UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
| | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-16572
Avondale Industries, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 39-1097012
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5100 River Road, Avondale, Louisiana 70094
(Address of principal executive offices) (Zip Code)
(504) 436-2121
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates
(affiliates being directors, executive officers and holders of more than 5% of
the Company's common stock) of the Registrant at December 31, 1998 was
approximately $331,156,568.
The number of shares of the Registrant's common stock, $1.00 par value
per share, outstanding at December 31, 1998 was 13,254,066.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999 Annual
Meeting have been incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
Item 1. Business.
Overview
Avondale Industries, Inc. ("Avondale" or the "Company") is one of the
largest shipbuilders in the United States, specializing in the design,
construction, conversion, repair and modernization of various types of
ocean-going vessels for the military and commercial markets. A majority of
Avondale's contracts in recent years has been for the construction of U.S. Navy
surface ships, although it secured its largest ever commercial contract in 1997
from ARCO Marine, Inc. for the construction of two 125,000 Dead Weight Tons
("DWT") crude oil carriers for the Jones Act Trade. Management believes the
Company's low cost structure, experienced and skilled work force, technological
capabilities, sophisticated construction processes and extensive experience in
building a variety of military and commercial vessels, position the Company as
one of the most cost-efficient and versatile shipbuilders in the United States.
At December 31, 1998, the Company's shipbuilding backlog (the "firm backlog")
was approximately $2.0 billion (including estimated contract escalation),
exclusive of unexercised options aggregating approximately $490 million held by
the U.S. Navy (including estimated contract escalation) and approximately $330
million held by a commercial customer for additional ship orders.
In December 1996, an alliance led by the Company was awarded a $641
million contract to construct the initial ship in the U.S. Navy's LPD program
(see glossary of selected industry terms). The original contract provided for
options exercisable by the U.S. Navy for two additional LPD vessels. The first
of these options was exercised in December 1998. For additional information on
the LPD-17 award, see "-U.S. Government." Also, in June 1997, the Company signed
a $332 million contract with ARCO Marine, Inc.("ARCO") of Long Beach,
California, for the construction of two 125,000 DWT crude oil carriers for the
Jones Act Trade. These vessels are to be built with double hulls in compliance
with the Oil Pollution Act of 1990 (see "-Commercial Shipbuilding"). The
contract, which is the largest commercial contract in the Company's history,
also provided for options valued at approximately $500 million that are
exercisable by ARCO for three additional ships. The first option was exercised
in September 1998. Management believes that securing the LPD and ARCO contracts
has conferred several immediate and substantial benefits upon the Company. Among
other things, the Company has substantially bolstered its visibility and
competitive posture by demonstrating the ability to compete successfully for
contracts based on the high level of its technical, engineering and production
skills, as well as its competitive prices. In addition, the backlog created from
these contract awards provides a strong foundation that will allow the Company
to compete aggressively for future shipbuilding opportunities.
<PAGE>
On January 19, 1999, Avondale announced a proposed merger with a
subsidiary of Newport News Shipbuilding Inc. which would result in Avondale
becoming a subsidiary of Newport News. The proposed merger would create a
broad-based shipbuilding company capable of designing, building and maintining
every type of ship used in the U. S. Navy, Coast Guard, and commercial fleets.
The proposed merger is structured as a stock-for-stock transaction and is
subject to regulatory and shareholder approval. Upon consummation of the
proposed merger, each Avondale share would be exchanged for a maximum of 1.25
and a minimum of 1.15 of Newport News Shipbuilding Inc. shares based on the
average closing price of Newport News shares during the fifteen day trading
period ending on the fourth trading day prior to the shareholder vote. If
such average closing price is $28.40 or less, Avondale shareholders would
receive 1.25 Newport News shares for each Avondale share. If such price is
$30.87 or more, Avondale shareholders would receive 1.15 Newport News shares
for each Avondale share. If such price is between $28.40 and $30.87, Avondale
shareholders would receive that number of Newport News shares determined by
dividing $35.50 by such price, or between 1.25 and 1.15 Newport News shares.
Avondale and Newport News expect to finalize the transaction during the second
quarter of 1999.
On February 22, 1999, Avondale and Newport News announced that their
proposed merger had been cleared by the Department of Justice under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976. The antitrust clearance
satisfies an important condition to the closing of the transaction, which
remains subject to the approval of the shareholders of both companies and to the
consent of the Administrator of the Maritime Administration of the Department of
Transportation.
In addition, on February 18, 1999, the Company announced that it had been
advised by Newport News that Newport News had received an unsolicited offer from
General Dynamics Corporation ("General Dynamics") proposing to acquire Newport
News for $38.50 per share in cash, subject to due diligence and regulatory
clearance. Although the General Dynamics offer did not specifically ask Newport
News to terminate its agreement with Avondale, the offer did state that Newport
News' proposed merger with Avondale would create antitrust problems in a
combination of General Dynamics and Newport News.
Newport News has advised General Dynamics that it is not prepared to
evaluate the General Dynamics proposal until it obtains reliable assurance that
a combination of General Dynamics and Newport News would not be opposed by the
Department of Defense and Department of Justice. To that end, Newport News made
a request to the Department of Defense seeking a prompt indication of the
Department's position on the General Dynamics proposal. At the date of this
Form 10-K, the Department of Defense has not responded to the Newport News
request. Pending any such determination, Newport News and the Company have each
publicly expressed their full commitment to the Newport News-Avondale merger.
<PAGE>
Historical Information. Avondale is a versatile shipyard that has been the
successful bidder for a variety of marine construction projects. Organized in
1938, Avondale first began building ocean-going ships in the 1950s. From 1959 to
1985, the Company operated as a subsidiary of Ogden Corporation, a diversified
New York Stock Exchange listed company headquartered in New York, New York.
Prior to the 1980s, Avondale built both military and commercial vessels. In
addition to the construction of 27 destroyer escorts for the U.S. Navy, Avondale
successfully completed a variety of construction projects during that period,
including general cargo and multi-product carriers, such as LASH vessels,
container vessels, crude oil tankers and product carriers. In the early 1980s,
however, several measures were implemented that changed the marine construction
industry significantly. The termination of the U.S. construction-differential
subsidy program in 1981 significantly curtailed the ability of U.S. shipyards to
compete successfully for international commercial shipbuilding contracts with
foreign shipyards, many of which are heavily subsidized by their governments.
The effects of the elimination of these subsidies were largely offset, however,
by the initiative to expand the U.S. Navy fleet to 600 ships, thereby
significantly increasing the U.S. Navy shipbuilding opportunities available to
Avondale.
Initially, Avondale capitalized on the U.S. Navy shipbuilding
opportunities through its construction of five auxiliary oilers ("AOs") during
the early 1980s. Since AOs are essentially oil tankers modified to meet certain
military requirements, they were a natural extension of the types of ships
previously built by Avondale.
During the remainder of the 1980s and the first part of this decade,
Avondale steadily expanded the range of vessels that it built for the U.S. Navy.
The Company principally focused on those vessels that were related to
predecessor vessels constructed by Avondale, where the Company could best
capitalize on its prior experience and proven capabilities. Among the U.S. Navy
vessels built or under construction during this period were sixteen T-AOs, five
LSDs, four LSD-CVs, five AOJs (which constituted conversions of AOs previously
built by Avondale), one T-AGS 45, fifteen LCACs, four MHCs and three SL 7
conversions. The Company's workload in the second half of the 1990's has been
dominated by the Sealift, ARCO, and LPD vessels.
With the end of the Cold War and the pressure of domestic budget
constraints, spending for new vessel construction by the U.S. Navy has been
reduced substantially, with the rate of new vessel construction reduced to
approximately 50% of that in the 1980s. However, in January 1999, President
Clinton announced a plan to increase the budget for military spending over the
next six fiscal years thereby increasing the U. S. Navy's budget by
approximately $2.7 billion for fiscal year 2000. Management believes that
Avondale's versatility will continue to be a significant factor in its ongoing
<PAGE>
efforts to obtain shipbuilding contracts, which efforts have also been
bolstered by Avondale's experience in building vessels comparable to those
currently in demand.
U.S. Government. In addition to the contract award by the U.S. Navy to
build the first LPD ship, the alliance was awarded options, exercisable by the
U.S. Navy, for two additional ships of the LPD class, the first of which was
exercised in December 1998. It is expected that a total of twelve ships will be
built under the LPD program. The members of the alliance, Bath Iron Works
("Bath"), Raytheon Company ("Raytheon") and the Company submitted a joint bid
with the Company as the prime contractor. Under the terms of an agreement
between the alliance members, the Company will build the vessel covered by the
December 1996 contract and the December 1998 option that was exercised, while
Bath would construct the third of the three LPD vessels if exercised by the
Navy. Raytheon will be responsible for total ship integration. The alliance
will use an advanced three-dimensional ship design and product modeling
technology for the design and manufacture of these ships.
The first three vessels of the LPD program will be built pursuant to a
cost-plus-award fee contract, with the Company, Raytheon and Bath each being
entitled to reimbursement for its respective allowable costs in performing the
contracts as such costs are incurred. The contract provides for the payment of
an award fee to the members of the alliance, the amount of which is dependent
upon the results of periodic evaluations of contract performance and will be
paid incrementally upon completion of each periodic evaluation. Pursuant to the
subcontracting agreements between the Company and each of Bath and Raytheon, any
award fees earned by the alliance will be distributed to the alliance members in
proportion to each member's performance and participation in the construction of
the vessel during the period for which the award was granted. Unlike the
Company's other principal shipbuilding contracts where profits are recognized
under the percentage-of-completion method of accounting, the Company will record
profits on the LPD contract as the incremental awards are determined. In
addition, although the LPD contract is on a cost-plus-award fee basis, the
ability of Avondale to realize any incremental award fee is dependent not only
upon its ability to perform its contractual obligations but also the
satisfactory performance by other members of the alliance.
In accordance with the U.S. Navy's requirement of a streamlined
contractual relationship, the alliance's agreement provides that the Company
will act as the prime contractor for all three vessels, and as such, the Company
will be responsible for submitting invoices for not only its own costs, but also
any costs incurred by Bath and Raytheon. Accordingly, all such amounts relating
to contract performance by alliance members Bath and Raytheon will be reflected
as sales and cost of sales in the Company's consolidated financial statements.
The Company's LPD backlog at December 31, 1998 includes approximately $910
million, which amount is the aggregate of the estimated cost to complete the
LPD-17 and the LPD-18 plus the maximum award fee that could be payable to
Avondale and the alliance. However, a substantial portion of the reported
backlog for the first vessel is related to work to be performed by the other
alliance members. To the extent that the Company's revenues include costs
incurred by and award fees paid to the other alliance members, such revenues
will be recorded with no corresponding operating profit margin.
<PAGE>
If the U.S. Navy proceeds with its previously announced intention to
construct additional LPD ships beyond the original contract, the Company
anticipates that future contracts for such vessels may provide for alternative
pricing arrangements, such as fixed-price incentive or fixed-price (see "-
Government Contracting").
The U.S. Navy has stated its expectation that the LPD vessels will be an
important element in its amphibious operations over the next three decades,
replacing more than 36 ships nearing the end of their useful lives and
approaching decommissioning. In 1995, Congress appropriated $974.0 million for
the construction of the first of an anticipated twelve ships under the LPD
program. During 1998, the Company was awarded a contract for approximately $391
million for the LPD-18. In addition, the President's initial fiscal year 2000
budget provides funding for both the LPD-19 and LPD-20. Management believes that
the award to the Company-led alliance of the contract to construct the initial
LPD ship and the subsequent exercise of the option for the second ship
significantly enhance the competitive position of the alliance in its pursuit of
the remaining nine LPD ships. Should the U.S. Navy award contracts to the
alliance to construct all twelve ships, the Company would construct eight ships
and Bath would construct four ships.
Also included in the current firm backlog for the military are contracts
to construct six Sealift ships with a remaining backlog of approximately $669
million (including estimated contract escalation). The Sealift ships, each of
which contains approximately 400,000 square feet of cargo space, are designed to
assist in the rapid transportation and deployment of military personnel,
equipment and supplies, and are comparable to other vessels, such as auxiliary
and amphibious support ships that have been previously delivered by Avondale to
the military. The first Sealift ship was delivered in 1998 with the final ship
scheduled for delivery in 2001.
While it represents only $30.9 million of the funded backlog, the contract
to construct the Icebreaker, which is scheduled for delivery in the middle of
1999, will occupy a significant portion of management's time and resources in
the first half of the year. The Icebreaker is a research vessel for the U. S.
Coast Guard that will be able to operate in polar regions. The fixed price
incentive contract for this vessel was awarded in 1993.
Although no significant new U.S. Navy shipbuilding programs are
anticipated to be contracted during 1999, it is expected that additional U.S.
Navy shipbuilding opportunities, including a series of ADC(X) vessels and the
Joint Command and Control Ship (JCC(X)) will become available shortly
thereafter. The ADC(X) is a new class of auxiliary vessels designed to deliver
food, ammunition and other supplies to the U.S. Navy fleet. It has been reported
that the Navy has a projected need for ten to twelve of these vessels with the
first vessel expected to be awarded in 2000 and enter service in 2006.
The JCC(X) is envisioned as a new class of ships designed to house
sophisticated and unified command and control capabilities that coordinate the
operational activities of all of the military branches. It is believed that
improved coordination of the services' command and control functions is possible
because of improvements in communication technology. It has been reported that
the Navy has a projected need for four of these vessels with the first vessel
expected to be awarded in the 2004-2005 timeframe.
<PAGE>
Finally, during August 1998, the Avondale Deepwater Alliance, which
includes Avondale as the prime contractor, Boeing, DAI, Inc., John J. McMullen
Associates, Inc. and Raytheon Systems Company, was one of three teams which were
selected to proceed with a Phase I study related to the Coast Guard Deep Water
project. This funded contract is designed to assist the U.S. Coast Guard in
developing a strategy to acquire 30-40 multi-purpose ships to replace its
existing high and medium endurance cutters, as well as aircraft, patrol boats
and certain command and control systems. The total value of this program is
estimated at approximately $8 billion. Upon completion of the Phase I study, it
is anticipated that the U.S. Coast Guard will move into Phase II, during which
the remaining team or teams will refine their proposals. Phase III will involve
the selection of one team for procurement. It is anticipated that the first
construction contract will be awarded to the successful bidder during 2002.
Commercial Shipbuilding. Two legislative enactments in the early 1990s
enhanced U.S. commercial shipbuilding opportunities. In late 1993, Congress
amended the loan guarantee program under Title XI of the Merchant Marine Act,
1936, to permit the U.S. government to guarantee loan obligations of foreign
vessel owners for foreign-flagged vessels that are built in U.S. shipyards.
Title XI authorizes MARAD to guarantee debt with a term of up to 25 years in an
amount up to 87.5% of the vessel cost, thereby enabling shipowners to obtain
financing on more favorable terms than those currently offered by other
countries having guarantee or subsidy programs for foreign nationals similar to
Title XI. These 1993 amendments expanded Title XI in a manner that has created
commercial shipbuilding opportunities for U.S. shipyards.
The Oil Pollution Act of 1990, which requires the phased-in transition of
single-hulled tankers and product carriers to double-hulled vessels beginning
January 1, 1995, created a demand for the retro-fitting of existing tankers and
the construction of new double-hulled tankers, as oil and energy companies and
other ship operators upgrade their fleets to comply with this legislation.
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.
The demand for double-hulled tonnage manifested itself for Avondale in
1997 when the Company signed a $332 million contract with ARCO for the
construction of two double-hulled crude oil carriers. This contract, the largest
commercial contract ever signed by Avondale, also provided for options
exercisable by the customer for three additional ships. In September 1998, ARCO
exercised the first of these options for a third vessel. The Company believes
that the receipt of these commercial contracts was assisted by its prior
experience in constructing three double-hulled T-AOs on behalf of the U.S. Navy
and the $143.9 million contract completed in 1997 to retrofit four single hull
tankers with double-hulled forebodies for a U.S. shipping company. The options
for the fourth and fifth vessels under the 1997 contract expire June 1, 1999 and
January 1, 2000, respectively. With the depressed state of crude oil prices,
ARCO announced plans to reduce costs and capital spending. To this end, ARCO and
the Company agreed to delay the deliveries of the three vessels currently under
contract by up to 16 months and the customer has agreed to pay the Company its
estimated out-of-pocket expenses for completing the vessels in a later time
frame. There can be no assurance that ARCO will exercise its remaining options
given its cost and spending reduction plans.
Prior to 1997, legislation was introduced in the U.S. Congress that would
implement a December 1994 trade agreement among the United States, the European
Union, Finland, Japan, Korea, Norway and Sweden (which collectively control over
<PAGE>
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 credit assistance to a term not to exceed
twelve years. Congress failed to adopt or ratify the OECD Agreement in 1997 and
in 1998. Proponents of the OECD Agreement may seek to have it reconsidered in
1999 and, if such legislation were enacted by Congress in its current form, the
Title XI guarantee program would be modified to be in accord with the uniform
credit assistance standards mandated under the OECD Agreement, thereby
eliminating the advantages available to U.S. shipyards under the 1993 Title XI
amendments.
Avondale is currently unable to assess whether legislation implementing
the OECD Agreement will be enacted by Congress or the ultimate impact that such
legislation may have on its prospects for additional commercial work. 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. In addition, Avondale cannot predict whether worldwide commercial
shipbuilding opportunities will 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 will be diverted to
non-signatory nations. If the competitive advantages of the current Title XI
guarantee program are eliminated and the OECD Agreement fails to achieve its
objectives, Avondale's ability to compete for international commercial
shipbuilding contracts will be further limited, notwithstanding the increased
opportunities that are expected to arise as vessels of the worldwide tanker and
product carrier fleet approach the end of their useful lives.
Legislative initiatives seeking to rescind or substantially modify the
provisions of the Jones Act, which mandates the use of U.S.-built ships for U.
S. 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.
Although current Jones Act opportunities have been diminished as the
continued low prices of oil and natural gas have caused exploration companies to
cut their capital budgets, the Company believes that, if oil prices recover,
significant domestic commercial shipbuilding opportunities could become
available during the next five years. Future commercial opportunities include
the retrofitting of existing tankers or product carriers and construction of new
double-hulled tankers or product carriers for the Jones Act Trade to replace
vessels taken out of service pursuant to the Oil Pollution Act of 1990.
Management believes a significant volume of such work as described herein could
become available before 2005, with orders being placed during the next several
years.
Technological Innovations. To assure that its shipyard remains among the
most modern in the world, Avondale regularly reviews and assesses its
construction and production processes. In this regard, Avondale often consults
<PAGE>
with other highly successful shipbuilding companies concerning advances in
shipbuilding technology. In the early 1980s, the Company was among the first
of U.S. shipyards to successfully implement modular construction techniques
that had been previously perfected by Japanese shipbuilders. Management
believes these techniques were a major factor in Japan's dominance of the
commercial shipbuilding market during the 1970s and 1980s. Avondale obtained
its modular construction capabilities and "know-how" pursuant to an agreement
with Ishikawajima-Harima Heavy Industries Co., Ltd., one of Japan's largest
shipbuilders, which worked with Avondale to change its manufacturing and design
processes and to train Avondale's employees. Modular construction afforded
Avondale significant production efficiencies in the installation of ship
systems, largely due to the greater ease with which such systems could be
installed in open modules rather than closed-in hulls. As a result of these
efforts, Avondale realized substantial improvements in labor productivity.
In addition, in 1994 the Company entered into a technology sharing
agreement with AESA of Spain, regarded as an innovative and successful
world-class shipyard. After an on-site review of Avondale's shipyard by AESA, as
well as a review by Avondale of current shipbuilding technology in other
countries, Avondale invested approximately $20 million in capital improvements
designed to increase efficiency by improving production flow. In particular, the
Company integrated certain assembly-line techniques with its modular
construction processes. To that end, the Company built a covered facility that
houses production lines dedicated to both military and commercial ships.
Avondale believes that the sheltering of the production process and the
introduction of assembly line procedures have both enhanced production
efficiencies and lowered unit production costs.
Because the construction of commercial vessels, particularly the product
carriers that Avondale has traditionally built, places an emphasis on steel
fabrication rather than the complex technological outfitting involved in U.S.
naval construction, Avondale's ability to compete effectively for additional
commercial work has been enhanced by this new assembly-line process.
An important element in the Company's success in obtaining the LPD-17
contract award was the Company's enhanced computer-aided design and product
modeling capabilities. The enhancement was made possible through a cooperative
endeavor between the Company, the University of New Orleans (the "University" or
"UNO"), the University of New Orleans Research and Technology Foundation, Inc.
(the "Foundation") and the State of Louisiana. Pursuant to the terms of various
agreements, the Foundation has purchased hardware and software required to
implement the extensive three-dimensional ship design and Integrated Product
Data Environment ("IPDE") technology. This technology also provides for
sophisticated storage, management and retrieval of data for future projects.
Among its other features, the technology permits engineering, production and
material procurement tasks to be performed cooperatively, thus enhancing the
efficiency of the design phase. The IPDE captures data in digital form at
creation and then organizes, integrates, maintains and makes available such data
to all program participants. The Foundation has also constructed a 200,000
square foot building on property donated to the University by the Company,
adjacent to the Company's main shipyard. This facility, known as the
"UNO/Avondale Maritime Technology Center of Excellence," houses this new
technology and is an integral part of the Company's efforts to design the lead
ship in the LPD program. In addition to the amounts expected to be funded by the
State, the Foundation, at the Company's request, is incurring approximately
$15.5 million in additional costs to enhance the integration and functionality
<PAGE>
of the ship design and IPDE technology. The Company is reimbursing the
Foundation for these additional amounts as incurred and will capitalize these
costs and amortize them over their estimated useful lives in accordance with the
Company's stated policies (See Note 1 of the Notes to Consolidated Financial
Statements).
Shipbuilding
The Company is predominantly engaged in the design, construction,
conversion, repair and modernization of various types of military and commercial
ships.
The main shipyard facility, which is located on a 270-acre site on the
Mississippi River near New Orleans, includes multiple building ways, side
launching facilities, a 900-foot floating dry dock/launch platform that permits
construction of vessels up to 1,000 feet in length, and a 650-foot floating dry
dock principally used for ship repair. The main shipyard is equipped to build
almost any type of vessel other than nuclear-powered submarines and aircraft
carriers and surface vessels of the largest classes, such as ultra-large crude
carriers. Avondale also operates several other facilities in the vicinity of the
main shipyard, including its Westwego, La. shipyard, which has been used
primarily for boat construction and repair, and its Algiers, La. shipyard, which
is used primarily for the repair and overhaul of ocean-going vessels. In
addition, the Company operates marine fabrication facilities in Gulfport,
Mississippi, and Tallulah, Louisiana, which are currently being used to support
marine construction activities.
The Company continues to be materially dependent on the U.S. Navy's ship
construction and conversion programs. The following table sets forth the
distribution of marine construction and repair activities during the last five
years based on contract billings. As the table indicates, a majority of
Avondale's work in the year ended December 31, 1998 was comprised of new
military construction.
Distribution of Marine Construction and Repair Work
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. MILITARY:
New construction 78% 86% 81% 80% 81%
COMMERCIAL:
New construction 21% 12% 17% 16% 11%
Repair, overhaul and
conversion 1% 2% 2% 4% 8%
---- ---- ---- ---- ----
TOTAL 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
The percentage of new construction has remained relatively constant since
1994. New commercial construction decreased and new U.S. military construction
correspondingly increased in 1997 as compared to 1996 and 1995 as the Company
substantially completed the double-hulled forebodies and the river hopper barges
in early 1997. In addition, new commercial construction increased and new U.S.
<PAGE>
military construction correspondingly decreased in 1998 as compared to prior
years as the Company began construction of the ARCO crude carriers in late 1997.
Also, the percentage of commercial repair, overhaul and conversion work
decreased in recent years as compared to 1994 as the Company's work on several
contracts with a private contractor for the repair of existing Sealift ships was
completed. See "-Other Operations - Repair Operations."
Government Contracting. Avondale's principal U.S. government business is
currently being performed under fixed-price incentive contracts although the
recent LPD-17 contract is a cost- plus-award fee contract. Fixed-price incentive
contracts provide for sharing between the government and the contractor of cost
savings and cost overruns based primarily on a specified formula that compares
the contract target cost with actual cost. In addition, fixed-price incentive
contracts generally provide for payment of escalation of costs based on
published indices relating to the shipbuilding industry. Although all cost
savings are shared under fixed-price incentive contracts, cost overruns in
excess of a specified amount must be borne entirely by the contractor. The
Sealift vessels and the Icebreaker are each being constructed under fixed-price
incentive contracts. The LPD-17 contract provides for the payment of all costs
that are reimbursable under government contracts. In addition, an award fee is
payable periodically after the Navy's evaluation of the alliance's performance
in executing the contract's performance goals and objectives. See "- U.S.
Government."
Contracts for the construction and conversion of U.S. Navy vessels are
typically subject to competitive bidding. As a safeguard against
anti-competitive bidding practices, the U.S. Navy has employed the concept of
"cost realism," which requires that each bidder submit information on pricing,
estimated costs of completion and anticipated profit margins. The U.S. Navy uses
this and other data to determine an estimated cost for each bidder. The U.S.
Navy may then re-evaluate a bid by using the greater of either the bidder's or
the U.S. Navy's cost estimates.
Under government regulations, certain costs, including certain financing
costs, portions of research and development costs and certain lobbying and
marketing expenses, are not allowable costs under fixed-price incentive and cost
reimbursable contracts. The government also regulates the methods by which
overhead costs are allocated to government contracts.
U.S. government contracts are subject to termination by the government
either for its convenience or upon default by the contractor. If the termination
is for the government's convenience, the 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.
<PAGE>
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 such options.
Because its U.S. Navy contracts require the Company to have access to
classified information, Avondale must maintain a security clearance for its
facility. Among other things, facilities with such clearances must restrict the
access of non-U.S. citizens to classified information. If in the future the
percentage of foreign ownership of the Company's common stock is increased to a
level that could result in foreign dominance or control of its activities, the
Company would be required to implement additional measures to insure that
classified material would not be compromised or risk the loss of its security
clearance.
Due to the complexity of government contracts and applicable regulations,
contract disputes with the government may occur in the ordinary course of the
Company's business. Based upon management's analysis of each such dispute and
advice of counsel, the Company records, if appropriate, an estimate of the
amount recoverable upon resolution of such disputes. 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 business with the U.S. Government.
The Company currently has an issue with the U. S. Navy related to certain
materials purchased from a subcontractor for use in the Strategic Sealift
program. The materials were purchased based on government-provided
specifications which have proven to be defective. In addition to delay and
disruption costs, the Company has incurred approximately $12.5 million in direct
costs through December 31, 1998 related to this issue. The Company believes that
it is entitled to recovery from the U. S. Navy of these costs and has recorded a
receivable for the amount of the direct costs incurred to date. While the
Company hopes to resolve this issue through negotiation, the Company has engaged
legal counsel to assist in the development of a claim.
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, 1998, the Company had a
firm backlog of shipbuilding contracts of approximately $2.0 billion (exclusive
of unexercised options aggregating approximately $490 million held by the U.S.
Navy (including estimated contract escalation) and approximately $330 million
held by a commercial customer for additional ship orders) compared with firm
<PAGE>
backlogs approximating $1.8 billion at December 31, 1997 and 1996, respectively.
The Company's firm backlog at December 31, 1998 primarily consisted of
approximately $669 million to complete the remaining six Sealift ships,
approximately $910 million related to the LPD-17 and LPD-18, and
approximately $365 million to complete the 125,000 DWT double-hulled crude oil
carriers.
Vessel deliveries in 1998 and 1997 included one MHC minehunter, the last
of four single- hulled commercial tankers retrofitted with double hulls, the
remainder of the river hopper barges, one LSD-CV, and the first of seven
Strategic Sealift ships. Vessel deliveries expected in 1999 include the Coast
Guard Icebreaker and the second and third Strategic Sealift vessels. The Company
plans to continue to actively pursue other government construction and
conversion opportunities, as well as commercial opportunities, as they become
available.
The Company has been actively pursuing commercial shipbuilding
opportunities but has focused its efforts on the Jones Act market. International
commercial shipbuilding opportunities remain limited because shipbuilders in
foreign countries are often subsidized by their governments, which allow them to
sell their ships for prices below their construction costs. Domestic
shipbuilding opportunities that are not affected by foreign subsidies therefore
offer better possibilities for the Company. See "-Overview - Commercial
Shipbuilding."
In connection with the bids and proposals that the Company has submitted
or plans to submit to various commercial and government customers, no assurance
can be given that the Company will be the successful bidder or that the vessels
bid on will actually be built.
Other Operations
Overview. Although the Company has from time to time, on a limited basis,
pursued opportunities to diversify its business, management strongly believes
that the Company's resources are most profitably employed in marine
construction. In the past, the Company sold or discontinued certain of its
non-core operations in order to focus on its core shipbuilding business and
improve liquidity. The Company will continue to evaluate suitable
diversification opportunities, principally those that would not detract from
Avondale's core business but that would utilize the Company's existing
facilities and complement the Company's current business activities.
Modular Construction. The Company has been able to apply its modular
construction methods to a variety of non-marine industrial fabrication projects,
including a sulphur recovery plant that was shipped to Saudi Arabia for on-site
assembly and installation, two cryogenic gas separation systems, two waste
disposal units, six gas turbine-driven compressors, six gas turbine- driven salt
water injection pumps, six condenser modules for inclusion in a nuclear power
plant, and two sled and receiver modules for sub-sea pipeline connections. The
Company has also fabricated steel bridge components, a hydroelectric power
plant, and an 800-bed floating detention facility that is 625 feet long, 125
feet wide, and five stories high. Sales by this division to unrelated third
parties for the years ended December 31, 1998, 1997, and 1996 were $10.3
million, $10.5 million, and $8.5 million, respectively.
<PAGE>
Boat Division. The Company leases a facility equipped for boat
construction at its Westwego, Louisiana shipyard that is capable of building
vessels up to 450 feet in length, as well as a facility in Gulfport,
Mississippi. In 1994 and 1995, the Boat Division delivered three gaming vessels
ranging from 210 to 350 feet in length. In 1996 and 1997, the division was
primarily engaged in the construction of river hopper barges under a contract
signed in 1995. The Boat Division is actively pursuing other projects involving
the construction of additional gaming boats as well as passenger vessels and
ferries, towboats, offshore supply boats and other vessels. While the division
had no active contracts in 1998, sales by this division to unrelated third
parties for the years ended December 31, 1997 and 1996 were $6.0 million and
$10.2 million, respectively.
Steel Operations. Through its Steel Sales operation, Avondale sells steel
plate and structural steel to the marine and industrial markets in the Gulf
Coast region of the United States. Sales by this division to unrelated third
parties for the years ended December 31, 1998, 1997 and 1996 were approximately
$45.8 million, $42.8 million, and $40.1 million, respectively. The higher sales
in 1998 reflect principally the increased construction activity in the Gulf
South driven by a resurgence in the oil and gas industry. However, particularly
in the second half of 1998, oil and gas construction activity slowed and the
devaluation of most Far East currencies resulted in a flood of foreign steel
into the U.S. These factors resulted in an oversupply of steel and pricing
pressure. As a result, in December 1998, management reviewed the carrying value
of its Steel Sales inventory and recorded a $2.2 million pre-tax charge to
reduce its carrying value to market prices.
Repair Operations. At its main shipyard and the Algiers shipyard, Avondale
engages in the repair, overhaul and conversion of ocean-going vessels. With the
900 and 650 foot drydocks located at the Company's main shipyard, the Company is
capable of offering a complete range of vessel repairs and overhaul services.
The Algiers shipyard is operated under a long-term lease and is designed
primarily for the topside repair and overhaul of large ocean-going vessels.
Although historically Avondale has engaged in the repair and overhaul of U.S.
Navy vessels, these opportunities have been curtailed by the U.S. Navy's current
policy of requiring such work to be conducted at or near the vessels' home
ports. Sales by this division to unrelated third parties for the years ended
December 31, 1998, 1997 and 1996 were $8.5 million, $10.3 million and $13.5
million, respectively.
Competition
The shipbuilding industry is divided into two distinct markets, U.S.
government contracts, which is dominated by contracts for the U.S. Navy, and
domestic and international shipbuilding contracts for commercial customers. The
reduced level of shipbuilding activity by the U.S. government during the past
decade has significantly intensified competition. With respect to the market for
U.S. military contracts, there are principally six private U.S. shipyards,
including Avondale, that compete for contracts to construct or convert the
largest surface vessels and submarines. Within certain of the product lines for
which it competes, Avondale also faces competition from a number of smaller
shipyards. Three of the principal competitors are subsidiaries of a much larger
corporation with substantially greater resources than Avondale. The fourth is
likewise a subsidiary of a much larger corporation with diverse defense and
non-defense product lines. In January 1999, the Company announced that its Board
of Directors had unanimously approved the execution of an Agreement and Plan of
Merger with Newport News Shipbuilding Inc. which would combine the two
<PAGE>
remaining independent shipyards into a single entity. It is believed that this
strategic combination will enhance the operating efficiencies and increase
value for the U.S. Navy by creating a broad-based shipbuilding company capable
of designing, building, and maintaining every type of ship in the Navy, Coast
Guard and commercial fleets.
A recent trend in certain government contracts is the concept of several
shipbuilders and a weapon systems integrator forming an alliance to bid on major
procurements. This is evidenced by the bidding process for the recent LPD-17
program where a Company-led alliance which includes Bath Iron Works and Raytheon
was awarded the contract against competition which included an alliance of other
major shipbuilders and a weapon systems integrator. This trend continued in the
DD-21 program and Coast Guard Deep Water project. For the ADC(X) program,
Congress has required that the construction of the ships be performed by at
least two shipyards. Management believes that the most cost-effective means for
the Navy to accomplish this mandate is to award the contract for the design and
construction of the ADC(X) to a shipbuilding team consisting of two or more
shipyards. The Company's success in participating in future Navy programs such
as the ADC(X) and the JCC(X) may be influenced by its ability to form a
competitive bidding team.
With respect to commercial vessels that must be constructed by a U.S.
shipyard under the Jones Act, there are approximately 20 private U.S. shipyards
that can accommodate the construction of vessels up to 400 feet in length, ten
of which Avondale considers to be its direct competitors for commercial
contracts. Because of the current overcapacity at U.S. shipyards, the current
small volume of commercial work available, and the fact that most contracts are
awarded on the basis of competitive bidding, price competition is particularly
intense. With respect to the international commercial shipbuilding market,
Avondale competes with numerous shipyards in several countries, many of which
are heavily subsidized by their governments. See "- Commercial Shipbuilding."
The Company has been successful recently in securing competitively bid
contracts in large part because the Company submitted the most cost-effective
bids for the available contracts. However, the Company also believes that its
receipt of the LPD and ARCO contract awards has demonstrated its ability to
successfully bid for shipbuilding work based on its technical capabilities as
well as its cost efficient production methods. The Company believes that it will
continue to be competitive in bidding for selected U.S. Navy and commercial
shipbuilding contracts in the future. However, no assurance can be given that
the Company will be the successful bidder on any future contracts or that, if
successful, it will realize profits on such contracts.
Marketing
The Company's marketing effort is decentralized and conducted separately
by each division. Generally, the Company and its competitors are all aware of
the shipbuilding, repair and conversion plans of the U.S. Navy and most
prospective commercial customers, and are invited to bid on all major projects.
The Company's boat building and repair operations are marketed by the
sales and business development personnel of the appropriate divisions primarily
through direct, personal sales calls. The services of the Steel Sales operation
<PAGE>
are marketed through industry advertising, personal sales calls and prior
business relationships.
Materials and Supplies
The principal materials used by Avondale in its shipbuilding, conversion
and repair business are standard steel shapes, steel plate and paint. Other
materials used in large quantities include aluminum, copper-nickel and steel
pipe, electrical cable and fittings. The Company also purchases component parts
such as propulsion systems, boilers, generators and other equipment. All of
these materials and parts are currently available in adequate supply from
domestic and foreign sources. Generally, for all its long-term contracts, the
Company obtains price quotations for its materials requirements from multiple
suppliers to ensure competitive pricing. In addition, through the cost
escalation provisions contained in its U.S. military contracts, the Company is
protected from increases in its materials costs to the extent that the increases
in the Company's costs are in line with industry indices.
In connection with its government contracts, the Company is required to
procure certain materials and component parts from supply sources approved by
the U.S. Government. Although certain components and sub-assemblies are
manufactured by subcontractors, the Company's reliance on subcontractors has
been and is expected by management to continue to be limited. The Company is not
dependent upon any one supply source and believes that its supply sources are
adequate to meet its future needs.
Insurance
The Company maintains insurance against property damage caused by fire,
explosion and similar catastrophic events that may result in physical damage or
destruction to the Company's premises and properties. The Company also maintains
general liability insurance in amounts it deems appropriate for its business.
The Company is self-insured for workers' compensation liability and employees'
health insurance except for losses in excess of $1.0 million per occurrence, for
which the Company maintains insurance in amounts it deems appropriate.
Environmental and Safety Matters
General. Avondale is subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of pollutants into
the environment and establish standards for the treatment, storage and disposal
of toxic and hazardous wastes. Stringent fines and penalties may be imposed for
non-compliance with these laws and regulations. In addition, 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.
<PAGE>
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.
During the fourth quarter of 1998, the Company consented to a
comprehensive inspection of its main facility by OSHA. It is believed that this
inspection was based on a complaint filed by the union that is seeking to
organize certain of the Company's employees. At the conclusion of the initial
inspection, representatives of OSHA sought judicial authority for a more
thorough review of substantially all of the Company's medical records. The
Company proposed to the court and the court ordered the Company to provide OSHA
access to the Company's records on Company property. The results of the initial
review and the review of the medical records are not known at this time but are
not expected to have a material adverse effect on the Company's consolidated
financial statements.
Waste Disposal. Avondale's operations produce a limited amount of
industrial waste products and certain hazardous materials. The Company's
industrial waste products, which consist principally of residual petroleum,
other combustibles and blasting abrasives, are shipped to third party disposal
sites that are licensed to handle such materials.
Employees
At December 31, 1998, Avondale had approximately 5,550 employees, many of
whom have been employed by the Company for many years. None of Avondale's
employees is currently covered by any collective bargaining agreement. However,
on June 23, 1993 an election was conducted to determine whether certain of the
New Orleans area employees desired to have union representation. A total of
3,914 workers cast votes, of which approximately 850 votes were challenged by
the National Labor Relations Board ("NLRB") and union organizers on a variety of
grounds. The Company filed objections with the NLRB seeking to have the election
set aside. In February 1997, the NLRB decided that certain of the disputed votes
should be counted and that the Company's objections to the election should be
rejected. The NLRB then counted the disputed votes, resulting in a favorable
outcome for the union, and certified the union. The final vote count included
1,950 votes for forming a union, 1,632 votes against forming a union, 59
disputed votes, with 273 ballots remaining sealed. The Company continues to
believe that it has substantive and meritorious bases for overturning the
decision of the NLRB and has appealed the decision. In October 1998, oral
arguments were made before the 5th Circuit Court of Appeals and the Company
expects the 5th Circuit's decision in 1999. If the NLRB's certification of the
union is enforced as a result of the proceedings, the Company would be required
under the federal labor laws to bargain in good faith with the union on matters
such as wages, hours and working conditions. Even though Avondale will agree
only to bargaining demands that can be economically justified, union
certification may result in an increased risk that the union will engage in
potentially disruptive activities such as strikes or picketing, or that the
Company may incur higher labor and operating costs.
<PAGE>
The union has also filed numerous unfair labor practice charges with the
NLRB alleging that Avondale has committed a variety of violations of the
National Labor Relations Act principally involving claims that employees were
wrongfully disciplined or discharged. In February 1998, an administrative law
judge ordered the Company to reinstate twenty-six fired workers, and rescind
disciplinary actions taken against another fifteen. Although the Company
disputes these claims and is currently appealing the decision, if the decision
is upheld, the respective employees would be entitled to back pay from the time
of his or her claim until the resolution of the case. However, even if there is
a finding in favor of some of the claimants with respect to one or more of the
unfair labor practice claims, management believes that any judgment would not
have a material impact on Avondale's consolidated financial statements.
<PAGE>
GLOSSARY OF SELECTED INDUSTRY TERMS
ADC(X) A class of auxiliary vessels designed to deliver a steady
stream of fuel, ammunition and stores to the U.S. Navy fleet.
It is currently envisioned that these vessels will have
"Refuel at Sea" capabilities similar to the T-AOs constructed
by Avondale.
AO An auxiliary oil tanker constructed for the U. S. Navy and
crewed by U. S. Navy personnel. Avondale has built and
delivered five AOs.
