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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
COMMISSION FILE NUMBER 0-14404
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
5501 LBJ FREEWAY, SUITE 1200
DALLAS, TEXAS 75240
214/386-3981
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 75-2085454
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $1.00 Nasdaq
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, 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. [ ]
As of , the number of shares of common stock outstanding was
. The aggregate market value of common stock (based upon the closing
price on the Nasdaq Stock Market on that date) held by nonaffiliates of the
registrant was approximately $ million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1996 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 8
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS . . . 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . 9
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. . . 10
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT . . . . . . . . . . . . . . . . . . 31
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 31
ITEM 15. SIGNATURES. . . . . . . . . . . . . . . . . . . . . . 34
2
PART I
ITEM 1. BUSINESS
GENERAL
Lone Star Technologies, Inc. (LST), a management and holding company, currently
has one principal operating subsidiary, Lone Star Steel Company (Steel), that
serves two business segments: oilfield products and services, comprised of
casing, tubing, and line pipe, that are manufactured and marketed globally to
the oil and gas drilling industry; and, industrial products that consist of
specialty tubing and flat rolled steel that are manufactured and provided to
general industrial markets. LST's consolidated revenues are not seasonal.
However, Steel's revenues are sensitive to the level of domestic drilling
activity, which is in turn dependent on the prices of oil and natural gas.
LST was incorporated in Delaware in 1986 and became the holding company of
Steel, pursuant to Steel's merger with a wholly owned subsidiary of LST. Steel
operated under federal bankruptcy protection from June 1989 to May 1991. During
May 1991, Steel emerged from bankruptcy, and a major creditor group received
19.5% of the common stock of Steel, creating a minority interest in Steel. In
1995, LST repurchased 4.95% of Steel's common stock from Steel's minority
shareholders.
In August 1988, LST acquired, for $48 million, the stock of American Federal
Bank, F.S.B. (AFB), a newly created, federally chartered savings bank. In
November 1993, LST sold the stock of AFB to Guaranty Federal Bank, F.S.B. (GFB)
for $155.7 million, of which LST received $135.7 million in cash on the sale
date and $5.0 million in November 1994. Fifteen million dollars remain in
escrow to provide for payment of claims that could be filed by GFB under the
terms of the sale agreement. The accompanying consolidated financial statements
reflect AFB as a discontinued operation.
LINES OF BUSINESS INFORMATION
In the last three years, segment revenues were as follows:
($ IN MILLIONS)
1995 1994 1993
----------- ---------- ----------
$ % $ % $ %
----- --- ----- --- ----- ---
Oilfield products and services 265.6 62 215.2 60 210.8 63
Industrial products 160.2 38 141.8 40 121.7 37
----- --- ----- --- ----- ---
Consolidated total 425.8 100 357.0 100 332.5 100
----- --- ----- --- ----- ---
----- --- ----- --- ----- ---
Additional segment information is included in Note B to the consolidated
financial statements.
OILFIELD PRODUCTS AND SERVICES. Steel manufactures, markets, stores, and
transports oil country tubular goods (OCTG) and line pipe.
OCTG manufactured by Steel includes a wide size and chemistry range of electric
resistance welded (ERW) high-quality prime casing and tubing for oil and gas
drilling and production. Casing, which represents about 80% of all OCTG tonnage
sold by Steel, is the structural retainer for the walls of oil and gas wells.
It also serves to prevent pollution of nearby water reservoirs and to prevent
contamination of a well's production. Casing is generally not removed after it
has been installed. Production tubing is installed within the casing to convey
oil and gas to the surface. Steel offers one of the widest ranges of OCTG
diameters (2 3/8" to 16 1/8") and grades produced in the industry, including
grades that have been successfully used for drilling at depths of over 30,000
feet.
Demand for OCTG is affected by drilling activity which is driven by customers'
expectations of future oil and gas prices and political factors such as energy
and trade policies. Domestic drilling activity was down 7% in 1995 from the
prior
3
year, according to the average number of rigs operating in this country as
measured by Baker Hughes. Steel's open orders for OCTG at December 31, 1995,
were down 26% from the prior year-end. However, since year-end, open orders
have increased and are now ahead of the December 1995 level. Although a
significant increase in drilling activity is not expected in 1996, a
reduction in imported OCTG could improve the characteristics of the domestic
market. Also, Steel continues its efforts to penetrate global markets.
Twelve percent of its shipments in 1995 were used outside the lower 48 United
States.
LINE PIPE manufactured by Steel ranges in diameter from 2 3/8" to 16" and is
used to gather and transport oil and gas from the well site to storage or
refining facilities. Approximately 5% of Steel's line pipe shipments were
exported in 1995.
OTHER MARKETING ARRANGEMENTS AND AGREEMENTS. Steel has expanded into other
marketing arrangements to sell steel tubular products manufactured by various
unrelated companies. These arrangements are intended to expand Steel's product
offerings without a substantial investment in plant and equipment and enhance
Steel's marketing competitiveness. These transactions are performed on both a
commission basis and through purchase and resale of the products.
OTHER SERVICES. Transportation, storage, and other services are provided by
Steel's subsidiaries.
SALES AND DISTRIBUTION. The domestic OCTG sales distribution network consists
of 12 nonexclusive distributors that maintain and deliver product inventory to
major and independent oil and gas companies that explore for oil and natural
gas. Line pipe is also sold through distributors. Internationally, OCTG is
sold through distributors and trading companies as well as directly to end
users. The largest single customer and the ten largest customers of Steel's
OCTG in 1995 accounted for 8% and 35% of total shipments, respectively. About
77% of the oil and gas wells drilled in the United States in 1995 were located
in Texas, Oklahoma, Kansas, Louisiana, and New Mexico, all within 750 miles of
Steel's mill in Lone Star, Texas. The majority of Steel's oilfield products was
sold for use in these states, as well as the Gulf of Mexico which is less than
250 miles from Steel's mill.
