AVONDALE INDUSTRIES INC, S-3/A, 1996-02-06

AVONDALE INDUSTRIES INC
S-3/A, 1996-02-06
SHIP & BOAT BUILDING & REPAIRING

Previous: CENTER BANKS INC, 8-K, 1996-02-06

Next: BSB BANCORP INC, 8-K, 1996-02-06

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1996.
REGISTRATION NO. 33-65267
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

----------------
AVONDALE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
5100 RIVER ROAD 39-1097012
LOUISIANA AVONDALE, LOUISIANA 70094 (I.R.S. EMPLOYER
(STATE OR OTHER (504) 436-2121 IDENTIFICATION NO.)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF REGTISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

ALBERT L. BOSSIER, JR.
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
AVONDALE INDUSTRIES, INC.
5100 RIVER ROAD
AVONDALE, LOUISIANA 70094
(504) 436-2121
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:
<TABLE>
<S> <C>
CURTIS R. HEARN ROBERT H. WHILDEN, JR.
JONES, WALKER, WAECHTER, VINSON & ELKINS L.L.P.
POITEVENT, CARRERE & DENEGRE, L.L.P. 2300 FIRST CITY TOWER
201 ST. CHARLES AVENUE 1001 FANNIN
NEW ORLEANS, LA 70170-5100 HOUSTON, TEXAS 77002-6760
(504) 582-8000 (713) 758-2222
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
[_]

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

----------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION

PROSPECTUS FEBRUARY 6 , 1996

3,000,000 SHARES

AVONDALE INDUSTRIES, INC.

LOGO
[Logo of Avondale Industries appears here]
COMMON STOCK
($1.00 PAR VALUE)

All of the 3,000,000 shares of Common Stock, $1.00 par value per share (the
"Common Stock"), of Avondale Industries, Inc. ("Avondale" or the "Company")
being offered hereby (the "Offering") are being sold by the Avondale
Industries, Inc. Employee Stock Ownership Plan (the "Selling Shareholder"). The
Company will not receive any of the proceeds from the sale of the shares of
Common Stock offered hereby. See "Selling Shareholder."

The Common Stock is traded on the Nasdaq National Market under the symbol
"AVDL." On January 18, 1996, the last reported sale price of the Common Stock
was $14.25 per share.

PROSPECTIVE PURCHASERS OF SHARES SHOULD CAREFULLY CONSIDER THE MATTERS SET
FORTH ON PAGE 7 UNDER THE CAPTION "RISK FACTORS."

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT SHAREHOLDER(1)
<S> <C> <C> <C>
Per Share............................. $ $ $
Total(2).............................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Selling Shareholder estimated at
$ . The expenses payable by the Company are estimated to be $ .
(2) The Selling Shareholder has granted to the Underwriters an option,
exercisable within 30 days of the date of this Prospectus, to purchase up
to 450,000 additional shares of Common Stock at the Price to Public, less
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Shareholder will be $ ,
$ and $ , respectively. See "Underwriting."

The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York,
or through the facilities of The Depository Trust Company, on or about ,
1996.

SALOMON BROTHERS INC JOHNSON RICE & COMPANY L.L.C.

The date of this Prospectus is , 1996
<PAGE>

THE USS HARPERS FERRY (LSD-49), DELIVERED TO THE U.S. NAVY IN NOVEMBER 1994.

THE EXXON BAYTOWN, DELIVERED TO EXXON IN AUGUST 1984.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus and in
the Consolidated Financial Statements, including the Notes thereto, and other
documents that are included elsewhere herein or incorporated herein by
reference. For descriptions of certain vessels and definitions of certain terms
used herein, see "Glossary of Selected Industry Terms" appearing elsewhere
herein. Unless otherwise indicated, the information in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised.

THE COMPANY

GENERAL

Avondale 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 has secured two large
commercial contracts in the past year for the construction or conversion of
double-hulled product carriers. Management believes the Company's low cost
structure, experienced and skilled work force, sophisticated construction
processes and extensive experience gained over the past 25 years 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, 1995, the Company's shipbuilding backlog (the "firm backlog") was
approximately $1.4 billion, exclusive of unexercised options aggregating $485
million held by the U.S. Navy for additional ship orders (including contract
escalation) and a commercial contract subject to financing. Of the firm
backlog, approximately $1.3 billion was attributable to contracts to build
ships for the U.S. Navy.

To assure that its shipyard remains among the most modern in the world,
Avondale regularly reviews and assesses its construction and production
processes. In the early 1980s, the Company was the first U.S. shipyard to
successfully implement modular construction techniques that had previously been
perfected by Japanese shipbuilders. Management believes these techniques were a
major factor in Japan's dominance of the commercial shipbuilding market during
the 1970s. Avondale obtained its modular construction capabilities and "know-
how" pursuant to an agreement with one of Japan's largest shipbuilders, which
worked with Avondale to change its manufacturing 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.

The Company has also embarked on a modernization program to enhance its
ability to build and deliver vessels at a lower cost. In 1994 the Company
entered into a technology sharing agreement with Astilleros Espanoles S.A.
("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 has built a covered facility that houses two production
lines dedicated to military vessels and two lines for commercial vessels.
Avondale believes that sheltering the production process and separating the
unit lines will enhance production efficiencies and lower unit production
costs.

The principal executive offices of the Company are located at 5100 River
Road, Avondale, Louisiana 70094 (telephone no. (504) 436-2121).

U.S. MILITARY OPPORTUNITIES

During the past 25 years, Avondale has built 72 vessels for the U.S. Navy and
other branches of the military, ranging from vessels such as AOs and T-AOs that
principally require large-scale steel fabrication at

3
<PAGE>

a competitive cost, to highly sophisticated vessels such as the T-AGS 45, the
LSD-CVs and the MHCs (with fiberglass hulls) that also require extensive
outfitting of electrical, command and control and weapons systems. U.S. Navy
vessels currently under construction include four TAKR 300 Class Sealift Ships,
three MHCs, two LSD-CVs, one T-AO and one Icebreaker. The Company anticipates
that it will continue to focus primarily on securing contracts to construct and
convert military vessels. See "Glossary of Selected Industry Terms."

Currently, Avondale's U.S. Navy bidding efforts are focused on the LPD-17,
for which approximately $974 million was recently appropriated for the
construction of the first of an anticipated 12 vessels. The LPD-17, which the
U.S. Navy has announced will be the next significant class of amphibious
vessels, will also be outfitted with sophisticated command and control systems,
as well as advanced ship-based weapon systems. In connection with its pursuit
of the LPD-17 contract, Avondale has announced an alliance with Bath Iron Works
Corporation ("Bath") (recently acquired by General Dynamics Corporation) and
Hughes Aircraft Company ("Hughes Aircraft"), a subsidiary of Hughes Electronics
Corporation, which it expects to finalize prior to submission of the LPD-17
contract bid. Under the alliance, Avondale would be the lead contractor, and
the LPD-17 vessels would be constructed at both the Avondale and Bath
shipyards, with Hughes Aircraft being responsible for integration of the ships'
electronic and weapon systems. Avondale believes that the formation of this
alliance, coupled with the Company's low cost structure and proven experience
in building vessels comparable to the LPD-17, such as the LSD-CVs, will enhance
the viability and competitiveness of its bid for the LPD-17 contracts. Although
funds for the construction of the first LPD-17 vessel have been appropriated as
part of the overall Department of Defense appropriations for 1996, the
President vetoed the original version of the FY1996 defense authorization bill.
Subsequently, Congress passed a revised version of the FY1996 defense
authorization bill which is currently awaiting action by the President. If the
President does not take action on this bill by February 10, 1996, it will
automatically become law. See "Risk Factors--Reliance on Major Customer."

In addition to the LPD-17, there are several other anticipated U.S. Navy
programs that may offer shipbuilding opportunities to Avondale, including the
possible construction of two additional Sealift vessels, a class of
prepositioning vessels for the U.S. Marine Corps, up to 14 ADC(X) vessels, and
the SC-21, which represents the next generation of surface combatant vessels.

COMMERCIAL OPPORTUNITIES

While Avondale focuses its efforts on pursuing U.S. Navy shipbuilding
contracts, it also pursues available commercial shipbuilding opportunities.
Federal legislation enacted since 1990 has significantly enhanced U.S.
commercial shipbuilding opportunities. The Oil Pollution Act of 1990 requires
the phased-in transition of single-hulled tankers and product carriers to
double-hulled vessels beginning January 1, 1995. 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 built in U.S. shipyards. In addition,
Avondale, along with other U.S. shipyards, has historically benefitted from the
Jones Act, which requires all vessels transporting products between U.S. ports
to be built by U.S. shipyards.

Within the past year, Avondale has secured two commercial contracts that
should benefit from the Company's expertise and newly adopted construction
techniques. In May 1995, Avondale finalized a $143.9 million contract to
construct four double-hulled forebodies for product carriers owned by American
Heavylift Shipping Company. Construction of these forebodies has already begun
and is expected to be completed by mid-1997. The Company has also signed a
contract with a U.S. shipping company for the construction of up to six (but
not less than four) double-hulled product carriers. This contract is subject to
the shipping company's ability to qualify for and receive a Title XI MARAD
financing guarantee. Assuming receipt of such guarantee, the contract calls for
delivery of the vessels by the end of 1998. See "Risk Factors" and "Business--
Overview--Reemergence of Commercial Shipbuilding."

4
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Selling Shareholder..... 3,000,000 shares
Shares outstanding before and after the Offering.... 14,464,175(1)
Nasdaq National Market Symbol....................... AVDL
Use of Proceeds .................................... The Company will not
receive any of the
proceeds from the sale
of the shares of Common
Stock offered hereby.
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding at December 31,
1995. Does not include 240,971 shares of Common Stock issuable upon
exercise of stock options (currently exercisable or exercisable within 60
days) granted under existing stock option plans.

SELLING SHAREHOLDER

The Selling Shareholder is the Avondale Industries, Inc. Employee Stock
Ownership Plan (the "ESOP"), which owns approximately 47.2% of the outstanding
shares of the Common Stock. After giving effect to the Offering, the Selling
Shareholder will own approximately 26.4% of the outstanding shares of the
Common Stock, or 23.3% if the Underwriters' over-allotment option is exercised
in full. See "Selling Shareholder."

5
<PAGE>

SUMMARY HISTORICAL FINANCIAL INFORMATION

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................. $ 456,724 $ 475,810 $ 576,308
Gross profit............................... 33,180 47,485 58,671
Income from operations..................... 3,400 16,949 26,548
Income (loss) from continuing operations... (5,233) 13,075 28,180
Net income (loss)(1)....................... (8,794) 8,523 28,180
Income (loss) per share of Common Stock
from continuing operations................ (0.36) 0.90 1.95
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 3,195 $ 15,414 $ 38,524
Property, plant and equipment-net.......... 125,542 119,161 130,038
Total assets............................... 302,139 273,503 316,727
Total debt................................. 88,719 51,741 65,655
Shareholders' equity....................... 114,355 122,878 151,058
OTHER FINANCIAL DATA:
EBITDA(2).................................. $ 15,210 $ 28,501 $ 36,367
OPERATING DATA:
Firm backlog............................... $1,268,000 $1,424,000 $1,413,000
</TABLE>
- --------
(1) Net income for the year ended December 31, 1995 includes a deferred income
tax benefit of $13.0 million ($.90 per share) attributable to certain net
operating loss carryforwards available to offset estimated future taxable
earnings.
(2) As used herein, EBITDA is income 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
as an indicator of the Company's operating performance or as an alternative
to cash flows as a better measure of the Company's liquidity.

6
<PAGE>

RISK FACTORS

RELIANCE ON MAJOR CUSTOMER

Avondale's business is primarily dependent upon the ship construction and
conversion programs of the U.S. Navy and the other branches of the military,
with over 90% of its $1.4 billion firm backlog at December 31, 1995 consisting
of contracts to build vessels for the U.S. Navy. With the continuing effort of
the federal government to reduce the federal budget deficit, there can be no
assurance that the shipbuilding and conversion programs currently in progress
will continue to be funded, or that those planned in the future by the U.S.
Navy and other branches of the U.S. military will be implemented. Any
significant reduction in the level of congressional appropriations for
shipbuilding programs would have a material adverse effect on Avondale.

The prospects of U.S. shipyards, including the Company, can be materially
affected by their success in securing significant contract awards. Currently,
Avondale's U.S. Navy bidding efforts are focused on the LPD-17, for which
approximately $974 million was recently appropriated for construction of the
first of an anticipated 12 vessels. Although funds for the construction of the
first LPD-17 vessel have been appropriated as part of the overall Department of
Defense appropriations for 1996, the President vetoed the original version of
the FY1996 defense authorization bill. Subsequently, Congress passed a revised
version of the FY1996 defense authorization bill which is currently awaiting
action by the President. If the President does not take action on this bill by
February 10, 1996, it will automatically become law. However, there is no
guarantee that the Department of Defense will fund the projects for which
appropriations were made. Furthermore, there can be no assurance that Avondale
will be awarded, assuming the appropriated funds are released, the initial LPD-
17 contract or that Congress will appropriate funds for any additional LPD-17
vessels. It is also possible that the U.S. Navy may allocate the vessels
between competing bidders, or that it may delay implementation of the
construction program. With a substantial portion of Avondale's current firm
backlog scheduled for completion by 1998, it is important that Avondale be a
successful bidder for all or a substantial portion of the LPD-17 vessels or
other U.S. Navy or commercial work if it is to maintain its current level of
shipbuilding activity beyond 1998. See "Business--Overview--U.S. Military."

