UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 1997
Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-16572
Avondale Industries, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 39-1097012
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 River Road, Avondale, Louisiana 70094
(Address of principal executive offices) (Zip Code)
(504) 436-2121
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
---
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by
non-affiliates (affiliates being directors, executive
officers and holders of more than 5% of the Company's common
stock) of the Registrant at December 31, 1997 was
approximately $301,016,311.
The number of shares of the Registrant's common stock,
$1.00 par value per share, outstanding at December 31, 1997
was 14,493,211.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its
1998 Annual Meeting have been incorporated by reference into
Part III of this Form 10-K.
PART I
Item 1. Business.
Overview
Avondale Industries, Inc. ("Avondale" or the
"Company") is one of the largest shipbuilders in
the United States, specializing in the design,
construction, conversion, repair and modernization
of various types of ocean-going vessels for the
military and commercial markets. A majority of
Avondale's contracts in recent years has been for
the construction of U.S. Navy surface ships,
although it secured its largest ever commercial
contract in 1997 for the construction of two
125,000 Dead Weight Tons ("DWT") crude oil
carriers for the Jones Act Trade. Management
believes the Company's low cost structure,
experienced and skilled work force, technological
capabilities, sophisticated construction processes
and extensive experience in building a variety of
military and commercial vessels, position the
Company as one of the most cost-efficient and
versatile shipbuilders in the United States. At
December 31, 1997, the Company's shipbuilding
backlog (the "firm backlog") was approximately
$1.8 billion (including estimated contract
escalation), exclusive of unexercised options
aggregating approximately $1.1 billion held by the
U.S. Navy (including estimated contract
escalation) and approximately $500 million held by
a commercial customer for additional ship orders.
In December 1996, an alliance led by the
Company was awarded a $641 million contract to
construct the initial ship in the U.S. Navy's LPD-
17 program (see glossary of selected industry
terms). In April 1997, the General Accounting
Office denied a protest filed by a competing
shipbuilding team and affirmed this contract
award. The contract award provides for options
exercisable by the U.S. Navy for two additional
LPD vessels to be built by the alliance. For
additional information on the LPD-17 award, see "-
U.S. Government." Also, in June 1997, the Company
announced that it had signed a $332 million
contract with ARCO Marine, Inc.("ARCO") of Long
Beach, California, for the construction of two
125,000 DWT crude oil carriers for the Jones Act
Trade. These vessels are to be built with double
hulls in compliance with the Oil Pollution Act of
1990 (see "-Commercial Shipbuilding"). The
contract, which represents the largest commercial
contract in the Company's history, also provides
for options valued at approximately $500 million
that are exercisable by ARCO for three additional
ships. Management believes that securing the LPD-
17 and ARCO contracts has conferred several
immediate and substantial benefits upon the
Company. Among other things, the Company has
substantially bolstered its visibility and
competitive posture by demonstrating the ability
to compete successfully for contracts based on the
high level of its technical, engineering and
production skills, as well as its competitive
prices. In addition, the backlog created from
these contract awards provides a strong foundation
that will allow the Company to compete
aggressively for other shipbuilding opportunities.
Historical Information. Avondale is a
versatile shipyard that has been the successful
bidder for a variety of marine construction
projects. Organized in 1938, Avondale first began
building ocean-going ships in the 1950s. From 1959
to 1985, the Company operated as a subsidiary of
Ogden Corporation, a diversified New York Stock
Exchange listed company headquartered in New York,
New York. Prior to the 1980s, Avondale built both
military and commercial vessels. In addition to
the construction of 27 destroyer escorts for the
U.S. Navy, Avondale successfully completed a
variety of construction projects during that
period, including general cargo and multi-product
carriers, such as LASH vessels, container vessels,
crude oil tankers and product carriers. In the
early 1980s, however, several measures were
implemented that changed the marine construction
industry significantly. The termination of the
U.S. construction-differential subsidy program in
1981 significantly curtailed the ability of U.S.
shipyards to compete successfully for
international commercial shipbuilding contracts
with foreign shipyards, many of which are heavily
subsidized by their governments. The effects of
the elimination of these subsidies were largely
offset, however, by the initiative to expand the
U.S. Navy fleet to 600 ships, thereby
significantly increasing the U.S. Navy
shipbuilding opportunities available to Avondale.
Initially, Avondale capitalized on the U.S.
Navy shipbuilding opportunities through its
construction of five AOs during the early 1980s.
Since AOs are essentially oil tankers modified to
meet certain military requirements, they were a
natural extension of the product carrier ships
previously built by Avondale.
During the remainder of the 1980s and the
first part of this decade, Avondale steadily
expanded the range of vessels that it built for
the U.S. Navy. The Company principally focused on
those vessels that were related to, or were
natural extensions of, predecessor vessels
constructed by Avondale, where Avondale could best
capitalize on its prior experience and proven
capabilities. Among the U.S. Navy vessels built or
under construction during this period were sixteen
T-AOs, five LSDs, four LSD-CVs, five AOJs (which
constituted conversions of AOs previously built by
Avondale), one T-AGS 45, fifteen LCACs, four MHCs
and three SL 7 conversions.
With the end of the Cold War and the pressure
of domestic budget constraints, spending for new
vessel construction by the U.S. Navy has been
reduced substantially, with the rate of new vessel
construction reduced to approximately 50% of that
in the 1980s. Despite the contraction in U.S. Navy
shipbuilding activity, management believes that
Avondale's versatility has been a significant
factor in its successful efforts to obtain
shipbuilding contracts, which efforts have also
been bolstered by Avondale's experience in
building vessels comparable to those currently in
demand.
U.S. Government. In addition to the contract
award by the U.S. Navy to build the first LPD-17
ship, the alliance was awarded options,
exercisable by the U.S. Navy, for two additional
ships of the LPD-17 class. It is expected that a
total of twelve ships will be built under the
LPD-17 program. The members of the alliance, Bath
Iron Works ("Bath"), Raytheon Company ("Raytheon")
(formerly Hughes Aircraft Company which later
became a subsidiary of Raytheon Company) and the
Company submitted a joint bid with the Company as
the prime contractor. Under the terms of an
agreement between the alliance members, the
Company will build the vessel covered by the
December 1996 contract and, if the U.S. Navy
exercises the two options, the Company would also
construct the second while Bath would construct
the third of the three LPD-17 vessels. Raytheon
will be responsible for total ship integration and
the alliance will use an advanced three-
dimensional ship design and modeling technology
for the design and manufacture of the ship.
The first three vessels of the LPD-17 program
will be built pursuant to a cost-plus-award fee
contract, with the Company, Raytheon and Bath each
being entitled to reimbursement for its
respective allowable costs in performing the
contracts as such costs are incurred. The
contract provides for the payment of an award fee
to the members of the alliance, the amount of
which is dependent upon the results of periodic
evaluations of contract performance and will be
paid incrementally upon completion of each
periodic evaluation. Pursuant to the
subcontracting agreements between the Company and
each of Bath and Raytheon, any award fees earned
by the alliance will be distributed to the
alliance members in proportion to each member's
performance and participation in the construction
of the vessel for which the award was granted.
Unlike the Company's other principal shipbuilding
contracts where profits are recognized under the
percentage-of-completion method of accounting, the
Company will record profits on the LPD-17 contract
upon determination of the incremental award. In
addition, although the LPD-17 contract is on a
cost-plus-award fee basis, the ability of Avondale
to realize any incremental award fee is dependent
not only upon its ability to perform its
contractual obligations but also the satisfactory
performance by other members of the team.
In accordance with the U.S. Navy's
requirement of a streamlined contractual
relationship, the alliance's agreement provides
that the Company will act as the prime contractor
for all three vessels, and as such, the Company
will be responsible for submitting invoices for
not only its own costs, but also any costs
incurred by Bath and Raytheon. Accordingly, all
such amounts relating to contract performance by
alliance members Bath and Raytheon will be
reflected as sales and cost of sales in the
Company's financial statements.
The Company's backlog at December 31, 1997
includes $609 million, which amount is the
aggregate of the estimated cost to complete the
first LPD-17 vessel and the maximum award fee that
would be payable to Avondale and the alliance.
However, a substantial portion of the reported
backlog for the first vessel is related to work to
be performed by the other alliance members. To
the extent that the Company's revenues include
costs incurred by and award fees paid to the other
alliance members, such revenues will be recorded
with no operating profit margin.
If the U.S. Navy proceeds with its previously
announced intention to construct additional LPD
ships beyond the first three, the Company
anticipates that the contracts for such vessels
may provide for an alternative pricing
arrangement, such as a fixed-price incentive
contract or fixed- price contract (see "-
Government Contracting").
The U.S. Navy has stated its expectation that
the LPD-17 vessels will be an important element in
the U.S. Navy's amphibious operations over the
next three decades, replacing more than 36 ships
nearing the end of their useful lives and
approaching decommissioning. In 1995, Congress
appropriated $974.0 million for the construction
of the first of an anticipated twelve ships under
the LPD-17 program. The award to the Company-led
alliance of the contract to construct the initial
LPD-17 ship enhances the viability and
competitiveness of the alliance in its pursuit of
the remaining LPD-17 ships. In 1997, Congress
appropriated $96.1 million as advance procurement
for LPD-18, the second ship in the program. If
the U.S. Navy awards contracts to the alliance to
construct all twelve ships, the Company would
construct eight ships and Bath would construct
four ships.
Also included in the current firm backlog for
the military are contracts to construct six
Sealift ships with a remaining backlog of $773
million (including estimated contract escalation).
The Sealift ships, which each contain more than
400,000 square feet of cargo space and are
designed to assist in the rapid transportation and
deployment of military personnel, equipment and
supplies, are comparable to other vessels, such as
auxiliary and amphibious support ships, that have
been previously constructed by Avondale for the
military. In addition, the Navy holds an option
to require the Company to construct a seventh
Sealift vessel for an additional $240 million
(including estimated contract escalation). In the
first quarter of 1998, the Navy exercised a
portion of this option relating to approximately
$24 million for long lead time materials while the
balance of the option is exercisable during the
first quarter of 1999. The first Sealift ship is
scheduled for delivery in 1998 with the final ship
(assuming exercise by the U.S. Navy of the balance
of the remaining Sealift option) scheduled for
delivery in 2001.
Although no significant new U.S. Navy
shipbuilding programs are anticipated to be
contracted before 2000, it is expected that
additional U.S. Navy shipbuilding opportunities,
including a series of ADC(X) vessels (a class of
auxiliary vessels designed to deliver fuel,
ammunition and other supplies to the U.S. Navy
fleet with capabilities similar to the T-AOs
constructed by Avondale), and the DD-21, which
represents the next generation of surface
combatant vessels, will become available shortly
thereafter. In addition, the Coast Guard Deep
Water project, which calls for the replacement of
133 vessels over the next fifteen years, is
expected in the early 2000 timeframe.
Commercial Shipbuilding. Two legislative
enactments in the early 1990s significantly
enhanced U.S. commercial shipbuilding
opportunities. The Oil Pollution Act of 1990,
which requires the phased-in transition of
single-hulled tankers and product carriers to
double-hulled vessels beginning January 1, 1995,
created a demand for the retro-fitting of existing
tankers and the construction of new double-hulled
tankers, as oil and energy companies and other
ship operators upgrade their fleets to comply with
the law. Industry analysts believe that other
countries may pass laws comparable to the Oil
Pollution Act of 1990, which would further
increase worldwide demand for double-hulled
product carriers.
In late 1993, Congress amended the loan
guarantee program under Title XI of the Merchant
Marine Act, 1936, to permit the U.S. government to
guarantee loan obligations of foreign vessel
owners for foreign-flagged vessels that are built
in U.S. shipyards. Title XI authorizes MARAD to
guarantee debt with a term of up to 25 years in an
amount up to 87.5% of the vessel cost, thereby
enabling shipowners to obtain financing on more
favorable terms than those currently offered by
other countries having guarantee or subsidy
programs for foreign nationals similar to Title
XI. These 1993 amendments expanded Title XI in a
manner that has attracted foreign owners and
created foreign and domestic commercial
shipbuilding opportunities for U.S. shipyards.
Management believes these initiatives have
assisted Avondale in attracting recent commercial
shipbuilding opportunities. In May 1995, the
Company finalized a $143.9 million contract to
retrofit four single hull tankers with double-
hulled forebodies for a U.S. shipping company.
These double-hulled product carriers were the
first U.S.-flag product carriers built in the
United States in the last eight years. The
contract is supported by a Title XI guarantee by
MARAD. The contract was completed and the last of
the vessels was delivered to the customer in
September 1997.
Also, in June 1997, the Company signed a $332
million contract with ARCO for the construction of
two double-hulled crude oil carriers. This
contract, the largest commercial contract ever
signed by Avondale, also provides for options
exercisable by the customer for three additional
ships. The Company believes that its receipt of
these commercial contracts was assisted by its
prior experience in constructing three double-
hulled T-AOs on behalf of the U.S. Navy.
Prior to 1997, legislation was introduced in
the U.S. Congress that would eliminate the
competitive advantages afforded to U.S. shipyards
under the 1993 amendments to the Title XI
guarantee program. This legislation would
implement a December 1994 trade agreement among
the United States, the European Union, Finland,
Japan, Korea, Norway and Sweden (which
collectively control over 75% of the market share
for worldwide vessel construction) negotiated
under the auspices of the Organization for
Economic Cooperation and Development (the "OECD
Agreement"). The OECD Agreement and related
accords seek, among other things, to eliminate
government subsidies provided to commercial
shipbuilders and to adopt a uniform standard of
government credit assistance for foreign
nationals. Under these multilateral accords, each
participating nation agreed not to provide credit
assistance to foreign nationals in excess of 80%
of the vessel construction price, and to limit the
term of any credit assistance to not more than
twelve years. During 1997, Congress adjourned
without adopting or ratifying the OECD Agreement.
Proponents of the OECD Agreement may seek to have
it reconsidered in 1998 and, if such legislation
were enacted by Congress in its current form, the
Title XI guarantee program would be modified to be
in accord with the uniform credit assistance
standards mandated under the OECD Agreement,
thereby eliminating the advantages available to
U.S. shipyards under the 1993 Title XI amendments.
Avondale is not able at this time to assess
whether legislation implementing the OECD
Agreement will be enacted by Congress or the
ultimate impact that any such legislation may
have. Although the OECD Agreement promotes the
goal of eliminating commercial shipbuilding
subsidies by signatory nations, there can be no
assurance that certain safeguards in the agreement
will not be circumvented or will be adequately
enforced, or that worldwide commercial
shipbuilding opportunities may continue to flow to
foreign shipyards located in signatory nations
(which may have developed structural competitive
advantages as a result of their long histories of
subsidization) or may be diverted to non-signatory
nations. If the competitive advantages of the
current Title XI guarantee program are eliminated
and the OECD Agreement fails to achieve its
objectives, Avondale's ability to compete for
international commercial shipbuilding contracts
will be further limited, notwithstanding the
increased opportunities that are expected to arise
as vessels of the worldwide tanker and product
carrier fleet approach the end of their useful
lives.
Legislative bills seeking to rescind or
substantially modify the provisions of the Jones
Act mandating the use of U.S.-built ships for
coastwise trade are introduced in Congress from
time to time, and are expected to be introduced in
the future. Although management believes it is
unlikely the Jones Act will be rescinded or
materially modified in the foreseeable future,
there can be no assurance to this effect with
respect to the Jones Act or any other law or
regulation benefitting U.S. shipbuilders.
The Company believes that significant
commercial shipbuilding opportunities could become
available during the next five years. Future
commercial opportunities include constructing
vessels with national defense features for the
Ready Reserve fleet and the retrofitting of
existing tankers or product carriers and
construction of new double-hulled tankers or
product carriers in response to the Oil Pollution
Act of 1990. In addition, the Company is
currently pursuing a contract with a U.S. owner to
construct luxury cruise vessels for operation in
the Jones Act market. Management believes a
significant volume of such work as described
herein could become available before 2000, with
orders being placed in the next two years.
