Transactions with McDermott
International."
 
  Letter Agreement. In connection with the Merger, the Company and McDermott
International entered into the Letter Agreement, which provides for, among
other things, the establishment and maintenance of an independent committee of
the Company's Board of Directors (the "Independent Committee") comprised of
 
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<PAGE>
 
each member of the Board of Directors who either (i) would qualify as an
independent director within the meaning given to such term under the rules of
the New York Stock Exchange, or (ii) is not an "Affiliate" or "Associate" (as
such terms are defined in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
McDermott International, the Company or, with respect to periods ending on or
prior to the Effective Time, OPI, other than solely as a result of being a
director of the Company. In addition to Messrs. Ritchie, Tatham, Cook and
Burdick, Messrs. Bookout and Macdonald, who are also members of McDermott
International's Board of Directors, are members of the Independent Committee.
 
  The Letter Agreement further provides that, until the earlier of January 31,
1998 and the date on which McDermott International and certain of its
affiliates cease to own at least 30% of the outstanding voting stock of the
Company, the Company shall not take any of the following actions, among others,
without the approval of the Independent Committee: (a) repurchase, redeem,
prepay or amend the 9% Notes or the Series A Preferred Stock or repurchase any
of the Common Stock owned by McDermott International or certain of its
affiliates; (b) lease, sell or otherwise provide any goods or services to, or
lease or purchase any goods or services from, McDermott International or any of
its affiliates (other than pursuant to the Services Agreement and the
Transition Services Agreement), involving aggregate payments in excess of $5.0
million; or (c) fill any vacancies on the Board of Directors of the Company
created by an increase in the size of such Board of Directors with certain
persons who are former executive employees or directors of McDermott
International, the Company or OPI.
 
  The repurchase of the 9% Notes with a part of the proceeds from the Offering
has been approved by the Independent Committee (with Messrs. Bookout and
Macdonald abstaining), as well as by the Board of Directors of the Company.
 
  The Letter Agreement also provides that, until the earlier of January 31,
1998 and the date on which McDermott International and certain of its
affiliates cease to own at least 30% of the outstanding voting stock of the
Company, the Company shall not take any of the following actions, among others,
without either (i) the affirmative vote of the holders of at least a majority
of the then outstanding voting stock owned by persons other than McDermott
International and certain of its Affiliates and Associates (the "McDermott
Group"), or (ii) the approval of the Independent Committee: (a) any merger or
consolidation of the Company or any subsidiary of the Company with any member
of the McDermott Group; (b) certain transfers or other dispositions of assets
outside of the ordinary course of business to, among others, any member of the
McDermott Group; (c) certain issuances or transfers by the Company or any
subsidiary of the Company of equity securities of the Company or any such
subsidiary to any member of the McDermott Group; (d) the adoption of any plan
or proposal for the liquidation or dissolution of the Company pursuant to which
any member of the McDermott Group would receive securities of the Company or
any subsidiary of the Company; (e) certain reclassifications or
recapitalizations of the Company, mergers or consolidations of the Company with
any subsidiary, or certain other transactions that have the effect of
increasing the proportionate equity interest of the Company or any subsidiary
of the Company owned by any McDermott Group member; or (f) certain loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided by the Company or any subsidiary of the
Company to any McDermott Group member.
 
  The Letter Agreement also provides that the net after-tax amount of cash
actually received by McDermott International in respect of its interest in CMM
shall be an offset against any amounts payable by the Company to McDermott
International pursuant to the terms of the Services Agreement and the
Transition Services Agreement. As of the date hereof, no amounts have been
received by McDermott International in connection with its equity interest in
such company.
 
  Services Agreements. In connection with the Merger, McDermott International
and the Company entered into a Transition Services Agreement (the "Transition
Services Agreement") and a Services
 
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<PAGE>
 
Agreement (the "Services Agreement") under which McDermott International agreed
to provide certain services to the Company and the Company agreed to purchase
such services.
 
  Under the terms of the Transition Services Agreement, McDermott International
agreed, for a period of one year after the Effective Time, to provide (i)
certain accounting, employee benefit, legal, salary, aviation and business
planning services to the Company, for which the Company agreed to pay based on
the amount of services used and the actual cost thereof to McDermott
International, which is estimated to be approximately $2.5 million, excluding
legal costs, and (ii) office support services to the Company for a fee of $1.2
million. The Transition Services Agreement has been extended through fiscal
1997 by the mutual agreement of McDermott International and the Company on
substantially the same terms as the initial year under such agreement.
 
  Under the terms of the Services Agreement, McDermott International has agreed
to provide certain services to the Company until such time as McDermott
International no longer owns a majority of the outstanding Common Stock. These
services, for which the Company will pay annual fees of approximately $5.5
million (excluding fees relating to corporate transportation and purchasing
services), include accounting and financial reporting, treasury and financing,
tax administration and research, human relations policies and procedures,
safety, health and environmental administration, public and investor relations,
executive officer and corporate secretary services, electronic information
services and corporate transportation and purchasing. In addition, McDermott
International has agreed to provide, and the Company has agreed to pay for,
computing and telecommunications services based on the amount of services used,
which are estimated to be approximately $3.0 million annually. Also, the
Company has agreed to pay McDermott International for marine system and
automation services. After consultation with McDermott International and giving
due consideration to the legal obligations of McDermott International, the
Company may seek the provision of such services from third parties if the Board
of Directors of the Company determines that obtaining such services from a
third party is in the best interests of the Company. It is anticipated that the
Company will pay to McDermott International a total of approximately $16.4
million in fiscal 1996 under the Services and Transition Services Agreements,
as modified.
 
  Registration Rights Agreement. In connection with the Merger, McDermott
International and the Company entered into a Registration Rights Agreement
pursuant to which McDermott International has been granted certain demand and
piggy-back rights with respect to the registration for sale under the
Securities Act of its shares of Common Stock and Series A Preferred Stock of
the Company. Under the Registration Rights Agreement, McDermott International
will have demand rights to require the Company to register its shares of Common
Stock and Series A Preferred Stock commencing January 31, 1997. In addition,
McDermott International currently has certain piggy-back rights to register its
shares of Common Stock and Series A Preferred Stock in the event the Company
files a registration statement under the Securities Act of 1933, as amended
(the "Securities Act"). The rights of McDermott International under the
Registration Rights Agreement are subject to a number of customary conditions
and limitations.
 
  Working Capital Facility. In accordance with the terms of the Merger
Agreement, the Company and McDermott International entered into a Loan
Agreement and Note (the "Working Capital Note"), pursuant to which McDermott
International provided working capital to the Company and its subsidiaries of
up to $50.0 million for a period of three months after the Effective Time. The
largest principal balance outstanding under the Working Capital Note prior to
its maturity was $29.4 million, and the Working Capital Note was repaid in full
prior to such maturity. From the Effective Time until the end of fiscal 1995,
interest payments in the amount of approximately $146,000 were paid by the
Company to McDermott International under the Working Capital Note.
 
OTHER TRANSACTIONS WITH MCDERMOTT INTERNATIONAL
 
  Shipyard Business Transfer. On May 30, 1995, the Company and McDermott
International and certain of its subsidiaries entered into a Purchase
Agreement, a sublease and other documents pursuant to which the
 
                                       63
<PAGE>
 
Company sold and transferred back to McDermott International those assets and
liabilities comprising the shipyard business located in Morgan City, Louisiana
(the "Shipyard Business") that were included among the assets contributed by
McDermott International to the Company in connection with the Merger. The sale
and transfer of the Shipyard Business was made effective as of January 31,
1995, and the fixed assets relating to the Shipyard Business were sold to
McDermott International in consideration of a reduction by $4.8 million (the
value attributed to such assets in the Merger) in the Floating Rate Note
received by McDermott International from the Company in connection with the
Merger. See "--Transactions with McDermott International in Connection with the
Merger."
 
  In connection with this sale and transfer, a subsidiary of the Company
subleased that portion of its leased Morgan City, Louisiana property on which
the Shipyard Business operates to McDermott Incorporated for $10,894 per
quarter. Such quarterly rental payment reflects an amount equal to that portion
of the total rent paid by such subsidiary of the Company for the total leased
area relative to that portion thereof occupied by the Shipyard Business. The
sublease contains terms and provisions similar to the underlying lease,
including the expiration term of such lease.
 
  Engineering Services. The Company purchases engineering services from
McDermott International based on reference to charges to unrelated parties for
similar work and for general and administrative activities based on an
allocation of cost. The Company is in the final stages of documenting the new
Engineering Joint Venture, which will be equally owned by the Company and
McDermott International. The Engineering Joint Venture will be a preferred (but
not exclusive) provider of services to the Delta Hudson International
subsidiaries of McDermott International for onshore-related work and to the
Company for offshore-related work. The charges for such services will also be
based on charges to unrelated parties for similar work and for general and
administrative activities based on an allocation of cost. Arrangements for
pricing these services will be reviewed from time to time.
 
  Insurance Arrangements. The Company's casualty and marine insurance programs
are placed through commercial insurance carriers, which in turn substantially
reinsure those exposures to wholly owned insurance subsidiaries of McDermott
International. Management believes that this approach is more cost effective as
there is no commercial market on the same economic terms for these types of
exposures.
 
  To the extent required by the Letter Agreement, the above-described
transactions have been approved by the Independent Committee.
 
TRANSACTIONS WITH OPI MANAGEMENT AND OTHERS PRIOR TO OR IN CONNECTION WITH THE
MERGER
 
  Noncompetition Agreements with Certain Directors. In connection with the
Merger, the Company entered into a noncompetition agreement with each of Frank
C. Wade and Michael H. Lam (both of whom are directors of the Company),
pursuant to which each of Messrs. Wade and Lam agreed not to compete with the
Company for a period of five years in exchange for (i) in the case of Mr. Wade,
an aggregate payment of $5.0 million at the Effective Time and additional
payments of $1.5 million per year for a five-year period thereafter, and (ii)
in the case of Mr. Lam, a payment of $2.0 million at the Effective Time.
 
  F-W Global Aviation. The Company and F-W Global Aviation, Inc. ("F-W Global
Aviation"), an affiliate of Mr. Wade, are currently resolving whether the whole
or any portion of an account receivable in the approximate amount of $634,000
carried on the books of the Company as payable by F-W Global Aviation was
properly recorded and is due and owing. The account receivable relates to the
operation and maintenance expenses of an airplane owned by F-W Global Aviation
that was used by OPI management prior to the Merger. Most of the amount in
question was carried on the books of a subsidiary of OPI at the time of the
Merger. In addition to questioning the account receivable, F-W Global Aviation
claims that the Company owes it approximately $213,000 for additional airplane
maintenance costs incurred prior to the Merger. The Company's management
anticipates that this matter will be resolved to the mutual satisfaction of
both parties.
 
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<PAGE>
 
  Tatham Offshore Note. On June 30, 1995, Tatham Offshore, a corporation of
which Thomas P. Tatham (one of the Company's directors) is Chairman of the
Board, paid in full the remaining principal balance of approximately $7.1
million, plus accrued interest, on a note payable to a subsidiary of the
Company. The note, which was in the original principal amount of approximately
$11.4 million with 9.5% interest per annum (subsequently amended to 10.5% per
annum), was issued by Tatham Offshore to such subsidiary when it was a
subsidiary of OPI, in connection with such subsidiary's acquisition,
fabrication and installation of an offshore platform for Tatham Offshore
pursuant to a Construction and Financing Agreement.
 
  Tatham Farmout and Sale. In anticipation of the Merger, on October 1, 1994,
J. Ray McDermott Properties, Inc., a subsidiary of the Company ("JRM
Properties"), OPI International, Inc. (a subsidiary of OPI prior to the Merger
that became a subsidiary of the Company under the name J. Ray McDermott, Inc.
as a result of the Merger), F-W Oil and Tatham Offshore entered into a Farmout
Agreement, a Unit Operating Agreement and other documents, pursuant to which
Tatham Offshore, as the operator and 100% working interest owner of a certain
offshore oil and gas property, assigned to the other parties an aggregate 25%
working interest in such property. The Company, through JRM Properties and J.
Ray McDermott, Inc. ("JRMI"), acquired a 12.5% working interest and a related
net revenue interest with respect to such property for approximately $2.0
million. On September 25, 1995, JRM Properties and JRMI sold its aggregate
12.5% working interest and net revenue interest in the property to Tatham
Offshore in exchange for a $8.0 million convertible production payment relating
to such property. Pursuant to the terms of the agreements entered into in
connection with such sale, these subsidiaries received a production payment
that allows them to share in up to $8.0 million of the net proceeds of any
production from the property based upon a percentage of their original 12.5%
working interest without incurring any additional development and production
costs, including their pro rata portion of approximately $10.4 million in such
costs that was called for by the operator of the property at that time. In
December 1995, this property was placed on production, and at February 29,
1996, an aggregate of approximately 65,000 mcf of natural gas per day was being
produced from the first two wells. Through February 29, 1996, the Company has
earned approximately $130,000 as a result of this production payment. Such $8.0
million production payment or any unpaid portion thereof is also convertible
into Tatham Offshore common stock at $8.00 per share (with registration
rights), and under certain circumstances, exchangeable for cash payments from
DeepTech International, a corporation of which Thomas P. Tatham (one of the
Company's directors) is Chairman of the Board, equaling 50% of the $8.0 million
production payment or any unpaid portion thereof, if the Company provides
project financing to DeepTech International or an affiliate thereof in the
future.
 
  Tatham Interests. The Company, through one of its subsidiaries, owns 140,000
shares of Tatham Offshore common stock and 20,000 units of Leviathan Gas
Pipeline Partners, L.P., an affiliate of Mr. Tatham. The Company acquired these
interests as a result of the Merger.
 
  Advance to Don W. Wilson. Under the terms of OPI's Incentive Compensation
Program, OPI, prior to the Merger, and the Company, after the Merger and as a
result of its indirect assumption of such program, advanced, on an interest
free basis, to the participants of such program amounts sufficient to satisfy
their federal tax liability in connection with the vesting of restricted stock
awards made under such program. During fiscal 1995, the Company advanced to Don
W. Wilson (the former Executive Vice President, Operations of the Company)
approximately $253,000 to satisfy federal tax withholding liability as a result
of the vesting of all his unvested restricted stock awards under such program.
As of March 31, 1995, the principal balance outstanding on all advances made to
Mr. Wilson under this program was $387,000. Such loan amounts were repaid in
January 1996 upon Mr. Wilson's resignation of employment with the Company.
 
OTHER TRANSACTIONS WITH MANAGEMENT
 
  Transactions with Affiliates of Messrs. Wade and/or Lam. Effective May 1,
1995, a subsidiary of the Company entered into an Office Sublease with F-W Oil
Interests, Inc., an affiliate of Messrs. Wade and Lam ("F-W Oil"), pursuant to
which such subsidiary subleased a portion of its leased space in Houston, Texas
to F-W Oil. Under the sublease, which expires no later than March 14, 1997, F-W
Oil is required to make
 
                                       65
<PAGE>
 
monthly rental payments of approximately $17,900 to such subsidiary. As of
February 29, 1996, F-W Oil has paid such subsidiary of the Company
approximately $126,000 and F-W Oil has been invoiced for an additional $45,000.
The Company expects that the amounts invoiced will be paid in the ordinary
course of business.
 
  Effective April 1, 1995, a subsidiary of the Company entered into a
Production Management and Operation Agreement with F-W Oil pursuant to which F-
W Oil manages and operates an offshore producing oil and gas property for such
subsidiary. Such oil and gas property was owned and managed by a subsidiary of
OPI prior to the Merger. Following the Merger, the Company did not retain the
expertise to operate and manage the property and, after evaluating the internal
and external costs associated with operating and managing such property,
decided that it was in its best interests to retain F-W Oil to operate and
manage the property for its benefit. Under the agreement, the Company's
subsidiary is required to pay F-W Oil a monthly fee of $48,000 for F-W Oil's
management and operation of such property (the "Operating Fee"), together with
certain third party costs incurred by F-W Oil not covered by the Operating Fee,
plus, in certain cases, a 15% mark-up. Under this agreement, such payment terms
are applicable until December 31, 1996, at which time if the parties fail to
agree to new payment terms, either party may terminate the agreement. As of
February 29, 1996, the Company has paid $528,000 to F-W Oil and reimbursed F-W
Oil for out-of-pocket expenses (without mark-up) in connection with the
agreement.
 
  During 1995, a subsidiary of the Company sold to F-W Oil an offshore jacket
and deck that the Company removed from a location offshore Louisiana (the
"Platform") for approximately $1.1 million. In connection therewith, such
subsidiary agreed to refurbish and install the Platform for F-W Oil. As of
February 29, 1996, such subsidiary has been paid $72,000 for services rendered
to date, and F-W Oil has been invoiced for an additional $1.1 million. The
Company expects that the amounts invoiced will be paid in the ordinary course
of business.
 
  Effective September 8, 1995, a subsidiary of the Company entered into a Lease
and Sublease with Resort Equities, Ltd., an affiliate of Mr. Wade ("Resort
Equities"), pursuant to which Resort Equities leased a portion of the Company's
former fabrication yard located in Orange, Texas and Calcasieu Parish,
Louisiana. The lease provides for rent in the initial amount of $30,000 per
month. Under the terms of the lease, Resort Equities has the option of
terminating the lease on September 8, 1996 by giving notice prior to that date.
Resort Equities has paid $90,000 rent under the lease and is currently engaged
in discussions with the Company with respect to its termination and
cancellation.
 
  Design, Fabrication and Installation Contracts with Affiliates of Mr. Tatham.
A subsidiary of the Company has agreed to design, fabricate or install several
offshore pipelines or structures for affiliates of Mr. Tatham (primarily
Leviathan Gas Pipeline Partners, L.P. and its affiliates). The value of these
agreements exceeds $68.5 million. As of February 29, 1996, Leviathan Gas
Pipeline Partners, L.P. and its affiliates and Tatham Offshore have paid to
such subsidiary of the Company approximately $30.8 million and $0.8 million,
respectively, for work completed under such agreements, and Leviathan Gas
Pipeline Partners, L.P. and its affiliates and Tatham Offshore have been
invoiced for an additional $33.9 million and $0.3 million, respectively. The
Company expects that the amounts invoiced will be paid in the ordinary course
of business.
 
  The transactions with members of management described above were entered into
in the Company's ordinary course of business, were negotiated on an arm's-
length basis and, in certain cases, were approved by the Company's Board of
Directors. The Company believes the terms thereof to be no more or less
favorable to either of the parties than those customary and standard in the
industry.
 
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<PAGE>
 
                      DESCRIPTION OF CERTAIN INDEBTEDNESS
 
CREDIT FACILITY
 
  On June 7, 1995, the Company, the Company's wholly owned subsidiary J. Ray
McDermott Holdings, Inc. ("JRMHI"), and JRMHI's wholly owned subsidiary JRMI
(collectively with the Company and JRMHI, the "Borrowers"), entered into the
Credit Facility with a group of banks (the "Lenders"), including Texas Commerce
Bank National Association as administrative agent (the "Administrative Agent"),
which contains the terms described below.
 
  Term, Interest and Fees. The Credit Facility is for an initial term expiring
June 8, 1998, which term may be extended for successive one-year terms upon the
request of the Borrowers and the consent of the Lenders. The Borrowers are
jointly and severally liable for each Borrower's obligations under the Credit
Facility. As of December 31, 1995, $60.0 million was outstanding under the
Credit Facility. Borrowings under the Credit Facility are used for general
corporate purposes.
 
  Under the terms of the Credit Facility, the Borrowers may at their option
invite the Lenders to bid on an uncommitted basis on short-term borrowings,
such borrowings to bear interest at the option of the Company at either a fixed
rate agreed to by the Borrowers and the Lender or at LIBOR plus the margin
agreed to by the Borrowers and the Lender. Other borrowings under the Credit
Facility will bear interest at a variable rate per annum equal to (i) the
Alternative Base Rate (defined as the higher of the Prime Rate (defined as the
rate of interest per annum announced by the Administrative Agent as its prime
rate), the Base CD Rate (as defined) plus 1% or the Federal Funds Effective
Rate (as defined) plus 1/2 of 1%) or (ii) the Adjusted LIBOR (as defined) plus
an applicable margin. The Borrowers are required to pay certain facility,
participation and administrative fees in connection with the Credit Facility.
 
  Covenants. The Credit Facility restricts, among other things, the Company's
ability (i) to incur or suffer to exist additional indebtedness, (ii) to create
or suffer to exist certain liens, (iii) to enter into or be a party to certain
sale and lease-back transactions, (iv) to enter into certain investments, (v)
to merge or consolidate with or into another person, (vi) to dispose of
substantially all of the assets of the Company, (vii) to enter into
transactions with affiliates, and (viii) to engage in business significantly
different from that currently conducted by the Company. In addition, the Credit
Agreement requires the Company to comply with certain financial ratios and
tests, including maintenance of (a) a minimum consolidated tangible net worth
(defined as the Company's shareholders' equity, determined on a consolidated
basis, minus the sum of all intangible assets of the Company and its
consolidated subsidiaries) on the last day of any fiscal quarter equal to at
least the sum of (i) $225,000, (ii) 50% of the consolidated net income of the
Company (defined as the net income of the Company and its subsidiaries as
determined on a consolidated basis) for the period (taken as a single
accounting period) commencing April 1, 1995 and ending on the last day of such
fiscal quarter and (iii) 50% of the net cash proceeds received by the Borrowers
and any of their subsidiaries after June 7, 1995 from issuances and sales of
their capital stock to third parties; (b) a consolidated funded indebtedness
(defined as the indebtedness of the Company and its subsidiaries, determined on
a consolidated basis, but excluding non-recourse indebtedness, all guarantees
of indebtedness of others, all obligations in respect of interest rate
protection agreements, foreign currency exchange agreements or other interest-
rate hedging arrangements and all obligations as an account party in respect of
letters of credit) to consolidated total capitalization (defined as the sum of
(i) the shareholders' equity in the Company, determined on a consolidated
basis, and (ii) the consolidated funded indebtedness (as defined)) ratio of not
more than 50% on and before June 30, 1996, declining to 45% after June 30,
1996, 40% after December 31, 1996 and 35% after March 31, 1997 and; (c) a
consolidated coverage ratio (defined as the ratio of (x) the sum of (i)
operating income (or operating loss) of the Company and its subsidiaries and
(ii) any amount which in the determination of such operating income (or
operating loss) has been deducted for depreciation expense or amortization
expense, in each case determined on a consolidated basis), provided that the
operating income of the Company and its subsidiaries for the fiscal quarter
ended March 31, 1996 shall include the gain from the Vessel Sales minus (iii)
the aggregate amount for the Company and its subsidiaries of all expenditures
during such period and the entire
 
                                       67
<PAGE>
 
amount of any indebtedness (other than non-recourse indebtedness) assumed or
incurred in connection with any such expenditure which would, in the case of
each such assumption or incurrence of indebtedness, be classified as a capital
expenditure in a statement of cash flows for such period, all determined on a
consolidated basis, to (y) the sum or gross interest expense and amortization
of debt discount of the Company and its subsidiaries during such period,
determined on a consolidated basis) for any period of four consecutive fiscal
quarters (or such lesser numbers of quarters as shall have ended since June 7,
1995) of not less than the following ratios for the period during which the
last of such fiscal quarters shall have ended: from October 1, 1995 through
March 31, 1996 at least 2.00 to 1.0, from April 1, 1996 through June 30, 1996,
2.25 to 1.0 and thereafter 3.00 to 1.0.
 
  As of December 31, 1995, (a) the Company's consolidated tangible net worth
(as defined) was $252.0 million, (b) the Company's ratio of consolidated funded
indebtedness to consolidated total capitalization (as defined) was 46% and (c)
the Company's consolidated coverage ratio (as defined) was 2.6 to 1.0. No
assurance can be given that, based on economic conditions then prevailing in
the marine construction industry, the Company will be able to meet all of its
financial covenants under the Credit Facility on an ongoing basis in the
future.
 
  Events of Default. The Credit Facility provides that, upon the occurrence of
certain events of default specified therein, all loans made thereunder will
become immediately due and payable, either automatically or upon notice to the
Company from the Administrative Agent. The events of default specified in the
Credit Facility include the failure of the Company to pay when due any
principal of or interest on the loans made thereunder, the breach by the
Company of any of its representations and warranties contained therein, the
failure of the Company to perform any of its obligations thereunder and certain
other customary events of default.
 
12 7/8% GUARANTEED SENIOR NOTES
 
  In July 1992, OPI's wholly owned subsidiary, OPI International, Inc. (now
JRMI), issued $70.0 million aggregate principal amount of 12 7/8% Guaranteed
Senior Notes due 2002 (the "12 7/8% Notes"). JRMI's obligations under the 12
7/8% Notes are fully and unconditionally guaranteed, on a joint and several
basis, by JRMHI (as successor by merger to OPI) and each of JRMHI's vessel-
owning, and certain other, subsidiaries.
 
  The 12 7/8% Notes are subject to mandatory sinking fund payments commencing
July 15, 2000, calculated to retire 50% of the original principal amount of the
12 7/8% Notes prior to their maturity in 2002. The 12 7/8% Notes are
redeemable, for cash, at the option of the issuer, at any time on or after July
15, 1997, in whole or in part, initially at a price of 106.4% of the principal
amount, and thereafter at prices declining annually to 100% of the principal
amount on or after July 15, 2000, plus accrued and unpaid interest to the date
of redemption.
 
  The 12 7/8% Notes are redeemable, for cash, at the option of the holder upon
the occurrence of a "Change of Control," as defined in the Indenture relating
to the 12 7/8% Notes (the "12 7/8% Notes Indenture"), at a price equal to 101%
of the principal amount plus accrued and unpaid interest to the date fixed for
redemption. A Change of Control for purposes of the 12 7/8% Notes is deemed to
have occurred at such time as any person or group of persons (within the
meanings of Section 13(d) under the Exchange Act), other than Mr. Wade and any
corporation or partnership he controls, becomes the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of more than 50% of the Common
Stock. Consummation of the Merger resulted in such a Change of Control.
Accordingly, the Company sent notice of the Change of Control to the holders of
record of the 12 7/8% Notes on February 9, 1995, informing such holders that
they had until March 17, 1995 to exercise their option to require the Company
to redeem the 12 7/8% Notes held by such holders as a result of such Change of
Control. None of the holders of the 12 7/8% Notes exercised their right to
require such redemption during the time period prescribed by the 12 7/8% Notes
Indenture.
 
  The terms of the 12 7/8% Notes impose certain restrictions or limitations on,
among other things, the ability of JRMHI to make certain investments, to allow
its consolidated net worth (defined as the sum of
 
                                       68
<PAGE>
 
(i) the capital stock other than disqualified stock (defined as capital stock
(other than preferred stock) that, by its terms (or by the terms of any
security into which it is convertible or for which it is exercisable,
redeemable or exchangeable), matures, or is mandatorily redeemable, pursuant to
a sinking fund obligation or otherwise, or is redeemable at the option of the
holder thereof, in whole or in part, on or prior to, the stated final maturity
of the 12 7/8% Notes) and (ii) additional paid-in capital plus retained
earnings (or minus accumulated deficit) of JRMHI and its subsidiaries on a
consolidated basis at such date) to fall below $60.0 million, to pay dividends
and to make other distributions on its capital stock, to merge or consolidate
or transfer all of its assets or to sell or dispose of certain vessels (being
substantially all of the significant vessels currently owned by JRMHI) if the
sale or disposition would cause the Stated Value (as defined) of such vessels
to fall below the Minimum Stated Value (originally $152.7 million). To the
extent any such sale or other disposition would cause the Stated Value of the
Vessels to fall below the Minimum Stated Value, JRMHI is required to reinvest
the proceeds in other vessels or to make an offer to purchase the 12 7/8% Notes
(or, to the extent such offer does not cure the deficiency in the Stated Value
of the Vessels, to defease the 12 7/8% Notes in a principal amount equal to the
remaining deficiency). The terms of the 12 7/8% Notes also prohibits JRMHI and
its subsidiaries from directly or indirectly creating, incurring, assuming or
otherwise becoming directly or indirectly liable with respect to any
indebtedness (other than certain permitted indebtedness, as defined) unless at
the time of the incurrence of such indebtedness, the consolidated cash flow
coverage ratio (defined as the ratio of (a) the sum of (i) the net income (or
loss) of JRMHI and its subsidiaries on a consolidated basis for such period
taken as a single accounting period ("consolidated net income"), (ii) the
aggregate interest expense of JRMHI and its subsidiaries for such period (the
"consolidated interest expense"), (iii) the aggregate income tax expense of
JRMHI and its subsidiaries for such period, (iv) the aggregate depreciation
expense of JRMHI and its subsidiaries for such period, (v) the aggregate
amortization expense of JRMHI and its subsidiaries for such period, and (vi)
other non-cash items reducing consolidated net income minus non-cash items
increasing consolidated net income, for the four consecutive fiscal quarters
(treated as one accounting period) to (b) the aggregate consolidated interest
expense during such four fiscal quarters (all of the foregoing figures
determined on a consolidated basis), as shown by a pro forma consolidated
income statement of JRMHI and its subsidiaries, exceeds 2.0 to 1.0 after giving
effect to the following: (a) the issuance of such indebtedness and (if
applicable) the application of the net proceeds thereof to refinance other
indebtedness as if such indebtedness were issued and the application of such
proceeds had occurred at the beginning of the period; (b) the issuance and
retirement of any other indebtedness since the last day of the most recent
fiscal quarter covered by such income statement as if such indebtedness were
issued or retired at the beginning of such period; and (c) the acquisition of
any company or business acquired by JRMHI or any of its subsidiaries since the
first day of the period, including any acquisition which will be consummated
contemporaneously with the issuance of such indebtedness (as if such
acquisition had occurred at the beginning of the period). The 12 7/8% Notes
also contain customary default provisions, including provisions that concern
failure to make payments of principal and interest when due, failure to comply
with the financial and other covenants thereunder and certain events of
bankruptcy.
 
  As of December 31, 1995, (a) JRMHI's consolidated net worth (as defined) was
$503.0 million, and (b) JRMHI's consolidated cash flow coverage ratio (as
defined) was 3.2 to 1.0. No assurance can be given that, based on economic
conditions then prevailing in the marine construction industry, JRMHI will be
able to meet all of its financial covenants under the 12 7/8% Notes on an
ongoing basis in the future.
 
                                       69
<PAGE>
 
                            DESCRIPTION OF THE NOTES
 
  The Notes will be issued under an indenture to be dated as of         , 1996
(the "Indenture"), between the Company and Citibank, N.A., as trustee (the
"Trustee"). The following summary of the material provisions of the Indenture
does not purport to be complete and is subject to, and qualified in its
entirety by, reference to the provisions of the Indenture, including the
definitions of certain terms contained therein and those terms made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended, as in
effect on the date of the Indenture. The definitions of certain capitalized
terms used in the following summary are set forth below under "--Certain
Definitions." All references to the Company in the following summary refer
exclusively to J. Ray McDermott, S.A., and not to any of its subsidiaries.
 