PROFIT RECOGNITION; GOVERNMENT CONTRACTING

Similar to other companies principally engaged in long-term construction
projects, Avondale recognizes profits under the percentage of completion method
of accounting, with profit recognition commencing when progress under the
contract is sufficient to estimate final results with reasonable accuracy.
Because contract profit recognition is dependent upon reliable estimates of the
costs to complete such contract, profits recognized upon completion of the
contract may be significantly less than anticipated, or the Company may incur a
loss with respect to such contract, if it proves necessary to revise such cost
estimates. Moreover, Avondale's principal U.S. government business is currently
being performed under fixed-price or fixed-price incentive contracts, which
wholly or partially shift the risk to Avondale of construction costs that
exceed the contract price. In certain circumstances, the Company may submit
Requests for Equitable Adjustment ("REAs") to the U.S. Navy seeking adjustments
to the contract prices to compensate the Company when it incurs costs for which
it does not believe it is responsible. Although the Company pursues REAs and
all other contractual disputes vigorously, there is no assurance that the U.S.
Navy will resolve the REAs or any of these disputes in a manner favorable to
the Company. 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. See "Business--Shipbuilding."

COMPETITION AND REGULATION

The reduced level of shipbuilding activity by the U.S. government during the
past decade has significantly increased competition. With respect to the market
for U.S. military contracts, there are

7
<PAGE>

principally five private U.S. shipyards, including Avondale, that compete for
contracts to construct or convert surface vessels. Three of these companies are
subsidiaries of corporations that have substantially greater resources than
Avondale. 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. With respect to the international commercial shipbuilding market,
Avondale competes with numerous shipyards in several countries. See "Business--
Competition."

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. Currently,
Avondale's commercial shipbuilding opportunities are materially dependent on
certain U.S. laws and regulations, including (i) the Jones Act, which requires
that all vessels transporting products between U.S. ports be constructed by
U.S. shipyards, (ii) 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, and (iii) the 1993 amendments to the loan
guarantee program under Title XI of the Merchant Marine Act, 1936 which permit
the U.S. government to guarantee loan obligations of foreign vessel owners for
foreign-flagged vessels built in U.S. shipyards. In connection with U.S.
efforts to implement a 1994 multilateral agreement designed in part to
eliminate government subsidies to commercial shipbuilders, Congress is
currently considering legislation that would eliminate the competitive
advantages afforded to U.S. shipyards under the 1993 amendments to the Title XI
guarantee program. In addition, 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 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. See
"Business--Overview--Reemergence of Commercial Shipbuilding."

LABOR MATTERS

Although none of the Company's employees is unionized, the National Labor
Relations Board (the "NLRB") is currently reviewing a 1993 election held among
certain of the Company's New Orleans area employees. Challenged ballots in
numbers sufficient to determine the outcome of the election remain uncounted
awaiting the NLRB's decision, although the union did receive a majority of the
unchallenged ballots. The Company has filed objections with the NLRB seeking to
have the election set aside. If the NLRB upholds the election and certifies the
union, and that decision is not overturned 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 other working
conditions. 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. See "Business--
Employees."

ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local environmental laws
and regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the transportation, storage and
disposal of toxic and hazardous wastes. Stringent fines and penalties may be
imposed for non-compliance 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. See
"Business--Environmental and Safety Matters."

8
<PAGE>

SELECTED 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, 1995. The data for each of the fiscal years in the
five-year period ended December 31, 1995 are derived from the consolidated
financial statements of the Company and its subsidiaries. The consolidated
financial statements as of December 31, 1994 and 1995, and for each of the
years in the three-year period ended December 31, 1995, and the report of
Deloitte & Touche LLP thereon, have been included in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1991 1992 1993(2) 1994(2) 1995(2)
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:(1)
Continuing operations:
Net sales.............. $768,887 $576,384 $ 456,724 $ 475,810 $ 576,308
Gross profit (loss).... (30,090) 37,796 33,180 47,485 58,671
Income (loss) from
operations............ (119,842) 7,281 3,400 16,949 26,548
Net ESOP
contribution(5)....... 24,000 8,141 -- -- --
Income (loss) from
continuing operations. (139,173) (11,321) (5,233) 13,075 28,180
Income (loss) from
discontinued
operations............. (1,705) 104 (3,561) (4,552) --
Net income
(loss)(3)(4)(6)........ (140,878) (11,217) (8,794) 8,523 28,180
Income (loss) per share
of Common Stock:
Continuing operations.. (9.64) (0.78) (0.36) 0.90 1.95
Discontinued
operations............ (0.12) -- (0.25) (0.31) --
Total.................. (9.76) (0.78) (0.61) 0.59 1.95
Cash dividends per share
of Common Stock(7)..... -- -- -- -- --
BALANCE SHEET DATA:
Current assets.......... $199,815 $177,075 $ 151,597 $ 127,936 $ 173,593
Current liabilities..... 127,522 113,917 127,032 93,100 92,605
Total assets............ 383,670 346,196 302,139 273,503 316,727
Long-term debt.......... 110,009 90,469 43,848 45,875 60,593
Total liabilities....... 257,528 223,047 187,784 150,625 165,669
Shareholders' equity.... 126,142 123,149 114,355 122,878 151,058
OTHER FINANCIAL DATA:
EBITDA(8)............... $(49,395) $ 19,599 $ 15,210 $ 28,501 $ 36,367
OPERATIONAL DATA:
Firm backlog............ $921,400 $678,000 $1,268,000 $1,424,000 $1,413,000
</TABLE>
- --------
(1) Income statement data for years 1991 through 1993 have been restated to
present Avondale's service contracting subsidiary as discontinued
operations (see Note 5 of the Notes to Consolidated Financial Statements).
(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, (i) proceeds received by the Company from
the settlements of REAs in December 1993 and December 1995 and (ii) the
impact of revisions of estimated profits on several previously completed
shipbuilding contracts in 1994.
(3) During 1991, the Company revised its estimated costs to complete certain
contracts which had the effect of decreasing net income by approximately
$69.0 million, or $4.78 per share.
(4) During 1991, the Company revised its estimate of the continuing value and
future benefits of goodwill. Accordingly, the Company reduced the carrying
value of goodwill which had the effect of decreasing net income for 1991
by $57.6 million, or $3.99 per share.
(5) The amounts reflected as Net ESOP contributions for 1991 and 1992 reflect
contributions made by the Company to the ESOP, all of which were returned
to the Company as repayments of indebtedness owed by the ESOP to the
Company incurred in connection with the purchase by the ESOP of the Common
Stock of the Company in 1985. Although these contributions were charged
against income, they had no net effect on Shareholders' equity.
(6) Net income for the year ended December 31, 1995 includes a deferred income
tax benefit of $13.0 million ($.90 per share) attributable to certain net
operating loss carryforwards available to offset estimated future taxable
earnings.
(7) The Company does not currently pay cash dividends on its Common Stock.
(8) 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 as a measure of the Company's operating performance or as an
alternative to cash flows as a better measure of the Company's liquidity.
For 1991, EBITDA does not include a $57.6 million write-down of goodwill.

9
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Avondale's
Consolidated Financial Statements and the Notes thereto.

OVERVIEW

The Company's results of operations improved substantially during fiscal 1995
compared to the prior year. Net sales were 21% above the level recorded in 1994
while income from continuing operations before income taxes increased 78% from
the amount reported for fiscal year 1994. Further, 1995 net income more than
tripled that of 1994.

The Company's firm backlog at December 31, 1995 was approximately $1.4
billion exclusive of unexercised options aggregating $485 million held by the
U.S. Navy for additional ship orders (including contract escalation) and a
commercial contract subject to financing. Firm backlog includes several
contracts awarded in 1995 with the most significant occurring in December 1995,
when the U.S. Navy exercised a previously awarded option to construct an
additional Sealift ship for approximately $206 million (or more than $235
million after considering certain additional components and cost escalation).
The exercise of this option represents the fourth ship which the Company has
been awarded in the Sealift program. The U.S. Navy holds options for two
additional Sealift ships that are exercisable over the next two years.

Other 1995 contract awards include a $143.9 million contract finalized in May
1995 to construct four double-hulled forebodies for product carriers and a
$25.9 million contract to construct a series of river hopper barges.
Construction of the forebodies has begun and is expected to be completed by
mid-1997. In 1995 the Company also signed a contract with a U.S. shipping
company for the construction of up to six (but not less than four) double-
hulled product carriers. This contract is subject to the shipping company's
ability to qualify for and receive a Title XI MARAD financing guarantee.
Assuming receipt of such guarantee, the contract calls for delivery of the
vessels by the end of 1998.

The Company previously disclosed that it had filed a REA with the U.S. Navy
related to the four MHCs currently under contract with the Company (the
"Minehunter REA"). On December 29, 1995 the Company announced that it settled
the Minehunter REA for an amount that was consistent with the previously
recorded estimate of the amount recoverable under the Minehunter REA. The
settlement should enable the Company to complete the MHC program on a break-
even basis through the remainder of contract performance. The first of the four
MHCs was delivered to the U.S. Navy in August 1995, with the remaining three
ships scheduled for completion and delivery during 1996 and early 1997.

With the exception of the contracts to construct the four MHCs and the three
LSD-CVs, which are projected to be completed on essentially a break-even basis
through the remainder of contract performance, the Company's committed backlog
is projected to be completed profitably. The operating profit projected for
1996 will be related principally to the LSD-CV 52, the T-AO and the Sealift
ship contracts, while profits projected for 1997 and 1998 will reflect the LSD-
CV 52 as well as the Sealift, Icebreaker and double-hulled forebodies
contracts. The Company records profits under the percentage-of-completion
method of accounting based on direct labor charges. 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 diminished if the
Company is required in the future to revise its estimate of the cost to
complete one or more of such contracts.

As discussed further in Note 10 of the Notes to Consolidated Financial
Statements, the Company was informed that it was a potentially responsible
party ("PRP") in connection with an oil reclamation site in Walker, Louisiana
operated by an unaffiliated company. The Company, along with other PRPs, has
fully funded its share of the clean-up costs incurred to date under a
preliminary cost-sharing agreement to fund

10
<PAGE>

the site's remediation. As of December 31, 1995, clean-up costs totaled $17
million, of which the Company has contributed $3.6 million. Additional work
scheduled for the site includes completion of studies in 1996, and, if required
by the results of these studies, subsequent post-closure activities (e.g.,
ground water monitoring or remediation). The Company believes that its
proportionate share of expenditures for any additional remedial work will not
have a material adverse effect on the Company's financial statements. In
addition, the Company believes that its proportionate responsibility for the
clean-up costs will not be materially changed.

Since July 1986, a number of "toxic tort" suits have been filed against the
Company and numerous other defendants alleging claims for personal injury,
property damage, and "fear of cancer" in connection with the reclamation site
discussed above. The plaintiffs also sought substantial punitive damages. These
cases were consolidated and certified as a class action. In 1995, the Judge for
the Federal District Court for the Western District of Louisiana issued a
ruling from the bench approving the Company's settlement of the class action
lawsuit. Based on the advice of its counsel, the Company believes that a
written order confirming its earlier bench ruling will be issued by the Federal
District Court in the near future. Under the terms of the court approved
settlement, which is subject to appeal following issuance of the final written
order, the Company paid $4.0 million cash into a settlement fund in the third
quarter of 1995, using cash from operations, and issued a $2.0 million
unsecured note to the plaintiff class. The note bears interest at 8% per annum
and is due on January 28, 1997. The Company had previously recorded an accrual
sufficient to provide for the $6.0 million settlement and has sufficient
liquidity to fund the note. The Company could also be responsible for payment
to the plaintiffs of up to an additional $6.0 million (plus interest at 8% per
annum) if the plaintiffs are unsuccessful in collecting certain claims under
Avondale's insurance policies that have been assigned to the plaintiff class
under the settlement agreement. With respect to the potential contingent
liability of the Company to pay additional sums under the settlement agreement,
management believes that the eventual resolution of this matter will not have a
material adverse effect on the Company's results of operations, financial
position or cash flows. See Note 10 of the Notes to Consolidated Financial
Statements.

As previously disclosed, certain of the Company's operations closed in 1994
with the completion of their respective contracts. Two of these facilities are
currently offered for sale while the Company continues to seek alternative uses
for these facilities. With respect to these properties, 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

1995 VS. 1994. The Company recorded net income of $28.2 million, or $1.95 per
share, for 1995 compared to $8.5 million, or $0.59 per share, for 1994
representing a threefold increase in net income over the prior year. The 1995
net income includes a $4.4 million, or $0.30 per share, net income tax benefit
(discussed below). Also included in 1995 net income is $4.5 million, or $0.31
per share, which is a reduction of a previously recognized loss which was
recorded in prior years on the contract to construct three LSD-CVs. The
reduction was due primarily to a revision of the total estimated contract cost
as it nears completion. Included in net income for 1994 are a $3.5 million, or
$0.24 per share, net gain related to revisions of estimated contract profits on
several previously completed shipbuilding contracts and a loss from
discontinued operations of $4.6 million, or $0.31 per share, reflecting the
Company's decision in 1994 to discontinue its service contracting business.

The significant increases in the Company's operating results in 1995
primarily reflect increased operating profits recognized on the LSD-CV 52
contract, as well as the reversal of part of a previously recognized loss on
the contract to construct three LSD-CVs, and the recognition of operating
profit on the T-AO contract. Also contributing to the increase in operating
results for 1995 were profits recorded by the Company's marine repair and
wholesale steel operations and an increase in interest income primarily
resulting from an increase in the Company's invested cash balances.