Technological Innovations. To assure that
its shipyard remains among the most modern in the
world, Avondale regularly reviews and assesses its
construction and production processes. In this
regard, Avondale often consults with other highly
successful shipbuilding companies concerning
advances in shipbuilding technology. In the early
1980s, the Company was among the first of U.S.
shipyards to successfully implement modular
construction techniques that had been previously
perfected by Japanese shipbuilders. Management
believes these techniques were a major factor in
Japan's dominance of the commercial shipbuilding
market during the 1970s and 1980s. Avondale
obtained its modular construction capabilities and
"know-how" pursuant to an agreement with
Ishikawajima-Harima Heavy Industries Co., Ltd.,
one of Japan's largest shipbuilders, which worked
with Avondale to change its manufacturing and
design processes and to train Avondale's
employees. Modular construction afforded Avondale
significant production efficiencies in the
installation of ship systems, largely due to the
greater ease with which such systems could be
installed in open modules rather than closed-in
hulls. As a result of these efforts, Avondale
realized substantial increases in labor
productivity.
In addition, in 1994 the Company entered into
a technology sharing agreement with AESA of Spain,
regarded as an innovative and successful
world-class shipyard. After an on-site review of
Avondale's shipyard by AESA, as well as a review
by Avondale of current shipbuilding technology in
other countries, Avondale invested $20 million in
capital improvements designed to increase
efficiency by improving production flow. In
particular, the Company integrated certain
assembly-line techniques with its modular
construction processes. To that end, the Company
built a covered facility that houses production
lines dedicated to both military and commercial
ships. Avondale believes that sheltering the
production process and the introduction of
assembly line procedures have enhanced production
efficiencies and lowered unit production costs.
Because the construction of commercial
vessels, particularly the product carriers that
Avondale has traditionally built, places an
emphasis on steel fabrication rather than the
complex technological outfitting involved in U.S.
naval construction, Avondale's ability to compete
effectively for additional commercial work has
been enhanced by the new assembly-line process.
An important element in the Company's success
in obtaining the LPD-17 contract award was the
Company's enhanced computer-aided design and
product modeling capabilities. The enhancement
was made possible through a cooperative endeavor
between the Company, the University of New Orleans
(the "University" or "UNO"), the University of New
Orleans Research and Technology Foundation, Inc.
(the "Foundation") and the State of Louisiana.
Pursuant to terms of various agreements, the
Foundation is purchasing hardware and software
required to implement the extensive three-
dimensional ship design and Integrated Product
Data Environment ("IPDE") technology. This
technology also provides for sophisticated data
storage, management and retrieval for future
projects. Among its other features, the
technology permits engineering, production and
material procurement tasks to be performed
cooperatively, thus enhancing the efficiency of
the design phase. The IPDE captures data in
digital form at creation and then organizes,
integrates, maintains and makes available such
data to all program participants. The Foundation
is also constructing a 200,000 square foot
building on property donated to the University by
the Company, adjacent to the Company's main
shipyard. This facility, which will be known as
the "UNO/Avondale Maritime Technology Center of
Excellence", will house this new technology.
Shipbuilding
The Company is predominantly engaged in the
design, construction, conversion, repair and
modernization of various types of military and
commercial ships.
The main shipyard facility, which is located
on a 270-acre site on the Mississippi River near
New Orleans, includes multiple building ways, side
launching facilities, a 900-foot floating dry
dock/launch platform that permits construction of
vessels up to 1,000 feet in length, and a 650-foot
floating dry dock principally used for ship
repair. The main shipyard is equipped to build
almost any type of vessel other than nuclear
submarines and surface vessels of the largest
classes, such as ultra-large crude carriers.
Avondale also operates several other facilities in
the vicinity of the main shipyard, including its
Westwego, La. shipyard, which is used primarily
for boat construction and repair, and its Algiers,
La. shipyard, which is used primarily for the
repair and overhaul of ocean-going vessels. In
addition, the Company operates a marine
fabrication facility in Gulfport, Mississippi,
which currently is being used to support marine
construction activities.
The Company continues to be materially
dependent on the U.S. Navy's ship construction and
conversion programs. The following table sets
forth the distribution of marine construction and
repair activities during the last five years based
on contract billings. As the table indicates, a
majority of Avondale's work in the year ended
December 31, 1997 was comprised of new military
construction. New commercial construction
increased in 1995 and 1996, principally due to the
construction of the four forebodies and the
construction of the river hopper barges discussed
in "-Other Operations - Boat Division."
Distribution of Marine Construction and Repair Work
Years Ended December 31,
1997 1996 1995 1994 1993
U.S. MILITARY:
New construction 86% 81% 80% 81% 88%
Repair, overhaul and
conversion -- -- -- -- 2%
COMMERCIAL:
New construction 12% 17% 16% 11% 6%
Repair, overhaul and
conversion 2% 2% 4% 8% 4%
---- ---- ---- ---- ----
TOTAL 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
The percentage of new construction for the
U.S. Navy has remained relatively constant since
1993. New commercial construction decreased in
1997 as compared to 1996 and 1995 as the Company
completed the double-hulled forebodies and the
river hopper barges and did not begin construction
of the ARCO crude oil carriers until late 1997.
Also, the percentage of commercial repair,
overhaul and conversion work decreased in recent
years as compared to 1994 as the Company's work on
several contracts with a private contractor for
the repair of existing Sealift ships approached
completion. See "-Other Operations - Repair
Operations."
Government Contracting. Avondale's principal
U.S. government business is currently being
performed under fixed-price incentive contracts
although the recent LPD-17 contract is a cost-
plus-award fee contract. Fixed-price incentive
contracts provide for sharing between the
government and the contractor of cost savings and
cost overruns based primarily on a specified
formula that compares the contract target cost
with actual cost. In addition, fixed-price
incentive contracts generally provide for payment
of escalation of costs based on published indices
relating to the shipbuilding industry. Although
all cost savings are shared under fixed-price
incentive contracts, cost overruns in excess of a
specified amount must be borne entirely by the
contractor. The Sealift vessels, the fourth
LSD-CV and the Icebreaker are each being
constructed under fixed-price incentive contracts.
The LPD-17 contract provides for the payment of
all costs that are reimbursable under government
contracts. In addition, an award fee is payable
periodically after the Navy's evaluation of the
alliance's performance in executing the contract's
performance goals and objectives. See "- U.S.
Government."
Contracts for the construction and conversion
of U.S. Navy vessels are typically subject to
competitive bidding. As a safeguard against
anti-competitive bidding practices, the U.S. Navy
has employed the concept of "cost realism," which
requires that each bidder submit information on
pricing, estimated costs of completion and
anticipated profit margins. The U.S. Navy uses
this and other data to determine an estimated cost
for each bidder. The U.S. Navy may then
re-evaluate a bid by using the greater of either
the bidder's or the U.S. Navy's cost estimates.
Under government regulations, certain costs,
including certain financing costs, portions of
research and development costs and certain
marketing expenses, are not allowable costs under
fixed-price incentive and cost reimbursable
contracts. The government also regulates the
methods by which overhead costs are allocated to
government contracts.
U.S. government contracts are subject to
termination by the government either for its
convenience or upon default by the contractor. If
the termination is for the government's
convenience, contracts provide for payment upon
termination for items delivered to and accepted by
the government, payment of the contractor's costs
incurred plus the costs of settling and paying
claims by terminated subcontractors, other
settlement expenses and a reasonable profit.
However, if a contract termination results from
the contractor's default, the contractor is paid
such amount as may be agreed upon for completed
and partially completed products and services
accepted by the government. The government is not
liable for the contractor's costs with respect to
unaccepted items and is entitled to repayment of
advance payments and progress payments, if any,
related to the terminated portions of the
contract. In addition, the contractor may be
liable for excess costs incurred by the government
in procuring undelivered items from another
source.
The continuation of any U.S. Navy
shipbuilding program is dependent upon the
continuing availability of Congressional
appropriations for that program. It is customary
for the U.S. Navy to award contracts to build one
or more vessels of a program to a contractor
together with options (exercisable by the U.S.
Navy) to purchase additional vessels in the
program. Generally, contracts to build vessels are
not awarded until funds to pay the full contract
have been appropriated. However, because Congress
usually appropriates funds on a fiscal year basis,
funds may never be appropriated to permit the U.S.
Navy to exercise options that have been awarded.
In addition, even if funds are appropriated, the
U.S. Navy is not required to exercise the options.
Because its U.S. Navy contracts require the
Company to have access to classified information,
Avondale must maintain a security clearance for
its facility. Among other things, facilities with
such clearances must restrict the access of
non-U.S. citizens to classified information. If in
the future the percentage of foreign ownership of
the Company's common stock is increased to a level
that could result in foreign dominance or control
of its activities, the Company would be required
to implement additional measures to insure that
classified material would not be compromised or
risk the loss of its security clearance.
Due to the complexity of government contracts
and applicable regulations, contract disputes with
the government may occur in the ordinary course of
the Company's business. Based upon management's
analysis of each such dispute and advice of
counsel, the Company records, if appropriate, an
estimate of the amount recoverable upon resolution
of such disputes. There are currently no such
amounts recorded relating to such contract
disputes. Although management believes its
estimates are based upon a reasonable analysis of
such disputes, no assurance can be given that its
estimates will be accurate, and variances between
such estimates and actual results can be material.
The Company believes that adequate provision has
been made in its financial statements for this and
other normal uncertainties incident to its
government business.
There is significant oversight of defense
contractors to prevent waste in the defense
procurement process. Areas of contract dispute are
reviewed by the government for evidence of
criminal misconduct such as mischarging, product
substitution and false certification of pricing
and other data. In the event the government
alleges a violation of its procurement
regulations, it may seek compensatory, treble or
punitive damages in substantial amounts and
indictments, fines, penalties and forfeitures. In
addition, the government has the right to suspend
or debar a contractor from government contracting
for significant violations of government
procurement regulations. Avondale has never been
subject to suspension or debarment.
Vessel Deliveries and Backlog. At December
31, 1997, the Company had a firm backlog of
shipbuilding contracts of approximately $1.8
billion (exclusive of unexercised options
aggregating $1.1 billion held by the U.S. Navy
(including estimated contract escalation) and $500
million held by a commercial customer for
additional ship orders ) compared with firm
backlogs of $1.8 billion and $1.4 billion at
December 31, 1996 and 1995, respectively. The
Company's firm backlog at December 31, 1997
primarily consisted of $773 million to complete
the remaining six Sealift ships, $609 million
related to the LPD-17 contract, and $326 million
to complete the 125,000 DWT double-hulled crude
oil carriers.
Vessel deliveries in 1997 and 1996 included
one T-AO, one LSD-CV, three MHCs, four double-
hulled commercial tankers and the remainder of the
river hopper barges. The Company plans to continue
to actively pursue other government construction
and conversion opportunities, as well as
commercial opportunities, when they become
available.
The Company has been actively pursuing
commercial shipbuilding opportunities, although
international commercial shipbuilding
opportunities remain limited because shipbuilders
in foreign countries are often subsidized by their
governments, which allows them to sell their ships
for prices below their construction costs.
Domestic shipbuilding opportunities that are not
affected by foreign subsidies offer better
possibilities for the Company. See "-Overview -
Commercial Shipbuilding."
In connection with the bids and proposals
that the Company has submitted or plans to submit
to various commercial and government customers, no
assurance can be given that the Company will be
the successful bidder or that the vessels bid on
will actually be built.
Other Operations
Overview. Although the Company has from time
to time, on a limited basis, pursued opportunities
to diversify its business, management strongly
believes that the Company's resources are most
profitably employed in marine construction. In
the past, the Company sold or discontinued certain
of its non-core operations in order to focus on
its core shipbuilding business and improve
liquidity. The Company will continue to evaluate
suitable diversification opportunities,
principally those that would not detract from
Avondale's core business and that would utilize
the Company's existing facilities. Among possible
diversification opportunities are: (i) the
construction of large industrial facilities
utilizing modular shipbuilding expertise and
project management experience; (ii) the repair and
overhaul of U.S. Navy and commercial vessels;
(iii) the construction of semi-submersible rigs,
tension-leg platforms or similar structures used
in the offshore oil and gas industry (which the
Company has constructed from time to time in the
past); (iv) steel fabrication and (v) other
operations.
Modular Construction. The Company has been
able to apply its modular construction methods to
a variety of non-marine industrial fabrication
projects, including a sulphur recovery plant that
was shipped to Saudi Arabia for on-site assembly
and installation, two cryogenic gas separation
systems, two waste disposal units, six gas
turbine-driven compressors, six gas turbine-driven
salt water injection pumps, six condenser modules
for inclusion in a nuclear power plant, and two
sled and receiver modules for sub-sea pipeline
connections. The Company has also fabricated steel
bridge components, a hydroelectric power plant,
and an 800-bed floating detention facility that is
625 feet long, 125 feet wide, and five stories
high. Sales by this division to unrelated third
parties for the years ended December 31, 1997,
1996 and 1995 were $10.5 million, $8.5 million and
$9.8 million, respectively.
Boat Division. The Company has a facility
equipped for boat construction at its Westwego,
Louisiana shipyard that is capable of building
vessels up to 450 feet in length, as well as a
facility in Gulfport, Mississippi. In 1994 and
1995, the Boat Division delivered three gaming
vessels ranging from 210 to 350 feet in length.
In 1996 and 1997, the division was primarily
engaged in the construction of river hopper barges
under a contract signed in 1995. The Boat
Division is actively pursuing other projects
involving the construction of additional gaming
boats as well as passenger vessels and ferries,
towboats, offshore supply boats and other vessels.
Sales by this division to unrelated third parties
for the years ended December 31, 1997, 1996 and
1995 were $6.0 million, $10.2 million and $29.4
million, respectively.
Steel Operations. Through its Steel Sales
operation, Avondale sells steel plate and
structural steel to the marine and industrial
markets in the Gulf Coast region of the United
States. Sales by this division to unrelated third
parties for the years ended December 31, 1997,
1996 and 1995 were approximately $42.8 million,
$40.1 million, and $28.2 million, respectively.
Repair Operations. At its main shipyard and
the Algiers shipyard, Avondale engages in the
repair, overhaul and conversion of ocean-going
vessels. With the 900 and 650 foot drydocks
located at the Company's main shipyard, the
Company is capable of offering a complete range of
vessel repairs and overhaul services. The Algiers
shipyard is operated under a long-term lease and
is designed primarily for the topside repair and
overhaul of large ocean-going vessels. Although
historically Avondale has engaged in the repair
and overhaul of U.S. Navy vessels, these
opportunities have been curtailed by the U.S.
Navy's current policy of requiring such work to be
conducted at or near the vessels' home ports.
Sales by this division to unrelated third parties
for the years ended December 31, 1997, 1996 and
1995 were $10.3 million, $13.5 million and $27.3
million, respectively.
Competition
The shipbuilding industry is divided into two
distinct markets, U.S. government contracts, which
is dominated by contracts for the U.S. Navy, and
domestic and international shipbuilding contracts
for commercial customers. The reduced level of
shipbuilding activity by the U.S. government
during the past decade has intensified competition
significantly. With respect to the market for U.S.
military contracts, there are principally five
private U.S. shipyards, including Avondale, that
compete for contracts to construct or convert
surface vessels. Two of these companies are
subsidiaries of much larger corporations that have
substantially greater resources than Avondale. A
recent trend in certain government contracts is
the concept of several shipbuilders and a weapon
systems integrator forming an alliance to bid on
major procurements. This is evidenced by the
bidding process for the recent LPD-17 program
where a Company-led alliance which includes Bath
Iron Works and Raytheon was awarded the contract
against competition which included an alliance of
other major shipbuilders and a weapon systems
integrator. This trend will likely continue on
the DD-21, ADC (X) and Coast Guard Deep Water
projects. The Company's success in participating
in these programs may be influenced by its ability
to form a competitive bidding team.
With respect to commercial vessels that must
be constructed by a U.S. shipyard under the Jones
Act, there are approximately 20 private U.S.
shipyards that can accommodate the construction of
vessels up to 400 feet in length, ten of which
Avondale considers to be its direct competitors
for commercial contracts. Because of the current
overcapacity at U.S. shipyards, the current small
volume of commercial work available, and the fact
that most contracts are awarded on the basis of
competitive bidding, price competition is
particularly intense. With respect to the
international commercial shipbuilding market,
Avondale competes with numerous shipyards in
several countries, many of which are heavily
subsidized by their governments. See "- Commercial
Shipbuilding."