AOJ An AO which has been "jumboized" (i.e. lenghtened by the
Company by inserting a 108 foot midbody). Avondale has
converted five AOs to AOJs.
DD-21 "Surface Combatant 21st Century," the next generation of
surface combatant to be built for the U.S. Navy.
Icebreaker WAGB-20 Polar Icebreaker, currently under construction at
Avondale, was ordered by the U.S. Coast Guard for its polar
operations.
IPDE An Integrated Product Data Environment which captures data in
digital format at the point of creation and then organizes,
integrates, maintains and makes the information available to
all program participants.
JCC(X) A class of auxiliary vessels that would house sophisticated
communications and computerized packages designed to enhance
coordination among the various branches of the military and
combine the strengths of all the services within a unified
framework in order to make interchangeability and
interoperability options possible.
Jones Act Merchant Marine Act of 1920, as amended. The principal
requirements of the act are that ships engaged in coastwise
trade must be owned by a U.S. company, crewed by U.S. citizens
and built by a U.S. shipbuilder.
LCAC "Landing craft air cushion," a surface vessel that was
constructed at the Company's previously owned Gulfport
facility. Avondale has built and delivered fifteen LCACs.
LPD The newest class of amphibious transport ship for the U.S.
Navy. Avondale was awarded a contract, with options for two
ships, for the design, construction and support of the initial
LPD ships. The first of these options was exercised in
December 1998.
LSD "Landing ship dock," designed to carry troops, materials and
up to four LCACs. Avondale has built five LSDs.
LSD-CV An LSD with a "cargo variant" design allowing for carrying
more cargo and only 2 LCACs. Avondale has delivered four
LSD-CVs and delivered a fifth during 1998.
MARAD United States Maritime Administration, Department of
Transportation.
<PAGE>
MHC MHC-51 class fiberglass coastal minehunter. Avondale has
constructed and delivered four MHCs to the U. S. Navy.
Sealift TAKR 300 Class Sealift vessels are transport vessels built for
the U.S. Navy. Avondale has contracts to build seven Sealift
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.
<PAGE>
Cautionary Statement for Purposes of "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Certain statements, other than statements of historical fact, contained in
this Annual Report on Form 10-K are forward-looking statements. These
forward-looking statements are generally accompanied by such terms and phrases
as "anticipates," "estimates," "expects," "believes," "should," "projects,"
"scheduled," or similar statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements include the
Company's reliance on U.S. Navy contracts, including its ability to replenish
its backlog by securing additional contracts from the U.S. Navy, profit
recognition on government contracts, the outcome of the Company's litigation
involving efforts to unionize the Company's production workers and the
competitive impact of a resolution in favor of the union, the importance of
obtaining commercial contracts, the Company's ability to complete its contracts
within its cost estimates, intense competition for government and commercial
contracts, labor, regulatory and other risks in the shipbuilding and marine
construction industries and other unanticipated events affecting the Company's
efforts and the efforts of its suppliers, subcontractors, and customers
(including the U. S. Navy) to timely correct Year 2000 problems inherent in
essential computer systems, which could impair the Company's operations or the
ability of its customers to timely pay for products and services provided. All
forward-looking statements in this Form 10-K are expressly qualified in their
entirety by the cautionary statements in this paragraph and the matters set
forth below:
Labor Matters
As discussed in "Business - Employees", the Company is involved in a
dispute involving the NLRB's certification of a union to represent certain of
the Company's New Orleans area employees. The Company continues to believe that
it has substantive and meritorious bases for overturning the decision of the
NLRB and has appealed the decision. In October 1998, oral arguments were made
before the 5th Circuit Court of Appeals and the Company expects the 5th
Circuit's decision in 1999. If the NLRB's certification of the union is enforced
by subsequent judicial proceedings, the Company would be required under the
federal labor laws to bargain in good faith with the union on matters such as
wages, hours and working conditions. Even though Avondale will agree only to
bargaining demands that can be economically justified, union certification may
result in an increased risk that the union will engage in potentially disruptive
activities such as strikes or picketing, or that the Company may incur higher
labor and operating costs.
The union has also filed numerous unfair labor practice charges with the
NLRB alleging that Avondale has committed a variety of violations of the
National Labor Relations Act principally involving claims that employees were
wrongfully disciplined or discharged. In February 1998, an administrative law
judge ordered the Company to reinstate twenty-six fired workers, and rescind
disciplinary actions taken against another fifteen. Although the Company
disputes these claims and is currently appealing the decision, if the decision
is upheld, the respective employees would be entitled to back pay from the time
of his or her claim until the resolution of the case.
See "Business - Employees."
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
<PAGE>
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.
During the fourth quarter of 1998, the Company consented to a comprehensive
inspection of its main facility by OSHA. Avondale believes that this inspection
was based on a complaint filed by the union that is seeking to organize certain
of the Company's employees. At the conclusion of the initial inspection,
representatives of OSHA sought judicial authority for a more thorough review of
substantially all of the Company's medical records. The Company proposed to the
court and the court ordered the Company to provide OSHA access to the Company's
records on Company property. The results of the initial review and the review of
the medical records are not known at this time but are not expected to have a
material adverse effect on the Company's consolidated financial statements.
Reliance on Major Customer
Avondale's business is primarily dependent upon the ship construction and
conversion programs of the U.S. Navy and other branches of the military, with
over 80% of its $2.0 billion firm backlog at December 31, 1998 consisting of
contracts to build vessels for the U.S. Navy and U.S. Coast Guard. 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. Although a
contract for the first two of an anticipated 12 vessels under the LPD program
was awarded to an alliance led by the Company, there can be no assurance that
the U.S. Navy will exercise its option for the remaining ship under the initial
LPD contract or that Congress will appropriate funds for the anticipated nine
additional ships not in the original contract. It is also possible that the U.S.
Navy may hold a competition for the additional vessels, or that it may delay
implementation of the construction program. In addition, while Avondale believes
that it should be a viable competitor for the ADC(X), JCC(X), and Coast Guard
Deepwater programs, no assurance can be given that sufficient monies will be
appropriated to fund these programs, that the timing of the appropriations will
permit the award of construction contracts in the time frame currently planned,
or that the Company will be the successful bidder. With a substantial portion of
Avondale's current firm backlog scheduled for completion by the end of 2001, it
is important that Avondale, or an alliance including Avondale, be a successful
bidder for all or a substantial portion of the remaining LPD vessels or other
U.S. Navy or commercial work if it is to maintain its current level of
shipbuilding activity beyond 2001.
Commercial Contracts
Although the LPD contract is expected to provide, assuming the award of
additional ships by the U.S. Navy, a substantial base of work continuing beyond
the year 2000, the Company has significant fixed costs associated with its
operations. As a result, in order for the Company to achieve desirable
operational efficiencies and profit levels during that period, it is important
<PAGE>
that the Company complement its firm backlog with additional shipbuilding
orders. Other than the follow-on LPD ships, the ADC(X) program, the JCC(X)
program and the Coast Guard Deepwater program, the Company is unaware of any
significant relevant military shipbuilding initiatives that are likely to
commence before 2005. If the Company is unsuccessful at securing additonal
military contracts, it will be important that the Company secure additional
commercial shipbuilding orders. Although for the reasons discussed elsewhere
herein, the Company believes that significant commercial shipbuilding
opportunities will become available during the next five years, competition for
such work is expected to be intense, and there can be no assurance that the
Company will be successful in obtaining such work, or if awarded, that it will
complete such work profitably. In addition, the current low level of crude oil
prices has resulted in many of the major oil companies reducing capital
spending. No assurance can be given that this reduced spending will not delay
or eliminate the purchase of additional crude oil tankers. See "Business -
Overview - U.S. Government" and "Business - Overview - Commercial Shipbuilding."
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, much of Avondale's principal construction activity 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 addition, although the LPD-17 contract award was made on a
cost-plus-award fee basis, the ability of Avondale to realize its award fee is
dependent not only upon its ability to perform its contractual obligations but
also the satisfactory performance by other members of the alliance.
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. As discussed in "Business - Government Contracting," the
Company has identified an issue which, if unresolved, will result in the
Company filing a claim or REA. Although the Company pursues REAs and all other
contractual disputes vigorously, there is no assurance that the U.S. Navy will
resolve REAs or any of these disputes in a manner favorable to the Company.
See "Business - Shipbuilding."
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.
<PAGE>
Competition and Regulation
The reduced level of shipbuilding activity by the U.S. government during
the past decade has increased competition significantly. With respect to the
market for U.S. military contracts, there are principally six private U.S.
shipyards, including Avondale, that compete for contracts to construct or
convert vessels for the U.S. Navy. Within certain of the product lines for which
it competes, Avondale also faces competition from a number of smaller shipyards.
Three of these companies are subsidiaries of a single corporation that has
substantially greater resources than Avondale. Another is likewise a subsidiary
of a larger corporation with diverse defense and commercial lines of business.
The remaining shipyard, Newport News Shipbuilding Inc., is independent but has
annual revenues of more than twice those of the Company. No assurance can be
given that the superior corporate resources and critical mass of these larger
companies will not put the Company at a competitive disadvantage for future U.S.
Government programs. As a result, as described elsewhere, the Company has
proposed to merge with Newport News Shipbuilding Inc.
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 (1) the Jones Act, which requires
that all vessels transporting products between U.S. ports be constructed by U.S.
shipyards, (2) 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 (3) 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, legislation has been introduced
each of the last several years 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 although each year Congress has adjourned without
adopting or ratifying the agreements. 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 - Commercial Shipbuilding."
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
<PAGE>
imposed for non-compliance. In addition, 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.
<PAGE>
Item 2. Properties.
The Company's corporate headquarters and main shipyard are located on the
west bank of the Mississippi River at Avondale, Louisiana, approximately 15
miles from downtown New Orleans. That facility includes approximately 229 acres
of Company-owned land with 174 buildings enclosing approximately 2.0 million
square feet of space, approximately 41 acres of leased land, a 900-foot floating
dry dock/launch platform that permits construction, conversion or repair of
vessels up to approximately 1,000 feet in length, and a 650-foot floating dry
dock principally used for ship repair and multiple building ways and side
launching facilities. The main shipyard includes approximately 5,800 feet of
wharves, 1,200 feet of launch ways and 2,900 feet of unimproved waterfront along
the Mississippi River. The Company's shipyard facilities have the capacity to
build virtually any type of vessel other than nuclear-powered submarines and
aircraft carriers and surface vessels of the largest classes, such as
ultra-large crude carriers.
The Company's 900-foot floating drydock was constructed in 1975 and
financed pursuant to Title XI of the Merchant Marine Act, 1936, as amended.
These mortgage bonds were refinanced in February 1995 with mortgage bonds of
approximately $4.3 million. The 900-foot drydock is currently subject to a Title
XI mortgage of approximately $1.6 million (see Note 4 of the Notes to
Consolidated Financial Statements).
The Company's 650-foot floating drydock and support facilities were
constructed in 1982 and financed with $36.3 million of industrial revenue bonds.
The 650-foot drydock is currently subject to $34.4 million of these industrial
revenue bonds (see Note 4 of the Notes to Consolidated Financial Statements).
As part of its program to significantly improve its efficiency, in 1995
the Company completed a capital expenditure program of approximately $20
million, financed principally through $17.8 million of bonds issued in February
1995 utilizing a Title XI guarantee. The modernization program is currently
subject to a Title XI mortgage of approximately $14.2 million (see Note 4 of the
Notes to Consolidated Financial Statements). The modernization program included
construction of a covered facility, which allows for productivity gains by
eliminating weather-related problems, and adoption of a more automated process
for building the various modules which are assembled into a completed vessel.
The Company has also made significant capital improvements, particularly
enhancing its computer-aided design and product modeling capabilities. In this
effort, the Company teamed with the University of New Orleans (the "University"
or "UNO"), the University of New Orleans Research and Technology Foundation,
Inc. (the "Foundation") and the State of Louisiana in a cooperative effort.
Pursuant to the terms of various agreements, the Foundation purchased hardware
and software required to implement the extensive three-dimensional ship design
and Integrated Product Data Environment technology and constructed a 200,000
square foot building on property donated to the University by the Company and
located adjacent to the Company's main shipyard. This facility is complete and
is currently an integral part of the design of the first vessel in the LPD
class. This investment in new technology and the facility are known as the
"UNO/Avondale Maritime Technology Center of Excellence" (the "Center"), and is
being financed by the Foundation using third party debt and lease financing,
both of which are guaranteed by the Company. In 1997, the Company entered into a
fifty-year lease for the Center requiring a nominal annual lease payment. The
<PAGE>
Company will provide access to the University for its use in research and the
development of educational curricula related to naval architecture and marine
engineering. In addition to the amounts expected to be funded by the State, the
Foundation, at the Company's request, is incurring approximately $15.5 million
in additional costs to enhance the integration and functionality of the ship
design and IPDE technology. The Company is reimbursing the Foundation for these
additional amounts as incurred and will capitalize these costs and amortize them
over their estimated useful lives in accordance with the Company's stated
policies (See Note 1 of the Notes to Consolidated Financial Statements.)
The Company also operates several other facilities in the vicinity of the
main shipyard. The Westwego Yard is located five miles down-river from the main
shipyard on 16.6 acres of land leased through June 2001 and includes facilities
for the construction or repair of boats and vessels up to 450 feet in length.
The Algiers Yard is located 19 miles down-river from the main shipyard on 22
acres of land leased through December 1999 and includes construction facilities
used predominantly for the repair and overhaul of large ocean-going vessels. The
Steel Sales operation is located on Company-owned property in Harvey, Louisiana,
where a steel warehouse is located. The location has direct access to the
Mississippi River via the Harvey Canal. The Modular Construction operation,
located in an approximately 70,000 square foot facility on a 58 acre
Company-owned site a few miles up-river from the main shipyard, consists of a
complete machine shop with steel fabricating facilities.
The Avondale Enterprises, Inc. ("AEI") facility is located on a
Company-owned 121.5 acre site near Gulfport, Mississippi on an industrial
seaway. The facility includes a 263,447 square foot manufacturing facility and a
6,300 square foot administration building. This facility was acquired in 1989
for construction of the Minehunters ("MHC") for the U.S. Navy. AEI has pledged a
portion of the facility to secure a $3 million loan it entered into in 1991 to
finance a portion of its 1989 acquisition debt. This facility is currently
subject to $1.7 million of general obligation industrial bonds (see Note 4 of
the Notes to Consolidated Financial Statements). Upon the transfer of the final
MHC hull to the main shipyard in December 1994, this facility became idle.
During 1996 and 1997, the Company utilized the facility for the completion of
the river hopper barge contract. The Company is currently utilizing the facility
to support shipbuilding activities.
Finally, in June 1998, the Company, in conjunction with the State of
Louisiana announced the opening of a new steel fabrication facility in Tallulah,
Louisiana. The state funded certain repairs and improvements to a site owned by
the Port of Madison Parish in north Louisiana on which a 100,000 square foot
facility is being leased to the Company. The Company is in the process of hiring
100 employees to fabricate steel subassemblies needed at the main shipyard.
These subassemblies will be transported to the main yard and joined together to
form units, or modules, that are the building blocks in Avondale's ship
construction process.
The Company believes that its core marine construction and repair
facilities provide it with sufficient capacity to handle any business it
reasonably expects to obtain in the foreseeable future. In general, the
Company's productive capacity is limited less by physical facilities than by the
number of employees the Company can effectively supervise. Management believes
that the Company would be operating at full capacity with approximately 8,000
employees. The Company's core business currently operates with approximately
5,550 employees.
<PAGE>
Item 3. Legal Proceedings.
Environmental Proceedings. Various governmental and private parties have
from time to time alleged that the Company is a potentially responsible party
("PRP") with respect to certain hazardous waste sites, including, among other
things, the site listed below.
In January 1986, the Louisiana Department of Environmental Quality ("DEQ")
advised the Company that it could be a PRP with respect to an oil reclamation
site operated by an unaffiliated company in Walker, La. The Company sold to the
operator a substantial portion of the waste oil that was processed at the
reclamation site during the period 1978 through 1982. The Company's potential
liability, if any, for cleanup of this site will be based on the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or the
Louisiana Environmental Quality Act. Under these statutes, such liability is
presumptively joint and several, but is typically apportioned among the
responsible parties based on the volume of material sent by each to the waste
site. The Company has cooperated with other PRPs to study the potential
aggregate liability under these statutes. Moreover, the Company believes it has
substantial defenses against liability and defenses that could mitigate the
portion of liability, if any, that would otherwise be attributable to it.
To date, the Company and certain of the other PRPs (the "Funding Group")
for the site have funded the site's remediation expenses, PRP identification
expenses and related costs for the participating parties. As of December 31,
1998, such costs totaled approximately $19.5 million, of which the Company has
funded approximately $4.0 million. Since 1988, the Funding Group filed petitions
to add a number of companies as third-party defendants with regard to the
remedial action. The Funding Group has agreed to settle with the majority of
these companies. All funds collected through these settlements are placed in
escrow to fund future expenses. At December 31, 1998, the balance of the escrow
was approximately $9.9 million, which is to be used to fund any ongoing
remediation expenses. The Company will not owe any future assessments until the
balance in escrow is depleted. There are additional settlements being negotiated
which should add to the balance in escrow.
Additional remedial work scheduled for the site includes completion of
studies and if required by the results of these studies, subsequent remediation.
Following completion of any such required additional remediation, it will be
necessary to obtain Environmental Protection Agency approval to close the site,
which consent may require subsequent post-closure activities such as groundwater
monitoring and site maintenance for many years. The Company is not able to
estimate the final costs for any such additional remedial work or post-closure
costs that may be required; however, the Company believes that its proportionate
share of expenditures for any additional work will not have a material impact on
the Company's consolidated financial statements. In addition, the members of the
Funding Group have entered into a final cost sharing agreement under which all
parties have agreed that there would be no re-allocation of previous remediation
costs, but that future remediation costs would be established by a formula.
Under this agreement, the Company's share of future costs will not exceed 17.5%
for any additional costs.
Furthermore, the Company has initiated litigation against its insurer for
a declaration of coverage of the liability, if any, that may arise in connection
with the remediation of the site referred to above. The court has ruled that
<PAGE>
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.
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 consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of its fiscal year ended December 31, 1998.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock trades on the Nasdaq National Market under the
symbol AVDL. The following table sets forth the range of high and low per share
sales prices, as reported by Nasdaq, for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, High Low
<S> <C> <C>
1997
First Quarter $23 1/2 $17
Second Quarter $21 3/8 $16 1/4
Third Quarter $29 $20 5/8
Fourth Quarter $30 $24 3/4
1998
First Quarter $29 7/8 $25
Second Quarter $29 3/4 $25
Third Quarter $29 1/4 $23 3/16
Fourth Quarter $30 $22 1/4
</TABLE>
At December 31, 1998, there were 585 holders of record of the Company's
Common Stock.
The Company does not currently pay dividends on its Common Stock and no
dividends were paid on the Company's Common Stock during the two years ended
December 31, 1998. As discussed in Note 4 of the Notes to Consolidated Financial
Statements, the terms of the Company's revolving credit agreement require bank
approval for the payment of cash dividends over a specified amount.
<PAGE>
Item 6. Selected Consolidated Financial Data.
The following table contains selected consolidated financial data for the
Company and its subsidiaries for each of the fiscal years in the five-year
period ended December 31, 1998. The data for each of the fiscal years in the
five-year period ended December 31, 1998 are derived from the consolidated
financial statements of the Company and its subsidiaries. The consolidated
financial statements as of December 31, 1998 and 1997, and for each of the years
in the three-year period ended December 31, 1998, and the report of Deloitte &
Touche LLP thereon, have been included in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands, except per share data)
1998 1997(1) 1996(1) 1995 1994
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Continuing operations:
Sales ................................... $ 748,936 $ 613,993 $ 624,929 $ 576,308 $ 475,810
Gross profit............................. 84,361 75,478 81,827 58,671 47,485
Income from operations................... 46,900 43,593 36,790 26,548 16,949
Income from continuing operations........ 38,991 26,833 30,795 28,180 13,075
Loss from discontinued operations........... -- -- -- -- (4,552)
Cumulative effect of accounting change(2)... (2,046) -- -- -- --
Net income(3)............................... 36,945 26,833 30,795 28,180 8,523
Income/(loss) per share of common stock:
BASIC:
Continuing operations.................... $ 2.83 $ 1.85 $ 2.13 $ 1.95 $ 0.90
Discontinued operations.................. -- -- -- -- (0.31)
Cumulative effect of accounting change... (0.15) -- -- -- --
Total ................................... $ 2.68 $ 1.85 $ 2.13 $ 1.95 $ 0.59
DILUTED:
Continuing operations.................... $ 2.82 $ 1.85 $ 2.13 $ 1.95 $ 0.90
Discontinued operations.................. -- -- -- -- (0.31)
Cumulative effect of accounting change... (0.15) -- -- -- --
Total ................................... $ 2.67 $ 1.85 $ 2.13 $ 1.95 $ 0.59
BALANCE SHEET DATA:
Working capital............................. $ 122,269 $ 145,224 $ 119,475 $ 80,988 $ 34,836
Total assets................................ 397,202 375,615 362,872 316,727 273,503
Long-term debt.............................. 48,682 51,819 54,866 60,593 45,875
Shareholders' equity........................ 210,415 208,977 181,853 151,058 122,878
CASH FLOW DATA:
Net cash provided by operating activities... $ 37,173 $ 50,557 $ 26,470 $ 27,995 $ 69,128
Net cash used for investing activities...... (27,544) (13,083) (10,449) (16,799) (11,931)
Net cash (used for) provided by
financing activities..................... (39,119) (4,666) (5,601) 11,914 (44,978)
OTHER FINANCIAL DATA:
EBITDA(4)................................... $ 55,834 $ 54,052 $ 47,599 $ 36,367 $ 28,501
OPERATIONAL DATA:
Firm backlog(5)............................. $ 1,988,000 $1,802,000 $1,766,000 $1,413,000 $1,424,000
- --------------------
</TABLE>
<PAGE>
(1) See " Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Notes to Consolidated Financial
Statements relating to, among other things, the impact of revisions of
estimated profits on previously completed shipbuilding contracts in
1998, 1997 and 1996.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Notes to Consolidated Financial
Statements relating to, among other things, the impact of the Company's
early adoption of the American Institute of Certified Public
Accountants' Statement of Position 97-3.
(3) Net income for the years ended December 31,1998, 1996 and 1995 includes
income tax benefits of $9.6 million ($.69 per share-diluted), $9.0
million ($.62 per share - diluted), and $13.0 million ($.90 per share -
diluted), respectively, attributable to certain net operating loss
carry forwards, tax credits and certain prior year tax deductions.
(4) As used herein, EBITDA is income (loss) from operations plus
depreciation and amortization. EBITDA is frequently used by securities
analysts and is presented here to provide additional information about
the Company's operations. EBITDA should not be considered as an
alternative to net income (loss) as a measure of the Company's
operating performance or as an alternative to cash flows as a measure
of the Company's liquidity and may not be comparable to similarly
titled measures of other companies.
(5) As used herein, firm backlog represents the total dollar value of all
contracts (including estimated contract escalation) net of costs
incurred and profits recorded for which the Company has signed
contracts with its customers but exclusive of unexercised options
(including the respective estimated contract escalation) within those
contracts.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion should be read in conjunction with Avondale
Industries, Inc.'s (the "Company" or "Avondale") Consolidated Financial
Statements and Notes thereto included elswhere in this Form 10-K.
Overview
The improvement in the Company's operating results continued during 1998
with the Company reporting record income from operations of $46.9 million
compared to Avondale's previous high of $43.6 million in 1997. Further, income
from operations increased 8% above the level of the prior year while income
before income taxes increased 13% compared to 1997.
The Company's firm backlog at December 31, 1998 was approximately $2.0
billion (including estimated contract escalation) exclusive of unexercised
options aggregating approximately $490 million held by the U.S. Navy (the
"Navy") (including estimated contract escalation) and approximately $330 million
held by a commercial customer for additional ship orders. The firm backlog
includes two Navy vessels awarded in 1998, the first of which was the exercise
of a previously awarded option to construct an additional Sealift ship for
approximately $240 million (including estimated contract escalation). The
exercise of this option represents the seventh ship which the Company has been
awarded in the Sealift program, the first of which was delivered during 1998.
The six Strategic Sealift ships remaining to be delivered have a backlog of
approximately $669 million (including estimated contract escalation). The
Company anticipates delivering two of the Sealift ships during 1999.
As previously disclosed, in December 1996 the U.S. Navy awarded a $641
million contract to a Company-led alliance, which includes Bath Iron Works
("Bath") and Raytheon Company ("Raytheon"), to design and construct the first of
an anticipated twelve ships under the Navy's LPD program. The original contract
provided for options exercisable by the Navy for two additional LPD ships.
During 1998, the U. S. Navy exercised the first such option for the second
vessel of the program, LPD-18, at a contract price of approximately $391
million. Under the terms of an agreement between the alliance members, the
Company will build the ships covered under the December 1996 and December 1998
contracts, and, if the Navy exercises the remaining option, Bath Iron Works
would construct the third of the three LPD ships to be built under the initial
contract. Raytheon is responsible for total ship integration and the alliance is
using an advanced three-dimensional ship design and product modeling technology
for the design and manufacture of the ship. As the prime contractor under the
LPD-17 contract, the Company is required to report in its consolidated financial
statements as sales and cost of sales the entire contract amount for each vessel
in the LPD program constructed by the alliance. Under the subcontracting
agreements entered into between the Company and each of Bath and Raytheon, the
award fees that can be earned under the LPD contract are distributable among the
alliance members in proportion to each member's performance and participation in
the construction of the vessel during the period for which the award was
granted. To the extent that the Company's revenues include costs incurred and
<PAGE>
award fees paid to the other alliance members, such revenues will be recorded
with no corresponding operating profit margin. For additional information on
the terms of the LPD-17 contract award, the relationship between the members of
the alliance and certain accounting considerations, see "Business - Overview."
Also included in the firm backlog is the largest commercial contract ever
awarded to Avondale. In June 1997, the Company was awarded a $332 million
contract for the construction of two 125,000 DWT crude oil carriers for the
Jones Act Trade to be built with double hulls in compliance with the Oil
Pollution Act of 1990. The original contract also provided for options
exercisable by the customer for three additional ships, and, in September 1998,
the customer exercised the first such option, valued at approximately $164
million. The first ship is scheduled for delivery in 2000. With the current low
level of crude oil prices, ARCO announced plans to reduce costs and capital
spending. To this end, ARCO and the Company agreed to delay the deliveries of
the three vessels currently under contract by up to 16 months and the customer
has agreed to pay the Company its estimated out-of-pocket expenses for
completing the vessels in a later time frame. There can be no assurance that
ARCO will exercise its remaining options given its cost and spending reduction
plans.
Vessel deliveries in 1998 and 1997 included one MHC minehunter, the last
of four double- hulled commercial tankers, the remainder of the river hopper
barges, one LSD-CV, and the first of seven Strategic Sealift ships. Vessel
deliveries expected in 1999 include the Coast Guard Icebreaker and the second
and third Strategic Sealift vessels.
The Company's operating results for 1999 are expected to be principally
related to the Strategic Sealift, the Icebreaker, the ARCO tanker and the LPD
contracts. Except for the LPD contracts for which the Company records award fees
as earned, the Company records profits under the percentage-of-completion method
of accounting based on direct labor charges. See "Business - Overview". Although
the Company generally does not begin to record profits on its contracts until
contract performance is sufficient to estimate final results with reasonable
accuracy, actual profits taken with respect to such contracts may be affected if
the Company is required in the future to revise its estimate of the cost to
complete of one or more of such contracts.
<PAGE>
On January 19, 1999, Avondale announced a proposed merger with a
subsidiary of Newport News Shipbuilding Inc. which would result in Avondale
becoming a subsidiary of Newport News. The proposed merger would create a
broad-based shipbuilding company capable of designing, building and maintaining
every type of ship used in the U. S. Navy, Coast Guard, and commercial fleets.
The proposed merger is structured as a stock-for-stock transaction and is
subject to regulatory and shareholder approval. Upon consummation of the
proposed merger, each Avondale share would be exchanged for a maximum of 1.25
and a minimum of 1.15 of Newport News Shipbuilding Inc. shares based on the
average closing price of Newport News shares during the fifteen day trading
period ending on the fourth trading day prior to the shareholder vote. If such
average closing price is $28.40 or less, Avondale shareholders would receive
1.25 Newport News shares for each Avondale share. If such price is $30.87 or
more, Avondale shareholders would receive 1.15 Newport News shares for each
Avondale share. If such price is between $28.40 and $30.87, Avondale
shareholders would receive that number of Newport News shares determined by
dividing $35.50 by such price, or between 1.25 and 1.15 Newport News shares.
Avondale and Newport News expect to finalize the transaction during the second
quarter of 1999.
On February 22, 1999, Avondale and Newport News announced that their
proposed merger had been cleared by the Department of Justice under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976. The antitrust clearance
satisfies an important condition to the closing of the transaction, which
remains subject to the approval of the shareholders of both companies and to the
consent of the Administrator of the Maritime Administration of the Department of
Transportation.
In addition, on February 18, 1999, the Company announced that it had been
advised by Newport News that Newport News had received an unsolicited offer from
General Dynamics Corporation ("General Dynamics") proposing to acquire Newport
News for $38.50 per share in cash, subject to due diligence and regulatory
clearance. Although the General Dynamics offer did not specifically ask Newport
News to terminate its agreement with Avondale, the offer did state that Newport
News' proposed merger with Avondale would create antitrust problems in a
combination of General Dynamics and Newport News.
Newport News has advised General Dynamics that it is not prepared to
evaluate the General Dynamics proposal until it obtains reliable assurance that
a combination of General Dynamics and Newport News would not be opposed by the
Department of Defense and Department of Justice. To that end, Newport News made
a request to the Department of Defense seeking a prompt indication of the
Department's position on the General Dynamics proposal. At the date of this
Form 10-K, the Department of Defense has not responded to the Newport News
request. Pending any such determination, Newport News and the Company have each
publicly expressed their full commitment to the Newport News-Avondale merger.
<PAGE>
Results of Operations
1998 vs. 1997. The Company recorded net income of $36.9 million, or $2.67
per diluted share, for 1998 compared to $26.8 million, or $1.85 per diluted
share, in 1997 and operating income increased 7.5% over the year-earlier period.
Net income for 1998 included income tax benefits of $9.6 million, or $0.69 per
diluted share, to recognize for financial statement purposes adjustments
associated with certain prior year tax deductions and income tax credits. No
similar benefit was recorded in 1997. In addition, 1998 net income reflected the
impact of the Company's adoption of the American Institute of Certified Public
Accountants' Statement of Position 97-3. The adoption of this SOP, which
prescribes accounting treatment for entities which are subject to assessments
related to insurance activities, resulted in an after-tax charge of
approximately $2.0 million, or $0.15 per diluted share. (See additional
discussion in Note 1 of the Notes to Consolidated Financial Statements,
contained elsewhere in this Form 10-K.)
The improvement in the Company's operating results for 1998 compared to
the same period of the prior year primarily reflects operating profits
recognized on the contracts to construct the seven Strategic Sealift ships, the
Icebreaker and the LSD-CV 52 as substantial progress toward completion of all
these contracts was achieved in 1998. Also contributing to the improved 1998
operating results were operating profits recorded by the Company's wholesale
steel, modular construction and marine repair operations. However, particularly
in the second half of 1998, the Company's wholesale steel sales division's
operating profits were adversely impacted as oil and gas construction activity
slowed and the depressed economic conditions in the Far East resulted in a
significant increase in the importation of low cost foreign steel into the U.S,
resulting in an oversupply of steel and significant pricing pressure. As a
result, at year end, management reviewed the carrying value of its Steel Sales
inventory and recorded a $2.2 million pre-tax charge to reduce its carrying
value to market prices. Nevertheless, total 1998 operating income increased $3.3
million, or 7.6% over the year-earlier period.
Sales in 1998 increased $134.9 million, or 22%, to $748.9 million compared
to $614.0 million in 1997. The increase in sales in 1998 is primarily a result
of increased costs associated with contracts in the initial stages of
construction. In 1998, the Company recorded increased sales on the contracts to
construct the three 125,000 DWT double-hulled crude oil carriers, (the last of
which is scheduled for delivery in 2002), the six remaining Strategic Sealift
ships (the last of which is expected to be delivered in 2001), and the LPD-17
(expected to be delivered in 2002). The double-hulled crude oil carriers and LPD
contracts are in the initial stages of construction resulting in significant
engineering design and material acquisition costs. The increases noted above
were partially offset by decreased sales recorded on contracts that are at or
near completion. The Company recorded decreased sales on the contract to
retrofit four single-hulled commercial tankers with new double hulls (the last
of which was delivered in September 1997) and the contracts to construct the
Icebreaker (expected to be delivered in the third quarter of 1999) and the
LSD-CV 52 (delivered in February 1998). Also, the Company recognized revenues in
1997 on contracts to construct the 100 river hopper barges and the four coastal
<PAGE>
MHCs all of which were delivered in 1997.
Gross profit for 1998 increased $8.9 million, or 12%, compared to 1997.
However, the gross profit margin percentage decreased approximately 1.0% as
compared to the prior year. The decrease in gross profit margin percentage is
primarily attributable to three factors. First, as noted above, the Company
recorded a $2.2 million write down of the carrying value of the inventory of its
wholesale steel sales operation. Second, the LPD and ARCO contracts are in the
initial stages of contract performance which result in significant engineering
design and material acquisition costs recorded as sales with little or no
corresponding gross profit. The Company does not begin profit recognition until
final results can be estimated with reasonable accuracy. (Refer to Note 1 of the
Notes to Consolidated Financial Statements, contained elsewhere in this Form
10-K, for a discussion of the Company's policies and procedures for revenue
recognition.) Finally, as stated above, the Company includes in its consolidated
financial statements costs incurred and award fees paid to other members of the
alliance in the LPD program as sales and cost of sales with no corresponding
gross profit margin.
The Company currently has an issue with the U. S. Navy related to certain
materials purchased from a subcontractor for use in the Strategic Sealift
program. The materials were purchased based on government-provided
specifications which have proven to be defective. In addition to delay and
disruption costs, the Company has incurred approximately $12.5 million in direct
costs through December 31, 1998 related to this issue. The Company believes that
it is entitled to recovery from the U. S. Navy of these costs and has recorded a
receivable for the amount of the direct costs incurred to date. While the
Company hopes to resolve this issue through negotiation, the Company has engaged
legal counsel to assist in the development of a claim.
Selling, general and administrative ("SG&A") expenses increased $5.6
million, or 17%, during 1998. The increase in SG&A expenses was due primarily to
an increase in proposal preparation and related costs in 1998 in connection with
U.S. Government and commercial shipbuilding opportunities and the rental and
maintenance of advanced technology in connection with the Company's focus on
enhancing overall efficiency.
Other income increased $0.9 million, or 27%, in 1998, reflecting an
increase in interest income resulting from significantly higher cash and cash
equivalents available for investment during the period preceding the June 1998
stock repurchase.
1997 vs. 1996. The Company recorded net income of $26.8 million, or $1.85
per diluted share, for 1997 compared to $30.8 million, or $2.13 per diluted
share, for 1996. Net income for 1996 included an income tax benefit of $9.0
million, or $0.62 per diluted share, which recognized, for financial reporting
purposes, the benefit of certain net operating loss carry forwards available to
offset estimated future earnings. No similar benefit was recorded in 1997.
Income from operations for 1997 increased $6.8 million, or 18%, compared
with 1996. This improvement is primarily reflected by operating profits
recognized on the contracts to construct the six Strategic Sealift ships, the
<PAGE>
Icebreaker and the LSD-CV 52. Profit recognition began in 1996 for the Sealift
and 1997 for the Icebreaker as contract progress was not sufficient to begin
profit recognition until that time. Also contributing to the improved
operating results during 1997 were operating profits of $7.8 million generated
by the Company's marine repair, modular construction and wholesale steel
operations.
These operating profits were offset, in part, by operating losses recorded
on two commercial marine construction contracts. During 1997, Avondale recorded
additional losses of $4.3 million on the contract to retrofit four single-hulled
commercial tankers with new double-hulls (the last of which was delivered in
September 1997), and an additional $1.5 million loss on the contract to
construct 100 river hopper barges (the last of which was delivered in November
1997). These losses resulted primarily from increases in the estimated labor
needed to complete the contracts.
Sales for 1997 decreased $10.9 million, or 2%, to $614.0 million compared
to $624.9 million for 1996. The decrease in 1997 sales was due primarily to a
reduction in production activity associated with contracts that are at or near
completion. The Company recorded decreased sales on the contract to retrofit
four single-hulled commercial tankers with new double hulls and the contracts to
construct the seven T-AOs (the last of which was delivered in May 1996), the
four MHCs (the last of which was delivered in January 1997), the LSD-CV 52
(expected to be delivered in February 1998) and the three LSD-CVs (the last of
which was delivered in March 1996). These decreases were partially offset by
increased sales recorded on the contracts to construct the six Strategic Sealift
ships (the first of which is expected to be delivered in 1998), the LPD-17
(expected to be delivered in 2002), the Icebreaker (scheduled for delivery in
1999) and the two 125,000 DWT double-hulled crude oil carriers (the last of
which is scheduled for delivery in 2000). The contracts to construct the six
Strategic Sealift ships, the LPD-17, the Icebreaker and the two double-hulled
crude oil carriers collectively accounted for 75% of the Company's 1997 sales.
Gross profit for 1997 decreased $6.3 million, or 8%, compared to 1996.
This decrease is primarily attributable to the early stages of construction of
the majority of the Company's contracts in progress. The Company does not begin
profit recognition until final results can be estimated with reasonable
accuracy. Refer to Note 1 of the Notes to Consolidated Financial Statements,
contained elsewhere in this Form 10-K, for a discussion of the Company's
policies and procedures for revenue recognition. In addition, the LPD-17 and the
two double-hulled crude oil carriers are in the initial stages of contract
performance which result in significant engineering design and material
acquisition costs recognized without any operating margins. As a result of the
factors discussed herein, contracts which account for a majority of the
Company's 1997 net sales have little or no operating margins recognized.
Selling, general and administrative ("SG&A") expenses decreased $13.2
million, or 29%, for 1997 compared to 1996. The overall decrease in SG&A
expenses was due primarily to a decrease in proposal preparation and related
costs compared with those recorded in 1996 in connection with the preparation of
the successful LPD-17 proposal.
<PAGE>
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") encourages but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations and has adopted the disclosure-only provisions of SFAS
123. Implementation of the provisions of SFAS 123 had no material effect on the
financial statements. See disclosure-only provisions in Note 9 of the Notes to
Consolidated Financial Statements, contained elsewhere in this Form 10-K.
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). The Company has adopted SFAS 130 and has included the required Statements
of Comprehensive Income within its consolidated financial statements with the
same prominence as its other consolidated financial statements. In addition, the
Company has considered the implications of SFAS 131 and has concluded that no
additional disclosure is required at this time. (Refer to Note 1 of the Notes to
Consolidated Financial Statements, contained elsewhere in this Form 10-K, for a
discussion of SFAS 130 and SFAS 131.)
In December 1997, the American Institute of Certified Public Accountants
promulgated Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-related Assessements" ("SOP 97-3"). SOP 97-3
prescribes certain accounting treatment for entities that are subject to a
variety of assessments related to insurance activities, including assessments by
workers' compensation second-injury funds. SOP 97-3 requires that companies
estimate and record the entity's future liabilities related to these
assessments. Although SOP 97-3 is not effective until fiscal years beginning
after December 15, 1998, it does encourage entities to early adopt its
requirements. As Avondale has ceded certain workers' compensation claims to a
second injury fund administered by the U.S. Department of Labor and is subject
to annual assessement, the Company has elected to adopt SOP 97-3 early. As a
result, the Company has recorded as a liability the estimated present value of
its future assessments. Thus, in accordance with SOP 97-3, the Company has
recorded the after-tax impact of the early adoption of SOP 97-3 as a cumulative
effect of accounting change within the Company's Consolidated Statements of
Operations.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises
the standards for disclosure of pension and other postretirement benefit plans
by standardizing the disclosure requirements, requiring additional information
on changes in the benefit obligations and fair values of plan assets, and
eliminating certain disclosure requirements no longer considered to be useful.
These new disclosure requirements are designed to improve the understandability
of benefit disclosures for financial analysis. The Company, in accordance with
SFAS 132, has adopted this standard in 1998. (See additional disclosure in Note
7 of the Notes to Consolidated Financial Statements, contained elsewhere in this
Form 10-K.)
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company has
considered the implications of SFAS 133 and has concluded that its
implementation will not have a material effect on the Company's consolidated
financial statements.