The Company's net sales in 1995 increased $100.5 million, or 21%, as compared
to the prior year. The increase in 1995 net sales was due primarily to
increases in sales revenues recognized on the contracts to

11
<PAGE>

construct the first three Sealift ships, the forebodies for four double-hulled
product tankers, the LSD-CV 52 and the Icebreaker, which collectively accounted
for 54% of the Company's 1995 net sales revenue. The increase in net sales was
partially offset by reductions in sales revenues recognized on the contracts to
construct the T-AOs (the fifth and sixth of which were delivered in 1995),
three LSD-CVs (the second of which was delivered in 1995) and four MHCs (the
first of which was delivered in 1995), as these contracts approach completion.
The contracts to construct the T-AOs, three LSD-CVs, and four MHCs collectively
accounted for 28% of the Company's 1995 net sales revenue.

Gross profit for 1995 increased $11.2 million, or 24%, compared to 1994. The
increase in 1995 gross profit was primarily due to profits recognized on the
contract to construct the LSD-CV 52 as the percentage of completion was
sufficient to begin profit recognition in 1995.

Selling, general and administrative ("SG&A") expenses increased $1.6 million,
or 5%, for 1995 compared to 1994. The overall increase in SG&A expenses
primarily reflected increased operating activity at the Company's main shipyard
and, in part, an increase in indirect labor and associated costs resulting from
a wage increase given in January 1995 to all employees. These increases in SG&A
expenses were partially offset by a decrease in SG&A expenses resulting from
the closing of certain subsidiary operations.

Interest expense increased by $457,000, or 10%, in 1995 as compared to 1994.
The increase was due principally to interest expense associated with the $17.8
million Title XI financing completed in February 1995 (as discussed below),
$36.3 million of Series 1994 industrial revenue bonds (see Note 4 of the Notes
to Consolidated Financial Statements) and a note issued as part of a litigation
settlement (discussed in Note 10 of the Notes to Consolidated Financial
Statements). These increases were partially offset by an increase in interest
capitalized on assets under construction relating primarily to the
modernization project.

The Company's 1995 operating results include a net income tax benefit of $4.4
million, or $0.30 per share. As further discussed in Note 7 of the Notes to
Consolidated Financial Statements, the net income tax benefit is principally
the result of recognizing, for financial reporting purposes, a $13 million
income tax benefit from certain net operating loss carryforwards available to
offset estimated future taxable earnings. The $13 million tax benefit was
partially offset by an income tax provision of $8.6 million related to 1995
operating results. There was a minor provision for income taxes in the same
period in 1994 as an income tax benefit related to available net operating loss
carryforwards was recognized only to the extent of then current operating
results. The further recognition of any remaining available tax benefit
(approximately $9.5 million) will depend on future assessments of estimated
taxable income.

During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" and Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." These statements are effective for fiscal 1996. Management
believes that implementation of these new accounting standards will not have a
material impact on the Company's financial statements.

1994 VS. 1993. The Company recorded income from continuing operations of
approximately $13.1 million, or $0.90 per share, for the year ended December
31, 1994 compared to a loss of approximately $5.2 million, or $0.36 per share,
for 1993. The improvement in the Company's 1994 income from continuing
operations principally reflects net gains of approximately $3.5 million, or
$0.24 per share, related to revisions of estimated contract profits on several
previously completed shipbuilding contracts, increases in operating income at
the Company's marine repair, wholesale steel and boat building operations and a
reduction in interest expense. The decrease in interest expense was due
primarily to the Company's repayment in early 1994 of balances owed on its
previously outstanding revolving credit facilities and senior notes. The
repayment of these debt obligations was made possible by the successful
resolution and settlement of the Company's REAs in December 1993.

In the third quarter of 1994 the Company decided to discontinue its service
contracting subsidiary formed in 1990 to pursue large-scale service contracts
with government and commercial operations. The

12
<PAGE>

Company concluded that managerial and financial resources devoted to service
contracting could be more productively invested in the Company's core marine
construction operations. As a result, the operating results for 1994 and prior
years are reported as discontinued operations (see Note 5 of the Notes to
Consolidated Financial Statements). The Company recorded a loss from
discontinued operations of approximately $4.6 million (including estimated
costs related to a contract termination), or $0.31 per share, for the year
ended December 31, 1994 and has restated prior year results to reflect a loss
from discontinued operations of approximately $3.6 million, or $0.25 per share,
for the year ended December 31, 1993.

The Company's net sales from continuing operations in 1994 increased
approximately $19.1 million, or 4.2%, compared to the prior year. The increase
in 1994 net sales was due primarily to increases in sales revenues recognized
on the contracts to construct the fourth LSD-CV, the contracts to construct the
three gaming vessels (two of which were delivered in 1994) and the start-up of
the first Sealift ship. These increases in sales were partially offset by
reductions in sales revenues recognized on the contracts to construct the three
LSD-CVs (the first of which was delivered in 1994), the T-AOs (the fourth of
which was delivered in 1994) and the four MHCs, as these contracts approached
completion. Additionally, the Company experienced reduced sales revenues in
1994 associated with the T-AGS 45 contract, which was delivered in 1993, and at
its Avondale Gulfport Marine, Inc. ("AGM") and Genco Industries, Inc. ("Genco")
operations. AGM delivered its last LCAC in June 1993, and Genco completed its
remaining construction contracts in August 1994. The contracts to construct the
four LSD-CVs, the four MHCs and the seven T-AOs collectively accounted for
approximately 69% of the Company's 1994 net sales revenue.

Gross profit for 1994 increased approximately $14.3 million, or 43%, compared
to 1993. The increase in 1994 gross profit was primarily due to profits
recognized on the contract to construct the seven T-AOs and revisions of
contract profits on several previously completed shipbuilding contracts. Also
contributing to the 1994 gross profit were profits recognized on the two gaming
vessels delivered in 1994 and profits recognized by the Company's marine repair
and wholesale steel operations.

SG&A expenses increased by approximately $756,000, or 2.5%, for 1994 compared
to 1993. The overall increase in SG&A expenses primarily resulted from
increased operating activity at the Company's main shipyard and a wage increase
given in January 1994 to all employees. This increase in SG&A expenses was
partially offset by a decrease in SG&A expenses resulting from the closing of
the AGM and Genco operations.

Interest expense decreased by approximately $4.4 million, or 50%, in 1994
compared to 1993. The decrease was due to the reduction in the Company's
overall level of debt, which decreased by approximately $37 million, or 41.7%,
at December 31, 1994 as compared to December 31, 1993. See "--Liquidity and
Capital Resources."

The Company recorded a $300,000 provision for income taxes in 1994 while no
provision was recorded in 1993 due to the loss from operations. See Note 7 of
the Notes to Consolidated Financial Statements for further discussion.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents totaled $38.5 million at December 31,
1995 compared to $15.4 million at December 31, 1994. The Company's principal
sources of cash in 1995 consisted of $28 million of funds provided by
operations, $3.2 million of proceeds from the sale of assets and $17.8 million
from long-term borrowings (both of which are discussed below). The Company's
primary uses of cash in 1995 consisted of $21.3 million of capital
expenditures, principally representing the plant modernization project, and
payment of long-term borrowings of $5.9 million.

In February 1995 the Company completed financing of its approximately $20
million plant modernization effort by issuing $17.8 million of mortgage bonds
utilizing a Title XI MARAD financing guarantee. The terms of the Title XI
guarantee provide for the bond proceeds to be held in escrow and released to
the Company as allowable project costs are incurred by the Company and approved
by MARAD.

13
<PAGE>

At December 31, 1995, $17.4 million of these bond proceeds had been released to
the Company. The Company has recorded project costs to date of $20.1 million of
which $17.3 million were incurred in 1995. Outstanding purchase commitments on
the project at December 31, 1995 were $741,000.

In the second quarter of 1995 the Company obtained additional liquidity as
its improved financial condition enabled it to amend its revolving credit
agreement. The amendment, among other things, increased the amount available
under the credit agreement to $42.5 million and extended its term to May 1997.
Further, the amendment permitted the issuance of the Title XI mortgage bonds
and revised the level of permitted capital expenditures and certain coverage
ratios to take into consideration the plant modernization project. While there
have been no borrowings in 1995 under the revolving credit agreement, there are
$25.4 million of letters of credit outstanding under the facility at December
31, 1995. See Note 4 of the Notes to Consolidated Financial Statements.

In connection with the year-end settlement of the Minehunter REA, the Company
submitted invoices totaling approximately $30.7 million to the U.S. Navy. The
Company expects that these invoiced amounts will be collected in full during
the first quarter of 1996.

As previously disclosed, in May 1995 the Company sold substantially all of
the operating assets used in its foundry operations. The sale generated $3.2
million of cash proceeds and did not significantly affect the Company's results
of operations.

The Company believes that its liquidity and capital resources will be
sufficient to finance current and projected operations.

14
<PAGE>

BUSINESS

OVERVIEW

Avondale 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 has secured two large
commercial contracts in the past year for the construction or conversion of
double-hulled product carriers. Management believes the Company's low cost
structure, experienced and skilled work force, sophisticated construction
processes and extensive experience gained over the past 25 years 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, 1995, the Company's firm backlog was approximately $1.4 billion
exclusive of unexercised options aggregating $485 million held by the U.S. Navy
for additional ship orders (including contract escalation) and a commercial
contract subject to financing. Of the firm backlog, approximately $1.3 billion
was attributable to contracts to build ships for the U.S. Navy.

During the past 25 years, Avondale has built over 72 vessels for the U.S.
Navy and other branches of the military, ranging from vessels such as AOs and
T-AOs that principally require large-scale steel fabrication at a competitive
cost, to highly sophisticated vessels such as the T-AGS 45, the LSD-CVs and the
MHCs (with fiberglass hulls) that also require extensive outfitting of
electrical, command and control and weapons systems. U.S. Navy vessels
currently under construction include four Sealift ships, three MHCs, two LSD-
CVs, one T-AO and one Icebreaker. The Company anticipates that it will continue
to focus primarily on securing contracts to construct and convert military
vessels. See "Glossary of Selected Industry Terms."

Within the past year, Avondale has secured two commercial contracts that
should benefit from the Company's expertise and newly adopted construction
techniques. In May 1995, Avondale finalized a $143.9 million contract to
construct four double-hulled forebodies for product carriers owned by American
Heavylift Shipping Company. Construction of these forebodies has begun and is
expected to be completed by mid-1997. The Company has also signed a contract
with Maritrans Ocean Transport, Inc. ("Maritrans") for the construction of up
to six (but not less than four) double-hulled product carriers. This contract
is subject to Maritrans' ability to qualify for and receive a Title XI MARAD
financing guarantee. Assuming receipt of such guarantee, the contract calls for
delivery of the vessels by the end of 1998.

Background. Avondale has historically maintained a flexible, versatile
shipyard and 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 was 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 vessels, 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 vessels 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

15
<PAGE>

related to, or 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 16 T-AOs, five LSDs, four LSD-CVs, five AOJs (which
constituted conversions of AOs previously built by Avondale), one T-AGS 45, 15
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
substantially reduced, 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 restore its backlog, which
efforts have also been bolstered by Avondale's experience in building vessels
comparable to those currently in demand.

U.S. Military. Included in the current firm backlog for the military are
contracts to construct four Sealift ships at an original contract price of $880
million. The Sealift ships, which 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 Company has been awarded options to construct two additional
Sealift vessels for an additional $485 million in the aggregate (including
contract escalation), which options have not yet been exercised by the U.S.
Navy. The first Sealift ship is scheduled for delivery in 1998 with the final
ship (assuming exercise by the U.S. Navy of the remaining Sealift options)
scheduled for delivery in 2001.

The award of the Sealift contract was one of a series of significant military
contract awards received by the Company since the beginning of 1993. In 1993,
the Company was awarded a $232.5 million contract for the construction of the
Icebreaker for the U.S. Coast Guard (scheduled for delivery in 1998) and a
contract to build one LSD-CV for the U.S. Navy at a contract price of $257.5
million. The 1994 LSD-CV award brought the total number of LSD-CV contracts
awarded to the Company to four, with two of the vessels having been delivered
to date, and the final two vessels scheduled for delivery in 1996 and 1998,
respectively. See "Glossary of Selected Industry Terms" and "--Shipbuilding--
Vessel Deliveries and Backlog."

In early 1994 Avondale was one of five U.S. shipyards awarded a contract to
undertake a preliminary design study on the U.S. Navy's LPD-17 (formerly LX)
ship. The U.S. Navy has stated its expectation that the LPD-17 vessels will be
a mainstay of the U.S. Navy over the next two decades, replacing a number of
vessels nearing the end of their useful lives. In November 1995, Congress
appropriated $974.0 million for the construction of the first of an anticipated
12 vessels under the LPD-17 program. The LPD-17, which the U.S. Navy has
announced will be the next significant class of amphibious vessels, will be
outfitted with sophisticated command and control systems, as well as ship-based
weapon systems. The Company believes that the U.S. Navy will award a contract
for the first LPD-17, together with options for two additional vessels, in mid-
1996.

In connection with its pursuit of the LPD-17 contract, Avondale has announced
an alliance with Bath and Hughes Aircraft. Under the alliance, which Avondale
expects to finalize prior to submission of the LPD-17 contract bid, Avondale
would be the lead contractor, and the LPD-17 vessels would be constructed in
both the Avondale and Bath shipyards, with Hughes Aircraft being responsible
for integration of the ships' electronic and weapons systems. More recently,
Ingalls Shipbuilding, a subsidiary of Litton Industries, announced that it had
formed an alliance with Tenneco's Newport News Shipbuilding, National Steel and
Shipbuilding Company and Lockheed Martin Government Electronic Systems to
pursue the same contract. Avondale believes that the formation of its alliance
with Bath and Hughes Aircraft, coupled with the Company's low cost structure
and proven experience in building vessels comparable to the LPD-17, such as the
LSD-CVs, will enhance the viability and competitiveness of the Company's bid
for the LPD-17 contracts.