GENERAL
 
  The Notes will be unsecured senior subordinated obligations of the Company
limited to $250,000,000 aggregate principal amount. The Notes will be issued
only in registered form without coupons, in denominations of $1,000 and
integral multiples thereof. Principal of, premium, if any, and interest on the
Notes will be payable, and the Notes will be transferable, at the corporate
trust office or agency of the Trustee in The City of New York maintained for
such purposes at        . In addition, in the event the Notes do not remain in
book-entry form, interest may be paid at the option of the Company by check
mailed to the person entitled thereto as shown on the security register. No
service charge will be made for any transfer, exchange or redemption of Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
 
MATURITY, INTEREST AND PRINCIPAL
 
  The Notes will mature on        , 2006. Interest on the Notes will accrue at
the rate of    % per annum and will be payable semi-annually on each       and,
      commencing        , 1996, to the holders of record of the Notes at the
close of business on the       and       immediately preceding such interest
payment date. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the
original date of issuance of the Notes (the "Issue Date"). Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
 
  The Notes are not subject to the benefit of any mandatory sinking fund.
However, upon the occurrence of certain Asset Sales or a Change of Control,
holders of Notes will have the right to require the Company to purchase their
Notes, as more fully described under "--Certain Covenants--Disposition of
Proceeds of Asset Sales" and "--Change of Control," respectively.
 
ADDITIONAL AMOUNTS
 
  All payments made by the Company under or with respect to the Notes will be
made free and clear of and without withholding or deduction for or on account
of any Taxes, unless the Company is required to withhold or deduct Taxes by law
or by the interpretation or administration thereof. If the Company is required
to withhold or deduct any amount for or on account of Indemnifiable Taxes from
any payment made under or with respect to the Notes, the Company will pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each holder of Notes (including Additional Amounts), after
withholding or deduction of such Indemnifiable Taxes, will not be less than the
amount the holder would have received if such Indemnifiable Taxes had not been
withheld or deducted. The Company will also (i) make such withholding or
deduction and (ii) remit the full amount deducted or withheld to the relevant
Taxing Authority in accordance with applicable law. The Company will use its
best efforts to obtain certified copies of tax receipts evidencing the payment
of any such Indemnifiable Taxes and furnish certified copies of such tax
receipts to the holders of the Notes within 30 days after the date on which the
payment of any such Taxes is due pursuant to applicable law. If,
notwithstanding the Company's efforts to obtain such receipts, the same are not
obtainable, the Company will provide to the holders of the Notes other evidence
of such payments by the Company.
 
                                       70
<PAGE>
 
  The Company will indemnify and hold harmless each holder of Notes and, upon
written request therefor from a holder of Notes (which request shall include a
reasonable description of the Indemnifiable Taxes), reimburse such holder, for
the amount of (i) any Indemnifiable Taxes levied or imposed and paid by such
holder as a result of payments made under or with respect to the Notes; (ii)
any liability (including penalties, interest and reasonable expenses) arising
under or with respect to the foregoing clause (i); and (iii) any Indemnifiable
Taxes so levied or imposed with respect to any reimbursement under the
foregoing clause (i) or (ii), so that the net amount received by such holder
after such reimbursement will not be less than the net amount the holder would
have received if Indemnifiable Taxes on such reimbursement had not been
imposed, but excluding any Indemnifiable Taxes on such holder's net income. In
certain circumstances, holders of Notes will be required to provide information
concerning their nationality, residence or identity.
 
  At least 30 days prior to each date on which payment under or with respect to
the Notes is due and payable, if the Company will be obligated to pay
Additional Amounts with respect to such payment, the Company will deliver to
the Trustee an Officers' Certificate stating the fact that such Additional
Amounts will be payable and the amounts so payable and setting forth such other
information necessary to enable the Trustee to pay such Additional Amounts to
holders of Notes on the payment date. Whenever in the Indenture or in this
"Description of the Notes" there is mentioned, in any context, the payment of
principal, premium, if any, interest or any other amount payable under or with
respect to any Note, such mention shall be deemed to include mention of the
payment of Additional Amounts to the extent that, in such context, Additional
Amounts are, were or would be payable in respect thereof.
 
  For a discussion of the exemption from Panamanian withholding taxes
applicable to payments under or with respect to the Notes, see "Certain Income
Tax Considerations--Panamanian Taxes."
 
OPTIONAL REDEMPTION
 
  Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after      , 2001, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest, if any, to the redemption date, if
redeemed during the 12-month period beginning        of the years indicated
below:
 
<TABLE>
<CAPTION>
                                                                      REDEMPTION
      YEAR                                                              PRICE
      ----                                                            ----------
      <S>                                                             <C>
      2001...........................................................        %
      2002...........................................................        %
      2003...........................................................        %
      2004 and thereafter............................................  100.00%
</TABLE>
 
  Selection and Notice. In the event that less than all of the Notes are to be
redeemed at any time, selection of such Notes for redemption will be made by
the Trustee in compliance with any applicable requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not then listed on a national securities exchange (or if the Notes
are so listed but such exchange does not impose requirements with respect to
the selection of debt securities for redemption), on a pro rata basis, by lot
or by such method as the Trustee in its sole discretion shall deem fair and
appropriate; provided, however, that no Notes of a principal amount of $1,000
or less shall be redeemed in part. Notice of redemption shall be given by
first-class mail, postage prepaid, mailed not less than 30 nor more than 60
days before the redemption date, to each holder of Notes to be redeemed, at its
address as shown in the security register. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon surrender for cancellation of the original
Note. On and after the redemption date, interest will cease to accrue on Notes
or portions thereof called for redemption unless the Company defaults in the
payment of the redemption price.
 
                                       71
<PAGE>
 
TAX REDEMPTION
 
  The Notes will also be redeemable, in whole but not in part, at the option of
the Company at any time prior to maturity at 100% of the principal amount
thereof, plus accrued interest, if any, to the redemption date, if the Company
has become or would become obligated to pay, on the next date on which any
amount would be payable with respect to the Notes, any Additional Amounts as a
result of a change in, amendment to or promulgation of any treaty or law (or
any regulation thereunder) with respect to Indemnifiable Taxes, or any change
in, amendment to or promulgation of, any official position (whether
administrative, judicial or otherwise) regarding the application or
interpretation of any such treaty, law or regulation, which change, amendment
or promulgation is announced or becomes effective on or after the Issue Date;
provided that the Company determines, in its business judgment, that the
obligation to pay such Additional Amounts cannot be avoided by the use of
reasonable measures available to the Company (not including substitution of the
obligor under the Notes) or that such reasonable measures cannot be taken
without the Company suffering any material economic, legal or regulatory
disadvantage.
 
SUBORDINATION
 
  Payments of and distribution of or with respect to the Senior Subordinated
Note Obligations will be subordinated, to the extent set forth in the
Indenture, in right of payment to the prior payment in full in cash or cash
equivalents of all existing and future Senior Indebtedness, which includes,
without limitation, all Credit Agreement Obligations of the Company. At the
present time, the Company is a joint and several obligor with respect to all
Credit Agreement Obligations of the Company's Subsidiaries that are obligors
under the Credit Agreement. The Notes will rank prior in right of payment only
to other indebtedness of the Company which is, by its terms, expressly
subordinated in right of payment to the Notes. There is currently no
indebtedness of the Company which would constitute such subordinated
indebtedness. In addition, the Senior Subordinated Note Obligations will be
effectively subordinated to all of the creditors of the Company's subsidiaries
and joint ventures, including trade creditors. See "Risk Factors--
Subordination; Company Structure."
 
  The Indenture will provide that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company (or
its creditors, as such) or its assets, or any liquidation, dissolution or other
winding-up of the Company, whether voluntary or involuntary, or any assignment
for the benefit of creditors or other marshalling of assets or liabilities of
the Company, all Senior Indebtedness of the Company must be paid in full in
cash or cash equivalents before any direct or indirect payment or distribution,
whether in cash, property or securities (excluding certain permitted equity and
subordinated debt securities referred to in the Indenture as "Permitted Junior
Securities"), is made on account of the Senior Subordinated Note Obligations.
In the event that, notwithstanding the foregoing, the Trustee or the holder of
any Note receives any payment or distribution of properties or assets of the
Company of any kind or character, whether in cash, property or securities, by
set-off or otherwise, in respect of Senior Subordinated Note Obligations before
all Senior Indebtedness is paid or provided for in full, then the Trustee or
the holders of Notes receiving any such payment or distribution (other than a
payment or distribution in the form of Permitted Junior Securities) will be
required to pay or deliver such payment or distribution forthwith to the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee,
agent or other person making payment or distribution of assets of the Company
for application to the payment of all Senior Indebtedness remaining unpaid, to
the extent necessary to pay all Senior Indebtedness in full.
 
  During the continuance of any default in the payment when due (whether at
Stated Maturity, upon scheduled repayment, upon acceleration or otherwise) of
principal of or premium, if any, or interest on, or of unreimbursed amounts
under drawn letters of credit or fees relating to letters of credit
constituting, any Designated Senior Indebtedness (a "Payment Default"), no
direct or indirect payment or distribution by or on behalf of the Company of
any kind or character shall be made on account of the Senior Subordinated Note
Obligations unless and until such default has been cured or waived or has
ceased to exist or such Senior Indebtedness shall have been discharged or paid
in full in cash or cash equivalents.
 
                                       72
<PAGE>
 
  In addition, during the continuance of any default other than a Payment
Default with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may then be accelerated (a "Non-payment Default"), after
receipt by the Trustee from the holders (or their representative) of such
Designated Senior Indebtedness of a written notice of such Non-payment Default,
no payment or distribution of any kind or character may be made by the Company
on account of the Senior Subordinated Note Obligations for the period specified
below (the "Payment Blockage Period").
 
  The Payment Blockage Period shall commence upon the receipt of notice of a
Non-payment Default by the Trustee from the holders (or their representative)
of Designated Senior Indebtedness stating that such notice is a payment
blockage notice pursuant to the Indenture and shall end on the earliest to
occur of the following events: (i) 179 days shall have elapsed since the
receipt by the Trustee of such notice; (ii) the date, as set forth in a written
notice to the Company or the Trustee from the holders (or their representative)
of the Designated Senior Indebtedness initiating such Payment Blockage Period,
on which such default is cured or waived or ceases to exist (provided that no
other Payment Default or Non-payment Default has occurred or is then continuing
after giving effect to such cure or waiver); (iii) the date on which such
Designated Senior Indebtedness is discharged or paid in full in cash or cash
equivalents; or (iv) the date, as set forth in a written notice to the Company
or the Trustee from the holders (or their representative) of the Designated
Senior Indebtedness initiating such Payment Blockage Period, on which such
Payment Blockage Period shall have been terminated by written notice to the
Company or the Trustee from the holders (or their representative) of Designated
Senior Indebtedness initiating such Payment Blockage Period, after which the
Company, subject to the subordination provisions set forth above and the
existence of another Payment Default, shall promptly resume making any and all
required payments in respect of the Notes, including any missed payments. Only
one Payment Blockage Period with respect to the Notes may be commenced within
any 360 consecutive day period. No Non-payment Default with respect to
Designated Senior Indebtedness that existed or was continuing on the date of
the commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period will be, or can be,
made the basis for the commencement of a second Payment Blockage Period,
whether or not within a period of 360 consecutive days, unless such default has
been cured or waived for a period of not less than 90 consecutive days (it
being acknowledged that any subsequent action, or any breach of any financial
covenant for a period commencing after the date of commencement of such Payment
Blockage Period, that, in either case, would give rise to a Non-payment Default
pursuant to any provision under which a Non-payment Default previously existed
or was continuing shall constitute a new Non-payment Default for this purpose;
provided that, in the case of a breach of a particular financial covenant, the
Company shall have been in compliance for at least one full period commencing
after the date of commencement of such Payment Blockage Period). In no event
will a Payment Blockage Period extend beyond 179 days from the date of the
receipt by the Trustee of the notice and there must be a 181 consecutive day
period in any 360-day period during which no Payment Blockage Period is in
effect. In the event that, notwithstanding the foregoing, the Company makes any
payment or distribution to the Trustee or the holder of any Note prohibited by
the subordination provision of the Indenture, then such payment or distribution
will be required to be paid over and delivered forthwith to the Company.
 
  If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default."
 
  By reason of such subordination, in the event of liquidation, receivership,
reorganization or insolvency, creditors of the Company who are holders of
Senior Indebtedness may recover more, ratably, than the holders of the Notes,
and funds which would be otherwise payable to the holders of the Notes will be
paid to the holders of the Senior Indebtedness to the extent necessary to pay
the Senior Indebtedness in full, and the Company may be unable to meet its
obligations in full with respect to the Notes. In addition, as described above,
the Senior Subordinated Note Obligations will be effectively subordinate to the
claims of creditors of the Company's subsidiaries and joint ventures including
trade creditors.
 
                                       73
<PAGE>
 
  As of December 31, 1995, on a pro forma basis, after giving effect to the
Vessel Sales and the sale of the Notes, and the application of the proceeds
therefrom, the aggregate amount of outstanding Senior Indebtedness would have
been approximately $105.1 million (all of which would be Indebtedness of the
Company's consolidated and unconsolidated subsidiaries and joint ventures that
the Company would have guaranteed), in addition to certain bid and performance
bonds (or letters of credit in respect of bids or performance obligations)
outstanding ($170.0 million at December 31, 1995), and the aggregate amount of
Indebtedness of the Company's consolidated subsidiaries and joint ventures
(excluding Indebtedness that the Company would have guaranteed) would have been
approximately $126.9 million. The foregoing amounts do not include the undrawn
portions under the Company's (or its consolidated subsidiaries' or joint
ventures') existing credit arrangements ($119.4 million at December 31, 1995,
without giving pro forma effect to the application of the proceeds from the
Vessel Sales). In addition, certain of the Company's unconsolidated joint
ventures have significant amounts of outstanding Indebtedness that the Company
has not guaranteed, as well as undrawn but available credit facilities ($114.1
million at December 31, 1995, without giving pro forma effect to the
Indebtedness to be incurred in connection with the Vessel Sales). See "Use of
Proceeds," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
  Although the Indenture will contain limitations on the amount of additional
Indebtedness that the Company and the Restricted Subsidiaries may incur, the
amounts of such Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness or Indebtedness of Subsidiaries (to
which the Notes will be structurally subordinated). The Indenture will not
limit the amount of Indebtedness which can be incurred by or Investments made
by the Company and the Restricted Subsidiaries in Joint Ventures. See "--
Certain Covenants--Limitation on Additional Indebtedness." The Indenture will
prohibit the incurrence by the Company of Indebtedness which is contractually
subordinated in right of payment to any Senior Indebtedness of the Company and
senior in right of payment to the Notes. After giving effect to the issuance of
the Notes and the Vessel Sales and the application of the net proceeds
therefrom, there will be no indebtedness of the Company which is subordinated
in right of payment to the Notes and there will be no indebtedness of the
Company which is pari passu in right of payment with the Notes.
 
CERTAIN COVENANTS
 
  The Indenture will contain the following covenants, among others:
 
  Limitation on Additional Indebtedness. The Indenture will provide that the
Company will not, and will not permit any of the Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or in any other
manner become liable, contingently or otherwise (in each case, to "incur"), for
the payment of any Indebtedness (including any Acquired Indebtedness); provided
that (i) the Company and each Wholly-owned Restricted Subsidiary will be
permitted to incur Indebtedness (including Acquired Indebtedness) and (ii) a
Restricted Subsidiary which is not a Wholly-Owned Restricted Subsidiary will be
permitted to incur Acquired Indebtedness if, immediately after giving pro forma
effect thereto, the Consolidated Fixed Charge Coverage Ratio of the Company
would be equal to or greater than    :1.0.
 
  Notwithstanding the foregoing, the Company (and, to the extent specifically
set forth below, the Restricted Subsidiaries) may incur each and all of the
following:
 
      (1) (a) Indebtedness of the Company or any Restricted Subsidiary
    under the Credit Agreement in an aggregate principal amount at any time
    outstanding not to exceed $250,000,000 (or, to the extent non-U.S.
    dollar denominated, the equivalent of such amount as determined by the
    Credit Agreement), and any fees, premiums, expenses (including costs of
    collection), indemnities and other similar amounts payable in
    connection with such Indebtedness; (b) Indebtedness of JRMI and the OPI
    Guarantors arising from the OPI Notes; and (c) other Indebtedness of
    the Company or any Restricted Subsidiary outstanding on the Issue Date;
 
                                       74
<PAGE>
 
      (2) Indebtedness of the Company evidenced by the Notes;
 
      (3) (a) Interest Rate Protection Obligations of the Company or any
    Restricted Subsidiary covering Indebtedness of the Company or any
    Restricted Subsidiary incurred in the ordinary course of business:
    provided that the notional principal amount of any such Interest Rate
    Protection Obligations does not exceed 105% of the principal amount of
    the Indebtedness to which such Interest Rate Protection Obligations
    expressly relates;
 
      (4) Indebtedness of the Company or any of the Restricted Subsidiaries
    under Currency Agreement Obligations; provided that such Currency
    Agreement Obligations do not increase the Indebtedness or other
    obligations of the Company and the Restricted Subsidiaries outstanding
    other than as a result of fluctuations in foreign currency exchange
    rates or by reason of fees, indemnities and compensation payable
    thereunder;
 
      (5) (i) Indebtedness of the Company owed to a Restricted Subsidiary
    and Indebtedness of a Restricted Subsidiary owed to the Company or a
    Restricted Subsidiary; provided that (a) any subsequent issuance or
    transfer of Capital Stock or any Designation that results in such
    Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
    subsequent transfer or assignment of such Indebtedness (other than to
    the Company or a Restricted Subsidiary or a Joint Venture) will be
    deemed to constitute the incurrence of such Indebtedness by the Company
    or such Restricted Subsidiary, as the case may be, and (b) any such
    Indebtedness of the Company owed to a Restricted Subsidiary must be
    subordinated in right of payment to the prior payment in full and
    performance of the Company's obligations under the Indenture and the
    Notes; and (ii) Indebtedness of the Company or any Wholly-Owned
    Restricted Subsidiary owed to any Joint Venture; provided that any such
    Indebtedness (a) if Indebtedness of the Company, must be subordinated
    in right of payment to the prior payment in full and performance of the
    Company's obligations under the Indenture and the Notes and (b) must
    not bear interest (other than through the accrual or payment in kind of
    Indebtedness of the same obligor containing terms identical to the
    terms of the Indebtedness on which such Indebtedness is paid as
    interest) except that cash interest may be paid (A) if required by law
    to prevent the holder of such Indebtedness from being treated for
    applicable revenue tax purposes as having received imputed interest
    thereon or (B) to minimize taxes payable by the parties to the Joint
    Venture;
 
      (6) Indebtedness of the Company or any Restricted Subsidiary incurred
    in respect of bid, performance and payment bonds (other than in respect
    of Indebtedness), surety bonds, trade letters of credit, bankers'
    acceptances and letters of credit supporting bids, advance payments and
    performance obligations of the Company, any Restricted Subsidiary or
    any Joint Venture (other than in respect of Indebtedness), in each case
    incurred in the ordinary course of business;
 
      (7) Indebtedness of the Company or any Restricted Subsidiary incurred
    in connection with capital expenditures (as determined in accordance
    with GAAP) not to exceed $30,000,000 in aggregate amount per year;
 
      (8) Indebtedness of the Company or any Restricted Subsidiary (a)
    representing Capitalized Lease Obligations and (b) in respect of
    Purchase Money Obligations for property acquired in the ordinary course
    of business (and not, in any event, in connection with an Asset
    Acquisition or a Capitalized Lease Obligation), which taken together do
    not exceed $20,000,000 in aggregate amount at any time outstanding;
 
      (9) Indebtedness of the Company or any Restricted Subsidiary in
    respect of Receivables Facility Obligations; provided that the holders
    of such Indebtedness have recourse only to the accounts receivable,
    work in progress and related assets transferred pursuant to such
    Receivables Facility;
 
      (10) Indebtedness of the Company and any Restricted Subsidiary
    consisting of the guarantee of Indebtedness of a Joint Venture not to
    exceed $50,000,000 in aggregate principal amount at any time
    outstanding; provided, however, that as and to the extent that the
    Company or such Restricted
 
                                       75
<PAGE>
 
    Subsidiary, as the case may be, shall be entitled pursuant to the terms
    of any agreement then in effect, to reimbursement, indemnity or
    contribution from any person (other than the Company or any of its
    Subsidiaries or the Joint Ventures) that the Company reasonably deems
    to be solvent for amounts as to which the Company or such Restricted
    Subsidiary, as the case may be, may become liable for or have to pay
    pursuant to such guarantee of Indebtedness of a Joint Venture, such
    amount, but not the remaining amount, shall not be treated for the
    purpose of the foregoing limitation as having been guaranteed;
 
      (11) Indebtedness of the Company and any Restricted Subsidiary
    consisting of a guarantee of performance obligations of any Joint
    Venture (other than in respect of Indebtedness of such Joint Venture);
 
      (12) (a) Indebtedness of the Company or any Restricted Subsidiary to
    the extent the proceeds thereof are used to refinance (whether by
    amendment, modification, supplement, restatement, replacement,
    restructuring, refinancing, renewal, extension or refunding)
    Indebtedness of the Company (including all or a portion of the Notes)
    or any Restricted Subsidiary to the extent the Indebtedness to be
    refinanced, redeemed or retired has been incurred under or referred to
    in the first paragraph of this covenant or clauses (1)(b), (1)(c), (2),
    (8)(b) or (13); provided that the principal amount of Indebtedness
    incurred pursuant to this clause (12) (or, if such Indebtedness
    provides for an amount less than the principal amount thereof to be due
    and payable upon a declaration of acceleration of the maturity thereof,
    the original issue price of such Indebtedness) shall not exceed the sum
    of the principal amount of Indebtedness so amended, modified,
    supplemented restated, replaced, restructured, refinanced, renewed,
    extended or refunded (or, if such Indebtedness provides for an amount
    less than the principal amount thereof to be due and payable upon a
    declaration of acceleration of the maturity thereof, the original issue
    price of such Indebtedness plus any accreted value attributable thereto
    since the original issuance of such Indebtedness) plus the amount of
    any premium required to be paid in connection therewith pursuant to the
    terms of such Indebtedness or the amount of any premium reasonably
    determined by the Company or a Restricted Subsidiary, as applicable, as
    necessary to accomplish the foregoing by means of a tender or exchange
    offer or privately negotiated purchase, plus the amount of expenses in
    connection therewith; and
 
      (13) additional Indebtedness of the Company and the Restricted
    Subsidiaries not to exceed $100,000,000 in aggregate principal amount
    at any time outstanding.
 
    Limitation on Restricted Payments. The Indenture will provide that the
Company will not, and will not permit any of the Restricted Subsidiaries to,
directly or indirectly:
 
    (i) declare or pay any dividend or make any other distribution or payment
  on or in respect of Capital Stock of the Company or any payment made to the
  direct or indirect holders (in their capacities as such) of Capital Stock
  of the Company (other than dividends or distributions payable solely in
  rights to purchase Capital Stock of the Company (other than Redeemable
  Capital Stock));
 
    (ii) purchase, redeem, defease or otherwise acquire or retire for value
  any Capital Stock of the Company (other than any such Capital Stock owned
  by a Wholly-Owned Restricted Subsidiary);
 
    (iii) make any principal payment on, or purchase, defease, repurchase,
  redeem or otherwise acquire or retire for value, prior to any scheduled
  maturity, scheduled repayment, scheduled sinking fund payment or other
  Stated Maturity, any Subordinated Indebtedness (other than any such
  Subordinated Indebtedness owed to a Wholly-Owned Restricted Subsidiary); or
 
    (iv) make any Investment (other than a Permitted Investment) in any
  person
 
(such payments or Investments described in (but not excluded from) the
preceding clauses (i) (other than by reason of the proviso thereto), (ii),
(iii) and (iv) are collectively referred to as "Restricted Payments"), unless,
at the time of and after giving effect to the proposed Restricted Payment (the
amount of any such Restricted
 
                                       76
<PAGE>
 
Payment, if other than in cash, shall be the Fair Market Value of the asset(s)
proposed to be transferred by the Company or such Restricted Subsidiary, as the
case may be, pursuant to such Restricted Payment), (A) no Default shall have
occurred and be continuing, (B) the aggregate amount of all Restricted Payments
declared or made from and after the Issue Date would not exceed the sum of (1)
50% of the aggregate Consolidated Net Income of the Company accrued on a
cumulative basis during the period (treated as one accounting period) beginning
on April 1, 1996 and ending on the last day of the fiscal quarter of the
Company immediately preceding the date of such proposed Restricted Payment (or,
if such aggregate cumulative Consolidated Net Income of the Company for such
period shall be a deficit, minus 100% of such deficit) plus (2) the aggregate
net cash proceeds received by the Company either (x) as capital contributions
in the form of common equity to the Company after the Issue Date or (y) from
the issuance or sale of Capital Stock (excluding Redeemable Capital Stock but
including Capital Stock issued upon the conversion of convertible Indebtedness,
in exchange for outstanding Indebtedness or from the exercise of options,
warrants or rights to purchase Capital Stock (other than Redeemable Capital
Stock)) of the Company to any person (other than to a Restricted Subsidiary of
the Company) after the Issue Date plus (3) in the case of the disposition or
repayment of any Investment constituting a Restricted Payment made after the
Issue Date (excluding any Investment made pursuant to clause (iv) of the
following paragraph), an amount equal to the lesser of the return of capital
with respect to such Investment and the initial amount of such Investment, in
either case, less the cost of the disposition of such Investment and (C) the
Company could incur $1.00 of additional Indebtedness under the first paragraph
of the "Limitation on Additional Indebtedness" covenant described above. For
purposes of the preceding clause (B)(2), upon the issuance of Capital Stock
either from the conversion of convertible Indebtedness or in exchange for
outstanding Indebtedness or upon the exercise of options, warrants or rights,
the amount counted as net cash proceeds received will be the cash amount
received by the Company at the original issuance of the Indebtedness that is so
converted or exchanged or from the issuance of options, warrants or rights, as
the case may be, plus the incremental amount of cash received by the Company,
if any, upon the conversion, exchange or exercise thereof.
 
  None of the foregoing provisions will prohibit (i) the payment of any
dividend within 60 days after the date of its declaration, if at the date of
declaration such payment would be permitted by the foregoing paragraph; (ii)
the redemption, repurchase or other acquisition or retirement of any shares of
any class of Capital Stock of the Company or any Restricted Subsidiary in
exchange for, or out of the net cash proceeds of, a substantially concurrent
issue and sale of other shares of Capital Stock (other than Redeemable Capital
Stock) of the Company to any person (other than to a Restricted Subsidiary or a
Joint Venture); provided that such net cash proceeds are excluded from clause
(B)(2)(y) of the preceding paragraph; (iii) so long as no Default shall have
occurred and be continuing, any redemption, repurchase or other acquisition or
retirement of Subordinated Indebtedness by exchange for, or out of the net cash
proceeds of, a substantially concurrent issue and sale of (1) Capital Stock
(other than Redeemable Capital Stock) of the Company to any person (other than
to a Restricted Subsidiary or a Joint Venture); provided that any such net cash
proceeds are excluded from clause (B)(2)(y) of the preceding paragraph; or (2)
Indebtedness of the Company so long as such Indebtedness (x) is subordinated to
the Notes in the same manner and at least to the same extent as the
Subordinated Indebtedness being redeemed, repurchased, acquired or retired and
(y) has no Stated Maturity earlier than the 91st day after the Stated Maturity
for the final scheduled principal payment of the Notes; (iv) so long as no
Default shall have occurred and be continuing, the making of Investments
constituting Restricted Payments in persons (other than Joint Ventures and
Wholly-Owned Restricted Subsidiaries of the Company) made after the Issue Date
not to exceed $30,000,000 at any time outstanding; (v) the making of
Investments constituting Restricted Payments made after the Issue Date as a
result of the receipt of non-cash consideration from any Asset Sale made
pursuant to and in compliance with the covenant "--Disposition of Proceeds of
Asset Sales;" or (vi) for so long as no Default shall have occurred and be
continuing, the declaration and payment of dividends of up to $15,000,000 in
aggregate amount to MII or its Affiliates in respect of shares of Series A
Preferred Stock owned by such persons that otherwise would not be permitted as
a result of the foregoing provisions. In computing the amount of Restricted
Payments previously made for purposes of clause (B) of the preceding paragraph,
Restricted Payments made under the immediately preceding clauses (i), (iv) and
(v) shall be included.
 
                                       77
<PAGE>
 
  The Indenture will also provide that the Company will not consent to or
otherwise authorize any Joint Venture to, directly or indirectly, and where the
Company has a legal or contractual right to do so, the Company will prevent a
Joint Venture from acting to
 
    (i) purchase, redeem, defease or otherwise acquire or retire for value
  any Capital Stock of the Company or any Subsidiary of the Company (other
  than Capital Stock of the Company upon original issuance by the Company);
 
    (ii) make any principal payment on, or purchase, repurchase, redeem or
  otherwise acquire or retire for value, any Subordinated Indebtedness (other
  than any Subordinated Indebtedness owed by such Joint Venture to the
  Company or any of its Subsidiaries); or
 
    (iii) make any Investment in any person (other than (x) a Subsidiary of
  which 100% of the outstanding Capital Stock is owned by such Joint Venture
  or (y) as permitted by clause (i) or (ii) above) other than in the ordinary
  course of business of such Joint Venture solely for the purpose of
  conducting activities directly related to the marine construction business
  or a business reasonably related thereto.
 
  Limitation on Liens. (a) The Indenture will provide that the Company will
not, and will not permit any Restricted Subsidiary to, create, incur, assume or
suffer to exist any Lien of any kind against or upon any of its property or
assets, whether now owned or acquired after the date of the Indenture, or any
proceeds therefrom, which secure either (i) Subordinated Indebtedness (other
than Subordinated Indebtedness of a Restricted Subsidiary owing to the Company
secured by assets of such Restricted Subsidiary) unless the Notes are secured
by a Lien on such property, assets or proceeds that is senior in priority to
the Liens securing such Subordinated Indebtedness or (ii) Pari Passu
Indebtedness unless the Notes are equally and ratably secured with the Liens
securing such Pari Passu Indebtedness. The foregoing covenant will not apply to
any Lien securing Acquired Indebtedness, provided that any such Lien extends
only to the properties or assets that were subject to such Lien prior to the
related acquisition by the Company or such Restricted Subsidiary and was not
created, incurred or assumed in contemplation of such transaction.
 