Substantially all military and commercial
contracts awarded to U.S. shipyards are
competitively bid. The Company has been successful
recently in securing competitively bid contracts
in large part because the Company submitted the
most cost-effective bids for the available
contracts. However, the Company also believes that
its receipt of the LPD-17 and ARCO contract awards
has demonstrated its ability to successfully bid
for shipbuilding work based on its technical
capabilities as well as its cost efficient
production methods. The Company believes that it
will continue to be competitive in bidding for
selected U.S. Navy and commercial shipbuilding
contracts in the future. However, no assurance can
be given that the Company will be the successful
bidder on any future contracts or that, if
successful, it will realize profits on such
contracts.
Marketing
The Company's marketing effort is
decentralized and conducted separately by each
division. Generally, the Company and its
competitors are all aware of the shipbuilding,
repair and conversion plans of the U.S. Navy and
most prospective commercial customers, and are
invited to bid on all major projects.
The Company's boat building and repair
operations are marketed by the sales and business
development personnel of the appropriate divisions
primarily through direct, personal sales calls.
The services of the Steel Sales operation are
marketed through industry advertising, personal
sales calls and prior business relationships.
Materials and Supplies
The principal materials used by Avondale in
its shipbuilding, conversion and repair business
are standard steel shapes, steel plate and paint.
Other materials used in large quantities include
aluminum, copper-nickel and steel pipe, electrical
cable and fittings. The Company also purchases
component parts such as propulsion systems,
boilers, generators and other equipment. All of
these materials and parts are currently available
in adequate supply from domestic and foreign
sources. Generally, for all its long-term
contracts, the Company obtains price quotations
for its materials requirements from multiple
suppliers to ensure competitive pricing. In
addition, through the cost escalation provisions
contained in its U.S. military contracts, the
Company is protected from increases in its
materials costs to the extent that the increases
in the Company's costs are in line with industry
indices.
In connection with its government contracts,
the Company is required to procure certain
materials and component parts from supply sources
approved by the U.S. Government. Although certain
components and sub-assemblies are manufactured by
subcontractors, the Company's reliance on
subcontractors has been and is expected by
management to continue to be limited. The Company
is not dependent upon any one supply source and
believes that its supply sources are adequate to
meet its future needs.
Insurance
The Company maintains insurance against
property damage caused by fire, explosion and
similar catastrophic events that may result in
physical damage or destruction to the Company's
premises and properties. The Company also
maintains general liability insurance in amounts
it deems appropriate for its business. The Company
is self-insured for workers' compensation
liability and employees' health insurance except
for losses in excess of $1.0 million per
occurrence, for which the Company maintains
insurance in amounts it deems appropriate.
Environmental and Safety Matters
General. Avondale is subject to federal,
state and local environmental laws and regulations
that impose limitations on the discharge of
pollutants into the environment and establish
standards for the treatment, storage and disposal
of toxic and hazardous wastes. Stringent fines and
penalties may be imposed for non-compliance with
these laws and regulations, and certain
environmental laws impose joint and several
"strict liability" for remediation of spills and
releases of oil and hazardous substances rendering
a person liable for environmental damage, without
regard to negligence or fault on the part of such
person. Such laws and regulations may expose the
Company to liability for the conduct of or
conditions caused by others, or for acts of the
Company which are or were in compliance with all
applicable laws at the time such acts were
performed. The Company is covered under its
various insurance policies for some, but not all,
potential environmental liabilities. See Note 9 of
the Notes to Consolidated Financial Statements.
The Company is also subject to the federal
Occupational Safety and Health Act ("OSHA") and
similar state statutes. The Company has an
extensive health and safety program and employs a
staff of safety inspectors and industrial hygiene
technicians, whose primary functions are to
develop Company policies that meet or exceed the
safety standards set by OSHA, train supervisors
and make daily inspections of safety procedures to
insure their compliance with Company policies on
safety and industrial hygiene. All supervisors are
required to attend safety training meetings at
which the importance of full compliance with
safety procedures is emphasized.
Waste Disposal. Avondale's operations
produce a limited amount of industrial waste
products and certain hazardous materials. The
Company's industrial waste products, which consist
principally of residual petroleum, other
combustibles and blasting abrasives, are shipped
to third party disposal sites that are licensed to
handle such materials.
Employees
At December 31, 1997, Avondale had
approximately 5,500 employees, many of whom have
been employed by the Company for many years. None
of Avondale's employees is currently covered by
any collective bargaining agreement. However, on
June 23, 1993 an election was conducted to
determine whether certain of the New Orleans area
employees desired to have union representation. A
total of 3,914 workers cast votes, of which
approximately 850 votes were challenged by the
National Labor Relations Board ("NLRB") and union
organizers on a variety of grounds. The Company
filed objections with the NLRB seeking to have the
election set aside. In February 1997, the NLRB
decided that certain of the disputed votes should
be counted and that the Company's objections to
the election should be rejected. The NLRB then
counted the disputed votes, resulting in a
favorable outcome for the union, and certified the
union. The final vote count included 1,950 votes
for forming a union, 1,632 votes against forming a
union, 59 disputed votes, with 273 ballots
remaining sealed. The Company continues to
believe that it has substantive and meritorious
bases for overturning the decision of the NLRB and
has taken steps to have the propriety of the
election reviewed in court. If the NLRB's
certification of the union is enforced by
subsequent judicial proceedings, the Company would
be required under the federal labor laws to
bargain in good faith with the union on matters
such as wages, hours and working conditions. Even
though Avondale will agree only to bargaining
demands that can be economically justified, union
certification may result in an increased risk that
the union will engage in potentially disruptive
activities such as strikes or picketing, or that
the Company may incur higher labor and operating
costs.
The union has also filed numerous unfair
labor practice charges with the NLRB alleging that
Avondale has committed a variety of violations of
the National Labor Relations Act principally
involving claims that employees were wrongfully
disciplined or discharged. In February 1998, an
administrative law judge ordered the Company to
reinstate twenty-six fired workers, and rescind
disciplinary actions taken against another
fifteen. Although the Company disputes these
claims and is currently appealing the decision, if
the decision is upheld, the respective employees
would be entitled to back pay from the time of his
or her claim until the resolution of the case.
However, even if there is a finding in favor of
some of the claimants with respect to one or more
of the unfair labor practice claims, management
believes that any judgment would not have a
material impact on Avondale's consolidated
financial statements.
GLOSSARY OF SELECTED INDUSTRY TERMS
ADC(X) A class of auxiliary vessels designed to
deliver a steady stream of fuel,
ammunition and stores to the U.S. Navy
fleet. It is currently envisioned that
these vessels will have "Refuel at Sea"
capabilities similar to the T-AOs
constructed by Avondale.
AO An auxiliary oil tanker constructed for
the U.S. Navy and crewed by U.S. Navy
personnel. Avondale has built five AOs.
AOJ An AO which has been "jumboized" i.e.,
lengthened by the Company by inserting a
108 foot midbody. Avondale has
converted five AOs to AOJs.
DD-21 "Surface Combatant 21st Century," the
next generation of surface combatant to
be built for the U.S. Navy.
Icebreaker WAGB-20 Polar Icebreaker, currently
under construction at Avondale, was
ordered by the U.S. Coast Guard for its
polar operations.
IPDE An Integrated Product Data Environment
which captures data in digital format at
the point of creation and then
organizes, integrates, maintains and
makes the information available to all
program participants.
Jones Act Merchant Marine Act of 1920, as amended.
The principal requirements of the act
are that ships engaged in coastwise
trade must be owned by a U.S. company,
crewed by U.S. citizens and built by a
U.S. shipbuilder.
LASH "Lighter aboard ship," a LASH vessel
carries its cargo in pre-loaded barges
(lighters). The Company constructed 21
such vessels in the late 1960s and early
1970s for five commercial customers.
LCAC "Landing craft air cushion," a surface
effect vessel that was constructed at the
Company's previously-owned Gulfport
facility. Avondale has built 15 LCACs.
LPD-17 The newest class of amphibious transport
ship for the U.S. Navy. Avondale was
awarded a contract, with options for two
ships, for the design, construction and
support of the initial LPD-17 ships.
LSD "Landing ship dock," designed to carry
troops, materials and up to four LCACs.
Avondale has built five LSDs.
LSD-CV An LSD with a "cargo variant" design
allowing for carrying more cargo and
only 2 LCACs. Avondale has delivered
four LSD-CVs and will deliver a fifth
during 1998.
MARAD United States Maritime Administration,
Department of Transportation.
MHC MHC-51 class fiberglass coastal
minehunter. Avondale has built four
MHCs.
SL 7 A "Roll on, Roll off" vessel operated by
the Military Sealift Command and crewed
by a civilian crew. Avondale has
converted three SL 7s.
Sealift As used herein, TAKR 300 Class Sealift
vessels are transport vessels built for
the U.S. Navy. Avondale has contracts
to build six Sealift vessels with an
option to build an additional vessel.
T-AGS 45 An oceanographic research vessel
constructed by Avondale and delivered to
the U.S. Navy in May 1993.
T-AO Same as an "AO" but operated by the
Military Sealift Command and crewed by a
civilian crew. Avondale has built
sixteen T-AOs.
Item 2. Properties.
The Company's corporate headquarters and main
shipyard are located on the west bank of the
Mississippi River at Avondale, Louisiana,
approximately 15 miles from downtown New Orleans.
That facility includes approximately 229 acres of
Company-owned land with 174 buildings enclosing
approximately 2.0 million square feet of space,
approximately 41 acres of leased land, a 900-foot
floating dry dock/launch platform that permits
construction, conversion or repair of vessels up
to approximately 1,000 feet in length, and a 650-
foot floating dry dock principally used for ship
repair and multiple building ways and side
launching facilities. The main shipyard includes
approximately 6,500 feet of wharves, 1,200 feet of
launch ways and 2,900 feet of unimproved
waterfront along the Mississippi River. The
Company's shipyard facilities have the capacity to
build virtually any type of vessel other than
submarines and surface vessels of the largest
classes, such as ultra-large crude carriers.
The Company's 900-foot floating drydock was
constructed in 1975 and financed pursuant to Title
XI of the Merchant Marine Act, 1936, as amended.
These mortgage bonds were refinanced in February
1995 with mortgage bonds of approximately $4.3
million. The 900-foot drydock is currently
subject to a Title XI mortgage of approximately
$2.3 million (see Note 4 of the Notes to
Consolidated Financial Statements).
The Company's 650-foot floating drydock and
support facilities were constructed in 1982 and
financed with $36.25 million of industrial revenue
bonds. The 650-foot drydock is currently subject
to $35.36 million of these industrial revenue
bonds (see Note 4 of the Notes to Consolidated
Financial Statements).
As part of its program to significantly
improve its efficiency, in 1995 the Company
completed an approximate $20 million capital
expenditure program, financed principally through
$17.8 million of bonds issued in February 1995
utilizing a Title XI guarantee. The modernization
program is currently subject to a Title XI
mortgage of approximately $15.4 million (see Note
4 of the Notes to Consolidated Financial
Statements). The modernization program included
construction of a covered facility, which allows
for productivity gains by eliminating weather-
related problems, and adoption of a more automated
process for building the various modules which are
assembled into a completed vessel.
The Company is also in the process of making
significant capital improvements, including
enhancing its computer-aided design and product
modeling capabilities. In this effort, the
Company teamed with the University of New Orleans
(the "University" or "UNO"), the University of New
Orleans Research and Technology Foundation, Inc.
(the "Foundation") and the State of Louisiana in a
cooperative effort. Pursuant to the terms of
various agreements, the Foundation is purchasing
hardware and software required to implement the
extensive three-dimensional ship design and
Integrated Product Data Environment technology and
is constructing a 200,000 square foot building on
property donated to the University by the Company
and located adjacent to the Company's main
shipyard. This facility is expected to be
completed during the second quarter of 1998. This
investment in new technology and facility, which
will be known as the "UNO/Avondale Maritime
Technology Center of Excellence" (the "Center"),
is being financed by the Foundation using third
party debt and lease financing, both of which are
guaranteed by the Company. In 1997, the Company
entered into a fifty-year lease for the Center
requiring a nominal annual lease payment. The
Company will provide access to the University for
its use in research and the development of
educational curricula related to naval
architecture and marine engineering. During 1998,
the Company expects to spend additional amounts in
order to complete the customization of the design
software to comply with the LPD-17 requirements.
The Company also operates several other
facilities in the vicinity of the main shipyard.
The Westwego Yard is located five miles down-river
from the main shipyard on 16.6 acres of land
leased through July 1999 and includes facilities
for the construction or repair of boats and
vessels up to 450 feet in length. The Algiers
Yard is located 19 miles down-river from the main
shipyard on 22 acres of land leased through
December 1999 and includes construction facilities
used predominantly for the repair and overhaul of
large ocean-going vessels. The Steel Sales
operation is located on 4.4 acres of property
leased on a month-to-month basis in Harvey,
Louisiana, where a steel warehouse is located.
The location has direct access to the Mississippi
River via the Harvey Canal. The Modular
Construction operation, located in an
approximately 70,000 square foot facility on a 58
acre Company-owned site a few miles up-river from
the main shipyard, consists of a complete machine
shop with steel fabricating facilities.
The Avondale Enterprises, Inc. ("AEI")
facility is located on a Company-owned 121.5 acre
site near Gulfport, Mississippi on an industrial
seaway. The facility includes a 263,447 square
foot manufacturing facility and a 6,300 square
foot administration building. This facility was
acquired in 1989 for construction of the
Minehunters ("MHC") for the U.S. Navy. AEI has
pledged a portion of the facility to secure a $3
million loan it entered into in 1991 to finance a
portion of its 1989 acquisition debt (see Note 4
of the Notes to Consolidated Financial
Statements). Upon the transfer of the final MHC
hull to the main shipyard in December 1994, this
facility became idle. During 1996 and 1997, the
Company utilized the facility for the completion
of the river hopper barge contract. The Company
is currently utilizing the facility to support
marine construction activities.
The main facility of the Genco Industries
Group ("Genco"), located on a Company-owned 8.7
acre site 20 miles southeast of Beaumont, Texas,
was sold in November 1997. Genco also has a
smaller facility that is located on a Company-
owned 3.2 acre site approximately 80 miles
northwest of Beaumont. This facility consists of
three manufacturing/administration buildings
totaling approximately 26,500 square feet. This
facility has been idle since the completion of
Genco's contracts in 1994 and is currently listed
for sale by the Company. The Company is also
exploring alternative uses.
The Company believes that its core marine
construction and repair facilities provide it with
sufficient capacity to handle any business it
reasonably expects to obtain in the foreseeable
future. In general, the Company's productive
capacity is limited less by physical facilities
than by the number of employees the Company can
effectively supervise. Management believes that
the Company would be operating at full capacity
with approximately 8,000 employees. The Company's
core business currently operates with
approximately 5,500 employees.
Item 3. Legal Proceedings.
Environmental Proceedings. Various
governmental and private parties have from time to
time alleged that the Company is a potentially
responsible party ("PRP") with respect to certain
hazardous waste sites, including, among other
things, the site listed below.
In January 1986, the Louisiana Department of
Environmental Quality ("DEQ") advised the Company
that it could be a PRP with respect to an oil
reclamation site operated by an unaffiliated
company in Walker, La. The Company sold to the
operator a substantial portion of the waste oil
that was processed at the reclamation site during
the period 1978 through 1982. The Company's
potential liability, if any, for cleanup of this
site will be based on the Comprehensive
Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") or the Louisiana
Environmental Quality Act. Under these statutes,
such liability is presumptively joint and several,
but is typically apportioned among the responsible
parties based on the volume of material sent by
each to the waste site. The Company has cooperated
with other PRPs to study the potential aggregate
liability under these statutes. Moreover, the
Company believes it has substantial defenses
against liability and defenses that could mitigate
the portion of liability, if any, that would
otherwise be attributable to it.
To date, the Company and certain of the other
PRPs (the "Funding Group") for the site have
funded the site's remediation expenses, PRP
identification expenses and related costs for the
participating parties. As of December 31, 1997,
such costs totaled approximately $19.0 million, of
which the Company has funded approximately $4.0
million. Since 1988 the Funding Group filed
petitions to add a number of companies as third-
party defendants with regard to the remedial
action. The Funding Group has agreed to settle
with the majority of these companies. All funds
collected through these settlements are placed in
escrow to fund future expenses. At December 31,
1997, the balance of the escrow was approximately
$8.5 million, which is to be used to fund any
ongoing remediation expenses. The Company will
not owe any future assessments until the balance
in escrow is depleted. There are additional
settlements being negotiated which should add to
the balance in escrow.