If Avondale is the successful bidder for the first LPD-17 contract, in order
to satisfy the terms of the contract, it will be required to make a significant
capital investment, to provide for, among others, the

16
<PAGE>

enhancement of its computer-aided design capabilities and installation of
sophisticated computer-based data systems, which are necessary for completing
the LPD-17.

Although funds for the construction of the first LPD-17 vessel have been
appropriated as part of the overall Department of Defense appropriations for
1996, the President vetoed the original version of the FY1996 defense
authorization bill. Subsequently, Congress passed a revised version of the
FY1996 defense authorization bill which is awaiting action by the President. If
the President does not take action on this bill by February 10, 1996, it will
automatically become law. See "Risk Factors--Reliance on Major Customer."

Reemergence of Commercial Shipbuilding. 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. Most of the commercial ships built in the
United States since 1981 have been constructed primarily due to the Jones Act
requirement that all vessels transporting products between U.S. ports be
constructed by U.S. shipyards. However, two recent legislative initiatives have
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, has created a demand (that is expected to continue through the
remainder of the decade) 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 construction 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 commercial
shipbuilding opportunities for U.S. shipyards.

Management believes these initiatives have assisted Avondale in attracting
commercial shipbuilding opportunities during the past year. In May of 1995, the
Company finalized a $143.9 million contract to construct four double-hulled
forebodies for product carriers owned by a U.S. shipping company. These double-
hulled product carriers are the first U.S.-flag product carriers built in the
United States in eight years. The contract is supported by a Title XI guarantee
by MARAD. Construction of the forebodies has already begun and is expected to
be completed by mid-1997. Avondale believes its receipt of this contract was
further assisted by its prior experience in constructing three double-hulled T-
AOs on behalf of the U.S. Navy.

In November 1995, the Company signed a contract with Maritrans for the
construction of up to six (but not less than four) double-hulled product
carriers. This contract is subject to Maritrans' ability to qualify for and
receive a Title XI MARAD financing guarantee. Assuming receipt of such
guarantee, the contract calls for delivery of the vessels by the end of 1998.
These U.S.-flag vessels will comply with all requirements of the Oil Pollution
Act of 1990 and will engage in transportation of petroleum products between
U.S. ports under the Jones Act.

17
<PAGE>

Recently, bills have been 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 12 years. In mid-December 1995, the Trade Subcommittee of the
Ways and Means Committee of the U.S. House of Representatives passed a bill
seeking to implement the OECD Agreement. The bill has not yet been considered
by the full House Ways and Means Committee or by any Committee of the U.S.
Senate. If this bill is 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 remain 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.

The OECD Agreement is not expected to immediately diminish commercial
opportunities arising under the Oil Pollution Act of 1990 and the Jones Act.
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.

Technological Innovations. To assure that its shipyard remains among the most
modern in the world, Avondale regularly reviews and assesses its construction
and production process. In this regard, Avondale often consults with other
highly successful shipbuilding companies concerning advances in shipbuilding
technology. In the early 1980s, the Company was the first U.S. shipyard to
successfully implement modular construction techniques that had previously been
perfected by Japanese shipbuilders. Management believes these techniques were a
major factor in Japan's dominance of the commercial shipbuilding market during
the 1970s. Avondale obtained its modular construction capabilities and "know-
how" pursuant to an agreement with Ishikawajima-Harima Heavy Industries Co.,
Ltd. ("IHI"), one of Japan's largest shipbuilders, which worked with Avondale
to change its manufacturing 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.

18
<PAGE>

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 has built a covered facility that houses two production
lines dedicated to military vessels and two lines for commercial vessels.
Avondale believes that sheltering the production process and separating the
unit lines will enhance production efficiencies and lower 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, the assembly-line process implemented by the Company's new
production facility should particularly benefit Avondale's efforts to remain an
efficient, low-cost commercial shipbuilder. In addition, the Company's recent
experience in constructing U.S. naval vessels that are primarily transport
vessels, such as the Sealift and the LSD-CV, can be beneficially applied to the
construction of large-scale commercial product carriers.

SHIPBUILDING

The Company is predominantly engaged in the design, construction, conversion,
repair and modernization of various types of military and commercial vessels.

The main shipyard facility, which is located on a 257-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 shipyard, which is used primarily for boat construction and repair,
and its Algiers shipyard, which is used primarily for the repair and overhaul
of ocean-going vessels.

The Company has been and 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, 1995 was comprised of new
military construction. Commercial new construction increased in 1995,
principally due to the construction of the four forebodies for American
Heavylift Shipping Company and the construction of the river hopper barges.

DISTRIBUTION OF MARINE CONSTRUCTION AND REPAIR WORK

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. MILITARY:
New construction................................ 72% 87% 88% 81% 80%
Repair, overhaul and conversion................. 13% 6% 2%
COMMERCIAL:
New construction................................ 10% 2% 6% 11% 16%
Repair, overhaul and conversion................. 5% 5% 4% 8% 4%
--- --- --- --- ---
TOTAL: 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>

The percentage of new construction for the U.S. Navy in 1995 was virtually
unchanged from 1994. Commercial repair, overhaul and conversion decreased in
1995 as compared to 1994 as the Company's work

19
<PAGE>

on several contracts with a private contractor for the repair of 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 and fixed-price incentive
contracts. Under fixed-price contracts, the contractor retains all cost savings
on completed contracts but is also liable for the full amount of all cost
overruns for which it is responsible. Fixed-price incentive contracts, on the
other hand, 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, such 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. Recent
contract awards for the Sealift vessels, the fourth LSD-CV and the Icebreaker
are each fixed-price incentive contracts.

All contracts for the construction and conversion of U.S. Navy vessels are
subject to competitive bidding. As a safeguard to anti-competitive bidding
practices, the U.S. Navy has recently 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 then re-
evaluates the bids by using the higher of the bidder's and 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 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.

20
<PAGE>

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. 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, 1995, the Company had a firm
backlog of shipbuilding contracts of approximately $1.4 billion (exclusive of
unexercised options aggregating $485.0 million held by the U.S. Navy for
additional ship orders (including contract escalation) and a commercial
contract subject to financing), compared with backlogs of $1.4 billion at
December 31, 1994 and $1.3 billion at December 31, 1993. The backlog at
December 31, 1995 included $40.0 million to complete the one remaining T-AO out
of the seven awarded in the initial contract; $140.0 million to complete two of
the four LSD-CV vessels that were awarded (two of which were delivered in
1995); $240.0 million related to the Icebreaker under a contract awarded in
1993; and $880.0 million related to four Sealift ships, under contracts awarded
in 1993, 1994 and 1995. Also included in the firm backlog at December 31, 1995
was $35.0 million to complete three MHCs out of the four contracted for by the
U.S. Navy. The first MHC has already been delivered. Currently two of the MHCs
are scheduled for delivery in 1996 and one in 1997. In addition, Avondale has
recently signed two commercial shipbuilding contracts, one of which is subject
to the shipping company's ability to qualify for and receive a Title XI MARAD
financing guarantee.

All major U.S. Navy contracts in the backlog, except for the contract to
construct three LSD-CVs and the last three T-AOs, contain cost escalation
clauses that are intended to compensate the Company for increases in wage rates
and material costs based on industry indices. The contract to construct the
three LSD-CVs and the last three T-AOs, as originally awarded, contained a cost
escalation clause, but as part of the contract modifications the contracts were
converted to fixed-price contracts.

Vessel deliveries in 1994 and 1995 included three T-AOs, two LSD-CVs, one MHC
and three gaming vessels. 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 also 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--Reemergence of 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.

21
<PAGE>

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. As noted in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in order to focus on its core
shipbuilding business and improve liquidity, the Company sold or discontinued
certain of its non-core operations. 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 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 turbine compressors and turbine generators, 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 bridges and a hydroelectric power plant that was floated up
the Mississippi River and installed in Vidalia, Louisiana in 1990. In January
1992, the Company delivered to the City of New York an 800-bed floating
detention facility that is 625 feet long, 125 feet wide, and five stories high.

Avondale's modular construction division has not engaged in any significant
projects since the floating detention center was delivered in the early 1990s.
Although at present there is a minimal level of production activity in this
division, Avondale will continue to pursue non-shipbuilding marine and
industrial-commercial projects suitable for modular construction as attractive
opportunities arise.

Small Vessel Construction. The Company pursues available opportunities for
the construction of special purpose vessels, and relatively small, special
purpose military vessels, commercial fishing boats, dredges, barges, and
ferries.

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. In 1994, the Boat Division delivered two gaming vessels which
are 266 and 210 feet in length, and in mid-1995 the division delivered a third
gaming vessel which is 350 feet in length. The Boat Division has also recently
signed a $26 million contract to construct river hopper barges for Ingram Ohio
Barge Company. The Boat Division is actively pursuing other projects, involving
the construction of additional gaming boats as well as passenger vessels and
ferries, towboats and other vessels. The Boat Division's backlog at December
31, 1995, 1994 and 1993 was approximately $18.8 million, $18.3 million and
$13.0 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. Net sales to other Avondale divisions are
not significant. Sales to unrelated parties for the years ended December 31,
1995, 1994 and 1993 were approximately $28.2 million, $22.4 million and $19.0
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.

22
<PAGE>

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 significantly intensified competition. 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. Three of these companies are subsidiaries of much larger corporations
that have substantially greater resources than Avondale.

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 "--Overview--Reemergence of
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. 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 boatbuilding 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.

23
<PAGE>

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 10 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

Since September 1985, when all of its outstanding Common Stock was purchased
by the ESOP from Ogden Corporation, Avondale has been owned principally by its
current and former employees. At December 31, 1995, Avondale had approximately
5,300 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 NLRB and union organizers on a
variety of grounds. Although the union did receive a majority of the
unchallenged ballots, challenged ballots (which remain under seal) in numbers
sufficient to determine the outcome of the election remain uncounted awaiting
the NLRB's decision. The Company has filed objections with the NLRB seeking to
have the election set aside. The NLRB is currently reviewing the challenged
votes and evaluating the Company's objections to the election. The hearing
officer assigned to the case has recommended to the NLRB that certain of the
disputed votes be counted and that the Company's objections be rejected. If the
NLRB upholds the election and certifies the union, and that decision is not

24
<PAGE>

overturned 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 other working conditions. Even though Avondale will
only agree 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. Although the Company disputes these claims and is
waging a vigorous defense, if there is a finding against the Company, depending
on the facts of each case, the employee 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 financial condition, results of
operations or cash flows.

25
<PAGE>

MANAGEMENT

The following table sets forth certain information regarding the executive
officers and directors of Avondale.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Albert L. Bossier, Jr.......................... 63 Chairman of the Board,
Chief Executive Officer
and President
Thomas M. Kitchen.............................. 48 Vice President, Chief
Financial Officer,
Secretary and a Director
Kenneth B. Dupont.............................. 57 Vice President and a
Director
Vice Admiral Francis R. Donovan (Retired, USN). 61 Director
William A. Harmeyer............................ 75 Director
Anthony J. Correro, III........................ 54 Director
Hugh A. Thompson............................... 60 Director
</TABLE>

Albert L. Bossier, Jr. has been a director of the Company since 1985 and
Chairman of the Board, President and Chief Executive Officer of the Company
since March 1987. From September 1985 until his appointment as President and
CEO, Mr. Bossier was Executive Vice President of the Company and President of
its Shipyards Division, and from 1978 until September 1985, he was President of
Avondale Shipyards, Inc. when it was a wholly-owned subsidiary of Ogden
Corporation.

Thomas M. Kitchen has been the Vice President, Chief Financial Officer,
Secretary and a director of the Company since March 1987. From September 1985
until March 1987, he was Vice President and Chief Financial Officer of the
Shipyards Division of the Company, and from 1979 until September 1985, he was
Controller of Avondale Shipyards, Inc. when it was a wholly-owned subsidiary of
Ogden Corporation.

Kenneth B. Dupont has been a director and Vice President of the Company since
March 1987.

Vice Admiral Francis R. Donovan (Retired, USN), who has been a director of
the Company since August 1994, was in active duty with the U.S. Navy, most
recently as Commander Military Sealift Command until August 31, 1992. Since
September 1992, he has served as a consultant to various companies on maritime
issues, and since November 1994 he has also served as Strategic Mobility
Coordinator for PRC Inc.

William A. Harmeyer has been a director of the Company since 1993. Mr.
Harmeyer retired from the Company in 1986. From 1978 until his retirement, Mr.
Harmeyer served as Shipyard Division, Group Vice President--Production.

Anthony J. Correro, III has been a director of the Company since 1988. For
more than five years prior to June 1994, Mr. Correro was a partner in the law
firm of Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. Since
June 1994 he has been a partner in the law firm of Correro, Fishman & Casteix,
L.L.P.

Hugh A. Thompson, who has been a director of Avondale since 1988, is a
Professor at Tulane University's School of Engineering. From 1976 to 1991 Mr.
Thompson was the Dean of the School of Engineering, Tulane University.

On January 19, 1996, the Company entered into change in control agreements
with its executive officers, Albert L. Bossier, Jr., Thomas M. Kitchen and
Kenneth B. Dupont. The agreements provide for the payment of certain benefits
upon an involuntary or constructive termination of the officers' employment,
except for cause, within three years following a change in control. Benefits
payable under the agreements include three times salary plus bonus, continued
health and life insurance benefits for three years after termination and
accelerated vesting under the Company's supplemental retirement plans.