  (b) Notwithstanding the foregoing, any security interest granted by the
Company or any Restricted Subsidiary to secure the Notes created pursuant to
paragraph (a) above shall provide by its terms that such security interest
shall be automatically and unconditionally released and discharged upon the
release by the holders of the Indebtedness of the Company or any Restricted
Subsidiary described in paragraph (a) above of their security interest
(including any deemed release upon payment in full of all obligations under
such Indebtedness), at a time when (A) no other Pari Passu Indebtedness and
Subordinated Indebtedness of the Company or any Restricted Subsidiary has been
secured by such property or assets of the Company or any such Restricted
Subsidiary or (B) the holders of all such other Pari Passu Indebtedness and
Subordinated Indebtedness which is secured by such property or assets of the
Company or any such Restricted Subsidiary also release their security interest
in such property or assets (including any deemed release upon payment in full
of all obligations under such Indebtedness).
 
  Limitation on Sale-Leaseback Transactions. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, enter into,
assume, guarantee or otherwise become liable with respect to any Sale-Leaseback
Transaction unless (a) the Attributable Value of the obligations of the Company
or such Restricted Subsidiary with respect thereto is treated as Indebtedness
and would be permitted under the "Limitation on Additional Indebtedness"
covenant, (b) the consideration received with respect to the property subject
to such Sale-Leaseback Transaction at the time of such Sale-Leaseback
Transaction is at least equal to the Fair Market Value of the property subject
to the Sale-Leaseback Transaction and (c) the Company applies an amount in cash
equal to the Net Cash Proceeds of the Sale-Leaseback Transaction in accordance
with the provisions of the "Disposition of Proceeds of Asset Sales" covenant as
if such Sale-Leaseback Transaction were an Asset Sale by the Company.
Notwithstanding the foregoing, the Company or any Wholly-Owned Restricted
Subsidiary may enter into a Sale-Leaseback Transaction with any Wholly-Owned
Restricted Subsidiary or any Joint Venture, and a Wholly-owned Restricted
Subsidiary may enter into a Sale-Leaseback Transaction with the Company or any
Joint Venture or another Wholly-owned Restricted Subsidiary, in each case
subject only to clause (b) of the preceding sentence.
 
                                       78
<PAGE>
 
  Change of Control. Upon the occurrence of a Change of Control, the Company
shall be obligated to make an offer to purchase (a "Change of Control Offer")
and shall, subject to the provisions described below, purchase, on a business
day not more than 60 nor less than 30 days following the occurrence of the
Change of Control, all of the then outstanding Notes at a purchase price equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any plus Additional Amounts, if any (the "Change of Control Purchase Price"),
to the Change of Control Purchase Date. The Company shall, subject to the
provisions described below, be required to purchase all Notes properly tendered
into the Change of Control Offer and not withdrawn. The Change of Control Offer
is required to remain open for at least 20 business days and until the close of
business on the Change of Control Purchase Date.
 
  In order to effect such Change of Control Offer, the Company shall, not later
than the 30th day after the Change of Control, mail to each holder of Notes
notice of the Change of Control Offer, which notice shall govern the terms of
the Change of Control Offer and shall state, among other things, the procedures
that holders of Notes must follow to accept the Change of Control Offer.
 
  If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of Notes
seeking to accept the Change of Control Offer. Instruments governing Senior
Indebtedness may prohibit the Company from purchasing any Notes prior to their
Stated Maturity, including pursuant to a Change of Control Offer. In the event
a Change of Control occurs at a time when the Company does not have available
funds sufficient to pay the Change of Control Purchase Price or at a time when
the Company is prohibited from purchasing the Notes (and the Company is unable
to obtain the consent of such holders of Senior Indebtedness or to repay such
Senior Indebtedness), an Event of Default would occur under the Indenture. The
definition of Change of Control includes an event by which the Company sells,
conveys, transfers or leases all or substantially all of its Properties to any
Person; the phrase "all or substantially all" is subject to applicable legal
precedent and as a result in the future there may be uncertainty as to whether
a Change of Control has occurred. The Company shall not be required to make a
Change of Control Offer upon a Change of Control if a third party makes the
Change of Control Offer at the Change of Control Purchase Price, at the same
times and otherwise in compliance with the requirements applicable to a Change
of Control Offer made by the Company and purchases all Notes validly tendered
and not withdrawn under such Change of Control Offer.
 
  The occurrence of the events constituting a Change of Control under the
Indenture will result in an event of default under the Credit Agreement as
presently in effect and, thereafter, the lenders will have the right to require
repayment of the borrowings thereunder in full. The Credit Agreement does not
permit the purchase of the Notes absent consent of the lenders thereunder in
the event of a Change of Control.
 
  The Company will comply with Section 14(e) and Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable, in the event that a Change of Control
occurs and the Company is required to purchase Notes as described above.
 
  Disposition of Proceeds of Asset Sales. The Indenture will provide that the
Company will not, and will not permit any of the Restricted Subsidiaries to,
make any Asset Sale unless (i) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the shares or assets sold or otherwise
disposed of and (ii) at least 75% of such consideration consists of cash and/or
Cash Equivalents (with Indebtedness of the Company or any Restricted Subsidiary
(other than any Restricted Subsidiary that will cease to be a Restricted
Subsidiary as a result of such Asset Sale) being counted as cash for all
purposes of this covenant if the Company or the Restricted Subsidiary is
unconditionally released from any liability therefor). Net Cash Proceeds of any
Asset Sale may be applied to repay Specified Indebtedness or Credit Agreement
Obligations (but only if the commitments or amounts available to be borrowed
under such Specified Indebtedness or the Credit Agreement, as the case may be,
are permanently reduced by the amount of such payment). To the extent that such
Net Cash Proceeds are not applied as provided in the preceding sentence, the
Company or a Restricted Subsidiary, as the case
 
                                       79
<PAGE>
 
may be, may apply the Net Cash Proceeds from such Asset Sale, within 18 months
of the date of such Asset Sale, to an investment in properties and assets that
were the subject of such Asset Sale or in properties and assets that will be
used in the business of the Company and the Restricted Subsidiaries existing on
the Issue Date or in businesses reasonably related thereto ("Replacement
Assets"); provided, however, that the Company or such Restricted Subsidiary, as
the case may be, may apply such Net Cash Proceeds towards the acquisition or
construction of a new marine vessel or the refurbishment or refitting of an
existing marine vessel, in either case that will be used in the business of the
Company or one or more of its Restricted Subsidiaries or Joint Ventures, to the
extent made pursuant to a binding written agreement entered into by the Company
or such Restricted Subsidiary, as the case may be, within six months of such
Asset Sale, notwithstanding that the application of such Net Cash Proceeds
pursuant to such binding written agreement may occur, in whole or in part,
following the expiration of the 18-month period following such Asset Sale, and
any such Net Cash Proceeds applied pursuant to this proviso shall not
constitute Excess Proceeds (as hereinafter provided) except to the extent that
they would otherwise constitute Excess Proceeds (but for the application of
this proviso) and then only to the extent that they are not actually applied
within the 30-month period following the completion of such Asset Sale. Any Net
Cash Proceeds from any Asset Sale not applied as provided in the preceding two
sentences, within 18 months of the date of such Asset Sale, constitute "Excess
Proceeds" subject to disposition as provided below.
 
  When the aggregate amount of Excess Proceeds equals or exceeds $25,000,000,
the Company shall make an offer to purchase, from all holders of the Notes and
any then outstanding Pari Passu Indebtedness required to be repurchased or
repaid on a permanent basis in connection with an Asset Sale, an aggregate
principal amount of Notes and any such Pari Passu Indebtedness equal to such
Excess Proceeds as follows:
 
    (i) (A) The Company shall make an offer to purchase (a "Net Proceeds
  Offer") from all holders of the Notes in accordance with the procedures set
  forth in the Indenture the maximum principal amount (expressed as a
  multiple of $1,000) of Notes that may be purchased out of an amount (the
  "Payment Amount") equal to the product of such Excess Proceeds multiplied
  by a fraction, the numerator of which is the outstanding principal amount
  of the Notes and the denominator of which is the sum of the outstanding
  principal amount of the Notes and such Pari Passu Indebtedness, if any
  (subject to proration in the event such amount is less than the aggregate
  Offered Price (as defined in clause (ii) below) of all Notes tendered), and
  (B) to the extent required by any such Pari Passu Indebtedness and provided
  there is a permanent reduction in the principal amount of such Pari Passu
  Indebtedness, the Company shall make an offer to purchase such Pari Passu
  Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu
  Indebtedness Amount") equal to the excess of the Excess Proceeds over the
  Payment Amount.
 
    (ii) The offer price for the Notes shall be payable in cash in an amount
  equal to 100% of the principal amount of the Notes tendered pursuant to a
  Net Proceeds Offer, plus accrued and unpaid interest, if any, to the date
  such Net Proceeds Offer is consummated plus Additional Amounts, if any (the
  "Offered Price"), in accordance with the procedures set forth in the
  Indenture. To the extent that the aggregate Offered Price of the Notes
  tendered pursuant to a Net Proceeds Offer is less than the Payment Amount
  relating thereto or the aggregate amount of the Pari Passu Indebtedness
  that is purchased or repaid pursuant to the Pari Passu Offer is less than
  the Pari Passu Indebtedness Amount (such shortfall constituting a "Net
  Proceeds Deficiency"), the Company may use such Net Proceeds Deficiency, or
  a portion thereof, for general corporate purposes, subject to the
  limitations of the "Limitation on Restricted Payments" covenant.
 
    (iii) If the aggregate Offered Price of Notes validly tendered and not
  withdrawn by holders thereof exceeds the Payment Amount, Notes to be
  purchased will be selected on a pro rata basis. Upon completion of such Net
  Proceeds Offer and Pari Passu Offer, the amount of Excess Proceeds shall be
  reset to zero.
 
  The Company will comply with Section 14(e) and Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable, in the event that an Asset Sale occurs and
the Company is required to purchase Notes as described above.
 
                                       80
<PAGE>
 
  Limitation on Issuance and Sale of Preferred Stock by Restricted
Subsidiaries. The Indenture will provide that the Company (i) will not permit
any of the Restricted Subsidiaries to issue any Preferred Stock (other than to
the Company or a Restricted Subsidiary) and (ii) will not permit any person
(other than the Company or a Restricted Subsidiary) to own any Preferred Stock
of any Restricted Subsidiary.
 
  Limitation on Transactions with Affiliates. The Indenture will provide that
the Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, enter into or suffer to exist any transaction or
series of related transactions (including, without limitation, the sale,
transfer, disposition, purchase, exchange or lease of assets, property or
services) with, or for the benefit of, any Affiliate of the Company (other than
a Wholly-Owned Restricted Subsidiary or a Joint Venture; provided that no
Affiliate (other than a Subsidiary of the Company) or beneficial holder of 10%
or more of any class of Capital Stock of the Company shall beneficially own any
Capital Stock in such Restricted Subsidiary or Joint Venture other than Capital
Stock beneficially owned by a Permitted Holder solely by virtue of its
ownership of Capital Stock of the Company) or any beneficial holder of 10% or
more of any class of Capital Stock of the Company except (i) on terms that are
no less favorable to the Company or the Restricted Subsidiary, as the case may
be, than those which could have been obtained in a comparable transaction at
such time from persons who do not have such a relationship with the Company,
and (ii) with respect to any transaction or series of related transactions
involving aggregate payments or value equal to or greater than $5,000,000, the
Company shall have delivered an officer's certificate to the Trustee certifying
that such transaction or series of related transactions comply with the
preceding clause (i) and, with respect to any transaction or series of
transactions involving aggregate payments or value equal to or greater than
$10,000,000, further certifying that such transaction or series of transactions
have been approved by a majority of the Board of Directors of the Company,
including a majority of the disinterested directors of the Board of Directors
of the Company. This covenant will not restrict the Company from (a) making
dividends permitted by the covenant "--Limitation on Restricted Payments," (b)
paying reasonable and customary regular fees to directors of the Company who
are not employees of the Company, (c) making loans or advances to officers of
the Company and the Restricted Subsidiaries for bona fide business purposes of
the Company, (d) the Company's employee compensation and other benefit
arrangements, (e) complying with the terms of any Permitted Agreement and (f)
performing any existing obligations in respect of the transactions separately
described under "Certain Transactions and Relationships."
 
  Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture will provide that the Company will not, and will
not permit any of the Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends, in cash or otherwise, or make any other distributions on or in
respect of its Capital Stock or any other interest or participation in, or
measured by, its profits, (b) pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (c) make loans or advances to the Company or any
other Restricted Subsidiary or (d) transfer any of its properties or assets to
the Company or any other Restricted Subsidiary (other than any customary
restriction on transfers of property subject to a Lien permitted under the
Indenture (other than a Lien on cash not constituting proceeds of non-cash
property subject to a Lien permitted under the Indenture) which would not
materially adversely affect the Company's ability to satisfy its obligations
under the Notes and the Indenture), except for such encumbrances or
restrictions existing under or by reason of (i) applicable law or governmental
regulation, (ii) customary non-assignment provisions of any contract or any
licensing agreement entered into by the Company or any of the Restricted
Subsidiaries in the ordinary course of business or any lease governing a
leasehold interest of the Company or any Restricted Subsidiary, (iii) any
agreement or other instrument of a person acquired by the Company or any
Restricted Subsidiary in existence at the time of such acquisition (but not
created in contemplation thereof), which encumbrance or restriction is not
applicable to any person, or the properties or assets of any person, other than
the person, or the property or assets (including subsequently acquired property
or assets to the extent subject thereto) of the person, so acquired, (iv) any
encumbrance or restriction in the Credit Agreement, the indenture governing the
OPI Notes or any other agreement, in each case, as in effect on the Issue Date
or otherwise modified from time to time; provided that
 
                                       81
<PAGE>
 
any such modification is not materially less favorable to the holders of Notes
than the applicable provision as in effect on the Issue Date and (v) any
encumbrance or restriction pursuant to any agreement that extends,
restructures, refinances, renews, refunds or replaces any agreement described
in clause (ii) or (iv) above, which is not materially less favorable to the
holders of Notes than those existing under the agreement being extended,
restructured, refinanced, renewed, refunded or replaced.
 
  Limitation on Other Senior Subordinated Indebtedness. The Indenture will
provide that the Company will not incur, directly or indirectly, any
Indebtedness which is expressly subordinate or junior in right of payment in
any respect to Senior Indebtedness unless such Indebtedness ranks pari passu in
right of payment with the Notes, or is expressly subordinated in right of
payment to the Notes.
 
  Limitation on Designations of Unrestricted Subsidiaries. The Indenture will
provide that the Company may designate any Subsidiary of the Company as an
"Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
 
    (a) no Default shall have occurred and be continuing at the time of or
  after giving effect to such Designation;
 
    (b) the Company would be permitted under the Indenture to make an
  Investment at the time of Designation (assuming the effectiveness of such
  Designation) in an amount (the "Designation Amount") equal to the Fair
  Market Value of the Capital Stock of such Subsidiary on such date; and
 
    (c) the Company would be permitted under the Indenture to incur $1.00 of
  additional Indebtedness pursuant to the first paragraph of the covenant
  described under "--Limitation on Additional Indebtedness" at the time of
  Designation (assuming the effectiveness of such Designation).
 
  In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"-- Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount. The Indenture will further provide that the Company shall
not and shall not permit any Restricted Subsidiary to, at any time (x) provide
credit support for, or a guarantee of, any Indebtedness of any Unrestricted
Subsidiary (including any undertaking, agreement or instrument evidencing such
Indebtedness) (provided, that the Company or a Restricted Subsidiary may
provide credit support to an Unrestricted Subsidiary if (i) such credit support
or Indebtedness constitutes a Permitted Investment or a Restricted Payment
permitted by the "Limitation on Restricted Payments" covenant, in each case at
the time of incurrence, or (ii) the credit support or Indebtedness would be a
Permitted Investment at the time of designation of such Subsidiary as an
Unrestricted Subsidiary), (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any Indebtedness which provides that the holder thereof may (upon
notice, lapse of time or both) declare a default thereon or cause the payment
thereof to be accelerated or payable prior to its final scheduled maturity upon
the occurrence of a default with respect to any Indebtedness of any
Unrestricted Subsidiary (including any right to take enforcement action against
such Unrestricted Subsidiary), except in the case of clause (i) or (ii) to the
extent permitted under the covenant described under "--Limitation on Restricted
Payments."
 
  The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if:
 
    (a) no Default shall have occurred and be continuing at the time of and
  after giving effect to such Revocation; and
 
    (b) all Liens and Indebtedness of such Unrestricted Subsidiary
  outstanding immediately following such Revocation would, if incurred at
  such time, have been permitted to be incurred for all purposes of the
  Indenture;
 
  All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
 
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  Reporting Requirements. The Indenture will require that the Company file with
the Commission the annual reports, quarterly reports and other documents
required to be filed with the Commission pursuant to Sections 13 and 15(d) of
the Exchange Act, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered under the
Exchange Act. The Company will be required to file with the Trustee within 30
days after it files them with the Commission copies of such reports and
documents (with exhibits) and to cause such reports and documents (without
exhibits) to be distributed to all holders of the Notes then shown in the
securities register.
 
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
 
  The Indenture will provide that the Company will not, in any transaction or
series of related transactions, merge or consolidate with or into, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets as an entirety to, any person or persons, and
that the Company will not permit any of the Restricted Subsidiaries to enter
into any such transaction or series of related transactions if such transaction
or series of related transactions, in the aggregate, would result in a sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Company or of the Company
and the Restricted Subsidiaries, taken as a whole, to any other person or
persons, unless at the time and after giving effect thereto (i) either (A)(1)
if the transaction or transactions is a merger or consolidation involving the
Company as a constituent to the merger or consolidation, the Company shall be
the surviving person of such merger or consolidation or (2) if the transaction
or related transactions is a merger or consolidation involving a Restricted
Subsidiary as a constituent to the merger or consolidation, such Restricted
Subsidiary shall be the surviving person of such merger or consolidation and
such surviving person shall be a Restricted Subsidiary, or (B)(1) the person
formed by such consolidation or into which the Company or such Restricted
Subsidiary is merged or to which the properties and assets of the Company or
such Restricted Subsidiary, as the case may be, substantially as an entirety,
are transferred (any such surviving person or transferee person being the
"Surviving Entity") shall be a corporation organized and existing under the
laws of Panama, the United States of America, any state thereof or the District
of Columbia and (2) in the case of a transaction involving the Company as a
constituent to the merger or consolidation, the Surviving Entity shall
expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the
Company under the Notes and the Indenture, and in each case, the Indenture
shall remain in full force and effect; and (ii) immediately after giving effect
to such transaction or series of related transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or as a result of such transaction or series of
related transactions), no Default shall have occurred and be continuing and the
Company, or the Surviving Entity, as the case may be, after giving effect to
such transaction or series of related transactions on a pro forma basis, could
incur $1.00 of additional Indebtedness under the first paragraph of the "--
Limitation on Additional Indebtedness" covenant described above.
 
  In connection with any consolidation, merger, transfer, lease or other
disposition contemplated by the provisions described in the foregoing
paragraph, the Company shall deliver, or cause to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such consolidation,
merger, transfer, lease or other disposition and the supplemental indenture in
respect thereof comply with the requirements under the Indenture. Such opinion
of counsel shall further state that the transaction will not result in the
Company or the Surviving Entity being required to make any deduction or
withholding on account of any Taxes from any payments made under or with
respect to the Notes unless the Company or the Surviving Entity shall agree to
waive its rights under "Tax Redemption" above and pay in full to the holders of
Notes any Additional Amounts which may become due and payable.
 
  Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, in which the
Company is not the continuing corporation, the Surviving
 
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<PAGE>
 
Entity shall succeed to, and be substituted for, and may exercise every right
and power of, the Company under the Indenture with the same effect as if the
Surviving Entity had been named as the Company therein; provided that, solely
for purposes of computing cumulative Consolidated Net Income for purposes of
clause (B) of the first paragraph of the covenant "Limitation on Restricted
Payments" above, the cumulative Consolidated Net Income of any persons other
than the Company and the Restricted Subsidiaries shall only be included for
periods subsequent to the effective time of such merger, consolidation,
combination or transfer of assets.
 
  The Indenture will provide that for all purposes of the Indenture and the
Notes (including the provision of this covenant and the covenants described in
"--Limitation on Additional Indebtedness", "--Limitation on Restricted
Payments" and "--Limitation on Liens"), Subsidiaries of any Surviving Entity
will, upon such transaction or series of transactions, become Restricted
Subsidiaries or Unrestricted Subsidiaries as provided pursuant to the covenant
described under "--Limitation on Designations of Unrestricted Subsidiaries" and
all Indebtedness, and all Liens on property or assets, of the Company and the
Restricted Subsidiaries immediately prior to such transaction or series of
transactions will be deemed to have been incurred upon such transaction or
series of transactions.
 
EVENT OF DEFAULT
 
  The following will be "Events of Default" under the Indenture:
 
    (i) default in the payment of the principal of, or premium, if any, when
  due and payable, on any of the Notes (at its Stated Maturity, upon optional
  redemption, upon required purchase, upon acceleration or otherwise); or
 
    (ii) default in the payment of an installment of interest on any of the
  Notes, when due and payable, and the continuation of such default for a
  period of 30 days or more; or
 
    (iii) the failure by the Company to comply with its obligations described
  under "Consolidation, Merger, Sale of Assets, Etc." above, the failure to
  make or consummate a Change of Control Offer in accordance with the
  Company's obligations under the covenant described under "Change of
  Control" above, or the failure to make or consummate an offer in accordance
  with the Company's obligations under the covenant described under
  "Disposition of Proceeds of Asset Sales" above; or
 
    (iv) the failure by the Company to perform or observe any other term,
  covenant or agreement contained in the Notes or the Indenture (other than a
  default specified in clause (i), (ii) or (iii) above) for a period of 60
  days after written notice of such failure stating that it is a "notice of
  default" under the Indenture and requiring the Company to remedy the same
  shall have been given (x) to the Company by the Trustee or (y) to the
  Company and the Trustee by the holders of 25% in aggregate principal amount
  of the Notes then outstanding; or
 
    (v) default or defaults under one or more agreements, instruments,
  mortgages, bonds, debentures or other evidences of Indebtedness (a "Debt
  Instrument") under which the Company or one or more Restricted Subsidiaries
  or the Company and one or more Restricted Subsidiaries then have
  outstanding Indebtedness in excess of $10,000,000, individually or in the
  aggregate, and either (x) the principal amount of such Indebtedness is
  already due and payable in full or (y) such default or defaults have
  resulted in the acceleration of the maturity of such Indebtedness; or
 
    (vi) the commencement of proceedings, or the taking of any enforcement
  action (including by way of set-off), by any holder of at least $15,000,000
  in aggregate principal amount of Indebtedness of the Company or any
  Restricted Subsidiary, after a default under such Indebtedness, to retain
  in satisfaction of such Indebtedness or to collect or seize, dispose of or
  apply in satisfaction of such Indebtedness, property or assets of the
  Company or any Restricted Subsidiary having a Fair Market Value in excess
  of $15,000,000 individually or in the aggregate; or
 
    (vii) one or more judgments, orders or decrees of any court or regulatory
  or administrative agency of competent jurisdiction for the payment of money
  in excess of $15,000,000 over the coverage under
 
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<PAGE>
 
  applicable binding insurance policies issued by a solvent insurer which has
  accepted such coverage, either individually or in the aggregate, shall be
  entered against the Company or any Restricted Subsidiary or any of their
  respective properties and shall not be discharged, settled or fully bonded
  and either (A) commencement by any creditor of an enforcement proceeding
  upon such judgment (other than a judgment that is stayed by reason of
  pending appeal or otherwise) or (B) there shall have been a period of 60
  days after the date on which any period for appeal has expired and during
  which a stay of enforcement of such judgment, order or decree shall not be
  in effect; or
 
    (viii) certain events of bankruptcy, insolvency or bankruptcy
  reorganization with respect to the Company or any Significant Subsidiary of
  the Company or any Significant Joint Venture shall have occurred; or
 
    (ix) any Significant Joint Venture defaults under one or more agreements,
  instruments, mortgages, bonds, debentures or other evidences of
  Indebtedness (a "JV Debt Instrument") under which such Significant Joint
  Venture and one or more of its Subsidiaries then have outstanding
  Indebtedness in excess of $40,000,000, individually or in the aggregate,
  and either (x) the principal amount of such Indebtedness is already due and
  payable in full or (y) such default or defaults have resulted in the
  acceleration of the maturity of such Indebtedness; or
 
    (x) the commencement of proceedings, or the taking of any enforcement
  action (including by way of set-off), by any holder of at least $40,000,000
  in aggregate principal amount of Indebtedness of any Significant Joint
  Venture or any Subsidiary of such Significant Joint Venture, after a
  default under such Indebtedness, to retain in satisfaction of such
  Indebtedness or to collect or seize, dispose of or apply in satisfaction of
  such Indebtedness, property or assets of such Significant Joint Venture or
  such Subsidiary having a Fair Market Value in excess of $40,000,000
  individually or in the aggregate.
 
  If an Event of Default (other than as specified in clause (viii) above with
respect to the Company) shall occur and be continuing, the Trustee, by notice
to the Company, or the holders of at least 25% in aggregate principal amount of
the Notes then outstanding, by notice to the Trustee and the Company, may
declare the principal of, premium, if any, and accrued interest on all of the
outstanding Notes due and payable immediately, upon which declaration, all
amounts payable in respect of the Notes shall be immediately due and payable.
If an Event of Default specified in clause (viii) above with respect to the
Company occurs and is continuing, then the principal of, premium, if any, and
accrued interest on all of the outstanding Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of Notes.
 
  Notwithstanding the foregoing, in the event of a declaration of acceleration
in respect of the Notes because an Event of Default specified in clause (v)
above shall have occurred and be continuing, such declaration of acceleration
shall be automatically annulled if the Indebtedness that is the subject of such
Event of Default has been discharged or paid or such Event of Default shall
have been cured or waived by the holders of such Indebtedness and written
notice of such discharge, cure or waiver, as the case may be, shall have been
given to the Trustee by the Company or by the requisite holders of such
Indebtedness or a trustee, fiduciary or agent for such holders, within 45 days
after such declaration of acceleration in respect of the Notes and no other
Event of Default shall have occurred which has not been cured or waived during
such 45-day period, and so long as such rescission of any such acceleration
does not conflict with any judgment or decree.
 
  After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of money due has been obtained by the Trustee,
the holders of a majority in aggregate principal amount of the outstanding
Notes, by written notice to the Company and the Trustee, may rescind such
declaration and its consequences if: (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all sums paid or advanced by the
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements, and advances of the Trustee, its agents and counsel, (ii) all
overdue interest on all Notes, (iii) the principal of and premium, if any, on
any Notes which have become due otherwise than by such
 
                                       85
<PAGE>
 
declaration of acceleration and interest thereon at the rate borne by the
Notes, and (iv) to the extent that payment of such interest is lawful, interest
upon overdue interest and overdue principal at the rate borne by the Notes
which has become due otherwise than by such declaration of acceleration; (b)
the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (c) all Events of Default, other than the non-
payment of principal of, premium, if any, and interest on the Notes that has
become due solely by such declaration of acceleration, have been cured or
waived.
 
  The holders of not less than a majority in aggregate principal amount of the
outstanding Notes may on behalf of the holders of all the Notes waive any past
defaults under the Indenture except a default in the payment of the principal
of, premium, if any, or interest on any Note, or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the holder of each Note outstanding.
 
  No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate principal amount of
the outstanding Notes have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding within 60 days after
receipt of such notice and the Trustee, within such 60-day period, has not
received directions inconsistent with such written request by holders of a
majority in aggregate principal amount of the outstanding Notes. Such
limitations do not apply, however, to a suit instituted by a holder of a Note
for the enforcement of the payment of the principal of, premium, if any, or
interest on, such Note on or after the respective due dates expressed in such
Note.
 
  During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, whether or not an Event of Default shall occur and be continuing, the
Trustee under the Indenture is not under any obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
holders of the Notes unless such holders shall have offered to the Trustee
reasonable security or indemnity. Subject to certain provisions concerning the
rights of the Trustee, the holders of a majority in aggregate principal amount
of the outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee under the Indenture.
 
  If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee shall mail to each holder of the Notes notice of the
Default or Event of Default within 30 days after obtaining knowledge thereof.
Except in the case of a Default or an Event of Default in payment of principal
of, premium, if any, or interest on any Notes, the Trustee may withhold the
notice to the holders of such Notes if the Trustee in good faith determines
that withholding the notice is in the interest of the Noteholders.
 
  The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within ten days of any event which is, or after
notice or lapse of time or both would become, an Event of Default.
 
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
 
  The Company may, at its option and at any time, terminate the obligations of
the Company with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company shall be deemed to have paid and discharged
the entire Indebtedness represented by the then outstanding Notes, except for
(i) the rights of holders of outstanding Notes to receive payment in respect of
the principal of, premium, if any, and interest on such Notes when such
payments are due, (ii) the Company's obligations to issue temporary Notes,
 
                                       86
<PAGE>
 
register the transfer or exchange of any Notes, replace mutilated, destroyed,
lost or stolen Notes and maintain an office or agency for receipt of payments
in respect of the Notes, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and (iv) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to terminate
its obligations with respect to certain covenants that are set forth in the
Indenture, some of which are described under "--Certain Covenants" above, and
any subsequent failure to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes ("covenant
defeasance").
 
  In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes to redemption or maturity, (ii) the
Company shall have delivered to the Trustee an opinion of counsel to the effect
that the holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
defeasance or covenant defeasance had not occurred (in the case of defeasance,
such opinion must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable federal income tax laws), (iii) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit, (iv) such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest under the Indenture or the Trust
Indenture Act with respect to any securities of the Company, (v) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a default under, any material agreement or instrument to which
the Company is a party or by which the Company is bound, and (vi) the Company
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent under the Indenture to
either defeasance or covenant defeasance, as the case may be, have been
complied with and that no violations under agreements governing any other
outstanding Indebtedness would result therefrom.
 
SATISFACTION AND DISCHARGE
 
  The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for which payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be,
(ii) the Company has paid all other sums payable under the Indenture by the
Company, and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion counsel, which, taken together, state that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
 
AMENDMENTS AND WAIVERS
 
  From time to time, the Company, when authorized by a resolution of its Board
of Directors, and the Trustee may, without the consent of the holders of any
outstanding Notes, amend, waive or supplement the Indenture or the Notes for
certain specified purposes, including, among other things, curing ambiguities,
 
                                       87
<PAGE>
 
defects or inconsistencies, qualifying, or maintaining the qualification of,
the Indenture under the Trust Indenture Act of 1939 or making any change that
does not adversely affect the rights of any holder. Other amendments or
modifications of the Indenture or the Notes may be made by the Company and the
Trustee with the consent of the holders of not less than a majority of the
aggregate principal amount of the outstanding Notes; provided that no such
modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby, (i) reduce the principal amount of, extend
the fixed maturity of or alter the redemption provisions of, the Notes, (ii)
change the currency in which the Notes or any premium or the interest thereon
is payable, (iii) reduce the percentage in principal amount of outstanding
Notes that must consent to an amendment, supplement or waiver or consent to
take any action under the Indenture or the Notes, (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to the
Notes, (v) waive a default in payment with respect to the Notes, (vi) following
the occurrence of a Change of Control or Asset Sale, amend, change or modify
the obligation of the Company to make and consummate a Change of Control Offer
in the event of a Change of Control or make and consummate the offer with
respect to any Asset Sale or modify any of the provisions or definitions with
respect thereto, (vii) reduce or change the rate or time for payment of
interest on the Notes or (viii) modify or change any provision of the Indenture
affecting the subordination of the Notes in a manner adverse to the holders of
the Notes.
 