Additional remedial work scheduled for the
site includes completion of studies and if
required by the results of these studies,
subsequent remediation. Following completion of
any such required additional remediation, it will
be necessary to obtain Environmental Protection
Agency approval to close the site, which consent
may require subsequent post-closure activities
such as groundwater monitoring and site
maintenance for many years. The Company is not
able to estimate the final costs for any such
additional remedial work or post-closure costs
that may be required; however, the Company
believes that its proportionate share of
expenditures for any additional work will not have
a material impact on the Company's financial
statements. In addition, the members of the
Funding Group have entered into a final cost
sharing agreement under which all parties have
agreed that there would be no re-allocation of
previous remediation costs, but that future
remediation costs would be established by a
formula. Under this agreement, the Company's
share of future costs will not exceed 17.5% for
any additional costs.
Furthermore, the Company has initiated
litigation against its insurer for a declaration
of coverage of the liability, if any, that may
arise in connection with the remediation of the
site referred to above. The court has ruled that
the insurer has the duty to defend the Company,
but has not yet ruled on whether the carrier has a
duty to indemnify the Company if any liability is
ultimately assessed against it. After consultation
with counsel, the Company is unable to predict the
eventual outcome of this litigation or the degree
to which such potential liability would be
indemnified by its insurance carrier.
In 1996, the Company settled a class action
lawsuit involving alleged personal injury and
property damage arising from the Walker
reclamation site. Under the terms of the
settlement, the Company paid approximately $6.0
million into a settlement fund. The Company could
also have been responsible for payment to the
plaintiffs of up to an additional $6.0 million
(plus interest at 8% per annum) if the plaintiffs
were unsuccessful in collecting certain claims
under Avondale's insurance policies that were
assigned to the plaintiff class under the
settlement agreement. During the first quarter of
1997, the parties reached a settlement with the
Company's insurers which does not require any
further contribution by the Company.
In addition to the above, the Company is also
named as a defendant in other lawsuits and
proceedings arising in the ordinary course of
business, some of which involve substantial
claims.
The Company has established accruals as
appropriate for certain of the matters discussed
above. While the ultimate outcome of lawsuits and
proceedings against the Company cannot be
predicted with certainty, management believes,
based on current facts and circumstances and after
review with counsel, that the eventual resolution
of these matters is not expected to have a
material adverse effect on the Company's financial
statements.
Item 4. Submission of Matters to a Vote of
Security Holders.
The Company did not submit any matters to a
vote of security holders during the fourth quarter
of its fiscal year ended December 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
The Company's common stock trades on the
Nasdaq National Market tier of the Nasdaq Stock
Market under the symbol AVDL. The following table
sets forth the range of high and low per share
sales prices, as reported by Nasdaq, for the
periods indicated.
Fiscal Year Ended December 31, High Low
---- ----
1996
First Quarter $18 1/8 $14
Second Quarter $20 1/8 $16 7/8
Third Quarter $19 1/8 $13 7/8
Fourth Quarter $22 $16 1/4
1997
First Quarter $23 1/2 $17
Second Quarter $21 3/8 $16 1/4
Third Quarter $29 $20 5/8
Fourth Quarter $30 $24 3/4
At December 31, 1997, there were 681 holders
of record of the Company's Common Stock.
The Company does not currently pay dividends
on its Common Stock and no dividends were paid on
the Company's Common Stock during the two years
ended December 31, 1997. As discussed in Note 4
of the Notes to Consolidated Financial Statements,
the terms of the Company's revolving credit
agreement require bank approval for the payment of
cash dividends over a specified amount.
Item 6. Selected Consolidated Financial Data.
The following table contains selected consolidated
financial data for the Company and its
subsidiaries for each of the fiscal years in the
five-year period ended December 31, 1997. The
data for each of the fiscal years in the five-year
period ended December 31, 1997 are derived from
the consolidated financial statements of the
Company and its subsidiaries. The consolidated
financial statements as of December 31, 1997 and
1996, and for each of the years in the three-year
period ended December 31, 1997, and the report of
Deloitte & Touche LLP thereon, have been included
in this Form 10-K.
Years Ended December 31,
---------------------------------------------
(in thousands, except per share data)
1997(2) 1996(2) 1995(2) 1994 1993(1)
--------- --------- --------- -------- ---------
INCOME STATEMENT DATA:
Continuing operations:
Net sales $ 613,993 $ 624,929 $ 576,308 $ 475,810 $ 456,724
Gross profit 75,478 81,827 58,671 47,485 33,180
Income from operations 43,593 36,790 26,548 16,949 3,400
Income (loss) from
continuing operations 26,833 30,795 28,180 13,075 (5,233)
Income (loss) from
discontinued operations -- -- -- (4,552) (3,561)
Net income (loss)(3) 26,833 30,795 28,180 8,523 (8,794)
Income (loss) per share
of Common stock
- basic & diluted:
Continuing operations 1.85 2.13 1.95 0.90 (0.36)
Discontinued operations -- -- -- (0.31) (0.25)
Total 1.85 2.13 1.95 0.59 (0.61)
BALANCE SHEET DATA:
Working capital $ 145,224 $ 119,475 $ 80,988 $ 34,836 $ 24,565
Total assets 375,615 362,872 316,727 273,503 302,139
Long-term debt 51,819 54,866 60,593 45,875 43,848
Shareholders' equity 208,977 181,853 151,058 122,878 114,355
CASH FLOW DATA:
Net cash provided by
operating activities $ 50,848 $ 26,701 $ 27,995 $ 69,128 $ 16,866
Net cash (used for)
provided by investing
activities (13,083) (10,449) (16,799) (11,931) 6,604
Net cash (used for)
provided by financing
activities (4,957) (5,832) 11,914 (44,978) (27,888)
OTHER FINANCIAL DATA:
EBITDA(4) $ 54,052 $ 47,599 $ 36,367 $ 28,501 $ 15,210
OPERATIONAL DATA:
Firm backlog $1,802,000 $1,766,000 $1,413,000 $1,424,000 $1,268,000
____________________
(1) Income statement data for 1993 has been restated
to present Avondale's service contracting subsidiary
as discontinued operations.
(2) See " Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to
Consolidated Financial Statements relating to, among
other things, the impact of revisions of estimated
profit on previously completed shipbuilding contracts
in 1997, 1996 and 1995.
(3) Net income for the years ended December 31, 1996 and 1995
include deferred income tax benefits of $9.0 million
($.62 per share - basic and diluted) and $13.0 million
($.90 per share - basic and diluted) respectively,
attributable to certain net operating loss carry forwards
available to offset estimated future taxable earnings.
(4) As used herein, EBITDA is income (loss) from operations
plus depreciation and amortization. EBITDA is frequently
used by securities analysts and is presented here to
provide additional information about the Company's
operations. EBITDA should not be considered as an
alternative to net income (loss) as a measure of the
Company's operating performance or as an alternative
to cash flows as a measure of the Company's liquidity.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following discussion should be read in conjunction
with Avondale Industries, Inc.'s (the "Company" or
"Avondale") Consolidated Financial Statements and Notes
thereto included elswhere in this Form 10-K.
Overview
The improvement in the Company's operating
results continued during fiscal 1997 with the
Company reporting record income from operations
for 1997. Income from operations increased 18%
above the level of the prior year while income
before income taxes increased 22% compared to
fiscal 1996.
The Company's firm backlog at December 31,
1997 was approximately $1.8 billion (including
estimated contract escalation) exclusive of
unexercised options aggregating approximately $1.1
billion held by the U.S. Navy (the "Navy")
(including estimated contract escalation) and
approximately $500 million held by a commercial
customer for additional ship orders. The firm
backlog includes two Navy contracts awarded in
1997, the first of which was the exercise of a
previously awarded option to construct an
additional Sealift ship for approximately $240
million (including estimated contract escalation).
The exercise of this option represents the sixth
ship which the Company has been awarded in the
Sealift program. The six Strategic Sealift ships
have a remaining backlog of approximately $773
million (including estimated contract escalation).
In addition, the Navy holds an option to require
the Company to construct a seventh Sealift vessel
for an additional $240 million (including
estimated contract escalation). In the first
quarter of 1998, the Navy exercised a portion of
this option relating to approximately $24 million
for long lead time materials while the balance of
the option is exercisable during the first quarter
of 1999. Delivery of the first two Sealift ships
is scheduled for 1998.
As previously disclosed, in December 1996 the
U.S. Navy awarded, and in April 1997 the General
Accounting Office affirmed, a $641 million
contract to a Company-led alliance, which includes
Bath Iron Works ("Bath") and Raytheon Company
("Raytheon") (formerly Hughes Aircraft Company
which later became a subsidiary of Raytheon), to
design and construct the first of an anticipated
twelve ships under the Navy's LPD-17 program. The
contract award provides for options exercisable by
the Navy for two additional LPD-17 ships to be
built by the alliance. Under the terms of an
agreement between the alliance members, the
Company will build the ship covered under the
December 1996 contract, and, if the Navy exercises
the two options, the Company would construct the
second and Bath would construct the third of the
three LPD-17 ships to be built under the initial
contract. Raytheon is responsible for total ship
integration and the alliance is using an advanced
three-dimensional ship design and modeling
technology for the design and manufacture of the
ship. In order to fairly represent its role as
the prime contractor under the LPD-17 contract,
the Company is required to report in its financial
statements as sales and cost of sales the entire
contract amount for each vessel in the LPD-17
program constructed by the alliance. Under the
subcontracting agreements entered into between the
Company and each of Bath and Raytheon, the award
fees that can be earned under the LPD-17 contract
are distributable among the alliance members in
proportion to each member's performance and
participation in the construction of the vessel
for which the award was granted. To the extent
that the Company's revenues include costs incurred
and award fees paid to the other alliance members,
such revenues will be recorded with no operating
profit margin. For additional information on the
terms of the LPD-17 contract award, the
relationship between the members of the alliance
and certain accounting considerations, see
"Business - Overview."
Also included in the firm backlog is the
largest commercial contract ever awarded to
Avondale. In June 1997, the Company was awarded a
$332 million contract for the construction of two
125,000 DWT crude oil carriers for the Jones Act
Trade to be built with double hulls in compliance
with the Oil Pollution Act of 1990. The contract
also provides options exercisable by the customer
for three additional ships. Delivery of the first
ship is scheduled for the first quarter of 2000.
Vessel deliveries in fiscal 1997 include a
MHC-51 Class Coastal Minehunter, representing the
fourth and final Minehunter constructed by the
Company for the Navy. Additionally, during 1997,
the Company delivered the final three vessels in a
contract to retrofit four commercial tankers with
double-hulled forebodies and the remaining river
hopper barges. Vessel deliveries expected in
fiscal 1998 include the LSD-CV 52 and the first
two Strategic Sealift vessels.
The Company's operating results projected for
1998 are expected to be principally related to the
Strategic Sealift, the Icebreaker and the LPD-17
contracts, while results projected for 1999 are
expected to reflect primarily the Sealift, LPD-17
and ARCO product tanker contracts. Except for the
LPD-17 contract, the Company records profits under
the percentage-of-completion method of accounting
based on direct labor charges. See "Business -
Overview". Although the Company generally does
not begin to record profits on its contracts until
contract performance is sufficient to estimate
final results with reasonable accuracy, actual
profits taken with respect to such contracts may
be affected if the Company is required in the
future to revise its estimate of the cost to
complete one or more of such contracts.
As previously disclosed, certain of the
Company's operations closed in 1994 with the
completion of their respective contracts. Two of
these facilities were sold (one in December 1996
and one in November 1997) and the one remaining
facility is currently offered for sale. With
respect to the remaining property, the Company
currently is not aware of any material
environmental liabilities to be incurred for site
restoration, post-closure monitoring commitments
or other exit costs.
Results of Operations
1997 vs. 1996. The Company recorded net
income of $26.8 million, or $1.85 per share basic
and diluted, for 1997 compared to $30.8 million,
or $2.13 per share basic and diluted, for 1996.
Net income for 1996 included an income tax benefit
of $9.0 million, or $0.62 per share basic and
diluted, which recognized, for financial reporting
purposes, the benefit of certain net operating
loss carry forwards available to offset estimated
future earnings. No similar benefit was recorded
in 1997.
Income from operations for 1997 increased
$6.8 million, or 18%, compared with 1996. This
improvement is primarily reflected by operating
profits recognized on the contracts to construct
the six Strategic Sealift ships, the Icebreaker
and the LSD-CV 52. Profit recognition began in
1996 for the Sealift and 1997 for the Icebreaker
as contract progress was not sufficient to begin
profit recognition until that time. Also
contributing to the improved operating results
during 1997 were operating profits of $7.8 million
generated by the Company's marine repair, modular
construction and wholesale steel operations.
These operating profits were offset, in part,
by operating losses recorded on two commercial
marine construction contracts. During 1997,
Avondale recorded additional losses of $4.3
million on the contract to retrofit four single-
hulled commercial tankers with new double-hulls
(the last of which was delivered in September
1997), and an additional $1.5 million loss on the
contract to construct 100 river hopper barges (the
last of which was delivered in November 1997).
These losses resulted primarily from increases in
the estimated labor needed to complete the
contracts.
Net sales for 1997 decreased $10.9 million,
or 2%, to $614.0 million compared to $624.9
million for 1996. The decrease in 1997 net sales
was due primarily to a reduction in production
activity associated with contracts that are at or
near completion. The Company recorded decreased
net sales on the contract to retrofit four single-
hulled commercial tankers with new double hulls
and the contracts to construct the seven T-AOs
(the last of which was delivered in May 1996), the
four MHCs (the last of which was delivered in
January 1997), the LSD-CV 52 (expected to be
delivered in February 1998) and the three LSD-CVs
(the last of which was delivered in March 1996).
These decreases were partially offset by increased
net sales recorded on the contracts to construct
the six Strategic Sealift ships (the first of
which is expected to be delivered in 1998), the
LPD-17 (expected to be delivered in 2002), the
Icebreaker (scheduled for delivery in 1999) and
the two 125,000 DWT double-hulled crude oil
carriers (the last of which is scheduled for
delivery in 2000). The contracts to construct the
six Strategic Sealift ships, the LPD-17, the
Icebreaker and the two double-hulled crude oil
carriers collectively accounted for 75% of the
Company's 1997 net sales.
Gross profit for 1997 decreased $6.3 million,
or 8% compared to 1996. This decrease is
primarily attributable to the early stages of
construction of the majority of the Company's
contracts in progress. The Company does not begin
profit recognition until final results can be
estimated with reasonable accuracy. Refer to Note
1 of the Notes to Consolidated Financial
Statements, contained elsewhere in this Form 10-K,
for a discussion of the Company's policies and
procedures for revenue recognition. In addition,
the LPD-17 and the two double-hulled crude oil
carriers are in the initial stages of contract
performance which result in significant
engineering design and material acquisition costs
recognized without any operating margins. As a
result of the factors discussed herein, contracts
which account for a majority of the Company's 1997
net sales have little or no operating margins
recognized.
Selling, general and administrative ("SG&A")
expenses decreased $13.2 million, or 29%, for 1997
compared to 1996. The overall decrease in SG&A
expenses was due primarily to a decrease in
proposal preparation and related costs compared
with those recorded in 1996 in connection with the
preparation of the successful LPD-17 proposal.
In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") and Statement
of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The Company is
required to adopt both standards for fiscal 1998.
Refer to Note 1 of the Notes to Consolidated
Financial Statements, contained elsewhere in this
Form 10-K, for a discussion of SFAS 130 and SFAS
131. Management believes that the implementation
of SFAS 130 and SFAS 131 will not have a material
impact on the presentation of the Company's
financial statements but may require additional
disclosure.
In accordance with the U.S. Securities and
Exchange Commission's Staff Legal Bulletin No. 5,
the Company has assessed both the cost of
addressing and the costs or the consequences of
incomplete or untimely resolution of the Year 2000
issue and has determined that it is not material
to the Company's business, operations or financial
condition.