Year 2000
In accordance with the U.S. Securities and Exchange Commission's ("SEC")
Staff Legal Bulletin No. 5 and the SEC's subsequent interpretive release, the
Company has assessed both the cost of addressing and the cost or the consequence
of incomplete or untimely resolution of the Year 2000 issue. This process
includes: (a) the development of Year 2000 ("Y2K") awareness, (b) a
comprehensive review to identify systems that could be affected by the Y2K
issue, (c) an assessment of potential risk factors (including noncompliance by
the Company's suppliers, subcontractors and customers, including the U.S. Navy),
(d) the allocation of required resources, (e) a determination of the extent of
remediation work required, (f) the development of an implementation plan and
timetable, and (g) the development of contingency plans.
In response to the Y2K issue, Avondale established its own team as a
collaborative effort involving key Company personnel. In addition, the Company
commissioned an outside consultant to make inquiries and provide observations
relating to the Company's plan for identifying and resolving Y2K issues within
its information technology ("IT") systems. The consultant discussed its
observations with members of senior management. A major observation of the
consultant identified some segments of the Company's overall accounting system
as non-compliant. As a result, management considered several alternatives for
remediating non-compliant systems including: repairing/modifying only those
systems, replacing only those systems or developing a more comprehensive
solution. After a thorough review of all options, the Company decided to replace
its entire accounting systems software. The acquisition and implementation of
this replacement software is projected to cost approximately $6.0 to $7.0
million.
The Company has established a two-phased approach for its solution of the
Y2K issue which includes: assessment of each system's compliance with the Y2K
issue, and the testing and modification/replacement of non-compliant systems.
The Company's remediation plan focuses on both IT systems as well as non-IT
systems which are integral to the Company's operating and support functions.
This plan includes both replacement and upgrades of these systems or equipment.
The Company is incurring both internal staff costs as well as consulting
and other expenses relating to these issues. All costs related to remediating
the Y2K issue will be funded with cash on hand. Expenditures, including
consulting fees and other expenses, have totaled approximately $1.7 million
since the inception of the Company's Y2K effort. Approximately $1.6 million has
been expended in 1998 and total aggregate expenditures for both IT and non-IT
systems remediation and testing are projected to be approximately $7.0 to $9.0
million, including the business systems software discussed above much of which
is not required for remediation of the Company's Y2K issue. The Company expects
<PAGE>
to complete its remediation of non-compliance systems during the first six
months of 1999.
In addition, the Company is in the process of initiating communications
with its significant suppliers, large customers (including the U.S. Navy),
subcontractors and others to determine the extent to which the Company is
vulnerable to these third parties' failure to remediate their own Y2K issues.
The Company can give no assurance that the systems of these third parties on
which the Company relies will be remediated on time or that failure to remediate
by them would not have a material adverse effect on the Company.
If the Company is unable to timely resolve Y2K issues inherent in its IT
and non-IT systems or any of the Company's significant suppliers, customers,
subcontractors and others are unsuccessful in resolving Y2K issues inherent in
their own systems and existent in machinery, equipment, and other systems
supplied to the Company, the Company may experience some operating disruption.
However, although the Company cannot give assurance on the Y2K issue, based on
current information, the Company does not expect such disruptions to be severe
and therefore does not expect unsatisfactory resolution of Y2K issues by the
Company or its significant suppliers, customers, subcontractors and others to
have a material adverse impact on the Company's consolidated financial
statements.
The Company believes that it will successfully implement its Y2K
remediation plan on schedule and will be Y2K compliant before the end of 1999.
However, management believes that there is a risk that significant suppliers,
customers, subcontractors, and others on whom the Company's finances and
operations largely depend may experience their own Y2K problems that could
affect the Company's operations or financial position. Such risks include but
are not limited to: the inability of the Company to retain qualified personnel
and outside consultants to successfully remediate Y2K issues and implement the
new business system as demand for their services rises due to other companies'
unanticipated or more severe Y2K problems; the inability of the Company's
customers, including the U. S. Navy, to accurately and timely pay invoices; the
inability of the Company to access necessary capital from lenders or other
sources when required; and the inability of the Company's significant suppliers,
customers, subcontractors and others to provide the necessary materials,
services, or systems required to run the Company's business.
If the Company does experience severe Y2K financial and operating
difficulties, notwithstanding its efforts to avoid or mitigate Y2K issues in its
own systems or adverse effects of Y2K issues experienced by third parties on
whom the Company relies, the Company is in the process of developing a
contingency plan for dealing with the most reasonably likely worst case
scenario. The development of this plan is the current focus of senior
management.
The Company will continue to review its plan for solution of Y2K issues
for effectiveness. As such, the Company can give no assurance that the estimated
costs herein for solving its own Y2K issues or the estimated impact of Y2K
issues on the Company's financial condition, operations, and cash flows will not
be revised as a result of the facts that become known to the Company.
<PAGE>
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $52.3 million at December
31, 1998 as compared to $81.8 million at December 31, 1997. The Company's
operations generated approximately $37.2 million of cash during 1998. The
Company's primary use of cash during 1998 was the purchase of 1.25 million
shares of the Company's common stock for approximately $36.3 million through a
self-tender offer executed in the second quarter of 1998. Other uses of cash in
the year included capital expenditures of approximately $27.7 million and
principal payments on long-term borrowings of approximately $3.0 million.
As discussed above, during the second quarter of 1998, the Company
completed a tender offer purchasing 1.25 million shares of its common stock at
$28 7/8 per share. Under the terms of the offer, the Company invited its
shareholders to tender their shares at prices ranging from $26 1/2 to $29 per
share as specified by each shareholder. The total cost to the Company of
completing the tender offer was approximately $36.3 million, including legal,
consulting and other professional fees. The total shares repurchased represented
approximately 8.6% of the outstanding shares at that date, and following the
tender offer, the Company had approximately 13.2 million shares of its common
stock outstanding. The transaction was funded using existing cash balances.
Capital expenditures in 1998 increased $14.1 million to $27.7 million
compared to $13.6 million during 1997. This increase is primarily attributable
to certain plant and facilities improvements required to construct the ARCO
vessels. In addition, 1998 capital spending includes approximately $2.0 million
of the approximately $7.0 million expected to be invested in connection with the
acquisition and implementation of new integrated business systems software. The
remainder of the 1998 capital spending represents plant improvements and
equipment additions which are designed to improve the Company's operating
efficiency. The Company continues to evaluate investment opportunities,
particularly productivity and technology-focused capital expenditures, in order
to enhance the Company's overall efficiency and provide for future growth. As a
result, the Company expects capital spending in 1999 to approximate the level in
1998.
The Company's $65 million revolving credit agreement (the "agreement")
provides liquidity for working capital purposes, capital expenditures and
letters of credit. At December 31, 1998, there were approximately $11.3 million
of letters of credit issued against the agreement leaving approximately $53.7
million of liquidity available to Avondale for operations and other purposes.
There have been no borrowings under the agreement since its inception in 1994.
Continuing access to the agreement is conditioned upon the Company remaining in
compliance with the covenants contained therein. At December 31, 1998, the
Company was in compliance with such covenants. The Company believes that its
capital resources will be sufficient to finance current and projected
operations, existing debt service requirements and planned capital expenditures.
In order to comply with the terms of the LPD contract, the Company was
required to make significant capital improvements, including enhancing its
computer-aided design and product modeling capabilities. As a result, the
Company teamed with the University of New Orleans (the "University" or "UNO"),
the University of New Orleans Research and Technology Foundation, Inc. (the
"Foundation") and the State of Louisiana in a cooperative effort. Pursuant to
terms of various agreements, the Foundation is purchasing hardware and software
required to implement the extensive three-dimensional ship design and Integrated
Product Data Environment teaming technology and constructed a 200,000 square
<PAGE>
foot building on property donated to the University by the Company and located
adjacent to the Company's main shipyard. This facility was completed during
the second quarter of 1998. The initial $40 million investment in this new
technology and facility, which is known as the "UNO/Avondale Maritime Technology
Center of Excellence" (the "Center"), is being financed by the Foundation using
third-party debt and lease financing, both of which are guaranteed by the
Company. The Company has entered into a long-term lease for the Center requiring
a nominal annual lease payment. The Company provides access to the technology
and a portion of the Center to the University for its use in research and the
development of educational curricula related to naval architecture and marine
engineering. In addition to the amounts expected to be funded by the State, the
Foundation, at the Company's request, is incurring approximately $15.5 million
in additional costs to enhance the integration and functionality of the ship
design and IPDE technology. The Company is reimbursing the Foundation for these
additional amounts as incurred and will capitalize these costs and amortize them
over their estimated useful lives in accordance with the Company's stated
policies. (See Note 1 of the Notes to Consolidated Financial Statements).
The Foundation is the borrower on all indebtedness incurred to construct
and equip the Center. Under the terms of a Cooperative Endeavor Agreement, the
State of Louisiana made a non-binding commitment to appropriate $40 million,
plus interest, in installments over a period from 1997 through 2007 for donation
to the Foundation for purposes of funding the Center. Avondale and the
Foundation anticipate that appropriations by the State will be sufficient for
the Foundation to service its debt. However, if the State's appropriations are
insufficient, Avondale will ultimately be required to repay any remaining debt.
The Company's guarantee is unsecured. As of December 31, 1998, the Foundation
had incurred $39.7 million of costs to construct and equip the Center. In
connection with its non-binding commitment, the State appropriated and paid $3.7
million during 1997 and $6.3 million in 1998, representing the first two
installments to the Foundation.
The Company's estimated income tax credit carry forward was $10.3 million
at December 31, 1998. This amount, plus $9.0 million of alternative minimum tax
credits will be used to reduce the income tax liabilities for 1999 and later
years. The $9.2 million of cash paid in 1998 for income taxes reflects payments
for alternative minimum tax. The income tax credit carry forward will expire in
years 2000 through 2013. The alternative minimum tax credits may be carried
forward indefinitely.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
See next consecutive numbered page.
<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, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 1 of the Notes to Consolidated Financial Statements,
effective January 1, 1998, the Company changed its method of accounting for
certain insurance-related assessments.
/s/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
February 22, 1999
<PAGE>
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 52,262 $ 81,752
Receivables (Note 2)......................................................... 125,917 101,746
Inventories (Note 3)......................................................... 33,603 23,226
Deferred tax assets (Note 6)................................................. 17,029 23,253
Prepaid expenses and other current assets ................................... 3,310 2,891
------------- -------------
Total current assets......................................................... 232,121 232,868
------------- -------------
Property, Plant and Equipment (Note 4):
Land......................................................................... 8,227 7,843
Buildings and improvements................................................... 68,880 55,917
Machinery and equipment...................................................... 213,068 200,777
------------- -------------
Total........................................................................ 290,175 264,537
Less accumulated depreciation................................................ (141,249) (134,481)
------------- -------------
Property, plant and equipment - net.......................................... 148,926 130,056
------------- -------------
Goodwill - net............................................................... 4,961 5,357
Other assets................................................................. 11,194 7,334
------------- -------------
TOTAL ASSETS................................................................. $ 397,202 $ 375,615
============= =============
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (Note 4)................................ $ 3,137 $ 3,047
Accounts payable............................................................. 79,876 59,548
Accrued employee compensation................................................ 14,950 13,198
Other........................................................................ 11,889 11,851
------------- -------------
Total current liabilities.................................................... 109,852 87,644
Long-term debt (Note 4)...................................................... 48,682 51,819
Deferred income taxes (Note 6)............................................... 1,487 13,400
Other accrued employee compensation.......................................... 26,766 13,775
------------- -------------
Total liabilities............................................................ 186,787 166,638
------------- -------------
Commitments and Contingencies (Notes 5 and 10)
Shareholders' equity (Note 9):
Common stock, $1.00 par value; authorized - 30,000,000 shares; issued -
15,967,082 shares in 1998 and 15,956,227 shares in 1997.................. 15,967 15,956
Additional paid-in capital................................................... 376,512 374,173
Accumulated deficit.......................................................... (132,351) (169,296)
Accumulated other comprehensive income/(loss)................................ (1,551) --
------------- -------------
Total........................................................................ 258,577 220,833
Treasury stock (2,713,016 shares in 1998 and 1,463,016 shares in 1997)
at cost (Note 8)......................................................... (48,162) (11,856)
------------- -------------
Total shareholders' equity................................................... 210,415 208,977
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..................................................... $ 397,202 $ 375,615
============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Sales (Note 2)....................................................... $ 748,936 $ 613,993 $ 624,929
Cost of sales........................................................ 664,575 538,515 543,102
---------- ---------- ---------
Gross profit ........................................................ 84,361 75,478 81,827
Selling, general and administrative expenses......................... 37,461 31,885 45,037
---------- ---------- ---------
Income from operations............................................... 46,900 43,593 36,790
Interest expense..................................................... (3,667) (4,804) (4,986)
Other - net.......................................................... 4,173 3,294 2,691
---------- ---------- ---------
Income before income taxes........................................... 47,406 42,083 34,495
Income tax provision (Note 6)........................................ 8,415 15,250 3,700
---------- ---------- ---------
Income before accounting change ..................................... 38,991 26,833 30,795
Cumulative effect of accounting change (Note 1)...................... (2,046) -- --
---------- ---------- ---------
NET INCOME........................................................... $ 36,945 $ 26,833 $ 30,795
========== ========== =========
Income per share of common stock- BASIC (Note 9):
Income before accounting change...................................... $ 2.83 $ 1.85 $ 2.13
Cumulative effect of accounting change............................... (0.15) -- --
---------- ---------- ---------
Net income........................................................... $ 2.68 $ 1.85 $ 2.13
========== ========== =========
Weighted average number of shares outstanding........................ 13,775 14,491 14,464
========== ========== =========
Income per share of common stock- DILUTED (Note 9):
Income before accounting change...................................... $ 2.82 $ 1.85 $ 2.13
Cumulative effect of accounting change............................... (0.15) -- --
---------- ----------- ---------
Net income........................................................... $ 2.67 $ 1.85 $ 2.13
========== ========== =========
Weighted average number of shares outstanding........................ 13,845 14,524 14,479
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net income........................................................... $ 36,945 $ 26,833 $ 30,795
Other comprehensive income/(loss):
Minimum pension liability adjustment, net of $605 tax benefit..... (1,551) -- --
---------- ---------- ---------
COMPREHENSIVE INCOME................................................. $ 35,394 $ 26,833 $ 30,795
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1997 and 1998
(in thousands)
Accumulated
Additional Other Total
Common Paid-In Accumulated Comprehensive Treasury Shareholders'
Stock Capital Deficit Income/(Loss) Stock Equity
-------- ---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............. $ 15,927 $ 373,911 $ (226,924) $ -- $(11,856) $ 151,058
Net Income........................... 30,795 30,795
-------- ---------- ----------- ---------- -------- ----------
BALANCE, DECEMBER 31, 1996........... 15,927 373,911 (196,129) -- (11,856) 181,853
Net Income........................... 26,833 26,833
Other................................ 29 262 291
-------- ---------- ----------- ---------- -------- ----------
BALANCE, DECEMBER 31, 1997........... 15,956 374,173 (169,296) -- (11,856) 208,977
Net Income........................... 36,945 36,945
Purchase of Treasury Stock
(Note 8)......................... (36,306) (36,306)
Minimum Pension
Liability Adjustment............ (1,551) (1,551)
Other................................ 11 2,339 2,350
-------- ---------- ----------- --------- -------- ----------
BALANCE, DECEMBER 31, 1998........... $ 15,967 $ 376,512 $ (132,351) $ (1,551) $(48,162) $ 210,415
======== ========== =========== ========= ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 36,945 $ 26,833 $ 30,795
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................................... 8,934 10,459 10,809
Deferred income taxes............................................ (3,524) 12,198 2,600
Loss on sale of assets........................................... 136 598 3,135
Write-down of inventories........................................ 2,200 -- --
Cumulative effect of accounting change........................... 2,046 -- --
Change in operating assets and liabilities, net of dispositions:
Receivables...................................................... (24,171) 17,393 (25,955)
Inventories...................................................... (12,577) (1,441) (6,496)
Prepaid expenses and other assets................................ (3,131) (3,053) (150)
Accounts payable................................................. 20,328 (14,041) 8,072
Accrued compensation and other liabilities....................... 9,987 1,517 3,660
Other - net...................................................... -- 94 --
---------- --------- ---------
Net cash provided by operating activities............................ 37,173 50,557 26,470
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................. (27,662) (13,593) (13,830)
Proceeds from sale of assets......................................... 118 510 2,998
Other - net.......................................................... -- -- 383
---------- --------- ---------
Net cash used for investing activities............................... (27,544) (13,083) (10,449)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term borrowings...................................... (3,047) (4,957) (5,832)
Payment for treasury stock (Note 8).................................. (36,306) -- --
Other - net.......................................................... 234 291 231
---------- --------- ---------
Net cash used for financing activities............................... (39,119) (4,666) (5,601)
---------- --------- ---------
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS.......................................................... (29,490) 32,808 10,420
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................................ 81,752 48,944 38,524
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR...................................................... $ 52,262 $ 81,752 $ 48,944
========== ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest (net of amounts capitalized)................................ $ 4,610 $ 5,093 $ 5,207
========== ========= =========
Income taxes paid.................................................... $ 9,150 $ 1,950 $ 1,760
========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<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 generally recorded on the basis of the
Company's estimates of the percentage of completion of individual contracts,
commencing when progress reaches a point where contract performance is
sufficient to estimate final results with reasonable accuracy. Estimates of the
percentage of completion are based on direct labor charges. Revisions in cost
and profit estimates during the course of the work are reflected in the
accounting period in which the facts requiring the revisions become known.
Amounts in excess of agreed upon contract price for customer caused delays,
disruptions, unapproved change orders or other causes of additional contract
costs are recognized in contract value if it is probable that the claim for such
amounts will result in additional revenue and the amount can be reasonably
estimated. Profits on long-term cost-plus- award fee contracts are recognized as
the aggregate of allowable costs reimbursed and award fees earned exceed total
costs incurred. Provisions for estimated losses, if any, on uncompleted
contracts are made in the period in which such losses are determined.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Fair Value Disclosures
The estimated fair value of all significant financial instruments has
been developed by the Company based on available market information and
appropriate valuation methodologies. However, considerable judgment is required
in developing the estimates of fair value. Therefore, such estimates are not
necessarily indicative of the amounts that could be realized in a current market
exchange. After such analysis, management believes that the carrying values of
the Company's significant financial instruments including cash and cash
equivalents, short-term investments, receivables, payables and certain accrued
liabilities approximate fair values. The fair value of the Company's long-term
debt at December 31, 1998 and 1997, based upon available market information,
approximated $56.2 million and $60.9 million, respectively.
Inventories
Inventories are recorded principally at the lower of cost (average or
first-in, first-out) or market.
<PAGE>
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>
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 1998, 1997 and 1996 approximated
$1.4 million, $519,000, and $759,000, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the underlying
fair value of the net assets of acquired businesses and is being amortized on a
straight-line basis over its estimated useful life of twenty years. Management
evaluates the continuing value and future benefits of goodwill, including the
appropriateness of related amortization periods, on a current basis.
Accumulated amortization at December 31, 1998 and 1997 amounted to $75.9
million and $75.5 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The recoverability of long-lived assets is
assessed by determining whether the carrying values can be recovered through
projected cash flows and operating results over their remaining lives. 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.
Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. Deferred income taxes are provided in the financial statements, where
necessary, to account for the tax effects of temporary differences resulting
from reporting revenues and expenses for income tax purposes in periods
different from those used for financial reporting purposes. The temporary
differences result principally from the use of different methods of accounting
for depreciation, long-term contracts, pension benefits and workers'
compensation benefits.
<PAGE>
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") encourages but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations and has adopted the disclosure-only provisions of SFAS
123. Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. See Note 9.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
provides guidance for the presentation and display of comprehensive income. SFAS
131 establishes standards for disclosure of operating segments, products,
services, geographic areas and major customers. The Company has adopted SFAS 130
and has included the required Statements of Comprehensive Income within its
consolidated financial statements with the same prominence as its other
consolidated financial statements. In addition, the Company has considered the
implications of SFAS 131 and has concluded that no additional disclosure is
required at this time.
In December 1997, the American Institute of Certified Public Accountants
promulgated Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-related Assessments" ("SOP 97-3"). SOP 97-3 prescribes
certain accounting treatment for entities that are subject to a variety of
assessments related to insurance activities, including assessments by workers'
compensation second-injury funds. SOP 97-3 requires that companies estimate and
record the entity's future liabilities related to these assessments. Although
SOP 97-3 is not effective until fiscal years beginning after December 15, 1998,
it does encourage entities to early adopt its requirements. As Avondale has
ceded certain workers' compensation claims to a second injury fund administered
by the U. S. Department of Labor and is subject to an annual assessment, the
Company has elected to adopt SOP 97-3 early. As a result, the Company has
<PAGE>
recorded as a liability the estimated present value of its future assessments.
Thus, in accordance with SOP 97-3, the Company has recorded the after-tax impact
of the early adoption of SOP 97-3 as a cumulative effect of accounting change
within the Company's 1998 Consolidated Statement of Operations. The effect of
this change in accounting principle was to decrease net income by $2.0 million
(net of related tax benefits of $1.3 million) or $0.15 per basic and diluted
share.
Assuming the change in accounting principle had been retroactively applied
to all periods presented, the reported net income of $36.9 million ($2.68 per
basic share and $2.67 per diluted share) and $30.8 million ($2.13 per basic and
diluted share) for 1998 and 1996, respectively, would have been $39.0 million
($2.83 per basic share and $2.82 per diluted share) and $28.7 million ($1.99 per
basic and diluted share), respectively. The effect on net income and related per
share amounts for 1997 is not material.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises
the standards for disclosure of pension and other postretirement benefit plans
by standardizing the disclosure requirements, requiring additional information
on changes in the benefit obligations and fair values of plan assets, and
eliminating certain disclosure requirements no longer considered to be useful.
The new disclosure requirements are designed to improve the understandability of
benefit disclosures for final analysis. The Company, in accordance with SFAS
132, has adopted this standard in 1998. See Note 7.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company has considered the implications of SFAS 133 and has concluded that its
implementation will not have a material effect on the Company's consolidated
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.
<PAGE>
2. Receivables
Receivables consisted of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Long-term contracts:
U.S. Government:
Amounts billed..................................................... $ 2,857 $ 967
Unbilled costs, including retentions, and
estimated profits on contracts in progress....................... 101,931 80,041
----------- -----------
Total.............................................................. 104,788 81,008
Commercial:
Amounts billed..................................................... 1,934 4,180
Unbilled costs, including retentions, and
estimated profits on contracts in progress....................... 13,427 8,543
----------- -----------
Total from long-term contracts......................................... 120,149 93,731
Trade and other current receivables.......................................... 5,768 8,015
----------- -----------
Total.................................................................. $ 125,917 $ 101,746
=========== ===========
</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
at December 31, 1998, approximately $38.8 million is expected to be collected in
1999 with the balance to be collected in subsequent years as contract deliveries
are made and warranty periods expire. Sales to the United States Government in
1998, 1997, and 1996 account for approximately 74%, 83% and 77% of total the
sales, respectively.
Costs and estimated profits (losses) on contracts in progress at December
31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Costs incurred on contracts in progress................................... $ 2,488,685 $ 2,786,024
Estimated profits recognized on contracts in progress..................... 127,416 135,701
Estimated losses recognized on contracts in progress...................... (34,323) (34,323)
-------------- --------------
Total..................................................................... 2,581,778 2,887,402
Less billings to date..................................................... (2,473,216) (2,801,829)
-------------- --------------
Net value of contracts in progress........................................ $ 108,562 $ 85,573
============== ==============
</TABLE>
<PAGE>
Net value of contracts in progress was comprised of the following amounts (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Unbilled costs and estimated
profits on contracts in progress
(included in receivables).............................................. $ 115,358 $ 88,584
Billings in excess of costs and estimated
profits on contracts in progress (included
in accounts payable)................................................... (6,796) (3,011)
----------- ------------
Total $ 108,562 $ 85,573
=========== ============
</TABLE>
The estimated losses on contracts in progress of $34.3 million included in
the net value of contracts in progress at December 31, 1998 and 1997, are
related to certain contracts which were delivered through 1998. During 1997 and
1996, the Company recorded increases of $5.8 million and $28.5 million,
respectively, in the reserves related to the contracts to retrofit the four
single- hulled forebodies with new double hulls and to construct the series of
river hopper barges. The losses resulted primarily from increases in the
estimated labor needed to complete these contracts.
The Company currently has an issue with the U.S. Navy related to certain
materials purchased from a subcontractor for use in the Strategic Sealift
program. The materials were purchased based on government-provided
specifications which have proven to be defective. In addition to delay and
disruption costs, the Company has incurred approximately $12.5 million in direct
costs through December 31, 1998 related to this issue. The Company believes that
it is entitled to recovery from the U.S. Navy of these costs and has recorded a
receivable for the amount of the direct costs incurred to date. While the
Company hopes to resolve this issue through negotiation, the Company has engaged
legal counsel to assist in the development of a claim.
3. Inventories
Inventories consisted of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Goods held for sale.......................................................... $ 25,108 $ 14,915
Materials and supplies....................................................... 8,495 8,311
----------- ------------
Total ................................................................... $ 33,603 $ 23,226
=========== ============
</TABLE>
Included in the results of operations for 1998 is a $2.2 million pre-tax
charge to reduce the carrying value of certain steel inventories to market
prices.
<PAGE>
4. Financing Arrangements
Revolving Credit Agreement
The Company has an unsecured revolving credit agreement ("the agreement")
with various financial institutions. The agreement provides for an available
line of credit equal to the lesser of $65 million or a specified borrowing base
with a term expiring in April 2000. At December 31, 1998, there were
aproximately $11.3 million of letters of credit issued against the agreement
leaving approximately $53.7 million of liquidity available to Avondale for
operations and other purposes. There were no borrowings in 1998 and 1997 under
the revolving credit agreement. A committment fee based on the average daily
amount of the unused line of credit is payable on a quarterly basis. Borrowings
under the agreement bear interest at fluctuating rates. The agreement (1)
requires the Company to meet certain financial covenants (relating to net worth,
debt coverage, interest coverage and backlog), (2) imposes limitations and
restrictions related to annual capital expenditures, the incurrence of new
indebtedness, the payment of dividends and the repurchase of common stock and
(3) requires compliance with the terms and conditions of all other debt
agreements.
Long-Term Debt
Long-term debt consisted of the following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Industrial revenue bonds........................................................ $ 34,390 $ 35,360
Mortgage bonds, interest at 8.16%, payable
in semi-annual principal installments to 2010................................. 14,222 15,408
Mortgage bonds,interest at 7.86%, payable in semi-annual
principal installments to 2000................................................ 1,552 2,328
General obligation industrial bonds, interest at 7%,
payable in annual installments to 2008........................................ 1,655 1,770
-------- --------
Total........................................................................... 51,819 54,866
Less current maturities of long-term debt....................................... (3,137) (3,047)
-------- --------
Long-term debt.................................................................. $ 48,682 $ 51,819
======== ========
</TABLE>
The $34.4 million of industrial revenue bonds represent Series 1994 bonds
which consist of (1) $4.9 million bearing interest at 8.25% and payable in
annual principal installments ranging from $650,000 in 1999 to a final payment
of $985,000 in 2004 and (2) $29.5 million bearing interest at 8.50% and payable
in annual principal installments ranging from $405,000 in 1999 to a final
payment of $3.8 million in 2014. The Series 1994 bonds are secured by certain
property and equipment which had a net book value of approximately $26.4 million
at December 31, 1998. 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.
<PAGE>
The $14.2 million of mortgage bonds represent the remaining balance of
$17.8 million of bonds issued in February 1995 as part of the financing of the
Company's approximately $20 million plant modernization effort. The bonds were
issued utilizing a U.S. Government guarantee under Title XI of the Merchant
Marine Act, 1936, as amended ("Title XI"), bear interest at the annual rate of
8.16% and are payable in equal semi-annual principal payments of $593,000 with
the final payment in 2010. The terms of the financing include various
restrictive covenants including provisions relating to the maintenance of
working capital, incurrence of additional indebtedness, and the maintenance of a
minimum net worth. Assets having a net book value of approximately $18.4 million
at December 31, 1998 have been pledged as collateral for these mortgage bonds.
The $1.6 million of mortgage bonds at December 31, 1998 represent the
balance of an earlier mortgage bond issue which also utilized a Title XI
guarantee. The terms of the financing provide for an annual interest rate of
7.86% and contain various restrictive covenants similar to those for the $14.2
million of Title XI mortgage bonds discussed above. These bonds are payable in
equal semi-annual principal payments of $388,000 and mature in the year 2000.
Property, plant and equipment having a net book value of approximately $12.0
million at December 31, 1998 has been pledged as collateral for these mortgage
bonds.
Annual maturities of long-term debt for each of the next five years and in
total thereafter follow (in thousands):
<TABLE>
<S> <C>
1999............................... $ 3,137
2000............................... 3,237
2001............................... 2,571
2002............................... 2,686
2003............................... 2,821
Thereafter......................... 37,367
--------
Total.............................. $ 51,819
========
</TABLE>
5. Leases
The Company leases equipment and real property in the normal course of
business under various operating leases, including non-cancelable and
month-to-month agreements. Certain of the leases provide for renewal privileges
with escalation of the lease payments based on changes in selected economic
indices.
Rental expense for operating leases was $10.5 million, $6.1 million and
$9.0 million in 1998, 1997 and 1996, respectively.
<PAGE>
Minimum rental commitments under leases having an initial or remaining
noncancelable term in excess of twelve months follow (in thousands):
<TABLE>
<S> <C>
1999............................... $2,437
2000............................... 1,830
2001............................... 607
2002............................... --
2003............................... --
------
Total.............................. $4,874
======
</TABLE>
6. Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which requires the
use of the asset and liability approach for financial accounting and reporting
for income taxes.
The Company has provided for Federal and State income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Current provision...................................................... $ 11,940 $ 3,052 $ 1,100
Deferred provision..................................................... 1,475 12,198 11,600
Deferred benefit attributable to the realization of
net operating loss carryforwards and tax credits.................... (5,000) -- (9,000)
-------- ------- --------
Provision for income taxes............................................. $ 8,415 $15,250 $ 3,700
======== ======= ========
</TABLE>
The provision for income taxes varied from the Federal statutory income
tax rate due to the following (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
Amount % Amount % Amount %
--------- --- --------- -- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Taxes at Federal statutory rate.......... $ 16,592 35 $ 14,729 35 $ 12,073 35
Net operating loss carry forwards
and tax credits utilized............... (5,000) (11) -- -- (9,000) (26)
Adjustments related to certain prior
year tax deductions..................... (4,600) (9) -- -- -- --
State income taxes ...................... 948 2 -- -- -- --
Other.................................... 475 1 521 1 627 2
--------- --- --------- -- --------- ---
Total.................................... $ 8,415 18 $ 15,250 36 $ 3,700 11
========= === ========= == ========= ===
</TABLE>
<PAGE>
At December 31, 1998 the Company has available for Federal income tax
purposes tax credit carry forwards of $10.3 million. These income tax credit
carry forwards expire in the years 2000 through 2013. Additionally, the Company
has $9.0 million of alternative minimum tax credits which may be carried forward
indefinitely.
Deferred income taxes represent the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and their tax bases, and (b) operating loss and tax credit
carry forwards. The tax effects of significant items comprising the Company's
net deferred tax balances at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Liabilities:
Differences between book
and tax basis of property, plant and equipment.................... $ 25,053 $ 25,566
Other............................................................... 712 818
-------- --------
Total........................................................... 25,765 26,384
-------- --------
Deferred Tax Assets:
Reserves not currently deductible................................... 8,555 3,795
Long-term contracts................................................. 6,684 18,710
Other temporary differences......................................... 7,368 6,126
Tax credit carry forwards........................................... 19,383 8,289
-------- --------
41,990 36,920
Valuation Allowance................................................. (683) (683)
-------- --------
Total........................................................... 41,307 36,237
-------- --------
Net deferred tax assets............................................. $ 15,542 $ 9,853
======== ========
</TABLE>
The net deferred tax assets are included in the following balance sheet
captions (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current deferred tax assets......................................... $ 17,029 $ 23,253
Non-current deferred income tax liabilities......................... (1,487) (13,400)
-------- --------
Net deferred tax assets............................................. $ 15,542 $ 9,853
======== ========
</TABLE>
<PAGE>
7. Retirement Plans
ESOP
The Company maintains the Avondale Industries, Inc. Employee Stock
Ownership Plan ("ESOP"). The ESOP covers 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 is a qualified,
noncontributory defined contribution plan intended to qualify as a stock bonus
plan and an employee stock ownership plan. The stock bonus plan portion of the
plan is designed to invest in a diversified portfilio and the employee stock
ownership plan portion is designed to invest primarily in common stock of the
Company. The ESOP is specifically authorized to leverage its acquisition of
equity securities of the Company. At December 31, 1998 and 1997, the ESOP owned
approximately 1,706,500 and 2,835,000 shares of the Company's common stock,
respectively. In June 1998, the Company purchased 1,054,750 shares of the
Company's common stock held by the ESOP for approximately $30.6 million of the
approximately $36.3 million expended to fund the share repurchase. See Note 8.
Company contributions to the ESOP for the years ended December 31 1998, 1997 and
1996 were not material.
Pension and Postretirement Plans
The Company sponsors a qualified, noncontributory defined benefit pension
plan (the "Pension Plan") which covers substantially all employees who have
attained age 21 and completed one year of service. Benefits payable under the
Pension Plan are coordinated with the benefits payable to participating
employees in the ESOP. At retirement, a person's benefit is based on the greater
of (i) the market value of the participant's ESOP account or (ii) the benefit
calculated under the pension plan formula. The pension plan formula benefits are
based on a defined dollar amount multiplied by a fraction related to a
participant's credited service.
The Company also maintains certain nonqualified, noncontributory, unfunded
defined benefit pension plans and a postretirement welfare plan which provide,
among other benefits, specified retirement, life insurance and medical insurance
benefits to employees designated by the Board of Directors.
<PAGE>
The following table sets forth the changes in benefit obligations, changes
in plan assets and estimated funded status for qualified and non-qualified
pension and other postretirement benefits as of December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................. $ 56,385 $ 50,868 $ 3,359 $ 3,019
Service cost............................................ 2,704 3,037 54 39
Interest cost........................................... 4,147 4,230 288 233
Plan amendments......................................... 1,847 -- -- --
Actuarial loss.......................................... 4,779 3,176 919 90
Benefits paid........................................... (4,535) (4,926) (106) (22)
--------- --------- -------- --------
Net benefit obligation at end of year .................. 65,327 56,385 4,514 3,359
--------- --------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of year.......... 66,791 58,769 -- --
Actual return on plan assets............................ 10,582 12,637 -- --
Employer contributions.................................. 333 311 106 22
Benefits paid........................................... (4,535) (4,926) (106) (22)
--------- --------- -------- --------
Fair value of plan assets at end of year ............... 73,171 66,791 -- --
--------- --------- -------- --------
Estimated funded status:
Funded status at end of year ........................... 7,844 10,406 (4,514) (3,359)
Unrecognized net actuarial (gain) loss.................. (15,389) (16,286) 968 68
Unrecognized prior service cost......................... 1,197 (896) -- --
Unrecognized net transition obligation.................. 45 61 2,641 2,830
--------- --------- -------- --------
Net amount recognized at end of year .................. $ (6,303) $ (6,715) $ (905) $ (461)
========= ========= ========= ========
</TABLE>
<PAGE>
Amounts recognized in the statements of financial position
consist of:
<TABLE>
<S> <C> <C> <C> <C>
Accrued benefit cost ................................ $ (6,303) $ (6,715) $ (905) $ (461)
Minimum pension liability adjustment................. (4,679) (831) -- --
Intangible asset..................................... 2,523 831 -- --
Accumulated other comprehensive loss................. 2,156 -- -- --
--------- --------- -------- --------
Net amount recognized at end of year................. $ (6,303) $ (6,715) $ (905) $ (461)
=========- ========== ======== ========
</TABLE>
The Company's funding policy for the Pension Plan 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 of
the Pension Plan consist primarily of United States Government and Agency
securities, corporate stocks and corporate bonds and notes. The Company's other
pension plans and its postretirement welfare plan are unfunded plans and the
Company's funding policy is to contribute amounts necessary to pay current
benefits. The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligations was 6.75% for 1998, 7.25% for
1997, and 7.75% for 1996. The rate of increase in future compensation levels
used was 4.0% for 1998, 1997 and 1996 and thereafter. The expected long-term
rate of return on the assets was 9.0% for 1998, 1997 and 1996.
For measurement purposes, an 8.0% annual rate of increase in the cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5.0% in 2004 and remain at that level thereafter.
The components of net periodic benefit cost/(income) are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
Pension Benefits
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Service cost................................................................ $ 2,704 $ 3,037 $ 3,883
Interest cost ............................................................. 4,147 4,230 4,352
Expected return on assets................................................... (5,833) (5,112) (4,531)
Amortization of:
Transition obligation.................................................... 15 15 15
Prior service cost....................................................... (245) (246) (246)
Actuarial (gain) loss.................................................... (867) (356) 244
---------- ---------- ---------
Total net periodic benefit (income) cost ................................... $ (79) $ 1,568 $ 3,717
========== ========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
Other Benefits
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Service cost................................................................ $ 54 $ 39 $ --
Interest cost............................................................... 288 233 --
Expected return on assets................................................... -- -- --
Amortization of:
Transition obligation.................................................... 189 189 --
Prior service cost....................................................... -- -- --
Actuarial (gain) loss.................................................... 19 -- --
---------- ---------- ---------
Total net periodic benefit cost............................................. $ 550 $ 461 $ --
========== ========== =========
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $14,249, $12,640 and $0, respectively, as of
December 31, 1998 and $10,408, $9,160 and $0, respectively, as of December 31,
1997.
Assumed health care cost trend rates impact the amounts reported for the
Company's post-retirement welfare plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects as of and for the
years ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- -----------------------
1% Point 1% Point 1% Point 1% Point
Increase Decrease Increase Decrease
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Effect on total service and interest cost components.... $ 23 $ (20) $ 19 $ --
Effect on postretirement benefit obligation............. 298 (250) 230 --
</TABLE>
401(k) Savings Plan
Beginning in 1996, the Company sponsored a 401(k) Savings Plan.
Participation in this defined contribution plan is available to substantially
all employees with one year of credited service to the Company. The Company may
elect to make contributions to the Plan; however, the timing and amount of such
contributions is at the discretion of the Company's Board of Directors. The
Company paid approximately $500,000 in matching contributions for the 1998 and
1997 Plan Years. There was no similar contribution for the 1996 Plan Year.
<PAGE>
8. Tender Offer
In June 1998, the Company completed a tender offer purchasing 1.25 million
shares of its common stock at $28 7/8 per share. Under the terms of the offer,
the Company invited its shareholders to tender their shares at prices ranging
from $26 1/2 to $29 per share as specified by each shareholder. The total cost
to the Company of completing the tender offer was approximately $36.3 million,
including legal, consulting and other professional fees. The total shares
repurchased represented approximately 8.6% of the outstanding shares at that
date, and following the tender offer, the Company had approximately 13.2 million
shares of its common stock outstanding. The transaction was funded using
existing cash balances.
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, 1998 and 1997.
Earnings Per Share
In accordance with Statement of Financial Accounting Standards Number 128,
"Earnings Per Share" ("SFAS 128"), the Company changed its method of calculating
earnings per share ("EPS") during the fourth quarter of 1997. The number of
weighted average shares outstanding for "basic" EPS was 13,775,333, 14,490,644
and 14,464,175 for the years ended December 31, 1998, 1997 and 1995,
respectively. The number of weighted average shares outstanding for "diluted"
EPS was 13,844,564, 14,523,838 and 14,479,364 for the years ended December 31,
1998, 1997 and 1996, respectively. The difference in weighted average shares
outstanding of 69,231, 33,194 and 15,189 for the years ended December 31, 1998,
1997 and 1996, respectively, relate to stock appreciation rights and options. In
accordance with the disclosure requirements of SFAS 128, the reconciliation of
the numerator and denominator for calculating earnings per share is as follows
(in thousands, except per share data):
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
--------------------------------- --------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount (Numerator) (Denominator) Amount
---------- ------------ --------- ---------- ------------ --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $36,945 13,775 $ 2.68 $26,833 14,491 $ 1.85 $30,795 14,464 $ 2.13
====== ====== ======
EFFECT OF DILUTIVE
SECURITIES
Stock appreciation
rights/options 70 33 15
------ ------ ------
DILUTED EPS
Income available to
common shareholders
plus assumed conversions $36,945 13,845 $ 2.67 $26,833 14,524 $ 1.85 $30,795 14,479 $ 2.13
======= ====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
As discussed in Note 8 of the Notes to Consolidated Financial Statements herein,
the Company completed a tender offer purchasing 1.25 million shares of its
common stock in June 1998. Had the repurchase taken place as of January 1, 1996,
the Company's diluted earnings per share for the years ended December 31, 1998,
1997 and 1996 would have been $2.73, $1.88 and $2.24, respectively.