  Subject to the limitations set forth above, the holders of a majority in
aggregate principal amount of the outstanding Notes may waive compliance by the
Company with certain restrictive provisions of the Indenture. The holders of a
majority in aggregate principal amount of the outstanding Notes may waive any
past default under the Indenture, except a default in the payment of principal
or premium, if any, or interest on the Notes.
 
THE TRUSTEE
 
  Citibank, N.A. is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
 
  The Indenture (including the provisions of the Trust Indenture Act
incorporated by reference therein) will contain limitations on the rights of
the Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, if it acquires
any conflicting interest (as defined in the Trust Indenture Act) it must
eliminate such conflict or resign.
 
GOVERNING LAW
 
  The Indenture and the Notes will be governed by the laws of the State of New
York, without regard to the principles of conflicts of law.
 
CONSENT TO JURISDICTION AND SERVICE
 
  The Indenture will provide that the Company will irrevocably appoint
as its agent for service of process in any suit, action or proceeding with
respect to the Indenture or the Notes and for actions brought under federal or
state securities laws brought in any federal or state court located in The City
of New York and submits to such jurisdiction.
 
CERTAIN DEFINITIONS
 
  "Acquired Indebtedness" means Indebtedness of a person (a) assumed in
connection with an Asset Acquisition from such person or (b) existing at the
time such person becomes a Subsidiary of any other person, but not including
Indebtedness incurred in connection with, or in anticipation of, such person
becoming a Subsidiary.
 
                                       88
<PAGE>
 
  "Affiliate" means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person. For the purposes of this definition,
"control," when used with respect to any person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of this definition, beneficial ownership of 10% or less of the voting
common equity (on a fully diluted basis) or options or warrants to purchase
such equity (but only if exercisable at the date of determination or within 60
days thereof) of a person shall not, in and of itself, be deemed to constitute
control of such person.
 
  "Asset Acquisition" means (a) an Investment by the Company or any Subsidiary
of the Company in any other person pursuant to which such person shall become a
Restricted Subsidiary, or shall be merged with or into the Company or any
Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any person which constitute all or substantially
all of the assets of such person or any division, operating unit or line of
business of such person.
 
  "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition by the Company or any Restricted Subsidiary to any person other
than the Company, a Restricted Subsidiary or a Joint Venture, in one or a
series of related transactions, of: (a) any Capital Stock of any Subsidiary of
the Company or any interest in any Joint Venture; (b) all or substantially all
of the properties and assets of any division or line of business of the Company
or any Restricted Subsidiary; or (c) any other properties or assets of the
Company or a Restricted Subsidiary other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include (i) any sale, issuance, conveyance, transfer, lease or other
disposition of properties or assets that is governed by the provisions
described under "--Consolidation, Merger, Sale of Assets, Etc.," (ii) any sale
of worn-out or obsolete vessels and other equipment which are no longer used or
useful; (iii) any sale of receivables and related assets pursuant to a
Receivables Facility; (iv) any sale, issuance, conveyance, transfer, lease or
other disposition of properties or assets, whether in one transaction or a
series of related transactions, involving assets with a Fair Market Value not
in excess of $5,000,000; and (v) any charter (bareboat or otherwise) or other
lease of assets or property entered into in the ordinary course of business and
with respect to which the Company or any Restricted Subsidiary is the charterer
or lessor, except any such charter or lease that provides for the acquisition
of such assets or property by the lessee during or at the term thereof for an
amount that is less than the Fair Market Value thereof as determined at the
time the right to acquire such assets or property is granted, in which case an
Asset Sale shall be deemed to occur at the time such right is granted; (vi) any
trade or exchange by the Comany or any Restricted Subsidiary or one or more
marine construction vessels for one or more other marine construction vessels
owned or held by another person, provided that the Fair Market Value of the
vessels traded or exchanged by the Company or such Restricted Subsidiary is
reasonably equivalent to the Fair Market Value of the vessels to be received by
the Company or such Restricted Subsidiary; and (viii) the completion of the
Vessel Sales.
 
  "Attributable Value" means, as to any particular lease under which any person
is at the time liable other than a Capitalized Lease Obligation, and at any
date as of which the amount thereof is to be determined, the total net amount
of rent required to be paid by such person under such lease during the initial
term thereof as determined in accordance with GAAP, discounted from the last
date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. The net amount of rent
required to be paid under any such lease for any such period shall be the
aggregate amount of rent payable by the lessee with respect to such period
after excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the
case of any lease which is terminable by the lessee upon the payment of a
penalty, such net amount shall also include the amount of such penalty, but no
rent shall be considered as required to be paid under such lease subsequent to
the first date upon which it may be so terminated. "Attributable Value" means,
as to a Capitalized Lease Obligation under which
 
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any person is at the time liable and at any date as of which the amount thereof
is to be determined, the capitalized amount thereof that would appear on the
face of a balance sheet of such person in accordance with GAAP.
 
  "Bankruptcy Law" means Title 11 of the United States Code or any similar
federal, state or foreign law for the relief of debtors.
 
  "Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock.
 
  "Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified
and accounted for as a capital lease obligation under GAAP, and, for the
purpose of the Indenture, the amount of such obligation at any date shall be
the Attributable Value thereof at such date.
 
  "Cash Equivalents" means, at any time: (i) any evidence of Indebtedness with
a maturity of 360 days or less from the date of acquisition thereof issued or
directly and fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States of America is pledged in support thereof); (ii) (x) demand
and time deposits and certificates of deposit or acceptances with a maturity of
360 days or less from the date of acquisition thereof of any financial
institution that is a member of the Federal Reserve System having combined
capital and surplus and undivided profits of not less than $250,000,000 and (y)
Eurocurrency time deposits maturing within 360 days from the date of
acquisition thereof with any branch or office of any commercial bank organized
under the laws of a country that is a member of the Organization for Economic
Cooperation and Development (the "OECD"), and comparable in quality to the
Investments permitted by the preceding clause (x); (iii) commercial paper with
a maturity of 360 days or less issued by a corporation that is not an Affiliate
of the Company organized under the laws of any state of the United States or
the District of Columbia and rated at least A-1 by S&P or at least P-1 by
Moody's or at least an equivalent rating category of another nationally
recognized securities rating agency; (iv) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the government of the United States of America or
issued by any agency thereof and backed by the full faith and credit of the
United States of America, in each case maturing within 360 days from the date
of acquisition; (v) deposits available for withdrawal on demand with any
commercial bank organized under the laws of any country that is a member of the
OECD and has total assets in excess of $100,000,000 or with any commercial bank
organized under the laws of any other country (other than the United States) in
which the Company or any Restricted Subsidiary maintains an office or is
engaged in offshore operations, provided that (a) all such deposits are
required to be made in such accounts in the ordinary course of business and (b)
such deposits do not at any one time exceed $30,000,000 in the aggregate; (vi)
deposits available for withdrawal on demand with any commercial bank not
meeting the qualifications specified in clause (ii) above but which is a
lending bank under any of the Company's or any Restricted Subsidiary's credit
facilities, provided that all such deposits do not exceed $10,000,000 in the
aggregate at any one time; and (vii) money market funds organized under the
laws of the United States of America or any state thereof that invest
substantially all of their assets in any of the types of investments described
in clause (i), (ii) or (iii) above.
 
  "Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), excluding a Permitted Holder, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all securities that
such person has the contractual right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Company; (b) the
Company consolidates with, or merges with or into, another person or sells,
assigns, conveys, transfers, leases or otherwise disposes
 
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<PAGE>
 
of all or substantially all of its assets to any person, or any person
consolidates with, or merges with or into, the Company in any such event
pursuant to a transaction in which the outstanding Voting Stock of the Company
is converted into or exchanged for cash, securities or other property, other
than any such transaction where (i) the outstanding Voting Stock of the Company
is converted into or exchanged for (1) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation or (2) cash,
securities and other property in an amount which could be paid by the Company
as a Restricted Payment under the Indenture and (ii) immediately after such
transaction, no "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), excluding a Permitted Holder, is the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the contractual right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly
or indirectly, of more than 50% of the total Voting Stock of the surviving or
transferee corporation or (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the stockholders of
the Company was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or persons
whose election as directors or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office other than by reason of an action taken
by a Permitted Holder.
 
  "Common Stock" means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
 
  "Consolidated EBITDA" means, with respect to the Company for any period, (i)
the sum of, without duplication, the amount for such period, taken as a single
accounting period, of (a) Consolidated Net Income, (b) Consolidated Non-cash
Charges, (c) Consolidated Interest Expense and (d) Consolidated Income Tax
Expense, less (ii) non-cash items increasing Consolidated Net Income for such
period.
 
  "Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company, the ratio of the aggregate amount of Consolidated EBITDA of the
Company for the four full fiscal quarters for which financial information in
respect thereof is available immediately preceding the date of the transaction
(the "Transaction Date") giving rise to the need to calculate the Consolidated
Fixed Charge Coverage Ratio (such four full fiscal quarter period being
referred to herein as the "Four Quarter Period") to the aggregate amount of
Consolidated Fixed Charges of the Company for the Four Quarter Period. In
addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to, without duplication, (a) the incurrence of any Indebtedness of
the Company or any of the Restricted Subsidiaries during the period commencing
on the first day of the Four Quarter Period to and including the Transaction
Date (the "Reference Period"), including, without limitation, the incurrence of
the Indebtedness giving rise to the need to make such calculation (and the
application of the net proceeds thereof), as if such incurrence (and
application) occurred on the first day of the Reference Period, (b) an
adjustment to eliminate or include, as the case may be, the Consolidated EBITDA
and Consolidated Fixed Charges of such person directly or indirectly
attributable to assets which are the subject of any Asset Sale or Asset
Acquisition (including, without limitation, any Asset Acquisition giving rise
to the need to make such calculation as a result of the Company or one of the
Restricted Subsidiaries (including any person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness) occurring during the
Reference Period, as if such Asset Sale (after giving effect to any Designation
of Unrestricted Subsidiaries) or Asset Acquisition occurred on the first day of
the Reference Period and (c) the retirement of Indebtedness during the
Reference Period which cannot thereafter be reborrowed occurring as if retired
on the first day of the Reference Period. For purposes of calculating
 
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<PAGE>
 
"Consolidated Fixed Charges" for this "Consolidated Fixed Charge Coverage
Ratio," interest on Indebtedness incurred during the Four Quarter Period under
any revolving credit facility which can be borrowed and repaid without reducing
the commitments thereunder shall be the actual interest during the Four Quarter
Period. Furthermore, in calculating "Consolidated Fixed Charges" for purposes
of determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio," (i) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date, (ii) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Reference
Period; and (iii) notwithstanding clauses (i) and (ii) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Rate Protection Obligations, shall
be deemed to have accrued at the rate per annum resulting after giving effect
to the operation of such agreements.
 
  "Consolidated Fixed Charges" means, with respect to the Company for any
period, the amounts for such period of Consolidated Interest Expense.
 
  "Consolidated Income Tax Expense" means, with respect to the Company for any
period, the provision for federal, state, local and foreign income taxes of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
 
  "Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, excluding fees related to the issuance of the
Notes, but including, without limitation, (a) any amortization of debt
discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation which in accordance with GAAP is required to be
reflected on an income statement, (d) all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing (other than in respect of Letters of Credit relating to bid,
performance and advance payment obligations incurred in the ordinary course of
business), (e) dividends payable in respect of Redeemable Capital Stock
(whether or not paid) other than Series A Preferred Stock and (f) all accrued
interest and (ii) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by the Company and the
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
 
  "Consolidated Net Income" means, with respect to the Company, for any period,
the consolidated net income (or loss) of the Company (including the Restricted
Subsidiaries and the Joint Ventures) for such period as determined in
accordance with GAAP consistently applied adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (i) all
extraordinary gains or losses (net of fees and expenses relating to the
transaction giving rise thereof) and the non-recurring cumulative effect of
accounting charges, (ii) except to the extent actually received by the Company,
any Restricted Subsidiary and any Joint Venture, income of the Company, the
Restricted Subsidiaries and the Joint Ventures derived from or in respect of
all Investments in persons other than any Restricted Subsidiary or Joint
Ventures, (iii) the portion of net income (or loss) of any Joint Venture
allocable to interests in such person other than the interests of the Company
or any Restricted Subsidiary, (iv) net income (or loss) of any person combined
with the Company, one of the Restricted Subsidiaries or one of the Joint
Ventures on a "pooling of interests" basis attributable to any period prior to
the date of combination, (v) any gain or loss realized upon the termination of
any employee pension benefit plan, on an after-tax basis, (vi) gains or losses
in respect of any Asset Sales by the Company, one of the Restricted
Subsidiaries or one of the Joint Ventures (net of fees and expenses relating to
the transaction giving rise thereto), on an after-tax basis, and (vii) the net
income of any Restricted Subsidiary (other than JRMI and the OPI Guarantors) to
the extent that the declaration of
 
                                       92
<PAGE>
 
dividends or similar distributions by that Restricted Subsidiary of that income
(A) is not at the time permitted, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to that Restricted
Subsidiary or its stockholders or (B) requires the approval of any minority
interest in such Restricted Subsidiary except to the extent dividends or
similar distributions are actually declared payable to the Company by such
Restricted Subsidiary; provided that there shall be included in net income of
the Company or such Restricted Subsidiary dividends or distributions excluded
from net income of such person in a previous fiscal period pursuant to clause
(ii) or clause (vii) to the extent such dividends or distributions are actually
received in the current fiscal period.
 
  "Consolidated Non-cash Charges" means, with respect to the Company for any
period, the aggregate depreciation, amortization and other non-cash expenses
(including, without limitation, non-cash reserves and non-cash charges) of the
Company, the Restricted Subsidiaries and the Joint Ventures reducing
Consolidated Net Income of the Company and the Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP adjusted, to
the extent included in calculating such depreciation, amortization and non-cash
expenses, by excluding, without duplication the portion thereof allocable to
interests in Joint Ventures by any person other than the Company or any
Restricted Subsidiary.
 
  "Credit Agreement" means the Competitive Advance and Revolving Credit
Facility Agreement dated as of June 7, 1995 among the Company, J. Ray McDermott
Holdings, Inc., JRMI, the financial institutions from time to time party
thereto, Texas Commerce Bank National Association as administrative agent,
Chemical Bank, as auction agent and Bank of America National Trust and Savings
Association, as co-agent, as such agreement may be amended, modified,
supplemented, extended, restated, replaced, restructured, renewed or refinanced
from time to time in one or more credit agreements, loan agreements,
instruments or similar agreements, as such may be further amended, modified,
supplemented, extended, restated, replaced, restructured, renewed or refinanced
from time to time, in each case in accordance with and as permitted by the
Indenture.
 
  "Credit Agreement Obligations" means all monetary obligations of every nature
of the Company or a Restricted Subsidiary, including without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities, from time to time owed to
the lenders or any agent under or in respect of the Credit Agreement.
 
  "Currency Agreement Obligations" means the obligations of any person under
any foreign exchange contract, currency swap agreement or other similar
agreement or arrangement designed to protect such person against fluctuations
in currency values.
 
  "Default" means any event that is, or after notice or passage of time or both
would be, an Event of Default.
 
  "Designated Senior Indebtedness" means (i) all Senior Indebtedness under the
Credit Agreement Obligations and (ii) any other Senior Indebtedness which (a)
at the time of incurrence equals or exceeds $50,000,000 in aggregate principal
amount and (b) is specifically designated by the Company in the instrument
evidencing such Senior Indebtedness as "Designated Senior Indebtedness" for
purposes of this Indenture.
 
  "Designation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
 
  "Designation Amount" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
 
  "Event of Default" has the meaning set forth under "--Events of Default"
herein.
 
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<PAGE>
 
  "Fair Market Value" with respect to any asset or property means the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer under no compulsion to buy. Fair Market Value shall be determined by the
Board of Directors of the Company acting in good faith and shall be evidenced
by a board resolution which determination shall be conclusive for all purposes
of the Indenture.
 
  "GAAP" means, at any date, generally accepted accounting principles in the
United States set forth in the Statements of Financial Accounting Standards and
the Interpretations, Accounting Principles Board Opinions and AICPA Accounting
Research Bulletins that are applicable to the circumstances as of the date of
determination and consistently applied; provided, however, that, except as
otherwise provided, all calculations made for purposes of determining
compliance with the terms of the covenants set forth in "Certain Covenants" and
other provisions of the Indenture shall utilize GAAP in effect at the Issue
Date.
 
  "guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
 
  "Indebtedness" means, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables, advances on
contracts and other accrued current liabilities incurred in the ordinary course
of business, but including, without limitation, all obligations, contingent or
otherwise, of such person in connection with any letters of credit, banker's
acceptance or other similar credit transaction, (b) all obligations of such
person evidenced by bonds, notes, debentures or other similar instruments, (c)
all Indebtedness of such person created or arising under any conditional sale
or other title retention agreement with respect to property acquired by such
person (even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade accounts payable arising in the ordinary course
of business, (d) all Capitalized Lease Obligations of such person, (e) all
Indebtedness referred to in the preceding clauses of other persons and all
dividends of other persons, the payment of which is secured by (or for which
the holder of such Indebtedness has an existing contractual right, contingent
or otherwise, to be secured by) any Lien upon property (including, without
limitation, accounts and contract rights) owned by such person, even though
such person has not assumed or become liable for the payment of such
Indebtedness (the amount of such obligation being deemed to be the lesser of
the value of such property or asset or the amount of the obligation so
secured), (f) all guarantees of Indebtedness referred to in this definition by
such person, (g) all Redeemable Capital Stock of such person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued dividends, (h) all obligations of such person under or in respect of
Currency Agreement Obligations and Interest Rate Protection Obligations of such
person and (i) any amendment, supplement, modification, deferral, renewal,
extension or refunding of any liability of the types referred to in clauses (a)
through (h) above. For purposes hereof, (x) the "maximum fixed repurchase
price" of any Redeemable Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Redeemable
Capital Stock as if such Redeemable Capital Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Redeemable Capital Stock, such fair market value shall be the
Fair Market Value of such Redeemable Capital Stock (provided that if such
Redeemable Capital Stock is not at the date of determination permitted or
required to be repurchased, the "maximum fixed repurchase price" shall be the
book value of such Redeemable Capital Stock) and (y) Indebtedness is deemed to
be incurred pursuant to a revolving credit facility each time an advance is
made thereunder. For purposes of the covenant "Limitation on Additional
Indebtedness," in determining the principal amount of any Indebtedness to be
incurred by the Company or a Restricted Subsidiary or which is outstanding at
any date, (x) the principal amount of any Indebtedness which
 
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<PAGE>
 
provides that an amount less than the principal amount thereof shall be due
upon any declaration of acceleration thereof shall be the accreted value
thereof at the date of determination and (y) effect shall be given to the
impact of any Interest Rate Protection Obligations and Currency Agreement
Obligations with respect to such Indebtedness. When any person becomes a
Restricted Subsidiary, there shall be deemed to have been an incurrence by such
Restricted Subsidiary of all Indebtedness for which it is liable at the time it
becomes a Restricted Subsidiary. If the Company or any of the Restricted
Subsidiaries, directly or indirectly, guarantees Indebtedness of a third
person, there shall be deemed to be an incurrence of such guaranteed
Indebtedness as if the Company or such Restricted Subsidiary had directly
incurred or otherwise assumed such guaranteed Indebtedness; provided that as
and to the extent that the Company or such Restricted Subsidiary, as the case
may be, shall be entitled pursuant to the terms of any agreement then in
effect, to reimbursement, indemnity or contribution from any person (other than
the Company or any of its Subsidiaries or Joint Ventures) that the Company
reasonably deems to be solvent for amounts as to which the Company or such
Restricted Subsidiary, as the case may be, may become liable for or have to pay
pursuant to such a guarantee of Indebtedness of a Joint Venture, such amount,
but not the remaining amount, shall not be treated for this purpose as having
been guaranteed.
 
  "Indemnifiable Taxes" means any Taxes imposed by the Republic of Panama (or
any province or territory or jurisdiction or subdivision thereof) in respect of
a payment upon, under or with respect to a Note pursuant to such Note or the
Indenture, other than any Taxes imposed, payable or due by reason of (i) a
failure of the holder of such Note to comply with any applicable certification,
identification, information, documentation, application, notification or other
reporting requirement imposed by statute, treaty, regulation or administrative
practice or (ii) a present or former connection between the Republic of Panama
(or any province or territory or jurisdiction or subdivision thereof) and the
holder of such Note (or a shareholder or affiliate thereof) otherwise than by
the mere acquisition, holding or disposition (other than an actual disposition
in the Republic of Panama) of the Note or the receipt of payments thereunder.
 
  "Interest Rate Protection Obligations" means the obligations of any person
pursuant to any arrangement with any other person whereby, directly or
indirectly, such person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
person calculated by applying a fixed or a floating rate of interest on the
same nominal amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
 
  "Investment" means, with respect to any person, any direct or indirect loan
or other extension of credit, guarantee or capital contribution to (by means of
any transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition by
such person of any Capital Stock, bonds, notes, debentures or other securities
or evidences of Indebtedness issued by, any other person. "Investments" shall
exclude contracts in progress and extensions of trade credit by any person in
the ordinary course of business of such person. In addition to the foregoing,
any foreign exchange contract, currency swap or similar agreement shall
constitute an Investment hereunder.
 
  "Joint Venture" means any person (i) in which the Company or any Wholly-Owned
Restricted Subsidiary, directly or indirectly, owns at least 33% or more of the
Capital Stock or partnership or other equity interests of such person, (ii) as
to which the Company or such Wholly-Owned Restricted Subsidiary, as the case
may be, has either (a) the power to control, directly or indirectly (whether
through the exercise of voting rights, representation on the board of directors
or other governing body of such person, the exercise of veto rights, or
otherwise), any decisions by such person with respect to the payment of
dividends or the making of distributions by such person or (b) the right (by
contract, applicable law or otherwise) to cause the dissolution and liquidation
of such person (including pursuant to contractual provisions governing deadlock
that may require good faith efforts to resolve any deadlock prior to any such
dissolution or liquidation) and (iii) that was formed with one or more persons
who are not Affiliates (provided that the [engineering joint venture] may be
formed with an Affiliate), and (iv) is engaged in the marine construction
business or a business reasonably related thereto. Any Subsidiary of a Joint
Venture of which the Company owns, directly
 
                                       95
<PAGE>
 
or indirectly, 25% of the Capital Stock of such Subsidiary, shall be treated as
a Joint Venture. As of the Issue Date, the following persons constituted Joint
Ventures: Offshore Marine Chartering, N.V.; HeereMac v.o.f.; Panama Offshore
Chartering Company, Inc.; U.S. Offshore Chartering; Far East Vessels Inc.;
Heerema McDermott Australia Pty Ltd; McDermott-ETPM Inc.; McDermott-ETPM West,
Inc.; McDermott-ETPM East, Inc.; McDermott-ETPM Far East, Inc.; ETPM
International S.A.S.; ETPM International (UK) Ltd.; McDermott Subsea
Constructors Ltd.; Brown & Root McDermott Fabricators Limited; CCC
Fabricacciones y Construcciones, S.A. de C.V.; Offshore Hyundai International,
Ltd.; TL Offshore Sdn. Bhd.; TL Marine Sdn. Bhd.; Spars International Inc.; and
each of their respective Subsidiaries.
 
  "JRMI" means J. Ray McDermott, Inc., a Delaware corporation and a Restricted
Subsidiary.
 
  "Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement having substantially the same economic effect as any of the
foregoing.
 
  "MII" means McDermott International, Inc., a Panama corporation.
 
  "Moody's" means Moody's Investors Services, Inc. and its successors.
 
  "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents, including, without limitation,
payments in respect of deferred payment obligations when received in the form
of cash or Cash Equivalents (except to the extent that such obligations are
financed or sold with recourse to the Company or any Restricted Subsidiary) net
of (i) brokerage commissions and other fees and expenses (including, without
limitation, fees and expenses of legal counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes payable as a result of such
Asset Sale, (iii) amounts required to be paid and which have been paid, or
amounts required to be pledged and which are pledged, to secure Indebtedness
owed, to any person (other than the Company or any Restricted Subsidiary)
owning a beneficial interest in the assets subject to the Asset Sale (which, in
the case of a Lien, is being pledged or applied to permanently reduce
Indebtedness secured by such Lien) and (iv) appropriate amounts to be provided
by the Company or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the
case may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an officers' certificate delivered to the
Trustee.
 
  "OPI Guarantors" means each person designated as either a "Parent Guarantor"
or a "Guarantor" in the indenture governing the OPI Notes.
 
  "OPI Notes" means the 12 7/8% Guaranteed Senior Notes due July 15, 2002
issued pursuant to an Indenture, dated as of July 2, 1992, as supplemented and
in effect from time to time, among JRMI, J. Ray McDermott Holdings, Inc., OPI
Vessels, Inc., OPI Vessels, Ltd. and Offshore Petroleum Divers, Inc. and
NationsBank of Texas, National Association, as Trustee.
 
  "Pari Passu Indebtedness" means any Indebtedness of the Company ranking pari
passu in right of payment with the Notes.
 
  "Permitted Agreement" means each of (i) the Letter Agreement dated as of
January 31, 1995 by and between the Company and MII; (ii) the Transition
Services Agreement dated as of August 16, 1994 by and between the Company and
MII, as amended through the Issue Date; (iii) the Services Agreement dated as
of August 16, 1994 by and between the Company and MII, as amended through the
Issue Date; (iv) the Registration Rights Agreement dated as of January 31, 1995
by and between the Company and MII; (v) the Purchase Agreement dated as of May
30, 1995 by and between the Company and MII; (vi) the Term Note
 
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<PAGE>
 
dated as of January 31, 1995 issued by the Company to MII; (vii) the Letter
Agreement relating to litigation support dated as of January 31, 1995 by and
between the Company and MII; and (viii) the [engineering joint venture
agreement]; as any such Permitted Agreement may be modified from time to time;
provided that any such modification is no less favorable to the holders of
Notes than the applicable provision of any such Permitted Agreement in effect
on the Issue Date.
 
  "Permitted Holder" means MII, its controlled Affiliates, and their respective
successors to their businesses substantially as an entirety.
 
  "Permitted Investment" means any of the following: (a) Investments in the
Company or any Wholly-Owned Restricted Subsidiary (including any person that
pursuant to such Investment becomes a Wholly-Owned Restricted Subsidiary) and
any person that is merged or consolidated with or into, or transfers or conveys
all or substantially all of its assets to, the Company or any Wholly-Owned
Restricted Subsidiary at the time such Investment is made; (b) Investments in
any Joint Venture; (c) Investments in prepaid expenses, negotiable instruments
and other similar instruments (other than of Affiliates) held for collection;
(d) Investments in Cash Equivalents; (e) Investments in deposits with respect
to leases, workers' compensation or utilities provided to third parties in the
ordinary course of business; (f) Investments in the Notes; (g) Investments in
agreements giving rise to Interest Rate Protection Obligations and Currency
Agreement Obligations permitted by the covenant "--Limitation on Additional
Indebtedness"; (h) loans or advances to officers, employees or consultants of
the Company and the Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes of the Company and the Restricted Subsidiaries
(including travel and moving expenses) not in excess of $    in the aggregate
at any one time outstanding; (i) Investments in evidences of Indebtedness,
securities or other property received from another person by the Company or any
of the Restricted Subsidiaries in connection with any bankruptcy proceeding or
by reason of a composition or readjustment of debt or a reorganization of such
person or as a result of foreclosure, perfection or enforcement of any Lien in
exchange for evidences of Indebtedness, securities or other property of such
person held by the Company or any of the Restricted Subsidiaries, or for other
liabilities or obligations of such other person to the Company or any of the
Restricted Subsidiaries that were created in accordance with the terms of the
Indenture; and (j) non-cash consideration received as a result of Asset Sales
permitted under the "Disposition of Proceeds of Asset Sales" covenant.
 
  "person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
 
  "Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding or issued after
the Issue Date, including, without limitation, all classes and series of
preferred or preference stock of such person.
 
  "Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company or the Restricted Subsidiaries,
and any additions and accessions thereto, which are purchased or constructed by
the Company or any Restricted Subsidiary at any time after the Issue Date;
provided that (i) any security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively a "Security Agreement") shall be entered into prior to the date
that is 90 days after the purchase or substantial completion of the
construction of such assets and shall at all times be confined solely to the
assets so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection
with the purchase of additions and accessions thereto and except in respect of
fees and other obligations in respect of such Indebtedness and (iii) (A) the
aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Security Agreement is entered into exceed 100% of
the purchase price to the Company or any Restricted Subsidiary of the assets
subject thereto or (B) the Indebtedness
 
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<PAGE>
 
secured thereby shall be with recourse solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom.
 
  "Receivables Facility" means an agreement or series of agreements under which
the Company or the Restricted Subsidiaries sell accounts receivable and related
assets to unrelated third parties (or to special purpose entities created for
this purpose for resale to unrelated third parties) for cash on a non-recourse
basis (subject to exposures and liabilities customarily retained by sellers in
transactions of that type) and on terms (including discounts) customary for
transactions of that type.
 
  "Receivables Facility Obligations" means any Indebtedness arising under a
Receivables Facility.
 
  "Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the Final
Stated Maturity of the principal of the Notes or is redeemable at the option of
the holder thereof at any time prior to the Final Stated Maturity of the
principal of the Notes, or, at the option of the holder thereof, is convertible
into or exchangeable for debt securities at any time prior to the Final Stated
Maturity of the principal of the Notes.
 
  "Restricted Payment" has the meaning set forth under "--Limitation on
Restricted Payments" covenant above.
 
  "Restricted Subsidiary" means any Subsidiary of the Company that is not a
Joint Venture and that has not been designated by the Board of Directors of the
Company, by a Board Resolution of the Company delivered to the Trustee, as an
Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Designations of
Unrestricted Subsidiaries." Any such designation may be revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions
of such covenant. For purposes of this definition, any directors' qualifying
shares or investments by foreign nationals mandated by applicable law or
governmental regulation shall be disregarded in determining the ownership of a
Restricted Subsidiary.
 
  "Revocation" has the meaning ascribed to that term under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
 
  "S&P" means Standard & Poor's Corporation and its successors.
 
  "Sale-Leaseback Transaction" means, with respect to any person, any direct or
indirect arrangement pursuant to which properties or assets are sold or
transferred by such person and are thereafter leased back from the purchaser or
transferee thereof by such person or one of its Affiliates.
 