1996 vs. 1995. The Company recorded net
income of $30.8 million, or $2.13 per share basic
and diluted, for 1996 compared to $28.2 million,
or $1.95 per share basic and diluted, for 1995
representing an increase of 9% in net income over
the prior year. Net income for 1996 and 1995
include income tax benefits of $9 million, or
$0.62 per share basic and diluted, and $13
million, or $0.90 per share basic and diluted,
respectively, as discussed below. Also included
in 1996 and 1995 net income are $4.4 million, or
$0.30 per share, basic and diluted,and $4.5
million, or $0.31 per share basic and diluted,
respectively, reductions of a previously
recognized loss which was recorded in prior years
on the contract to construct three LSD-CVs. The
reductions were due primarily to revisions of the
total estimated contract cost as it neared
completion.
In addition to the improvements on the three
LSD-CV contract, the increases in the Company's
operating results in 1996 reflect improved
operating profits recognized on the seven T-AO
contract, which was completed in 1996, and the
LSD-CV 52 contract. In addition, the Company
began profit recognition on the contract to
construct five Strategic Sealift vessels for the
Navy. Also contributing to the increase in
operating results for 1996 were operating profits
of $8.2 million recorded by the Company's marine
repair, modular construction and wholesale steel
operations.
These profits were offset, in part, by losses
recorded on two commercial marine construction
contracts. The Company recognized an $8.5 million
loss on the contract to construct river hopper
barges, primarily representing costs incurred in
connection with the Company's entry into this
competitive market. In addition, the Company
recorded a $20 million loss with respect to the
contract to retrofit four single-hulled commercial
tankers with new double hulls. This loss resulted
from several factors, the most important of which
related to certain modifications to the hull
design that were required in order to comply with
American Bureau of Shipbuilding standards after
construction had been commenced by the Company in
order to respond to a significantly compressed
construction schedule caused by the customer's
delay in obtaining financing. In addition, this
project was commenced prior to the time that the
Company's new automated production facility had
become fully operational, and therefore did not
benefit from the efficiencies which would have
been realized from the completed factory.
Finally, the pre-delivery testing of the first
vessel revealed a condition which required certain
modifications causing the Company to incur
incremental costs.
The impact of these losses was mitigated by
the fact that these contracts absorbed a
substantial amount of operating expenses which, in
the absence of these contracts, would have been
allocated to other contracts. In addition, these
contracts have been important in the Company's
reemergence in the competitive commercial marine
construction markets. The tanker contract has
also enabled the Company to construct four
forebodies which are patterned after the forebody
of Avondale's standard tanker, providing
experience in constructing this portion of the
vessel, enabling the Company to refine the design
and construction techniques, and furthering the
Company's progress toward achieving its stated
goal of a more balanced mix of military and
commercial work. The first double-hulled tanker
was delivered on October 3, 1996 while the second
hull was delivered January 16, 1997. The
remaining vessels are scheduled to be delivered in
May and September 1997.
The Company's net sales in 1996 increased
$48.6 million, or 8%, as compared to the prior
year. The increase in 1996 net sales was due
primarily to increases in sales revenues
recognized on the contracts to construct the first
five Sealift ships, the Icebreaker and the
forebodies for four double-hulled product tankers,
which collectively accounted for 63% of the
Company's 1996 net sales revenue. The increase in
net sales was partially offset by reductions in
sales revenues recognized on the contracts to
construct the three LSD-CVs (the last of which was
delivered in March 1996), LSD-CV 52 (scheduled for
completion in November 1997), the seven T-AOs (the
last of which was delivered in May 1996) and four
MHCs (the third of which was delivered in July
1996 and the last vessel which was delivered in
January 1997). The increase in 1996 net sales was
also partially offset by reduced net sales
recorded on paddle-wheeled gaming vessels (the
last of which was delivered in 1995). The
contracts to construct the three LSD-CVs, the LSD-
CV 52, the seven T-AOs and four MHCs collectively
accounted for 24% of the Company's 1996 net sales
revenue.
Gross profit for 1996 increased $23.2
million, or 39%, compared to 1995. The increase in
1996 gross profit was due primarily to profits
recognized on the contract to construct the LSD-CV
52 and the seven T-AOs. Also contributing to the
increase in gross profit was the start of profit
recognition on the contract to construct the
Strategic Sealift vessels. The increase in gross
profit was partially offset by the losses recorded
on the barge and forebody contracts discussed
above.
Selling, general and administrative ("SG&A")
expenses increased $12.9 million, or 40%, for 1996
compared to 1995. The overall increase in SG&A
expenses was due primarily to increased labor
costs, professional fees and related costs
associated with the Company's successful LPD-17
proposal.
The Company's 1996 and 1995 operating results
include income tax benefits of $9 million, or
$0.62 per share basic and diluted, and $13
million, or $0.90 per share basic and diluted,
respectively. As further discussed in Note 6 of
the Notes to Consolidated Financial Statements,
these amounts were principally the result of
recognizing, for financial reporting purposes,
income tax benefits from certain net operating
loss carry forwards available to offset estimated
future taxable earnings. In 1996 and 1995, the $9
million and $13 million respective tax benefits
were offset by income tax provisions of $12.7
million and $8.6 million related to 1996 and 1995
operating results, respectively.
Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") encourages but does not require
companies to record compensation cost for stock-
based employee compensation plans at fair value.
The Company has chosen to continue to account for
stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations and has
adopted the disclosure-only provisions of SFAS
123. Implementation of the provisions of SFAS 123
had no material effect on the financial
statements.
Liquidity and Capital Resources
The Company's cash and cash equivalents
totaled $81.8 million at December 31, 1997 as
compared to $48.9 million at December 31, 1996.
The Company's operating activities represented a
significant source of cash during 1997, generating
approximately $50.8 million. The Company's
primary uses of cash in the current year consisted
of capital expenditures of $13.6 million and
principal payments on long-term borrowing of $5.0
million.
The Company's $65 million revolving credit
agreement ("the agreement") provides liquidity for
working capital purposes, capital expenditures and
letters of credit. At December 31, 1997, there
were approximately $11.3 million of letters of
credit issued against the agreement leaving
approximately $53.7 million of liquidity available
to Avondale for operations and other purposes.
There have been no borrowings under the agreement
since its inception in 1994. Continuing access to
the agreement is conditioned upon the Company
remaining in compliance with the covenants
contained therein. At December 31, 1997, the
Company was in compliance with such covenants.
The Company believes that its capital resources
will be sufficient to finance current and
projected operations.
In order to comply with the terms of the LPD-
17 contract, the Company was required to make
significant capital improvements, including
enhancing its computer-aided design and product
modeling capabilities. As a result, the Company
teamed with the University of New Orleans (the
"University" or "UNO"), the University of New
Orleans Research and Technology Foundation, Inc.
(the "Foundation") and the State of Louisiana in a
cooperative effort. Pursuant to the terms of
various agreements, the Foundation is purchasing
hardware and software required to implement the
extensive three-dimensional ship design and
Integrated Product Data Environment teaming
technology and is constructing a 200,000 square
foot building on property donated to the
University by the Company and located adjacent to
the Company's main shipyard. This facility is
expected to be completed during the second quarter
of 1998. The initial $40 million investment in
this new technology and facility, which will be
known as the "UNO/Avondale Maritime Technology
Center of Excellence" (the "Center"), is being
financed by the Foundation using third party debt
and lease financing, both of which are guaranteed
by the Company. The Company has entered into a
long-term lease for the Center requiring a nominal
annual lease payment. The Company will provide
access to the technology and a portion of the
Center to the University for its use in research
and the development of educational curricula
related to naval architecture and marine
engineering. During 1998, the Company expects to
spend additional amounts in order to complete the
customization of the design software to comply
with the LPD-17 requirements.
The Foundation is the borrower on all
indebtedness incurred to construct and equip the
Center. Under the terms of a Cooperative Endeavor
Agreement, the State of Louisiana made a non-
binding commitment to appropriate $40 million,
plus interest, in installments over a period from
1997 through 2007 for donation to the Foundation
for purposes of funding the Center. Avondale and
the Foundation anticipate that appropriations by
the State will be sufficient for the Foundation to
service its debt. However, if the State's
appropriations are insufficient, Avondale will
ultimately be required to repay the debt. The
Company's guarantee is unsecured. As of December
31, 1997, the Foundation had incurred $15.3
million of cost to construct and equip the Center.
Also, as of December 31, 1997, the State had
appropriated and paid $3.8 million, representing
the first installment to the Foundation, pursuant
to the terms of the Cooperative Endeavor
Agreement.
The Company's estimated income tax credit
carry forward was $5.3 million at December 31,
1997. This amount, plus $3.0 million of
alternative minimum tax credits will be used to
reduce the income tax liabilities for 1998 and
later years. The $1.95 million of cash paid in
1997 for income taxes reflects payments for
alternative minimum tax. The income tax credit
carry forward will expire in years 2000 through
2012. The alternative minimum tax credits may be
carried forward indefinitely.
Cautionary Statement for Purposes of "Safe Harbor"
Provisions of the Private Securities Litigation
Reform Act of 1995
Certain statements, other than statements of
historical fact, contained in this Annual Report
on Form 10-K are forward-looking statements as
defined in the Private Securities Litigation
Reform Act of 1995. These forward-looking
statements are generally accompanied by such terms
and phrases as "anticipates," "estimates,"
"expects," "believes," "should," "projects," or
"scheduled," or similar statements. Although the
Company believes that the expectations reflected
in such forward-looking statements are reasonable,
it can give no assurance that such expectations
will prove to have been correct. Important
factors that could cause the Company's results to
differ materially from the results discussed in
such forward-looking statements include the
Company's reliance on U.S. Navy contracts, profit
recognition on government contracts, the
importance of obtaining commercial contracts, the
Company's ability to complete its contracts within
its cost estimates, intense competition for
government and commercial contracts and labor,
regulatory and other risks in the shipbuilding and
marine construction industries. All forward-
looking statements in this Form 10-K are expressly
qualified in their entirety by the cautionary
statements in this paragraph.
Item 8. Financial Statements and Supplementary
Data.
See next consecutive numbered page.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Avondale Industries, Inc.:
We have audited the accompanying consolidated
balance sheets of Avondale Industries, Inc. and
subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations,
shareholders' equity, and cash flows for each of
the three years in the period ended December 31,
1997. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform the
audit to obtain reasonable assurance about whether
the financial statements are free of material
misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit
also includes assessing the accounting principles
used and significant estimates made by management,
as well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial
statements present fairly, in all material
respects, the financial position of Avondale
Industries, Inc. and subsidiaries at December 31,
1997 and 1996, and the results of their operations
and their cash flows for each of the three years
in the period ended December 31, 1997 in
conformity with generally accepted accounting
principles.
/S/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
February 20, 1998
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
1997 1996
ASSETS -------- --------
------
Current Assets:
Cash and cash equivalents $ 81,752 $ 48,944
Receivables (Note 2) 101,746 119,139
Inventories (Note 3) 23,226 21,785
Deferred tax assets (Note 6) 23,253 30,157
Prepaid expenses and other current assets 2,891 2,465
-------- --------
Total current assets 232,868 222,490
-------- --------
Property, Plant and Equipment (Note 4):
Land 7,843 7,984
Buildings and improvements 55,917 55,251
Machinery and equipment 200,777 191,376
-------- --------
Total 264,537 254,611
Less accumulated depreciation (134,481) (127,009)
-------- --------
Property, plant and equipment - net 130,056 127,602
-------- --------
Goodwill - net 5,357 8,073
Other assets 7,334 4,707
-------- --------
TOTAL ASSETS $375,615 $362,872
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 3,047 $ 4,957
Accounts payable 59,548 73,589
Accrued employee compensation 13,198 11,919
Other 11,851 12,550
-------- --------
Total current liabilities 87,644 103,015
Long-term debt (Note 4) 51,819 54,866
Deferred income taxes (Note 6) 13,400 10,300
Other liabilities and deferred credits 13,775 12,838
-------- --------
Total liabilities 166,638 181,019
-------- --------
Commitments and Contingencies (Notes 5 and 9)
Shareholders' equity (Note 8):
Common stock, $1.00 par value;
authorized - 30,000,000 shares;
issued - 15,956,227 shares in 1997
and 15,927,191 shares in 1996 15,956 15,927
Additional paid-in capital 374,173 373,911
Accumulated deficit (169,296) (196,129)
-------- --------
Total 220,833 193,709
Treasury stock (1,463,016 shares in 1997
and 1996) at cost (11,856) (11,856)
-------- --------
Total shareholders' equity 208,977 181,853
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $375,615 $362,872
======== ========
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
1997 1996 1995
-------- -------- --------
Net sales (Note 2) $613,993 $624,929 $576,308
Cost of sales 538,515 543,102 517,637
-------- -------- --------
Gross profit 75,478 81,827 58,671
Selling, general and administrative expenses 31,885 45,037 32,123
-------- -------- --------
Income from operations 43,593 36,790 26,548
Interest expense (4,804) (4,986) (4,842)
Other - net 3,294 2,691 2,074
-------- -------- --------
Income before income taxes 42,083 34,495 23,780
Income tax provision (benefit) (Note 6) 15,250 3,700 (4,400)
-------- -------- --------
NET INCOME $ 26,833 $ 30,795 $ 28,180
======== ======== ========
Income per share of common stock (Note 8)
INCOME PER SHARE OF COMMON STOCK-BASIC $ 1.85 $ 2.13 $ 1.95
======== ======== ========
INCOME PER SHARE OF COMMON STOCK-DILUTED $ 1.85 $ 2.13 $ 1.95
======== ======== ========
Weighted average number of shares outstanding - basic 14,491 14,464 14,464
======== ======== ========
Weighted average number of shares outstanding - diluted 14,524 14,479 14,474
======== ======== ========
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
(in thousands)
Additional Total
Common Paid-In Accumulated Treasury Shareholders'
Stock Capital Deficit Stock Equity
-------- --------- ---------- --------- ---------
BALANCE, JANUARY 1, 1995 $ 15,927 $ 373,911 $ (255,104) $ (11,856) $ 122,878
Net income 28,180 28,180
-------- --------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1995 15,927 373,911 (226,924) (11,856) 151,058
Net Income 30,795 30,795
-------- --------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1996 15,927 373,911 (196,129) (11,856) 181,853
Net Income 26,833 26,833
Other 29 262 291
-------- --------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1997 $ 15,956 374,173 $ (169,296) $ (11,856) $ 208,977
======== ========= ========== ========= =========
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,833 $ 30,795 $ 28,180
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,459 10,809 9,819
Deferred income taxes 12,198 3,700 (5,900)
(Gain) loss on sale of assets 598 3,135 (813)
Change in operating assets and liabilities,
net of dispositions:
Receivables 17,393 (25,955) (9,674)
Inventories (1,441) (6,496) 296
Prepaid expenses and other assets (3,053) (150) 2,952
Accounts payable (14,041) 8,072 4,600
Accrued employee compensation and other liabilities 1,517 3,660 (3,470)
Other - net 385 (869) 2,005
-------- -------- --------
Net cash provided by operating activities 50,848 26,701 27,995
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,593) (13,830) (21,290)
Proceeds from sale of assets 510 2,998 3,248
Other - net -- 383 1,243
-------- -------- --------
Net cash used for investing activities (13,083) (10,449) (16,799)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term borrowings (4,957) (5,832) (5,866)
Proceeds from issuance of long-term borrowings (Note 4) -- -- 17,780
-------- -------- --------
Net cash (used for) provided by financing activities (4,957) (5,832) 11,914
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 32,808 10,420 23,110
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 48,944 38,524 15,414
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 81,752 $ 48,944 $ 38,524
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 5,093 $ 5,207 $ 5,255
======== ======== ========
Income taxes paid $ 1,950 $ 1,760 $ 945
======== ======== ========
Noncash investing and financing activities:
Note issued in litigation settlement $ 2,000
========
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts
of Avondale Industries, Inc. and its wholly-owned subsidiaries
("Avondale" or the "Company") which are primarily engaged in
marine construction and repair. All significant intercompany
transactions have been eliminated.
Revenue Recognition
Profits on long-term contracts are generally recorded on the
basis of the Company's estimates of the percentage of completion
of individual contracts, commencing when progress reaches a point
where contract performance is sufficient to estimate final
results with reasonable accuracy. Estimates of the percentage of
completion are based on direct labor charges. Revisions in cost
and profit estimates during the course of the work are reflected
in the accounting period in which the facts requiring the
revisions become known. Amounts in excess of agreed upon contract
price for customer caused delays, disruptions, unapproved change
orders or other causes of additional contract costs are
recognized in contract value if it is probable that the claim for
such amounts will result in additional revenue and the amount can
be reasonably estimated. Profits on long-term cost-plus-award
fee contracts are recognized as the aggregate of allowable costs
reimbursed and award fees earned exceed total costs incurred.