<PAGE>
Stock-Based Compensation Plans
The Company has two stock-based compensation plans which are described
below. The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense is recognized for its stock-based compensation plans other than for
performance-based awards as the exercise price of all stock options granted
thereunder is equal to the fair value of the Company's common stock at the date
of grant. Since no options were granted under the Company's stock-based
compensation plans during 1996, there would have been no effect on net income
and income per common share. Had 1998 and 1997 compensation costs for the
Company's stock-based compensation plans been determined based upon the fair
value at the grant date for awards under these plans consistent with the
methodology presented under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C> <C>
Net income As reported $ 36,945 $ 26,833
Pro forma $ 35,982 $ 25,413
Earnings per share-basic As reported $ 2.68 $ 1.85
Pro forma $ 2.61 $ 1.75
Earnings per share-diluted As reported $ 2.67 $ 1.85
Pro forma $ 2.60 $ 1.75
</TABLE>
The weighted average fair value of the options granted during 1998 and
1997 was $15.3993 and $15.4542, respectively. The fair value of each option
granted in 1998 and 1997 is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: no dividend
yield; expected volatility of 56.6209% and 85.0581% for 1998 and 1997,
respectively; risk-free interest rate of 4.753% and 5.772% for 1998 and 1997,
respectively; and an expected life of 5.86 years for both 1998 and 1997.
<PAGE>
During 1997, the Board of Directors adopted and the shareholders approved
the Avondale Industries, Inc. 1997 Stock Incentive Plan (the "1997 Plan") which
provides for the award of various economic incentives to key employees and
directors. Incentives granted under the 1997 Plan may be in the form of stock
options, stock appreciation rights, restricted stock and performance shares or
any combination thereof. A total of 1,430,000 shares of common stock of the
Company are reserved for issuance under the 1997 Plan. Incentives granted under
the 1997 Plan have a maximum term of ten years and are exercisable, subject to
various terms and conditions as set forth by the Compensation Committee of the
Board of Directors. Transactions of the 1997 Plan during 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------
Weighted Average
Remaining
Number Contractual Life Weighted Average Number Weighted Average
Outstanding (Years) Exercise Price Exercisable Exercise Price
----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Beginning of year 274,904 9.47 $ 20.723 90,219 $ 22.940
Granted/vested 221,036 8.10 26.868 46,957 19.639
Exercised (10,855) -- 21.725 (10,855) 21.725
Forfeited/expired (8,764) -- 22.934 -- --
------- -------
End of year 476,321 8.30 $ 23.511 126,321 $ 21.817
======= =======
Available for grant,
end of year 962,443
=======
</TABLE>
The range of exercise prices for options outstanding at December 31, 1998,
under the 1997 Plan was $19.625 to $26.875. The 221,036 options granted under
the 1997 Plan in 1998 vest 25% on the first, second, third and fourth
anniversary date of the grant.
<PAGE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------
Weighted Average
Remaining
Number Contractual Life Weighted Average Number Weighted Average
Outstanding (Years) Exercise Price Exercisable Exercise Price
----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Beginning of year -- -- -- -- --
Granted/vested 274,904 9.47 $ 20.723 90,219 $ 22.940
Exercised -- -- -- -- --
Forfeited/expired -- -- -- -- --
--------- ------
End of year 274,904 9.47 $ 20.723 90,219 $ 22.940
========= ======
Available for grant,
end of year 1,155,096
=========
</TABLE>
The range of exercise prices for options outstanding at December 31, 1997,
under the 1997 Plan was $19.625 to $22.940. Of the 274,904 options granted under
the 1997 Plan in 1997, 184,685 options vest 25% on the first, second, third and
fourth anniversary date of the grant, while the remaining 90,219 options vested
on the grant date.
<PAGE>
The Company's Performance Share Plan provided for the award of shares of
Common Stock to senior executives of the Company, as designated by a committee
of the Board of Directors, which were earned upon the attainment of specified
performance objectives. These performance objectives have been attained and
therefore no further awards will be made.
A summary of the status of the Performance Share Plan as of December 31,
1998, 1997 and 1996 and changes during the three years ended December 31, 1998
are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
and exercisable,
beginning of year 4,896 $16.994 226,404 $17.718 240,971 $17.463
Forfeited/expired -- -- -- -- 1,360 19.000
Exercised 3,298 16.970 221,508 17.537 13,207 12.940
----- ------- -------
Options outstanding
and exercisable,
end of year 1,598 $17.044 4,896 $16.994 226,404 $17.718
===== ======= =======
</TABLE>
The range of exercise prices for options outstanding at December 31, 1998
under the Performance Share Plan (which contain a stock appreciation right
feature) was $3.875 to $19.00 and the weighted-average remaining contractual
life for such options was 0.82 years.
Compensation expense for the years ended December 31, 1998, 1997 and 1996
was not material.
Upon the consummation of the Company's proposed merger with Newport News
Shipbuilding Inc., pursuant to the terms of the 1997 Plan, all options
immediately become exercisable. See Note 11.
<PAGE>
10. Commitments and Contingencies
Litigation
In January 1986, the Louisiana Department of Environmental Quality ("DEQ")
advised the Company that it could be a potentially responsible party ("PRP")
with respect to an oil reclamation site operated by an unaffiliated company in
Walker, Louisiana. To date, the Company and certain of the other PRPs (the
"Funding Group") for the site have funded the site's remediation expenses, PRP
identification expenses and related costs for the participating parties. As of
December 31, 1998 such costs totaled approximately $19.5 million, of which the
Company has funded approximately $4.0 million. Since 1988, the Funding Group
filed petitions to add a number of companies as third-party defendants with
regard to the remedial action. The Funding Group has agreed to settle with the
majority of these companies. All funds collected are placed in escrow to fund
future expenses. At December 31, 1998, the balance of the escrow was $9.9
million, which is to be used to fund any ongoing remediation expenses. The
Company will not owe any future assessments until the balance in escrow is
depleted. There are additional settlements being negotiated which should add to
the balance in escrow.
Additional remedial work scheduled for the site includes completion of
studies and if required by the results of these studies, subsequent remediation.
Following completion of any such required additional remediation, it will be
necessary to obtain Environmental Protection Agency approval to close the site,
which consent may require subsequent post-closure activities such as groundwater
monitoring and site maintenance for many years. The Company is not able to
estimate the final costs for any such additional remedial work or post-closure
costs that may be required; however, the Company believes that its proportionate
share of expenditures for any additional work will not have a material impact on
the Company's financial statements. In addition, the Company and other members
of the Funding Group have entered into a final cost sharing agreement under
which all parties have agreed that there would be no re-allocation of previous
remediation costs, but that future remediation costs would be established by a
formula. Under this agreement, the Company's share of future costs will not
exceed 17.5% for any additional costs.
Furthermore, the Company has initiated litigation against its insurer for
a declaration of coverage of the liability, if any, that may arise in connection
with the remediation of the site referred to above. The court has ruled that the
insurer has the duty to defend the Company, but has not yet ruled on whether the
carrier has a duty to indemnify the Company if any liability is ultimately
assessed against it. After consultation with counsel, the Company is unable to
predict the eventual outcome of this litigation or the degree to which such
potential liability would be indemnified by its insurance carrier.
In 1996, the Company settled a class action lawsuit involving alleged
personal injury and property damage arising from the Walker, La. reclamation
site. Under the terms of the settlement, the Company paid approximately $6.0
million into a settlement fund. The Company could also have been responsible for
payment to the plaintiffs of up to an additional $6.0 million (plus interest at
8% per annum) if the plaintiffs were unsuccessful in collecting certain claims
under Avondale's insurance policies that were assigned to the plaintiff class
under the settlement agreement. During the first quarter of 1997, the parties
reached a settlement with the Company's insurers which does not require any
further contribution by the Company.
<PAGE>
In addition to the above, the Company is also named as a defendant in
other lawsuits and proceedings arising in the ordinary course of business, some
of which involve substantial claims.
The Company has established accruals as appropriate for certain of the
matters discussed above. While the ultimate outcome of lawsuits and proceedings
against the Company cannot be predicted with certainty, management believes,
based on current facts and circumstances and after review with counsel, that the
eventual resolution of these matters is not expected to have a material adverse
effect on the Company's financial statements.
Guarantee
Pursuant to agreements related to the University of New Orleans
("UNO")/Avondale Maritime Technology Center of Excellence ("the Center"), the
Company has agreed to guarantee indebtedness with a principal amount not to
exceed $40 million incurred by the UNO Research and Technology Foundation, Inc.
(the "Foundation") for construction of the facility and the acquisition of
computer-aided technology. Under the terms of a Cooperative Endeavor Agreement,
the State of Louisiana made a non-binding commitment to appropriate $40 million,
plus interest, in installments over a period from 1997 through 2007 for donation
to the Foundation for purposes of servicing the debt incurred in connection with
construction of the Center. Avondale and the Foundation anticipate that
appropriations by the State will be sufficient for the Foundation to service its
debt. However, if the State's appropriations are insufficient, Avondale will
ultimately be required to repay any remaining debt. The Company's guarantee is
unsecured. As of December 31, 1998, the Foundation had incurred $39.7 million of
costs to construct and equip the Center. In connection with its non-binding
commitment, the State appropriated and paid $3.7 million during 1997 and $6.3
million in 1998, representing the first two installments to the Foundation.
Letters of Credit and Bonds
In the normal course of its business activities, the Company is required
to provide letters of credit and bonds to secure the payment of workers'
compensation obligations, other insurance obligations and to provide a debt
service reserve fund related to $34.4 million of Series 1994 industrial revenue
bonds. Additionally, under certain contracts the Company may be required to
provide letters of credit to secure certain performance obligations of the
Company thereunder. Outstanding letters of credit and bonds relating to these
business activities amounted to approximately $32.3 million at December 31, 1998
and 1997.
<PAGE>
11. Subsequent Event
On January 19, 1999, Avondale announced a proposed merger with a
subsidiary of Newport News Shipbuilding Inc. which would result in Avondale
becoming a subsidiary of Newport News. The proposed merger is structured as a
stock-for-stock transaction and is subject to regulatory and shareholder
approval. Upon consummation of the proposed merger, each Avondale share would
be exchanged for a maximum of 1.25 and a minimum of 1.15 of Newport News
Shipbuilding Inc. shares based on the average closing price of Newport News
shares during the fifteen day trading period ending on the fourth trading day
prior to the shareholder vote. If such average closing price is $28.40 or less,
Avondale shareholders would receive 1.25 Newport News shares for each Avondale
share. If such price is $30.87 or more, Avondale shareholders would receive 1.15
Newport News shares for each Avondale share. If such price is between $28.40 and
$30.87, Avondale shareholders would receive that number of Newport News shares
determined by dividing $35.50 by such price, or between 1.25 and 1.15 Newport
News shares. Avondale and Newport News expect to finalize the transaction during
the second quarter of 1999.
On February 22, 1999, Avondale and Newport News announced that their
proposed merger had been cleared by the Department of Justice under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976. The antitrust clearance
satisfies an important condition to the closing of the transaction, which
remains subject to the approval of the shareholders of both companies and to the
consent of the Administrator of the Maritime Administration of the Department of
Transportation.
In addition, on February 18, 1999, the Company announced that it had been
advised by Newport News that Newport News had received an unsolicited offer from
General Dynamics Corporation ("General Dynamics") proposing to acquire Newport
News for $38.50 per share in cash, subject to due diligence and regulatory
clearance. Although the General Dynamics offer did not specifically ask Newport
News to terminate its agreement with Avondale, the offer did state that Newport
News' proposed merger with Avondale would create antitrust problems in a
combination of General Dynamics and Newport News.
Newport News has advised General Dynamics that it is not prepared to
evaluate the General Dynamics proposal until it obtains reliable assurance that
a combination of General Dynamics and Newport News would not be opposed by the
Department of Defense and Department of Justice. To that end, Newport News made
a request to the Department of Defense seeking a prompt indication of the
Department's position on the General Dynamics proposal. Pending any such
determination, Newport News and the Company have each publicly expressed their
full commitment to the Newport News-Avondale merger.
<PAGE>
12. Quarterly Results (Unaudited)
Consolidated operating results for the four quarters of 1998 and 1997 were
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- --------------------------------------------
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>
Sales................... $184,625 $178,463 $197,961 $187,887 $139,513 $145,792 $159,217 $169,471
Gross Profit ........... 20,128 21,345 23,409 19,479 18,633 19,501 19,670 17,674
Income from Operations.. 11,815 11,936 12,419 10,730 10,299 10,866 10,950 11,478
Income before
Accounting Change.... 7,377 7,654 7,856 16,104 6,291 6,380 6,920 7,242
Cumulative Effect of
Accounting Change.... (2,046) -- -- -- -- -- -- --
Net Income ............. $ 5,331 $ 7,654 $ 7,856 $ 16,104 $ 6,291 $ 6,380 $ 6,920 $ 7,242
======== ======== ======== ======== ======== ======== ======== ========
Income per share:
BASIC:
Income before
Accounting Change.... $ 0.51 $ 0.54 $ 0.59 $ 1.22 $ 0.43 $ 0.44 $ 0.48 $ 0.50
Cumulative Effect of
Accounting Change.... (0.14) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net Income ............. $ 0.37 $ 0.54 $ 0.59 $ 1.22 $ 0.43 $ 0.44 $ 0.48 $ 0.50
======== ======== ======== ======== ======== ======== ======== ========
DILUTED:
Income before
Accounting Change.... $ 0.51 $ 0.54 $ 0.59 $ 1.21 $ 0.43 $ 0.44 $ 0.48 $ 0.50
Cumulative Effect of
Accounting Change.... (0.14) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net Income ............. $ 0.37 $ 0.54 $ 0.59 $ 1.21 $ 0.43 $ 0.44 $ 0.48 $ 0.50
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Net income and related per share amounts previously reported by the Company for
the first quarter of 1998 differ from the first quarter data shown above solely
due to the change in accounting principle discussed in Note 1. Included in the
fourth quarter 1998 results are the following:
-- $9.6 million income tax benefit to recognize income tax credits and
adjustments associated with certain prior year tax deductions.
-- $2.2 million pre-tax charge to reduce the carrying value of certain steel
inventories to market prices.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Company's directors and officers called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1999 Annual Meeting of shareholders and is
incorporated herein by reference.
Item 11. Executive Compensation.
Information concerning the executive compensation called for by this
item will be included in the Company's definitive Proxy Statement prepared in
connection with the 1999 Annual Meeting of shareholders and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management called for by this item will be included in the Company's
definitive Proxy Statement prepared in connection with the 1999 Annual Meeting
of shareholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions
called for by this item will be included in the Company's definitive Proxy
Statement prepared in connection with the 1999 Annual Meeting of shareholders
and is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
(a)(1) Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1997 and 1998.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
Not applicable
(a)(3) Exhibits
2.1 Agreement and Plan of Merger dated as of January 19, 1999,
among Newport, Ares and Avondale.(1)
2.2 Parent Stock Option Agreement dated as of January 19, 1999,
between Newport and Avondale.(1)
2.3 Company Stock Option Agreement dated as of January 19, 1999,
between Avondale and Newport.(1)
3.1 Articles of Incorporation of the Company.(2)
3.2 By-laws of the Company, as amended on November 3, 1997.(3)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Company's
Articles of Incorporation and By-laws defining the rights of
holders of Common Stock.
4.2 Specimen of Common Stock Certificate.(4)
<PAGE>
4.3 Instruments Relating to Title XI Vessel Financing
(a) Trust Indenture dated October 21, 1975, by and between the
Company and Manufacturers Hanover Trust Company, as
Indenture Trustee, relating to $19,012,000 of United
States Government Guaranteed Ship Financing Bonds, as
amended by an Assumption Agreement and Supplemental
Indenture dated September 16, 1985(5), 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"),(6)
which has been further amended by a Third Supplemental
Indenture dated February 9, 1995.(7)
(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(5), as further amended by the Master Assumption
Agreement (filed as Exhibit 4.3(a) hereto). The Reserve
Fund and Financial Agreement has been further amended by
Amendment No. 5 dated February 9, 1995(7) and Amendment
No. 6 dated August 22, 1996.(8)
(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.(7)
4.4 Instruments relating to AEI's and the Company's
obligations arising in connection with the issuance of
General Obligation Bonds by Harrison County, Mississippi.
(a) Loan Agreement dated April 1, 1991 between Harrison
County, Mississippi and AEI, pursuant to which AEI is
obligated to repay $3 million in order to fund the
County's bond payment obligations.(4)
(b) Guaranty Agreement dated April 1, 1991 between the
Company, Harrison County, Mississippi and the State of
Mississippi.(4)
4.5 Instruments relating to the Company's $36.25 million
Industrial Revenue Refunding Bond Series 1994 Financing.
(a) Refunding Agreement dated April 1, 1994 between the
Company and the Board of Commissioners of the Port of New
Orleans, Exhibit A and First Preferred Vessel Mortgage
thereto.(9)
(b) Trust Indenture dated April 1, 1994 between the Board of
Commissioners of the Port of New Orleans and First
National Bank of Commerce.(9)
(c) Form of Industrial Revenue Refunding Bond Series 1994.(9)
<PAGE>
4.6 Instruments Relating to February 1995 Title XI Vessel
Financing.
(a) Trust Indenture dated February 9, 1995 by and between the
Company and Chemical Bank, as Indenture Trustee, relating
to $17,780,000.00 of United States Government Guaranteed
Ship Financing Bonds.(7)
(b) Title XI Reserve Fund and Financial Agreement dated
February 9, 1995, by and between the Company and the
United States of America,(7) as amended by Amendment No.
1 dated August 22, 1996.(8)
(c) Form of 8.16% Sinking Bond Fund, 2010 Series.(7)
10.1 Contracts With The United States Navy
(a) Agreement dated June 28, 1985, by and between the Company
and the United States of America (Contract No.
N00024-85-C-2131) for the construction of T-AO 187 Class
Oiler Ships and various modifications thereto(5) including
modification P00005 thereto entered into on June 16, 1988,
and the related Acknowledgment of Transfer and Transfer
Agreement relating to the Company's agreement to assume
certain of the rights and obligations to build two such
vessels under an Agreement dated May 6, 1985, by and
between Pennsylvania Shipbuilding Co. and the United
States of America.(10)
(b) Agreement dated June 20, 1988, by and between the Company
and the United States of America (Contract No.
N00024-88-C-2050) for the construction of T-AO 187 Class
Oiler Ships and various modifications thereto(10) and
modification P00036 thereto.(6)
(c) Agreement dated November 21, 1983, by and between the
Company and the United States of America (Contract No.
N00024-84-C-2027) for the construction of LSD-41 Class
Landing Ship Dock vessels and various modifications
thereto.(5)
(d) Agreement dated June 17, 1988, by and between the Company
and the United States of America (Contract No. N00024-88-
C-2048) for the construction of LSD-41 Class Landing Ship
Dock vessels and modification nos. P00001 and P00002(10),
modification nos. P00008 and P00013 thereto(4) and
modification P00029 thereto.(6)
(e) Agreement dated July 15, 1988, by and between the Company
and the United States of America (Contract No. N00024-88-
C-2221) for the conversion of AO-177 Class Oilers to
AO-177 Jumbo Class and various modifications thereto.(10)
(f) Agreement dated December 13, 1988, by and between AGM and
the United States of America (Contract No. N00024-89-C-
2110) for the construction of three LCACs.(10)
<PAGE>
(g) Agreement dated July 1, 1987, by and between Lockheed
Shipbuilding Company and the United States of America
(Contract No. N00024-87-C-2089) for the construction of
seven LCACs (assumed by AGM in 1988).(10)
(h) Agreement dated October 3, 1989, by and between the
Company and the United States of America (Contract No.
N00024-89-C-2162) for the construction of one MHC Class 51
ship and various modifications thereto(11), modification
no. P00020(6) and modification no. P00027 thereto.(12)
(i) Agreement dated August 2, 1990, by and between the
Company and the United States of America (Contract No.
N00024-90-C-2304) for the construction of one MHC Class 51
ship,(4) and modification nos. P00002 (6), P00013(6) and
modification no. P00020 thereto.(12)
(j) Agreement dated November 30, 1990, by and between the
Company and the United States of America (Contract No.
N00024-90-C-2307) for the construction of one TAGS 45 ship
and various modifications thereto.(4)
(k) Agreement dated July 15, 1993, by and between the Company
and the United States of America (Contract No. N00024-93-
C-2300) for the construction of one WAGB 20 Coast Guard
Polar Icebreaker ship, amendment 0001 and modification
nos. P0001 and P00013 thereto.(2)
(l) Agreement dated September 3, 1993, by and between the
Company and the United States of America (Contract No.
N00024-93-C-2205) for the construction of one T- AKR 300
Class Strategic Sealift ship, various amendments and
modifications nos. P00001, P00003 and P00004(6),
P00007(9), P00019 (8) and modifications P00025 and
P00028(13) and modification P00033 thereto.
(m) Agreement dated October 12, 1993, by and between the
Company and the United States of America (Contract No.
N00024-94-C-2200) for the construction of one LSD 41 Class
Landing Ship Dock.(6)
(n) Agreement dated December 17, 1996 by and between the
Company and the United States of America (Contract No.
N00024-97-C-2202) for the design and construction of one
LPD-17 ship(8) and modification P00021 thereto.
10.2 Other Operating Contracts
(a) Agreement dated July 10, 1991 by and between Crawford
Technical Services, Inc. and the Dallas Area Rapid Transit
Authority, and the supplement thereto, relating to
providing operational and maintenance services for
paratransit van services for the Dallas, Texas
metropolitan area.(6)
<PAGE>
(b) Agreement dated January 28, 1991, by and between Crawford
Technical Services, Inc. and the United States of America
and various modifications thereto (Contract No. F03602-91-
C0007) relating to providing maintenance services with
respect to family housing units located in a Little Rock,
Arkansas air force base.(6)
(c) Agreement dated January 12, 1994 by and between the
Company and Belle of Orleans, L.L.C. for the construction
of a 350-foot-long paddlewheel gaming vessel, various
exhibits and Amendment nos. 1, 2 and 3 thereto.(9)
(d) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
King.(14)
(e) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
Knight.(14)
(f) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
Solar.(14)
(g) Agreement dated May 12, 1995 by and between the Company
and American Heavy Lift Shipping Company for the
construction of one ocean-going product tanker, S/S
Spray.(14)
10.3 Employee Benefit Plans
(a) The Company's Amended and Restated Performance Share Plan
dated April 24, 1989(15), as amended by Amendment No. 1
adopted December 5, 1994.(9)
(b) The Company's Amended and Restated Stock Appreciation
Plan and attachments thereto dated April 24, 1989(15),
as amended by Amendment No. 1 adopted December 5,
1994.(9)
(c) The Company's Amended and Restated Employee Stock
Ownership Plan(9) as further amended by: Amendment No. 1
adopted April 5, 1995(7), Amendment No. 2 adopted June 16,
1995(14), Amendment No. 3 adopted February 5, 1996 (16),
Amendment No. 4 adopted December 31, 1996(8), Amendment
No. 5 adopted December 30, 1997 (13), Amendment No. 6
adopted May 5, 1998(3), and Amendment No. 7 adopted
December 30, 1998 and the related Amended and Restated
Trust Agreement(16) as further amended by Amendment No. 1
adopted May 5, 1998.(3)
(d) The Company's Pension Plan as Amended and Restated dated
December 30, 1997(13) as amended by Amendment No. 1
thereto adopted December 30, 1998.
<PAGE>
(e) The Company's Amended and Restated Supplemental Pension
Plan(5), as amended by Amendment Nos. 1 and 2 thereto
adopted December 29, 1989(4), and Amendment No. 3 adopted
May 5, 1998.(3)
(f) The Company's Excess Retirement Plan(4) as amended by
Amendment No. 1 adopted February 2, 1998(3), and Amendment
No. 2 adopted May 5, 1998.(3)
(g) The Amended and Restated Avondale Services Corporation
Executive Group Insurance Benefits Plan and Summary Plan
Description specifying the excess insurance benefits
provided to the Company's executive officers and certain
other key personnel, and a summary description of health,
accidental death and dismemberment, disability and life
insurance benefits made available to employees dated
October 14, 1997 (13) as amended by Amendment No. 1 dated
March 23, 1998 (17), and Amendment No. 2 dated December 8,
1998.
(h) The Company's Directors' Deferred Compensation Plan.(4)
(i) Avondale Industries, Inc. Management Incentive Plan.(7)
(j) The Company's 401(k) Savings Plan as restated adopted
December 30, 1998.
(k) The Company's Executive Retirement Plan.(16)
(l) Avondale Industries, Inc. 1997 Stock Incentive Plan
adopted May 23, 1997.(18)
(m) Avondale Industries, Inc. Flexible Benefits Plan adopted
December 30, 1998.
10.4 Employment Agreements
(a) Employment Agreement dated March 23, 1998, by and between
the Company and Albert L. Bossier, Jr. the term of which
extends through December 31, 2000.(17)
(b) Employment Agreement dated March 23, 1998, by and between
the Company and Thomas M. Kitchen the term of which
extends through December 31, 2000.(17)
(c) Employment Agreement dated March 23, 1998, by and between
the Company and Kenneth B. Dupont the term of which
extends through December 31, 2000.(17)
(d) Amended and Restated Change Control Agreement dated
January 19, 1996, by and between the Company and Albert
L. Bossier, Jr.(16) as amended by Amendment No. 1 dated
March 23, 1998.(17)
(e) Amended and Restated Change Control Agreement dated
January 19, 1996, by and between the Company and Thomas M.
Kitchen(16) as amended by Amendment No. 1 dated March 23,
1998.(17)
<PAGE>
(f) Amended and Restated Change Control Agreement dated
January 19, 1996, by and between the Company and Kenneth
B. Dupont(16) as amended by Amendment No. 1 dated March
23, 1998.(17)
(g) The Company's Severance Pay Plan and Summary Plan
Description adopted March 1, 1996.(16)
(h) Employment Agreement dated March 5, 1998, by and between
the Company and R. Dean Church the term of which extends
through December 31, 2000.(17)
(i) Employment Agreement dated March 23, 1998, by and between
the Company and Thomas H. Doussan the term of which
extends through December 31, 2000.(17)
(j) Employment Agreement dated March 23, 1998, by and between
the Company and Ronald J. McAlear the term of which
extends through December 31, 2000.(17)
(k) Employment Agreement dated March 23, 1998, by and between
the Company and Edmund C. Mortimer the term of which
extends through December 31, 2000.(17)
(l) Change of Control Agreement dated March 5, 1998, by and
between the Company and R. Dean Church.(17)
(m) Change of Control Agreement dated March 23, 1998, by and
between the Company and Thomas H. Doussan.(17)
(n) Change of Control Agreement dated March 23, 1998, by and
between the Company and Ronald J. McAlear.(17)
(o) Change of Control Agreement dated March 23, 1998, by and
between the Company and Edmund C. Mortimer.(17)
10.5 Avondale/Ogden Letter Agreement.(19)
10.6 Acquisition and Disposition Agreements
(a) Asset Purchase Agreement dated January 27, 1987, by and
between the Company and Connell Industries, L.P.(5)
(b) Purchase Agreement dated June 22, 1988, by and between
AGM, Lockheed Shipbuilding Company and Lockheed
Corporation.(10)
(c) Stock Purchase Agreement dated February 15, 1991, by and
between Avondale Technical Services, Inc. and Oliver R.
Crawford relating to the purchase of Crawford Technical
Services, Inc.(4)
(d) Asset Purchase Agreement dated November 20, 1992, by and
between the Company and Bollinger Machine Shop &
Shipyard, Inc., a Louisiana corporation (without
exhibits).(6)
<PAGE>
10.7 Lease Agreements
(a) Lease Agreement dated June 24, 1988, by and between the
Company and the Board of Commissioners of the Port of New
Orleans.(10)
(b) Lease Agreement dated June 4, 1979, by and between the
Company and Marrero Land and Improvement Association,
Ltd.(10)
(c) Adoption Agreement dated July 22, 1988, by and between the
Company and Missouri Pacific Railroad Company, as
supplemented on the date thereof.(10)
(d) Lease of Commercial Property dated July 1, 1970, by and
between the Company and Metal Building Products Co.,
Inc.(4)
(e) Sub-lease agreement dated May 16, 1997, by and between the
Company and the University of New Orleans Research and
Technology Foundation, Inc. (Without exhibits).(18)
10.8 Other Material Agreements
(a) Registration Rights Agreement between the Company and the
ESOP as Annex I of the Common Stock Purchase Agreement
dated as of September 27, 1985, by and between Ogden
American Corporation and the trustees of the Avondale
Industries, Inc., Employee Stock Ownership Trust.(5)
(b) Registration Rights Agreement between the Company and the
participants in the Amended and Restated Performance
Share Plan (included in Exhibit 10.3(a)).
(c) License dated October 13, 1989, by and between the
Company and Intermarine S.p.A. relating to the license of
molded, glass-reinforced polyester hull construction
technology.(4)
(d) Stockholder Protection Rights Agreement dated as of
September 26, 1994, by and between Avondale Industries,
Inc. and Boatmen's Trust Company, as Rights Agent(20)
and Amendment No. 1 thereto dated January 19, 1999.(21)
(e) Agreement by and between the Company and Bath Iron Works
Corporation, Subcontract for LPD-17 Class Work dated June
23, 1996.(8)
(f) Agreement by and between the Company and Hughes Aircraft
Co., Subcontract for LPD-17 Class Work dated June 23,
1996.(8)
(g) Cooperative Endeavor Agreement dated May 16, 1997, by and
among the Company, the State of Louisiana, Board of
Supervisors of Louisiana State University and
Agricultural and Mechanical College acting on behalf of
the University of New Orleans, and the University of New
Orleans Research and Technology Foundation, Inc.(18)
<PAGE>
10.9 Revolving Credit Agreement dated as of May 10, 1994 among
Avondale Industries, Inc., various financial institutions
signatory thereto ("the Banks") and Continental Bank N.A.
as the Agent for the Banks, and Amendment Nos. 1 and 2
thereto.(9)
(a) Third Amendment, Waiver and Consent to Revolving Credit
Agreement, dated May 10, 1995.(12)
(b) Fourth Amendment and Consent to Revolving Credit
Agreement, dated September 1, 1995(12).
(c) Fifth Amendment to Revolving Credit Agreement, dated
November 17, 1995.(12)
(d) Sixth Amendment to Revolving Credit Agreement, dated
October 22, 1996.(8)
10.10 Amended and Restated Revolving Credit Agreement dated
January 29, 1997, effective April 30, 1997, among
Avondale Industries, Inc., various financial institutions
signatory thereto ("the Banks") and Bank of America
National Trust and Savings Association as the Agent for the
Banks, (without exhibits and schedules).(18)
(a) First Amendment to Amended and Restated Revolving Credit
Agreement, dated March 14, 1997.(13)
(b) Second Amendment to Amended and Restated Revolving Credit
Agreement, dated April 30, 1997.(13)
(c) Third Amendment to Amended and Restated Revolving Credit
Agreement and Request for Release of Collateral, dated
October 24, 1997.(13)
(d) Fourth Amendment to Amended and Restated Revolving Credit
Agreement, dated September 12, 1998.(22)
21 List of subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule as of and for the Twelve Month Period
Ended December 31, 1998
27.2 Restated Financial Data Schedule as of and for the Three, Six
and Nine Month Periods Ended March 31, 1998, June 30, 1998 and
September 30, 1998, Respectively
<PAGE>
- ----------
(1) Incorporated by reference to Newport News Shipbuilding Inc.'s Form 8-K
dated January 22, 1999 (Commission File No. 1-12385).
(2) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1993.
(3) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(4) 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.
(5) 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.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1995.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(10) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 33- 27342) filed with the Commission on
March 6, 1989.
(11) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
(14) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
(15) Incorporated by reference from the Company's Registration Statement on
Form S-8 and Form S-3 (Registration No. 33-31984) filed with the
Commission on November 8, 1989.
(16) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
<PAGE>
(17) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998.
(18) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997.
(19) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1994.
(20) Incorporated by reference from the Company's Current Report on Form 8-K
filed with the Commission on September 30, 1994.
(21) Incorporated by reference from the Company's Report on Form 8-A/A filed
with the Commission on February 1, 1999.
(22) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three month period
ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February , 1999.
AVONDALE INDUSTRIES, INC.
By: /S/ALBERT L. BOSSIER, JR.
-------------------------
Albert L. Bossier, Jr.
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and on the dates indicated.
Signature Title Date
/s/Albert L. Bossier, Jr. Chairman of the Board, President February 23, 1999
- -------------------------- and Chief Executive Officer
Albert L. Bossier, Jr.
/s/Thomas M. Kitchen Vice President, Chief Financial February 23, 1999
- -------------------------- Officer, Corporate Secretary and
Thomas M. Kitchen a Director
/s/Kenneth B. Dupont Vice President and a Director February 23, 1999
- --------------------------
Kenneth B. Dupont
/s/Anthony J. Correro, III Director February 23, 1999
- --------------------------
Anthony J. Correro, III
/s/Francis R. Donovan Director February 23, 1999
- --------------------------
Francis R. Donovan
/s/Hugh A. Thompson Director February 23, 1999
- ---------------------------
Hugh A. Thompson
/s/Eugene K. Simon Vice President of Finance February 23, 1999
- ---------------------------
Eugene K. Simon
<PAGE>
EXHIBIT INDEX
Number Description
10.1 Contracts With The United States Navy
(l) Agreement dated September 3, 1993, by and between the
Company and the United States of America (Contract
No. N00024-93-C-2205) for the construction of one
T-AKR 300 Class Strategic Sealift ship, various
amendments and modifications nos. P00001, P00003 and
P00004(4), P00007 (7), P00019 (6) and modifications
P00025 and P00028 thereto.
(n) Agreement dated December 17, 1996 by and between the
Company and the United States of America (Contract
No. N00024-97-C-2202) for the design and construction
of one LPD-17 ship(8) and modification P00021
thereto.
10.3 Employee Benefit Plans
c) The Company's Amended and Restated Employee Stock
Ownership Plan(9) as further amended by: Amendment
No. 1 adopted April 5, 1995(7), Amendment No. 2
adopted June 16, 1995(14), Amendment No. 3 adopted
February 5, 1996 (16), Amendment No. 4 adopted
December 31, 1996 (8), Amendment No. 5 adopted
December 30, 1997 (13), Amendment No. 6 adopted May
5, 1998(3), and Amendment No. 7 adopted December 30,
1998 and the related Amended and Restated Trust
Agreement(16) as further amended by Amendment No. 1
adopted May 5, 1998.(3)
(d) The Company's Pension Plan as Amended and Restated
dated December 30, 1997(13) as amended by Amendment
No. 1 thereto adopted December 30, 1998.
(g) The Amended and Restated Avondale Services
Corporation Executive Group Insurance Benefits Plan
and Summary Plan Description specifying the excess
insurance benefits provided to the Company's
executive officers and certain other key personnel,
and a summary description of health, accidental death
and dismemberment, disability and life insurance
benefits made available to employees dated October
14, 1997 (13) as amended by Amendment No. 1 dated
March 23, 1998 (17), and Amendment No. 2 dated
December 8, 1998.
(j) The Company's 401(k) Savings Plan as restated adopted
December 30, 1998.
(m) Avondale Industries, Inc. Flexible Benefits Plan
adopted December 30, 1998.
21 List of subsidiaries of the Company
23 Consent of Deloitte & Touche LLP
<PAGE>
27.1 Financial Data Schedule as of and for the Twelve Month Period
Ended December 31, 1998
27.2 Restated Financial Data Schedule as of and for the Three, Six
and Nine Month Periods Ended March 31, 1998, June 30, 1998 and
September 30, 1998, Respectively
- ----------
(1) Incorporated by reference to Newport News Shipbuilding Inc.'s Form 8-K
dated January 22, 1999 (Commission File No. 1-12385).
(2) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1993.
(3) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(4) 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.
(5) 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.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.
(7) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1995.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(10) Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration No. 33-27342) filed with the Commission on March
6, 1989.
(11) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
(14) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
(15) Incorporated by reference from the Company's Registration Statement on
Form S-8 and Form S-3 (Registration No. 33-31984) filed with the
Commission on November 8, 1989.
<PAGE>
(16) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
(17) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998.
(18) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997.
(19) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1994.
(20) Incorporated by reference from the Company's Current Report on Form 8-K
filed with the Commission on September 30, 1994.
(21) Incorporated by reference from the Company's Report on Form 8-A/A filed
with the Commission on February 1, 1999.
(22) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
1. Contract ID Code Page 1 of 2 Pages
AMENDMENT OF SOLICITATION/MODIFICATION
OF CONTRACT L
- --------------------------------------------------------------------------------
2. Amendment/Modification No. 3. Effective Date
P00033 See Block 16C
- --------------------------------------------------------------------------------
4. Requisition/Purchase Reg. No. 5. Proj. No. (If applicable)
N00024-99-FR-91007 9-385P-91007
- --------------------------------------------------------------------------------
6. Issued By Code N00024 7. Administered By Code N63124
NAVAL SEA SYSTEMS COMMAND
BUYER/SYMBOL: Jerry Clement SEA 02225 SUPSHIP New Orleans
2531 JEFFERSON DAVIS HWY New Orleans, LA 70142-5700
ARLINGTON VA 22242-5160
PHONE: Area Code (703)602-3102 ext 225
- --------------------------------------------------------------------------------
8. Name and Address of Contractor 9a. Amendment of Solicitation No.
(No., street, county, State and ZIP Code)
DUNS NO: 144620747
Avondale Industries, Inc.
Shipyard Division 9b. Dated (See Item 11)
P.O. Box 50280
New Orleans, LA 70150-1967
10a. Modification of Contract/
Order No.
[X] N00024-93-C-2205
10b. Dated (See Item 13)
Cage Code 96204 Facility Code NOV 20 1992
- --------------------------------------------------------------------------------
11. This Item Only Applies to Amendments of Solicitations
The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified for receipt of Offers [ ]is [ ] is not extended.
Offers must acknowledge receipt of this amendment prior to the hour and date
specified in the solicitation as amended, by one of the following methods:
(a) By completing Items 8 and 15, and returning _ copies of the amendment, (b)
By acknowledging receipt of this amendment on each copy of the offer submitted;
or (c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGEMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
- --------------------------------------------------------------------------------
12. Accounting and Appropriation Data (if required) SEE ATTACHED FINANCIAL
ACCOUNTING DATA SHEET
- --------------------------------------------------------------------------------
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS,
IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
- --------------------------------------------------------------------------------
[ ] A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGES
SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
- --------------------------------------------------------------------------------
[ ] B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REPLACE THE
ADMINISTRATIVE CHANGES (such as changes in paying office, appropriation
data, etc.)
- --------------------------------------------------------------------------------
[X] C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:
In Accordance with Options Clause
- --------------------------------------------------------------------------------
[ ] D. OTHER (Specify type of modification and authority)
- --------------------------------------------------------------------------------
E. IMPORTANT: Contractor ( ) is not, (x) is required to sign this document
and return 2 copies to the issuing office.
- --------------------------------------------------------------------------------
14. Description of Amendment/Modification (Organize by UCF section headings,
including solicitation/contract subject matter where feasible.)
SEE ATTACHED
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A, as heretofore changed, remain unchanged and in full force and
effect.
- --------------------------------------------------------------------------------
15A. Name and Title of Signer (Type or print)
E. C. MORTIMER
V. P. GOV'T PROGRAMS
- --------------------------------------------------------------------------------
15B. Contractor/Offeror 15C. Date Signed
/S/ E. C. MORTIMER 2/19/98
----------------------------------------
(Signature of person authorized to sign)
- -------------------------------------------------------------------------------
16A. Name and Title of Contracting Officer (Type or Print)
Jerry M. Clement
Contracting Officer
- -------------------------------------------------------------------------------
16B. United States of America 16C. Date Signed
By /s/ JERRY M. CLEMENT 18 DEC 1998
-------------------------------------
(Signature of Contracting Officer)
- --------------------------------------------------------------------------------
NSN 7540-01-152-8070 STANDARD FORM 30 (REV 10-83)
PREVIOUS EDITION UNUSABLE Prescribed by GSA
FAR (48 CFR) 53.243
<PAGE>
N00024-93-C-2205
P00033
PAGE 2 OF 2
Contract N00024-93-C-2205 provides, in part, under Section B.3, Item(s) 0503
through 0509 that "the Government may require the Contractor to furnish Item(s)
0503 through 0509 as specified in Section B, for delivery at the time(s) and
place(s) and at the applicable price(s) set forth herein. The Option(s) will be
exercised, if at all, by written or telegraphic notice from the Contracting
Officer sent within the time specified below:"
Pursuant to the above provisions, the Government hereby exercises its options
for Items 0503 through 0509.