  "Senior Indebtedness" means the principal of, premium, if any, and interest
on any Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall also include the principal of,
premium, if any, and interest (including interest accruing after the filing of
a petition initiating any proceeding under any Bankruptcy Law, whether or not
such interest is an allowable claim in such proceeding) on, and all other
amounts owing in respect of, all Credit Agreement Obligations of the Company.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a)
Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly
subordinate or junior in right of payment to any Senior Indebtedness of the
Company, (c) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is by its terms
without recourse to the Company, (d) any repurchase, redemption or other
obligation in respect of Redeemable Capital Stock of the Company, (e) to the
extent it might constitute Indebtedness, amounts owing for goods, materials or
services purchased in the ordinary
 
                                       98
<PAGE>
 
course of business or consisting of trade payables or other current liabilities
(other than any current liabilities owing under the Credit Agreement
Obligations or the current portion of any long-term Indebtedness which would
constitute Senior Indebtedness but for the operation of this clause (e)), (f)
to the extent it might constitute Indebtedness, any liability for federal,
state, local or other taxes owed or owing by the Company, (g) Indebtedness of
the Company to a Subsidiary of the Company or any other Affiliate of the
Company or any of such Affiliate's Subsidiaries, and (h) that portion of any
Indebtedness of the Company which at the time of issuance is issued in
violation of the Indenture (but, as to any such Indebtedness, no such violation
shall be deemed to exist for purposes of this clause (h) if the holder(s) of
such Indebtedness or their representative or the Company shall have furnished
to the Trustee an opinion of counsel unqualified in all material respects of
independent legal counsel, addressed to the Trustee (which legal counsel may,
as to matters of fact, rely upon a certificate of the Company) to the effect
that the incurrence of such Indebtedness does not violate the provisions of
such Indenture).
 
  "Senior Subordinated Note Obligations" means any principal of, premium, if
any, and interest on, and any other amounts (including, without limitation, any
payment obligations with respect to the Notes arising as a result of any Asset
Sale, Change of Control or redemption) owing in respect of, the Notes payable
pursuant to the terms of the Notes or the Indenture or upon acceleration of the
Notes.
 
  "Series A Preferred Stock" means the Series A $2.25 cumulative convertible
Preferred Stock of the Company, par value $.01 per share.
 
  "Significant Joint Venture" means any Joint Venture which, if it were a
Subsidiary of the Company, would be a Significant Subsidiary.
 
  "Significant Subsidiary" shall have the same meaning as in Rule 1.02(w) of
Regulation S-X under the Securities Act as of the Issue Date, provided that no
Unrestricted Subsidiary shall be deemed a Significant Subsidiary.
 
  "Specified Indebtedness" means any Senior Indebtedness and any Indebtedness
of any Restricted Subsidiary which is not subordinated to any other
Indebtedness of such Restricted Subsidiary.
 
  "Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which any principal of such Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness or any
installments of interest thereon, means any date specified in the instrument
governing such Indebtedness as the fixed date on which the principal of such
Indebtedness, or such installment of interest thereon, is due and payable.
 
  "Subordinated Indebtedness" means Indebtedness of the Company which by its
terms is expressly subordinated in right of payment to the Notes.
 
  "Subsidiary" means, with respect to any person, (i) a corporation a majority
of whose Voting Stock is at the time, directly or indirectly, owned by such
person, by one or more Subsidiaries of such person or by such person and one or
more Subsidiaries of such person and (ii) any other person (other than a
corporation), including, without limitation, a joint venture, in which such
person, one or more Subsidiaries of such person, directly or indirectly, at the
date of determination thereof, has at least a majority ownership interest
entitled to vote in the election of directors, managers or trustees thereof (or
other person performing similar functions). For purposes of this definition,
any directors' qualifying shares or investments by foreign nationals mandated
by applicable law or governmental regulation shall be disregarded in
determining the ownership of a Subsidiary.
 
  "Taxes" means any present or future tax, duty, levy, impost, assessment or
other governmental charge (including penalties, interest and any other
liabilities related thereto) imposed or levied by or on behalf of a Taxing
Authority.
 
                                       99
<PAGE>
 
  "Taxing Authority" means any government or any political subdivision or
territory or possession of any government or any authority or agency therein or
thereof having power to tax.
 
  "Unrestricted Subsidiary" means a Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries," and any
Subsidiary of such Unrestricted Subsidiary. Any such designation may be revoked
by a Board Resolution of the Company delivered to the Trustee, subject to the
provisions of such covenant.
 
  "Vessel Sales" means the sale by the Company to the HeereMac Joint Venture
("HeereMac") of the Company's Vessels identified as DB 101 and DB 102 pursuant
to each of the [Purchase and Sale Agreement dated as of [    ], 1996 among the
Company, Heerema Offshore Construction Group, Inc. ("Heerema") and HeereMac
related to [    ]] and the [Purchase and Sale Agreement dated as of [   ], 1996
among the Company, Heerema and HeereMac related to [    ]] and the transactions
contemplated by each such agreement.
  "Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
 
  "Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary of the
Company of which 100% of the outstanding Capital Stock is owned by the Company
and/or another Wholly-Owned Restricted Subsidiary of the Company. For purposes
of this definition, any directors' qualifying shares or investments by foreign
nationals mandated by applicable law or governmental regulation shall be
disregarded in determining the ownership of a Restricted Subsidiary.
 
BOOK-ENTRY DELIVERY AND FORM
 
  The Notes will be issued in the form of one or more fully registered global
certificates (the "Global Certificates"). The Global Certificates will be
deposited with, or on behalf of, The Depository Trust Company, New York, New
York (the "Depositary") and registered in the name of the Depositary's nominee.
The Depositary will maintain the Notes in denominations of $1,000 and integral
multiples thereof through its book-entry facilities.
 
  Except as set forth below, the Global Certificates may be transferred, in
whole and not in part, only to another nominee of the Depositary or to a
successor of the Depositary or its nominee.
 
  The Depositary has advised the Company and the Underwriters as follows: It is
a limited-purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary was created to hold securities for its participating
organizations (the "Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. Participants
include securities brokers and dealers (including the Underwriter), banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own the Depositary. Access to the
Depositary's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("indirect
participants"). Persons who are not Participants may beneficially own
securities held by the Depositary only through Participants or indirect
participants.
 
  The Depositary has also advised that pursuant to procedures established by it
(i) upon the issuance by the Company, of the Notes, the Depositary will credit
the accounts of Participants designated by the Underwriters with the principal
amount of the Notes purchased by the Underwriters, and (ii) ownership of
beneficial interests in the Global Certificates will be shown on, and the
transfer of that ownership will be
 
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<PAGE>
 
effected only through, records maintained by the Depositary (with respect to
Participants' interests), the Participants and the indirect participants. A
beneficial owner is the person who has the right to sell, transfer or otherwise
dispose of an interest in the Notes and the right to receive the proceeds
therefrom, as well as principal, premium (if any) and interest payable in
respect of the Notes. The beneficial owner must rely on the foregoing
arrangements to evidence its interest in the Notes. Beneficial ownership of the
Notes may be transferred only by complying with the procedures of a beneficial
owner's Participant (e.g., a brokerage firm) and the Depositary. The laws of
some states require that certain persons take physical delivery in definitive
form of securities which they own. Consequently, the ability to transfer
beneficial interests in the Global Certificates is limited to such extent.
 
  So long as a nominee of the Depositary is the registered owner of the Global
Certificates, such nominee will be considered the sole owner or holder of the
Notes for all purposes under the Indenture and any applicable laws. Except as
provided below, owners of beneficial interests in the Global Certificates will
not be entitled to have Notes registered in their names, will not receive or be
entitled to receive physical delivery of Notes in definitive form and will not
be considered the owners or holders thereof under the Indenture.
 
  All rights of ownership must be exercised through the Depositary and the
book-entry system, and notices that are to be given to registered owners by the
Company or the Trustee will be given only to the Depositary. It is expected
that the Depositary will forward notices to the Participants who will in turn
forward notices to the beneficial owners. Neither the Company, the Trustee, the
the paying agent nor the Notes registrar will have any responsibility or
obligation to assure that any notices are forwarded by the Depositary to any
Participant or by any Participant to the beneficial owners. Neither the
Company, the Trustee, the paying agent nor the Notes registrar will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Certificates, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
 
  Principal and interest payments on the Global Certificates registered in the
name of the Depositary's nominee will be made by the Company, either directly
or through a paying agent, to the Depositary's nominee as the registered owner
of the Global Certificates. Under the terms of the Indenture, the Company and
the Trustee will treat the persons in whose names the Notes are registered as
the owners of such Notes for the purpose of receiving payments of principal and
interest on such Notes and for all other purposes whatsoever. Therefore,
neither the Company, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of principal or interest on the
Notes to owners of beneficial interests in the Global Certificates. The
Depositary has advised the Company and the Trustee that its present practice
is, upon receipt of any payment of principal or interest to credit immediately
the accounts of the Participants with payment in amounts' proportionate to
their respective holdings in principal amount of beneficial interests in the
Global Certificates as shown on the records of the Depositary. Payments by
Participants and indirect participants to owners of beneficial interests in the
Global Certificates will be governed by standing instructions and customary
practices as is now the case with securities held for the accounts of customers
in bearer form or registered in "street name" and will be the responsibility of
such Participants or indirect participants.
 
  As long as the Notes are represented by the Global Certificates, the
Depositary's nominee will be the holder of the Notes and therefore will be the
only entity that can exercise a right to repayment or repurchase of the Notes.
See "--Certain Covenants--Change of Control" and "--Limitation on Disposition
of Proceeds of Asset Sales." Notice by Participants or indirect participants or
by owners of beneficial interests in the Global Certificates held through such
Participants or indirect participants of the exercise of the option to elect
repayment of beneficial interests in Notes represented by the Global
Certificates must be transmitted to the Depositary in accordance with its
procedures on a form required by the Depositary and provided to Participants.
In order to ensure that the Depositary's nominee will timely exercise a right
to repayment with respect to a particular Note, the beneficial owner of such
Note must instruct the broker or other Participant or indirect participant
through which it holds an interest in such Note to notify the Depositary of its
desire to exercise a right to repayment. Different firms have cut-off times for
accepting instructions from their
 
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<PAGE>
 
customers and, accordingly, each beneficial owner should consult the broker or
other Participant or indirect participant through which it holds an interest in
a Note in order to ascertain the cut-off time by which such an instruction must
be given in order for timely notice to be delivered to the Depositary. The
Company will not be liable for any delay in delivery of notices of the exercise
of the option to elect repayment.
 
  The Company will issue Notes in definitive form in exchange for the Global
Certificates if, and only if, either (1) the Depositary is at any time
unwilling or unable to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, or (2) an Event of Default has
occurred and is continuing and the Notes registrar has received a request from
the Depositary to issue Notes in definitive form in lieu of all or a portion of
the Global Certificates. In either instance, an owner of a beneficial interest
in the Global Certificates will be entitled to have Notes equal in principal
amount to such beneficial interest registered in its name and will be entitled
to physical delivery of such Notes in definitive form. Notes so issued in
definitive form will be issued in denominations of $1,000 and integral
multiples thereof and will be issued in registered form only, without coupons.
 
                       CERTAIN INCOME TAX CONSIDERATIONS
 
UNITED STATES TAXATION
 
  Certain Federal Income Tax Considerations. The following summarizes certain
United States federal income tax considerations relevant to investors
purchasing the Notes, but is not a complete analysis of all of those provisions
of United States federal income tax law that could apply to a holder of the
Notes. This Summary does not address special rules applicable to certain
investors, such as investors who are not citizens or residents of the United
States or United States corporations, dealers in securities, banks, insurance
companies and tax-exempt organizations. SUCH PERSONS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF ANY
INVESTMENT IN THE NOTES.
 
  Taxation of Interest. Interest paid or accrued on the Notes will be taxable
to a holder as ordinary income for United States federal income tax purposes.
Certain holders of the Notes may be subject to backup withholding at the rate
of 31% with respect to interest. Generally, backup withholding applies only
when such holder (i) fails to furnish or certify a correct taxpayer
identification number to the payor in the manner required or otherwise qualify
for an exemption, (ii) is notified by the Internal Revenue Service ("IRS") that
it has failed to report payments of interest and dividends properly or (iii)
fails, under certain circumstances, to certify that it has not been notified by
the IRS that it is subject to backup withholding for failure to report interest
and dividend payments.
 
  Taxation on Disposition of the Notes. A holder whose Notes are sold or
redeemed for cash will recognize gain or loss to the extent of the difference
between the cash received (other than amounts reflecting accrued and unpaid
interest on the Notes, which will be treated as ordinary income) and the
holder's tax basis in the Notes. If the Note is a capital asset in the hands of
the holder, such gain or loss may constitute a capital gain or loss, which will
be long-term capital gain or loss if the note was held by the exchanging holder
for more than one year. Proceeds from such a disposition of a Note can also be
subject to backup withholding unless an exemption applies.
 
PANAMANIAN TAXES
 
  The principal Panamanian tax consequences of ownership of the Notes are as
follows:
 
  General. Panama's income tax is exclusively territorial. Only income actually
earned from sources within Panama is subject to taxation. Income earned by
Panamanian corporations from operations outside Panama is not taxable in
Panama. The territorial principle of taxation has been in force throughout the
history of the country and is reflected in legislation, administrative
regulations and court decisions.
 
                                      102
<PAGE>
 
  The Company is not subject to income taxes in Panama because all of its
income arises from activities conducted entirely outside Panama. This is the
case even though the Company maintains its registered office and permanently
employs administrative personnel in Panama.
 
  Taxation of Interest. Interest paid by the Company in respect of the Notes
will be exempted from Panamanian taxes otherwise payable by withholding at
source on such income if the Company has no Panama sourced revenue.
 
  Taxation on Disposition of Notes. There are no Panamanian taxes on capital
gains or other income realized by an individual or corporation, regardless of
nationality or residence, on the sale or other disposition of the Notes because
any gain arising from the sale or disposition of the Notes will not be deemed
taxable in Panama if the Company's assets and activities are held or conducted
entirely outside of Panama.
 
  The preceding summary of certain tax matters is based upon tax laws and
regulations in effect as of the date of this Circular and is subject to any
subsequent change in laws and regulations which may come into effect after such
date.
 
 
 
                                  UNDERWRITING
 
  Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") between the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the "Underwriter"), the Company has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Company, the
entire principal amount of the Notes. In the Purchase Agreement, the
Underwriter has agreed, subject to the terms and conditions set forth therein,
to purchase all the Notes offered hereby if any are purchased.
 
  The Company has been advised by the Underwriter that the Underwriter proposes
initially to offer the Notes to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of     % of the principal amount. The
Underwriter may allow, and such dealers may reallow, a discount not in excess
of     % of the principal amount to certain other dealers. After the initial
public offering of the Notes, the public offering price, concession and
discount may be changed.
 
  The Notes are a new issue of securities for which there is currently no
public market. The Company intends to apply for listing of the Notes on the New
York Stock Exchange. The Company has been advised by the Underwriter that,
following completion of the initial offering of the Notes, the Underwriter
presently intends to make a market in the Notes, although the Underwriter is
under no obligation to do so and may discontinue any market making activities
at any time without notice. No assurance, however, can be given as to the
liquidity of the trading market for the Notes or that an active trading market
for the Notes will develop. If an active public market does not develop, the
market price and liquidity of the Notes may be adversely affected.
 
  The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriter may be required to make in respect of such
liabilities.
 
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<PAGE>
 
                                 LEGAL MATTERS
 
  Certain legal matters in connection with the Notes offered hereby will be
passed upon for the Company by Baker & Botts, L.L.P., Houston, Texas, U.S.
counsel to the Company. Certain matters with respect to Panamanian law will be
passed upon for the Company by Durling & Durling, Panama City, Panama,
Panamanian counsel to the Company. Certain legal matters will be passed upon
for the Underwriter by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York. In giving their opinions, Baker
& Botts, L.L.P. and Cahill Gordon & Reindel will rely upon the opinion of
Durling & Durling as to the legal organization of the Company and as to other
matters of Panamanian law. Cahill Gordon & Reindell has represented the Company
and McDermott International in various legal matters from time to time.
 
                                    EXPERTS
 
  The consolidated financial statements of J. Ray McDermott, S.A. at March 31,
1995 and 1994, and for each of the three years in the period ended March 31,
1995, appearing in this Prospectus and the Registration Statement of which this
Prospectus forms a part (the "Registration Statement") and in J. Ray McDermott,
S.A.'s Annual Report on Form 10-K for the year ended March 31, 1995, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and included in such Annual Report on
Form 10-K incorporated herein by reference. Such consolidated financial
statements are included and incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
 
  The combined financial statements of McDermott-ETPM West, Inc. and Heerema
Offshore Construction Group Inc.-McDermott International Inc. Joint Venture at
March 31, 1995 and 1994, and for each of the three years in the period ended
March 31, 1995, appearing in this Prospectus and the Registration Statement and
in J. Ray McDermott, S.A.'s Annual Report on Form 10-K, as amended, for the
year ended March 31, 1995, have been audited by KPMG Accountants N.V.,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and included in such Annual Report on Form 10-K, as amended,
incorporated herein by reference, which is based in part on the report of Ernst
& Young LLP, independent auditors. Such combined financial statements referred
to above are included and incorporated by reference herein in reliance upon
such reports given upon the authority of such firms as experts in accounting
and auditing.
 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"),
which can be inspected and copied at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549; and at the regional offices of the Commission at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. The Common Stock
is listed on the New York Stock Exchange. Reports, proxy statements and other
information concerning the Company can be inspected and copied at the office of
the New York Stock Exchange at 20 Broad Street, New York, New York 10005.
 
  This Prospectus, which constitutes part of a registration statement (the
"Registration Statement") filed by the Company with the Commission under the
Securities Act, omits certain of the information contained in the Registration
Statement. Reference is hereby made to the Registration Statement and the
exhibits thereto, which may be obtained at the public reference facilities
maintained by the Commission as provided in the preceding paragraph, for
further information with respect to the Company and the securities offered
 
                                      104
<PAGE>
 
hereby. Statements contained herein concerning the provisions of such documents
are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission.
 
                      ENFORCEABILITY OF CIVIL LIABILITIES
                       UNDER THE FEDERAL SECURITIES LAWS
 
  The Company is a corporation organized under the laws of the Republic of
Panama. In addition, certain of the directors and officers of the Company are
residents of countries other than the United States. Accordingly, it may not be
possible to effect service of process on such persons in the United States and
to enforce judgments against such persons predicated on the civil liability
provisions of the federal securities laws of the United States. Because a
substantial amount of the assets of the Company is located outside the United
States, any judgment obtained in the United States against the Company may not
be fully collectible in the United States. The Company has been advised by its
counsel in the Republic of Panama, Durling &
Durling, that courts in the Republic of Panama will enforce foreign judgments
for liquidated amounts in civil matters, subject to certain conditions and
exceptions.
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
  The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act (File No. 1-0558), are incorporated in
this Prospectus by reference and shall be deemed to be a part hereof:
 
    (a) The Company's Annual Report on Form 10-K for the year ended March 31,
  1995, as amended by Amendment No. 1 thereto on Form 10-K/A-1 dated June 28,
  1995 and Amendment No. 2 thereto on Form 10-K/A-2 dated November 15, 1995;
 
    (b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
  June 30, 1995, September 30, 1995 and December 31, 1995; and
 
    (c) The Company's Current Report on Form 8-K dated February 14, 1995.
 
  All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in this
Prospectus, in a supplement to this Prospectus or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed supplement to this Prospectus or
in any document that also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
 
  The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, on the written or oral request of any such person, a copy of any or
all of the documents referred to above that have been or may be incorporated in
this Prospectus by reference, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference into such documents).
Written or telephone requests for such copies should be directed to the Company
at its principal executive offices located at 1450 Poydras Street, New Orleans,
Louisiana 70112-6050, Attention: Richard R. Foreman (telephone number: (504)
587-5300).
 
 
                                      105
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                         NUMBER
                                                                         ------
<S>                                                                      <C>
Consolidated Financial Statements for J. Ray McDermott, S.A. for the
 years ended March 31, 1995, 1994 and 1993
  Report of Independent Auditors.......................................    F-2
  Consolidated Balance Sheet...........................................    F-4
  Consolidated Statement of Income.....................................    F-6
  Consolidated Statement of Equity.....................................    F-8
  Consolidated Statement of Cash Flows.................................   F-10
  Notes to Consolidated Financial Statements...........................   F-11
Interim Condensed Consolidated Financial Statements for J. Ray
 McDermott, S.A. for the nine months ended December 31, 1995 and 1994
 (Unaudited)
  Condensed Consolidated Balance Sheet.................................   F-30
  Condensed Consolidated Statement of Income...........................   F-32
  Condensed Consolidated Statement of Cash Flows.......................   F-33
  Notes to Condensed Consolidated Financial Statements.................   F-34
Combined Financial Statement for McDermott ETPM-West, Inc. and Heerema
 Offshore Construction Group Inc.-- McDermott International, Inc. Joint
 Venture for the years ended March 31, 1995, 1994 and 1993
  Report of Independent Auditors--KPMG Accountants N.V.................   F-36
  Report of Independent Auditors--Ernst & Young LLP....................   F-37
  Combined Balance Sheet...............................................   F-38
  Combined Statement of Income.........................................   F-39
  Combined Statement of Owners' Equity.................................   F-40
  Combined Statement of Cash Flows.....................................   F-41
  Notes to Combined Financial Statements...............................   F-42
</TABLE>
 
 
                                      F-1
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
J. Ray McDermott, S. A.
 
  We have audited the accompanying consolidated balance sheet of J. Ray
McDermott, S.A. as of March 31, 1995 and 1994, and the related consolidated
statements of income, equity and cash flows for each of the three years in the
period ended March 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of J. Ray McDermott,
S.A. at March 31, 1995 and 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended March 31,
1995, in conformity with generally accepted accounting principles.
 
  As discussed in Note 2 to the consolidated financial statements, the Company
changed its methods of accounting for postemployment benefits in 1995 and
postretirement benefits other than pensions in 1993.
 
                                          ERNST & YOUNG LLP
 
New Orleans, Louisiana
May 24, 1995
 
                                      F-2
<PAGE>
 
                      [THIS PAGE INTENTIONALLY LEFT BLANK]
 
                                      F-3
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                           CONSOLIDATED BALANCE SHEET
 
                            MARCH 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                         ASSETS                               1995       1994
                         ------                            ---------- ----------
                                                              (IN THOUSANDS)
<S>                                                        <C>        <C>
Current Assets:
  Cash and cash equivalents..............................  $   52,224 $   53,343
  Accounts receivable--trade.............................     244,212    152,047
  Accounts receivable--unconsolidated affiliates.........      56,104     11,126
  Accounts receivable--other.............................      33,830     48,134
  Contracts in progress..................................      54,947     47,202
  Other current assets...................................      28,819     19,946
                                                           ---------- ----------
    Total Current Assets.................................     470,136    331,798
                                                           ---------- ----------
Property, Plant and Equipment, at Cost:
  Land...................................................      21,948     16,949
  Buildings..............................................      82,490     84,393
  Machinery and equipment................................   1,374,672  1,392,814
  Property under construction............................      25,607     10,380
                                                           ---------- ----------
                                                            1,504,717  1,504,536
  Less accumulated depreciation..........................     910,555  1,022,729
                                                           ---------- ----------
Net Property, Plant and Equipment........................     594,162    481,807
                                                           ---------- ----------
Notes Receivable from McDermott International............          --     57,382
                                                           ---------- ----------
Excess of Cost Over Fair Value of Net Assets of Purchased
 Businesses Less Accumulated Amortization of $5,483,000
 at March 31, 1995.......................................     245,179     15,662
                                                           ---------- ----------
Investment in Unconsolidated Affiliates..................     105,283     90,370
                                                           ---------- ----------
Other Assets.............................................      67,502     30,590
                                                           ---------- ----------
    TOTAL................................................  $1,482,262 $1,007,609
                                                           ========== ==========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                           CONSOLIDATED BALANCE SHEET
 
                            MARCH 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                LIABILITIES AND EQUITY                     1995        1994
                ----------------------                  ----------  ----------
                                                           (IN THOUSANDS)
<S>                                                     <C>         <C>
Current Liabilities:
  Notes payable and current maturities of long-term
   debt................................................ $   55,894  $    3,346
  Note payable to McDermott International..............     39,750          --
  Current maturity of note payableto McDermott
   International.......................................         --      16,600
  Accounts payable.....................................    141,376     112,022
  Accrued employee benefits............................     18,351      16,739
  Accrued contract costs...............................     53,610      54,302
  Accrued liabilities--other...........................     86,891      57,625
  Advance billings on contracts........................     62,495      49,211
  U.S. and foreign income taxes........................     38,357      27,329
                                                        ----------  ----------
    Total Current Liabilities..........................    496,724     337,174
                                                        ----------  ----------
Long Term Debt.........................................     93,872       2,092
                                                        ----------  ----------
Notes Payable to McDermott International...............    231,000     281,419
                                                        ----------  ----------
Deferred and Non-Current Income Taxes..................     44,697     105,163
                                                        ----------  ----------
Other Liabilities......................................     56,498      28,740
                                                        ----------  ----------
Contingencies
Equity:
  Preferred Stock, par value $.01 per share, authorized
   10,000,000 shares:
   Series A $2.25 cumulative convertible, outstanding
    3,200,000 shares (liquidation preference
    $160,000,000)......................................         32          --
   Series B $2.25 cumulative convertible exchangeable,
    outstanding 458,632 shares (liquidation preference
    $11,465,800).......................................          5          --
  Common stock, par value $0.01 per share, authorized
   60,000,000 shares; outstanding 38,649,349 shares....        386          --
  Capital in excess of par value.......................    580,279          --
  Deficit..............................................     (6,598)         --
  Owner's equity.......................................         --     279,946
  Currency translation adjustments.....................    (14,633)    (26,925)
                                                        ----------  ----------
    Total Equity.......................................    559,471     253,021
                                                        ----------  ----------
    TOTAL.............................................. $1,482,262  $1,007,609
                                                        ==========  ==========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                        CONSOLIDATED STATEMENT OF INCOME
 
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
 
<TABLE>
<CAPTION>
                                               1995        1994        1993
                                            ----------  ----------  ----------
                                                     (IN THOUSANDS)
<S>                                         <C>         <C>         <C>
Revenues................................... $1,127,320  $1,193,881  $1,601,060
                                            ----------  ----------  ----------
Costs and Expenses:
  Cost of operations (excluding
   depreciation and amortization)..........    887,223     976,636   1,344,115
  Depreciation and amortization............     70,372      53,627      80,856
  Selling, general and administrative
   expenses................................    114,165     115,428     115,480
                                            ----------  ----------  ----------
                                             1,071,760   1,145,691   1,540,451
                                            ----------  ----------  ----------
                                                55,560      48,190      60,609
Equity in Income of Investees..............     22,857     106,593      84,973
                                            ----------  ----------  ----------
    Operating Income.......................     78,417     154,783     145,582
                                            ----------  ----------  ----------
Other Income (Expense):
  Interest income..........................      9,298       3,483       2,773
  Interest expense.........................    (25,158)    (20,076)    (22,569)
  Other-net................................      7,028       8,997      12,730
                                            ----------  ----------  ----------
                                               (8,832)      (7,596)     (7,066)
                                            ----------  ----------  ----------
Income Before Provision for Income Taxes
 and Cumulative Effect of Accounting
 Changes...................................     69,585     147,187     138,516
Provision for Income Taxes.................      8,885      28,050      42,760
                                            ----------  ----------  ----------
Income Before Cumulative Effect of
 Accounting Changes........................     60,700     119,137      95,756
Cumulative Effect of Accounting Changes....     (1,326)         --     (58,745)
                                            ----------  ----------  ----------
Net Income................................. $   59,374  $  119,137  $   37,011
                                            ==========  ==========  ==========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
        Significant related party transactions are disclosed in Note 6.
 