Provisions for estimated losses, if any, on uncompleted contracts
are made in the period in which such losses are determined.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Fair Value Disclosures
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments", requires
the disclosure of the fair value of all significant financial
instruments. The estimated fair value amounts have been developed
by the Company based on available market information and
appropriate valuation methodologies. However, considerable
judgment is required in developing the estimates of fair value.
Therefore, such estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange.
After such analysis, management believes that the carrying values
of the Company's significant financial instruments including
cash and cash equivalents, short-term investments, receivables,
payables and certain accrued liabilities approximate fair values.
The fair value of the Company's long-term debt at December 31,
1997 and 1996, based upon available market information,
approximated $60.9 million and $65.5 million, respectively.
Inventories
Inventories are recorded principally at the lower of cost
(average or first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment is stated at cost.
Depreciation of property, plant and equipment is computed in the
financial statements on the straight-line method based on
estimates of useful lives as follows:
Type Period
-------------------------- -----------
Machinery and equipment 3-20 years
Buildings and improvements 15-40 years
Accelerated depreciation methods are generally used for
income tax purposes. Maintenance and repairs are charged directly
to expense as incurred. Additions, improvements and major
renewals are capitalized. Interest costs for the construction of
certain long-term assets are capitalized as part of the cost of
property, plant and equipment and amortized over the related
assets' useful lives. Interest costs capitalized in fiscal 1997,
1996 and 1995 approximated $519,000, $759,000 and $1.2 million,
respectively.
Goodwill
Goodwill represents the excess of the purchase price over
the underlying fair value of the net assets of acquired
businesses and is being amortized on a straight-line basis over
its estimated useful life of twenty years. Management evaluates
the continuing value and future benefits of goodwill, including
the appropriateness of related amortization periods, on a current
basis.
The recoverability of goodwill is assessed by determining
whether the unamortized balance can be recovered through
projected cash flows and operating results over its remaining
life. Any impairment of the asset is recognized when it is
probable that such future undiscounted cash flows will be less
than the carrying value of the asset.
Accumulated amortization at December 31, 1997 and 1996
amounted to $75.5 million and $75.0 million, respectively.
Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Deferred income taxes are provided in the
financial statements, where necessary, to account for the tax
effects of temporary differences resulting from reporting
revenues and expenses for income tax purposes in periods
different from those used for financial reporting purposes. The
temporary differences result principally from the use of
different methods of accounting for depreciation, long-term
contracts and certain employee benefits.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") encourages
but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations and has adopted
the disclosure-only provisions of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire
the stock. See Note 8.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
New Accounting Standards
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130
provides guidance for the presentation and display of
comprehensive income. SFAS 131 establishes standards for
disclosure of operating segments, products, services, geographic
areas and major customers. The Company is required to adopt both
standards for fiscal 1998. Management believes that the
implementation of SFAS 130 and SFAS 131 will not have a material
impact on the presentation of the Company's financial statements
but may require additional disclosure.
Reclassifications
Certain reclassifications of prior year amounts have been
made to conform to the current year presentation. These
reclassifications were made for comparative purposes only and
have no effect on net income as previously reported.
2. Receivables
Receivables consisted of the following at December 31, 1997 and
1996 (in thousands):
1997 1996
-------- --------
Long-term contracts:
U.S. Government:
Amounts billed $ 967 $ 859
Unbilled costs, including retentions, and
estimated profits on contracts in progress 80,041 90,325
-------- --------
Total 81,008 91,184
Commercial:
Amounts billed 4,180 7,274
Unbilled costs, including retentions, and
estimated profits on contracts in progress 8,543 14,681
-------- --------
Total from long-term contracts 93,731 113,139
Trade and other current receivables 8,015 6,000
-------- --------
Total $101,746 $119,139
======== ========
Unbilled costs, including retentions, and estimated profits
on contracts in progress were not billable to customers at the
balance sheet dates under terms of the respective contracts. Of
the unbilled costs and estimated profits at December 31, 1997,
approximately $20.2 million is expected to be collected in 1998
with the balance to be collected in subsequent years as contract
deliveries are made and warranty periods expire. Net sales to the
United States Government in 1997, 1996, and 1995 account for
approximately 83%, 77% and 74% of the net sales, respectively.
Costs and estimated profits (losses) on contracts in
progress at December 31, 1997 and 1996 were as follows (in
thousands):
1997 1996
---------- ----------
Costs incurred on contracts in progress $2,786,024 $3,026,965
Estimated profits recognized on contracts in progress 135,701 92,080
Estimated losses recognized on contracts in progress (34,323) (58,600)
---------- ----------
Total 2,887,402 3,060,445
Less billings to date (2,801,829) (2,956,710)
---------- ----------
Net value of contracts in progress $ 85,573 $ 103,735
========== ==========
Net value of contracts in progress was comprised of the following
amounts (in thousands):
1997 1996
-------- --------
Unbilled costs and estimated profits
on contracts in progress
(included in receivables) $ 88,584 $105,006
Billings in excess of costs and estimated
profits on contracts in progress
(included in accounts payable) (3,011) (1,271)
-------- --------
Total $ 85,573 $103,735
======== ========
The estimated losses on contracts in progress of $34.3
million and $58.6 million included in the net value of contracts
in progress at December 31, 1997 and 1996, respectively, are
related to certain contracts which were delivered through 1997.
During 1997 and 1996, the Company recorded increases of $5.8
million and $28.5 million, respectively in the reserves related
to the contracts to retrofit the four single-hulled forebodies
with new double hulls and to construct the series of river hopper
barges. The losses resulted primarily from increases in the
estimated labor needed to complete these contracts.
Additionally, in 1996, the Company recorded a reduction of $4.4
million of a previously recognized loss due primarily to a
revision of the total estimated contract cost as it neared
completion.
3. Inventories
Inventories consisted of the following at December 31, 1997 and
1996 (in thousands):
1997 1996
-------- --------
Goods held for sale $ 14,915 $ 13,184
Materials and supplies 8,311 8,601
-------- --------
Total $ 23,226 $ 21,785
======== ========
4. Financing Arrangements
Revolving Credit Agreement
The Company has available an unsecured revolving credit
agreement ("the agreement") with various financial institutions.
The agreement provides for an available line of credit equal to
the lesser of $65 million or a specified borrowing base with a
term expiring in April 2000. A committment fee based on the
average daily amount of the unused line of credit is payable on a
quarterly basis. Borrowings under the agreement bear interest at
fluctuating rates. The agreement (1) requires the Company to meet
certain financial covenants (relating to net worth, debt
coverage, interest coverage and backlog), (2) imposes limitations
and restrictions related to annual capital expenditures, the
incurrence of new indebtedness, the payment of dividends and the
repurchase of common stock and (3) requires compliance with the
terms and conditions of all other debt agreements. The agreement
also provides the Company with the right to require the bank
group to post letters of credit on the Company's behalf in
support of its operations which letters of credit reduce the
remaining available credit (see Note 9). There were no
borrowings in 1997 and 1996 under the revolving credit agreement.
Long-Term Debt
Long-term debt consisted of the following at December 31, 1997
and 1996 (in thousands):
1997 1996
-------- --------
Industrial revenue bonds $ 35,360 $ 36,250
Mortgage bonds, interest at 8.16%, payable
in semi-annual principal installments to 2010 15,408 16,594
Mortgage bonds,interest at 7.86%, payable in
semi-annual principal installments to 2000 2,328 3,104
General obligation industrial bonds, interest at
7%, payable in annual installments to 2008 1,770 1,875
Other long-term debt -- 2,000
-------- --------
Total 54,866 59,823
Less current maturities of long-term debt (3,047) (4,957)
-------- --------
Long-term debt $ 51,819 $ 54,866
======== ========
The $35.4 million of industrial revenue bonds represent
Series 1994 bonds which consist of (1) $5.5 million bearing
interest at 8.25% and payable in annual principal installments
ranging from $600,000 in 1998 to final payment of $985,000 in 2004
and (2) $29.9 million bearing interest at 8.50% and payable in
annual principal installments ranging from $370,000 in 1998 to a
final payment of $3.8 million in 2014. The Series 1994 bonds are
secured by certain property and equipment which had a net book
value of approximately $20.4 million at December 31, 1997. Among
other things, the terms and conditions of the Series 1994 bonds
(1) require the Company to meet certain financial covenants
(relating to net worth, debt and debt service coverage and
liquidity), (2) impose limitations and restrictions related to the
incurrence of new indebtedness and the payment of dividends, and
(3) require compliance with the terms and conditions of other
specified debt agreements.
The $15.4 million of mortgage bonds represent the remaining
balance of $17.8 million of bonds issued in February 1995 as part
of the financing of the Company's approximately $20 million plant
modernization effort. The bonds were issued utilizing a U.S.
Government guarantee under Title XI of the Merchant Marine Act,
1936, as amended ("Title XI"), bear interest at the annual rate of
8.16% and are payable in equal semi-annual principal payments of
$593,000 with the final payment in 2010. The terms of the
financing include various restrictive covenants including
provisions relating to the maintenance of working capital,
incurrence of additional indebtedness, and the maintenance of a
minimum net worth. The plant modernization assets having a net
book value of approximately $19.5 million at December 31, 1997
have been pledged as collateral for these mortgage bonds.
The $2.3 million of mortgage bonds at December 31, 1997
represent the balance of an earlier mortgage bond issue which also
utilized a Title XI guarantee. The terms of the financing provide
for an annual interest rate of 7.86% and contain various
restrictive covenants similar to those for the $17.8 million of
Title XI mortgage bonds discussed above. These bonds are payable
in equal semi-annual principal payments of $388,000 and mature in
the year 2000. Property, plant and equipment having a net book
value of approximately $12.5 million at December 31, 1997 has been
pledged as collateral for these mortgage bonds.
Annual maturities of long-term debt for each of the next five
years and in total thereafter follow (in thousands):
1998 $ 3,047
1999 3,137
2000 3,237
2001 2,571
2002 2,686
Thereafter 40,188
--------
Total $ 54,866
========
5. Leases
The Company leases equipment and real property in the normal
course of business under various operating leases, including
non-cancelable and month-to-month agreements. Certain of the
leases provide for renewal privileges with escalation of the lease
payments based on changes in selected economic indices.
Rental expense for operating leases was $6.1 million, $9.0
million and $6.3 million in 1997, 1996 and 1995, respectively.
Minimum rental commitments under leases having an initial or
remaining noncancelable term in excess of twelve months follow (in
thousands):
1998 $ 3,111
1999 2,191
2000 1,118
2001 94
2002 --
--------
Total $ 6,514
========
6. Income Taxes
Income taxes are accounted for under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") which requires the use of the asset and liability approach
for financial accounting and reporting for income taxes.
The Company has provided for Federal income taxes as
follows (in thousands):
YEARS ENDED DECEMBER 31,
1997 1996 1995
-------- -------- --------
Current provision $ 3,052 $ 1,100 $ 1,500
Deferred provision 12,198 11,600 7,100
Deferred benefit attributable to the realization
of net operating loss carryforwards -- (9,000) (13,000)
-------- -------- --------
Provision (benefit) for income taxes $ 15,250 $ 3,700 $ (4,400)
======== ======== ========
The provision (benefit) for income taxes varied from
the Federal statutory income tax rate due to the following
(dollars in thousands):
YEARS ENDED DECEMBER 31,
1997 1996 1995
Amount % Amount % Amount %
-------- --- -------- --- -------- ---
Taxes at Federal statutory rate $ 14,729 35 $ 12,073 35 $ 8,323 35
Net operating loss
carry forwards utilized -- -- (9,000) (26) (13,000) (55)
Other 521 1 627 2 277 1
-------- --- -------- --- -------- ---
Total $ 15,250 36 $ 3,700 11 $ (4,400) (19)
======== === ======== === ======== ===
At December 31, 1997 the Company has available for Federal
income tax purposes a tax credit carry forward of $5.3 million.
The income tax credit carry forward expires in the years 2000
through 2012. Additionally, the Company has $3.0 million of
alternative minimum tax credits which may be carried forward
indefinitely.
Deferred income taxes represent the net tax effects of (a)
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and their tax bases,
and (b) operating loss and tax credit carry forwards. The tax
effects of significant items comprising the Company's net deferred
tax balances at December 31, 1997 and 1996 are as follows (in
thousands):
1997 1996
-------- --------
Deferred Tax Liabilities:
Differences between book
and tax basis of property, plant and equipment $ 25,566 $ 24,753
Other 818 976
-------- --------
Total 26,384 25,729
-------- --------
Deferred Tax Assets:
Reserves not currently deductible 3,795 4,417
Long-term contracts 18,710 18,844
Other temporary differences 6,126 4,761
Operating loss carry forwards -- 10,211
Tax credit carry forwards 8,289 8,036
-------- --------
36,920 46,269
Valuation Allowance (683) (683)
-------- --------
Total 36,237 45,586
-------- --------
Net deferred tax assets $ 9,853 $ 19,857
======== ========
The net deferred tax assets are included in the following
balance sheet captions (in thousands):
1997 1996
-------- --------
Current deferred tax assets $ 23,253 $ 30,157
Non-current deferred income tax liabilities (13,400) (10,300)
-------- --------
Net deferred tax assets $ 9,853 $ 19,857
======== ========
7. Retirement Plans
ESOP
In 1985, the Company established the Avondale Industries, Inc.
Employee Stock Ownership Plan (the "ESOP"). The ESOP is a
qualified, defined contribution plan designed primarily to invest
in equity securities of the Company and is specifically authorized
to leverage its acquisition of these securities. The ESOP is
intended to cover all employees of the Company upon completion of
one year of service, except certain employees who are covered by
collective bargaining agreements, unless, by the terms of such
agreements, the employees are to participate in the ESOP. The ESOP
owned approximately 2,835,000 and 2,980,000 shares of the
Company's Common Stock at December 31, 1997 and 1996,
respectively. In February 1996, the ESOP sold 3,581,100 shares of
the Company's common stock. The Company did not receive any of
the proceeds from this public offering.
Pension Plan
The Company also sponsors a defined benefit pension plan, which
is coordinated with the benefits payable to participating
employees in the ESOP. At retirement, a person's benefit is based
upon the greater of (i) the market value of the shares of common
stock allocated to the participant's ESOP account or (ii) the
benefit calculated under the pension plan formula. The pension
plan formula benefits are based on a defined dollar amount
multiplied by a fraction related to a participant's credited
service.
The net periodic pension cost for the years ended December 31,
1997, 1996 and 1995 included the following components (in
thousands):
1997 1996 1995
------- ------- -------
Service costs of the current period $ 2,800 $ 3,700 $ 3,300
Interest cost on the projected benefit obligation 3,500 3,700 4,200
Actual return on plan assets (5,100) (4,600) (3,600)
Net amortization of transition liability and
deferred investment (loss) gain (900) (400) 300
------- ------- -------
Net periodic pension cost $ 300 $ 2,400 $ 4,200
======= ======= =======
The following table sets forth the pension plan's estimated
funded status as of December 31, 1997 and 1996 (in thousands):
1997 1996
-------- --------
Projected benefit obligation:
Vested benefits $ 40,800 $ 38,800
Nonvested benefits 500 400
-------- --------
Accumulated benefit obligation 41,300 39,200
Effect of projected future compensation levels 4,700 2,600
-------- --------
Projected benefit obligation 46,000 41,800
Plan assets at market value 66,800 58,800
-------- --------
Plan assets in excess of projected benefit obligation 20,800 17,000
Unrecognized net transition obligation 100 100
Unrecognized prior service costs (1,800) (2,100)
Unrecognized net gain (18,900) (14,500)
-------- --------
Prepaid pension costs $ 200 $ 500
======== ========
The Company's funding policy is to contribute each year an
amount equal to the minimum required contribution under the
Employee Retirement Income Security Act of 1974. However, the
contribution for any year will not be greater than the maximum
tax deductible contribution. Plan assets consist primarily of
United States Government and Agency securities, corporate stocks
and corporate bonds and notes. The weighted-average discount
rate used in determining the actuarial present value of the
projected benefit obligation was 7.25% for 1997 and 7.75% for
1996. The rate of increase in future compensation levels used
was 4.0% for 1997 and 1996 and thereafter. The expected long-term
rate of return on the assets was 9.0% for 1997 and 1996.