As a result of the above option exercise, this modification executes and fully
funds CLINS 0503 through 0509.
3. Funding in the amount of $163,177,789.00, which consists of $162,846,891.00
for CLIN 0503, $307,713.00 for CLIN 0507 and $23,185.00 for CLIN 0510 is hereby
provided in the attached Financial Accounting Data Sheet to fully fund the
effort in CLINS 0503 through 0509 inclusive of administrative modifications
A00162, A00195, A00196 and A00205 plus $9,242,000.00 for Item 0503 for payment
of compensation adjustment thereof.
4. The total amount obligated on this modification is $172,419,789.00 which
consists of $163,177,789.00 for the target price as appropriate for Items 0503
through 0509 plus $9,242,000.00 for payment of compensation adjustment thereof.
Except as modified above, all other terms, conditions, and prices of Contract
N00024-93-C-2205 remain unchanged and in full force and effect.
<PAGE>
FINANCIAL ACCOUNTING DATA SHEET-NAVY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1. CONTRACT NUMBER (CRITICAL) 2.SPIN (CRITICAL) 3. MOD (CRITICAL) 4. PR NUMBER
N0002493-C-2205 P00033 N0002498FR91011
- -----------------------------------------------------------------------------------------------------------------------------------
5. 6. LINE OF ACCOUNTING
-----------------------------------------------------------------------------------------------------------------------
A. B. C. D. E. F. G. H. I. J. K.
CLIN/SLIN ACRN APPROPRIATION SUBHEAD OBJ PARM RFM SA AAA TT PAA COST CODE
(CRITICAL) (CRITICAL) (CRITICAL) CLA (CRITICAL) ----------------
PROJ PDLI
UNIT MCC & SUF
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0503
0507
0510
CS 17X4557 8910 312 SA 385 0 068342 2D 000000 22252 200 0000
0503 CT 17X4557 8910 312 SA 385 0 068342 2D 000000 22252 291 0000
</TABLE>
PAGE 1 OF 1
<TABLE>
<CAPTION>
NAVY INTERNAL
AMOUNT USE ONLY
(CRITICAL) REF DOC/ACRN
- ------------------------------------------------------------------------------
<S> <C>
$162,846,891.00
$307,713.00
$23,185.00
---------------
$163,177,789.00 N000240XAF0NDSF
$9,242,000.00 N000240XAF0NDSF
---------------
PAGE TOTAL $172,419,789.00
---------------
GRAND TOTAL $172,419,789.00
- ------------------------------------------------------------------------------------
PREPARED/AUTHORIZED BY: HENRY W. FITZPATRICK, JR., PMS385P COMPTROLLER APPROVAL:
/S/ HENRY W. FITZPATRICK, JR. /S/ V. JEFFERSON
V. JEFFERSON
DATE: 12/16/98 BY DIRECTION OF
CAPT V. H. ACKLEY
DEPUTY COMMANDER/COMPTROLLER
</TABLE>
1. Contract ID Code Page 1 of 3 Pages
AMENDMENT OF SOLICITATION/MODIFICATION
OF CONTRACT L
- --------------------------------------------------------------------------------
2. Amendment/Modification No. 3. Effective Date
P00021 See Blk 16C
- --------------------------------------------------------------------------------
4. Requisition/Purchase Reg. No. 5. Proj. No. (If applicable)
N00024-99-FR-91157 7-317-91157
- --------------------------------------------------------------------------------
6. Issued By Code N00024 7. Administered By Code N63124
NAVAL SEA SYSTEMS COMMAND
BUYER/SYMBOL: Claire Grady, SEA 02223 SUPSHIP New Orleans
2531 JEFFERSON DAVIS HWY Bldg. 16, Naval Support Activity
ARLINGTON VA 22242-5160 NEW ORLEANS, LA 70142-5700
- --------------------------------------------------------------------------------
8. Name and Address of Contractor 9a. Amendment of Solicitation No.
(No., street, county, State and ZIP Code)
9b. Dated (See Item 11)
Avondale Industries, Inc.
Shipyard Division
P.O. Box 50280
New Orleans, LA 70150-1967 10a. Modification of Contract/
Order No.
DUNS No. 144620747 N00024-97-C-2202
10b. Dated (See Item 13)
Cage Code 96204 Facility Code 17 December 1996
- --------------------------------------------------------------------------------
11. This Item Only Applies to Amendments of Solicitations
The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified for receipt of Offers [ ]is [ ] is not extended.
Offers must acknowledge receipt of this amendment prior to the hour and date
specified in the solicitation as amended, by one of the following methods:
(a) By completing Items 8 and 15, and returning 2 copies of the amendment, (b)
By acknowledging receipt of this amendment on each copy of the offer submitted;
or (c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGEMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
- --------------------------------------------------------------------------------
12. Accounting and Appropriation Data (if required)
N/A
- --------------------------------------------------------------------------------
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS, IT MODIFIES THE
CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
- --------------------------------------------------------------------------------
[X] A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGES
SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
- --------------------------------------------------------------------------------
[ ] B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REPLACE THE
ADMINISTRATIVE CHANGES (such as changes in paying office, appropriation
data, etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR
43.103(b)
- --------------------------------------------------------------------------------
[ ] C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:
MUTUTAL AGREEMENT OF THE PARTIES
- --------------------------------------------------------------------------------
[ ] D. OTHER (Specify type of modification and authority)
X SPECIAL CONTRACT REQUIREMENT B-5 OPTIONS.
- --------------------------------------------------------------------------------
E. IMPORTANT: Contractor (x) is not, ( ) is required to sign this document
and return 2 copies to the issuing office.
- --------------------------------------------------------------------------------
14. Description of Amendment/Modification (Organize by UCF section headings,
including solicitation/contract subject matter where feasible.)
SEE ATTACHED PAGES
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A, as heretofore changed, remain unchanged and in full force and
effect.
- --------------------------------------------------------------------------------
15A. Name and Title of Signer (Type or print)
- --------------------------------------------------------------------------------
15B. Contractor/Offeror 15C. Date Signed
----------------------------------------
(Signature of person authorized to sign)
- -------------------------------------------------------------------------------
16A. Name and Title of Contracting Officer (Type or Print)
CLAIRE M. GRADY
Contracting Officer
- -------------------------------------------------------------------------------
16B. United States of America 16C. Date Signed
By /s/ CLAIRE M. GRADY 18 DEC 1998
-------------------------------------
(Signature of Contracting Officer)
- --------------------------------------------------------------------------------
NSN 7540-01-152-8070 STANDARD FORM 30 (REV 10-83)
PREVIOUS EDITION UNUSABLE Prescribed by GSA
FAR (48 CFR) 53-243
<PAGE>
N00024-97-C-2202
P00021
Page 2 of 3
The purpose of this modification to Contract N00024-97-C-2202 is to exercise
SLIN 0002AB for the construction of LPD-18. Accordingly, said contract is
hereby modified as follows:
1. In accordance with Special Contract Requirement B-5 OPTIONS of SECTION B
SUPPLIES OR SERVICES AND PRICES/COSTS, SLIN 0002AB is exercised and fully
funded.
2. Under SECTION B SUPPLIES OR SERVICES AND PRICES/COST General Requirement
B-3. DETERMINATION OF FEE (NAVSEA) (OCT 1990), the following revisions are
made
(a)
"(a) Minimum Fee
The base (fixed) fee of this contract is $14,471,227 for CLIN 0001,
the base (fixed) fee currently available for payment under CLIN 0002 is
$8,846,285."
(b) Subparagraph (1) of Paragraph (g) Evaluation Periods is replaced and
supersed with the following:
"(1) Performance evaluations for CLIN 0001 will be conducted in
accordance with the schedule below:
EVALUATION PERIODS BEGINNING END
------------------ -------------- -------------
One Contract Award 30 SEP 1997
Two 01 OCT 1997 31 MAR 1998
Three 01 APR 1998 30 SEP 1998
Four 01 OCT 1998 31 MAR 1999
Five 01 APR 1999 30 SEP 1999
Six 01 OCT 1999 31 MAR 2000
Seven 01 APR 2000 30 SEP 2000
Eight 01 OCT 2000 31 MAR 2001
Nine 01 APR 2001 30 SEP 2001
Ten 01 OCT 2001 31 MAR 2002
Eleven 01 APR 2002 Delivery
Performance evaluations for CLIN 0002 will be conducted in
accordance with the schedule below:
EVALUATION PERIODS BEGINNING END
------------------ -------------- -------------
One Option Exercise 30 SEP 1998
Two 01 OCT 1998 31 MAR 1999
Three 01 APR 1999 30 SEP 1999
Four 01 OCT 1999 31 MAR 2000
Five 01 APR 2000 30 SEP 2000
Six 01 OCT 2000 31 MAR 2001
Seven 01 APR 2001 30 SEP 2001
Eight 01 OCT 2001 31 MAR 2002
Nine 01 APR 2002 30 SEP 2002
Ten 01 OCT 2002 31 MAR 2003
Eleven 01 APR 2003 30 SEP 2003
Twelve 01 OCT 2003 Delivery"
<PAGE>
N00024-97-C-2202
P00021
Page 3 of 3
(c) Subparagraph (1) of Paragraph (h) Award Fee Pool is replaced and
superceded with the following:
"(h) Award Fee Pool
(1) Award Fee for CLIN 0001 shall be available for the
consideration of payment on the following basis:
- ----------------------------------------------------------------------------
Evaluation Award Fee Pool Award Fee Pool Award Fee
Period $ % Earned
- ----------------------------------------------------------------------------
One $1,500,000 3.4% $1,370,400
Two $4,375,000 10.1% $3,722,264
Three $6,200,000 14.3%
Four $5,900,000 13.6%
Five $5,600,000 12.9%
Six $2,700,000 6.2%
Seven $1,325,000 3.1%
Eight $1,400,000 3.2%
Nine $3,800,000 8.8%
Ten $5,013,680 11.5%
Eleven $5,600,000 12.9%
- -----------------------------------------------------------------------------
Total $43,413,680 100% $5,092,664
=============================================================================
Award Fee for CLIN 0002 shall be available for the
consideration of payment on the following basis:
- ----------------------------------------------------------------------------
Evaluation Award Fee Pool Award Fee Pool Award Fee
Period $ % Earned
- ----------------------------------------------------------------------------
One $140,000 0.4%
Two $800,000 3.0%
Three $810,000 3.1%
Four $840,000 3.2%
Five $860,000 3.2%
Six $880,000 3.3%
Seven $900,000 3.4%
Eight $1,800,000 6.8%
Nine $3,200,000 12.1%
Ten $4,000,000 15.1%
Eleven $5,200,000 19.6%
Twelve $7,108,857 26.8%
- -----------------------------------------------------------------------------
Total $26,538,857 100% $0
=============================================================================
3. Under SECTION F - DELIVERIES OR PERFORMANCE, Item 0002AA/002AB is
replaced and superceded by the following:
ITEM SHIP DELIVERY DATE
"0002 LPD 18 18 Debruary 2004"
4. This modification results in the obligation of $291,512,107 for SLIN
0002AB.
Except as provided herein, all other terms and conditions, as heretofore
mentioned, remains unchanged and in full force and effect.
FINANCIAL ACCOUNTING DATA SHEET-NAVY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1. CONTRACT NUMBER (CRITICAL) 2.SPIN (CRITICAL) 3. MOD (CRITICAL) 4. PR NUMBER
N00024-97-C-2202 P00021 N0002499FR91157
- -----------------------------------------------------------------------------------------------------------------------------------
5. 6. LINE OF ACCOUNTING
-----------------------------------------------------------------------------------------------------------------------
A. B. C. D. E. F. G. H. I. J. K.
CLIN/SLIN ACRN APPROPRIATION SUBHEAD OBJ PARM RFM SA AAA TT PAA COST CODE
(CRITICAL) (CRITICAL) (CRITICAL) CLA (CRITICAL) ----------------
PROJ PDLI
UNIT MCC & SUF
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0002 AS 1791711 2317 252 WA WTB 0 068342 2D 000000 23168 200 0010
</TABLE>
PAGE 2 OF 2
<TABLE>
<CAPTION>
NAVY INTERNAL
AMOUNT USE ONLY
(CRITICAL) REF DOC/ACRN
- ------------------------------------------------------------------------------
<S> <C>
$291,512,107.00 N0002499AF22317
---------------
PAGE TOTAL $291,512,107.00
---------------
OBLIGATE ESTIMATED COST AND BASE FEE
GRAND TOTAL
- ------------------------------------------------------------------------------------
PREPARED/AUTHORIZED BY: COMPTROLLER APPROVAL:
/S/ JAN PAUL HOPE /S/ V. H. ACKLEY
DATE: 12/8/98 DATE: 12/15/98
JAN P. HOPE PMS317F V. H. ACKLEY
DEPUTY COMMANDER
COMPTROLLER
</TABLE>
AMENDMENT NUMBER SEVEN
TO
AVONDALE INDUSTRIES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
WHEREAS, Avondale Industries, Inc., a corporation organized and
existing under the laws of the State of Louisiana, adopted the Avondale
Industries, Inc. Employee Stock Ownership Plan (the "Plan") effective September
1, 1985, said Plan has been amended from time to time, said Plan was amended and
restated on December 28, 1994 effective January 1, 1989;
WHEREAS, Avondale Industries, Inc. reserved the right to amend the Plan
by resolution of the Board of Directors;
WHEREAS, it is desirable to amend the Plan to revise the Plan's tender
offer provisions;
NOW, THEREFORE, as authorized by Section 7.1, the Plan is hereby
amended, effective December 1, 1998, as follows:
Section 7.1 of Article X, Time of Payment is amended to add the
following after the third paragraph:
Notwithstanding the foregoing paragraphs, in the case of a
non-highly compensated Participant who has terminated employment (other
than by reason of death, Disability, Early Retirement Age or Normal
Retirement Age), the payment of his Vested Interest shall be made in
connection with the settlement of a bona fide lawsuit concerning such
Participant's employment. The payment shall be made, or commence, as
soon as administratively practicable following the settlement.
IN WITNESS WHEREOF, Avondale Industries, Inc. has caused this amendment
to be executed in multiple originals by its officers thereunto duly authorized
and its corporate seal to be hereunto affixed, as of the 30th day of December,
1998.
ATTEST AVONDALE INDUSTRIES, INC
RONALD E. BAILEY BY: /S/ THOMAS M. KITCHEN
- ---------------- ----------------------------
(Corporate Seal) Thomas M. Kitchen, Secretary
1
<PAGE>
ACKNOWLEDGMENT
STATE OF LOUISIANA
PARISH OF JEFFERSON
BEFORE ME, the undersigned Notary Public, personally came and appeared
Thomas M. Kitchen, who being by me sworn did depose and state that he signed the
foregoing Amendment Number Seven to the Avondale Industries, Inc. Employee Stock
Ownership Plan as a free act and deed on behalf of Avondale Industries, Inc. for
the purposes therein set forth.
/S/ THOMAS M. KITCHEN
---------------------
Thomas M. Kitchen
SWORN TO AND SUBSCRIBED
BEFORE ME THIS 30TH DAY
OF DECEMBER, 1998.
A. BLOMKALNS
- ------------
NOTARY PUBLIC
2
AMENDMENT NUMBER ONE
TO
AVONDALE INDUSTRIES, INC.
PENSION PLAN
WHEREAS, Avondale Industries, Inc., a corporation organized and
existing under the laws of the State of Delaware, adopted the Avondale
Industries, Inc. Pension Plan (the "Plan") effective September 1, 1985; said
Plan has been amended from time to time; said Plan was amended and restated
January 1, 1988;
WHEREAS, Avondale Industries, Inc. reserved the right to amend the Plan
by resolution of the Board of Directors;
WHEREAS, it is desirable to amend the Plan to clarify the forfeiture
provisions;
NOW, THEREFORE, as authorized by Section 11.1, the Plan is hereby
amended effective January 1, 1998 as follows:
I.
Paragraph Article I, Section 1.43, Year of Benefit Service, is amended
and restated to eliminate duplication between Section 1.43 and Section 1.35,
which defines the phrase "Service Termination Date." Section 1.43 is amended to
read as follows:
1.43 Year of Benefit Service shall mean a 12-month
period commencing on the date the Eligible Employee completes
One Hour of Service, but counting only months while an
Eligible Employee (or such later date of participation as
specified in Appendix A), or anniversary thereof during which
he is employed by a Participating Employer, provided that:
a. An Employee shall be credited with one year of
Benefit Service for each 12 complete months of
employment, whether or not consecutive.
b. An Employee shall cease accruing Years of Benefit
Service on his Service Termination Date, except if
such Employee performs an Hour of Service within the
12-month period commencing on his Service Termination
Date, his period of absence shall be treated as
employment.
c. Years of Benefit Service shall include any period of
absence because of Service in the Uniformed Services
for a Returning Veteran.
1
<PAGE>
Except as provided in Section 1.43(b), a
Participant's Years of Benefit Service regardless of whether
the Participant is an employee of Avondale Shipyards
Corporation or Avondale Services Corporation, is equal to the
years (and fractional years) of service beginning with the
Participant's date of hire and ending with his Service
Termination Date (other than additional credit for certain
periods as explained above). Fractional years are determined
by dividing the number of days between the Participant's last
anniversary of employment and his Service Termination Date by
365 (366 in leap years).
II.
Article II, Section 2.5(f), Reemployment of Vested Participant, is
amended to insert the phrase "for purposes of receiving future benefit
accruals". The amended provision reads as follows:
If a Participant who was vested in his Accrued
Benefit terminates employment and is re-employed after any
number of One Year Breaks in Service or any number of One Year
Breaks in Benefit Service, he shall be reinstated as a
Participant for purposes of receiving future benefit accruals,
if he is an Eligible Employee, after he completes a Year of
Benefit Service from his date of re-employment. His Years of
Service and Years of Benefit Service accumulated before his
termination shall be added to any Years of Service and Years
of Benefit Service which subsequently accumulate. However, his
Employment Year may be re-set based on the rules stated in
Section 2.5(c).
III.
Article II, Section 2.5(g)(iv), is amended to replace the reference to
Section 2.5(h) to Section 2.5(g).
IV.
Article III, Section 3.5, Vesting Date, is amended to restate the last
paragraph to read as follows:
If a Participant, who was first credited with an Hour
of Service after December 31, 1987, terminates employment with
a zero benefit, such Participant will be deemed to have
received his full benefit and the non-vested portion shall be
immediately forfeited. A Participant can have a benefit
restored after reemployment, but only under the circumstances
described in Section 2.5.
2
<PAGE>
V.
Article X, Provisions to Prevent Discrimination, is amended to
capitalize all references to Highly Compensated Employees.
VI.
Article XIV, Section 14.6, Payment of Small Benefits, is amended and
restated to read as follows:
If the Actuarial Equivalent present value of monthly
payments of retirement income to a Participant, who was
covered under either the Danly Machine Corporation Pension
Plan for Salaried Employees or the Danly Machine Corporation
Hourly (Non-Union) Pension Plan, would amount to less than
$3,500 before such payments have commenced, the Committee may,
it its sole discretion, direct the Trustee to pay such person
the then present value of such retirement income in one lump
sum payment.
If the Actuarial Equivalent present value of monthly
payments of retirement income to a Participant, other than a
Participant described in the above paragraph, would amount to
less than $5,000 before such payments have commenced, the
Committee may, in its sole discretion, direct the Trustee to
pay such person the then present value of such retirement
income in one lump sum payment.
This Section 14.6 applies even if the Participant
retires prior to his Early, Disability, or Normal Retirement
Date.
IN WITNESS WHEREOF, Avondale Industries, Inc. has caused this amendment
to be executed by its officers thereunto duly authorized and its corporate seal
to be hereunto affixed, as of the 30th day of December, 1998.
AVONDALE INDUSTRIES, INC.
BY: /S/ THOMAS M. KITCHEN
--------------------------------
Thomas M. Kitchen, Secretary
ATTEST
/S/ RONALD E. BAILEY
- --------------------
(Corporate Seal)
3
<PAGE>
ACKNOWLEDGMENT
STATE OF LOUISIANA
PARISH OF JEFFERSON
BEFORE ME, the undersigned Notary Public, personally came and appeared
Thomas M. Kitchen, who being by me sworn did depose and state that he signed the
foregoing Amendment Number One to the Avondale Industries, Inc. Pension Plan as
a free act and deed on behalf of Avondale Industries, Inc. for the purposes
therein set forth.
/S/ THOMAS M. KITCHEN
---------------------
Thomas M. Kitchen
SWORN TO AND SUBSCRIBED BEFORE ME THIS 30th DAY OF DECEMBER, 1998.
/S/ A. BLOMKALNS
- ----------------
NOTARY PUBLIC
4
AMENDMENT NO. 2
TO THE
AMENDED AND RESTATED AVONDALE SERVICES CORPORATION
EXECUTIVE GROUP INSURANCE BENEFIT PLAN
AND
SUMMARY PLAN DESCRIPTION
PREAMBLE
Avondale Services Corporation (the "Company") maintains the Avondale
Services Corporation Executive Group Insurance Benefit Plan pursuant to a plan
document effective October 1, 1997 (the "Plan").
The Board of Directors of Avondale Services Corporation hereby desires
to amend the Plan in the following respect to increase the maximum coverage for
Employee Life insurance to five million:
AMENDMENT
The description of "Maximum Coverage" in Article II under the
description of Employee Life is hereby amended to read as follows:
Maximum Coverage - Five million dollars or such
lesser amount as may be set forth in any applicable
insurance policy.
Executed in Avondale, Louisiana this 8th day of December, 1998.
WITNESSES: AVONDALE SERVICES CORPORATION
/S/ JACKIE H. WALKER By: /S/ THOMAS M. KITCHEN
- -------------------- ---------------------
/S/ JOY T. RINALDI Thomas M. Kitchen
- --------------------
AVONDALE INDUSTRIES, INC.
401(k)
SAVINGS PLAN
(Effective January 1, 1998)
<PAGE>
AVONDALE INDUSTRIES, INC.
401(k)
SAVINGS PLAN
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS
1.1 Accounts.............................................. I-2
1.2 Active Participant.................................... I-2
1.3 Affiliated Company.................................... I-2
1.4 Beneficiary........................................... I-2
1.5 Board of Directors.................................... I-2
1.6 Code .............................................. I-2
1.7 Committee............................................. I-3
1.8 Company .............................................. I-3
1.9 Compensation.......................................... I-3
1.10 Disability............................................ I-4
1.11 Disability Retirement Date............................ I-4
1.12 Eligible Employee..................................... I-4
1.13 Employee.............................................. I-4
1.14 Employee-Deferral or Employee-Deferral Contribution... I-4
1.15 Employee-Deferral Account............................. I-4
1.16 Employee-Deferral Agreement........................... I-4
1.17 Employer.............................................. I-4
1.18 Employer Contribution................................. I-5
1.19 Employer Contribution Account......................... I-5
1.20 Employer Discretionary Contribution................... I-5
1.21 Employment Year....................................... I-5
1.22 Entry Date............................................ I-5
1.23 ERISA .............................................. I-5
1.24 Highly Compensated Employee........................... I-5
1.25 Hour of Service....................................... I-5
1.26 Leased Employee....................................... I-7
1.27 Matching Contribution................................. I-7
1.28 Non-Highly Compensated Employee....................... I-7
1.29 Non-Participating Employer............................ I-8
1.30 Normal Retirement Date................................ I-8
1.31 One Year Break in Service or Break in Service......... I-8
1.32 Parental Absence...................................... I-8
1.33 Participant........................................... I-8
i
<PAGE>
1.34 Participating Employer................................ I-8
1.35 Plan .............................................. I-9
1.36 Plan Year............................................. I-9
1.37 Rollover Contribution Account......................... I-9
1.38 Service Termination Date.............................. I-9
1.39 Trust or Trust Agreement.............................. I-9
1.40 Trustee .............................................. I-9
1.41 Trust Fund............................................ I-9
1.42 Valuation Date........................................ I-9
1.43 Vested Interest....................................... I-10
1.44 Year of Service....................................... I-10
ARTICLE II - PARTICIPATION
2.1 Commencement of Participation......................... II-1
2.2 Termination of Participation.......................... II-1
2.3 Reemployment of an Eligible Employee
or Former Participant............................... II-1
2.4 Rights of Returning Veteran........................... II-3
ARTICLE III - EMPLOYEE-DEFERRALS
3.1 Employee-Deferrals.................................... III-1
3.2 Delivery of Employee-Deferral Contributions........... III-1
3.3 Changes in and Discontinuance of Employee-Deferrals... III-1
3.4 Dollar Limitation..................................... III-1
3.5 Return of Excess Deferral Amounts..................... III-1
3.6 Non-Discrimination Rules for Employee-Deferrals....... III-2
3.7 Rollover Contributions................................ III-6
ARTICLE IV - MATCHING CONTRIBUTIONS
4.1 Matching Contributions................................ IV-1
4.2 Forfeitures........................................... IV-1
4.3 Delivery of Contributions............................. IV-1
4.4 Adjustments if Employee-Deferral Contributions
Adjusted............................................ IV-1
4.5 Non-Discrimination Rules for Matching Contributions... IV-1
4.6 Qualified Matching Contributions, Qualified
Nonelective Contributions........................... IV-7
ARTICLE V - EMPLOYER DISCRETIONARY CONTRIBUTIONS
5.1 Employer Discretionary Contributions.................. V-1
5.2 Allocation of Employer Discretionary Contributions.... V-1
5.3 Top-Heavy Contributions............................... V-1
ii
<PAGE>
ARTICLE VI - VESTING
6.1 Employee-Deferral Account............................. VI-1
6.2 Rollover Contribution Account......................... VI-1
6.3 Employer Contribution Account......................... VI-1
6.4 Forfeitures........................................... VI-1
6.5 Reemployment.......................................... VI-1
ARTICLE VII - ALLOCATIONS
7.1 Allocation of Contributions........................... VII-1
7.2 Definitions........................................... VII-1
7.3 Annual Additions...................................... VII-2
7.4 Limitation for Other Defined Contribution Plans....... VII-2
7.5 Limitation for Defined Benefit Plan................... VII-3
ARTICLE VIII - TRUST FUND
8.1 Plan Assets........................................... VIII-1
8.2 Separate Accounts..................................... VIII-1
8.3 Valuation............................................. VIII-1
8.4 Investment Funds...................................... VIII-1
8.5 Investment of Contributions........................... VIII-2
8.6 Transfer of Amounts Among Investment Funds............ VIII-2
8.7 Liability for Investment Decisions.................... VIII-3
8.8 Accounting Procedures................................. VIII-4
ARTICLE IX - BENEFITS
9.1 Normal Retirement Date................................ IX-1
9.2 Disability Retirement Date............................ IX-1
9.3 Nonalienation of Benefits............................. IX-1
9.4 Qualified Domestic Relations Order.................... IX-1
ARTICLE X - PAYMENT OF BENEFITS
10.1 Time of Payment....................................... X-1
10.2 Required Beginning Date............................... X-1
10.3 Death Benefit......................................... X-2
10.4 Form of Distribution.................................. X-2
10.5 Temporary Non-Payment of Benefits..................... X-2
10.6 Direct Rollover Rules................................. X-2
10.7 Notice .............................................. X-3
ARTICLE XI - IN-SERVICE DISTRIBUTION AND LOANS
11.1 Distribution after Attaining Age 59 1/2............... XI-1
11.2 Financial Hardship.................................... XI-1
11.3 Loans to Participant.................................. XI-2
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ARTICLE XII - ADMINISTRATION
12.1 Board of Directors................................... XII-1
12.2 401(k) Administrative Committee...................... XII-1
12.3 Committee's Duties and Responsibilities.............. XII-1
12.4 Committee's Powers................................... XII-2
12.5 Chairman of the Committee............................ XII-3
12.6 Claims Review Procedure.............................. XII-3
12.7 Information from Participants, Beneficiaries and
Alternate Payees................................... XII-4
12.8 Actions ............................................. XII-4
12.9 Bond ............................................. XII-4
12.10 Indemnification...................................... XII-4
ARTICLE XIII - AMENDMENT OF THE PLAN
13.1 Right to Amend or Suspend Contributions.............. XIII-1
13.2 Amendment by Committee............................... XIII-1
13.3 Restriction on Amendment............................. XIII-1
13.4 Retroactivity........................................ XIII-2
13.5 Merger ............................................. XIII-2
ARTICLE XIV - TERMINATION OF THE PLAN
14.1 Events Constituting Termination...................... XIV-1
14.2 Partial Termination.................................. XIV-1
14.3 Disposition of Accounts After a Termination.......... XIV-1
14.4 Internal Revenue Service Approval for Distribution... XIV-2
ARTICLE XV - STAND-BY TOP-HEAVY PROVISIONS
15.1 Top Heavy Plan....................................... XV-1
15.2 Definitions.......................................... XV-1
15.3 Vesting ............................................. XV-2
15.4 Minimum Contribution................................. XV-2
15.5 Limitations on Contributions......................... XV-3
15.6 Other Plans.......................................... XV-3
ARTICLE XVI - GENERAL PROVISIONS
16.1 Plan Voluntary....................................... XVI-1
16.2 Payments to Minors and Incompetents.................. XVI-1
16.3 Missing Payee........................................ XVI-1
16.4 Required Information................................. XVI-1
16.5 Subject to Trust Agreement........................... XVI-1
16.6 Communications to Committee.......................... XVI-1
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16.7 Communications from Employer or Committee............ XVI-2
16.8 Action ............................................. XVI-2
16.9 Liability for Benefits............................... XVI-2
16.10 Named Fiduciary...................................... XVI-2
16.11 Gender ............................................. XVI-2
16.12 Captions............................................. XVI-2
16.13 Applicable Law....................................... XVI-2
16.14 Reversion of Employer Contributions.................. XVI-2
16.15 Expenses............................................. XVI-3
v
<PAGE>
PREAMBLE
Avondale Industries, Inc. originally established the Avondale
Industries, Inc. 401(k) Savings Plan (the "Plan") effective January 1, 1996 and
such Plan has been amended from time to time thereafter. The Plan was amended to
change Year of Service from an "elapsed time " method to an "Hours of Service"
method for participation, break in service and vesting purposes. The provisions
relating to the "elapsed time" method, under the terms of the Plan prior to this
restatement, continue to be in effect for each Participant until the
Participant's Employment Year beginning in Plan Year 1997. Other amendments
included adding provisions relating to the Family and Medical Leave Act of 1993,
the Uniformed Services Employment and Reemployment Rights Act of 1994, and the
Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and
making other administrative changes. The Plan is restated, effective January 1,
1998, unless stated otherwise, to incorporate prior amendments and to make other
clarifications and revisions.
The purpose of this Plan is to encourage Employees to save and invest
systematically a portion of their current compensation in order that they may
have an additional source of income upon their retirement or disability. The
benefits provided by the Plan are paid from the Trust Fund established by the
Employer and are in addition to the benefits Employees are entitled to receive
under any other programs of the Employer and the United States Social Security
Administration.
The Plan and its related Trust are intended to qualify as a
profit-sharing plan and a cash-or-deferred arrangement under Sections 401(a),
501(a), 401(k) and 401(m) of the Internal Revenue Code of 1986, as amended. Any
ambiguity shall be resolved by giving effect to these intentions. The Plan and
the Trust forming a part hereof are maintained for the exclusive benefit of the
Participants and their Beneficiaries.
<PAGE>
ARTICLE I
DEFINITIONS
All capitalized terms used in this Plan shall have the meaning set
forth in this Article I, unless a different meaning is plainly required by the
context:
1.1 Accounts shall mean each of a Participant's Employee-Deferral
Account, Employer Contribution Account and Rollover Contribution Account
(including subaccounts established from time to time under each such Account)
established and maintained to record the interest of a Participant in the Trust
Fund as more fully described in Sections 1.15, 1.19 and 1.37.
1.2 Active Participant shall mean an Eligible Employee who is employed
by a Participating Employer through the last payroll period ending within the
Plan Year.
1.3 Affiliated Company means the Company and all other entities
required to be aggregated with the Company under Sections 414(b), (c), (m) or
(o) of the Code.
1.4 Beneficiary shall mean the person or persons designated by a
Participant to receive the amount, if any, payable under the Plan in the event
of a Participant's death. Each Beneficiary designation shall be in the form
prescribed by the Committee.
If the Participant is married and designates someone other than his
legal spouse, his Beneficiary designation must include the written consent of
his spouse at the time the designation is made. Such written consent must
approve the Beneficiary designated and acknowledge the effect of such
designation and must be notarized by a notary public. If it is established to
the satisfaction of the Committee that the Participant has no spouse or that the
spouse's consent cannot be obtained because the spouse cannot be located, or
because of such other circumstances as may be prescribed in regulations issued
pursuant to Section 417 of the Code, such written consent shall not be required.
If no valid Beneficiary designation is in effect at the time of the
Participant's death, then, to the extent, if any, benefits are payable under the
Plan after such death, Beneficiary shall mean the Participant's legal spouse, if
he is married at the time of his death, otherwise the Participant's estate.
1.5 Board of Directors shall mean the Board of Directors of Avondale
Industries, Inc.
1.6 Code shall mean the Internal Revenue Code of 1986, as amended from
time to time. Reference to any Section of the Code shall include any successor
provision thereto.
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1.7 Committee shall mean the 401(k) Administrative Committee designated
by the Company to administer the Plan in accordance with Section 12.2 or a
person or entity designated by the 401(k) Administrative Committee.
1.8 Company shall mean Avondale Industries, Inc. and any
successor company that may continue the Plan.
1.9 Compensation. The term "Compensation" as modified below, has the
following meaning for each respective purpose under the Plan:
(a) Plan Compensation. For purposes of determining
contributions to the Plan, Plan Compensation means
base pay plus overtime, bonuses and short-term
Disability payments, if any, and shall exclude
permanent Disability payments and any other extra
compensation in any form paid to the Employee by the
Employer during the Plan Year. Plan Compensation
will include Employee-Deferrals made on behalf of the
Participant under this Plan and any elective
contributions made on behalf of the Participant to a
Section 125 cafeteria plan maintained by the
Employer.
(b) Section 415 Compensation. For the purpose of applying
individual account limitations of Section 415 of the
Code, Section 415 Compensation means Compensation as
reported on the Employee's W-2. Effective January 1,
1998, Section 415 Compensation is Total
Compensation.
(c) Total Compensation means W-2 Compensation, plus the
Elective-Deferrals made on behalf of the Participant
under this Plan and any elective contributions made
on behalf of the Participant to a Section 125
cafeteria plan maintained by the Employer.
A Participant's Total Compensation for the entire
Plan Year shall be counted even though the
Participant may participate in the Plan for less than
the entire Plan Year (e.g., even though the
Participant enters the Plan on a monthly entry date
occurring during the Plan Year).
The amount of a Participant's annual Compensation that can be taken
into account under any of Subparagraphs (a) - (c) for any Plan Year shall not
exceed $150,000, as adjusted from time to time in accordance with Section
401(a)(17) of the Code. This limitation for 1998 is $160,000.
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1.10 Disability of a Participant shall mean the total and permanent
incapacity of a Participant to engage in any substantial gainful employment, as
determined by the Committee and which qualifies him for commencement of benefits
for permanent and total disability under Federal Old Age and Survivor Insurance.
1.11 Disability Retirement Date shall have the meaning set forth in
Section 9.2.
1.12 An Eligible Employee shall mean any Employee of a Participating
Employer; provided, however, that an Eligible Employee shall not include: (a)
any Employee who is included in a unit of employees covered by a negotiated
collective bargaining agreement which does not provide for his participation in
this Plan; (b) any Employee who is providing services pursuant to an oral or
written contract or leasing arrangement with an unrelated employer, including
any Employee who under a Participating Employer's standard personnel practices,
is deemed a subcontractor or a leased employee; (c) any Employee who is a Leased
Employee; (d) any Employee who, under a Participating Employer's standard
personnel practices, is deemed an independent contractor (without regard to such
person's status for Federal income tax purposes and without regard to any
subsequent determination that such person is a common law employee) and (e) any
Employee who, under a Participating Employer's standard personnel practices, is
deemed a contractor, jobber, or a consultant. All determinations shall be made
in the sole discretion of the Participating Employer in a uniform
non-discriminatory manner.
1.13 Employee shall mean any person who is employed by a Participating
Employer or Non-Participating Employer as a common law employee receiving
remuneration subject to withholding for purposes of the Federal Insurance
Contribution Act (except that Leased Employees as described in Section 414(n)(2)
of the Code shall be considered Employees solely for purposes of determining
whether the requirements of Section 414(n)(3) of the Code are satisfied). A
director of the Company is not eligible for participation in the Plan unless he
is also an Employee.
1.14 Employee-Deferral or Employee-Deferral Contribution shall mean the
amount contributed by the Employer on behalf of a Participant in accordance with
Article III.
1.15 Employee-Deferral Account shall mean the Account maintained for a
Participant to record the Employee-Deferrals under Article III, and any
contributions under Section 4.6, contributed by the Employer on such
Participant's behalf.
1.16 Employee-Deferral Agreement shall mean the agreement described in
Article III.
1.17 Employer shall mean a Participating Employer or a
Non-Participating Employer. Appendix A lists each Participating Employer.
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<PAGE>
1.18 Employer Contribution means any (a) Matching Contributions, (b)
Employer Discretionary Contributions and (c) contributions required on account
of a Top-Heavy Plan Year.
1.19 Employer Contribution Account shall mean the account established
for a Participant which is funded by Employer Contributions.
1.20 Employer Discretionary Contribution shall mean a contribution by
an Employer to the Trust Fund as described in Article V.
1.21 Employment Year shall mean the twelve month period of employment
commencing on the date the Employee first performs an Hour of Service for the
Employer and each anniversary thereof. The Employment Year for a reemployed
Eligible Employee is determined in Section 2.3.
1.22 Entry Date shall mean February 1, 1996 and the first day of each
month thereafter and any other date during the Plan Year specified by the
Committee.
1.23 ERISA shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time. References to any Section of ERISA include
any successor provision thereto.
1.24 Highly Compensated Employee, as determined for any Plan Year after
the Plan Year ending December 31, 1996, means any Employee who (a) was a 5%
owner (as defined at Section 416(i)(1)(B)(i) of the Code) at any time during the
current year or the previous year or (b) received Compensation in excess of
$80,000 (as adjusted after 1997 under Code Section 414(q)(1)) in the preceding
Plan Year and was one of the highest-paid 20% of Employees.
1.25 Hour of Service shall mean:
(a) Each hour for which an Employee is directly or
indirectly paid or entitled to payment by a
Participating Employer or Non-Participating Employer
for the performance of duties, including periods of
vacation and holidays;
(b) Each hour for which an Employee is directly or
indirectly paid or entitled to payment by a
Participating Employer or Non-Participating Employer
(including payments made or due from a trust fund or
insurer to which the Participating Employer or
Non-Participating Employer contributes or pays
premiums) on account of a period of time during which
no duties are performed (irrespective of whether the
employment
I-5
<PAGE>
relationship has terminated) due to vacation,
holiday, illness, incapacity (including disability),
layoff, jury duty, or leave of absence, provided
that:
(i) no more than 501 Hours of Service shall be
credited under this paragraph (b) to an
Employee on account of any single continuous
period during which the Employee performs no
duties; and
(ii) Hours of Service shall not be credited under
this paragraph (b) to an Employee for a
payment which solely reimburses the Employee
for medically-related expenses incurred by
the Employee or which is made or due under a
plan maintained solely for the purpose of
complying with applicable worker's
compensation, unemployment compensation or
disability insurance laws;
(c) Each hour not already included under this Section
1.25 above for which back pay, irrespective of
mitigation of damages, is either awarded or agreed to
by such Employer, provided that crediting of Hours of
Service under this Section 1.25 with respect to
periods described in this Section 1.25 above shall be
subject to the limitation therein set forth; and
(d) If an Employee is absent from his or her employment
with the Employer for any paid period on account of
(i) Parental Absence, or (ii) any period of leave
recognized under the Family and Medical Leave Act of
1993 such Employee shall be credited with sufficient
Hours of Service (not in excess of 501 in any Plan
Year) so that a Break in Service does not occur in
either the Employment Year in which such absence
begins (if credit is required to preclude a Break in
Service in such year) or in the immediately following
Employment Year (if no credit was awarded in the
preceding year). For purposes of computing Hours of
Service credited under this paragraph (d), an
Employee shall be credited with (i) Hours of Service
which would otherwise be credited to such Employee
without regard to the absence, or (ii) 8 Hours of
Service for each day of the absence. The Committee,
in its sole discretion, may require (i) evidence that
the absence is on account of a reason enumerated in
this paragraph (d), and (ii) evidence as to the
duration of the absence.