26
<PAGE>

SELLING SHAREHOLDER

All of the 3,000,000 shares of Common Stock offered hereby are being sold by
the ESOP. The ESOP owns 6,822,349 shares of Common Stock, or 47.2% of the
outstanding Common Stock, and after completion of the Offering the ESOP will
own 3,822,349 shares of Common Stock, or 26.4% of the outstanding Common Stock
(3,372,349 shares, or 23.3%, if the Underwriters' over-allotment option is
exercised in full). The ESOP Trustees are Blanche S. Barlotta, R. Dean Church
and Rodney J. Duhon, Jr., all three of whom are officers of the Company, with
one on medical leave.

The ESOP will bear the expenses of the registration of the shares of Common
Stock offered hereby, other than Avondale's legal and accounting fees and
related costs. The expenses to be paid by the Company and the ESOP for the
registration of the shares of Common Stock offered hereby are estimated at
$100,000 and $140,000, respectively.

27
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is authorized to issue 30,000,000 shares of Common Stock, $1.00
par value, and 5,000,000 shares of Preferred Stock, $1.00 par value. As of
December 31, 1995, the Company had 14,464,175 shares of Common Stock issued and
outstanding and 240,971 shares reserved for issuance upon the exercise of
options that are currently exercisable or will be exercisable within 60 days.
No shares of Preferred Stock are outstanding, but 1,000,000 shares of Preferred
Stock have been designated Participating Preferred Stock under the Stockholder
Protection Rights Agreement (the "Rights Agreement"), which is described
further below. Generally, all holders of Common Stock are entitled to one vote
for each share of Common Stock held of record on all matters on which
shareholders are entitled to vote. Subject to any dividend or liquidation
preferences that may be accorded to the holders of any shares of Preferred
Stock that may be issued in the future, holders of Common Stock are entitled to
dividends at such times and in such amounts as the Board of Directors shall
determine. Holders of shares of Common Stock have no preemptive, subscription,
cumulative voting, conversion or redemption rights, and the Common Stock is not
subject to mandatory redemption by the Company.

CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS

Certain provisions of the Articles and By-laws and certain Louisiana
statutes, which are described below, may have the effect, either alone, in
combination with each other and the Rights Agreement, or with the existence of
authorized but unissued capital stock, of making more difficult or discouraging
an acquisition of the Company deemed undesirable by the Board of Directors.

Classified Board of Directors. The Articles and By-laws divide the members of
the Board of Directors who are elected by the holders of the Common Stock into
three classes serving three-year staggered terms.

Advance Notice of Intention to Nominate a Director. The Articles and By-laws
permit a shareholder to nominate a person for election as a director only if
written notice of such shareholder's intent to make the nomination, including
such information regarding the nominee as would be required to be included in
the Company's proxy statement, has been given to the Secretary of the Company,
generally no less than 45 days or more than 90 days prior to the meeting. Any
shareholder nomination that fails to comply with these requirements may be
disqualified.

Supermajority and Fair Price Provisions. The Company's Articles contain
certain provisions designed to provide safeguards for shareholders when a
Related Person (as defined below) attempts to effect a Business Combination (as
defined below) with the Company. In general, a Business Combination between the
Company and a Related Person must be approved by the Board of Directors prior
to the time the Related Person became a Related Person unless certain minimum
price and procedural requirements are satisfied. Furthermore, a Business
Combination must be approved by the affirmative vote of 80% of the total voting
power excluding the voting power of all voting securities beneficially owned by
the acquiring entity, at a shareholders' meeting called for that purpose. The
Business Combination also must be approved by the vote of the holders of any
class or series of the Company's stock otherwise required by law or the
Articles. These provisions may be amended only by the affirmative vote of 80%
of the total voting power excluding the voting power of all voting securities
beneficially owned by any Related Person.

For purposes of these provisions, a "Related Person" is defined as any person
or entity, or any group of persons or entities acting in concert, that is the
beneficial owner, directly or indirectly, of 10% or more of the total voting
power of the Company, other than the Company, any wholly-owned subsidiary of
the Company, any employee stock ownership or other employee benefit plan of the
foregoing, or any trustee of, or fiduciary with respect to, any such plan when
acting in such capacity. The term "Business Combination" is generally defined
to include, among other transactions, any merger, consolidation, sale of all or
substantially all of the assets of the Company, reclassification,
recapitalization, liquidation plan or similar transaction, all as defined
further in the Company's Articles.

28
<PAGE>

Shareholders' Right to Call Special Meeting. The Articles and By-laws provide
that a special shareholders' meeting may be called by a shareholder or group of
shareholders holding in the aggregate at least 80% of the Company's total
voting power.

Removal of Directors; Filling Vacancies on Board of Directors. The Articles
and By-laws provide that any director elected by holders of the Common Stock
may be removed, only for cause (as defined by the Articles and By-laws) by a
vote of not less than 80% of the total voting power at any meeting of
shareholders called for such purpose. Subject to certain limitations, the
Articles and By-laws also provide that any vacancies on the Board of Directors
(including any resulting from an increase in the authorized number of
directors) may be filled by the affirmative vote of at least two-thirds of the
entire Board, provided that the shareholders have the right, at any special
meeting called for that purpose prior to such action by the Board, to fill the
vacancy.

Adoption and Amendment of By-laws. The Articles and By-laws provide, subject
to certain limitations, that By-laws may be adopted only by a majority of the
entire Board of Directors. Generally, By-laws may be amended or repealed only
by (i) a majority of the entire Board of Directors (except any amendment to or
repeal of a by-law concerning the removal of a director, which requires an
affirmative vote of at least three quarters of the entire Board of Directors)
or (ii) the affirmative vote of the holders of at least 80% of the total voting
power at any shareholders' meeting the notice of which states that the
amendment or repeal is to be considered at the meeting.

Special Shareholder Voting Requirements. Under certain conditions relating to
the presence of a Related Person, an amendment to the Articles must be approved
by the affirmative vote of at least 80% of the total voting power. When there
is no Related Person, an amendment generally must be approved by the
affirmative vote of a majority of the voting power present at a shareholders'
meeting, unless otherwise specifically provided in the Articles.

Consideration of Tender Offers and Other Extraordinary Transactions. As
permitted by Louisiana law, the Articles expressly authorize the Board of
Directors, when considering a tender offer, exchange offer, merger or
consolidation, to consider, among other factors, the social and economic
effects of the proposal on the Company and its employees, customers, creditors
and the communities in which it does business.

Limitation of Liability and Indemnification. The Articles provide that to the
fullest extent permitted by Louisiana law, no director or officer of the
Company will be liable to the Company or to its shareholders for monetary
damages for breach of his or her fiduciary duty as a director or officer. These
provisions of the Articles may only be amended by the affirmative vote of at
least 80% of the total voting power and any amendment or repeal may not
adversely affect any limitation of liability of a director or officer with
respect to action or inaction occurring prior to the amendment or repeal. The
Company's By-laws provide that the Company will indemnify to the full extent
permitted by law any person made or threatened to be made a party to any
action, suit or proceeding by reason of the fact that such person is or was a
director, officer or employee of the Company or served at the request of the
Company as a director, officer or employee of any other enterprise.

Louisiana Control Share Acquisition Statute. The Louisiana Control Share
Acquisition Statute provides that any shares acquired by a person or group (an
"Acquiror") in an acquisition that causes such person or group to have the
power to direct the exercise of voting power in the election of directors in
excess of 20%, 33 1/3% or 50% thresholds will have only such voting power as
shall be accorded by (i) the holders of a majority of all shares other than
"interested shares," as defined below, and (ii) a majority of the total voting
power. "Interested shares" include all shares as to which the Acquiror, any
officer of the Company and any director of the Company who is also an employee
of the Company may exercise or direct the exercise of voting power. The statute
permits the articles of incorporation or by-laws of a company to exclude from
the statute's application acquisitions occurring after the adoption of the
exclusion. As of December 31, 1995, the Company's Articles and By-laws did not
contain such an exclusion.

29
<PAGE>

Louisiana Fair Price Protection Statute. The Articles provide that the
Company claims the benefits of the Louisiana Fair Price Protection Statute,
provided that the statute will not apply to any business combination, as
defined in such statute, involving the Company's ESOP.

The Louisiana Fair Price Protection Statute requires that any "business
combination" (defined to include a merger, consolidation, share exchange,
certain asset distributions and certain issuances of securities) with a
shareholder who is the beneficial owner of 10% or more of the voting power of
the outstanding voting stock of the Company (an "interested shareholder"), or
an affiliate of an interested shareholder, be recommended by the Board of
Directors. Additionally, the business combination must be approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by
outstanding shares of voting stock of the Company voting together as a single
voting group, and (ii) two-thirds of the votes entitled to be cast by holders
of voting stock other than voting stock held by the interested shareholder who
is, or whose affiliate is, a party to the business combination or an affiliate
or associate of the interested shareholder, voting together as a single group.
These votes are not required if certain minimum price, form of consideration
and procedural requirements are satisfied by the interested shareholder, or if
the Board approves the business combination before the interested shareholder
becomes such.

Louisiana Employee Benefit Plan Protection Statute. Sections 130 through
130.2 of the Louisiana Business Corporation Law may have the effect of
deterring a takeover of a Louisiana corporation with a large pension plan such
as the Company's ESOP. While the statute has not been interpreted by a court,
it may impose liability on any person responsible for losses suffered by an
employee benefit fund as a result of transactions occurring during a two-year
period following a change in the majority voting ownership of a Louisiana
corporation.

SHAREHOLDER RIGHTS PLAN

In September 1994, the Board of Directors of Avondale declared a distribution
of one preferred stock purchase right (a "Right") for each outstanding share of
Common Stock held of record at the close of business on October 10, 1994 (the
"Record Time"), or issued thereafter, subject to the terms of the Rights
Agreement. Each Right currently entitles the registered holder to purchase from
the Avondale one one-hundredth of a share of Participating Preferred Stock,
$1.00 par value ("Participating Preferred Stock"), for $32.00 (the "Exercise
Price"), subject to adjustment. The Rights are represented by the Common Stock
certificates and are exercisable only after an entity acquires 15% or more of
the outstanding Common Stock or commences a tender offer that will result in
the entity owning 15% or more of the Common Stock. After an entity acquires 15%
or more of the outstanding Common Stock, each Right would then entitle the
holder (other than the acquiring entity) to purchase, at the exercise price,
the number of shares of Common Stock or other securities of Avondale (or, in
certain situations, the acquiring entity) having a market value of twice the
Right's exercise price. The Rights will expire on October 10, 2004 (the
"Expiration Time") unless earlier redeemed by Avondale, as described below.
Until a Right is exercised, the holder, as such, will have no rights as a
shareholder of Avondale, including without limitation, the right to vote or to
receive dividends.

The Board of Directors of the Company may, at its option, at any time prior
to the close of business on the Flip-in Date, redeem all (but not less than
all) the then outstanding Rights at a price of $.01 per Right (the "Redemption
Price"), as provided in the Rights Agreement. Immediately upon the action of
the Board of Directors of the Company electing to redeem the Rights, without
any further action and without any notice, the right to exercise the Rights
will terminate and each Right will thereafter represent only the right to
receive the Redemption Price in cash for each Right so held.

The Rights will not prevent a takeover of the Company. However, the Rights
may cause substantial dilution to a person or group that acquires 15% or more
of the Common Stock unless the Rights are first redeemed by the Board of
Directors of the Company. The Rights are intended to encourage any person
desiring to acquire a controlling interest in the Company to do so through a
transaction negotiated with the

30
<PAGE>

Company's Board of Directors rather than through a hostile takeover attempt.
The Rights are intended to assure that any acquisition of control of the
Company will be subject to review by the Board to take into account, among
other things, the interests of all the Company's shareholders.

LIMITATION ON FOREIGN OWNERSHIP OF COMMON STOCK

Certain federal statutes dictate that contractors undertaking work for the
U.S. military maintain a certain percentage of U.S. citizen ownership. The
Company believes that it is currently in compliance with such statutes but has
not to date adopted charter provisions or other corporate governance measures
that have been adopted by other public companies having similar foreign
ownership restrictions that are intended to assure that such thresholds are not
exceeded. Following completion of the offering, a lower percentage of the
Company's Common Stock will be held by the ESOP, increasing the possibility
that the percentage of foreign ownership could exceed federal statutory
limitations. The Company may in the future consider proposing to its
shareholders amendments to the Company's Articles to impose restrictions on
foreign ownership as well as granting the Company certain rights to institute
remedial action in the event the foreign ownership limit is exceeded.

31
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement,
the Selling Shareholder has agreed to sell to each of the Underwriters named
below (the "Underwriters"), and each of the Underwriters for whom Salomon
Brothers Inc and Johnson Rice & Company L.L.C. are acting as representatives
(the "Representatives") has severally agreed to purchase from the Selling
Shareholder, the number of shares of Common Stock set forth opposite its name
below:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Salomon Brothers Inc.....................................
Johnson Rice & Company L.L.C.............................
---------
Total.................................................... 3,000,000
=========
</TABLE>

In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all 3,000,000 shares
of Common Stock offered hereby if any such shares of Common Stock are
purchased. In the event of a default of any Underwriter, the Underwriting
Agreement provides that, in certain circumstances, purchase commitments of the
non-defaulting Underwriter may be increased or the Underwriting Agreement may
be terminated. The Selling Shareholder has been advised by the Representatives
that the several Underwriters propose initially to offer such shares of Common
Stock at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to other dealers. After
the initial offering, the public offering price and such concessions may be
changed.

The Selling Shareholder has granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 450,000 additional shares of Common Stock at the public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriters may exercise such option to cover over-allotments
in the sale of the shares of Common Stock that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriter's initial
commitment.