                                      F-6
<PAGE>
 
                      [THIS PAGE INTENTIONALLY LEFT BLANK]
 
                                      F-7
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                        CONSOLIDATED STATEMENT OF EQUITY
 
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
 
                    (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                         PREFERRED STOCK
                                                  -----------------------------
                                                     SERIES A       SERIES B
                                                  --------------- -------------
                                                             PAR           PAR
                                                   SHARES   VALUE SHARES  VALUE
                                                  --------- ----- ------- -----
<S>                                               <C>       <C>   <C>     <C>
Balance March 31, 1992...........................        --  $--       --  $--
                                                  ---------  ---  -------  ---
Net income.......................................        --   --       --   --
Translation adjustments..........................        --   --       --   --
Distributions to McDermott International.........        --   --       --   --
                                                  ---------  ---  -------  ---
Balance March 31, 1993...........................        --   --       --   --
                                                  ---------  ---  -------  ---
Net income.......................................        --   --       --   --
Translation adjustments..........................        --   --       --   --
Distributions to McDermott International.........        --   --       --   --
                                                  ---------  ---  -------  ---
Balance March 31, 1994...........................        --   --       --   --
                                                  ---------  ---  -------  ---
Net income.......................................        --   --       --   --
Dividends declared on preferred stock............        --   --       --   --
Translation adjustments..........................        --   --       --   --
Distributions to McDermott International.........        --   --       --   --
Contribution of McDermott International's marine
 construction services business.................. 3,200,000   32       --   --
Acquisition of Offshore Pipelines, Inc...........        --   --  458,632    5
Shares issued upon exercise of stock options.....        --   --       --   --
Net unrealized loss on Investments...............        --   --       --   --
                                                  ---------  ---  -------  ---
Balance March 31, 1995........................... 3,200,000  $32  458,632  $ 5
                                                  =========  ===  =======  ===
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-8
<PAGE>
 
 
 
 
 
 
<TABLE>
<CAPTION>
 
  COMMON STOCK
-----------------   CAPITAL                        CURRENCY
             PAR   IN EXCESS            OWNER'S   TRANSLATION
  SHARES    VALUE OF PAR VALUE DEFICIT   EQUITY   ADJUSTMENTS  TOTAL
----------  ----- ------------ -------  --------  ----------- --------
<S>         <C>   <C>          <C>      <C>       <C>         <C>
        --   $--         $--       $--  $201,426   $(6,239)   $195,187
----------  ----    --------   -------  --------   --------   --------
        --    --          --        --    37,011         --     37,011
        --    --          --        --        --    (15,242)   (15,242)
        --    --          --        --   (47,333)        --    (47,333)
----------  ----    --------   -------  --------   --------   --------
        --    --          --        --   191,104    (21,481)   169,623
----------  ----    --------   -------  --------   --------   --------
        --    --          --        --   119,137         --    119,137
        --    --          --        --        --     (5,444)    (5,444)
        --    --          --        --   (30,295)        --    (30,295)
----------  ----    --------   -------  --------   --------   --------
        --    --          --        --   279,946    (26,925)   253,021
----------  ----    --------   -------  --------   --------   --------
        --    --          --    (5,106)   64,480         --     59,374
        --    --          --    (1,117)       --         --     (1,117)
        --    --          --        --        --     12,292     12,292
        --    --          --        --   (46,249)        --    (46,249)
 
24,668,297   246     231,277        --  (298,177)        --    (66,622)
13,917,946   139     348,573        --        --         --    348,717
    63,106     1         429        --        --         --        430
        --    --          --      (375)       --         --       (375)
----------  ----    --------   -------  --------   --------   --------
38,649,349  $386    $580,279   $(6,598) $     --   $(14,633)  $559,471
==========  ====    ========   =======  ========   ========   ========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-9
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
 
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
<TABLE>
<CAPTION>
                                                   1995      1994      1993
                                                 --------  --------  --------
                                                       (IN THOUSANDS)
<S>                                              <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................... $ 59,374  $119,137  $ 37,011
                                                 --------  --------  --------
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation and amortization.................   70,372    53,627    80,856
  Equity in income of investees less dividends..   42,810   (47,414)  (83,611)
  Gain on sale and disposal of assets...........   (1,862)   (2,997)  (20,708)
  Provision for (benefit from) deferred taxes...  (35,769)    3,616   (15,804)
  Other.........................................    1,253   (23,410)   (2,215)
  Changes in assets and liabilities, net of
   effects from acquisitions:
    Accounts receivable.........................   28,290    85,955   (16,851)
    Net contracts in progress and advance
     billings...................................   13,081    25,506    11,224
    Accounts payable............................  (46,707)  (29,490)    7,321
    Accrued liabilities.........................  (33,689)  (39,172)   41,368
    Income taxes................................    9,958    (6,525)   33,017
    Other, net..................................  (28,086)   (3,315)   62,666
                                                 --------  --------  --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......   79,025   135,518   134,274
                                                 --------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquired from Offshore Pipelines, Inc...........   10,828        --        --
Purchases of property, plant and equipment......  (46,793)  (18,898)  (35,576)
Proceeds from sale and disposal of assets.......   15,580     3,938     9,129
(Increase) decrease in notes receivable from
 McDermott International........................  (16,802)  (50,096)      818
Other...........................................     (773)       --       (97)
                                                 --------  --------  --------
NET CASH USED IN INVESTING ACTIVITIES...........  (37,960)  (65,056)  (25,726)
                                                 --------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt......................    2,348        --        --
Increase (decrease) in short-term borrowings....   22,348     1,627    (9,782)
Decrease in notes payable to McDermott
 International..................................  (19,705)  (13,927)  (30,796)
Distributions to McDermott International........  (46,249)  (30,295)  (47,333)
Preferred dividends paid........................     (900)       --        --
Other...........................................     (369)     (410)   (2,965)
                                                 --------  --------  --------
NET CASH USED IN FINANCING ACTIVITIES...........  (42,527)  (43,005)  (90,876)
                                                 --------  --------  --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH........      343    (1,108)   (8,869)
                                                 --------  --------  --------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS....................................   (1,119)   26,349     8,803
                                                 --------  --------  --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..   53,343    26,994    18,191
                                                 --------  --------  --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 52,224  $ 53,343  $ 26,994
                                                 ========  ========  ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:
Cash paid during the period for:
  Interest (net of amount capitalized).......... $ 23,146  $ 20,080  $ 22,584
  Income taxes (net of refunds)................. $ 21,910  $ 15,233  $ 11,075
                                                 --------  --------  --------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-10
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1995
 
NOTE 1--BASIS OF PRESENTATION
 
  J. Ray McDermott, S.A. ("JRM") was incorporated on March 22, 1994 in the
Republic of Panama and had no significant operations prior to January 31, 1995
when McDermott International, Inc. ("International") contributed substantially
all of its marine construction services business to JRM and JRM acquired
Offshore Pipelines, Inc. ("OPI") (the "Merger") pursuant to an Agreement and
Plan of Merger dated as of June 2, 1994 as amended (the "Merger Agreement").
See Note 3 to the consolidated financial statements.
 
  JRM issued 3,200,000 shares of Series A $2.25 Cumulative Convertible
Preferred Stock; 24,668,297 shares of common stock; $231,000,000 of 9% Senior
Subordinated Notes due 2001 and a Floating Rate Demand Note of $39,750,000 to
International in exchange for its marine construction services business
excluding certain assets and liabilities which were retained by International.
 
  The contribution of International's marine construction services business to
JRM has been accounted for in a manner similar to a pooling of interests and
the financial statements reflect International's historical cost of the assets
and liabilities contributed. For periods prior to the contribution, the
financial statements include charges from International for direct costs and
allocations of corporate overhead and other costs. Management believes that the
allocation methods were reasonable and that the allocations were representative
of what the costs would have been on a stand alone basis.
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of Consolidation
 
  The consolidated financial statements are presented in U.S. Dollars in
accordance with accounting principles generally accepted in the United States.
The consolidated financial statements include the accounts of JRM, and all
subsidiaries and controlled joint ventures. Investments in joint ventures and
other entities in which JRM has a 20% to 50% interest are accounted for on the
equity method. Differences between the cost of equity method investments and
the amount of underlying equity in net assets of the investees are amortized
systematically to income. All significant intercompany transactions and
accounts have been eliminated. Certain amounts previously reported have been
reclassified to conform with the presentation at March 31, 1995.
 
  Unless the context otherwise requires, hereinafter, "JRM" will be used to
mean J. Ray McDermott, S.A. and its consolidated subsidiaries; "International"
will be used to mean McDermott International, Inc., a Panamanian corporation
that is the parent company of the McDermott group of companies and the majority
owner of JRM; and "McDermott International" will be used to mean the
consolidated enterprise.
 
 Changes in Accounting Policies
 
  Postemployment Benefits--Effective April 1, 1994, JRM adopted Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits," in accounting for disability benefits and other types
of benefits paid to employees, their beneficiaries and covered dependents after
active employment, but before retirement. The cumulative effect as of April 1,
1994 of this change in accounting was to reduce net income by $1,326,000 (net
of income taxes of $72,000). Other than the cumulative effect, the accounting
change had no material effect on the results of fiscal year 1995. Prior to
April 1, 1994, JRM recognized the cost of providing most of these benefits on a
cash basis. Under this new
 
                                      F-11
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

principle of accounting, the cost of these benefits is accrued when it becomes
probable that such benefits will be paid and when sufficient information exists
to make reasonable estimates of the amounts to be paid. In accordance with the
Statement, prior period financial statements have not been restated to reflect
this change in accounting principle.
 
  Postretirement Health Care Benefits--Effective April 1, 1992, JRM adopted
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". In accordance with the Statement, JRM elected immediate recognition
of the transition obligation and recognized $58,745,000 (net of income tax
benefit of $25,478,000) as the cumulative effect of an accounting change. In
fiscal year 1993, other than the cumulative effect of the accounting change,
the adoption of SFAS No. 106 resulted in a decrease in Income before Cumulative
Effect of Accounting Change of $1,958,000.
 
 Income Taxes
 
  Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes". Prior to the January 31, 1995
contribution by International, the U.S. subsidiaries and divisions of JRM were
included in the U.S. federal income tax return filed by McDermott Incorporated
("McDermott"), a subsidiary of International. McDermott's policy for allocation
of U.S. federal income taxes provided generally that the U.S. subsidiaries and
divisions of JRM compute the provision for U.S. federal income taxes on a
separate company basis. Subsequent to the contribution, these U.S. subsidiaries
and divisions are included in the U.S. federal tax return filed by J. Ray
McDermott Holdings, Inc., a subsidiary of JRM.
 
 Foreign Currency Translation
 
  Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U.S. Dollars at current exchange
rates and income statement items are translated at average exchange rates for
the year. Adjustments resulting from the translation of foreign currency
financial statements are recorded in a separate component of equity. Foreign
currency transaction adjustments are reported in income. Included in Other
Income (Expense) are transaction gains (losses) of $771,000, ($2,029,000), and
($4,540,000) for fiscal years 1995, 1994 and 1993, respectively.
 
 Contracts and Revenue Recognition
 
  Contract revenues and related costs are principally recognized on a
percentage of completion method for individual contracts or components thereof
based upon work performed or a cost to cost method, as applicable to the
product or activity involved. Revenues and related costs so recorded, plus
accumulated contract costs that exceed amounts invoiced to customers under the
terms of the contracts, are included in Contracts in Progress. Billings that
exceed accumulated contract costs and revenues and costs recognized under
percentage of completion are included in Advance Billings on Contracts. Most
long-term contracts have provisions for progress payments. Contract price and
cost estimates are reviewed periodically as the work progresses and adjustments
proportionate to the percentage of completion are reflected in income in the
period when such estimates are revised. There are no unbilled revenues which
will not be billed. Provisions are made currently for all known or anticipated
losses. Claims for extra work or changes in scope of work are included in
contract revenues when collection is probable. Included in Accounts Receivable
and Contracts in Progress at March 31, 1994 was $46,567,000 relating to
commercial and U.S. Government contract claims
 
                                      F-12
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

whose final settlement was subject to future determination through negotiations
or other procedures which had not been completed. These claims were excluded
from the contribution of McDermott International's marine construction services
business to JRM under the terms of the Merger Agreement.
 
<TABLE>
<CAPTION>
                                                                1995     1994
                                                               -------  -------
                                                               (IN THOUSANDS)
   <S>                                                         <C>      <C>
   Included in Contracts in Progress are:
   Costs incurred less costs of revenue recognized............ $ 2,795  $29,703
   Revenues recognized less billings to customers.............  52,152   17,499
                                                               -------  -------
   Contracts in Progress...................................... $54,947  $47,202
                                                               =======  =======
   Included in Advance Billings on Contracts are:
   Billings to customers less revenues recognized............. $67,839  $49,235
   Costs incurred less costs of revenue recognized............  (5,344)     (24)
                                                               -------  -------
   Advance Billings on Contracts.............................. $62,495  $49,211
                                                               =======  =======
</TABLE>
 
  Included in accounts receivable--trade are amounts representing retainages on
contracts as follows:
 
<TABLE>
<CAPTION>
                                                                  1995    1994
                                                                 ------- -------
                                                                 (IN THOUSANDS)
   <S>                                                           <C>     <C>
   Retainages................................................... $20,864 $12,253
                                                                 ======= =======
</TABLE>
 
  All of the 1995 retainages are expected to be collected within the next year.
 
 Depreciation, Maintenance and Repairs and Drydocking Expenses
 
  Except for major marine vessels, property, plant and equipment is depreciated
on the straight-line method, using estimated economic useful lives of 8 to 30
years for buildings and 2 to 20 years for machinery and equipment.
 
  Major marine vessels are depreciated on the units-of-production method based
on the utilization of each vessel. Depreciation expense calculated under the
units-of-production method may be less than, equal to, or greater than
depreciation expense calculated under the straight-line method in any period.
The annual depreciation based on utilization of each vessel will not be less
than the greater of 25% of annual straight-line depreciation, or 50% of
cumulative straight-line depreciation.
 
  Maintenance, repairs and renewals which do not materially prolong the useful
life of an asset are expensed as incurred except for drydocking costs for the
marine fleet, which are estimated and accrued over the period of time between
drydockings, and such accruals are charged to operations currently.
 
 Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased
Businesses
 
  Excess of the cost over fair value of net assets of purchased businesses
pertains to the acquisitions of OPI and Northern Ocean Services Limited (See
Note 3) and is being amortized on a straight-line basis over ten years.
Management periodically reviews goodwill to assess recoverability, and
impairments would be recognized in operating results if a permanent diminution
in value were to occur.
 
                                      F-13
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Earnings Per Share
 
  Earnings per share has been omitted because JRM was not a separate entity
with its own capital structure during the periods presented (See Note 3).
 
 Cash Equivalents
 
  Cash equivalents are highly liquid investments, with maturities of three
months or less when purchased.
 
 Derivative Financial Instruments
 
  Derivatives, primarily forward exchange contracts, are utilized to minimize
exposure and reduce risk from foreign exchange fluctuations in the regular
course of business. Gains and losses relating to qualified hedges of firm
commitments are deferred and recognized in income or as adjustments of carrying
amounts when the hedged transactions occur. Gains and losses on forward
exchange contracts which hedge foreign currency assets or liabilities are
recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged.
 
NOTE 3--ACQUISITIONS
 
  On January 31, 1995, JRM acquired OPI, a full-range provider of offshore
marine construction and other related services to the oil and gas industry.
Pursuant to the Merger Agreement, OPI investors received 13,867,946 shares of
JRM common stock, options to acquire 897,818 shares of JRM common stock and
458,632 shares of JRM Series B $2.25 Cumulative Convertible Exchangeable
Preferred Stock in exchange for all of the outstanding common stock, common
stock options and preferred stock of OPI. The acquisition was accounted for by
the purchase method and, accordingly, the purchase price ($369,868,000,
including direct costs of acquisition and non-compete agreements) has been
allocated to the underlying assets and liabilities based upon the preliminary
fair values at the date of acquisition. The excess of cost over fair value of
net assets acquired is being amortized over 10 years. The operating results
have been included in the Consolidated Statement of Income from the acquisition
date. The preliminary purchase price allocation is subject to change when
additional information concerning asset and liability valuations is obtained.
Therefore, the final allocation may differ from the preliminary allocation
summarized as follows:
 
<TABLE>
<CAPTION>
                                                                 (IN THOUSANDS)
                                                                 --------------
      <S>                                                        <C>
      Cash and cash equivalents.................................   $  10,828
      Other working capital--net................................      18,875
      Excess of cost over fair value of net assets of purchased
       businesses...............................................     235,000
      Net property, plant and equipment.........................     173,134
      Other assets--net.........................................      17,965
      Long-term debt............................................    (107,085)
      Stockholders' equity......................................    (348,717)
</TABLE>
 
 
                                      F-14
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following unaudited pro forma results of operations for the years ended
March 31, 1995 and 1994 assume that the contribution by McDermott International
of substantially all of its marine construction services business to JRM and
the acquisition of OPI had occurred as of the beginning of the periods
presented.
 
<TABLE>
<CAPTION>
                                                            FISCAL YEAR ENDED
                                                          ---------------------
                                                           3/31/95    3/31/94
                                                          ---------- ----------
                                                               (UNAUDITED)
                                                             (IN THOUSANDS)
   <S>                                                    <C>        <C>
   Revenues.............................................. $1,444,090 $1,531,773
   Income Before Cumulative Effect of Accounting Change.. $   29,846 $  101,518
   Net Income............................................ $   28,520 $  101,518
   Earnings Per Common and Common Equivalent Share:
     Primary:
       Income Before Cumulative Effect of Accounting
        Change........................................... $     0.55 $     2.23
       Net Income........................................ $     0.52 $     2.23
     Fully Diluted:
       Income Before Cumulative Effect of Accounting
        Change........................................... $     0.55 $     2.21
       Net Income........................................ $     0.52 $     2.21
</TABLE>
 
  The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the transaction been completed as of April 1, 1993, nor is it
necessarily indicative of future operating results. The pro forma information
does not reflect estimates of cost savings that may be realized.
 
  On February 28, 1994, JRM acquired Northern Ocean Services Limited ("NOS")
with cash provided by McDermott International. JRM issued a $58,040,000 note
payable to McDermott International in consideration for the financing. NOS owns
and operates two major marine construction vessels and specialized construction
equipment for providing subsea and trenching services to industries worldwide,
including oil, gas, marine construction and hydrocarbon processing. The
acquisition was accounted for by the purchase method of accounting and,
accordingly, the purchase price has been allocated to the underlying assets and
liabilities based on fair values at the date of acquisition. The excess of cost
over fair value of net assets acquired is being amortized over a period of 10
years. The operating results, which were not material for the one month ended
March 31, 1994 to the consolidated financial statements of JRM, have been
included in the Consolidated Statement of Income from the acquisition date. A
summary of the purchase price allocation follows:
 
<TABLE>
<CAPTION>
                                                                 (IN THOUSANDS)
      <S>                                                        <C>
      Net working capital.......................................    $(10,738)
      Excess of cost over fair value of net assets of purchased
       businesses...............................................      15,662
      Net property, plant and equipment.........................      53,116
      Note payable to McDermott International...................     (58,040)
</TABLE>
 
NOTE 4--INVESTMENTS IN UNCONSOLIDATED AFFILIATES
 
  Transactions with unconsolidated affiliates which are accounted for by the
equity method included sales to ($136,681,000, $78,748,000 and $75,839,000 in
fiscal years 1995, 1994 and 1993, respectively, including approximately
$54,657,000, $49,121,000 and $47,535,000, respectively, attributable to leasing
activities) and purchases from ($1,119,000, $131,608,000 and $59,606,000 in
fiscal years 1995, 1994 and 1993, respectively) these entities. Included in
non-current Other Assets at March 31, 1995 was a 4% interest bearing note
receivable of $5,000,000 from an unconsolidated affiliate. Included in Accounts
payable at March 31, 1995 and 1994 were $3,815,000 and $14,438,000,
respectively, of payables to unconsolidated affiliates.
 
                                      F-15
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  In fiscal year 1995, JRM contributed various marine construction barges
(including the DB100 semi-submersible derrick barge) with a book value of
$102,602,000 and accumulated depreciation of $76,763,000 and sold the Derrick
Barge 51 to the HeereMac joint venture for $9,101,000. In fiscal year 1994, JRM
recognized revenues of $131,000,000 on work subcontracted to HeereMac.
 
  At March 31, 1995 and 1994, property, plant and equipment included
$402,479,000 and $409,952,000, and accumulated depreciation included
$230,674,000 and $221,503,000, respectively, of marine equipment that is leased
to unconsolidated investees. Dividends received from unconsolidated investees
were $65,667,000, $59,179,000 and $28,764,000 (including a return of capital of
$27,402,000) in fiscal years 1995, 1994 and 1993, respectively. Undistributed
earnings in unconsolidated affiliates were $25,929,000 and $62,265,000,
respectively, at March 31, 1995 and 1994.
 
  Summarized combined balance sheet and income statement information based on
the most recent financial information for equity investments in joint ventures
and other entities (49-50% owned) are presented below:
 
<TABLE>
<CAPTION>
                                                                1995     1994
                                                              -------- --------
                                                               (IN THOUSANDS)
   <S>                                                        <C>      <C>
   Current Assets............................................ $400,197 $408,065
   Non-Current Assets........................................  202,673   76,679
                                                              -------- --------
     Total Assets............................................ $602,870 $484,744
                                                              ======== ========
   Current Liabilities....................................... $341,306 $200,086
   Non-Current Liabilities...................................   68,152   61,510
   Owners' Equity............................................  193,412  223,148
                                                              -------- --------
     Total Liabilities and Owners' Equity.................... $602,870 $484,744
                                                              ======== ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                    1995      1994       1993
                                                  --------- --------- ----------
                                                          (IN THOUSANDS)
   <S>                                            <C>       <C>       <C>
   Revenues...................................... $ 725,225 $ 896,412 $1,129,856
   Gross Profit.................................. $ 153,075 $ 318,503 $  336,775
   Income Before Provision for Income Taxes...... $  52,899 $ 213,862 $  182,647
   Provision for Income Taxes....................     4,193     8,025      3,003
                                                  --------- --------- ----------
   Net Income.................................... $  48,706 $ 205,837 $  179,644
                                                  ========= ========= ==========
</TABLE>
 
NOTE 5--INCOME TAXES
 
  Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted. All income has been earned outside
of Panama and JRM is not subject to income tax in Panama on income earned
outside of Panama. Therefore, there is no expected relationship between the
provision for income taxes and income before income taxes. The major reason for
the variations in such relationships is that income is earned within and
subject to the taxation laws of various countries, each of which has a regime
of taxation which varies from that of any other country (not only with respect
to nominal rate but also with respect to the allowability of deductions,
credits and other benefits) and because the proportional extent to which income
is earned in, and subject to tax by, any particular country or countries varies
from year to year. JRM and certain of its subsidiaries keep books and file tax
returns on the completed contract method of accounting.
 
                                      F-16
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  U.S. and foreign income taxes payable and net deferred tax liabilities at
March 31, 1994 included allocated income tax liabilities of $36,365,000, under
McDermott's policy for allocation of U.S. federal income taxes.
 
  Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities. Significant
components of deferred tax assets and liabilities as of March 31, 1995 and 1994
were as follows:
 
<TABLE>
<CAPTION>
                                                              1995      1994
                                                            --------  --------
                                                             (IN THOUSANDS)
   <S>                                                      <C>       <C>
   Deferred tax assets:
     Accrued provisions for facility closings.............. $  1,480  $     --
     Accrued liabilities for executive and employee
      incentive compensation...............................    1,670        --
     Long-term contracts...................................    3,837    19,309
     Investments in joint ventures and affiliated
      companies............................................    5,179        --
     Net operating loss carryforwards......................   17,323    18,185
     Foreign tax credits...................................   15,662        --
     Property, plant and equipment.........................    3,753        --
     Other.................................................    4,044    14,183
                                                            --------  --------
       Total deferred tax assets...........................   52,948    51,677
     Valuation allowance for deferred tax assets...........  (21,091)  (16,337)
                                                            --------  --------
       Net deferred tax assets.............................   31,857    35,340
                                                            --------  --------
   Deferred tax liabilities:
     Property, plant and equipment.........................   30,031    63,428
     Long-term contracts...................................   10,064    11,891
     Prepaid pension costs.................................    1,846     5,059
     Other.................................................    3,882       777
                                                            --------  --------
       Total deferred tax liabilities......................   45,823    81,155
                                                            --------  --------
       Net deferred tax liablities......................... $ 13,966  $ 45,815
                                                            ========  ========
</TABLE>
 
 Income before provision for income taxes and cumulative effect of accounting
changes was as follows:
 
<TABLE>
<CAPTION>
                                                       1995      1994     1993
                                                     --------  -------- --------
                                                           (IN THOUSANDS)
      <S>                                            <C>       <C>      <C>
      U.S........................................... $ (3,265) $ 18,435 $  5,946
      Other than U.S................................   72,850   128,752  132,570
                                                     --------  -------- --------
                                                     $ 69,585  $147,187 $138,516
                                                     ========  ======== ========
</TABLE>
 
                                      F-17
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 The provision for income taxes consists of:
 
<TABLE>
<CAPTION>
                                                      1995     1994      1993
                                                    --------  -------  --------
                                                         (IN THOUSANDS)
   <S>                                              <C>       <C>      <C>
   Current:
     U.S.--Federal................................. $ 30,514  $ 3,388  $ 21,746
     Other than U.S................................   14,140   21,046    36,818
                                                    --------  -------  --------
       Total current...............................   44,654   24,434    58,564
                                                    --------  -------  --------
   Deferred:
     U.S.--Federal.................................  (31,742)  (2,579)  (19,693)
     Other than U.S................................   (4,027)   6,195     3,889
                                                    --------  -------  --------
       Total deferred..............................  (35,769)   3,616   (15,804)
                                                    --------  -------  --------
   Provision for Income Taxes...................... $  8,885  $28,050  $ 42,760
                                                    ========  =======  ========
</TABLE>
 
  The current provision for other than U.S. income taxes in 1995, 1994 and 1993
includes a reduction of $1,323,000, $21,987,000 and $26,606,000, respectively,
for the benefit of net operating loss carryforwards.
 
NOTE 6--RELATED PARTY TRANSACTIONS
 
  Transactions with subsidiaries, divisions and controlled joint ventures of
McDermott International that are not disclosed elsewhere are as follows:
 
<TABLE>
<CAPTION>
                                                        1995     1994    1993
                                                       -------  ------- -------
                                                           (IN THOUSANDS)
   <S>                                                 <C>      <C>     <C>
   Sale of marine construction services............... $ 2,652  $ 1,221 $ 1,017
   Purchase of engineering services...................  16,672    7,981   7,599
   Insurance premiums.................................  21,602   30,114  35,698
   Postretirement health care benefits................   6,075    8,029   7,821
   Pension expense (benefit)..........................  (6,679)   1,030  (1,553)
   Selling, general and administrative expense........  19,690   21,240  22,354
   Interest income....................................   2,920    1,433     335
   Interest expense...................................  20,169   18,799  21,563
</TABLE>
 
  Non-current Notes Receivable from McDermott International and Notes Payable
to McDermott International are as follows:
 
 Notes receivable:
<TABLE>
<CAPTION>
                                                                  1995   1994
                                                                 ------ -------
                                                                 (IN THOUSANDS)
   <S>                                                           <C>    <C>
   Note due December 1996 (Interest at 3.25%)................... $   -- $28,100
   Non-interest bearing notes due April 1999....................     --  20,600
   Interest bearing note (Interest at 5.32%)....................     --   8,682
                                                                 ------ -------
     Total...................................................... $   -- $57,382
                                                                 ====== =======
</TABLE>
 
                                      F-18
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 Notes payable:
 
<TABLE>
<CAPTION>
                                                                1995     1994
                                                              -------- --------
                                                               (IN THOUSANDS)
<S>                                                           <C>      <C>
9% Senior Subordinated Notes due 2001........................ $231,000 $     --
10.375% Note due 1998........................................       --   90,400
15% Note due April 2003......................................       --   60,872
Non-interest bearing notes...................................       --   94,871
Non-interest bearing notes due April 1996....................       --   41,750
Other notes payable..........................................       --   10,126
                                                              -------- --------
                                                               231,000  298,019
Less: Amounts due within one year............................       --   16,600
                                                              -------- --------
  Total...................................................... $231,000 $281,419
                                                              ======== ========
</TABLE>
 
  The 9% Senior Subordinated Notes due 2001 ("9% Notes") are redeemable at any
time after September 15, 1997 (subject to any required approvals), in whole or
in part, for cash, at the option of JRM, initially at a price of 105% of the
principal amount, and thereafter at prices declining annually to 100% of the
principal amount after September 15, 2000. The terms of the 9% Notes impose
certain restrictions or limitations on, among other things, the ability of JRM
to pledge its assets as security for certain indebtedness or to incur debt
ranking senior to these notes.
 
  JRM issued a Floating Rate Demand Note of $39,750,000 at 7.69% on the date of
Merger (7.4375% at March 31, 1995) to International. This note is due January
31, 1997 or earlier upon demand. JRM expects to pay this note during fiscal
year 1996.
 
  Included in Accounts receivable-trade are receivables from McDermott
International of $7,668,000 and $2,550,000 at March 31, 1995 and 1994,
respectively. Included in Accounts payable are payables to McDermott
International of $5,272,000 and $3,396,000 at March 31, 1995 and 1994,
respectively.
 
  In connection with the Merger, two directors and two officers of JRM entered
into noncompetition agreements. As consideration, the directors and officers
received a total of $10,117,000 (including 50,000 shares of JRM's common stock
valued at $1,117,000) during fiscal year 1995. In addition, one director will
receive additional payments of $1,500,000 per year over the next five years.
 
  A subsidiary of JRM has entered into an office sublease with an affiliate of
two of JRM's directors. Under the sublease which expires no later than March
1997, the affiliate is required to make monthly rental payments of
approximately $18,000 to the subsidiary. Under another agreement, the affiliate
will manage and operate the subsidiary's offshore producing oil and gas
property for a monthly fee of $48,000 and reimbursement of certain costs. In
addition, a subsidiary of JRM sold an offshore jacket and deck to the affiliate
for $1,100,000 during fiscal year 1995 and has a contract to refurbish and
install the jacket and deck for approximately $1,300,000.
 
  A subsidiary of JRM entered into agreements with an affiliate of another
director of JRM pursuant to which the subsidiary acquired interests in certain
offshore oil and gas property. During fiscal year 1995, the subsidiary paid
$3,000,000 to the affiliate under the agreements in connection with the
acquisition of its interests and the development of such property. In addition,
a subsidiary of JRM owns 140,000 shares of common stock of this affiliate and
20,000 units in a limited partnership which is also an affiliate of this
director. JRM has a $15,000,000 contract to fabricate and install a platform
with the limited partnership.
 
  In connection with the Merger, JRM entered into various agreements under
which McDermott International will provide administrative and technical
services to JRM. These services include, but are not
 
                                      F-19
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

limited to: accounting, treasury, tax administration and other financial
services; human relations; computing and telecommunications; corporate officer
and secretarial; purchasing; and marine systems and automation. The annual cost
of these services to JRM is approximately $13,400,000.
 
  Effective January 31, 1995, JRM sold to McDermott International those assets
and liabilities comprising the shipyard business located in Morgan City,
Louisiana that were included in the business contributed by McDermott
International with the Merger. In consideration, JRM received $4,802,000.
 
  Certain officers and employees of JRM participate in certain benefit plans
which involve the issuance of International Common Stock.
 
  Certain former employees of McDermott International's marine construction
services business who transferred to JRM participate in the Thrift Plan for
Employees of McDermott Incorporated and Participating Subsidiary and Affiliated
Companies, which is a defined contribution plan maintained by a subsidiary of
McDermott International. Monthly employer contributions are equal to 50% of the
first 6% of compensation (as defined in the plan) contributed by participants.
JRM will establish a similar plan during fiscal 1996.
 
  JRM maintains employment agreements with certain officers and employees which
contain change in control provisions that would entitle each to receive two
times his three-year average annual salary plus continuation of certain
benefits if there is a change in control of JRM (as defined) and a termination
of his employment within two years after a change in control. These agreements
also provide medical and health insurance benefits for a two year period
following the termination of employment.
 
NOTE 7--NOTES PAYABLE AND LONG-TERM DEBT
 
  Long-term debt consists of:
 
<TABLE>
<CAPTION>
                                                                  1995    1994
                                                                -------- ------
                                                                (IN THOUSANDS)
      <S>                                                       <C>      <C>
      Unsecured Debt:
        12.875% Guaranteed Senior Notes due 2002 ($70,000,000
         face value)........................................... $ 74,933 $   --
        Other notes payable....................................    5,771     --
      Secured debt:
        Capitalized Lease Obligations..........................   19,812  3,037
                                                                -------- ------
                                                                 100,516  3,037
      Less amounts due within one year.........................    6,644    945
                                                                -------- ------
                                                                $ 93,872 $2,092
                                                                ======== ======
</TABLE>
 
  In connection with the Merger, a subsidiary of JRM assumed OPI's $70,000,000
12 7/8% Guaranteed Senior Notes ("12.875% Notes"). The 12.875% Notes are
subject to mandatory sinking fund requirements beginning on July 15, 2000
calculated to retire 50% of the original principal amount prior to maturity in
2002. The 12.875% Notes are redeemable, for cash, at the option of JRM, at any
time on or after July 15, 1997, in whole or in part, at a price of 106.4% of
the principal amount, and thereafter at prices declining annually to 100% of
the principal amount on or after July 15, 2000. JRM is restricted, as a result
of covenants in this credit agreement, in its ability to transfer funds to
International and its subsidiaries through cash dividends or through unsecured
loans or investments.
 
  Maturities of long-term debt during the five fiscal years subsequent to March
31, 1995 are as follows: 1996--$6,644,000; 1997--$3,651,000; 1998--$3,782,000;
1999--$8,778,000; 2000--$381,000.
 