The number of Hours of Service to be credited under this Section 1.25
above on account of a period during which an Employee performs no duties, and
the Plan Years to which Hours of Service shall be credited under this Section
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<PAGE>
1.25 above shall be determined by the Committee in accordance with Sections
2530.200b-2(b) and (c) of the Regulations of the U.S. Department of Labor.
1.26 A Leased Employee shall mean any person (excluding a person who is
a common law employee of the Participating Employer or Non-Participating
Employer) who, pursuant to an agreement between a Participating Employer (or an
Affiliated Company) and any other person ("leasing organization") has performed
services for the Participating Employer (or an Affiliated Company) and related
persons determined in accordance with Section 414(n)(6) of the Code, on a
"substantially full-time basis" for a period of at least one year and: for Plan
Years after 1996, such services are performed under the primary direction or
control of a Participating Employer (or an Affiliated Employer); for Plan Years
prior to 1997, such services are of the type historically performed, in the
business field of the Participating Employer (or an Affiliated Employer) by
employees.
A person is considered to have performed services on a "substantially
full-time basis" for a period of at least one year if: (a) during any
consecutive 12-month period such person has performed at least 1,500 Hours of
Service for the Employer or (b) during any consecutive 12-month period such
person performed services for the Employer for a number of Hours of Service at
least equal to 75% of the average number of hours that are customarily performed
by an employee of the Employer in the particular position.
Such a person will not be a Leased Employee if the person (a) is
covered by a money purchase pension plan providing (i) a nonintegrated employer
contribution rate of at least 10% of such person's W-2 wages, (ii) immediate
participation, and (iii) full and immediate vesting, and (b) provided, the
Leased Employee, determined without regard to whether such person is a
participant in the above described money purchase plan, do not constitute more
than 20 percent of the recipient's nonhighly compensated workforce.
In the event that any Leased Employee subsequently becomes an Eligible
Employee, then unless the Plan is otherwise excluded by applicable Treasury
Regulations from the requirements of Code Section 414(n), the total period that
such former Leased Employee provided services to the Participating Employer
shall be treated under the Plan, for participation eligibility and vesting
purposes as though he had been an Employee of the Participating Employer or
Non-Participating Employer.
1.27 Matching Contribution shall mean a contribution by an Employer to
the Trust Fund as described in Article IV.
1.28 Non-Highly Compensated Employee shall mean an Employee who is not
a Highly Compensated Employee.
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1.29 Non-Participating Employer shall mean an Affiliated Company which
is not a Participating Employer.
1.30 Normal Retirement Date shall have the meaning set forth in Section
9.1. Normal Retirement Age means the Participant's sixty-fifth (65th) birthday.
1.31 One Year Break in Service or Break in Service shall mean an
Employment Year in which a Participant has 500 or less Hours of Service.
1.32 Parental Absence shall mean an Employee's absence from work for
any of the following reasons: (i) the pregnancy of the Employee, (ii) the birth
of the Employee's child, (iii) the adoption of a child by the Employee, or (iv)
the need to care for the Employee's child immediately following its birth or
adoption; provided, however, that the Committee, in its sole discretion, may
require evidence that any absence is on account of a reason enumerated herein
and evidence as to the duration of such absence.
1.33 Participant shall mean (a) any Eligible Employee who satisfies the
participation requirements set forth in Article II, and (b) any former Employee
on whose behalf an Account continues to be maintained in the Plan pursuant to
Article II. An Eligible Employee remains a Participant as long as he has an
Account balance, as provided in Section 2.2.
In the event the Plan fails to pass the coverage requirements of
Section 410(b) of the Code for a Plan Year, certain Employees will be given
"Eligible Employee" status in a number necessary to satisfy the coverage
requirements of Section 410(b) of the Code. "Eligible Employee" status will be
given to certain Employees beginning first with the Employee who has both
satisfied the participation requirements of Article II and has the most recent
original employment date and continuing in descending original employment date
order, to the extent necessary for the Plan to pass the coverage requirements of
Section 410(b) of the Code. If two or more Employees have satisfied the
participation requirements of Article II and have the same original employment
date, Employees will be given "Eligible Employee" status determined in
alphabetical order of the Employees' last names until the coverage requirements
are met. Coverage under this paragraph only applies to the year in question.
1.34 Participating Employer shall mean the Company, Avondale Services
Corporation, and any Affiliated Company that adopts this Plan pursuant to
authorization by the Board of Directors of the Company and the board of
directors of the newly-adopting entity.
By authorizing the adoption of this Plan, the governing body of any
Participating Employer expressly recognizes and delegates to the Company and its
Board of Directors the right to exercise on the behalf of the Participating
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<PAGE>
Employer all power and authority conferred by the Plan to the Company or its
Board of Directors.
1.35 Plan shall mean the Avondale Industries, Inc. 401(k) Savings Plan,
as set forth in this document and as amended from time to time.
1.36 Plan Year shall mean the calendar year.
1.37 Rollover Contribution Account shall mean the Account maintained
for a Participant to record his rollover contribution made pursuant to Section
3.7.
1.38 Service Termination Date shall mean the earliest of the following:
(a) the date on which an Employee resigns, is discharged,
retires or dies;
(b) the first anniversary of the date on which an
Employee is laid off, starts an authorized leave of
absence, or is absent from work for any other reason
(other than those instances covered under paragraphs
(a) and (c)), including holidays, paid vacations,
sick leaves and absence on account of disability;
(c) the second anniversary of the date on which an
Employee commenced a Parental Absence, if such
Employee has not yet returned to work with a
Participating or Non-Participating Employer.
1.39 Trust or Trust Agreement shall mean the agreement and any and all
amendments and supplements thereto entered into between the Company and the
Trustee. The Trust Agreement shall be deemed to be part of this Plan as if all
the terms and provisions were fully set forth herein.
1.40 Trustee shall mean the person or persons appointed by the Board of
Directors to be Trustee under the Trust Agreement.
1.41 Trust Fund shall mean all assets held by the Trustee in accordance
with the Trust Agreement.
1.42 Valuation Date shall mean the last day of each quarter during the
Plan Year or any other date or dates during the Plan Year specified by the
Committee upon which the assets of the Trust Fund are valued as described in
Article VIII. The Annual Valuation Date shall mean the last day of the Plan
Year.
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<PAGE>
1.43 Vested Interest shall mean the portion of a Participant's Accounts
which has become vested and nonforfeitable, under Section 6.3.
1.44 Year of Service shall mean any Employment Year beginning on or
after January 1, 1997 in which an Employee completes 1000 Hours of Service with
the Employer. An Employee's Years of Service include all periods counted as the
Employee's Years of Service earned prior to 1997 under Plan provisions then in
effect.
All the Employee's Years of Service with the Employer shall be taken
into account including service prior to the year the Employee meets the
definition of Eligible Employee, for purposes of satisfying the Plan's
eligibility requirements and for calculating a Participant's Vested Interest in
his Employer Contribution Account unless such periods of service are disregarded
pursuant to Section 2.3 of the Plan.
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<PAGE>
ARTICLE II
PARTICIPATION
2.1 Commencement of Participation. Each person who is an Eligible
Employee shall become a Participant on the Entry Date which coincides with or
immediately follows the date (a) which such Eligible Employee attained age 21
and (b) on which such Eligible Employee completed one Year of Service, provided
he is employed by a Participating Employer on such date.
2.2 Termination of Participation. An Eligible Employee or Participant
who either (i) terminates employment with the Employer, or (ii) becomes employed
in a position that is not eligible for benefits under this Plan as explained in
Section 1.12 including when an Employee becomes a member of a group of employees
covered by a negotiated collective bargaining agreement which does not provide
for participation in the Plan or (iii) becomes an Employee of a
Non-Participating Employer shall no longer be an Eligible Employee but shall
continue as a Participant in the Plan entitled to share in the earnings and
losses of the Trust Fund and to exercise the rights of a Participant hereunder
until his Vested Interest has been distributed and the non-vested portion of his
Accounts, if any, has been forfeited pursuant to Section 6.4.
The participation of any Participant shall end when (i) no further
benefits are payable to him or his Beneficiary under the Plan and (ii) no
further amounts are credited to his Accounts.
2.3 Reemployment of an Eligible Employee or Former Participant. The
following reemployment rules apply:
(a) Resetting the Employment Year. If an Eligible
Employee is reemployed his Employment Year is reset
based on his reemployment date if the following
conditions are met:
(i) the Eligible Employee is not reemployed
until after the end of the Employment Year
of his Service Termination Date, and
(ii) the Eligible Employee has a One Year Break
in Service in the Employment Year prior to
the Employment Year of his reemployment
date.
(b) Reemployment of a Former Participant. Except as
provided in Section 2.3(d), a "Former Participant" is
an Employee who terminated employment after the Entry
Date following the date on which he met the
requirements of Section 2.1. A Former Participant who
is reemployed shall be treated as if his employment
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<PAGE>
was not broken. Such Employee, if an Eligible
Employee, shall be allowed to make Employee-
Deferrals pursuant to Section 3.1. His past Years of
Service for purposes of vesting will be added to any
Years of Service earned after reemployment.
(c) Reemployment of a Non-Participant.
(i) If an Eligible Employee who had not become a
Participant is reemployed and his Employment
Year is not reset, he becomes a Participant
on the first Entry Date after he meets the
requirements of Sections 1.12 and 2.1.
(ii) If an Eligible Employee who had not become a
Participant is reemployed and his Employment
Year is reset, he becomes a Participant on
the first Entry Date after he meets the
requirements of Sections 1.12 and 2.1. Hours
of Service prior to reemployment are not
considered for purposes of determining
eligibility to participate.
(iii) If an Eligible Employee who had previously
met the requirements of Sections 1.12 and
2.1 but had not yet become a Participant
because he was not employed on an Entry Date
is reemployed and his Employment Year is not
reset, he shall become a Participant as of
the first Entry Date following reemployment.
If such Eligible Employee is reemployed and
his Employment Year is reset, he shall
become a Participant on the first Entry
Date following the completion of one Year of
Service.
(d) Reemployment of Non-Vested Participant. If a
Participant who was not fully vested in his Employer
Contribution Account terminates employment and is
reemployed after incurring the greater of (i) five
consecutive One Year Breaks in Service or (ii) the
aggregate number of Years of Service prior to
termination, he shall be treated as a new employee
for purposes of vesting and any Years of Service
accumulated by him prior to termination shall be
disregarded. For purposes of participation, see
Section 2.3(b).
(e) Reemployment of Vested Participant. If a Participant
who was fully vested in his Employer Contribution
Account terminates employment and is reemployed after
any number of One Year Breaks in Service, he shall be
reinstated as a Participant, if he is an Eligible
Employee, as of the date he first performs an Hour of
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Service following reemployment. However, his
Employment Year may be reset for vesting purposes
based on the rules stated in Section 2.3(a).
2.4 Rights of Returning Veteran. This Section applies to Returning
Veterans who apply for reemployment on or after December 12, 1994.
(a) Definitions.
(i) Returning Veteran means a reemployed
Employee who gave notice to the Employer of
his impending Service in the Uniformed
Services, (unless such notice was precluded
by military necessity or was otherwise
impossible or unreasonable), and resumes
employment with an Employer during such time
as such Employee has reemployment rights
under Chapter 43 of Title 38 of the United
States Code, popularly known as the
Uniformed Services Employment and
Reemployment Rights Act.
(ii) Service in the Uniformed Services means the
performance of duty on a voluntary or
involuntary basis in a "Uniformed Service"
and includes: active duty, active duty for
training, initial active duty for
training, inactive duty training, full-time
National Guard duty, and a period for which
a person is absent from a position of
employment for the purpose of an examination
to determine the fitness of the person to
perform any such duty. The "Uniformed
Services" include the Armed Forces, the
Army National Guard, and the Air National
Guard when engaged in active duty for
training, inactive duty training, or
full-time National Guard duty; the
commissioned corps of the Public Health
Service; and any other category of persons
designated by the President of the United
States in time of war or emergency.
(iii) Compensation of the Returning Veteran. The
allowable contributions will be based on the
Compensation that the Returning Veteran
would have received for that period if not
in the Uniformed Services (including wage
increases and bonuses), or, if that can not
be determined with reasonable certainty,
based on the Returning Veteran's average
earnings during the 12 months preceding the
leave.
(iv) Employee-Deferrals Limitations. For
purposes of the limitations under Articles
III and VII, Employee-Deferrals shall be
II-3
<PAGE>
deemed to be made in the Plan Years to which
the contributions apply, not the year in
which they are made. No earnings shall be
included in the Employee-Deferrals, even
though the Returning Veteran's account
balance would have been greater if the
contributions had been made in the years to
which the Employee-Deferrals apply.
(b) Make-Up Employee-Deferrals. A Returning Veteran is
allowed to make the Employee-Deferral Contribution
that he or she could have made if employed by the
Employer during the period of service in the
Uniformed Services.
The Employee-Deferral Contribution can be made over a
period of years equal to three times the period of
Uniformed Service, not to exceed five years. The
Employee-Deferral Contribution shall be deemed to
apply first to the earliest period of the Service
with the Uniformed Services.
(c) Make-Up Matching Contributions. If a Returning
Veteran makes an Employee-Deferral Contribution, the
Employer will make the Matching Contribution, if any,
that would have been made to the account of the
Returning Veteran if he or she had made the
Employee-Deferral Contribution in the years to which
they apply.
(d) Make-Up Discretionary Contributions. A Returning
Veteran shall receive the Employer Discretionary
Contributions, if any, (exclusive of forfeitures)
that he would have received if employed by an
Employer during the period of service in the
Uniformed Services.
(e) Hours of Service. An Hour of Service means each hour
the Returning Veteran would have been paid, directly
or indirectly, or entitled to payment under Section
1.25 assuming that but for such military service he
would have been regularly engaged in the performance
of his duties. Such hours shall be credited to the
Year of Service in which he would have been regularly
engaged in the performance of his duties but for such
military service.
(f) Severance Date. A Returning Veteran who is absent
from employment on account of Service in the
Uniformed Services shall incur a Service Termination
Date under this subsection only if he fails to return
to active employment with the Employer within the
period provided by law for the protection of his
re-employment rights.
II-4
<PAGE>
(g) Loan Repayment. Any loan repayment suspension for a
Participant will not be taken into account for
purposes of Code Sections taxing unpaid loans for any
part of any period during which such Participant is
in the Service in the Uniformed Services and will not
be considered in testing for discriminatory benefits
or treated as a "prohibited transaction" between the
Plan and Participant.
II-5
<PAGE>
ARTICLE III
EMPLOYEE-DEFERRALS
3.1 Employee-Deferrals. An Eligible Employee may enter into an
Employee-Deferral Agreement with his Employer on such form or forms as the
Committee shall prescribe or through a voice response system after such
Participant has entered his personal identification number. In the
Employee-Deferral Agreement the Eligible Employee shall agree to accept a
deferral of his Plan Compensation expressed as a whole percentage no less than
1% and no more than 13%. The Employee-Deferral Agreement shall remain in effect
until changed or discontinued as provided in Section 3.3. An Employee's election
under this Section 3.1 can be made when the Employee becomes an Eligible
Employee effective as of the next payroll period provided the Participant has
given the Committee advance notice of such change in such form and within such
time period preceding the effective date of the change as the Committee may
prescribe.
No Employee-Deferral may be paid to the Plan by the Employer on behalf
of a Participant after he ceases to be an Employee or during any period when
such Participant is not receiving Plan Compensation from the Employer.
3.2 Delivery of Employee-Deferral Contributions. All Employee-Deferrals
shall be transmitted to the Trustee by the Employer as soon as practicable (but
in no event later than the 15th business day of the month following the month in
which the Employee-Deferrals would have otherwise been payable to the
Participant in cash).
3.3 Changes in and Discontinuance of Employee-Deferrals. A Participant
may change the rate of Employee-Deferrals or discontinue Employee-Deferrals paid
by his Employer to the Plan on his behalf effective as of the next payroll
period provided the Participant has given the Committee advance notice of such
change in such form and within such time period preceding the effective date of
the change as the Committee may prescribe.
3.4 Dollar Limitation. In no event shall a Participant's
Employee-Deferral Contributions for a Participant's taxable year exceed $9,500,
or such larger amount as allowed under Code Section 402(g) to reflect increases
in the cost of living. The dollar limit for 1998 is $10,000.
3.5 Return of Excess Deferral Amounts. If a Participant's
Employee-Deferral Contributions under the Plan should exceed the dollar
limitation under Section 3.4 for a Plan Year, the excess amount and the earnings
thereon shall be distributed to the Participant no later than the April 15
following the calendar year of the excess deferral. If a Participant notifies
the Committee in writing no later than March 1 following the calendar year of
the excess deferral that he was also a participant in a plan of an unrelated
employer governed by the Code Section 402(g) dollar limitation described in
Section 3.4, that the total deferrals under the plans exceeded the dollar
III-1
<PAGE>
limitation described in Section 3.4, and that he has allocated some or all of
the excess deferrals to this Plan, then the excess allocated to this Plan (and
the earnings thereon) shall be distributed to the Participant no later than the
following April 15. Excess deferrals that are distributed are not Annual
Additions.
Any returned excess deferrals must include income or loss for the
calendar year of the excess deferral, and must include income or loss for the
"gap period" between the end of that year and the date of distribution. The gain
or loss allocable to the excess deferral amount for the preceding calendar year
shall be determined by any reasonable method, provided that such method does not
violate Section 401(a)(4) of the Code, is consistently applied, and is used for
allocating income to Participants' Accounts.
Any Matching Contributions attributable to returned Employee-Deferrals
shall be forfeited. The amount of excess deferrals to be distributed shall be
reduced by Excess Contributions previously distributed for the taxable year
ending in the same Plan Year, as provided in Section 3.6(e).
3.6 Non-Discrimination Rules for Employee-Deferrals
(a) Definition.
(i) The term "Actual Deferral Percentage"
(hereinafter "ADP") as used in this Section
3.6 shall mean, for each specified group of
Eligible Participants for a Plan Year, the
average of the ratios (calculated
separately for each Eligible Participant in
such group) of (1) the amount of Employee-
Deferrals actually delivered to the Trustee
for the Eligible Participant for the
applicable Plan Year to (2) the Eligible
Participant's Total Compensation for the
portion of such Plan Year (during which)
the Employee was an Eligible Participant.
The ADP shall be calculated separately for
the group consisting of Highly Compensated
Participants and the group consisting of
Non-Highly Compensated Participants.
(ii) The term "Eligible Participant" means an
individual who performs services for an
Employer as a common law employee, or as a
leased employee (not excluded under Code
Section 414(n)(5))who is treated as an
employee of the employer-recipient under
Code section 414(n)(2) or 414(o)(2) if such
individual is an Eligible Employee under
Section 1.12 and has met the participation
requirements of Section 2.1. An Eligible
Participant who fails to make Employee-
Deferrals shall be included in the testing
with a ratio of zero.
III-2
<PAGE>
(iii) "Highly Compensated Participant" means any
Eligible Participant who is a Highly
Compensated Employee for the applicable Plan
Year.
(iv) "Non-Highly Compensated Participant" means
any eligible Participant who is not a Highly
Compensated Employee for the applicable Plan
Year.
(b) The Tests. In each Plan Year the Plan must satisfy
one of the following tests:
(i) The ADP for Eligible Participants who are
Highly Compensated for the Plan Year shall
not exceed the ADP for Eligible Participants
who are Non-Highly Compensated Participants
for the applicable Plan Year multiplied by
1.25; or
(ii) The ADP for Eligible Participants who are
Highly Compensated Participants for the Plan
Year shall not exceed the ADP for Eligible
Participants who are Non-Highly Compensated
Participants for the applicable Plan Year
multiplied by 2.0, provided that the ADP for
Eligible Participants who are Highly
Compensated Participants does not exceed the
ADP for Eligible Employees who are Non-
Highly Compensated Participants by more than
two (2) percentage points.
(c) Under transition relief provided by Internal Revenue
Service Notice 97-2, the Company may elect to
determine the ADP for the Non-Highly Compensated
Participants for each Plan Year after 1996 based upon
either the prior plan year or current plan year data.
For the 1996 and 1997 Plan Year, the ADP for the Non-
Highly Compensated Participant may be calculated
using prior plan year or current plan year data. For
Plan Years after 1997, the Company has elected to use
the prior plan year testing method. However, the
Company may elect to change to the current plan year
method as provided for in Internal Revenue Service
Notice 98-1 or its subsequent modification.
(d) Special Rules in Connection with ADP Testing:
(i) The ADP for any Eligible Participant who is
a Highly Compensated Participant for the
Plan Year and who is eligible to have
Employee-Deferrals allocated to his accounts
under two or more arrangements described in
Code Section 401(k), that are maintained by
III-3
<PAGE>
one or more Employers, shall be determined
as if such contributions were made under a
single arrangement. If a Highly Compensated
Participant participates in two or more cash
or deferred arrangements that have different
plan years, all cash or deferred
arrangements ending with or within the same
calendar year shall be treated as a single
arrangement.
(ii) In the event that this Plan satisfies the
requirements of Code Sections 401(k),
401(a)(4), or 410(b) only if aggregated with
one or more other plans, or if one or more
other plans satisfy the requirements of such
Code Sections only if aggregated with this
Plan, then this Section 3.6 shall be applied
by determining the ADP of Eligible
Participants as if all such plans were a
single plan.
(iii) For purposes of determining the ADP test,
Employee-Deferrals shall be taken into
account only if: paid to the Trust before
the last day of the twelve (12) month period
immediately following the Plan Year to which
the contributions relate; and which relate
to Total Compensation which would have been
received by the Eligible Participant in the
Plan Year (but for the deferral election) or
which is attributable to services performed
by the Eligible Participant in the Plan Year
and would have been received by the Eligible
Participant within 2 1/2 months after the
close of the Plan Year (but for the deferral
election).
(iv) The determination and treatment of the ADP
amounts of any Eligible Participant shall
satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
(v) In the event that the ADP of the Highly
Compensated Participants for the Plan Year
determined as a date prior to the last day
of the Plan Year indicates that the Plan for
the year will not otherwise comply with
either ADP test, the Committee has the
authority to reduce the Employee-Deferral
rate for the remainder of the Plan Year for
all or a portion of the Highly Compensated
Participants in an equitable manner to
increase the likelihood that one of the ADP
tests will be satisfied.
(e) Excess Contributions. If the ADP Test limits are
exceeded for a Plan Year, excess amounts (called
Excess Contributions) must be corrected. "Excess
Contributions" means for any plan year, the excess of
(i) the aggregate amount of Elective Deferrals (and
III-4
<PAGE>
any Qualified Nonelective Contributions and Qualified
Matching Contributions taken into account in
determining the participant's Actual Deferral
Percentage) actually paid to the Trust on behalf of
Highly Compensated Participants for such Plan Year,
over (ii) the maximum amount of such contributions
permitted under the ADP test (determined by reducing
contributions made on behalf of Highly Compensated
Participants beginning with the highest percentages).
If the Plan fails to satisfy the ADP Test, Excess
Contributions (the excess of Employee-Deferrals on
behalf of Highly Compensated Participants for a Plan
Year over the maximum amount of such contributions
permitted under the ADP Test), and income or loss
allocable thereto for the Plan Year in which the ADP
Test is failed, shall be treated as follows:
(i) Determination of Income or Loss. The income
or loss allocable to Excess Contributions
shall be determined pursuant to Section 8.3.
Earnings must include income or loss for the
"gap period" between the end of the taxable
year and the date of distribution.
(ii) Distribution of Excess Contributions.
Notwithstanding any other provision of this
Plan, Excess Contributions, plus any income
and minus any loss allocable thereto, shall
be distributed preferably no later than
March 15 (in order to avoid a 10% penalty
tax otherwise imposed on the Employer under
Section 4979 of the Code) following the end
of the applicable Plan Year but in no event
later than the last day of the Plan Year
following the applicable Plan Year, the
Excess Contributions (and other
contributions so treated), plus any income
and minus any loss allocable thereto, of the
Highly Compensated Participants shall be
distributed in accordance with IRS Notice
97-2 or subsequent modifications. The
Excess Contributions are attributed first
to the Highly Compensated Participants with
the greatest Employee-Deferrals.
(iii) Excess Contributions shall be treated as
Annual Additions under the Plan. The amount
of Excess Contributions to be distributed
shall be reduced by excess deferrals
previously distributed for the same year
pursuant to Section 3.5 and any Matching
Contributions with respect to such
distributed Excess Contributions (and the
earnings thereon) shall be forfeited.
III-5
<PAGE>
(iv) Additional Contribution Alternative. In lieu
of, or in conjunction with, the application
of the Excess Contribution distribution
provisions of this Section, the Employer may
make additional Contributions, described in
Section 4.6 to satisfy the ADP test.
3.7 Rollover Contributions. A Participant who has entered into an
Employee-Deferral Agreement may contribute to the Plan any amount distributed
from the Participant's individual retirement account, individual retirement
annuity, or qualified plan which qualifies under either of Code Sections 402(c)
or 408(d)(3)(A)(ii), which is transferred within the required time, and which
meets all other requirements of law for a rollover to the Plan. The Employer,
the Committee, and the Trustee shall accept rollover contributions only if it
can "reasonably conclude" that the plan making the distribution is qualified. If
the distributing plan provides a statement that it has received a favorable
determination letter from the Internal Revenue Service, the Employer, Committee,
and Trustee may conclude that the distributing plan is qualified. Such a
contribution shall be held in a separate Rollover Contribution Account for the
Participant. If the Committee should learn that the rollover did not meet all
the aforesaid requirements, the value of the Participant's Rollover Contribution
Account as of the preceding Valuation Date (or the date of the rollover, if
later) shall be returned to him.
III-6
<PAGE>
ARTICLE IV
MATCHING CONTRIBUTIONS
4.1 Matching Contributions. The Board of Directors shall annually
determine the amount of a Matching Contribution, if any, to be contributed for
the Plan Year. The Matching Contribution shall be allocated to all Active
Participants who make Employee-Deferrals for the applicable year. For purposes
of this allocation, Participant Employee-Deferrals in excess of 6% of each
Participant's Plan Compensation shall be disregarded.
4.2 Forfeitures. After a forfeiture occurs, the forfeiture shall be
applied to reduce Matching Contributions, determined by the Board of Directors
pursuant to Section 4.1, until the forfeitures are used up. Until applied in
this way, the forfeitures are held in the Trust and will continue to share in
the allocation of earnings.
4.3 Delivery of Contributions. An Employer's Matching Contributions
shall be delivered to the Trustee at such time as the Employer determines, but
in no event shall any contribution for a Plan Year be made later than the
deadline, including extensions, for the filing of the Company's tax return for
that year.
4.4 Adjustments if Employee-Deferral Contributions Adjusted. If under
Section 3.5 or Section 3.7 a Participant's Employee-Deferral Contributions are
returned to him, and as a result the net Employee-Deferral Contributions for the
Plan Year are a smaller percentage of Plan Compensation than the amount taken
into account in making Matching Contributions, the amount of the Matching
Contributions shall be reduced accordingly. The reduction in the Matching
Contribution (and any earnings attributable to the reduction) shall be treated
as a Forfeiture under the provisions of Section 4.2.
4.5 Non-Discrimination Rules for Matching Contributions.
(a) Definitions:
(i) "Average Contribution Percentage" or "ACP"
shall mean the average of the Contribution
Percentages of the Eligible Participants in
a group.
(ii) "Contribution Percentage" shall mean the
ratio (expressed as a percentage) of an
Eligible Participant's Contribution
Percentage Amounts to the Eligible
Participant's Total Compensation for the
portion of the Plan Year in which he was
eligible to make Employee-Deferrals.
IV-1
<PAGE>
(iii) "Contribution Percentage Amounts" shall mean
the Matching Contributions under the Plan on
behalf of the Eligible Participant for the
Plan Year. The Employer may elect to use
Employee-Deferrals in the Contribution
Percentage Amounts so long as the ADP test
is met before the Employee-Deferrals are
used in the ACP test and continues to be met
following the exclusion of those
Employee-Deferrals that are used to meet the
ACP test.
(iv) "Eligible Participants" - See definition at
Section 3.6(a)(ii)
(v) "Highly Compensated Participant" - See
definition at Section 3.6(a)(iii).
(vi) "Non-Highly Compensated Participant" - See
definition at Section 3.6(a)(iv).
(b) If an Eligible Participant makes no Employee
Deferrals and receives no Matching Contributions, the
contribution ratio that is to be included in
determining the ACP is zero.
(c) The Tests. In each Plan Year the Plan must satisfy
one of the following tests:
(i) The ACP for Eligible Participants who are
Highly Compensated Participants for the Plan
Year shall not exceed the ACP for Eligible
Participants who are Non-Highly Compensated
Participants for the applicable Plan Year
multiplied by 1.25; or
(ii) The ACP for Eligible Participants who are
Highly Compensated Participants for the Plan
Year shall not exceed the ACP for Eligible
Participants who are Non-Highly Compensated
Participants for the applicable Plan Year
multiplied by two (2), provided that the ACP
for Eligible Participants who are Highly
Compensated Participants for the Plan Year
does not exceed the ACP for Eligible
Participants who are Non-Highly Compensated
Participants for the applicable Plan Year by
more than two (2) percentage points.
(d) Under transition relief provided by Internal
Revenue Service Notice 97-2, the Company may
elect to determine the actual contribution
percentage (ACP) for the Non-Highly
Compensated Participants for each Plan Year
after 1996 based upon either the prior plan
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<PAGE>
year or current plan year data. For the
1996 and 1997 Plan Year, the ADP for the
Non-Highly Compensated Participant may be
calculated using prior plan year or current
plan year data. For Plan Years after 1997,
the Company has elected to use the prior
plan year testing method. However, the
Company may elect to change to the current
plan year method as provided for in Internal
Revenue Service Notice 98-1 or its
subsequent modification.
(e) Excess Aggregate Contributions. If the ACP Test
limits are exceeded for a Plan Year, excess mounts
(called Excess Aggregate Contributions) must be
corrected. "Excess Aggregate Contributions" means
for any plan year, the excess of (i) the aggregate
amount of Matching Contributions and Employee-
Deferrals (and any Qualified Nonelective
Contributions taken into account in computing the
ACP test) actually made on behalf of Highly
Compensated Participants for the PlanYear over (ii)
the maximum amount of the contributions allowed
under the ACP Test, determined by reducing
contributions made on behalf of Highly Compensated
Participants in order of their contribution
percentages beginning with the highest of the
percentages. In determining Excess Aggregate
Contributions for a Plan Year, Qualified Matching
Contributions treated as elective contributions for
the ADP test are disregarded. If the Plan fails to
satisfy the ACP Test, Excess Aggregate Contributions
(the excess of the aggregate amount of Matching
Contributions actually made on behalf of Highly
Compensated Participants for such Plan Year over the
maximum amount of such contributions permitted under
the limitations of Section 401(m)(2)(A) of the Code),
and income or loss allocable thereto for the Plan
Year in which the ACP Test is failed, shall be
treated as follows:
(i) Disposition of Excess Aggregate
Contributions. Notwithstanding any other
provision of this Plan, Excess
Aggregate Contributions, plus any income and
minus any loss allocable thereto, shall be
distributed, no later than the last day of
each Plan Year, to Highly Compensated
Participants or forfeited, where otherwise
appropriate, from the accounts of
Participants in which such Excess Aggregate
Contributions were allocated for the
preceding Plan Year.
(ii) Distributions of Excess Aggregate
Contributions shall be made in the
accordance with Internal Revenue Service
Notice 97-2 and any subsequent modification.
Any distribution of the Excess Aggregate
IV-3
<PAGE>
Contributions for any Plan Year
shall be made to Highly Compensated
Participants on the basis of the amount of
contributions on behalf of, or by, each such
Participants in accordance with Internal
Revenue Service 97-2 or subsequent
modifications. The Excess Aggregate
Contributions are attributed first to the
Highly Compensated Participant with the
greatest dollar amount of Matching
Contributions. Forfeitures of Excess
Aggregate Contributions may not be allocated
to Participants whose contributions are
reduced under this paragraph.
(iii) Nonforfeitable Matching Contributions which
exceed the maximum amount permitted under
the ACP Test, plus any income and minus any
loss allocable thereto, shall be distributed
preferably by March 15 (in order to avoid a
10% penalty tax imposed on the Employer
under Section 4979 of the Code) following
the end of the applicable Plan Year but in
no event later than the close of the Plan
Year following the applicable Plan Year.
(iv) Excess Aggregate Contributions shall be
treated as Annual Additions under the Plan
even if such contributions are corrected
through distributions or recharacterization.
(v) Determination of Income or Loss. Excess
Aggregate Contributions shall be adjusted
for any income or loss attributable thereto
in the year in which the contribution was
made. The income or loss allocable to Excess
Aggregate Contributions shall be determined
pursuant to Section 8.3.
(vi) Accounting for Excess Aggregate
Contributions. Excess Aggregate
Contributions shall be distributed on a
pro-rata basis from the Participant's
Employer Contribution Account (and, if
applicable, the Participant's
Employee-Deferral Account).
(f) Multiple Use Aggregate Limit
(i) The ADP and ACP limitations set forth in 3.6
and 4.5 may be subject to further limit
under the Aggregate Limit rules set forth
below. Multiple use does not occur if both
the ADP and ACP of the Highly Compensated
Participants does not exceed 1.25
IV-4
<PAGE>
multiplied by the ADP and ACP of the Non-
Highly Compensated Participants.
(ii) The sum of the ADP and ACP of the Highly
Compensated Participants for a Plan Year
must not exceed the Aggregate Limit. The
"Aggregate Limit" shall mean the greater of
(1) or (2) below:
(1) The sum of
a) one hundred twenty-five percent
(125%) of the greater of the ADP or
the ACP of the Non-Highly
Compensated Participants in the
applicable Plan Year, plus
b) Two (2) percentage points plus the
lesser of such ADP or ACP of
Non-Highly Compensated Participants
in the applicable Plan Year,
provided, however, that in no event
shall this amount exceed two hundred
percent (200%) of the lesser of the
ADP or the ACP of Non-Highly
Compensated Participants in the
applicable Plan Year, or
(2) The sum of
a) one hundred twenty-five percent
(125%) of the lesser of the ADP or
the ACP of the Non-Highly
Compensated Participants in the
applicable Plan Year, plus
b) Two (2) percentage points plus the
greater of the ADP or the ACP of
Non-Highly Compensated Participants
in the applicable Plan Year,
provided, however, that in no event
shall this amount exceed two hundred
percent (200%) of the greater of the
ADP or the ACP of Non-Highly
Compensated Participants.
(iii) Correction of Multiple Use: If the sum of
the ADP and ACP of the Highly Compensated
Participants exceeds the Aggregate Limit,
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<PAGE>
then the ADP or the ACP (as elected by
the Committee) of the Highly Compensated
Participants will be reduced on the basis of
the amount of contributions on behalf of, or
by each such participant in accordance with
Internal Revenue Service 97-2 or subsequent
modification, so that the limit is not
exceeded. If the Employer elects to reduce
the ACP of the Highly Compensated
Participant, the required reduction shall be
treated as an Excess Aggregate Contribution
described above. The ADP and ACP of the
Highly Compensated Employees are determined
after any corrections required to meet the
ADP and ACP tests. For purposes of the
multiple use test, if a distribution of
Excess Contributions has been made, the ADP
for Highly Compensated Participants is
deemed to be the largest amount permitted
under Code Section 401(k)(3). Similarly, if
a corrective distribution of Excess
Aggregate Contributions has been made, the
ACP for Highly Compensated Participants is
deemed to be the largest amount permitted
under Code Section 401(m)(2).
(g) Special Rules
(i) For purposes of this Section, the
Contribution Percentage for any Eligible
Participant who is a Highly Compensated
Participant and who is eligible to have
Contribution Percentage Amounts allocated to
his account under two (2) or more plans
described in Code Section 401(a), or
arrangements described in Code Section
401(k) that are maintained by one or more
Employers, shall be determined as if the
total of such Contribution Percentage
Amounts was made under each plan. If a
Highly Compensated Participant participates
in two (2) or more cash or deferred
arrangements under Code Section 401(k)
("CODA"), that have different plan years,
all CODAs ending with or within the same
calendar year shall be treated as a single
arrangement.
(ii) In the event that this Plan satisfies the
requirements of Code Sections 401(m),
401(a)(4) or 410(b) only if aggregated with
one or more other plans, or if one or more
other plans satisfy the requirements of such
Code Sections only if aggregated with this
Plan, then this Section shall be applied by
determining the Contribution Percentages of
Eligible Employees as if all such plans were
a single plan.
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<PAGE>
(iii) For purposes of determining the Average
Contributions Percentage test, Employer
Matching Contributions will be considered
made for a Plan Year only if (i) paid to the
trust no later than the end of the twelve
(12) month period beginning on the day after
the close of the Plan Year and (ii) made on
account of the Employee's Employee-Deferral
for the Plan Year.
4.6 Qualified Matching Contributions, Qualified Nonelective
Contributions. The Company may, in its sole discretion, use the following
contributions to enable the Plan to satisfy the nondiscrimination requirements
of Section 3.6 and/or Section 4.5:
(a) Qualified Matching Contributions. A Qualified
Matching Contribution may be made by the Employers on
the basis of either a specified dollar amount or a
specified percentage of Plan Compensation of the
Participant who is eligible for such contribution
under the nondiscrimination tests. Such Qualified
Matching Contributions shall be nonforfeitable when
made and shall be subject to the same restrictions on
distribution that apply to Employee-Deferrals.
(b) Qualified Nonelective Contributions. A Qualified
Nonelective Contribution may be made by the Employer
on the basis of either a specified dollar amount or a
specified percentage of Plan Compensation of the
Participant who is eligible for such contribution
under the nondiscrimination tests. Such Qualified
Nonelective Contributions shall be nonforfeitable and
shall be subject to the same restrictions on
distribution that apply to Employee-Deferrals.
(c) Qualified Matching Contributions and/or Qualified
Nonelective Contributions may be treated as
Employee-Deferrals only if the conditions described
in Section 1.401(k)-1(b)(5) are satisfied. Qualified
Nonelective Contributions may be treated as Matching
Contributions if the conditions described in Section
1.401(m)-1(b)(5) of the regulations are satisfied.
(d) The Employer will maintain records sufficient to
demonstrate compliance with this Section, including
the extent to which Qualified Nonelective
Contributions and Qualified Matching Contributions
are taken into account to satisfy the ADP and ACP
tests.
(e) The use of contributions described above shall be as
provided in regulations under Section 401(k) and
Section 401(m) of the Code.
IV-7
<PAGE>
(f) In order to be taken into account in the calculation
of the ADP or ACP for a year under the prior plan
year testing or current plan year testing method, a
Qualified Nonelective Contribution and Qualified
Matching Contributions must be allocated as of a date
within the year and must actually be paid to the
trust no later than the end of the twelve month
period following the end of the year to which the
contribution relates. For example, if the prior year
testing method is used for the 1998 testing year,
Qualified Nonelective Contributions that are
allocated to the accounts of the Non-Highly
Compensated Participants for the 1997 Plan Year (i.e.
the prior year) must be contributed to the Plan by
the end of the 1998 Plan Year in order to be treated
as Employee-Deferrals for purposes of the ADP test
for the 1998 testing year.
IV-8
<PAGE>
ARTICLE V
EMPLOYER DISCRETIONARY CONTRIBUTIONS
5.1 Employer Discretionary Contributions. The Board of Directors shall
annually determine the amount of Employer Discretionary Contributions, if any,
to be contributed for the Plan Year. The Company may contribute all or part of
the entire amount due on behalf of one or more Participating Employers and
charge the amount thereof to the Participating Employers responsible therefor.
In no event shall the contribution, when added to the other
contributions under the Plan, exceed the maximum amount which may be claimed as
a deduction by the Company for federal income tax purposes under Code Section
404(a)(3).
The contribution, if any, shall be delivered in one or more
installments to the Trustee no later than the due date (including extensions) of
the Company's federal income tax return for its fiscal year ending with or
during the Plan Year for which the contribution is made.
5.2 Allocation of Employer Discretionary Contributions. As of each
Annual Valuation Date, the Employer Discretionary Contribution, if any, shall be
allocated to the Employer Contribution Accounts of all Active Participants in
the proportion that each such Active Participant's Total Compensation bears to
the Total Compensation for all Active Participants for such year.