401(k) Savings Plan
Beginning in 1996, the Company sponsored a 401(k) Savings
Plan. Participation in this defined contribution plan is available
to substantially all employees with one year of credited service
to the Company. The Company may elect to make contributions to the
Plan; however, the timing and amount of such contributions is at
the discretion of the Company's Board of Directors. The Company
paid approximately $500,000 in matching contributions for the 1997
Plan Year. There was no similar contribution in 1996.
8. Shareholders' Equity
Preferred Stock
The Company is authorized to issue 5,000,000 shares of
preferred stock, $1.00 par value, none of which was outstanding at
December 31, 1997 and 1996.
Earnings Per Share
In accordance with Statement of Financial Accounting
Standards Number 128, "Earnings Per Share" ("SFAS 128"), the
Company changed its method of calculating earnings per share
("EPS") during the fourth quarter of 1997. The number of weighted
average shares outstanding for "basic" EPS was 14,490,644,
14,464,175 and 14,464,175 for the years ended December 31, 1997,
1996 and 1995, respectively. The number of weighted average
shares outstanding for "diluted" EPS was 14,523,838, 14,479,364
and 14,473,613 for the years ended December 31, 1997, 1996 and
1995, respectively. In accordance with the disclosure
requirements of SFAS 128, the reconciliation of the numerator and
denominator for calculating earnings per share is as follows (in
thousands except per share data):
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ----------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
---------- ------------ --------- ---------- ------------ -------- ---------- ------------ ---------
BASIC EPS
Income available to
common shareholders $26,833 14,491 $ 1.85 $30,795 14,464 $ 2.13 $28,180 14,464 $ 1.95
====== ====== ======
EFFECT OF DILUTIVE
SECURITIES
Stock appreciation
rights/options 33 15 10
------ ------ ------
DILUTED EPS
Income available to
common shareholders
plus assumed
conversions $26,833 14,524 $ 1.85 $30,795 14,479 $ 2.13 $28,180 14,474 $ 1.95
======= ====== ====== ======= ====== ====== ======= ====== ======
Stock-Based Compensation Plans
At December 31, 1997, the Company had two stock-based
compensation plans which are described below. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related Interpretations in
accounting for its plans. Accordingly, no compensation expense is
recognized for its stock-based compensation plans other than for
performance-based awards as the exercise price of all stock
options granted thereunder is equal to the fair value of the
Company's common stock at the date of grant. Since no options
were granted under the Company's stock-based compensation plans
during 1996, there would have been no effect on net income and
income per common share. Had 1997 compensation costs for the
Company's stock-based compensation plans been determined based
upon the fair value at the grant date for awards under these plans
consistent with the methodology presented under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), the Company's net income and
earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
Net Income As reported $26,833
Pro forma $25,413
Earnings per share-basic As reported $1.85
Pro forma $1.75
Earnings per share-diluted As reported $1.85
Pro forma $1.75
The weighted average fair value of the options granted during
1997 was $15.4542. The fair value of each option granted in 1997
is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions: no dividend yield;
expected volatility of 85.0581%; risk-free interest rate of
5.772%; an expected life of 5.86 years.
During 1997, the Board of Directors adopted and the
shareholders approved the Avondale Industries, Inc. 1997 Stock
Incentive Plan (the "1997 Plan") which provides for the award of
various economic incentives to key employees and directors.
Incentives granted under the 1997 Plan may be in the form of stock
options, stock appreciation rights, restricted stock and
performance shares or any combination thereof. A total of
1,430,000 shares of common stock of the Company are reserved for
issuance under the 1997 Plan. Incentives granted under the Plan
have a maximum term of ten years and are exercisable, subject to
various terms and conditions as set forth by the Compensation
Committee of the Board of Directors. Transactions of the 1997
Plan during 1997 were as follows:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted Average
Remaining
Number Contractual Life Weighted Average Number Weighted Average
Outstanding (Years) Exercise Price Exercisable Exercise Price
----------- ---------------- ---------------- ----------- ----------------
Beginning of year -- -- -- -- --
Granted 274,904 9.47 $ 20.723 90,219 $ 22.940
Exercised -- -- -- -- --
Forfeited/expired -- -- -- -- --
--------- ------
End of year 274,904 9.47 $ 20.723 90,219 $ 22.940
========= ======
Available for grant,
end of year 1,155,096
=========
The range of exercise prices for options outstanding at
December 31, 1997, under the 1997 Plan was $19.625 to $22.940. Of
the 274,904 options granted under the Plan in 1997, 184,685
options vest 25% on the second, third and fourth anniversary date
of the grant, while the remaining 90,219 options vested on the
grant date.
The Company's Performance Share Plan provided for the award
of shares of Common Stock to senior executives of the Company, as
designated by a committee of the Board of Directors, which were
earned upon the attainment of specified performance objectives.
These performance objectives have been attained and therefore no
further awards will be made.
A summary of the status of the Performance Share Plan as of
December 31, 1997, 1996 and 1995 and changes during the three
years ended December 31, 1997 are presented below:
1997 1996 1995
----------------- ----------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------- --------
Options outstanding
and exercisable,
January 1 226,404 $17.718 240,971 $17.463 279,155 $15.885
Forfeited/expired -- -- 1,360 19.000 2,280 15.965
Exercised 221,508 17.537 13,207 12.940 35,904 5.285
------- ------- -------
Options outstanding
and exercisable,
December 31 4,896 $16.994 226,404 $17.718 240,971 $17.463
======= ======= =======
The range of exercise prices for options outstanding at
December 31, 1997 under the Performance Share Plan (which contain a
stock appreciation right feature) was $3.875 to $19.00 and the
weighted-average remaining contractual life for such options was
1.77 years.
The Company provided a Stock Appreciation Plan for key
management employees which contains a stock appreciation right
feature. As this plan has expired, no further award will be made.
There were no transactions relating to this plan during the
years ended December 31, 1997 and 1996. A summary of changes in the
Stock Appreciation Plan for the year ended December 31, 1995 is
presented below:
1995
-----------------------
Weighted
Average
Exercise
Shares Price
-------- ---------
Options outstanding, January 1 40,000 $ 11.250
Forfeited/expired (40,000) $ 11.250
-------
Options outstanding, December 31 -- $ --
=======
There were no options exercisable at December 31, 1997, 1996
and 1995. There were no shares available for grant at December 31,
1997 and 1996, and 437,000 shares were available for grant at
December 31, 1995. Under the terms of the plan, options expired
on March 31, 1995.
Compensation expense for the years ended December 31, 1997,
1996 and 1995 was not material.
9. Commitments and Contingencies
Litigation
In January 1986, the Louisiana Department of Environmental
Quality ("DEQ") advised the Company that it could be a potentially
responsible party ("PRP") with respect to an oil reclamation site
operated by an unaffiliated company in Walker, Louisiana. To
date, the Company and certain of the other PRPs (the "Funding
Group") for the site have funded the site's remediation expenses,
PRP identification expenses and related costs for the
participating parties. As of December 31, 1997 such costs totaled
approximately $19.0 million, of which the Company has funded
approximately $4.0 million. Since 1998, the Funding Group filed
petitions to add a number of companies as third-party defendants
with regard to the remedial action. The Funding Group has agreed
to settle with the majority of these companies. All funds
collected are placed in escrow to fund future expenses. At
December 31, 1997, the balance of the escrow was $8.5 million,
which is to be used to fund any ongoing remediation expenses. The
Company will not owe any future assessments until the balance in
escrow is depleted. There are additional settlements being
negotiated which should add to the balance in escrow.
Additional remedial work scheduled for the site includes
completion of studies and if required by the results of these
studies, subsequent remediation. Following completion of any such
required additional remediation, it will be necessary to obtain
Environmental Protection Agency approval to close the site, which
consent may require subsequent post-closure activities such as
groundwater monitoring and site maintenance for many years. The
Company is not able to estimate the final costs for any such
additional remedial work or post-closure costs that may be
required; however, the Company believes that its proportionate
share of expenditures for any additional work will not have a
material impact on the Company's financial statements. In
addition, the Company and other members of the Funding Group have
entered into a final cost sharing agreement under which all
parties have agreed that there would be no re-allocation of
previous remediation costs, but that future remediation costs
would be established by a formula. Under this agreement, the
Company's share of future costs will not exceed 17.5% for any
additional costs.
Furthermore, the Company has initiated litigation against its
insurer for a declaration of coverage of the liability, if any,
that may arise in connection with the remediation of the site
referred to above. The court has ruled that the insurer has the
duty to defend the Company, but has not yet ruled on whether the
carrier has a duty to indemnify the Company if any liability is
ultimately assessed against it. After consultation with counsel,
the Company is unable to predict the eventual outcome of this
litigation or the degree to which such potential liability would
be indemnified by its insurance carrier.
In 1996, the Company settled a class action lawsuit involving
alleged personal injury and property damage arising from the
Walker, La. reclamation site. Under the terms of the settlement,
the Company paid approximately $6.0 million into a settlement
fund. The Company could also have been responsible for payment to
the plaintiffs of up to an additional $6.0 million (plus interest
at 8% per annum) if the plaintiffs were unsuccessful in collecting
certain claims under Avondale's insurance policies that were
assigned to the plaintiff class under the settlement agreement.
During the first quarter of 1997, the parties reached a settlement
with the Company's insurers which does not require any further
contribution by the Company.
In addition to the above, the Company is also named as a
defendant in other lawsuits and proceedings arising in the
ordinary course of business, some of which involve substantial
claims.
The Company has established accruals as appropriate for
certain of the matters discussed above. While the ultimate outcome
of lawsuits and proceedings against the Company cannot be
predicted with certainty, management believes, based on current
facts and circumstances and after review with counsel, that, the
eventual resolution of these matters is not expected to have a
material adverse effect on the Company's financial statements.
Guarantee
Pursuant to agreements related to the University of New
Orleans ("UNO")/Avondale Maritime Technology Center of Excellence
("the Center"), the Company has agreed to guarantee indebtedness
with a principal amount not to exceed $40 million expected to be
incurred by the UNO Research and Technology Foundation, Inc. (the
"Foundation") for construction of the facility and the acquisition
of technology. Under the terms of a Cooperative Endeavor
Agreement, the State of Louisiana made a non-binding commitment to
appropriate $40 million, plus interest, in installments over a
period from 1997 through 2007 for donation to the Foundation for
purposes of funding the Center. Avondale and the Foundation
anticipate that appropriations by the State will be sufficient for
the Foundation to service its debt. However, if the State's
appropriations are insufficient, Avondale will ultimately be
required to repay the debt. The Company's guarantee is unsecured.
As of December 31, 1997, the Foundation had incurred $15.3 million
of cost to construct and equip the Center. In connection with its
non-binding commitment, the State appropriated and paid $3.8
million during 1997, representing the first installment to the
Foundation.
Letters of Credit
In the normal course of its business activities, the Company
is required to provide letters of credit to secure the payment of
workers' compensation obligations, other insurance obligations and
to provide a debt service reserve fund related to $35.4 million of
Series 1994 industrial revenue bonds. Additionally, under certain
contracts the Company may be required to provide letters of credit
to secure certain performance obligations of the Company
thereunder. Outstanding letters of credit relating to these
business activities amounted to approximately $11.3 million at
December 31, 1997 and 1996.
10. Quarterly Results (Unaudited)
Consolidated operating results for the four quarters of 1997 and
1996 were as follows (in thousands, except per share data):
1997 1996
------------------------------------------ ------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
Net Sales $ 139,513 $ 145,792 $ 159,217 $ 169,471 $ 156,496 $ 152,577 $ 148,384 $ 167,472
Gross Profit 18,633 19,501 19,670 17,674 17,286 18,166 19,048 27,327
Income from Operations 10,299 10,866 10,950 11,478 8,253 8,874 9,237 10,426
Net Income 6,291 6,380 6,920 7,242 4,736 14,290 5,612 6,157
Net Income per Share
- Basic $ 0.43 $ 0.44 $ 0.48 $ 0.50 $ 0.33 $ 0.99 $ 0.39 $ 0.43
========= ========= ========= ========= ========= ========= ========= =========
Net Income per Share
- Diluted $ 0.43 $ 0.44 $ 0.48 $ 0.50 $ 0.33 $ 0.99 $ 0.39 $ 0.43
========= ========= ========= ========= ========= ========= ========= =========
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Company's directors and officers called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1998 Annual Meeting of shareholders and is
incorporated herein by reference.
Item 11. Executive Compensation.
Information concerning the executive compensation called for by this
item will be included in the Company's definitive Proxy Statement prepared
in connection with the 1998 Annual Meeting of shareholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning security ownership of certain beneficial owners
and management called for by this item will be included in the Company's
definitive Proxy Statement prepared in connection with the 1998 Annual
Meeting of shareholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions
called for by this item will be included in the Company's definitive Proxy
Statement prepared in connection with the 1998 Annual Meeting of
shareholders and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
Not applicable
(a)(3) Exhibits
3.1 Articles of Incorporation of the Company.(1)
3.2 By-laws of the Company, as amended on November 3, 1997.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Company's
Articles of Incorporation and By-laws defining the rights of
holders of Common Stock.
4.2 Specimen of Common Stock Certificate.(2)
4.3 Instruments Relating to Title XI Vessel Financing
(a) Trust Indenture dated October 21, 1975, by and between
the Company and Manufacturers Hanover Trust Company, as
Indenture Trustee, relating to $19,012,000 of United
States Government Guaranteed Ship Financing Bonds, as
amended by an Assumption Agreement and Supplemental
Indenture dated September 16, 1985(3), as further
amended by a Master Assumption Agreement, Supplemental
Indenture No. 2 and Amendment to Title XI Finance
Agreements dated March 13, 1991 (the "Master Assumption
Agreement"),(4) which has been further amended by a
Third Supplemental Indenture dated February 9, 1995.(5)
(b) Title XI Reserve Fund and Financial Agreement dated
October 21, 1975, by and between the Company and the
United States of America, as amended by Amendments Nos.
1 and 2(3), as further amended by the Master Assumption
Agreement (filed as Exhibit 4.3(a) hereto). The
Reserve Fund and Financial Agreement has been further
amended by Amendment No. 5 dated February 9, 1995(5)
and Amendment No. 6 dated August 22, 1996.(6)
(c) Form of 8.80% Sinking Fund Bond, Series A (included in
Exhibit 4.3(a)).
(d) Form of 9.30% Sinking Fund Bond, Series B (included in
Exhibit 4.3(a)).
(e) Form of 7.86% Sinking Bond Fund, 2000 Series.(5)
4.4 Instruments relating to AEI's and the Company's obligations
arising in connection with the issuance of General Obligation
Bonds by Harrison County, Mississippi.
(a) Loan Agreement dated April 1, 1991 between Harrison
County, Mississippi and AEI, pursuant to which AEI is
obligated to repay $3 million in order to fund the
County's bond payment obligations.(2)
(b) Guaranty Agreement dated April 1, 1991 between the
Company, Harrison County, Mississippi and the State of
Mississippi.(2)
4.5 Instruments relating to the Company's $36.25 million
Industrial Revenue Refunding Bond Series 1994 Financing.
(a) Refunding Agreement dated April 1, 1994 between the
Company and the Board of Commissioners of the Port of
New Orleans, Exhibit A and First Preferred Vessel
Mortgage thereto.(7)
(b) Trust Indenture dated April 1, 1994 between the Board
of Commissioners of the Port of New Orleans and First
National Bank of Commerce.(7)
(c) Form of Industrial Revenue Refunding Bond Series
1994.(7)
4.6 Instruments Relating to February 1995 Title XI Vessel
Financing.
(a) Trust Indenture dated February 9, 1995 by and between
the Company and Chemical Bank, as Indenture Trustee,
relating to $17,780,000.00 of United States Government
Guaranteed Ship Financing Bonds.(5)
(b) Title XI Reserve Fund and Financial Agreement dated
February 9, 1995, by and between the Company and the
United States of America,(5) as amended by Amendment
No. 1 dated August 22, 1996.(6)
(c) Form of 8.16% Sinking Bond Fund, 2010 Series.(5)
10.1 Contracts With The United States Navy
(a) Agreement dated June 28, 1985, by and between the
Company and the United States of America (Contract No.