                                      F-20
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  At March 31, 1995 and 1994, JRM had available to it various uncommitted
short-term lines of credit from banks totaling $119,581,000 and $16,493,000,
respectively. Borrowings against these lines of credit at March 31, 1995 and
1994 were $24,750,000 and $2,401,000, respectively. In addition, JRM had
available two secured and committed revolving credit facilities with banks
totaling $53,500,000 of which $24,500,000 was outstanding at March 31, 1995.
These two facilities were repaid and terminated on May 10, 1995. The weighted
average interest rate on all short term borrowings outstanding as of March 31,
1995 and 1994 was 7.86% and 7.81%, respectively.
 
NOTE 8--PENSION PLANS AND POSTRETIREMENT BENEFITS
 
  Pension Plans--JRM provides retirement benefits, primarily through employee
participation in non-contributory pension plans of McDermott International (See
Note 6), for substantially all of its regular full-time employees, except
certain non-resident alien employees of foreign subsidiaries who are not
citizens of a European Community country or who do not earn income in the
United States or the United Kingdom. JRM also provides benefits to employees in
the United Kingdom through participation of certain of its subsidiaries and
affiliate companies in a contributory pension plan (the U.K. plan) sponsored by
McDermott International. JRM's policy was to fund the U.K. plan to meet the
minimum requirements as recommended by the plan actuary and in accordance with
applicable law. Under the terms of the Merger Agreement, this plan was excluded
from the contribution of McDermott International's marine construction services
business at January 31, 1995, but former employees of McDermott International's
marine construction services business who transferred to JRM will continue to
participate in this plan until a new one is established.
 
  Assets and liabilities attributable to former employees of McDermott
International's marine construction services business who transferred to JRM in
connection with the Merger are to be transferred to pension plans established
by JRM during fiscal year 1996.
 
  The net periodic pension cost (benefit) of the U.K. plan for the ten months
ended January 31, 1995 and fiscal years 1994 and 1993 included the following
components:
 
<TABLE>
<CAPTION>
                                                    1995      1994      1993
                                                   -------  --------  --------
                                                        (IN THOUSANDS)
   <S>                                             <C>      <C>       <C>
   Service cost--benefits earned during the
    period.......................................  $ 1,450  $  1,544  $  4,328
   Interest cost on projected benefit obligation.    3,342     4,130     4,989
   Actual return on plan assets..................   (1,240)  (14,608)  (23,545)
   Net amortization and deferral.................   (7,303)    2,679    14,291
                                                   -------  --------  --------
   Net periodic pension cost (benefit)...........  $(3,751) $ (6,255) $     63
                                                   =======  ========  ========
</TABLE>
 
  Due to a reduction in workforce at one foreign subsidiary, net income in
fiscal year 1994 includes a net after-tax loss of $1,456,000 resulting from the
recognition of a curtailment of the U.K. plan.
 
                                      F-21
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following table sets forth the U.K. plan's funded status and the amount
recognized in JRM's consolidated financial statements at March 31, 1994:
 
<TABLE>
<CAPTION>
                                                                       1994
                                                                  --------------
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
   Actuarial present value of benefit obligations:
     Vested benefit obligation...................................    $ 58,017
                                                                     ========
     Accumulated benefit obligation..............................    $ 58,017
                                                                     ========
       Projected benefit obligation..............................    $ 66,943
   Plan assets at fair value.....................................     110,530
                                                                     --------
   Plan assets in excess of projected benefit obligation.........      43,587
   Unrecognized net gain.........................................     (14,443)
   Unrecognized prior service cost...............................       1,058
   Unrecognized transition asset.................................     (15,202)
                                                                     --------
   Net prepaid pension cost......................................    $ 15,000
                                                                     ========
</TABLE>
 
  The assumptions used in determining the funded status and net periodic
pension cost (benefit) of the U.K. plan were:
 
<TABLE>
<CAPTION>
                                                                1995  1994  1993
                                                                ----  ----  ----
      <S>                                                       <C>   <C>   <C>
      Actuarial assumptions:
       Discount rate........................................... 8.25% 7.5%  9.5%
                                                                ----  ---   ---
        Rate of increase in future compensation levels.........  5.0% 6.0%  7.5%
                                                                ----  ---   ---
       Expected long-term rate of return on plan assets........  8.5% 8.0%  9.0%
                                                                ----  ---   ---
</TABLE>
 
  Postretirement Health Care and Life Insurance Benefits--JRM offers
postretirement health care and life insurance benefits to substantially all of
its regular full time employees who retire and receive retirement income from a
defined benefit pension plan funded by JRM, except certain non-resident alien
retired employees who are not citizens of a European Community country, or who,
while employed, did not earn income in the United States, Canada or the United
Kingdom. JRM shares the cost of providing these benefits, except for certain
life insurance plans, with all affected retirees. JRM does not fund any of its
plans.
 
  The following table sets forth the amounts recognized in the consolidated
financial statements at March 31, 1995:
 
<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
      <S>                                                         <C>
      Accumulated Postretirement Benefit Obligation:
        Fully eligible active participants.......................    $ 1,313
        Other active plan participants...........................     11,539
                                                                     -------
      Accrued postretirement benefit cost........................    $12,852
                                                                     =======
      Weighted-average discount rate.............................       8.25%
                                                                     =======
</TABLE>
 
  The accumulated postretirement benefit obligation in the above table includes
$12,264,000 for health care plans and $588,000 for life insurance plans at
March 31, 1995. For the period January 31 to March 31, 1995, net periodic
postretirement benefit cost was $337,000.
 
                                      F-22
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  For measurement purposes, a weighted-average annual assumed rate of increase
in the per capita cost of covered health care claims of 11 1/2% was assumed for
1995. For 1996, a rate of 10 3/4% will be assumed. The rate was assumed to
decrease gradually to 5% in 2005 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of March 31, 1995 by $2,017,000.
 
NOTE 9--CAPITAL STOCK
 
  At March 31, 1995, 12,081,354 shares of Common Stock were reserved for
issuance in connection with the conversion of Series A $2.25 Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") and Series B $2.25
Cumulative Convertible Exchangeable Preferred Stock ("Series B Preferred
Stock"), conversion of subordinated debentures and the exercise of stock
options and awards of restricted stock under JRM's stock incentive plans.
 
 Series A Preferred Stock
 
  At March 31, 1995, 3,200,000 shares of Series A Preferred Stock were owned by
International. Shares of Series A Preferred Stock have one vote per share and a
liquidation preference of $50.00 per share. Dividends on Series A Preferred
Stock are cumulative at the annual rate of $2.25 per share.
 
  Each share of Series A Preferred Stock is redeemable, for cash at $52.00 per
share, after January 31, 1997 (subject to any required approvals) and prior to
January 31, 2000, provided that the last reported sales price of JRM Common
Stock in its principal trading market for any 20 trading days within a period
of 30 consecutive trading days ending not more than five days prior to the date
the Series A Preferred Stock is called for redemption is at least $55.74 after
January 31, 2000.
 
  Each share of Series A Preferred Stock is convertible into 1.794 shares of
Common Stock at any time after a call by JRM for redemption of any or all of
the outstanding Series A Preferred Stock or at any time after January 31, 2000.
 
 Series B Preferred Stock
 
  Dividends on Series B Preferred shares are cumulative at an annual rate of
$2.25 per share. The stock is non-voting and has a liquidation preference of
$25.00 per share.
 
  Each share of Series B Preferred Stock is convertible into 2.192 shares
(subject to adjustment in certain circumstances) of Common Stock at the option
of the holder, at any time. The stock is redeemable, in whole or in part, at
the option of JRM after July 15, 1995, initially at a redemption price of
$26.60 per share and thereafter at prices declining to $25.00 per share on July
15, 2000. The stock is exchangeable, in whole but not in part, at the option of
JRM, for 9% Convertible Subordinated Debentures due 2007 at a rate of $25.00
principal amount of debentures for each share of stock. Each $25.00 principal
amount of debentures would be convertible into 2.192 shares of Common Stock.
 
 
                                      F-23
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Stock Incentive Plans--The following table summarizes activity related to
stock options under JRM's stock incentive plans for the year ended March 31,
1995:
 
<TABLE>
   <S>                                                             <C>
   Issued January 31, 1995, under the terms of the Merger
    Agreement (See Note 3)........................................    897,818
   Granted........................................................    243,530
   Exercised......................................................    (63,106)
                                                                   ----------
   Options outstanding at March 31................................  1,078,242
                                                                   ==========
   Options exercisable at March 31................................    834,712
                                                                   ==========
   Average price:
     Outstanding options.......................................... $   9.4574
     Exercisable options.......................................... $   5.6158
                                                                   ==========
   Shares available at March 31 that may be granted for options...  4,156,470
                                                                   ==========
</TABLE>
 
  Generally, all options awarded expire 10 years after the date of grant.
Pursuant to the stock incentive plans, eligible employees may be granted rights
to purchase shares of Common Stock at $1.00 per share subject to restrictions
on transfer which lapse at such times and circumstances as specified when
granted. At March 31, 1995, no rights have been granted.
 
NOTE 10--CONTINGENCIES AND COMMITMENTS
 
  Litigation--JRM and certain of its officers, directors and subsidiaries are
defendants in numerous legal proceedings. Management believes that the outcome
of these proceedings will not have a material adverse effect upon the
consolidated financial position of JRM.
 
  Operating Leases--Future minimum payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
at March 31, 1995 are as follows: 1996--$9,837,000; 1997--$5,633,000; 1998--
$3,562,000; 1999--$2,978,000; 2000--$2,494,000; and thereafter--$22,042,000.
Total rental expense for fiscal years 1995, 1994 and 1993 was $79,098,000,
$87,531,000 and $93,153,000, respectively. These expense figures include
contingent rentals and are net of sublease income, both of which are not
material.
 
  Other--JRM maintains liability and property insurance that it considers
normal in the industry. However, certain risks are either not insurable or
insurance is available only at rates which JRM considers uneconomical.
 
  JRM has been identified as a potentially responsible party at two cleanup
sites under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended. JRM has not been determined to be a major
contributor of wastes to these sites. However, each potentially responsible
party or contributor may face assertions of joint and several liability.
Generally, however, a final allocation of costs is made based on relative
contribution of wastes to each site. Based on estimates of its relative
contribution of waste to each site (clean up efforts at one site are nearing
completion), JRM's share of the ultimate liability for the sites is not
expected to have a material effect on its consolidated financial position.
 
  Commitments for capital expenditures amounted to approximately $31,042,000 at
March 31, 1995, all of which relates to fiscal year 1996.
 
                                      F-24
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  JRM is contingently liable under standby letters of credit totaling
$168,804,000 (including $47,403,000 issued on behalf of unconsolidated foreign
joint ventures) at March 31, 1995, issued in the normal course of business. JRM
has guaranteed $20,500,000 of loans to and McDermott International continues to
guarantee $26,559,000 of standby letters of credit issued by certain
unconsolidated foreign joint ventures of JRM at March 31, 1995.
 
NOTE 11--FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
 
  The principal customers of JRM are the offshore oil, natural gas and
hydrocarbon processing industries and other marine construction companies.
These concentrations of customers may impact JRM's overall exposure to credit
risk, either positively or negatively, in that the customers may be similarly
affected by changes in economic or other conditions. However, JRM's management
believes that the portfolio of receivables is well diversified and that such
diversification minimizes any potential credit risk. Receivables are generally
not collateralized.
 
  JRM believes that its provision for possible losses on uncollectible accounts
receivable is adequate for its credit loss exposure. At March 31, 1995 and
1994, the allowance for possible losses deducted from accounts receivable-trade
on the balance sheet was $795,000 and $646,000, respectively.
 
NOTE 12--DERIVATIVE FINANCIAL INSTRUMENTS
 
  JRM operates internationally giving rise to exposure to market risks from
changes in foreign exchange rates. Derivative financial instruments, primarily
forward exchange contracts, are utilized to reduce those risks. JRM does not
hold or issue financial instruments for trading purposes.
 
  Forward exchange contracts are entered into primarily as hedges of certain
firm purchase and sale commitments denominated in foreign currencies. At March
31, 1995, JRM had forward exchange contracts to purchase $10,134,000 in foreign
currencies (primarily Pound Sterling), and to sell $60,445,000 in foreign
currencies (primarily Dutch Guilders and Malaysian Ringgits), at varying
maturities through fiscal year 1996. At March 31, 1994, JRM had forward
exchange contracts to purchase $21,065,000 in foreign currencies (primarily
Dutch Guilders, Australian Dollars and Saudi Riyals) and to sell $48,362,000 in
foreign currencies (primarily Dutch Guilders, Malaysian Ringgits and Saudi
Riyals) at varying maturities through fiscal year 1995.
 
  Deferred realized and unrealized gains and losses from hedging firm purchase
and sale commitments are included on a net basis in the balance sheet as a
component of either other current assets or accrued liabilities. They are
recognized in income as part of the purchase or sale transaction when it is
recognized, or as other gains or losses when a hedged transaction is no longer
expected to occur. At March 31, 1995, JRM had deferred gains of $537,000 and
deferred losses of $1,570,000 related to forward exchange contracts which are
expected to be recognized during fiscal year 1996.
 
  JRM is exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments, but it does not anticipate
nonperformance by any of the counterparties. The amount of such exposure is
generally the unrealized gains in such contracts.
 
NOTE 13--FAIR VALUES OF FINANCIAL INSTRUMENTS
 
 The following methods and assumptions were used by JRM in estimating its fair
value disclosures for financial instruments:
 
    Cash and cash equivalents: The carrying amount reported in the balance
  sheet for cash and cash equivalents approximates its fair value.
 
                                      F-25
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
    Long and short-term debt: The fair value of JRM's debt instruments are
  based on quoted market prices or where quoted prices are not available, on
  the present value of cash flows discounted at estimated borrowing rates for
  similar debt instruments or on estimated prices based on current yields for
  debt issues of similar quality and terms. At March 31, 1995 and 1994, JRM
  had total debt (excluding capitalized leases and notes payable to McDermott
  International) with a carrying value of $129,954,000 and $2,401,000 and a
  fair value of $130,814,000 and 2,401,000, respectively.
 
    Notes payable to and receivable from McDermott International: The fair
  value of JRM's notes payable to McDermott International are calculated
  using estimated prices based on current yields for debt issues of similar
  quality and terms. At March 31, 1995 JRM's total notes payable issued to
  McDermott International on January 31, 1995 had a carrying value of
  $270,750,000, which approximates fair value. At March 31, 1994, the 10.375%
  Note due 1998 had a carrying value of $90,400,000 and a fair value of
  $99,336,000. At March 31, 1994, it was not practicable to estimate the fair
  value of JRM's non-current notes receivable from and payable to McDermott
  International (other than the 10.375% Note) because the time of their
  settlement had not yet been determined.
 
    Foreign currency exchange contracts: The fair values of foreign currency
  forward exchange contracts are estimated by obtaining quotes from brokers.
  At March 31, 1995 and 1994, JRM had net forward exchange contracts to sell
  foreign currencies with a notional value of $50,311,000 and $27,297,000 and
  a fair value of $51,647,000 and $27,403,000, respectively.
 
NOTE 14--SEGMENT REPORTING
 
  JRM operates in a single business segment and supplies worldwide services for
the offshore oil, natural gas and hydrocarbon processing industries, and to
other marine construction companies. Principal activities include the design,
engineering, fabrication and installation of marine pipelines and offshore
structures and subsea production systems for development drilling and
production, transportation of oil and gas and onshore construction and
maintenance services. JRM also provides vessel chartering operations,
principally to its unconsolidated affiliates.
 
  JRM does not believe it is dependent on any one customer. Sales to major
customers that exceeded 10% of revenues were: 1995--customer A $118,820,000
(11%); 1994--customer B $174,688,000 (15%), customer C $160,195,000 (13%).
 
  At March 31, 1995 and 1994 receivables of $6,230,000 and $810,000,
respectively, were due from minority shareholders participating in JRM's
majority-owned joint ventures, primarily ETPM S.A. Sales to ETPM S.A. were
$1,801,000, $3,133,000 and $31,234,000, respectively, for the fiscal years
ended March 31, 1995, 1994 and 1993. In fiscal years 1995, 1994 and 1993,
equipment charters and overhead expenses of $4,938,000, $6,330,000 and
$6,046,000, respectively, were charged by ETPM S.A. to the McDermott-ETPM joint
venture.
 
                                      F-26
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Information about JRM's Operations in Different Geographic Areas.
 
<TABLE>
<CAPTION>
                                                       1995        1994        1993
                                                    ----------  ----------  ----------
                                                                     (IN THOUSANDS)
<S>                      <C> <C>                    <C>         <C>         <C>         <C>
Revenues(1).............  -- United States          $  349,186  $  351,296  $  334,854
                          -- Europe and West Africa    322,817     142,525     516,894
                          -- Middle East               129,010     154,791     238,221
                          -- Far East                  326,307     545,269     511,076
                          -- Other Foreign                  --          --          15
                                                    ----------  ----------  ----------
                             Total................. $1,127,320  $1,193,881  $1,601,060
                                                    ==========  ==========  ==========
Operating Income (Loss)
 by Geographic Area(2)..  -- United States          $   (7,049) $   11,241  $    6,617
                          -- Europe and West Africa     26,568       8,359      19,582
                          -- Middle East                18,468      12,662      21,388
                          -- Far East                   41,692      38,719      35,894
                          -- Other Foreign              (1,496)     (1,551)       (518)
                                                    ----------  ----------  ----------
                             Total................. $   78,183  $   69,430  $   82,963
                                                    ==========  ==========  ==========
Identifiable Assets.....  -- United States          $  312,131  $  293,344  $  268,478
                          -- Europe and West Africa    609,618     411,271     326,977
                          -- Middle East               206,463     101,141     115,804
                          -- Far East                  271,233     195,967     219,558
                          -- Other Foreign                  --       5,886       1,711
                          -- Corporate                  82,817          --          --
                                                    ----------  ----------  ----------
                             Total................. $1,482,262  $1,007,609  $  932,528
                                                    ==========  ==========  ==========
</TABLE>
--------
(1) Net of inter-geographic area revenues in fiscal years 1995 and 1994 as
    follows: United States--$4,820,000, $16,537,000; Europe and West Africa--
    $5,074,000, $15,543,000; Middle East--$36,802,000, $2,660,000; Far East--
    $341,000, $475,000; and Other Foreign--$26,259,000, none. United States in
    fiscal year 1993: $63,291,000.
(2) Reconciling items to Operating Income on the Consolidated Statement of
    Income are General and Allocated Corporate Expenses of $2,933,000 and
    $19,690,000, respectively, for fiscal year 1995, and allocated General
    Corporate Expenses of $21,240,000 and $22,354,000 for fiscal years 1994 and
    1993, respectively, and Equity in Income of Investees.
 
 
                                      F-27
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
 
  The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1995 and 1994:
 
<TABLE>
<CAPTION>
                                                           1995
                                           ------------------------------------
                                                Q U A R T E R   E N D E D
                                           ------------------------------------
                                           JUNE 30,  SEPT.   DEC. 31, MARCH 31,
                                             1994   30, 1994   1994     1995
                                           -------- -------- -------- ---------
                                                      (IN THOUSANDS)
   <S>                                     <C>      <C>      <C>      <C>
   Revenues............................... $279,046 $279,322 $247,190 $321,762
   Operating income.......................   16,799   32,481   31,071   (1,934)
   Income (loss) before cumulative effect
    of accounting change..................   14,024   29,649   18,017     (990)
   Net income (loss)......................   12,698   29,649   18,017     (990)
</TABLE>
 
  Pre-tax results for the quarter ended September 30, 1994 include the
settlement of claims for interest on certain foreign tax refunds of $2,233,000
and the acceleration of depreciation on certain marine construction equipment
of $4,314,000. Results for the quarter ended December 31, 1994 include the
settlement of claims for interest on certain foreign tax refunds of $2,163,000.
Results for the quarter ended March 31, 1995 included a reduction in taxes due
to settlement of outstanding tax issues of $5,200,000.
 
<TABLE>
<CAPTION>
                                                            1994
                                            ------------------------------------
                                                 Q U A R T E R   E N D E D
                                            ------------------------------------
                                            JUNE 30,  SEPT.   DEC. 31, MARCH 31,
                                              1993   30, 1993   1993     1994
                                            -------- -------- -------- ---------
                                                       (IN THOUSANDS)
   <S>                                      <C>      <C>      <C>      <C>
   Revenues................................ $353,501 $304,247 $294,857 $241,276
   Operating income........................   66,959   59,031   27,209    1,584
   Net income..............................   47,500   38,468   14,476   18,693
</TABLE>
 
  Net income for the quarter ended March 31, 1994 includes a reduction in the
provision for taxes of $10,000,000 due to the settlement of outstanding tax
issues.
 
                                      F-28
<PAGE>
 
                      [THIS PAGE INTENTIONALLY LEFT BLANK]
 
                                      F-29
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                      CONDENSED CONSOLIDATED BALANCE SHEET
 
                               DECEMBER 31, 1995
 
<TABLE>
<CAPTION>
                         ASSETS                           12/31/95    3/31/95
                         ------                          ----------- ----------
                                                         (UNAUDITED)
                                                             (IN THOUSANDS)
<S>                                                      <C>         <C>
Current Assets:
  Cash and cash equivalents............................. $   79,454  $   52,224
  Accounts receivable--trade............................    245,985     244,212
  Accounts receivable--unconsolidated affiliates........     66,149      56,104
  Accounts receivable--other............................     20,712      33,830
  Contracts in progress.................................    174,953      54,947
  Other current assets..................................     16,134      28,819
                                                         ----------  ----------
    Total Current Assets................................    603,387     470,136
                                                         ----------  ----------
Property, Plant and Equipment, at Cost..................  1,474,473   1,504,717
  Less accumulated depreciation and amortization........    931,274     910,555
                                                         ----------  ----------
    Net Property, Plant and Equipment...................    543,199     594,162
                                                         ----------  ----------
Excess of Cost Over Fair Value of Net Assets of
 Purchased Businesses Less Accumulated Amortization of
 $23,034,000 at December 31, 1995 and $5,483,000 at
 March 31, 1995.........................................    322,750     245,179
                                                         ----------  ----------
Investment in Unconsolidated Affiliates.................     88,231     105,283
                                                         ----------  ----------
Other Assets............................................     86,923      67,502
                                                         ----------  ----------
    TOTAL............................................... $1,644,490  $1,482,262
                                                         ==========  ==========
</TABLE>
 
 
     See accompanying notes to condensed consolidated financial statements.
 
                                      F-30
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                      CONDENSED CONSOLIDATED BALANCE SHEET
 
                               DECEMBER 31, 1995
 
<TABLE>
<CAPTION>
          LIABILITIES AND STOCKHOLDERS' EQUITY            12/31/95     3/31/95
          ------------------------------------           -----------  ----------
                                                         (UNAUDITED)
                                                             (IN THOUSANDS)
<S>                                                      <C>          <C>         
Current Liabilities:
  Notes payable and current maturities of long-term
   debt................................................. $  145,138   $   55,894
  Note payable to McDermott International...............     20,543       39,750
  Accounts payable......................................    188,569      141,376
  Accrued contract costs................................     51,770       53,610
  Accrued liabilities--other............................    111,243      105,242
  Advanced billings on contracts........................     50,071       62,495
  U.S. and foreign income taxes.........................     26,240       38,357
                                                         ----------   ----------
    Total Current Liabilities...........................    593,574      496,724
                                                         ----------   ----------
Long-Term Debt..........................................    123,358       93,872
                                                         ----------   ----------
Note Payable to McDermott International.................    231,000      231,000
                                                         ----------   ----------
Deferred and Non-Current Income Taxes...................     55,101       44,697
                                                         ----------   ----------
Other Liabilities.......................................     66,391       56,498
                                                         ----------   ----------
Contingencies...........................................
                                                         ----------   ----------
Stockholders' Equity:
  Preferred Stock, par value $0.01 per share, authorized
   10,000,000 shares:
   Series A $2.25 cumulative convertible, outstanding
    3,200,000 shares (liquidation preference
    $160,000,000).......................................         32           32
   Series B $2.25 cumulative convertible exchangeable,
    outstanding 458,632 at March 31, 1995...............         --            5
  Common stock, par value $0.01 per share, authorized
   60,000,000 shares; outstanding 40,180,333 at December
   31, 1995 and 38,649,349 at March 31, 1995............        402          386
  Capital in excess of par value........................    584,432      580,279
  Retained earnings (deficit)...........................      5,462       (6,598)
  Currency translation adjustments......................    (15,262)     (14,633)
                                                         ----------   ----------
    Total Stockholders' Equity..........................    575,066      599,471
                                                         ----------   ----------
      TOTAL............................................. $1,644,490   $1,482,262
                                                         ==========   ==========
</TABLE>
 
     See accompanying notes to condensed consolidated financial statements.
 
                                      F-31
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                   CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
                               DECEMBER 31, 1995
 
<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED
                                                            ------------------
                                                            12/31/95  12/31/94
                                                            --------  --------
                                                               (UNAUDITED)
                                                             (IN THOUSANDS)
<S>                                                         <C>       <C>
Revenues................................................... $939,996  $805,558
                                                            --------  --------
Costs and Expenses:
  Cost of operations (excluding depreciation and
   amortization)...........................................  752,450   605,449
  Depreciation and amortization............................   66,045    52,094
  Selling, general and administrative expenses.............   85,107    90,508
                                                            --------  --------
                                                             903,602   748,051
                                                            --------  --------
Operating Income Before Equity in Income of Investees......   36,394    57,507
Equity in Income of Investees..............................    9,845    22,844
                                                            --------  --------
  Operating Income.........................................   46,239    80,351
                                                            --------  --------
Other Income (Expense):
  Interest income..........................................    3,339     8,114
  Interest expense.........................................  (33,494)  (17,173)
  Other--net...............................................    6,371     5,428
                                                            --------  --------
                                                            (23,784)    (3,631)
                                                            --------  --------
Income Before Provision for Income Taxes and Cumulative
 Effect of Accounting Change...............................   22,455    76,720
Provision for Income Taxes.................................    3,979    15,030
                                                            --------  --------
Income Before Cumulative Effect of Accounting Change.......   18,476    61,690
Cumulative Effect of Accounting Change.....................       --    (1,326)
                                                            --------  --------
Net Income................................................. $ 18,476  $ 60,364
                                                            ========  ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                        NINE MONTHS ENDED
                                                   ----------------------------
                                                             12/31/95
                                                             --------
                                                           (UNAUDITED)
                                                   (IN THOUSANDS, EXCEPT SHARES
                                                      AND PER SHARE AMOUNTS)
<S>                                                        <C>
NET INCOME APPLICABLE TO COMMON STOCK (AFTER
 PREFERRED STOCK DIVIDENDS).......................         $    12,565
                                                           ===========
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
 (PRIMARY AND FULLY DILUTED)......................         $      0.32
                                                           ===========
  Weighted average number of common and common
   equivalent shares..............................          39,738,798
CASH DIVIDENDS:
  Per preferred share.............................         $    1.6875
                                                           ===========
</TABLE>
 
  Earnings per share are not presented for the nine months ended December 31,
1994 because JRM was not a separate entity with its own capital structure for
that period.
 
     See accompanying notes to condensed consolidated financial statements.
 
                                      F-32
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
                               DECEMBER 31, 1995
 
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED
                                                          -------------------
                                                          12/31/95   12/31/94
                                                          ---------  --------
                                                             (UNAUDITED)
                                                            (IN THOUSANDS)
<S>                                                       <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................... $  18,476  $ 60,364
                                                          ---------  --------
Adjustments to reconcile net income to net cash provided
 by (used in) operating activities:
  Depreciation and amortization..........................    66,045    52,094
  Equity in income or loss of investees, less dividends..     3,684    32,180
  Gain on sale and disposal of assets....................    (2,232)   (2,345)
  Benefit from deferred taxes............................    (1,737)   (1,127)
  Other..................................................       854     1,008
  Changes in assets and liabilities:
    Accounts receivable..................................   (28,954)      677
    Net contracts in progress and advance billings.......  (128,646)  (19,025)
    Accounts payable.....................................    15,247   (22,847)
    Accrued contract costs...............................    (1,840)  (16,428)
    Accrued liabilities..................................    (7,217)  (13,198)
    Income taxes.........................................    (8,795)   (7,752)
    Other, net...........................................     9,827   (10,712)
                                                          ---------  --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......   (65,288)   52,889
                                                          ---------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...............   (26,583)  (30,124)
Proceeds from sale and disposal of assets................    23,108     1,997
Investment in asset held for lease.......................   (26,518)       --
Increase in notes receivable from McDermott
 International...........................................        --   (15,490)
Other....................................................     8,218        --
                                                          ---------  --------
NET CASH USED IN INVESTING ACTIVITIES....................   (21,775)  (43,617)
                                                          ---------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt................................    (5,407)     (666)
Issuance of long-term debt...............................    32,291        --
Increase in short-term borrowing.........................    92,413     8,385
Decrease in notes payable to affiliates..................        --    (5,935)
Distributions to McDermott International.................        --   (36,121)
Issuance of common stock.................................     1,572        --
Preferred dividends paid.................................    (5,911)       --
Other....................................................      (182)       --
                                                          ---------  --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......   114,776   (34,337)
                                                          ---------  --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH.................      (483)      377
                                                          ---------  --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.....    27,230   (24,688)
                                                          ---------  --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.........    52,224    53,343
                                                          ---------  --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $  79,454  $ 28,655
                                                          =========  ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest (net of amount capitalized)................... $  30,825  $ 17,049
  Income taxes (net of refunds).......................... $  10,352  $ 19,571
                                                          =========  ========
</TABLE>
     See accompanying notes to condensed consolidated financial statements.
 
                                      F-33
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
              FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
                     AND AT DECEMBER 31 AND MARCH 31, 1995
 
NOTE 1--BASIS OF PRESENTATION
 
  J. Ray McDermott, S.A. ("JRM") was incorporated on March 22, 1994 in the
Republic of Panama and had no significant operations prior to January 31, 1995
when McDermott International, Inc. ("International") contributed substantially
all of its marine construction services business to JRM and JRM acquired
Offshore Pipelines, Inc. ("OPI") (the "Merger") pursuant to an Agreement and
Plan of Merger. The contribution of International's marine construction
services business to JRM was accounted for in a manner similar to a pooling of
interests and the financial statements reflect International's historical cost
of the assets and liabilities contributed.
 
  The accompanying unaudited condensed consolidated financial statements are
presented in U.S. Dollars and have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Such adjustments are of a normal,
recurring nature except for an adjustment to the OPI acquisition preliminary
purchase price allocation (see Note 3); the settlement of claims for interest
relating to foreign tax refunds and contract claims of $4,396,000, and the
accelerated depreciation on marine equipment of $4,314,000 and the cumulative
effect of the accounting change for the adoption of Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" included in the nine months ended December 31, 1994. Operating
results for the three and nine months ended December 31, 1995 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in JRM's Annual Report on Form 10-K
for the year ended March 31, 1995.
 