5.3 Top-Heavy Contributions. As of the end of any Plan Year in which
the Plan is Top-Heavy, the Employer shall contribute to the Employer
Contribution Account of each Participant who is a Non-Key Employee the amount
required under Article XV.
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ARTICLE VI
VESTING
6.1 Employee-Deferral Account. The interest of a Participant in his
Employee-Deferral Account shall be fully vested and nonforfeitable at all times.
6.2 Rollover Contribution Account. The interest of a Participant
in his Rollover Contribution Account shall be fully vested and nonforfeitable at
all times.
6.3 Employer Contribution Account. The interest of a Participant in his
Employer Contribution Account shall be fully vested and nonforfeitable upon such
Participant's death prior to termination of employment, attainment of the Normal
Retirement Age while still employed, or termination of employment by reason of
Disability. When a Participant's employment is terminated for any other reason,
the vested and nonforfeitable interest of such Participant shall be determined
in accordance with the following schedule:
Years of Service
Less than 5 years
5 years or more
Vested %
0
100
6.4 Forfeitures. The non-vested portion of a Participant's Accounts
shall be forfeited at the end of the Plan Year in which he incurs 5 consecutive
One Year Breaks in Service and shall be applied in accordance with Section 4.2.
6.5 Reemployment. Years of Service prior to reemployment may be
considered, but only under the circumstances described in Section 2.3.
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<PAGE>
ARTICLE VII
ALLOCATIONS
7.1 Allocation of Contributions. Contributions to the Plan shall be
allocated in the following manner:
(a) Employee-Deferral Contributions shall be allocated to
the Employee-Deferral Account of each Participant in
accordance with the provisions of Article III.
(b) Employer Discretionary Contributions shall be
allocated to the Employer Contribution Account of
each Participant in accordance with the provisions of
Article V.
(c) Matching Contributions shall be allocated to the
Employer Contribution Account of each Participant in
accordance with the provisions of Article IV.
(d) Qualified Matching Contributions and Qualified
Nonelective Contributions shall be allocated to the
Employee-Deferral Account of each Participant in
accordance with the provisions of Section 4.6.
7.2 Definitions. For purposes of this Article VII, the term Accounts
shall mean a Participant's Employee-Deferral Account and Employer Contribution
Account.
The term Annual Addition shall mean, for any Limitation Year, the sum
of (a) Matching Contributions, (b) Employee-Deferral Contributions, (c) Employer
Discretionary Contributions, (d) Qualified Matching Contributions, and (e)
Qualified Non-elective Contributions.
The term Defined Benefit Plan Fraction shall mean, for any year, a
fraction (a) the numerator of which is the projected annual benefit of the
Participant under any defined benefit plan maintained by the Employer
(determined as of the close of the Plan Year), and (b) the denominator of which
is the lesser of (i) the product of 1.25 multiplied by the maximum dollar
limitation in effect under Code Section 415(b)(1)(A) for such year, or (ii) the
product of 1.4 multiplied by the amount which may be taken into account under
Code Section 415(b)(1)(B) for such year.
The term Defined Contribution Plan Fraction shall mean, for any year, a
fraction (a) the numerator of which is the sum of the Annual Additions to the
Participant's Accounts as of the close of the Plan Year, and (b) the denominator
of which is the sum of the lesser of the following amounts determined for such
year and each prior year of service with a Employer: (i) the product of 1.25
VII-1
<PAGE>
multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A)
for such year (determined without regard to Code Section 415(c)(6)), or (ii) the
product of 1.4 multiplied by the amount which may be taken into account under
Code Section 415(c)(1)(B) for such year.
The term Employer includes the group of Employers, if any, which
constitute a controlled group of corporations, trades or businesses under common
control (within the meaning of Code Sections 1563(a) or 414(b) as modified by
415(h) and 414(c)), or an affiliated service group (within the meaning of Code
Sections 414(m) and 318) with an Employer. All such Employers shall be treated
as a single Employer for purposes of applying the Code Section 415 limitations.
The term Limitation Year shall mean the Plan Year or any other
twelve-month period designated by the Board of Directors.
7.3 Annual Additions. No contribution or forfeiture shall be allocated
to the Accounts of an Employee for a Limitation Year in excess of an amount
which, when expressed as an Annual Addition to such Employee's Accounts, is
equal to the lesser of (a) $30,000 or such larger amount equal to 1/4 of the
defined benefit dollar limitation as adjusted for cost-of-living increases
pursuant to Code Sections 415(c)(1), 415(d)(1) and 415(d)(3), or (b) twenty-five
percent of such Employee's Section 415 Compensation for such limitation.
7.4 Limitation for Other Defined Contribution Plans. In the event that
the Annual Addition which would otherwise be made to an Employee's accounts
under all defined contribution plans maintained by the Employer for any
Limitation Year exceeds the limitations set forth in this Article VII, the
excess Annual Addition shall be attributed first to the Plan, and the Employer
shall treat such excess as follows:
(a) First, the Employee-Deferral Contributions in excess
of six percent of Plan Compensation shall be returned
to the Employee to the extent necessary.
(b) Second, the portion of the excess consisting of
Matching Contributions shall be allocated and
reallocated to the Employer Contribution Accounts of
other Participants in accordance with Section 4.1 to
the extent such allocations would not cause Annual
Additions to each Participant's Accounts to exceed
the limitations of this Section 7.4
(c) Third, the portion of the excess consisting of
Employer Discretionary Contributions shall be
allocated and reallocated to the Employer
Contribution Accounts of other Participants in
accordance with Section 5.2 to the extent such
VII-2
<PAGE>
allocations would not cause Annual Additions to each
Participant's Accounts to exceed the limitation of
this Section 7.4.
(d) If treated in accordance with subparagraphs (a)
through (c) above, the excess amounts shall not be
deemed Annual Additions in that limitation year if
the excess amounts are a result of the allocation of
forfeitures, a reasonable error in estimating a
Participant's annual Plan Compensation, a reasonable
error in determining the amount of elective deferrals
(within the meaning of Section 402(g)(3)) that may be
made with respect to any individual under the limits
of Section 415 or under other limited facts and
circumstances that the Commissioner finds justify the
availability of the rules set forth in this
subparagraph.
(e) To the extent excess Annual Additions exist after the
distributions described in subparagraphs (a) through
(c), such excess amounts shall be allocated to a
Section 415 Suspense Account. All amounts in the
Section 415 Suspense Account must be used to reduce
Matching Contributions, contributions required on
account of a Top-Heavy Plan Year, or Employer
Discretionary Contributions in succeeding Limitation
Years. In the event of termination of the Plan, the
balance of the Section 415 Suspense Account shall
revert to the Company to the extent it may not then
be allocated to any Participants' Accounts.
7.5 Limitation for Defined Benefit Plan. If an Employee is also a
Participant in one or more defined benefit plans maintained by the Employer (or
an Employee was a Participant in any defined benefit plan previously maintained
by an Employer), the sum of such Employee's Defined Benefit Plan Fraction and
Defined Contribution Plan Fraction (as determined pursuant to Code Section
415(e)) for any Limitation Year may not exceed 1.0.
In the event that the sum of an Employee's Defined Contribution Plan
and Defined Benefit Plan Fractions would otherwise exceed 1.0 for any Limitation
Year, the benefit accrual which would otherwise be made under all applicable
defined benefit plans for such Employee shall be considered not to have accrued,
to the extent necessary, so that the sum of such fractions does not exceed 1.0.
If after all such adjustments the sum of the fractions would still exceed 1.0,
then the annual addition which would otherwise be made with respect to such
Employee shall be reduced in this Plan pursuant to Section 7.4 and finally under
any applicable defined contribution plan to the extent necessary so that the sum
does not exceed 1.0.
This Section 7.5 shall not apply for Limitation Years after December
31, 1999.
VII-3
<PAGE>
ARTICLE VIII
TRUST FUND
8.1 Plan Assets. Avondale Industries, Inc. and the Trustee have entered
into a Trust Agreement, which agreement provides for the establishment of a
single Trust for the purpose of holding and administering all amounts
contributed to Accounts under the Plan. All contributions, and the earnings on
such amounts, shall be delivered to the Trustee and held and administered
pursuant to the provisions of the Plan and the Trust Agreement.
8.2 Separate Accounts. A separate Employee-Deferral Account, Employer
Contribution Account and Rollover Contribution Account shall be maintained by
the Trustee or a recordkeeping agent appointed by the Plan Administrator for
each Participant.
8.3 Valuation. The fair market value of the assets comprising the Trust
shall be determined as of each Valuation Date, in accordance with
generally-accepted valuation methods and accounting practices.
As of each Valuation Date, the value of each Account shall be adjusted
to reflect the effect on each sub-account of any change in the value of each
Investment Fund since the preceding Valuation Date, as well as the effect of any
deposits, withdrawals, distributions, or other transactions occurring since the
last Valuation Date. The Committee shall provide to each Participant,
Beneficiary and Alternate Payee as of the end of each calendar quarter a
statement of the value of each Account in which such person has an interest.
8.4 Investment Funds.
(a) The Committee shall determine what investment funds
to offer under the Plan and may, from time to time,
change the investment funds offered hereunder. As of
the Effective Date of this Plan, the investment funds
are Merrill Lynch Retirement Preservation Trust,
Merrill Lynch Capital Fund, Merrill Lynch Corporate
Bond Fund Investment Grade, AIM Constellation Fund,
AIM Value Fund, and Templeton Growth Fund.
(b) As of each Valuation Date, the Trustee shall perform
a valuation of each Investment Fund in order to
determine the value of each Investment Fund and to
reconcile the Investment Funds from the prior
Valuation Date. Such valuation shall recognize any
appreciation or depreciation in the fair market value
of all securities or other property held by each
respective Investment Fund, any cash and accrued
earnings and shall take into account any accrued
expenses and proper charges against the Investment
Fund as of such Valuation Date.
VIII-1
<PAGE>
8.5 Investment of Contributions.
(a) A Participant may direct that his Employee-Deferral
Contributions, Employer Contributions and Rollover
Contributions, if any, be allocated to one or more of
the Investment Funds then available, in multiples of
one percent (1%), by providing voice consent after
such Participant has accessed a voice response system
by entering his personal identification number in
accordance with limitations reasonably determined by
the Committee, or in writing on a form acceptable to
the Committee. The total of all such allocations
shall equal one hundred percent of the Participant's
interest in his Accounts. The Committee will provide,
upon Participant's request, a written confirmation of
his written investment instructions.
(b) If no investment direction exists the Participant's
affected interest shall automatically be invested in
a short term income fund until adequate instructions
are received through a voice response system or in
writing on an acceptable form; provided that such
investment will not result in violation of ERISA.
(c) Each Participant must consent to the allocation of
his contributions among the Investment Funds. Such
direction shall continue in effect until such time as
the Participant consents to a different allocation.
The investment of future contributions may be changed
daily, provided such change is received by the
Committee within such time period preceding the
effective date as shall be prescribed by the
Committee.
8.6 Transfer of Amounts Among Investment Funds
(a) A Participant may elect to transfer amounts from one
Investment Fund to another in increments of one
percent (1%). Any such change shall be by providing
voice consent after the Participant has accessed a
voice response system by entering his personal
identification number, or in writing on a form
acceptable to the Committee. Such election shall be
effective on the business day transacted if requested
via the voice response system before 3 p.m. Eastern
Standard Time or as soon as administratively feasible
if requested on a written form. Transfers out of an
investment fund can be processed in terms of dollars,
shares, or percentages. Dollar and percent transfers
will be converted into shares, traded based on the
previous night's price, and processed based on the
current night's price.
VIII-2
<PAGE>
(b) In the event an acceptable form is not received by
the Committee for all or any portion of a
Participant's Accounts, the current investment
direction shall continue in effect until adequate
instructions are received through a voice response
system or in writing on an acceptable form.
(c) The timing and frequency of transfers among
investment options may be further restricted if such
restrictions are required by the institution handling
or providing the investment fund.
8.7 Liability for Investment Decisions. This Plan is intended to
constitute a plan described in Section 404(c) of ERISA, and Title 29 of the Code
of Federal Regulations Section 2550.404c-1. Fiduciaries of the Plan may be
relieved of liability for any losses which are the direct and necessary result
of investment instructions given by each Participant or Beneficiary. Neither the
Employer, the Trustee nor the Committee shall be responsible for any loss which
may result from a Participant's exercise of control over the investment of his
Accounts.
Each Participant shall have exclusive responsibility for and control
over the investment of amounts allocated to his Accounts. Neither the Employers,
the Trustee nor the Committee shall have any duty, responsibility or right to
question a Participant's investment directions or to advise a Participant with
respect to the investment of his accounts.
The Committee will be obligated to follow the Participant's investment
directions except when the instructions:
(a) are not in accordance with this Plan document and
instruments governing this Plan insofar as such
documents and instruments are consistent with the
provisions of Title I of ERISA;
(b) would result in a prohibited transaction described in
ERISA Section 406 or Code Section 4975 that is not
otherwise exempted by statute or regulation;
(c) would generate income that would be taxable to this
Plan;
(d) would cause a fiduciary to maintain the indicia of
ownership of any assets of the Plan outside the
jurisdiction of the district courts of the United
States other than as permitted by Section 404(b) of
ERISA and related regulations;
(e) would jeopardize the Plan's tax qualified status
under the Code; or
(f) could result in a loss in excess of the Account
balance.
VIII-3
<PAGE>
8.8 Accounting Procedures. The Committee shall establish such equitable
accounting procedures as may be required to make (a) allocations, (b)
valuations, and (c) adjustments to Participants' accounts in accordance with the
provisions of the Plan. The Plan Administrator may modify its accounting
procedures, from time to time, for the purpose of achieving equitable and
nondiscriminatory allocations.
VIII-4
<PAGE>
ARTICLE IX
BENEFITS
9.1 Normal Retirement Date. The Normal Retirement Date shall be the
later of (a) the Participant's Normal Retirement Age or (b) the first day of the
month coincident with or next following a Participant's fourth anniversary of
commencement of participation in the Plan. Any Participant who remains an
Employee beyond Normal Retirement Date, or becomes a Participant after such
date, shall participate in the contributions and benefits of the Plan in the
same manner as any other Participant.
9.2 Disability Retirement Date. Any Participant who has incurred a
Disability, as determined by the Committee, may retire on a Disability
Retirement Date by making written application to the Committee specifying a
Disability Retirement Date which is the first day of a month not more than 90
days following the date of the filing of the application. Former Employees shall
not be eligible for Disability Retirement unless the Disability was determined
to have occurred during the course of such former Employee's employment with the
Employer. Subject to Section 12.6 the determination of the Committee as to
whether a Participant has a Disability and the date of such Disability shall be
final, binding and conclusive.
9.3 Nonalienation of Benefits. Except with respect to federal income
tax withholding and federal tax levies, benefits payable under this Plan shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, including any such liability which is for
alimony or other payments for the support of a spouse or former spouse or for
any other relative of the Employee, prior to actually being received by the
person entitled to the benefit under the terms of the Plan; and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or
otherwise dispose of any right to benefits payable hereunder, shall be void. The
Trust Fund shall not in any manner be liable for, or subject to, the debts,
contracts, liabilities, engagements or torts of any person entitled to benefits
hereunder.
Notwithstanding the above, the Committee shall direct the Trustee to
comply with a qualified domestic relations order described in Section 9.4.
9.4 Qualified Domestic Relations Order. Benefits shall be paid only to
a Participant, or after his death to his Beneficiary, unless a qualified
domestic relations order ("QDRO"), as defined in Code Section 414(p) directs
that payment be made to an Alternate Payee. An Alternate Payee is any spouse,
former spouse, child or other dependent of a Participant who is recognized by a
QDRO as having a right to receive all or a portion of the benefits payable under
the Plan with respect to the Participant.
IX-1
<PAGE>
The Committee shall establish reasonable rules concerning how it
determines whether a purported QDRO that it receives is indeed a QDRO, and how
it administers amounts due to Alternate Payees. Payment to an Alternate Payee
pursuant to a QDRO shall be made at such time as determined pursuant to the
QDRO, and even while the Participant is employed, if the QDRO requires or
permits such distribution. The payment shall be based on the value of the
Alternate Payee's interest in the accounts as of the Valuation Date coincident
with or immediately preceding the date the payment is made. No payment to an
Alternate Payee can be made later than when the Participant's benefit is paid to
him as a result of his termination of employment. If the Participant has a loan
as an investment of his account, such Participant will continue to be
responsible for the entire loan. The Plan Administrator is authorized to
establish any additional rules necessary to determine the rights of Alternate
Payees under qualified domestic relations orders.
Pursuant to the provisions of Section 414(p) of the Code, a QDRO shall
mean a judgment, decree or order (including approval of a property settlement
agreement) made pursuant to a state domestic relations law (including a
community property law) that relates to the provision of child support, alimony
payments, or marital property rights to a spouse, former spouse, child or other
dependent of a Participant ("alternate payee") and which:
(a) creates or recognizes the existence of an alternate
payee's right to, or assigns to an Alternate Payee
the right to, receive all or a portion of the
benefits payable to a Participant under this Plan;
and
(b) specifies (i) the name and last known mailing address
(if any) of the Participant and each Alternate Payee
covered by the order, (ii) the amount or percentage
of the Participant's benefits under the Plan to be
paid to each such Alternate Payee, or the manner in
which such amount or percentage is to be determined
and, (iii) the number of payments or the period to
which the order applies; and
(c) does not require this Plan to:
(i) provide any type or form of benefit, or any
option, not otherwise provided hereunder;
(ii) pay any benefits to any alternate payee
prior to the earlier of:
a) the earliest date benefits are
payable hereunder to a Participant,
or
b) the later of the date the
Participant attains age 50 or the
earliest date on which the
Participant could obtain a
IX-2
<PAGE>
distribution under the Plan if the
Participant terminated employment;
(iii) pay any benefits which are not vested under
the Plan;
(iv) provide increased benefits; or
(v) pay benefits to an Alternate Payee which are
required to be paid to another Alternate
Payee under a prior qualified domestic
relations order.
Upon receipt of any judgment, decree or order (including approval of a
property settlement agreement) relating to the provision of payment by the Plan
to an alternate payee pursuant to a state domestic relations law, the Committee
shall promptly notify the affected Participant and any person identified in the
document as an Alternate Payee of the receipt of such judgment, decree order and
shall notify the affected Participant and any such designated Alternate Payee of
the Committee's procedure for determining whether or not the judgment, decree or
order is a qualified domestic relations order.
The valid provisions of a QDRO shall, after it is received by the
Committee, take precedence over the provisions of the Plan relating to payments
to Participants and their Beneficiaries. If the Committee receives two or more
QDROs with respect to a Participant, the earlier shall take precedence over the
later.
IX-3
<PAGE>
ARTICLE X
PAYMENT OF BENEFITS
10.1 Time of Payment. A Participant shall be eligible to receive a
distribution of his Vested Interest when he has terminated employment. A
distribution is based upon the value of the Participant's Vested Interest as of
the Valuation Date coincident with or immediately preceding the date of
distribution.
(a) If the value of a Participant's Vested Interest is
$5,000 or less ($3,500 prior to January 1, 1998), the
Vested Interest will be distributed 30 days following
his date of termination or as soon as
administratively practicable thereafter but no later
than the 60th day after the latest of the close of
the Plan Year in which (a) the Participant attains
age 65, or (b) terminates employment with all
Participating Employers;
(b) If the value of a Participant's Vested Interest is
greater than $5,000 ($3,500 prior to January 1,
1998), the Participant must consent to the
distribution. Such a Participant's Vested Interest
cannot be made sooner than 30 days following his date
of termination and no later than the Participant's
Required Beginning Date.
A distribution may occur while a Participant remains in the employ of
an Employer, in the event of a withdrawal by reason of Financial Hardship or
after age 59 1/2, as described in Sections 11.1 and 11.2, below.
The distribution rules that apply to an "alternate payee" pursuant to a
"qualified domestic relations order" are stated in Section 9.4 herein.
10.2 Required Beginning Date shall mean, for anyone who attains age
70-1/2 after December 31, 1998, other than a 5% owner (as defined at Section
416(i)(1)(B)(i) of the Code), April 1st of the calendar year following the later
of (a) the calendar year in which the Employee attains age 70-1/2, or (b) the
calendar year in which the Employee terminates employment with the Participating
Employer.
A Participant (other than a 5% owner) who attains the age of 70-1/2 in
1997 or 1998 and remains employed with a Participating Employer, may elect to
delay receipt until April 1 following the calendar year in which the Participant
retires from employment with a Participating Employer.
For Plan Years beginning prior to January 1, 1997, Required Beginning
Date was defined as April 1st of the calendar year following the calendar year
in which a Participant attained age 70-1/2.
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<PAGE>
10.3 Death Benefit. If a Participant dies with a balance in his
Accounts, the interest of such Participant shall be distributed to the
Participant's Beneficiary in a single-sum payment as soon as administratively
practicable after 90 days from the Participant's death.
10.4 Form of Distribution. Distributions shall be made in a single-
sum payment.
10.5 Temporary Non-Payment of Benefits.
(a) Unless the Participant elects otherwise in writing,
the payment of his Vested Interest shall commence no
later than the sixtieth (60th) day after the close of
the Plan Year in which the last of the following
occurs:
(i) the Participant achieves Normal Retirement
Age, or
(ii) the Participant terminates his service with
the Employer, whichever is the latest.
(b) If a Participant or Beneficiary fails to furnish
information reasonably requested by the Committee
which is necessary to determine whether such
Participant or Beneficiary has satisfied all
requirements for payment of benefits, the Committee
shall delay payment of benefits until the requested
information is furnished and shall make reasonable
efforts to obtain such information.
10.6 Direct Rollover Rules. Notwithstanding any provision of the Plan
to the contrary that would otherwise limit a Distributee's election under this
Article, the Distributee may elect, at the time and in the manner prescribed by
the Committee, to have any portion of an Eligible Rollover Distribution paid
directly to an Eligible Retirement Plan specified by the Distributee in a Direct
Rollover. Definitions are as follows:
(a) The term Eligible Rollover Distribution means any
distribution of all or any portion of the balance to
the credit of the Distributee, except that an
Eligible Rollover Distribution does not include: any
distribution that is one of a series of substantially
equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of
the Distributee or the joint lives (or joint life
expectancies) of the Distributee and the
Distributee's designated beneficiary, or for a
specified period of ten years or more; any
distribution to the extent such distribution is
required under Section 401(a)(9) of the Code; and
the portion of any distribution that is not
includible in gross income (determined without
regard to the exclusion for net unrealized
appreciation with respect to employer securities).
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<PAGE>
(b) An Eligible Retirement Plan includes an individual
retirement account described in Section 408(a) of the
Code, an individual retirement annuity described
in Section 408(b) of the Code, an annuity plan
described in Section 403(a) of the Code, or a
qualified trust described in Section 401(a) of the
Code, that accepts the Distributee's Eligible
Rollover Distribution. However, in the case of
an Eligible Rollover Distribution to the surviving
spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
(c) The term Distributee includes an employee or former
employee. In addition, the employee's or former
employee's surviving spouse and the employee's or
former employee's spouse or former spouse who is the
alternate payee under a qualified domestic relations
order, as defined in Section 414(p) of the Code, are
Distributees with regard to the interest of the
spouse or former spouse.
(d) The term Direct Rollover means a payment by the plan
to the eligible retirement plan specified by the
Distributee.
10.7 Notice. The notice required by Section 1.411(a)-11(c) of the
Income Tax Regulations must be provided to a Participant no less than 30 days
and no more than 90 days before the date of distribution. The notice explains a
Participant's right to defer receipt of a distribution if his Vested Interest
exceeds $5,000 ($3,500 prior to January 1, 1998). A Participant will also
receive an explanation of his distribution options no less than 30 days and no
more than 90 days before the date of distribution. The distribution may commence
no less than 30 days after the notice required under Section 1.411(a)-11(c) of
the Income Tax Regulations is given, provided that:
(a) the Committee clearly informs the Participant that
the Participant has a right to a period of at least
30 days after receiving the notice to consider the
decision of whether or not to elect a distribution,
and
(b) the Participant, after receiving the notice,
affirmatively elects a distribution.
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<PAGE>
ARTICLE XI
IN-SERVICE DISTRIBUTION AND LOANS
11.1 Distribution after Attaining Age 59 1/2. A Participant who is
still an Employee and has attained age 59 1/2 shall be entitled to make
withdrawal(s) from his Employee-Deferral Account, Rollover Account and the
vested portion of the Participant's Employer Contribution Account by notifying
the Committee.
11.2 Financial Hardship. Prior to a Participant's termination of
employment or age 59 1/2 he may apply to the Committee for a withdrawal of funds
held in his Rollover Contribution Account and Employee-Deferral Account on
account of a Financial Hardship. The total of such withdrawals from a
Participant's Employee-Deferral Account shall not exceed the total of his
Employee-Deferral Contributions. The withdrawal shall be made only under the
following conditions:
(a) The withdrawal may be made only to meet one of the
following needs:
(i) Medical expenses described in Code Section
213(d), incurred by the Participant, the
Participant's spouse, or any dependent (as
defined in Code Section 152) of the
Participant;
(ii) Purchase (excluding mortgage payments) of a
principal residence for the Participant;
(iii) Payment for all or a portion of the next
twelve (12) months of post-secondary
education for the Participant, his spouse,
children, or dependents;
(iv) To prevent the eviction of the Participant
from his principal residence or foreclosure
on the mortgage of the Participant's
principal residence; or
(v) Any other need permitted under Code Section
401(k) and the regulations issued thereunder
and authorized by the Committee.
(b) The Participant provides to the Committee a letter
containing the following:
(i) A statement of the amount needed and the
purpose for which it is needed;
XI-1
<PAGE>
(ii) A representation that the expense will not
be paid for by insurance or other source
specific to the expense, that the
Participant and his spouse (and the
Participant's minor child, if the expense is
for the child's benefit) have no assets he
can liquidate to pay for the expense without
creating a new hardship, and that ceasing
Employee Deferrals will not suffice to
satisfy the needs;
(iii) A representation that the Participant has
not been able to borrow from commercial
sources on reasonable commercial terms in an
amount sufficient to satisfy the need; and
(iv) A promise that the funds will be used only
for the specified purpose.
(c) The withdrawal cannot exceed the amount necessary to
satisfy the need described at paragraph (a), plus any
amounts necessary to pay federal or state income
taxes or penalties reasonably anticipated to result
from the distribution.
(d) The Participant has obtained all distributions, other
than hardship distributions, and all non-taxable
loans currently available under all "plans" (as
contemplated by U.S. Treasury Regulation Section
1.401(k)-1(d)(2)(iii)), maintained by the Employer.
(e) The Participant shall not be allowed to make
Employee-Deferral Contributions until the Entry Date
next following the 12-month anniversary of the
withdrawal.
(f) The Participant's limit on Employee-Deferral
Contributions in the year immediately following the
year of the withdrawal shall be the limit under
Section 3.4 for that year, less the amount of the
Participant's Employee-Deferral Contributions made in
the year of the hardship withdrawal.
11.3 Loans to Participant. A Participant who is an Employee may make a
loan from the Plan, subject to the following rules and limitations:
(a) The total amount of a Participant's loan when added
to the outstanding balance of all the Participant's
prior loans from the Plan during the one year period
ending the day before the loan is made shall not
exceed $50,000, nor shall the total amount of the
loan when added to the outstanding balance of the
XI-2
<PAGE>
Participant's loans under the Plan exceed one-half
the Participant's Vested Interest under the Plan.
Amounts set aside for an alternate payee shall not
be included. The Plan Administrator can establish
uniform nondiscriminatory policies further limiting
the amount or frequency of Employee loans.
(b) Each loan shall be deemed an investment of the
account of the Participant receiving the loan. Loan
disbursements shall be pro rated across all funds.
(c) Each loan shall bear a reasonable rate of interest as
determined by the Trustee.
(d) A Participant can have no more than two (2) loans
outstanding at anytime if a Participant makes a final
payment on one of two outstanding loans, a new loan
can be obtained after a 30-day delay following that
final payment.
(e) Each loan may not be less than $1,000.
(f) The Plan Administrator shall provide each loan
applicant with a clear statement of the charges with
respect to each loan transaction. Such statement
shall include the dollar amount and annual interest
rate or the finance charge.
(g) The term of a loan shall be determined by the
Participant but shall not be less than 12 months or
exceed five years.
(h) A loan made pursuant to this Article XI shall be
repaid in accordance with a schedule established by
the Committee which schedule shall call for payments
of interest and amortized payments of principal over
the term of the loan.
(i) Each loan shall be evidenced by the Participant's
promissory note for the amount of the loan, including
interest, payable to the order of the Trust, and each
loan shall be secured by collateral. The collateral
shall consist of the assignment of the Participant's
right, title and interest in the Participant's Vested
Interest in the Trust.
(j) During paid employment each loan shall be repaid by
withholding from the Participant's pay. Upon
termination of employment, the Participant has 90
days to pay the loan in full. If the Participant
terminates employment and receives an immediate lump
XI-3
<PAGE>
sum distribution, any promissory note held by the
Plan for his account shall be distributed to him.
(k) Leave of Absence. Notwithstanding anything contained
herein to the contrary, the Committee is permitted to
provide that loan repayments are suspended if a
Participant is on an excused leave of absence either
without pay from the Employer or at a rate of pay
from the Employer (after income and employment tax
withholding) that is less than the amount of the
repayments required under the terms of the loan;
provided, however, that the following conditions are
met:
(i) The permitted suspension period shall end
upon the Participant's return to active
employment with the Employer at the end of
the leave of absence. In no event, however,
may the suspension period last longer than
one year.
(ii) Upon the Participant's return to active
employment, the loan repayments shall resume
and, as soon as administratively feasible
thereafter, the remaining loan repayment
installments shall be recalculated
(increased) in order to amortize the
repayment of the suspended payment amount
over the remaining term of the loan.
(iii) In any event, the loan repayment term shall
not be lengthened or otherwise altered as a
result of the suspension period. The loan
will be required to be paid in full by the
date its final installment payment would
otherwise be due under the terms of the
original note, even if the Participant
remains on leave of absence as of such date.
(l) Repayments shall be credited to the Participant's
accounts out of which the loan was made, and
allocated among the Investment Funds pursuant to the
Participant's most recent allocation election.
(m) Default. Unless stated otherwise in IRS
promulgations, in the event of default, foreclosure
on the note and attachment of security shall not take
place until the occurrence of a distributable event
under the Plan. No distribution shall be made to any
Participant or to a Beneficiary of any amount until
all outstanding loans to such Participant, including
interest accrued thereon, have been liquidated.
XI-4
<PAGE>
ARTICLE XII
ADMINISTRATION
12.1 Board of Directors. The Board of Directors shall have the
following duties and responsibilities in connection with the administration of
the Plan:
(a) making decisions with respect to contributions to the
Plan;
(b) making decisions with respect to amending or
terminating the Plan;
(c) making decisions with respect to the selection,
retention and removal of the Trustee and the members
of the Committee;
(d) periodically reviewing the performance of the Trustee
and the members of the Committee; and
(e) performing such additional duties as are imposed by
law.
The Board of Directors will have all powers and authority necessary or
appropriate to carry out its duties and responsibilities with respect to the
administration of the Plan. The Board of Directors may by written resolution
allocate its duties and responsibilities to one or more of its members or
delegate such duties and responsibilities to any other persons, provided,
however, that any such allocation or delegation shall be terminable upon such
notice as the Board of Directors deems reasonable and prudent under the
circumstances.
12.2 401(k) Administrative Committee. The 401(k) Administrative
Committee (the "Committee") shall administer the Plan and is designated as the
"administrator" within the meaning of Section 3(16) of ERISA. The Committee
shall have not less than three nor more than five members, who shall be
appointed by the Board of Directors and who may be removed by the Board of
Directors at any time with or without cause. A Committee member may resign at
any time by filing his written resignation with the Board of Directors.
All members of the Committee are designated as agents of the Plan for
the service of legal process.
The Company will notify the Trustee in writing of each Committee
member's appointment, and the Trustee may assume such appointment continues in
effect until written notice to the contrary is given by the Company.
12.3 Committee's Duties and Responsibilities. The Committee shall have
the following duties and responsibilities in connection with the administration
of the Plan:
XII-1
<PAGE>
(a) interpreting and construing the provisions of the
Plan;
(b) determining all questions of eligibility to
participate, eligibility for benefits, the allocation
of contributions, and the status and rights of
Participants, Beneficiaries and alternate payees;
(c) complying with the reporting and disclosure
requirements established by ERISA;
(d) determining and deciding any dispute arising under
the Plan and administering the Plan's claims
procedures;
(e) directing the Trustee concerning all payments to be
made out of the Trust in accordance with the
provisions of the Plan;
(f) establishing procedures for withholding of federal
income tax from distributions;
(g) establishing procedures to prevent the Plan from
engaging in transactions described in Section 406 of
ERISA and transactions described in Section 4975(c)
of the Code;
(h) establishing equitable accounting methods and
designating additional Valuation Dates;
(i) communicating with Participants, Beneficiaries and
alternate payee;
(j) reviewing the investment performance of the Trustee;
(k) reviewing the performance of any advisors appointed
by the Committee;
(l) selecting and reviewing selected investment funds;
(m) making recommendations to the Board of Directors with
respect to the amendment or termination of the Plan;
and
(n) keeping minutes to record its proceedings, acts and
decisions pertaining to the administration of the
Plan.
12.4 Committee's Powers. The Committee will have all powers and
authority necessary or appropriate to carry out its duties and responsibilities
with respect to the operation and administration of the Plan. It shall interpret
and apply all provisions of the Plan and may supply any omission or reconcile
XII-2
<PAGE>
any inconsistency or ambiguity in such manner as it deems advisable,
including the adoption of interpretative memoranda. All determinations and
any actions of the Committee will be conclusive and binding upon all persons,
except as otherwise provided herein or by law; provided, however, that the
Committee may revoke or modify a determination or action previously made
in error. The Committee shall exercise all powers and authority given to it in a
nondiscriminatory manner, and will apply uniform administrative rules of general
application in order to assure similar treatment to persons in similar
circumstances.
The Committee may delegate to any such agent or any sub-committee or
member of the Committee its authority to perform any duty or responsibility
specified in Section 12.3, including those matters involving the exercise of
discretion, provided that such delegation shall be subject to revocation at any
time at the discretion of the Committee. Any member of the Committee, any
sub-committee or agent to whom the Committee delegates any authority, and any
other person or group of persons, may serve in more than one fiduciary capacity
(including service as both Committee member and Trustee) with respect to the
Plan.
Any action or decision concurred in by a majority of the Committee
members, either at a meeting or in writing without a meeting, will constitute an
action or decision of the Committee. The Committee may adopt and amend such
rules for the conduct of its business and administration of the Plan as it deems
advisable.
12.5 Chairman of the Committee. The Committee shall elect any Committee
member to serve as Chairman, and may remove him at any time. The Chairman, or a
majority of the Committee members then in office, will have the authority to
execute all instruments or memoranda necessary or appropriate to carry out the
actions and decisions of the Committee; and any person may rely upon any
instrument or memoranda so executed as evidence of the Committee's action or
decision indicated thereby.
12.6 Claims Review Procedure. If a Participant (Beneficiary or
alternate payee) believes a benefit or distribution is due under the Plan, he
may request the distribution of such benefit, in writing, on forms acceptable to
the Committee. At such time, the Participant (or Beneficiary) will be given the
information and materials necessary to complete any request for the distribution
of a benefit.
If the request for distribution is disputed or denied, the following
action shall be taken:
(a) First, the Participant (or Beneficiary) will be
notified, in writing, of the dispute or denial as
soon as possible (but no later than 90 days) after
receipt of the request for a distribution. The notice
will set forth the specific reasons for the denial,
including any relevant provisions of the Plan. The
XII-3
<PAGE>
notice will also explain the claims review procedure
of the Plan.
(b) Second, the Participant (or Beneficiary) shall be
entitled to a full review of his request for a
distribution. A Participant (or Beneficiary)
desiring a review of the dispute or denial must
request such a review, in writing, no later than 60
days after notification of the dispute or denial is
received. During the review, the Participant (or
Beneficiary) may be represented and will have the
right to inspect all documents pertaining to the
dispute or denial. Any such review may include a
hearing for the Participant or his designated
representative.
(c) The Committee shall render its decision within 60
days after receipt of the request for the review. In
the event special circumstances require an extension
of time, the Committee shall notify the Participant
(or Beneficiary), and the decision will be rendered
no later than 120 days after the receipt of the
request. The decision of the Committee shall be in
writing. The decision shall include specific reasons
for the action taken and specific references to the
Plan provisions on which the decision is based.
12.7 Information from Participants, Beneficiaries and Alternate Payees.
Each Participant, Beneficiary and alternate payee shall be required to furnish
to the Committee, in the form prescribed by it, such personal data, affidavits,
authorization to obtain information, and other information as the Committee may
deem appropriate for the proper administration of the Plan.
12.8 Actions. Any action taken by the Plan Administrator or Committee
on matters within its discretion shall be final and binding on the parties and
on all Participants, Beneficiaries or other persons claiming any right or
benefit under the Plan, in the Trust, or in the administration of the Plan.
All decisions of the Plan Administrator or Committee shall be uniform
and made in a nondiscriminatory manner.
12.9 Bond. The Company shall purchase a bond for the Plan Administrator
or Committee and any other fiduciaries of the Plan in accordance with the
requirements of the Code and ERISA.
12.10 Indemnification. The Company shall defend and indemnify to the
full extent permitted by law (including ERISA), which indemnification shall
include, but not be limited to, attorney's fees and any tax imposed as a result
of a claim asserted by any person, persons or entity (including a governmental
XII-4
<PAGE>
entity), any individual serving as a member of the Committee made or threatened
to be made a part to any action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that such individual is
or was a member of the Committee.
XII-5
<PAGE>
ARTICLE XIII
AMENDMENT OF THE PLAN
13.1 Right to Amend or Suspend Contributions. Subject to the provisions
of Section 13.3, the Board of Directors reserves the right to amend the Plan or
Trust or suspend contributions to the Plan, in whole or in part, at any time and
for any reason without the consent of any Participating Employer, Participant,
Beneficiary, or alternate payee. Each amendment of the Plan shall be in writing,
executed by order of the Board of Directors and shall be effective on the date
specified therein. Notice of any amendment, modification or suspension of
contributions to the Plan shall be given by the Board of Directors to the
Committee, the Trustee, and to all Participating Employers.
13.2 Amendment by Committee. Notwithstanding Section 13.1 the Committee
may adopt any amendment which may be necessary or appropriate to facilitate the
administration, management and interpretation of the Plan or to conform the Plan
thereto, or to qualify or maintain the Plan and Trust as a plan and trust
meeting the requirements of Sections 401(a), 501(a), 401(k) and 401(m) of the
Code or any other applicable Section of law and the Regulations issued
thereunder, provided said amendment does not have any material effect on the
currently estimated cost to the Employer maintaining the Plan. Such amendment
shall be in writing, executed by a majority of the Committee members and shall
be effective on the date specified therein. Notice of any amendment by the
Committee shall be given to the Board of Directors, the Trustee and to all
Participating Employers within a reasonable time.
13.3 Restriction on Amendment. No amendment under Sections 13.1
or 13.2 shall:
(a) authorize or permit any part of the Plan assets
(other than such part as is required to pay taxes, if
any, and administrative expenses as provided in
Section 16.15) to be used for or diverted to purposes
other than for the exclusive benefit of the
Participants and that Beneficiaries and alternate
payees under the Plan prior to the satisfaction of
all liabilities of the Plan; and
(b) deprive a Participant of his nonforfeitable right to
benefits accrued as of the date of such amendment.
If the vesting schedule of the Plan is amended in
such a way that an Employee might in any Plan Year
have less vesting credit under the new schedule than
under the schedule prior to the amendment, each
Employee with at least three Years of Service may
elect to have his nonforfeitable percentage computed
without regard to such amendment. The period during
which such election may be made shall commence with
XIII-1
<PAGE>
the date the amendment is adopted and shall end on
the later of (i) sixty days after the
amendment is adopted, (ii) sixty days after the
amendment becomes effective, or (iii) sixty days
after the Employee or Participant is provided with
written notice of the amendment.
13.4 Retroactivity. Any amendment or modification of any provisions of
the Plan may be made retroactively if necessary or appropriate to qualify or
maintain the Plan or the Trust as a plan and trust meeting the requirements of
Section 401(a), 501(a), 401(k), or 401(m) of the Code or any other applicable
Section of law (including ERISA) and the Regulations issued thereunder.