Upon completion of the Offering, the ESOP will be the recordholder of
3,822,349 shares or 26.4% of the Company's outstanding Common Stock (3,372,349
shares, or 23.3%, if the Underwriters' over-allotment is exercised in full).
The shares of Common Stock that will continue to be held by the ESOP will be
eligible for resale under Rule 144 or otherwise. The Company and the Selling
Shareholder have agreed not to offer, sell or contract to sell, or otherwise
dispose of, or announce the offering of, any shares of Common Stock, or any
securities convertible into, or exchangeable for, shares of Common Stock,
except the shares of Common Stock offered hereby, for a period of 120 days from
the date of this Prospectus, without the prior written consent of Salomon
Brothers Inc; provided, however, that the Company may issue and sell Common
Stock pursuant to its existing benefit plans or existing stock option
(including restricted stock) plans, the conversion of existing securities, or
pursuant to the Company's Rights Agreement and provided further, that the ESOP
may sell shares if the ESOP committee in good faith determines that its
fiduciary duties require it to sell such shares.

The Underwriting Agreement provides that the Company and the Selling
Shareholder will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.

32
<PAGE>

In connection with the Offering certain Underwriters and selling group
members who are qualifying registered market makers on the Nasdaq National
Market may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market in accordance with Rule 10b-6A under the Securities
Exchange Act of 1934, during the two business day period before commencement of
offers or sales of the Common Stock offered hereby. Passive market making
transactions must comply with certain volume and price limitations and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for the security, and if all
independent bids are lowered below the passive market maker's bid, then such
bid must be lowered when certain purchase limits are exceeded.

LEGAL MATTERS

Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., New Orleans,
Louisiana, will render an opinion that under the Louisiana Business Corporation
Law the shares of Common Stock offered hereby have been duly authorized and
validly issued and are fully paid and non-assessable.

Vinson & Elkins L.L.P., Houston, Texas, will pass upon certain legal matters
for the Underwriters and Sonnenschein Nath & Rosenthal, New York, New York,
will pass upon certain legal matters for the Selling Shareholder.

EXPERTS

The consolidated financial statements of Avondale Industries, Inc. and
subsidiaries as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995 included in this Prospectus, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is included herein, and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.

AVAILABLE INFORMATION

The Company has filed a Registration Statement on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), pertaining
to the Common Stock covered by this Prospectus. This Prospectus omits certain
information and exhibits included in the Registration Statement, copies of
which may be obtained upon payment of a fee prescribed by the Commission or may
be examined free of charge at the principal office of the Commission in
Washington, D.C.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed with the
Commission by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at Seven World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Company's Common Stock is listed on the Nasdaq National
Market (Symbol: AVDL).

33
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are by this reference incorporated in
and made a part of this Prospectus: (i) the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1995 (File No. 0-16572); and (ii) the
description of the Company's capital stock and associated Rights set forth in
its amendments to its Registration Statement under the Exchange Act on Form 8-
A/A filed with the Commission on December 21, 1995 and September 30, 1994,
respectively.

All reports and other documents subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the Offering shall be deemed to be
incorporated by reference herein and to be part of this Prospectus from their
respective dates of filing. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded to the extent that a statement contained herein or in any other
document subsequently filed which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.

The Company hereby undertakes to provide without charge to each person to
whom this Prospectus is delivered, upon a written or oral request, a copy of
any or all of the documents that are incorporated herein by reference (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed to
Avondale Industries, Inc., Attention: Thomas M. Kitchen, Chief Financial
Officer, 5100 River Road, Avondale, Louisiana 70094 (Telephone: (504) 436-
2121).

34
<PAGE>

GLOSSARY OF SELECTED INDUSTRY TERMS

<TABLE>
<C> <S>
ADC(X) A class of auxiliary vessels designed to deliver a steady supply 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 currently under construction at
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 AOJs.
Icebreaker WAGB-20 Polar Icebreaker, which has been ordered by the U.S. Coast
Guard for its polar operations.
Jones Act Merchant Marine Act of 1920, as amended.
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 Gulfport facility. Avondale has built
15 LCACs.
LPD-17 The next class of amphibious assault ship proposed by the U.S.
Navy.
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 of more
cargo and only 2 LCACs. Avondale has built four LSD-CVs.
MARAD United States Maritime Administration, Department of
Transportation.
MHC MHC-51 class fiberglass coastal minehunter. Avondale has built four
MHCs.
REAs Requests for Equitable Adjustments submitted by a government
contractor to the U.S. government, as explained further under the
heading "Risk Factors."
SC-21 "Surface Combatant 21st Century," the next generation of surface
combatant to be built for the U.S. Navy. As currently conceived,
this vessel would most closely resemble the Aegis class destroyer.
SL 7 A "Roll on Roll off" vessel operated by a private company for the
Military Sealift Command. 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
four Sealift vessels with options to build an additional two
vessels.
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.
</TABLE>

35
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995.............. F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995...................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1994
and 1995................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>

F-1
<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, 1994 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Avondale Industries, Inc. and
subsidiaries at December 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.

/s/ Deloitte & Touche LLP
-------------------------------------
DELOITTE & TOUCHE LLP

New Orleans, Louisiana
January 19, 1996

F-2
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1994 1995
- ------ -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 15,414 $ 38,524
Receivables (Note 2)...................................... 84,510 93,184
Inventories (Note 3)...................................... 16,109 15,289
Deferred tax assets (Note 7).............................. 4,100 23,650
Prepaid expenses and other current assets................. 7,803 2,946
-------- --------
Total current assets...................................... 127,936 173,593
-------- --------
Property, Plant and Equipment (Note 4):
Land...................................................... 9,324 9,161
Buildings and improvements................................ 47,979 59,991
Machinery and equipment................................... 174,694 182,547
-------- --------
Total..................................................... 231,997 251,699
Less accumulated depreciation............................. (112,836) (121,661)
-------- --------
Property, plant and equipment--net........................ 119,161 130,038
-------- --------
Goodwill--net (Note 7).................................... 15,431 8,637
Deferred tax assets--net (Note 7)......................... 7,000 --
Other assets.............................................. 3,975 4,459
-------- --------
TOTAL ASSETS............................................ $273,503 $316,727
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt (Note 4)............. $ 5,866 $ 5,062
Accounts payable.......................................... 60,917 65,517
Accrued employee compensation............................. 12,948 10,777
Other..................................................... 13,369 11,249
-------- --------
Total current liabilities................................. 93,100 92,605
Long-term debt (Note 4)................................... 45,875 60,593
Other liabilities and deferred credits.................... 11,650 12,471
-------- --------
Total liabilities......................................... 150,625 165,669
-------- --------
Commitments and Contingencies (Notes 6 and 10)
SHAREHOLDERS' EQUITY (Note 9):
Common stock, $1.00 par value; authorized--30,000,000
shares; issued--15,927,191 shares in 1995 and 1994....... 15,927 15,927
Additional paid-in capital................................ 373,911 373,911
Accumulated deficit....................................... (255,104) (226,924)
-------- --------
Total..................................................... 134,734 162,914
Treasury stock (1,463,016 shares in 1995 and 1994) at
cost..................................................... (11,856) (11,856)
-------- --------
Total shareholders' equity................................ 122,878 151,058
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $273,503 $316,727
======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Net sales (Note 2)............................... $456,724 $475,810 $576,308
Cost of sales.................................... 423,544 428,325 517,637
-------- -------- --------
Gross profit..................................... 33,180 47,485 58,671
Selling, general and administrative expenses..... 29,780 30,536 32,123
-------- -------- --------
Income from operations........................... 3,400 16,949 26,548
Interest expense................................. (8,769) (4,385) (4,842)
Other--net....................................... 136 811 2,074
-------- -------- --------
Income (Loss) from continuing operations before
income taxes.................................... (5,233) 13,375 23,780
Income taxes (Note 7)............................ -- 300 (4,400)
-------- -------- --------
Income (Loss) from continuing operations......... (5,233) 13,075 28,180
-------- -------- --------
DISCONTINUED OPERATIONS (NOTE 5):
Loss from discontinued operations................ (3,561) (1,909) --
Disposal costs................................... -- (2,643) --
-------- -------- --------
Loss from discontinued operations................ (3,561) (4,552) --
-------- -------- --------
NET INCOME (LOSS)................................ $ (8,794) $ 8,523 $ 28,180
======== ======== ========
Income (Loss) per share of common stock (Note 9):
Continuing operations............................ $ (0.36) $ 0.90 $ 1.95
Discontinued operations.......................... (0.25) (0.31) --
-------- -------- --------
INCOME (LOSS) PER SHARE OF COMMON STOCK.......... $ (0.61) $ 0.59 $ 1.95
======== ======== ========
Weighted average number of shares outstanding.... 14,464 14,464 14,464
======== ======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
STOCK CAPITAL DEFICIT STOCK EQUITY
------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993................... $15,927 $373,911 $(254,833) $(11,856) $123,149
Net (loss).............. ( 8,794) (8,794)
------- -------- --------- -------- --------
BALANCE, DECEMBER 31,
1993................... 15,927 373,911 (263,627) (11,856) 114,355
Net income.............. 8,523 8,523
------- -------- --------- -------- --------
BALANCE, DECEMBER 31,
1994................... 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
======= ======== ========= ======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $(8,794) $ 8,523 $28,180
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 11,810 11,552 9,819
Deferred income tax benefit...................... -- -- (5,900)
Gain on sale of assets........................... -- -- (813)
Change in operating assets and liabilities, net
of dispositions:
Receivables.................................... 16,634 45,542 (9,674)
Inventories.................................... 189 (2,500) 296
Prepaid expenses and other current assets...... 653 (1,251) 3,429
Accounts payable............................... (4,476) 4,120 4,600
Accrued employee compensation.................. (248) 596 (2,171)
Other--net..................................... 1,098 2,546 229
------- ------- -------
Net cash provided by operating activities.......... 16,866 69,128 27,995
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (2,863) (5,120) (21,290)
Proceeds from sale of assets....................... 9,467 -- 3,248
Change in restricted short-term investments--net... -- (1,811) 1,243
Payment to former corporate parent (Note 4)........ -- (5,000) --
------- ------- -------
Net cash provided by (used for) investing
activities........................................ 6,604 (11,931) (16,799)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term borrowings.................... (27,888) (81,228) (5,866)
Proceeds from issuance of long-term borrowings
(Note 4).......................................... -- 36,250 17,780
------- ------- -------
Net cash provided by (used for) financing
activities........................................ (27,888) (44,978) 11,914
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... (4,418) 12,219 23,110
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 7,613 3,195 15,414
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 3,195 $15,414 $38,524
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest (net of amounts capitalized).............. $ 8,659 $ 4,537 $ 5,255
======= ======= =======
Income taxes paid.................................. $ 945
=======
Noncash investing and financing activities:
Note issued in litigation settlement (Note 10)..... $ 2,000
=======
Note issued to former corporate parent............. $ 8,000
=======
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE>

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 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 (see Note 2).
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" ("SFAS 107"), 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 (consisting
of cash and cash equivalents, short-term investments, receivables, payables,
certain accrued liabilities and long-term debt) approximate fair values.

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:

<TABLE>
<CAPTION>
TYPE PERIOD
---- -----------
<S> <C>
Machinery and equipment.......... 3-20 years
Buildings and improvements....... 15-40 years
</TABLE>

F-7
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 1993 and 1994 were not material.
Interest costs capitalized in fiscal 1995 approximated $1.2 million.

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, 1994 and 1995 amounted to $73.7
million and $74.5 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 effect 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.

New Accounting Standards

During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS
121 establishes accounting standards for recording the impairment of long-lived
assets, certain identifiable intangibles, goodwill, and assets to be disposed
of. The Company is required to adopt SFAS 121 effective for fiscal 1996.
Management believes that the implementation of SFAS 121 will not have a
material impact on the Company's financial statements.

During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123, which the Company is required to adopt
effective for fiscal 1996, provides guidance relating to the recognition,
measurement and disclosure of stock-based compensation. Management believes
that the implementation of SFAS 123 will not have a material impact on the
Company's financial statements.

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.

F-8
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. RECEIVABLES

Receivables consisted of the following at December 31, 1994 and 1995 (in
thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Long-term contracts:
U.S. Government:
Amounts billed............................................. $13,754 $30,151
Unbilled costs, including retentions, and estimated profits
on contracts in progress.................................. 48,254 41,119
------- -------
Total...................................................... 62,008 71,270
Commercial:
Amounts billed............................................. 7,568 4,364
Unbilled costs, including retentions, and estimated profits
on contracts in progress.................................. 10,914 12,312
------- -------
Total from long-term contracts............................. 80,490 87,946
Trade and other current receivables............................ 4,020 5,238
------- -------
Total.......................................................... $84,510 $93,184
======= =======
</TABLE>

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,
approximately $5.1 million is expected to be collected in 1996 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 1993,
1994 and 1995 account for approximately 79%, 77% and 74% of the net sales,
respectively.

Costs and estimated profits (losses) on contracts in progress at December
31, 1994 and 1995 were as follows (in thousands):

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Costs incurred on contracts in progress................. $2,177,750 $2,668,388
Estimated profits recognized............................ 25,634 49,287
Reserve for anticipated contract losses................. (39,000) (34,500)
---------- ----------
Total................................................... 2,164,384 2,683,175
Less billings to date................................... (2,108,384) (2,643,912)
---------- ----------
Net value of contracts in progress...................... $ 56,000 $ 39,263
========== ==========
</TABLE>

Net value of contracts in progress was comprised of the following amounts (in
thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Unbilled costs and estimated profits on contracts in progress
(included in receivables)................................... $59,168 $53,431
Billings in excess of costs and estimated profits on
contracts in progress (included in accounts payable)........ (3,168) (14,168)
------- -------
Total........................................................ $56,000 $39,263
======= =======
</TABLE>

F-9
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The reserve for anticipated contract losses of $39.0 million and $34.5
million included in the net value of contracts in progress at December 31, 1994
and 1995, respectively, is related to certain U.S. Navy contracts which are
presently scheduled for delivery at varying dates into 1997. The reserve
decreased in 1995 when the Company recorded a $4.5 million reduction of a
previously recognized loss due primarily to a revision of the total estimated
contract cost as it nears completion.