N00024-85-C-2131) for the construction of T-AO 187
Class Oiler Ships and various modifications thereto(3)
including modification P00005 thereto entered into on
June 16, 1988, and the related Acknowledgment of
Transfer and Transfer Agreement relating to the
Company's agreement to assume certain of the rights and
obligations to build two such vessels under an
Agreement dated May 6, 1985, by and between
Pennsylvania Shipbuilding Co. and the United States of
America.(8)
(b) Agreement dated June 20, 1988, by and between the
Company and the United States of America (Contract No.
N00024-88-C-2050) for the construction of T-AO 187
Class Oiler Ships and various modifications thereto(8)
and modification P00036 thereto.(4)
(c) Agreement dated November 21, 1983, by and between the
Company and the United States of America (Contract No.
N00024-84-C-2027) for the construction of LSD-41 Class
Landing Ship Dock vessels and various modifications
thereto.(3)
(d) Agreement dated June 17, 1988, by and between the
Company and the United States of America (Contract No.
N00024-88-C-2048) for the construction of LSD-41 Class
Landing Ship Dock vessels and modification nos. P00001
and P00002(8), modification nos. P00008 and P00013
thereto(2) and modification P00029 thereto.(4)
(e) Agreement dated July 15, 1988, by and between the
Company and the United States of America (Contract No.
N00024-88-C-2221) for the conversion of AO-177 Class
Oilers to AO-177 Jumbo Class and various modifications
thereto.(8)
(f) Agreement dated December 13, 1988, by and between AGM
and the United States of America (Contract No. N00024-
89-C-2110) for the construction of three LCACs.(8)
(g) Agreement dated July 1, 1987, by and between Lockheed
Shipbuilding Company and the United States of America
(Contract No. N00024-87-C-2089) for the construction of
seven LCACs (assumed by AGM in 1988).(8)
(h) Agreement dated October 3, 1989, by and between the
Company and the United States of America (Contract No.
N00024-89-C-2162) for the construction of one MHC Class
51 ship and various modifications thereto(9),
modification no. P00020(4) and modification no. P00027
thereto.(10)
(i) Agreement dated August 2, 1990, by and between the
Company and the United States of America (Contract
N00024-90-C-2304) for the construction of one MHC Class
51 ship,(2) and modification nos. P00002(4),
P00013(4)and modification no. P00020 thereto.(10)
(j) Agreement dated November 30, 1990, by and between the
Company and the United States of America (Contract No.
N00024-90-C-2307) for the construction of one T-AGS 45
ship and various modifications thereto.(2)
(k) Agreement dated July 15, 1993, by and between the
Company and the United States of America (Contract No.
N00024-93-C-2300) for the construction of one WAGB 20
Coast Guard Polar Icebreaker ship, amendment 0001 and
modification nos. P0001 and P00013 thereto.(1)
(l) Agreement dated September 3, 1993, by and between the
Company and the United States of America (Contract No.
N00024-93-C-2205) for the construction of one T-AKR 300
Class Strategic Sealift ship, various amendments and
modifications nos. P00001, P00003 and P00004(4), P00007
(7), P00019 (6) and modifications P00025 and P00028
thereto.
(m) Agreement dated October 12, 1993, by and between the
Company and the United States of America (Contract No.
N00024-94-C-2200) for the construction of one LSD 41
Class Landing Ship Dock.(4)
(n) Agreement dated December 17, 1996 by and between the
Company and the UnitedStates of America (Contract No.
N00024-97-C-2202) for the design and construction of
one LPD-17 ship.(6)
10.2 Other Operating Contracts
(a) Agreement dated July 10, 1991 by and between Crawford
Technical Services, Inc. and the Dallas Area Rapid
Transit Authority, and the supplement thereto, relating
to providing operational and maintenance services for
paratransit van services for the Dallas, Texas
metropolitan area.(4)
(b) Agreement dated January 28, 1991, by and between
Crawford Technical Services, Inc. and the United States
of America and various modifications thereto (Contract
No. FO3602-91-C0007) relating to providing maintenance
services with respect to family housing units located
in a Little Rock, Arkansas air force base.(4)
(c) Agreement dated January 12, 1994 by and between the
Company and Belle of Orleans, L.L.C. for the
construction of a 350-foot-long paddlewheel gaming
vessel, various exhibits and Amendment nos. 1, 2 and 3
thereto.(7)
(d) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
King.(11)
(e) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
Knight.(11)
(f) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
Solar.(11)
(g) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
Spray.(11)
10.3 Employee Benefit Plans
(a) The Company's Amended and Restated Performance Share
Plan dated April 24, 1989(12), as amended by Amendment
No. 1 adopted December 5, 1994.(7)
(b) The Company's Amended and Restated Stock Appreciation
Plan and attachments thereto dated April 24, 1989(12),
as amended by Amendment No. 1 adopted December 5,
1994.(7)
(c) The Company's Amended and Restated Employee Stock
Ownership Plan(7) and the related Amended and Retated
Trust Agreement(13) as further amended by: Amendment
No. 1 adopted April 5, 1995(5), Amendment No. 2 adopted
June 16, 1995(11), Amendment No. 3 adopted February 5,
1996(13), Amendment No. 4 adopted December 31, 1996(6),
and Amendment No. 5 adopted December 30, 1997.
(d) The Company's Pension Plan as Amended and Restated
dated December 30, 1997.
(e) The Company's Amended and Restated Supplemental Pension
Plan(3), as amended by Amendment Nos. 1 and 2
thereto(2).
(f) The Company's Excess Retirement Plan.(2)
(g) The Amended and Restated Avondale Services Corporation
Executive Group Insurance Benefits Plan and Summary
Plan Description specifying the excess insurance
benefits provided to the Company's executive officers
and certain other key personnel, and a summary
description of health, accidental death and
dismemberment, disability and life insurance benefits
made available to employees dated October 14, 1997.
(h) The Company's Directors' Deferred Compensation Plan.(2)
(i) Avondale Industries, Inc. Management Incentive Plan.(5)
(j) The Company's 401(k) Plan as restated effective
September 20, 1996(6), as amended by Amendment No. 1
dated December 31, 1996(6) and Amendment No. 2 dated
December 30, 1997.
(k) The Company's Executive Retirement Plan.(13)
(l) Avondale Industries, Inc. 1997 Stock Incentive Plan
adopted May 23, 1997.(15)
10.4 Employment Agreements
(a) Employment Agreement dated September 27, 1985, by and
between the Company and Albert L. Bossier, Jr.(3) the
term of which has been extended such that its current
term extends through December 31, 1999.(7)
(b) Employment Agreement dated June 18, 1987, by and
between the Company and Thomas M. Kitchen(3) the term
of which has been extended such that its current term
extends through December 31, 1999.(7)
(c) Employment Agreement dated June 18, 1987, by and
between the Company and Kenneth B. Dupont(3) the term
of which has been extended such that its current term
extends through December 31, 1999.(7)
(d) Amended and Restated Change Control Agreement dated
January 19, 1996, by and between the Company and Albert
L. Bossier, Jr.(13).
(e) Amended and Restated Change Control Agreement dated
January 19, 1996, by and between the Company and Thomas
M. Kitchen(13).
(f) Amended and Restated Change Control Agreement dated
January 19, 1996, by and between the Company and
Kenneth B. Dupont(13).
(g) The Company's Severance Pay Plan and Summary Plan
Description adopted March 1, 1996.(13)
10.5 Avondale/Ogden Letter Agreement.(14)
10.6 Acquisition and Disposition Agreements
(a) Asset Purchase Agreement dated January 27, 1987, by and
between the Company and Connell Industries, L.P.(3)
(b) Purchase Agreement dated June 22, 1988, by and between
AGM, Lockheed Shipbuilding Company and Lockheed
Corporation.(8)
(c) Stock Purchase Agreement dated February 15, 1991, by
and between Avondale Technical Services, Inc. and
Oliver R. Crawford relating to the purchase of Crawford
Technical Services, Inc.(2)
(d) Asset Purchase Agreement dated November 20, 1992, by
and between the Company and Bollinger Machine Shop &
Shipyard, Inc., a Louisiana corporation (without
exhibits).(4)
10.7 Lease Agreements
(a) Lease Agreement dated June 24, 1988, by and between the
Company and the Board of Commissioners of the Port of
New Orleans.(8)
(b) Lease Agreement dated June 4, 1979, by and between the
Company and Marrero Land and Improvement Association,
Ltd.(8)
(c) Adoption Agreement dated July 22, 1988, by and between
the Company and Missouri Pacific Railroad Company, as
supplemented on the date thereof.(8)
(d) Lease of Commercial Property dated July 1, 1970, by and
between the Company and Metal Building Products Co.,
Inc.(2)
(e) Sub-lease agreement dated May 16, 1997, by and between
the Company and the University of New Orleans Research
and Technology Foundation, Inc. (Without exhibits).(15)
10.8 Other Material Agreements
(a) Registration Rights Agreement between the Company and
the ESOP as Annex I of the Common Stock Purchase
Agreement dated as of September 27, 1985, by and
between Ogden American Corporation and the trustees of
the Avondale Industries, Inc., Employee Stock Ownership
Trust.(3)
(b) Registration Rights Agreement between the Company and
the participants in the Amended and Restated
Performance Share Plan (included in Exhibit 10.3(a)).
(c) License dated October 13, 1989, by and between the
Company and Intermarine S.p.A. relating to the license
of molded, glass-reinforced polyester hull construction
technology.(2)
(d) Stockholder Protection Rights Agreement dated as of
September 26, 1994, by and between Avondale
Industries, Inc. and Boatmen's Trust Company, as Rights
Agent.(16)
(e) Agreement by and between the Company and Bath Iron
Works Corporation, Subcontract for LPD-17 Class Work
dated June 23, 1996.(6)
(f) Agreement by and between the Company and Hughes
Aircraft Co., Subcontract for LPD-17 Class Work dated
June 23, 1996.(6)
(g) Cooperative Endeavor Agreement dated May 16, 1997, by
and among the Company, the State of Louisiana, Board of
Supervisors of Louisiana State University and
Agricultural and Mechanical College acting on behalf of
the University of New Orleans, and the University of
New Orleans Research and Technology Foundation,
Inc.(15)
10.9 Revolving Credit Agreement dated as of May 10, 1994 among
Avondale Industries, Inc., various financial institutions
signatory thereto ("the Banks") and Continental Bank N.A. as
the Agent for the Banks, and Amendment Nos. 1 and 2
thereto.(7)
(a) Third Amendment, Waiver and Consent to Revolving Credit
Agreement, dated May 10, 1995(10).
(b) Fourth Amendment and Consent to Revolving Credit
Agreement, dated September 1, 1995(10).
(c) Fifth Amendment to Revolving Credit Agreement, dated
November 17, 1995 (10)
(d) Sixth Amendment to Revolving Credit Agreement, dated
October 22, 1996.(6)
10.10 Amended and Restated Revolving Credit Agreement dated January
29, 1997, effective April 30, 1997, among Avondale Industries,
Inc., various financial institutions signatory thereto ("the
Banks") and Bank of America National Trust and Savings
Association as the Agent for the Banks, (without exhibits and
schedules).(15)
(a) First Amendment to Amended and Restated Revolving
Credit Agreement, dated March 14, 1997.
(b) Second Amendment to Amended and Restated Revolving
Credit Agreement, dated April 30, 1997.
(c) Third Amendment to Amended and Restated Revolving
Credit Agreement and Request for Release of Collateral,
dated October 24, 1997.
21 List of subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
__________
(1) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1993.
(2) Incorporated by reference from the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1991, as amended by Form 10-
K/A.
(3) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 33-20145) filed with the Commission on
February 16, 1988.
(4) Incorporated by reference from the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1993.
(5) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1995.
(6) Incorporated by reference from the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1996.
(7) Incorporated by reference from the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 33-27342) filed with the Commission on
March 6, 1989.
(9) Incorporated by reference from the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1990.
(10) Incorporated by reference from the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Registration Statement on
Form S-8 and Form S-3 (Registration No. 33-31984) filed with the
Commission on November 8, 1989.
(13) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
(14) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1994.
(15) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997.
(16) Incorporated by reference from the Company's Current Report on Form 8-
K filed with the Commission on September 30, 1994.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three month period
ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 23, 1998.
AVONDALE INDUSTRIES, INC.
By: /s/Albert L. Bossier, Jr.
-------------------------
Albert L. Bossier, Jr.
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and on the dates indicated.
Signature Title Date
------------------------- ------------------------ --------------
/s/Albert L. Bossier, Jr. Chairman of the Board, March 23, 1998
------------------------- President and Chief
Albert L. Bossier, Jr. Executive Officer
/s/Thomas M. Kitchen Vice President, Chief March 23, 1998
------------------------- Financial Officer,
Thomas M. Kitchen Corporate Secretary and
a Director
/s/Kenneth B. Dupont Vice President and a March 23, 1998
------------------------- Director
Kenneth B. Dupont
/s/Anthony J. Correro, III Director March 23, 1998
--------------------------
Anthony J. Correro, III
/s/Francis R. Donovan Director March 23, 1998
--------------------------
Francis R. Donovan
/s/Hugh A. Thompson Director March 23, 1998
--------------------------
Hugh A. Thompson
/s/Eugene K. Simon Vice President of March 23, 1998
-------------------------- Finance
Eugene K. Simon
EXHIBIT INDEX
Number Description
3.2 By-laws of the Company, as amended on November 3, 1997.
10.1 Contracts With The United States Navy
(l) Agreement dated September 3, 1993, by and between the
Company and the United States of America (Contract
No. N00024-93-C-2205) for the construction of one T-
AKR 300 Class Strategic Sealift ship, various
amendments and modifications nos. P00001, P00003 and
P00004(4), P00007 (7), P00019 (6) and modifications
P00025 and P00028 thereto.
10.3 Employee Benefit Plans
(c) The Company's Amended and Restated Employee Stock
Ownership Plan(7) and the related Amended and
Retated Trust Agreement(13) as further amended by:
Amendment No. 1 adopted April 5, 1995(5), Amendment
No. 2 adopted June 16, 1995(11), Amendment No. 3
adopted February 5, 1996(13), Amendment No. 4
adopted December 31, 1996(6), and Amendment No. 5
adopted December 30, 1997.
(d) The Company's Pension Plan as Amended and Restated
dated December 30, 1997.
(g) The Amended and Restated Avondale Services
Corporation Executive Group Insurance Benefits Plan
and Summary Plan Description specifying the excess
insurance benefits provided to the Company's
executive officers and certain other key personnel,
and a summary description of health, accidental
death and dismemberment, disability and life
insurance benefits made available to employees
dated October 14, 1997.
(j) The Company's 401(k) Plan as restated effective
September 20, 1996(6), as amended by Amendment No. 1
dated December 31, 1996(6) and Amendment No. 2 dated
December 30, 1997.
10.10 Amended and Restated Revolving Credit Agreement dated
January 29, 1997, effective April 30, 1997, among
Avondale Industries, Inc., various financial institutions
signatory thereto ("the Banks") and Bank of America
National Trust and Savings Association as the Agent for
the Banks, (without exhibits and schedules).(15)
(a) First Amendment to Amended and Restated Revolving
Credit Agreement, dated March 14, 1997.
(b) Second Amendment to Amended and Restated Revolving
Credit Agreement, dated April 30, 1997.
(c) Third Amendment to Amended and Restated Revolving
Credit Agreement and Request for Release of
Collateral, dated October 24, 1997.
21 List of subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
__________
(1) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1993.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, as
amended by Form 10-K/A.
(3) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-20145) filed with
the Commission on February 16, 1988.
(4) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(5) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1995.
(6) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
(7) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-27342) filed with
the Commission on March 6, 1989.
(9) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990.
(10) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(11) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1995.
(12) Incorporated by reference from the Company's Registration
Statement on Form S-8 and Form S-3 (Registration No. 33-31984)
filed with the Commission on November 8, 1989.
(13) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter endedMarch 31, 1996.
(14) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarterended March 31, 1994.
(15) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarterended June 30, 1997.
(16) Incorporated by reference from the Company's Current Report on
Form 8-K filed with the Commission on September 30, 1994.