13.5 Merger. The Plan may be merged or consolidated with, or its assets
and liabilities may be transferred to any other plan only if the benefits which
would be received by a Participant in the event of a termination of the Plan
immediately after such transfer, merger or consolidation are at least equal to
the benefit such Participant would have received if the Plan had terminated
immediately prior to the transfer, merger or consolidation.
XIII-2
<PAGE>
ARTICLE XIV
TERMINATION OF THE PLAN
14.1 Events Constituting Termination. It is expressly declared to be
the desire and intention of each Participating Employer to continue the Plan in
existence for an indefinite period of time. However, circumstances not now
anticipated or foreseeable may arise in the future, as a result of which a
Participating Employer may deem it impractical or unwise to continue the Plan
established hereunder, and each Participating Employer therefore reserves the
right to terminate the Plan at any time insofar as it affects its Employees. Any
Participating Employer may terminate its participation in the Plan by action of
its board of directors. Such termination shall be evidenced by an instrument of
termination executed by an officer of the Participating Employer pursuant to
authorization by its board of directors and shall be delivered to the Board of
Directors, the Committee and to each other Participating Employer. To the
maximum extent permitted by ERISA, the termination of the Plan as to any
Participating Employer shall not in any way affect any other Participating
Employer's participation in the Plan.
With respect to any Participating Employer which has adopted the Plan,
its adjudication of bankruptcy or insolvency by any court of competent
jurisdiction, its making of a general assignment for the benefit of creditors,
its dissolution, merger, consolidation, other reorganization or discontinuance
of business, unless coverage for its Employees under the Plan is continued by a
successor company, or its complete discontinuance of contributions, shall
operate to terminate the Plan with respect to such Participating Employer.
The Committee may require any Participating Employer to withdraw from
the Plan for failure of the Participating Employer to make proper contributions
or to comply with any other provision of the Plan.
14.2 Partial Termination. Upon the withdrawal of one or more
Participating Employers or upon the termination of active participation of a
group of Employees, the Committee shall determine, upon the advice of counsel to
the Plan and under applicable law, whether a partial termination has occurred
with respect to a group of Participants.
14.3 Disposition of Accounts After a Termination. Upon termination or
partial termination of the Plan or upon complete discontinuance of
contributions, the Accounts of all affected Participants shall become fully
vested and nonforfeitable. Upon the termination or partial termination or upon
complete discontinuance of contributions, the Committee shall continue to
administer the Plan, the Trustee shall continue to administer the Trust Fund,
and all payments to Participants shall continue in accordance with the
provisions of Article X; provided, however, that in the event of a partial
termination the Committee may direct the Trustee to segregate the assets
attributable to the Accounts of the affected Participants and apply such
segregated assets for the benefit of such Participants.
XIV-1
<PAGE>
After a Plan termination, the assets of the Plan shall be distributed
to the Participants (and others for whose benefits accounts are then maintained)
at such time as the Committee determines. No distribution shall be made of
Employee-Deferral Account balances as a result of a termination of the Plan
unless the Plan is terminated without the establishment or maintenance of
another defined contribution plan, as provided in Code Sections
401(k)(2)(B)(i)(II) and 401(k)(10)(A)(i).
Notwithstanding the foregoing paragraph, upon or after the termination
of the Plan, the Board of Directors shall have the power to terminate the Trust.
14.4 Internal Revenue Service Approval for Distribution. In the event
that the Committee applies to the Internal Revenue Service for a determination
that the termination of the Plan does not disqualify it, no person shall have
any right or claim to any assets of the Trust Fund before the Internal Revenue
Service shall determine that the Plan is qualified through the proposed
distribution of assets under this Article XIV.
XIV-2
<PAGE>
ARTICLE XV
STAND-BY TOP-HEAVY PROVISIONS
15.1 Top Heavy Plan. The Plan will be considered a Top Heavy Plan for
any Plan Year if it is determined to be a Top Heavy Plan as of the last day of
the preceding Plan Year. Notwithstanding any other provisions in the Plan, the
provisions of this Article XV shall apply and supersede all other provisions in
the Plan with respect to a Plan Year for which the Plan is a Top Heavy Plan.
15.2 Definitions. For purposes of this Article XV and as otherwise used
in this Plan, the following terms shall have the meanings set forth below:
(a) "Aggregation Group" shall mean the group composed of
each qualified retirement plan of a Participating
Employer or an Affiliated Company in which a Key
Employee is a Participant and each other qualified
retirement plan of a Participating Employer or an
Affiliated Company which enables a plan of a
Participating Employer or an Affiliated Company in
which a Key Employee is a Participant to satisfy
Sections 401(a)(4) or 410 of the Code. In addition,
the Company may choose to treat any other qualified
retirement plan as a member of the Aggregation Group
if such Aggregation Group will continue to satisfy
Sections 401(a)(4) and 410 of the Code with such plan
being taken into account.
(b) "Key Employee" shall mean a "Key Employee" as defined
in Section 416(i)(1) and (5) of the Code or
Regulations. For purposes of determining which
employee is a Key Employee, compensation shall mean
"compensation" as defined in Section 1.415-2(d) of
the Regulations but including employer contributions
made pursuant to a salary reduction arrangement.
(c) This Plan shall be a "Top Heavy Plan" for any Plan
Year if, as of the Determination Date (as defined in
paragraph (d) below), the aggregate of the Accounts
under the Plan for Participants who are Key Employees
(as defined in paragraph (b), above) exceeds 60% of
the aggregate of the Accounts of all Participants or
if this Plan is required to be in an Aggregation
Group (as defined in paragraph (a), above) which for
such Plan Year is a top-heavy group.
(d) "Determination Date" means for any Plan Year the last
day of the immediately preceding Plan Year.
XV-1
<PAGE>
15.3 Vesting. If the Plan is a Top Heavy Plan with respect to any Plan
Year, the Vested Interest of each Participant who has performed one Hour of
Service on or after the date the Plan becomes a Top Heavy Plan shall not be less
than the percentage determined in accordance with the following vesting
schedule:
Years of Service
Less than 2 years 2 years but less than 3 3 years but less than 4 4 years but
less than 5 5 years but less than 6 6 years or more
Vested Interest
0%
20%
40%
60%
80%
100%
The following additional rules shall apply:
(a) The Top-Heavy vesting schedule set forth in this
Section shall apply to the entire balance of such
accounts, including benefits which accrued before the
Plan became Top-Heavy.
(b) In the event the Plan ceases to be Top-Heavy, the
vested and nonforfeitable percentage of each
Participant's Employer Contribution Account shall not
be reduced by a change in the Plan's vesting
schedule.
(c) The Top-Heavy vesting schedule set forth above shall
not apply to the Employer Contribution Account of any
Participant who does not have an Hour of Service
after the Plan initially becomes Top-Heavy. The
vested interest of such Participant in his or her
Employer Contribution Account shall be determined
without regard to this Section.
(d) If the Plan ceases to be Top-Heavy, the vesting
schedule set forth in this Section shall apply to all
Employer Contributions attributable to Plan Years
after the Plan ceases to be Top-Heavy. Such change in
the vesting schedule shall be treated as an amendment
and the provisions of Section 13.3 shall apply.
15.4 Minimum Contribution. For each Plan Year that the Plan is a Top
Heavy Plan, the Employer Contribution (including forfeitures but excluding
rollovers pursuant to Section 3.8) allocable to the Accounts of each Participant
who has performed an Hour of Service at the end of the Plan Year and who is not
a Key Employee, shall not be less than the lesser of (i) 3% of such
Participant's compensation, within the meaning of Section 415 of the Code, or
XV-2
<PAGE>
(ii) the percentage at which contributions and forfeitures for such Plan
Year are made and allocated on behalf of the Key Employee for whom such
percentage is the highest. Such allocation shall be made for each Participant
who is not a Key Employee and who is employed by the Employer through the last
payroll period ending within the Plan Year. For the purpose of determining the
appropriate percentage under clause (i), all defined contribution plans required
to be included in an Aggregation Group shall be treated as one plan. Clause (ii)
shall not be applicable if the Plan is required to be included in an Aggregation
Group which enables a defined benefit plan also required to be included in said
Aggregation Group to satisfy Sections 401(a)(4) or 410 of the Code.
Compensation, for purposes of determining a minimum contribution, is Section 415
Compensation.
15.5 Limitations on Contributions. For each Plan Year that the Plan is
a Top Heavy Plan, 1.0 shall be substituted for 1.25 as the multiplicand of the
dollar limitation in determining the denominator of the defined benefit plan
fraction and of the defined contribution plan fraction for purposes of Section
415(e) of the Code. If, after substituting 90 percent for 60 percent wherever
the latter appears in Section 416(g) of the Code, the Plan is not determined to
be a Top Heavy Plan, the provisions of this Section 15.5 shall not be applicable
if the minimum Employer Contribution (including forfeitures) allocable to the
Accounts of any Participant who is not a Key Employee is determined by
substituting "4" for "3". If the Participant is a participant in both a defined
contribution plan and a defined benefit plan, the benefit from the defined
contribution plan minimum shall be comparable to a 3% defined benefit plan
benefit.
15.6 Other Plans. The Committee shall, to the extent permitted by the
Code and in accordance with the Regulations, apply the provisions of this
Article XV by taking into account the benefits payable and the contributions
made under any other plans maintained by a Participating Employer or Affiliated
Company which are qualified under Section 401(a) of the Code to prevent
inappropriate omissions or required duplication of minimum benefits or
contributions by making a comparability analysis to prove that the defined
contribution plan is providing a benefit at least equal to the minimum benefit
under the defined benefit plan.
XV-3
<PAGE>
ARTICLE XVI
GENERAL PROVISIONS
16.1 Plan Voluntary. Although it is intended that the Plan shall be
continued indefinitely, this Plan is entirely voluntary on the part of the
Participating Employers and the continuance of this Plan and the payment of
contributions hereunder are not to be regarded as contractual obligations of the
Participating Employers. The Plan shall not be deemed to constitute a contract
between a Participating Employer and any Employee or to be a consideration for,
or an inducement for, the employment of an Employee by an Employer. Nothing
contained in the Plan shall be deemed to give any Employee the right to be
retained in the service of an Employer or to interfere with the right of an
Employer to discharge or to terminate the service of any Employee at any time
without regard to the effects such discharge or termination may have on any
rights under the Plan.
16.2 Payments to Minors and Incompetents. If a Participant, Beneficiary
or alternate payee entitled to receive any benefits hereunder is a minor or is
deemed by the Committee, or is adjudged, to be legally incapable of giving valid
receipt and discharge for such benefits, such benefits will be paid to such
person or institution as the Committee may designate or to the duly appointed
guardian. Such payment shall, to the extent made, be deemed a complete discharge
of any liability for such payment under the Plan.
16.3 Missing Payee. The Committee shall retain the address of each
Participant, Beneficiary or alternate payee. Any notice sent to the last address
filed with the Plan Administrator or for the last address indicated on an
Employer's records will be binding upon a Participant or Beneficiary.
16.4 Required Information. Each Participant shall file with the
Committee such pertinent information concerning himself, his spouse and his
Beneficiary as the Committee may specify, and no Participant, or Beneficiary, or
other person shall have any rights or be entitled to any benefits under the Plan
unless and until such information is filed by or with respect to him.
16.5 Subject to Trust Agreement. Any and all rights or benefits
accruing to any persons under the Plan shall be subject to the terms of the
Trust Agreement.
16.6 Communications to Committee. All elections, designations,
requests, notices, instructions, and other communications from an Employee, a
Participant, Beneficiary, or alternate payee to the Committee required or
permitted under the Plan (i) shall be in such form as is prescribed from time to
time by the Committee, (ii) shall be mailed by first-class mail or delivered to
such location as shall be specified by the Committee, and (iii) shall be deemed
to have been given and delivered only upon actual receipt thereof by the
Committee at such location.
XVI-1
<PAGE>
16.7 Communications from Employer or Committee. All notices,
statements, reports and other communications from an Employer or the Committee
to any Employee, Participant, Beneficiary or alternate payee shall be deemed to
have been duly given when delivered to, or when mailed by first-class mail,
postage prepaid and addressed to, such Employee, Participant, Beneficiary or
alternate payee at his address last appearing on the records of the Committee or
Company, or when posted by the Company or the Committee as permitted by law.
16.8 Action. Except as may be specifically provided herein, any action
required or permitted to be taken by an Employer may be taken on behalf of the
Employer by any authorized officer of the Employer.
16.9 Liability for Benefits. Neither the Trustee, the Employers, the
Committee nor the Plan Administrator guarantee the Trust from loss or
depreciation, nor do they guarantee any payment to any person. The liability of
the Trustee, the Employers, the Committee and the Plan Administrator to make any
payment is limited to the available assets of the Trust.
16.10 Named Fiduciary. The "named fiduciaries" of the Plan within the
meaning of ERISA Section 403 shall be (a) the Employer, (b) the Plan
Administrator, (c) the Trustee, and (d) the Committee.
16.11 Gender. Whenever used in the Plan the masculine gender includes
the feminine.
16.12 Captions. The captions preceding the Sections of the Plan have
been inserted solely as a matter of convenience and in no way define or limit
the scope or intent of any provisions of the Plan.
16.13 Applicable Law. The Plan and all rights thereunder shall be
governed by and construed in accordance with ERISA and the laws of the State of
Louisiana.
16.14 Reversion of Employer Contributions. In no event shall the assets
of the Plan revert to the benefit of the Employer. Notwithstanding any provision
of the Plan to the contrary, however, all contributions by Employers are
conditioned upon the deductibility of such contribution under Code Section 404.
To the extent that a deduction is disallowed for an Employer's contribution, the
Trustee shall return the principal amount of such contribution upon the demand
of the Employee. Any such demand shall be made within one year following the
final determination of the disallowance.
Further, notwithstanding any provision of the Plan to the contrary, any
contribution which is made by the Employer on account of a good faith mistake of
fact may be returned to the Employer. The Employer shall notify the Trustee, in
writing, of such mistake within one year of the contribution. The Trustee shall
XVI-2
<PAGE>
return the principal amount of the Employer Contribution as soon as possible,
but in any event within 60 days after written notification by the Employer.
The maximum amount that may be returned to an Employer in the case of a
mistake of fact or the disallowance of a deduction is the excess of (a) the
amount contributed, over, as relevant, (b)(i) the amount that would have been
contributed had no mistake of fact occurred, or (ii) the amount that would have
been contributed had the contribution been limited to the amount that is
deductible after any disallowance by the Internal Revenue Service. Earnings
attributable to the excess contribution may not be returned to the Employer, but
losses attributable thereto must reduce the amount to be so returned.
Furthermore, if the withdrawal of the amount attributable to the mistaken or
nondeductible contribution would cause the balance of the individual account of
any Participant to be reduced to less than the balance which would have been in
the account had the mistaken or nondeductible amount not been contributed, then
the amount to be returned to the Employer must be limited so as to avoid such
reduction.
16.15 Expenses. All expenses of administration shall be paid from the
Trust unless paid directly by the Employer. The Employer may reimburse the Trust
for any administrative expense paid by the Trust; such reimbursement shall not
be treated as an Employer Contribution under the terms of the Plan.
XVI-3
<PAGE>
EXECUTED in multiple originals in New Orleans, Louisiana, effective as
of the 30th day of December, 1998.
WITNESSES: AVONDALE INDUSTRIES, INC.
/S/ GEORGE E. WHITE, JR. BY: /S/ THOMAS M. KITCHEN
- ------------------------ ------------------------
/S/ RONALD E. BAILEY
- ------------------------
XVI-4
<PAGE>
ACKNOWLEDGMENT
STATE OF LOUISIANA
PARISH OF ORLEANS
BEFORE ME, the undersigned Notary Public, personally came and appeared
Thomas M. Kitchen, who being by me sworn did depose and state that he signed
the foregoing Avondale Industries, Inc. 401(k) Savings Plan as a free act and
deed on behalf of Avondale Industries, Inc. for the purposes therein set forth.
BY: /S/ THOMAS M. KITCHEN
------------------------
Print Name: THOMAS M. KITCHEN
-----------------
Title: VP & CFO
------------------------
SWORN TO AND SUBSCRIBED
BEFORE ME THIS 30TH DAY
OF DECEMBER, 1998.
/S/ A. BLOMKALNS
- -----------------------
NOTARY PUBLIC
<PAGE>
Appendix "A"
Participating Employers
The following Participating Employers have entered under this Plan as
of the following dates:
Participating Employer Date of Participation
---------------------- ---------------------
Avondale Gulfport Marine Inc. January 1, 1996
Avondale Industries of New York, Inc. January 1, 1996
Avondale Services Corp. January 1, 1996
Avondale Shipyards of Texas, Inc. January 1, 1996
Avondale Transportation Company, Inc. January 1, 1996
Avondale Enterprises, Inc. January 1, 1996
Avondale Construction Management, Inc. January 1, 1996
AVONDALE INDUSTRIES, INC.
FLEXIBLE BENEFITS PLAN
Effective January 1, 1998
<PAGE>
AVONDALE INDUSTRIES, INC.
FLEXIBLE BENEFITS PLAN
Table of Contents
Page
INTRODUCTION 1
ARTICLE I Definitions 2
ARTICLE II Eligibility Provisions 5
Effective Date of Participation for Eligible Employees 5
Termination of Participation for Eligible Employees 5
Participation During FMLA 5
ARTICLE III Contributions 6
Elective Contributions 6
Nonelective Company Contributions 6
New Employees 6
Pay Reduction and Payroll Withholding 6
Maximum Amount of Elective Contributions 7
Participant Contributions by Participants on FMLA Leave 7
ARTICLE IV Participant Elections/Benefit Options 8
Enrollment Procedures 8
Duration of Elections 8
Benefit Enrollment 8
Value of Benefits 8
New Employees 8
Absence of Completed Election Form 9
Changes in Employee Elections 9
Special Enrollment Rights 10
ARTICLE V COBRA Rights 11
In General 11
Definition of Employee and Participant 11
Continuation of Benefits 11
Benefit Plan 11
Enrollment Options 11
Other COBRA Provisions 11
<PAGE>
ARTICLE VI Amendment or Termination 12
ARTICLE VII Administration 13
Company as Administrator 13
Powers and Duties 13
Reliance on Tables, etc. 14
Nondiscriminatory Exercise of Authority 14
Status as Fiduciary 14
Fiduciary Liability 14
Examination of Records 15
Indemnification 15
ARTICLE VIII Miscellaneous Provisions 16
Information to be Furnished 16
Limitation of Rights 16
Governing Law 16
No Guarantee of Tax Consequences 16
<PAGE>
INTRODUCTION
Avondale Industries, Inc. (the "Company") established a cafeteria plan within
the meaning of Section 125 of the Internal Revenue Code of 1986, effective as of
July 1, 1987, known as the Avondale Industries, Inc. Flexible Benefits Plan
(hereinafter referred to as "Plan"). This Plan is amended effective January 1,
1998 to comply with the Family and Medical Leave Act of 1993 and to make other
clarifications and revisions. The purpose of this Plan is to provide eligible
employees a choice between certain taxable and nontaxable benefits.
This Plan is intended to qualify as a cafeteria plan under section 125 of the
Internal Revenue Code of 1986 and is to be interpreted in a manner consistent
with the requirements of that section (as it may be amended).
1
<PAGE>
ARTICLE I
Definitions
Definitions. As used herein, the following words and phrases, whether or not
capitalized, shall have the following meanings unless a different meaning is
plainly required by the context. Words implying the masculine gender include the
feminine, and words in the singular shall include the plural and the plural the
singular. Any headings herein are included for reference only and are not to be
construed so as to alter any of the terms of the Plan.
1.01 "Benefit Plan" means any of the health (disability, medical or dental)
plans, group term life insurance plan, and any accidental death and
dismemberment plan offered by the Company to its Employees. All of
these plans are maintained in accordance with, and described in, one or
more other documents that are not specifically contained within this
plan document, but are by this reference incorporated herein.
1.02 "Change in Family Status" includes:
a. Marriage, divorce, death of spouse or child, birth or adoption
of child;
b. Change in employment status of a spouse or a significant
change in the health coverage of the employee or spouse
attributable to the spouse's employment; or
c. Such other events related to family status that are either
specifically permitted under regulations of the Internal
Revenue Service or are substantially similar and consistent
with the intent of such regulations. Change in Family Status
does not include termination of employment or reduction in
hours, with respect to the Participant himself.
1.03 "Code" means the Internal Revenue Code of 1986, as amended from time to
time. Reference to any section or subsection of the Code includes
references to any comparable or successor provisions of any legislation
that amends, supplements or replaces such section or subsection.
1.04 "Company" means Avondale Industries, Inc.
1.05 "Compensation" means a Participant's salary, as determined by the
Company.
1.06 "Company Contributions" means those contributions made by the Company
to provide certain taxable and nontaxable benefits to the Employees.
2
<PAGE>
1.07 "Dependent means an unmarried child of a Participant (including a
legally adopted child, or a stepchild) who is dependent upon the
Participant for his or her support and:
a. is under the age of nineteen; or
b. is under the age of twenty-five and is a full-time student.
1.08 "Effective Date" means January 1, 1998. The original effective date was
July 1, 1987.
1.09 "Election Form" means the Flexible Benefits Plan 1998 Enrollment Form
and any future Enrollment Forms provided by the Company by which a
Participant makes his benefits selection and by which the Participant
may authorize the Company to reduce his Compensation in order to obtain
certain benefits.
1.10 "Election Period" means the period designated by the Company
immediately preceding the beginning of each Plan Year during which the
Employee must complete his Election Form.
1.11 "Elective Contributions" means those contributions as described in
Article III, Section 3.01.
1.12 "Employee" means a full-time employee of the Company who is performing
active work for at least 30 hours per week.
1.13 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time. Reference to any section or subsection of
ERISA includes references to any comparable or successor provisions of
any legislation that amends, supplements or replaces such section or
subsection.
1.14 "FMLA" means the Family and Medical Leave Act of 1993 (29 USCSss.2601
et seq.).
1.15 "FMLA Leave" means a leave of absence that the Company is required to
extend to an Employee under the provisions of the FMLA.
1.16 "Nonelection Company Contributions" means those contributions as
described in Article III, Section 3.02.
1.17 "Participant" means any eligible Employee covered under this Plan in
accordance with Article II.
3
<PAGE>
1.18 "Plan" means the Avondale Industries, Inc. Flexible Benefits Plan
maintained pursuant to this plan document.
1.19 "Plan Year" means the period beginning on the effective date and ending
on December 31, 1998 and each succeeding 12-month period beginning
January 1 thereafter; except that the first Plan Year was from July 1,
1987 to December 31, 1987.
1.20 "Qualified Beneficiary" means, with respect to a Participant, any other
individual who, on the day before the qualifying event for that
Employee, is a beneficiary under the plan (a) as the spouse of the
covered Employee, or (b) as the dependent child of the Employee.
4
<PAGE>
ARTICLE II
Eligibility Provisions
2.01 Effective Date of Participation for Eligible Employees
An Employee will become a Participant in this Plan on the first day of
the first month following 30 days of employment with the Company.
2.02 Termination of Participation for Eligible Employees
With respect to any Participant, coverage ends on the date of the
earlier of the following events:
a. The date this Plan terminates;
b. The date the person ceases to be an Employee.
2.03 Participation During FMLA. Any Participant who is absent from work due
to a FMLA Leave shall have the right to continue to participate in the
Plan conditioned on the Participant's (a) continuing to have an
employment relationship with the Company, and (b) making the payments
pursuant to Section 3.06. If the Participant fails to make the required
Elective Contributions, upon return from FMLA Leave the Participant can
elect to be reinstated as a Participant of the Plan on the same terms
as prior to taking FMLA Leave (including family and dependent
coverage).
5
<PAGE>
ARTICLE III
Contributions
3.01 Elective Contributions
A Participant may elect under this Plan to receive his full
Compensation for any Plan Year in cash or elect to have a portion of
his Compensation withheld from receipt to be applied to the cost of his
participation in the Company Health Plan, that provides a combination
of life insurance and medical benefits, and any other Benefit Plan
offered by the Company.
The monetary amount associated with this election constitutes Elective
Contributions. Such salary redirection shall be authorized by the
Participant on the Election Form. The Company may reduce any
Participant's allocation of Elective Contributions to the extent it
deems it necessary to enable the Plan to comply with any
nondiscrimination requirements imposed by the Code, and any other
applicable law or regulation.
3.02 Nonelective Company Contributions
If a Participant elects one or more of the benefit options under this
Plan, the Company shall make Nonelective Company Contributions which
vary based on the benefit option(s) chosen. The amount of such
Nonelective Company Contribution shall be the amount equal to the
premium required for the benefit option(s) selected, less the Elective
Contribution for such benefit option.
3.03 New Employees
In the case of a new Employee who first becomes a Participant during
the middle of a Plan Year, the maximum amount of Elective Contributions
made available to such Participant for the balance of that Plan Year
shall be prorated on the basis of the number of pay periods remaining
in such Plan Year.
3.04 Pay Reduction and Payroll Withholding
A Participant's Compensation for a Plan Year shall be reduced by the
amount of the Elective Contributions that the Participant elects for
the Plan Year under this Article III. Such contributions shall be made
only by payroll reduction on a pre-tax basis.
6
<PAGE>
3.05 Maximum Amount of Elective Contributions
The Elective Contributions under each Benefit Plan for any Participant
are listed in the Election Form provided each year by the Company.
3.06 Participant Contributions by Participants on FMLA Leave. Any
Participant who elect to maintain coverage while on unpaid FMLA Leave
must continue to make any Elective Contributions specified in Section
3.01 by remitting payment on an after-tax basis to the Company on or
before each pay period for which the contributions would have been
deducted from the Participant's paycheck if FMLA Leave had not been
taken, provided that any delinquent payments must be made within 30
days of their due date.
7
<PAGE>
ARTICLE IV
Participant Elections/Benefit Options
4.01 Initial Enrollment Period
An Employee who is eligible to become a Participant must complete sign
and file an Election Form at any time during the period beginning on
the first day of employment through the end of that month. Coverage is
effective as of the first of the following month.
The Election Form shall permit an Employee to elect to participate in
the Plan by:
a. an affirmative election to participate; and
b. authorizing a pay reduction in exchange for benefits under the
Company Health Plan or any other Benefit Plan offered by the
Company.
If an Employee fails to complete, sign and file an Election Form during
such period the Employee may become a Participant on a later date in
accordance with Section 4.02, 4.07, or 4.08.
4.02 Annual Enrollment Period
Each Employee who is a Participant or who is eligible to become a
Participant shall complete, sign and file an Election Form during the
thirty (30) day period immediately prior to the beginning of each Plan
Year. The elections made by the Participant on this Election Form shall
be effective, subject to Section 4.07, for the entire Plan Year. An
Employee who is a Participant and who fails to complete, sign and file
an Election Form as required by this Section 4.02 shall be deemed to
have elected to continue the same benefits then in effect for such
Participant.
4.03 Duration of Elections
Except as provided in Changes in Employee Elections below, each
Participant's election is irrevocable and shall remain in effect until
the beginning of the following Plan Year.
4.04 Benefit Enrollment
Election to enroll in a Benefit Plan offered under this Plan shall be
governed by the terms, conditions and provisions of the respective
Benefit Plan's plan document.
8
<PAGE>
4.05 Value of Benefits
Each Plan Year the Company has the duty and right to determine and set
the values and Elective Contributions associated with each benefit
offered under this Plan.
4.06 Absence of Completed Election Form
Failure to return a completed Election Form to the Company on or before
the specified due date for the Plan Year in which a new Employee first
becomes a Participant shall be considered a choice by the Participant
to select cash only and to select no Benefit Plan coverage. A
Participant who fails to return an Election Form for any subsequent
Election Period shall be deemed to have elected to continue whatever
benefit options he had selected on the most recent Election Form
previously provided by the Participant to the Company.
4.07 Changes in Employee Elections
A Participant may revoke his elections and make new elections with
respect to the remainder of the Plan Year only if the Company
determines that both the revocation and the new election are on account
of and consistent with a Change in Family Status; and provided further
that such change is permitted under the terms of the respective Benefit
Plan document. The Company shall make the necessary determination
within a reasonable time after receiving the new Election Form and any
proof of such family status change the Company may require in order to
make such determination. Changes in contributions and benefits
attributable to a change in the Participant's election shall be
effective with respect to the pay period which begins coincident with
or immediately following the date on which the new Election Form is
approved by the Company.
Further, any Participant who takes an FMLA Leave may revoke any and all
existing elections at the beginning of (or during) the leave. Such
Employee shall have the right to reinstate any revoked election of
Elective Contributions at the end of the FMLA Leave. The new election
must be consistent with the reason that such change was permitted.
In the event that a benefit option is materially changed or terminated
during a Plan year, due in no fault to either the Participant or the
Company, any Participant who had elected such option may prospectively
change, at the time the option is so changed or terminated, to another
similar option; provided further that such change is permitted under
the terms of the respective Benefit Plan document. In the event that no
similar option remains, cash will be deemed to be elected.
9
<PAGE>
4.08 Special Enrollment Right
Notwithstanding any provision of the Plan to the contrary, an election
of coverage under the Benefit Plan options made by a Participant on his
or her Election Form may be revoked and a new election may be made if
the Participant has exercised a Special Enrollment Right under the
Plan, provided such revocation and new election must be made within (a)
30 days of marriage, birth, adoption, or placement of adoption of a new
Dependent or (b) within 30 days following the termination of other
health insurance coverage for one of the following reasons: (i) the
Participant or Participant's Dependent's coverage was under a COBRA
continuation policy at open enrollment and such coverage was exhausted,
or (ii) the Participant or Participant's Dependent's coverage was not
under a COBRA continuation policy and either the coverage was
terminated as a result of loss of eligibility for the coverage
(including as a result of legal separation, divorce, death, termination
of employment, or reduction of hours of employment) or employer
contributions toward such coverage was terminated.
Any such revocation and new election shall be made by executing a new
Election Form. The new Election Form shall become effective as of the
first payroll period of the month following receipt of such form by an
authorized representative of the Company; however, if the revocation
and new election is made by reason of birth or adoption of a Dependent
the election shall be retroactive to the date of birth, adoption or
placement for adoption of the Dependent.
For purposes of this Section 4.08, a Special Enrollment Right may be
exercised by an Employee or Dependent who was covered under another
group health plan or health insurance coverage at open enrollment and
who stated in writing the reason for declining enrollment (provided the
Company required such statement on the enrollment form). A Special
Enrollment Right is also available to a Participant, if not otherwise
enrolled, and to the Participant's spouse if the Participant has a new
Dependent through birth, marriage, adoption, or placement for adoption.
10
<PAGE>
ARTICLE V
COBRA Rights
5.01 In General
The benefits provided under this Plan may be subject to the
Consolidated Omnibus Budget Reconciliation Act ("COBRA"). In the event
any provision of this document is inconsistent with COBRA, the
provisions of COBRA are applicable.
5.02 Definition of Employee and Participant
For purposes of COBRA, the terms Employee and Participant may include
former Employees who have terminated employment with the Company and
persons who are current or former dependent spouses or dependent
children of Employees. Accordingly, to the extent required by COBRA,
any Qualified Beneficiary who has elected certain rights under COBRA
shall be afforded privileges otherwise restricted to Participants as
defined in Section 1.16.
5.03 Continuation of Benefits
To the extent required by COBRA, rights under the Benefit Plan will
continue for any Qualified Beneficiary beyond the date of normal
termination of coverage.
5.04 Benefit Plan
A statement of COBRA rights under the Benefit Plan is contained in its
plan document.
5.05 Enrollment Options
During open enrollment periods described in Section 4.02, a Participant
who has election rights on account of his status as a Qualified
Beneficiary shall be limited to electing prospective coverage in an
option within the Benefit Plans.
5.06 Other COBRA Provisions
Provisions concerning length of COBRA benefits, COBRA election periods,
and COBRA notification requirements, which apply to this Plan, shall be
consistent with those specified in the Benefit Plan's plan document.
11
<PAGE>
ARTICLE VI
Amendment or Termination
Avondale Industries, Inc. shall have the right to terminate, suspend,
withdraw, amend or modify the Plan in whole or in part at any time on a
prospective basis without prior consultation with, notice to, or
approval by, the Participants.
12
<PAGE>
ARTICLE VII
Administration
7.01 Company as Administrator
The administration of the Plan shall be under the supervision of
Avondale Industries, Inc. The day to day responsibilities are delegated
by Avondale Industries, Inc. to the Avondale Industries, Inc. Benefits
Committee. It shall be a principal duty of Avondale Industries, Inc. to
see that the Plan is carried out, in accordance with its terms, for the
exclusive benefit of persons entitled to participate in the Plan
without discrimination among them.
7.02 Powers and Duties
The Company will have full power to administer the Plan in all of its
details, subject to applicable requirement of law. For this purpose,
the Company's powers will include, but will not be limited to, the
following authority, in addition to all other powers provided by this
Plan:
a. To establish a funding policy and method consistent with the
objectives of the Plan.
b. To make and enforce such rules and regulations as it deems
necessary or proper for the efficient administration of the
Plan, including the establishment of any claims procedures
that may be required by applicable provisions of law.
c. To interpret the Plan, its interpretation in good faith to be
final and conclusive on all persons claiming benefits under
the Plan.
d. To decide all questions concerning the Plan and the
eligibility of any person to participate in the Plan.
e. To appoint such agents, counsel, accountants, consultants and
other persons as may be required to assist in administering
the Plan.
f. To allocate and delegate its responsibilities under the Plan
and to designate other persons to carry out any of its
responsibilities under the Plan, provided such allocation or
delegation is evidenced in some form satisfactory to the
Company.
13
<PAGE>
g. To notify the Participants in writing of any substantive
amendment or termination of the Plan or of a change in
benefits available under the Plan.
Notwithstanding the provisions of this Section, the powers and duties
allocated to Avondale Industries, Inc. and described in this section
shall only be applicable with respect to a claim arising under the
Benefit Plans or to the administration of the Benefit Plans to the
extent that such power or duty is not allocated (either expressly or by
implication) to the individual(s) or entity appointed to serve as
administrator or insurer of the Benefit Plans.
7.03 Reliance on Tables, etc.
In administering the Plan, Avondale Industries, Inc. will be entitled
to the extent permitted by law to rely conclusively on all tables,
valuations, certificates, opinions and reports which are furnished by,
or in accordance with the instructions of, the administrators of any of
the plans offered within the Plan, or by accountants, counsel or other
experts employed or engaged by Avondale Industries, Inc..
7.04 Nondiscriminatory Exercise of Authority
Whenever, in the administration of the Plan, any discretionary action
by Avondale Industries, Inc. is required, Avondale Industries, Inc.
shall exercise its authority in a nondiscriminatory manner so that all
persons similarly situated will receive substantially the same
treatment.
7.05 Status as Fiduciary
Avondale Industries, Inc. shall be the named fiduciary of the Plan,
pursuant to ERISA. Any person or group of persons may serve in more
than one fiduciary capacity with respect to the Plan.
7.06 Fiduciary Liability
No named fiduciary shall be liable with respect to a breach of
fiduciary duty, if such breach was committed before he became a named
fiduciary or after he ceases to be a named fiduciary. No fiduciary
shall be liable for an act or omission of another person in carrying
out any fiduciary responsibility where such fiduciary responsibility is
allocated to such other person by the Plan, or where such other person
was designated to carry out such fiduciary responsibility in the manner
prescribed by the Plan, except to the extent that such fiduciary is in
violation of his duty under Section 405(a) or Section 405(c)(2) of
ERISA.
14
<PAGE>
7.07 Examination of Records
The Company will make available to each Participant such of his records
under the Plan as pertain to him, for examination at reasonable time
during normal business hours.
7.08 Indemnification
The Company agrees to indemnify and to defend to the fullest extent
permitted by law any Employee or other Plan fiduciary acting within the
scope of their respective duties (including any former Employee)
against all liabilities, damages, costs and expenses (including
attorneys' fees and amounts paid in settlement of any claims approved
by the Company) occasioned by any act or omission to act in connection
with the Plan, if such act or omission is in good faith.
15
<PAGE>
ARTICLE VIII
Miscellaneous Provisions
8.01 Information to be Furnished
Participants shall provide the Company with such information and
evidence and shall sign such documents, as may reasonably be requested
from time to time, for the purpose of administration of the Plan.
8.02 Limitation of Rights
Neither the establishment of the Plan nor any amendment thereof, nor
the payment of any benefits, will be construed as giving to any
Participant or other person any legal or equitable right against the
Company except as provided herein.
8.03 Governing Law
This Plan shall be construed, administered and enforced according to
the laws of Louisiana.
8.04 No Guarantee of Tax Consequences
Notwithstanding anything herein to the contrary, the Company does not
insure or make any commitment or guarantee that any amounts paid to a
Participant pursuant to the Plan or any amounts by which a
Participant's wages are reduced pursuant to Article III will be
excludable from the Participant's gross income for federal, state or
local income tax purposes. It shall be the obligation of each
Participant to notify the Company if the Participant has reason to
believe that any payment made or to be made to the Participant pursuant
to the Plan is not excludable from the Participant's gross income for
federal, state or local income tax purposes.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed in its name
and behalf this 30th day of December, 1998, by its officer thereunto duly
authorized.
WITNESSES: AVONDALE INDUSTRIES, INC.
/S/ RONALD E. BAILEY By: /S/ THOMAS M. KITCHEN
- ------------------------ ---------------------
/S/ GEORGE E. WHITE, JR. Title: VP & CFO
- ------------------------ ---------------------
16
Avondale Properties, Inc.
Avondale Services Corporation
Avondale Transportation Company, Inc.
Avondale Shipyard of Texas, Inc.
Avondale Construction Management, Inc.
Avondale Gulfport Marine, Inc.
Avondale Industries of New York, Inc.
Avondale Enterprises, Inc.
Avondale Technical Services, Inc.
Crawford Technical Services, Inc.
Genco Industries, Inc.
M & D Steel Fabrication, Inc.
AAA Quality Construction, Inc.
Genco Industries of Lufkin, Inc.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-32165 of Avondale Industries, Inc. on Form S-8 of our report dated February
22, 1999, appearing in this Annual Report on Form 10-K of Avondale Industries,
Inc. for the year ended December 31, 1998.
\s\ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
February 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AVONDALE
INDUSTRIES, INC.'S ANNUAL REPORT FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 52,562
<SECURITIES> 0
<RECEIVABLES> 125,917
<ALLOWANCES> 0
<INVENTORY> 33,603
<CURRENT-ASSETS> 232,121
<PP&E> 290,175
<DEPRECIATION> (141,249)
<TOTAL-ASSETS> 397,202
<CURRENT-LIABILITIES> 109,852
<BONDS> 48,682
0
0
<COMMON> 15,967
<OTHER-SE> 194,448
<TOTAL-LIABILITY-AND-EQUITY> 397,202
<SALES> 748,936
<TOTAL-REVENUES> 748,936
<CGS> 664,575
<TOTAL-COSTS> 664,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,667
<INCOME-PRETAX> 47,406
<INCOME-TAX> 8,415
<INCOME-CONTINUING> 38,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,046)
<NET-INCOME> 36,945
<EPS-PRIMARY> 2.68
<EPS-DILUTED> 2.67
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
AVONDALE INDUSTRIES, INC.'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS AT THE DATES AND FOR THE PERIODS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 101,060 67,439 58,211
<SECURITIES> 0 0 0
<RECEIVABLES> 94,320 103,993 108,236
<ALLOWANCES> 0 0 0
<INVENTORY> 19,364 21,986 28,971
<CURRENT-ASSETS> 239,177 215,629 213,860
<PP&E> 268,849 274,311 282,833
<DEPRECIATION> (136,565) (137,001) (139,155)
<TOTAL-ASSETS> 383,989 365,303 370,981
<CURRENT-LIABILITIES> 89,204 100,046 99,254
<BONDS> 50,838 49,663 48,682
0 0 0
0 0 0
<COMMON> 15,956 15,962 15,963
<OTHER-SE> 198,352 169,828 177,703
<TOTAL-LIABILITY-AND-EQUITY> 383,989 365,303 370,981
<SALES> 184,625 363,088 561,049
<TOTAL-REVENUES> 184,625 363,088 561,049
<CGS> 164,497 321,615 496,167
<TOTAL-COSTS> 164,497 321,615 496,167
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,137 2,120 2,927
<INCOME-PRETAX> 11,902 24,231 36,687
<INCOME-TAX> 4,525 9,200 13,800
<INCOME-CONTINUING> 7,377 15,031 22,887
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> (2,046) (2,046) (2,046)
<NET-INCOME> 5,331 12,985 20,841
<EPS-PRIMARY> 0.37 0.91 1.49
<EPS-DILUTED> 0.37 0.90 1.48
</TABLE>