The Company filed a Request for Equitable Adjustment ("Minehunter REA") with
the U.S. Navy seeking substantial increases in the contract prices related to
four MHC-51 Class Minehunters currently under contract. The Company believes
that the additional costs addressed by the Minehunter REA resulted from
defective ship specifications provided to the Company that proved impossible to
perform at the original cost estimate developed by the Company. In December
1995, the Company settled the Minehunter REA for $23 million, which
approximates the previously recorded estimate of the amount recoverable. This
should enable the Company to complete the MHC program on a break-even basis
through the remainder of contract performance. In connection with the
settlement of the Minehunter REA in December 1995, the Company submitted
invoices totalling $30.7 million to the U.S. Navy, which includes certain
contractual cost sharing and cost escalation provisions which obligate the U.S.
Navy to bear a portion of the additional costs. The Company expects that these
amounts will be collected in full during the first quarter of 1996.

3. INVENTORIES

Inventories consisted of the following at December 31, 1994 and 1995 (in
thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Goods held for sale............................................. $ 7,908 $ 7,409
Materials and supplies.......................................... 8,201 7,880
------- -------
Total........................................................... $16,109 $15,289
======= =======
</TABLE>

4. FINANCING ARRANGEMENTS

Revolving Credit Agreement

In 1994, the Company entered into a two-year revolving credit agreement with
various financial institutions, which established an available line of credit
equal to the lesser of $35 million or a specified borrowing base. Borrowings
under the facility bear interest at fluctuating rates. The credit facility is
collateralized by substantially all of the Company's working capital assets and
its 900-foot floating drydock and, among other things, (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 and
the payment of dividends and (3) requires compliance with the terms and
conditions of all other debt agreements.

During 1995, the Company amended the revolving credit agreement. The
amendment, among other things, increased the amount available under the credit
agreement to $42.5 million and extended its term to May 1997. Further, the
amendment permitted the issuance of $17.8 million of mortgage bonds (as
discussed below) and revised the level of permitted capital expenditures and
certain coverage ratios to take into consideration the plant modernization
project. There were no borrowings in 1994 and 1995 under the revolving credit
agreement.

The credit facility 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 (see Note 10).

F-10
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Long-Term Debt

Long-term debt consisted of the following at December 31, 1994 and 1995 (in
thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Industrial revenue bonds..................................... $36,250 $36,250
Mortgage bonds, interest at 8.16%, payable in semi-annual
principal installments to 2010.............................. 17,780
Mortgage bonds, payable in semi-annual principal installments
to 2000..................................................... 4,656 3,880
General obligation industrial bonds, interest at 7%, payable
in annual installments to 2011.............................. 2,835 2,745
Other long-term debt......................................... 8,000 5,000
------- -------
Total........................................................ 51,741 65,655
Less current maturities of long-term debt.................... (5,866) (5,062)
------- -------
Long-term debt............................................... $45,875 $60,593
======= =======
</TABLE>

The $36.3 million of industrial revenue bonds represent Series 1994 bonds
which consist of (1) $6 million bearing interest at 8.25% and payable in annual
principal installments ranging from $550,000 in 1997 to final payment of
$985,000 in 2004 and (2) $30.3 million bearing interest at 8.50% and payable in
annual principal installments ranging from $340,000 in 1997 to final payment of
$3.8 million in 2014. The Series 1994 bonds are secured by certain property and
equipment. 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 $17.8 million of mortgage bonds were 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 over a 15 year period beginning in 1996. 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 have
been pledged as collateral for these mortgage bonds.

The $3.9 million of mortgage bonds at December 31, 1995 represent the balance
of an earlier mortgage bond issue which also utilized a Title XI guarantee. The
Company refinanced these mortgage bonds in February 1995 (approximately $4.3
million) which reduced the annual interest rate from 9.30% to 7.86%. The
refinancing agreement contains 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 $13.5 million at December 31, 1995 has been pledged as collateral
for these mortgage bonds.

Included in other long-term debt at December 31, 1995 is the $3 million
balance of a two-year $8 million unsecured note issued to the Company's former
corporate parent as part of a settlement in 1994 which terminated certain
arrangements which had existed since 1985. The note bears interest at 10% per
annum with the $3 million balance payable on June 30, 1996. Also included in
other long-term debt at December 31, 1995 is a $2 million unsecured note issued
as part of the settlement of certain claims against the Company (as further
discussed in Note 10). The note bears interest at 8% per annum and is due in
January 1997.

F-11
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Annual maturities of long-term debt for each of the next five years and in
total thereafter follow (in thousands):

<TABLE>
<S> <C>
1996................................. $ 5,062
1997................................. 4,957
1998................................. 3,047
1999................................. 3,137
2000................................. 3,237
Thereafter........................... 46,215
-------
Total................................ $65,655
=======
</TABLE>

5. DISCONTINUED OPERATIONS

During the third quarter of 1994 the Company decided to discontinue operation
of its service contracting subsidiary formed in 1990 to pursue large-scale
service contracts with government and commercial operations. The Company
concluded that managerial and financial resources could be more productively
invested in the Company's core marine construction operations.

The operating results for the prior-year periods are reported as discontinued
operations. Summarized results are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Net sales............................................. $14,442 $13,520
Costs and expenses.................................... 18,003 15,429
------- -------
Income (Loss) from discontinued operations............ (3,561) (1,909)
Loss on disposal of discontinued operations........... -- (2,643)
------- -------
Income (Loss) from discontinued operations............ $(3,561) $(4,552)
======= =======
</TABLE>

6. 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 $5.3 million, $5.8 million and $6.3
million in 1993, 1994 and 1995, respectively.

Minimum rental commitments under leases having an initial or remaining
noncancelable term in excess of twelve months follow (in thousands):

<TABLE>
<S> <C>
1996.................................. $3,243
1997.................................. 1,747
1998.................................. 1,260
1999.................................. 297
2000.................................. 52
------
Total................................. $6,599
======
</TABLE>

F-12
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. INCOME TAXES

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The
statement requires the use of the asset and liability approach for financial
accounting and reporting for income taxes. Financial statements for prior years
have not been restated and the cumulative effect of the accounting change was
not material.

The Company has provided for Federal income taxes as follows (in thousands):

<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -------
<S> <C> <C> <C>
Current provision........................................ $ -- $ 600 $ 1,500
Deferred provision (benefit)............................. -- (300) 7,100
Deferred benefit attributable to the realization of net
operating loss carryforwards............................ -- -- (13,000)
----- ----- -------
Provision (benefit) for income taxes..................... $ -- $ 300 $(4,400)
===== ===== =======
</TABLE>

The provision (benefit) for income taxes varied from the Federal statutory
income tax rate due to the following (dollars in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
------------ ----------- -------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------ --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Taxes at Federal statutory rate...... $(3,078) (35) $3,088 35 $ 8,323 35
Amortization of goodwill not
deductible.......................... 357 4 511 6 246 1
Net operating loss carryforwards
utilized............................ -- -- -- -- (13,000) (55)
Settlement of prior year tax
examinations........................ -- -- (3,200) (36) -- --
Losses for which no tax benefit was
provided............................ 2,595 30 -- -- -- --
Other................................ 126 1 (99) (1) 31 --
------- --- ------ --- -------- ---
Total................................ $ -- -- $ 300 4 $( 4,400) (19)
======= === ====== === ======== ===
</TABLE>

At December 31, 1995 the Company has available for Federal income tax
purposes net operating loss carryforwards and tax credit carryforwards of $69.5
million and $5.3 million, respectively. The net operating loss carryforwards
expire in years 2004 through 2008 and the tax credit carryforwards expire in
the years 2000 through 2010. Additionally, the Company has $1.9 million of
minimum tax credits which may be carried forward indefinitely.

F-13
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 carryforwards. The tax effects of significant items comprising the
Company's net deferred tax balances at December 31, 1994 and 1995 are as
follows (in thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred Tax Liabilities:
Differences between book and tax basis of property, plant and
equipment................................................... $27,018 $26,266
Other........................................................ 1,511 759
------- -------
Total...................................................... 28,529 27,025
------- -------
Deferred Tax Assets:
Reserves not currently deductible............................ 6,020 5,174
Long-term contracts.......................................... 5,252 18,557
Other temporary differences.................................. 3,598 4,263
Operating loss carryforwards................................. 47,600 24,334
Tax credit carryforwards..................................... 5,800 7,200
------- -------
68,270 59,528
Valuation Allowance.......................................... (28,641) (9,703)
------- -------
Total...................................................... 39,629 49,825
------- -------
Net deferred tax assets...................................... $11,100 $22,800
======= =======
</TABLE>

The net deferred tax assets are included in the following balance sheet
captions (in thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Current deferred tax assets.................................... $ 4,100 $23,650
Non-current deferred tax assets................................ 7,000 --
Other non-current liabilities and deferred tax credits......... -- (850)
------- -------
Net deferred tax assets...................................... $11,100 $22,800
======= =======
</TABLE>

During 1995, the deferred tax valuation allowance decreased approximately
$19.0 million as a result of the Company's current year operating results and a
re-evaluation of its expectations of the likelihood of future operating income
related to its existing backlog. Approximately $6.0 million of this decrease in
the valuation allowance was recorded as a reduction in goodwill in accordance
with SFAS 109, which requires that the realization of tax benefits first be
attributed to any acquired tax assets. In the event that additional tax
benefits are realized in future periods, all such benefits will be recorded as
a reduction of income tax expense.

8. 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 7,096,000 and
6,822,000 shares of the Company's Common Stock at December 31, 1994 and 1995,
respectively.

F-14
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

401(k) Savings Plan

Beginning in 1996 the Company will sponsor a 401(k) Savings Plan.
Participation in this defined contribution plan is available to substantially
all employees of 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.

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 his 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, 1993, 1994 and
1995 included the following components (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- ------
<S> <C> <C> <C>
Service costs of the current period.................. $ 3,700 $ 3,400 $3,300
Interest cost on the projected benefit obligation.... 4,400 3,800 4,200
Actual return on plan assets......................... (7,000) (2,700) (3,600)
Net amortization of transition liability and deferred
investment gain (loss).............................. 5,000 (200) 300
------- ------- ------
Net periodic pension cost............................ $ 6,100 $ 4,300 $4,200
======= ======= ======
</TABLE>

The following table sets forth the pension plan's estimated funded status as
of December 31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Projected benefit obligation:
Vested benefits............................................ $40,800 $49,100
Nonvested benefits......................................... 600 400
------- -------
Accumulated benefit obligation............................. 41,400 49,500
Effect of projected future compensation levels............. 4,200 12,700
------- -------
Projected benefit obligation................................. 45,600 62,200
Plan assets at market value.................................. 44,200 50,400
------- -------
Plan assets less than projected benefit obligation........... (1,400) (11,800)
Unrecognized net transition obligation....................... 200 100
Unrecognized prior service costs............................. (3,000) (2,500)
Unrecognized net loss........................................ 6,800 12,600
------- -------
Prepaid pension costs (pension liability).................... $ 2,600 $(1,600)
======= =======
</TABLE>

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 bonds and notes,
corporate stocks, and an unallocated insurance contract. The weighted-average
discount rate used in determining the actuarial present value of the projected
benefit obligation was 8.5% for 1994 and 7.25% for 1995. The rate of increase
in future compensation levels used was 3.5% for 1994 and 4.0% for 1995 and
thereafter. The expected long-term rate of return on the assets was 9.0% for
1994 and 1995.

F-15
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. 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, 1994 and 1995.

Income (Loss) Per Share

The weighted average number of shares used in the computation of income
(loss) per share was 14,464,000, for each of the years ended December 31, 1993,
1994 and 1995, respectively. The assumed exercise of stock options would not
result in dilution in any of such periods.

Performance Share Plan

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. Transactions relating to the plan
during 1993, 1994 and 1995 were not material.

The plan provided for a cash distribution in an amount equal to the
Participant's income tax liability resulting from the settlement of an award.
To the extent that a Participant received cash in lieu of common stock as
payment of an award, options were granted to the participant to purchase an
equivalent number of such shares. There were 303,159 stock options outstanding
at December 31, 1993, 279,155 stock options outstanding at December 31, 1994
and 240,971 stock options outstanding at December 31, 1995 . The stock options
are exercisable at prices of $3.875 to $19.00 per share, the majority of which
contain a stock appreciation right feature and expire on various dates to
February 2002.

Stock Appreciation Plan

The Company maintains a Stock Appreciation Plan for key management employees
which contains a stock appreciation right feature. There are 500,000 shares of
common stock of the Company reserved for award under the plan. Transactions of
the Stock Appreciation Plan during 1993, 1994 and 1995 were as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Outstanding, January 1............................... 60,000 50,000 40,000
Canceled............................................. (10,000) (10,000) (40,000)
------- ------- -------
Outstanding, December 31............................. 50,000 40,000 --
======= ======= =======
Exercisable at end of year........................... 2,000 -- --
======= ======= =======
Available for grant at end of year................... 387,000 397,000 437,000
======= ======= =======
</TABLE>

Options were outstanding at prices ranging from $11.25 to $18.375 per share
at December 31, 1993 and $11.25 per share at December 31, 1994. Under the terms
of the plan, options expired on March 31, 1995.