NOTE 2--SUMMARIZED INCOME STATEMENT INFORMATION OF UNCONSOLIDATED AFFILIATES
 
  The combined financial results of JRM's equity investments in HeereMac and
McDermott-ETPM West, Inc. are summarized below. These ventures were significant
as defined by applicable SEC regulations in fiscal year 1995. The following
summarizes their combined income statements:
 
<TABLE>
<CAPTION>
                                                              NINE MONTHS ENDED
                                                              -----------------
                                                              12/31/95 12/31/94
                                                              -------- --------
                                                               (IN THOUSANDS)
   <S>                                                        <C>      <C>
   Revenues.................................................. $435,488 $560,171
                                                              -------- --------
   Operating Income..........................................    6,422   37,169
                                                              -------- --------
   Income Before Income Taxes................................   17,545   50,459
   Provision for Income Taxes................................    1,206    4,178
                                                              -------- --------
   Net Income................................................ $ 16,339 $ 46,281
                                                              ======== ========
   Equity in Net Income...................................... $  8,706 $ 22,993
                                                              ======== ========
</TABLE>
 
                                      F-34
<PAGE>
 
                             J. RAY MCDERMOTT, S.A.
 
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 3--ACQUISITION OF OFFSHORE PIPELINES, INC.
 
  During the December quarter of fiscal 1996, JRM recorded adjustments to the
OPI preliminary purchase price allocation resulting in an increase of
$95,000,000 in excess of cost over fair value of net assets acquired. These
adjustments resulted from the completion of certain asset and liability
valuations related primarily to joint ventures, property, plant and equipment,
and preacquisition contingencies. Additionally, during the December quarter,
management completed its assessment of the amortization period of excess of
cost over fair value of net assets acquired and determined the amortization
period should be 15 years.
 
NOTE 4--OTHER AGREEMENTS
 
  During the June 1995 quarter, JRM and ETPM S.A. entered into agreements
restructuring their joint venture. These agreements expand the joint venture
into the Far East, the Mediterranean Sea, and all of Africa, give ETPM S.A. a
minority interest in a new JRM subsea company and give JRM a minority interest
in a new ETPM company. This transaction is not significant as defined by
applicable SEC regulations.
 
                                      F-35
<PAGE>
 
                                AUDITORS' REPORT
 
To the Board of Directors
of J. Ray McDermott, S.A.
 
  We have audited the accompanying combined balance sheet of the McDermott-ETPM
West, Inc. and Heerema Offshore Construction Group Inc.--McDermott
International, Inc. Joint Venture as of March 31, 1995 and 1994 and the related
combined statements of income, owners' equity and cash flows for each of the
three years in the period ended March 31, 1995. These combined financial
statements are the responsibility of the Joint Ventures' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits. We did not audit the combined financial statements of
McDermott-ETPM West, Inc., which reflect total assets constituting 37% in 1995
and 39% in 1994, and total revenues constituting 49%, 43% and 49% in 1995, 1994
and 1993 of the related combined totals. Those statements were audited by other
auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for McDermott-ETPM West, Inc., is based solely
on the report of other auditors.
 
  We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
 
  In our opinion, based on our audits and the report of other auditors, the
combined financial statements, referred to above, present fairly, in all
material respects, the combined financial position of McDermott-ETPM West, Inc.
and Heerema Offshore Construction Group Inc.--McDermott International, Inc.
Joint Venture at March 31, 1995 and 1994 and the combined results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1995, in conformity with generally accepted accounting principles in
the United States of America.
 
The Hague, April 28, 1995
 
KPMG Accountants N.V.
 
                                      F-36
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors
J. Ray McDermott, S. A.
 
  We have audited the combined balance sheet of McDermott-ETPM West, Inc. as of
March 31, 1995 and 1994, and the related combined statements of income, common
stock and other equity, and cash flows for each of the three years in the
period ended March 31, 1995 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of McDermott-ETPM West,
Inc. at March 31, 1995 and 1994, and the combined results of its operations and
its cash flows for each of the three years in the period ended March 31, 1995,
in conformity with generally accepted accounting principles.
 
                                          ERNST & YOUNG LLP
 
New Orleans, Louisiana
April 28, 1995
 
                                      F-37
<PAGE>
 
                           MCDERMOTT-ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
              COMBINED BALANCE SHEET AS OF MARCH 31, 1995 AND 1994
 
<TABLE>
<CAPTION>
                       ASSETS                             1995             1994
                       ------                        ---------------  ---------------
                                                     (IN THOUSANDS OF U.S. DOLLARS)
<S>                                                  <C>              <C>
Current assets:
  Cash and cash equivalents......................... $       232,244  $      242,474
  Accounts receivable--trade........................          52,563          46,827
  Accounts receivable--related parties..............          20,841          47,572
  Accounts receivable--other........................           5,596           3,355
  Contracts in progress.............................           3,658          21,089
  Other current assets..............................          10,507           9,992
                                                     ---------------  --------------
    Total current assets............................         325,409         371,309
                                                     ---------------  --------------
Fixed assets at cost................................         178,698         149,445
  Less accumulated depreciation.....................        (107,821)        (71,032)
                                                     ---------------  --------------
    Net fixed assets................................          70,877          78,413
                                                     ---------------  --------------
Other assets........................................             130             109
                                                     ---------------  --------------
      TOTAL......................................... $       396,416  $      449,831
                                                     ===============  ==============
<CAPTION>
           LIABILITIES AND OWNERS' EQUITY
           ------------------------------
<S>                                                  <C>              <C>
Current liabilities:
  Notes payable and current maturities of long-term
   debt............................................. $        18,110  $       27,747
  Accounts payable..................................          46,222          81,074
  Accounts payable--related parties.................          35,663          15,953
  Advance billings on contracts.....................          65,456          58,306
  Accrued drydocking and refurbishment costs........          35,872          25,298
  Income taxes payable..............................           9,392           4,047
  Accrued liabilities--other........................          28,123          42,525
                                                     ---------------  --------------
    Total current liabilities.......................         238,838         254,950
                                                     ---------------  --------------
Other liabilities...................................           7,671           8,362
                                                     ---------------  --------------
Pension liability...................................           1,958           1,843
                                                     ---------------  --------------
Long-term debt......................................          28,441          31,887
                                                     ---------------  --------------
Owners equity:
  Common stock and capital contributions............          53,888          53,883
  Retained earnings.................................          69,096         128,098
  Currency translation adjustments..................          (3,476)        (29,192)
                                                     ---------------  --------------
    Total owners' equity............................         119,508         152,789
                                                     ---------------  --------------
      TOTAL......................................... $       396,416  $      449,831
                                                     ===============  ==============
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-38
<PAGE>
 
                           MCDERMOTT-ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
             COMBINED STATEMENT OF INCOME FOR THE THREE YEARS ENDED
                                 MARCH 31, 1995
 
<TABLE>
<CAPTION>
                             1995      1994       1993
                           --------  --------  ----------
                              (IN THOUSANDS OF U.S.
                                     DOLLARS)
<S>                        <C>       <C>       <C>
Revenues.................. $704,316  $890,866  $1,082,992
                           --------  --------  ----------
Costs and expenses:
  Costs of operations
   (before depreciation)..  538,973   617,764     790,809
  Depreciation............   27,849    30,879      43,001
  Selling, general and
   administrative
   expenses...............   65,123    66,447      69,404
                           --------  --------  ----------
                            631,945   715,090     903,214
                           --------  --------  ----------
Operating income..........   72,371   175,776     179,778
                           --------  --------  ----------
Other income (expenses):
  Interest income.........   13,305    12,886      10,209
  Interest expense........   (2,866)   (3,865)    (13,614)
  Foreign currency
   transaction gains
   (losses)...............   (2,537)    1,507      15,486
                           --------  --------  ----------
                              7,902    10,528      12,081
                           --------  --------  ----------
Income before provision
 for income taxes.........   80,273   186,304     191,859
Provision for income
 taxes....................   (7,226)   (6,284)     (3,003)
                           --------  --------  ----------
Net Income................ $ 73,047  $180,020   $ 188,856
                           ========  ========  ==========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-39
<PAGE>
 
                           MCDERMOTT-ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
         COMBINED STATEMENT OF OWNERS' EQUITY FOR THE THREE YEARS ENDED
                                 MARCH 31, 1995
 
<TABLE>
<CAPTION>
                                COMMON STOCK              CURRENCY
                                 AND CAPITAL  RETAINED   TRANSLATION
                                CONTRIBUTIONS EARNINGS   ADJUSTMENTS   TOTAL
                                ------------- ---------  ----------- ---------
                                       (IN THOUSANDS OF U. S. DOLLARS)
<S>                             <C>           <C>        <C>         <C>
Balance April 1, 1992..........   $164,636    $(186,988)   $ 3,610   $ (18,742)
                                  --------    ---------    -------   ---------
Net Income.....................         --      188,856         --     188,856
Repayment of capital...........    (26,882)          --         --     (26,882)
Currency translation
 adjustments...................         --           --    (20,964)    (20,964)
                                  --------    ---------    -------   ---------
Balance March 31, 1993.........    137,754        1,868    (17,354)    122,268
                                  --------    ---------    -------   ---------
Net Income.....................         --      180,020         --     180,020
Repayment of capital...........    (83,871)          --         --     (83,871)
Distribution of profits........         --      (53,790)        --     (53,790)
Currency translation
 adjustments...................         --           --    (11,838)    (11,838)
                                  --------    ---------    -------   ---------
Balance March 31, 1994.........     53,883      128,098    (29,192)    152,789
                                  --------    ---------    -------   ---------
Net Income.....................         --       73,047         --      73,047
Contribution of capital........          5           --         --           5
Distribution of profits........         --     (132,049)        --    (132,049)
Currency translation
adjustments....................         --           --     25,716      25,716
                                  --------    ---------    -------   ---------
Balance March 31, 1995.........   $ 53,888    $  69,096    $(3,476)  $ 119,508
                                  ========    =========    =======   =========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-40
<PAGE>
 
                           MCDERMOTT--ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
           COMBINED STATEMENT OF CASH FLOWS FOR THE THREE YEARS ENDED
                                 MARCH 31, 1995
 
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
<TABLE>
<CAPTION>
                                                  1995       1994       1993
                                                ---------  ---------  --------
                                                   (IN THOUSANDS OF U. S.
                                                          DOLLARS)
<S>                                             <C>        <C>        <C>
Cash flows from operating activities:
Net Income....................................  $  73,047  $ 180,020  $188,856
                                                ---------  ---------  --------
Adjustments to reconcile net income to net
 cash provided (used in) operating activities:
  Depreciation................................     27,849     30,879    43,001
Changes in assets and liabilities:
  Accounts receivable.........................     24,054     70,416     5,107
  Net contracts in progress and advance
   billings...................................     21,846       (664)   17,451
  Accounts payable............................    (18,880)   (50,943)    7,517
  Other, net..................................     (3,518)    17,044    26,399
                                                ---------  ---------  --------
Net cash provided by operating activities.....    124,398    246,752   288,331
                                                ---------  ---------  --------
Cash flows from investing activities:
  Investment in fixed assets..................    (12,448)    (9,499)  (21,809)
                                                ---------  ---------  --------
Total cash used in investing activities.......    (12,448)    (9,499)  (21,809)
                                                ---------  ---------  --------
Cash flows from financing activities:
  Capital (repayments) contributions..........          5    (83,871)  (26,882)
  Distribution of profits to owners...........   (132,049)   (53,790)       --
  Repayment of long-term debt.................    (19,244)   (34,096)  (44,887)
  Increase of long-term debt..................         --     14,910    28,149
  Increase (decrease) in short-term borrowing.        183     (5,084)  (45,534)
                                                ---------  ---------  --------
Total cash used in financing activities.......   (151,105)  (161,931)  (89,154)
                                                ---------  ---------  --------
Effects of exchange rate changes on cash......     28,925    (12,719)  (28,899)
                                                ---------  ---------  --------
Net increase (decrease) in cash and cash
 equivalents..................................    (10,230)    62,603   148,469
                                                ---------  ---------  --------
Cash and cash equivalents at beginning of
 year.........................................    242,474    179,871    31,402
                                                ---------  ---------  --------
Cash and cash equivalents at end of year......  $ 232,244  $ 242,474  $179,871
                                                =========  =========  ========
Supplemental disclosures of cash flow
 information:
  Interest paid during the year...............  $   2,866  $   6,025  $ 12,917
                                                =========  =========  ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-41
<PAGE>
 
                           MCDERMOTT-ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED MARCH 31, 1995
 
1. GENERAL
 
  The McDermott-ETPM West, Inc. and Heerema Offshore Construction Group Inc.--
McDermott International, Inc. Joint Venture is comprised of the Joint Ventures
between J. Ray McDermott, S.A. ("JRM") and ETPM, S.A., respectively 49.9% and
50.1% owners, and the Joint Venture between Heerema Offshore Construction Group
Inc. ("HOCG") and McDermott International, Inc. ("MII"), 50% owner each.
 
  The Joint Ventures provide general marine construction services to the
petroleum industry. To this purpose the Joint Ventures charter one semi-
submersible lay barge, one combination derrick-pipelaying barge and two semi-
submersible derrick barges from JRM, two combination derrick-pipelaying barges
from ETPM, S.A. and two semi-submersible derrick barges from HOCG. In addition,
the Joint Ventures own a fleet of anchor handling tugs and cargo barges. JRM
and ETPM, S.A. also provide fabrication facilities located in Warri, Nigeria
and Tchengue, Gabon, respectively.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
2.1 BASIS OF PRESENTATION
 
  The combined financial statements are presented in U. S. Dollars in
accordance with accounting principles generally accepted in the United States
of America. These statements combine financial information of McDermott-ETPM
West, Inc., a company incorporated in Panama, and its wholly owned subsidiaries
and other entities of both JRM and ETPM, S.A. which perform contracts on behalf
of McDermott-ETPM West, Inc. and of HOCG--MII Joint Venture. HOCG--MII Joint
Venture combines HeereMac v.o.f., a Dutch partnership, and its wholly owned
subsidiaries and other entities of both HOCG and MII which perform contracts on
behalf of HeereMac v.o.f., Panama Offshore Chartering Company Inc. and its
wholly owned subsidiaries, all incorporated in Panama, and Offshore Marine
Chartering N.V., a company incorporated in the Netherlands Antilles.
 
  Unless the context otherwise requires, hereinafter "Joint Ventures" will be
used to mean the combined enterprises.
 
2.2 FOREIGN CURRENCY TRANSLATION
 
  Assets and liabilities are translated into U.S. Dollars at current exchange
rates and income statement items are translated at average rate for the year.
Adjustments resulting from the translation of foreign currency financial
statements are recorded in a separate component of equity. Foreign currency
transaction adjustments are recorded in income.
 
2.3 CONTRACTS AND REVENUE RECOGNITION
 
  Revenues on long-term contracts are recognized on a percentage of completion
method. Under this method, revenues and costs are recognized based on the
percentage that costs to date bear to total estimated costs. Revenues that
exceed amounts invoiced to customers under the terms of the contracts are
included in Contracts in Progress. Billings that exceed revenues recognized
under percentage of completion are included in Advance Billings on Contracts.
Most long-term contracts have provisions for progress payments. Contract price
and cost estimates are reviewed periodically as the work progresses and
adjustments proportionate to the percentage of completion are reflected in
income in the period when such estimates are revised. There are
 
                                      F-42
<PAGE>
 
                           MCDERMOTT-ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
   NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED MARCH 31,
                               1995--(CONTINUED)
no unbilled revenues which will not be billed. Provisions are currently made
for all known or anticipated losses. Claims for extra work of changes in scope
of work are included in contract revenues when collection is probable.
 
2.4 DEPRECIATION, MAINTENANCE AND REPAIR AND DRYDOCKING EXPENSES
 
  Fixed assets are stated at cost and are depreciated on the straight-line
method, using estimated useful lives of three to eight years. Maintenance,
repairs and renewals which do not materially prolong the useful life of an
asset are expensed as incurred except for drydocking and refurbishment costs
for the marine fleet.
 
  Drydocking costs are estimated and accrued over the period of time between
drydockings and are charged to operations currently. Refurbishment costs for
the main work barges are estimated and accrued during working periods and
charged to operations currently.
 
2.5 CASH AND CASH EQUIVALENTS
 
  Cash equivalents are highly liquid investments, with maturities of three
months or less when purchased. The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair value.
 
2.6 ACCOUNTS RECEIVABLE
 
  Accounts receivable are stated at net realizable value after deduction of a
provision for uncollectability.
 
2.7 DERIVATIVE FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
 
  The Joint Ventures enter into forward exchange contracts with international
financial institutions primarily relating to identifiable foreign currency
exposures with respect to operations. These financial instruments are designed
to minimize exposure and reduce risk from exchange rate fluctuations in the
regular course of business. Gains and losses on forward exchange contracts
which hedge exposure on firm foreign currency commitments are deferred and
recognized as adjustments of the bases of those assets.
 
  Gains and losses on forward exchange contracts which hedge foreign currency
assets and liabilities are recognized in income as incurred. The Joint Ventures
risk in the forward exchange transactions is the cost of replacing, at current
market rates, these contracts in the event of default by the financial
institution. The Joint Ventures believe that risk of such losses is remote.
 
3. INCOME TAXES
 
  The Joint Ventures operate through various entities in various countries
under different tax jurisdictions. Substantially all income taxes provided are
based on the deemed profits of contracts performed in various taxing
jurisdictions.
 
  In the countries in which the Joint Ventures' operations are conducted
through a registered partnership, the respective partners are responsible for
taxes based on their proportionate share of contract revenues and costs,
therefore no taxes are reflected in these financial statements. Therefore there
is no expected relationship between the provision for income taxes and income
before provision for income taxes. Panama Offshore Chartering Company Inc. and
its subsidiaries as well as McDermott- ETPM West, Inc. and its subsidiaries are
not subject to income taxes in the three year period ended March 31, 1995.
Offshore Marine Chartering N.V. incurred no income tax in 1995.
 
                                      F-43
<PAGE>
 
                           MCDERMOTT-ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
   NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED MARCH 31,
                               1995--(CONTINUED)
 
4. RELATED PARTY TRANSACTIONS
 
  The Joint Ventures have material transactions with JRM, ETPM, S.A., MII and
HOCG and their subsidiaries, occurring in the normal course of operations.
Under the various joint venture agreements, marine equipment and fabrication
facilities are chartered into the Joint Ventures by the respective partners.
The charter expenses for the years 1995, 1994 and 1993 were US$ 86 million, US$
88 million and US$ 92 million, respectively. In addition, ETPM, S.A. provides
general and administrative services to one of the Joint Ventures. In 1995, 1994
and 1993 the amount of these services were approximately US$ 29 million, US$ 36
million and US$ 44 million, respectively.
 
5. LONG-TERM DEBT AND SHORT-TERM BORROWINGS
 
<TABLE>
<CAPTION>
                                                                1995     1994
                                                               -------  -------
                                                                (IN THOUSANDS
                                                                   OF U.S.
                                                                  DOLLARS)
   <S>                                                         <C>      <C>
   Third Party Loans.......................................... $35,552  $49,940
   Less: amounts due within one year..........................  (7,111) (18,053)
                                                               -------  -------
     Total long-term debt..................................... $28,441  $31,887
                                                               =======  =======
</TABLE>
 
  These are roll over loans at prevailing market rates maturing 1999. The
installments are US$ 7,111 in each of the following four years.
 
  In 1994 an interest-swap agreement was entered into which effectively fixes
the interest at 6.7% until maturity. The loans are secured by the right of
first and second mortgages on the anchor handling tugs and most of the cargo
barges.
 
  Short-term borrowings are denominated in foreign currencies and carry
interest at prevailing market rates. In general these short-term borrowings
mature within a month.
 
6. PENSION LIABILITY
 
  One of the Joint Ventures' entities, HeereMac v.o.f., has pension plans
covering the majority of its permanent staff. These plans are fully insured by
a third party life insurance company in the Netherlands. Premiums charged by
the insurance company and expensed by the Joint Ventures relate to a calendar
year and are calculated by determining the actuarial present value of future
benefits to be provided based upon current compensation levels. Further, at the
time of granting compensation increases, the Joint Ventures accrue as pension
provision the increase in its actuarial present value of future benefits. Such
amounts will be funded through enhanced future premiums. The discount rate used
to calculate the actuarial present value of future benefits was 6% in 1995, 5%
in 1994 and 7% in 1993. Pension cost paid by the Joint Ventures amounted to US$
2.1 million in 1995, US$ 1.8 million in 1994 and US$ 1.6 million in 1993.
 
7. CONTINGENCIES AND COMMITMENTS
 
  The Joint Ventures have the usual liability of a contractor for completion of
contracts and the warranty of its work. In relation to this liability, bank
guarantees, performance bonds and standby letters of credit are issued in the
normal line of business. Bank guarantees outstanding at year end amounted to
US$ 115 million. Due to the short term nature of the guarantees, the fair value
is considered to be nil. Management is not
 
                                      F-44
<PAGE>
 
                           MCDERMOTT-ETPM WEST, INC.
                                      AND
                   HEEREMA OFFSHORE CONSTRUCTION GROUP INC.--
                  MCDERMOTT INTERNATIONAL, INC. JOINT VENTURE
 
   NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED MARCH 31,
                               1995--(CONTINUED)

aware of any material exposure related thereto which has not been provided for
in the accompanying statements. Certain marine equipment (primarily anchor
handling tugs and cargo barges) have been pledged as collateral to secure
certain long-term debt (See note 5).
 
  The Joint Ventures are defendants in various legal proceedings. Management
believes that the outcome of these proceedings will not have a material adverse
effect on the combined financial position of the Joint Ventures.
 
8. FIXED ASSETS
 
<TABLE>
<CAPTION>
                                                               1995      1994
                                                             --------  --------
                                                             (IN THOUSANDS OF
                                                               U.S. DOLLARS)
   <S>                                                       <C>       <C>
   At cost:
   Machinery and equipment.................................. $141,736  $112,866
   Cargo barges.............................................   30,856    30,856
   Onshore office equipment.................................    6,106     5,723
                                                             --------  --------
                                                              178,698   149,445
   Less accumulated depreciation............................ (107,821)  (71,032)
                                                             --------  --------
   Net fixed assets......................................... $ 70,877  $ 78,413
                                                             ========  ========
</TABLE>
 
9. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION
 
  The Joint Ventures' entities, HeereMac v.o.f. and McDermott--ETPM West, Inc.,
had forward exchange contracts at the 1995 and 1994 year end to sell US$ 47.5
million and US$ 35 million, respectively, for Dutch Guilders, to purchase US$
18 million and US$ 32 million, respectively, in foreign currency (primarily
Dutch Guilders) with French Francs and to sell US$ 23 million and US$ 106
million, respectively, in foreign currencies (primarily U.S. Dollars, British
Pounds, and Dutch Guilders) for French Francs. The 1995 year end forward
exchange contracts have varying maturities, all of which occur before the end
of next fiscal year.
 
  The fair values of forward exchange contracts are estimated by obtaining
quotes from brokers. At year end, the net fair value of the contracts
approximates the notional amounts.
 
  Financial instruments which potentially subject the Joint Ventures to
concentrations of credit risk are primarily cash and cash equivalents and
accounts receivable. The Joint Ventures have not experienced any significant
losses related to any of the short-term instruments it has used for excess cash
balances, nor from receivables for individual customers or groups of customers.
 
  The Joint Ventures' customers are primarily in the petroleum industry. This
customer base is diversified between both public and private industry
customers, in numerous countries. The management of the Joint Ventures believes
this diversification minimizes any potential credit risk. Receivables are
generally not collateralized.
 
10. SUBSEQUENT EVENT
 
  Subsequent to the year end, five launch barges and one derrick barge were
contributed to the HOCG -MII Joint Venture. This Joint Venture also purchased
one derrick barge from related parties for US$ 9 million.
 
                                      F-45
<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
  NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
 
                               ----------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Prospectus Summary........................................................    3
Risk Factors..............................................................   12
The Company...............................................................   18
Use of Proceeds...........................................................   19
Capitalization............................................................   20
Selected Historical Financial Data........................................   21
Unaudited Pro Forma Consolidated Financial Statements.....................   23
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   30
Business..................................................................   39
Management................................................................   59
Certain Transactions and Relationships....................................   61
Description of Certain Indebtedness.......................................   67
Description of the Notes..................................................   70
Certain Income Tax Considerations.........................................  102
Underwriting..............................................................  103
Legal Matters.............................................................  104
Experts...................................................................  104
Available Information.....................................................  104
Enforceability of Civil Liabilities Under the Federal Securities Laws.....  105
Incorporation of Certain Documents by Reference...........................  105
Index to Financial Statements.............................................  F-1
</TABLE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
 
 
                    [LOGO OF J. RAY MCDERMOTT APPEARS HERE]
 
                                 $250,000,000
 
                            J. RAY MCDERMOTT, S.A.
 
                              % SENIOR SUBORDINATED
                                NOTES DUE 2006
 
                               ----------------
                                  PROSPECTUS
 
                               ----------------
 
                              MERRILL LYNCH & CO.
 
                                       , 1996
 
 
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
  The following table sets forth all expenses payable by the Company in
connection with the issuance and distribution of the securities being
registered. All the amounts shown are estimates, except the registration fee
and the NASD fee:
 
<TABLE>
   <S>                                                                  <C>
   Registration fee...................................................  $86,207
   NASD fee...........................................................   25,500
   Printing expenses..................................................     *
   Accounting fees and expenses.......................................     *
   Legal fees and expenses............................................     *
   Blue Sky fees and expenses.........................................     *
   Trustee fees and expenses..........................................     *
   Rating agency fees.................................................     *
   Miscellaneous......................................................     *
                                                                        -------
       Total..........................................................  $
                                                                        =======
</TABLE>
--------
* To be provided by amendment.
 
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  Under the Civil Code of the Republic of Panama (the "PCC"), an agent is
indemnified against liability incurred in acting without fault or imprudence on
behalf of the agent's principal. It is the opinion of Durling & Durling, the
Company's Panamanian counsel ("Panamanian Counsel"), that this provision would
apply to indemnify directors and officers against liability incurred in
connection with the performance of their duties. According to Panamanian
Counsel, Panamanian law does not permit a limitation on the liability of
directors to a corporation or its stockholders, but neither does Panamanian law
recognize the concept of actions brought by stockholders in the right of the
corporation against directors or officers (i.e., derivative actions). Directors
can be held liable to the corporation or stockholders only on demand made by
resolution of the stockholders, which the Company believes is difficult to
achieve in a public company. Article VII of the registrant's Bylaws provides
for indemnification of directors and officers of the registrant to the full
extent permitted by, and in the manner permissible under, the laws of the
Republic of Panama. The foregoing statements are subject to the detailed
provisions of Article 1420 of the PCC, Article 12 of the Certificate of
Incorporation of the Company and Article VII of the Bylaws of the Company, as
applicable.
 
ITEM 16. EXHIBITS
 
<TABLE>
<CAPTION>
 EXHIBIT NO.                             DOCUMENT
 -----------                             --------
 <C>         <S>
 +1.1        --Form of Underwriting Agreement.
 *2.1        --Agreement and Plan of Merger dated as of June 2, 1994 (as
              amended) by and among J. Ray McDermott, S.A., McDermott
              International, Inc., MCB I, Inc. and Offshore Pipelines, Inc.
              (filed as Exhibit 2.1 to the Company's Registration Statement
              on Form S-4, Registration No. 33-87592, and incorporated herein
              by reference).
 +4.4        --Form of Indenture.
 +5.1        --Opinion of Durling & Durling
 12          --Statement of computation of ratios.
 23.1        --Consent of Ernst & Young LLP.
</TABLE>
 
                                      II-1
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT NO.                           DOCUMENT
 -----------                           --------
 <C>         <S>
  23.2       --Consent of KMPG Accountants N.V.
 +23.3       --Consent of Durling & Durling (contained in Exhibit 5.1).
 24          --Powers of Attorney (included on the signature page of this
              Registration Statement).
  25         --Statement of Eligibility and Qualification under the Trust
              Indenture Act of 1939.
</TABLE>
--------
*  Incorporated by reference as indicated.
+  To be filed by amendment.
 
ITEM 17. UNDERTAKINGS
 
  The Company hereby undertakes that, for purposes of determining any liability
under the Securities Act of 1933, each filing of the Company's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
 
  The Company hereby undertakes that:
 
    (1) For purposes of determining any liability under the Securities Act of
  1933, the information omitted from the form of prospectus filed as part of
  this Registration Statement in reliance upon Rule 430A and contained in a
  form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
  or 497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective.
 
    (2) For the purpose of determining any liability under the Securities Act
  of 1933, each post-effective amendment that contains a form of prospectus
  shall be deemed to be a new Registration Statement relating to the
  securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described under Item 15 above, or otherwise,
the Company has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless, in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
                                      II-2
<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New Orleans, the State of Louisiana, on March 26,
1996.
 
                                          J. Ray McDermott, S.A.
 
                                                  /s/ Robert E. Howson
                                          By___________________________________
                                                     Robert E. Howson,
                                              Chairman of the Board and Chief
                                                     Executive Officer
 
                               POWER OF ATTORNEY
 
  Each person whose signature appears below hereby appoints Robert E. Howson,
Richard R. Foreman and Daniel R. Gaubert, and each of them, each of whom may
act without the joinder of the others, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing appropriate or necessary to be done, as fully and for
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them or
their substitutes may lawfully do or cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on March 26, 1996.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE
             ---------                           -----
<S>                                  <C>                           <C>
       /s/ Robert E. Howson
------------------------------------
          Robert E. Howson           Chairman of the Board, Chief
  (Principal Executive Officer and    Executive Officer and
     Authorized Representative        Director
       in the United States)

      /s/ Ricahrd R. Foreman
------------------------------------
         Richard R. Foreman          Executive Vice President
   (Principal Financial Officer)      and Chief Financial Officer

      /s/ Daniel R. Gaubert
------------------------------------
         Daniel R. Gaubert           Vice President, Finance
   (Principal Accounting Officer)

       /s/ John F. Bookout
------------------------------------
          John F. Bookout            Director
</TABLE>
 
                                      II-3
<PAGE>
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE
             ---------                           -----
<S>                                  <C>                           <C>
                                     Director
------------------------------------
          Rick L. Burdick            

       /s/ Brock A. Hattox           Director
------------------------------------
          Brock A. Hattox           

        /s/ Michael H. Lam           Director
------------------------------------
           Michael H. Lam            

      /s/ J. Howard Macdonald        Director
------------------------------------
        J. Howard Macdonald          

                                     Director
------------------------------------
         Cedric E. Ritchie           

       /s/ Thomas P. Tatham          Director
------------------------------------
          Thomas P. Tatham           

                                     Director
------------------------------------
           Frank C. Wade             

                                     Director
------------------------------------
         James J. Wildasin           
 
                                     Director
------------------------------------
          Lodwrick M. Cook           
</TABLE>
 
                                      II-4