10. COMMITMENTS AND CONTINGENCIES

Litigation

In January 1986, the Louisiana Department of Environmental Quality ("DEQ")
advised the Company that it may be a potentially responsible party ("PRP") with
respect to an oil reclamation site operated by an

F-16
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
unaffiliated company in Walker, Louisiana. 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 Affairs 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 for the site have funded
the site's remediation under a preliminary cost-sharing agreement. As of
December 31, 1995 clean-up costs totalled $17 million, of which the Company has
contributed $3.6 million. Additional work scheduled for the site includes the
expected completion in 1996 of a Remedial Investigation/Feasibility Study and,
if required by the results of these studies, subsequent post-closure activities
(e.g., groundwater monitoring or remediation). The Company believes that its
proportionate share of expenditures for any additional remedial work will not
have a material effect on the Company's financial statements. In addition, the
Company believes that its proportionate responsibility for the clean-up costs
will not be materially changed.

Since July 1986, a number of "toxic tort" suits have been filed against the
Company and numerous other defendants alleging claims for personal injury,
property damage, and "fear of cancer" in connection with the reclamation site
discussed above. The plaintiffs also sought substantial punitive damages. These
cases were consolidated and certified as a class action. In 1995, the Judge for
the Federal District Court for the Western District of Louisiana issued a
ruling from the bench approving the Company's settlement of the class action
lawsuit. Based on the advice of its counsel, the Company believes that a
written order confirming its earlier bench ruling will be issued by the Federal
District Court in the near future. Under the terms of the court approved
settlement, which is subject to appeal following the issuance of the final
written order, the Company paid $4.0 million cash into a settlement fund in the
third quarter of 1995, using cash from operations, and issued a $2.0 million
unsecured note to the plaintiff class. The note bears interest at 8% per annum
and is due on January 28, 1997. The Company had previously recorded an accrual
sufficient to provide for the $6.0 million settlement and has sufficient
liquidity to fund the note. The Company could also be responsible for payment
to the plaintiffs of up to an additional $6.0 million (plus interest at 8% per
annum) if the plaintiffs are unsuccessful in collecting certain claims under
Avondale's insurance policies that have been assigned to the plaintiff class
under the settlement agreement. With respect to the potential contingent
liability of the Company to pay additional sums under the settlement agreement,
management believes that the eventual resolution of this matter will not have a
material adverse effect on the Company's results of operations, financial
position or cash flows.

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 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.

F-17
<PAGE>

AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

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. Additionally, under certain contracts, the Company may be required
to provide letters of credit to secure certain performance obligations of the
Company thereunder. At December 31, 1995, outstanding letters of credit
relating to these business activities amounted to approximately $25.4 million.

11. QUARTERLY RESULTS (UNAUDITED)

Consolidated operating results for the four quarters of 1994 and 1995 were as
follows (in thousands, except per share data):

<TABLE>
<CAPTION>
1994 1995
------------------------------------- -----------------------------------
(1) (1) (2) (3) (3) (3)
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............... $101,329 $118,437 $125,487 $130,557 $133,575 $152,788 $148,785 $141,160
Gross Profit............ 9,506 11,283 14,943 11,753 13,404 13,820 14,793 16,654
Income (Loss) from
Continuing Operations.. 1,918 2,470 6,323 2,364 3,044 8,493 12,054 4,589
Income (Loss) from
Discontinued
Operations............. 116 (396) (4,272) -- -- -- -- --
Net Income.............. 2,034 2,074 2,051 2,364 3,044 8,493 12,054 4,589
Net Income (Loss) per
Share:
Continuing Operations... $ 0.13 $ 0.17 $ 0.44 $ 0.16 $ 0.21 $ 0.59 $ 0.83 $ 0.32
Discontinued Operations. 0.01 (0.03) (0.30) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net Income per Share.... $ 0.14 $ 0.14 $ 0.14 $ 0.16 $ 0.21 $ 0.59 $ 0.83 $ 0.32
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) Income statement data for these periods have been restated to present
discontinued operations (See Note 5).
(2) During the third quarter of 1994, the Company revised its estimated profits
on several previously-completed shipbuilding contracts which had the effect
of increasing net income for the third quarter of 1994 by approximately
$3.5 million, or $0.24 per share.
(3) During 1995, the Company recorded a reduction of a previously recorded loss
on a shipbuilding contract which had the effect of increasing net income
for the second, third and fourth quarters of 1995 by approximately $2.3
million (or $0.16 per share), $750,000 (or $0.05 per share) and $1.5
million (or $0.10 per share), respectively.

F-18
<PAGE>

Aerial view of Avondale's main shipbuilding facility in Avondale, Louisiana.

The USNS Yukon (T-AO 202), a double-hulled tanker delivered to the U.S. Navy in
March 1994.
<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDER OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Selected Financial Data................................................... 9
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 10
Business.................................................................. 15
Management................................................................ 26
Selling Shareholder....................................................... 27
Description of Capital Stock.............................................. 28
Underwriting.............................................................. 32
Legal Matters............................................................. 33
Experts................................................................... 33
Available Information..................................................... 33
Incorporation of Certain Documents by Reference........................... 34
Glossary of Selected Industry Terms....................................... 35
Index to Consolidated Financial Statements................................ F-1
</TABLE>

3,000,000 SHARES

AVONDALE
INDUSTRIES, INC.

COMMON STOCK
($1.00 PAR VALUE)

LOGO
[Logo of Avondale Industries appears here]

SALOMON BROTHERS INC

JOHNSON RICE & COMPANY L.L.C.

PROSPECTUS

DATED , 1996
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated fees and expenses payable by the Registrant and Selling
Shareholder in connection with the offering of the shares of Common Stock
registered hereunder are as follows:

<TABLE>
<CAPTION>
SELLING
SHAREHOLDER REGISTRANT
----------- ----------
<S> <C> <C>
Securities and Exchange
Commission registration
fee...................... $ 16,209 $ --
Printing fees and
expenses................. 75,000 --
Legal fees and expenses... 25,000 70,000
Accounting fees and
expenses................. -- 25,000
Blue Sky fees and
expenses................. 12,000 --
NASD filing fee........... 5,200 --
Miscellaneous............. 6,591 5,000
-------- --------
Total................... $140,000 $100,000
======== ========
Total to be Paid by
Both................... $240,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 83 of the Louisiana Business Corporation Law provides in part that a
corporation may indemnify any director, officer, employee or agent of the
corporation against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with any action, suit or proceeding to which he is or was a party or
is threatened to be made a party (including any action by or in the right of
the corporation) if such action arises out of the fact that he is or was a
director, officer, employee or agent of the corporation and he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.

The indemnification provisions of the Louisiana Business Corporation Law are
not exclusive; however, no corporation may indemnify any person for willful or
intentional misconduct. A corporation has the power to obtain and maintain
insurance, or to create a form of self-insurance on behalf of any person who is
or was acting for the corporation, regardless of whether the corporation has
the legal authority to indemnify the insured person against the liability.

Section 12 of the Registrant's by-laws provides for mandatory indemnification
for directors, officers and employees or former directors, officers and
employees of the Registrant to the fullest extent permitted by Louisiana law.
The Registrant maintains an insurance policy covering the liability of its
directors, officers and employees for actions taken in their official capacity.

ITEM 16. EXHIBITS.

<TABLE>
<C> <S>
1 --Form of Underwriting Agreement
4.1(a) --Articles of Incorporation of the Company(1)
4.1(b) --By-laws of the Company(2)
4.2 --Specimen of Common Stock certificate(3)
4.3 --Instruments Relating to Title XI Vessel Financing
</TABLE>
(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

II-1
<PAGE>

amended by an Assumption Agreement and Supplemental Indenture
dated September 16, 1985(4), 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")(5), as further amended by
a Third Supplemental Indenture dated February 9, 1995(6).
(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(4), as further
amended by the Master Assumption Agreement (filed as Exhibit
4.3(a) hereto), as further amended by Amendment No. 5 to the
Title XI Reserve Fund and Financial Agreement dated February
9, 1995(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(6).
<TABLE>
<C> <S>
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
</TABLE>
(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.(3)
(b) Guaranty Agreement dated April 1, 1991 between the Company,
Harrison County, Mississippi and the State of Mississippi.(3)
<TABLE>
<C> <S>
4.5 --Instruments relating to the Company's $36.25 million Industrial
Revenue Refunding Bond Series 1994 Financing.
</TABLE>
(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)
<TABLE>
<C> <S>
4.6 --Instruments relating to February 1995 Title XI Vessel Financing.
</TABLE>
(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(6).
(b) Title XI Reserve Fund and Financial Agreement dated February
9, 1995 by and between the Company and the United States of
America(6).
(c) Form of 8.16% Sinking Bond Fund, 2010 Series(6).

<TABLE>
<C> <S>
4.7 --Stockholder Protection Rights Agreement dated as of September 26,
1994 between the Company and Boatmen's Trust Company, as Rights
Agent(8)
5 --Opinion of Jones, Walker, Waechter, Poitevent, Carrere & Denegre,
L.L.P.
23.1 --Consent of Deloitte & Touche LLP*
23.2 --Consent of Jones, Walker, Waechter, Poitevent, Carrere & Denegre,
L.L.P. (included in Exhibit 5)
24 --Powers of Attorney (included on the signature page of this
Registration Statement)
</TABLE>
- --------

* Refiled by this Amendment. All other exhibits have been previously filed.

II-2
<PAGE>

(4) 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.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(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 Current Report on Form 8-K
filed with the Commission on September 30, 1994.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 15 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

(3) (a) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(b) That, for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 2 TO
ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW ORLEANS, STATE OF LOUISIANA, ON
FEBRUARY 6, 1996.

Avondale Industries, Inc.

/s/ Albert L. Bossier
By __________________________________
Albert L. Bossier
Chairman of the Board, President
and Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----

<S> <C> <C>
Albert L. Bossier, Jr.* Chairman of the Board of February 6, 1996
____________________________________ Directors, President and
Albert L. Bossier, Jr. Chief Executive Officer

/s/ Thomas M. Kitchen Executive Vice President and February 6, 1996
____________________________________ Chief Financial Officer
Thomas M. Kitchen

Kenneth S. Dupont* Director February 6, 1996
____________________________________
Kenneth S. Dupont

Anthony J. Correro, III* Director February 6, 1996
____________________________________
Anthony J. Correro, III

Francis R. Donovan* Director February 6, 1996
____________________________________
Francis R. Donovan

William A. Harmeyer* Director February 6, 1996
____________________________________
William A. Harmeyer

Hugh A. Thompson* Director February 6, 1996
____________________________________
Hugh A. Thompson

Bruce L. Hicks* Vice-President and February 6, 1996
____________________________________ Controller (principal
Bruce L. Hicks accounting officer)
*By: /s/ Thomas M. kitchen
____________________________________ February 6, 1996
Thomas M. Kitchen
Agent and Attorney-in-Fact
</TABLE>

S-1
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION LOCATION(+)
------- -------------------- -----------
<C> <S> <C>
1 --Form of Underwriting Agreement
4.1(a) --Articles of Incorporation of the Company(1) I
4.1(b) --By-laws of the Company(2) I
4.2 --Specimen of Common Stock certificate(3) I
4.3 --Instruments Relating to Title XI Vessel Financing I
(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(4), 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")(5), as further amended by a
Third Supplemental Indenture dated February 9,
1995(6).
(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(4), as further amended by the Master
Assumption Agreement (filed as Exhibit 4.3(a) hereto),
as further amended by Amendment No. 5 to the Title XI
Reserve Fund and Financial Agreement dated February 9,
1995(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(6).

4.4 --Instruments relating to AEI's and the Company's I
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.(3)
(b) Guaranty Agreement dated April 1, 1991 between the
Company, Harrison County, Mississippi and the State of
Mississippi.(3)
4.5 --Instruments relating to the Company's $36.25 I
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.
</TABLE>
(a) Trust Indenture dated February 9, 1995 by and between
the Company and Chemical Bank, as Indenture Trustee,
relating to $17,780,000 of United States Government
Guaranteed Ship Financing Bonds(6).
(b) Title XI Reserve Fund and Financial Agreement dated
February 9, 1995 by and between the Company and the
United States of America(6).
(c) Form of 8.16% Sinking Bond Fund, 2010 Series(6).
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION LOCATION(+)
------- -------------------- -----------
<C> <S> <C>
4.7 --Stockholder Protection Rights Agreement dated as of I
September 26, 1994 between the Company and Boatmen's
Trust Company, as Rights Agent(8)
5 --Opinion of Jones, Walker, Waechter, Poitevent,
Carrere & Denegre, L.L.P.
23.1 --Consent of Deloitte & Touche LLP* F
23.2 --Consent of Jones, Walker, Waechter, Poitevent,
Carrere & Denegre, L.L.P. (included in Exhibit 5)
24 --Powers of Attorney (included on the signature page F
of this Registration Statement)
</TABLE>
- --------
+ "I" indicates that the Exhibit is incorporated by reference herein. "F"
indicates that the Exhibit is filed herewith.

* Refiled by this Amendment. All other exhibits have been previously filed.

(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 Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995.
(3) 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.
(4) 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.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995.
(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 Current Report on Form 8-K
filed with the Commission on September 30, 1994.

<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 2 to Registration Statement No.
33-65267 of Avondale Industries, Inc. on Form S-3 of our report dated January
19, 1996, included in the Annual Report on Form 10-K of Avondale Industries,
Inc. for the year ended December 31, 1995, and to the use of our report dated
January 19, 1996, appearing in the Prospectus, which is a part of such
Registration Statement. We also consent to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.

DELOITTE & TOUCHE LLP

New Orleans, Louisiana

February 6, 1996