RAW MATERIALS AND INVENTORIES. OCTG and line pipe are generally produced to
fill specific orders and, accordingly, Steel maintains the majority of its
inventory in the form of raw materials, work-in-process, or finished goods
earmarked for specific orders. Some work-in-process and finished inventories
are maintained in order to provide flexibility in responding to customer
demands.
Steel purchases steel slabs and scrap steel for use in the manufacture of its
products. The availability of steel slabs to meet production needs remained
tight in 1995, and it was often necessary for Steel to commit to purchase slabs
90 to 150 days prior to production. Steel's principal raw material for its
internally produced steel slabs is steel scrap, which is purchased in the spot
market. The price of scrap steel and steel slabs is highly volatile and is
influenced by a number of competitive market conditions beyond the control of
Steel.
COMPETITION. OCTG and line pipe are sold in highly competitive markets, and
sales and earnings are affected by price, cost, and availability of raw
materials, oil and gas drilling activity, and general economic conditions.
Steel offers a wide range of sizes and chemistries and, based on shipment data
compiled by the American Iron & Steel Institute, Steel believes that it is one
of the largest domestic suppliers of OCTG. Users of OCTG base their purchase
decisions on four factors: availability, price, quality, and service. Steel
believes that it is competitive in all of these areas.
Two primary markets exist for OCTG, and Steel serves both. Deep critical wells
require high-performance OCTG that can sustain enormous pressure as measured by
burst strength, collapse strength, and yield strength. Both major and
independent oil companies that conduct drilling programs of this nature
emphasize quality and compliance with specific standards. Steel, with its full-
body normalized ERW manufacturing process that meets American Petroleum
Institute standards, competes with seamless OCTG in this market. Operators who
drill shallower wells generally purchase OCTG on the basis of price and
availability because wells of this nature require fewer performance
characteristics. Steel competes in this market, which is served primarily by
producers of seam-annealed ERW and seamless OCTG, with its full range of Lone
Star-Registered Trademark- products as well as with its Wildcat-TM- brand of
OCTG. Several domestic manufacturers produce limited lines of OCTG, and a
number of foreign manufacturers produce OCTG for export to the United States.
Imported OCTG accounted for approximately 15% of the supply available to the
domestic OCTG market during 1995 and 25% in 1994.
4
In 1995, several trade cases against foreign producers were resolved in favor
of domestic producers. As a result, the supply of imported OCTG in the
United States is expected to remain comparable to levels experienced in the
last half of 1995 for at least the next 12 months.
INDUSTRIAL PRODUCTS. Steel manufactures and markets specialty tubing and flat
rolled steel.
SPECIALTY TUBING includes a wide array of high-quality, custom-made steel
tubular products which require critical tolerances, precise dimensional control,
and special metallurgical properties. Steel's specialty tubing products range
in size from 7/8" to 15 1/2" in outside diameter and are made from a variety of
combinations of chemical compositions, thermal treatments, mechanical
properties, and surface finishes. The products are used in the manufacture of
automotive, construction, and farm equipment and in industrial applications such
as hydraulic cylinders, stabilizer tubes and intrusion devices, machine parts,
bearing races, downhole pump barrels, and printing rollers. Because of the wide
range of industrial applications, sales traditionally follow general domestic
economic conditions.
Steel produces most of its specialty tubing by the drawn over mandrel (DOM)
process which uses a drawbench to pull tubing through a die and over a mandrel.
Steel's use of the DOM manufacturing process enables the Company to achieve
higher critical tolerances and dimensional control than other processes. The
Company's 1,000,000 pound drawbench, the largest in the United States, also
enables the Company to manufacture larger diameter, heavier wall products and
thus access a broader market than its competitors. Moreover, Steel is the only
DOM specialty tubing manufacturer that produces its own electric arc furnace
(EAF) steel, which allows for control of the complete manufacturing process.
DOM specialty tubing order quantities are typically small (usually less than
50,000 pounds) and made to exact customer specifications. The Company's
integration of steelmaking and tube finishing allows for optimal inventory
control, combined with just-in-time customer delivery of tubes with special
steel chemistries and precise dimensional requirements.
Demand for specialty tubing products, within the traditional markets, was down
slightly in the second half of 1995; however, Steel has continued to identify
new market applications which enabled it to increase both volume and price.
Open orders were down 26% at year-end as compared to prior year-end as many
steel service centers worked to reduce their year-end inventories.
FLAT ROLLED STEEL is used by Steel in the manufacture of tubular products, and
it is also sold to fabricators of large diameter transmission pipe, storage
tanks, rail cars, and a variety of other construction and industrial products.
SALES AND DISTRIBUTION. Domestically, specialty tubing is marketed and sold
through 19 nonexclusive steel service centers and directly to end users.
Specialty tubing products have detailed design specifications and in some cases
long lead times, making annual contracts an efficient mechanism for large
purchasers. The largest single user and the ten largest customers of Steel's
specialty tubing in 1995 accounted for 2% and 16%, respectively, of total
shipments. Internationally, the majority of Steel's specialty tubing is
currently sold directly to end users. Exports accounted for approximately 13%
and 17% of Steel's specialty tubing shipments in 1995 and 1994, respectively.
Flat rolled steel products are sold directly to end users or through steel
service centers, primarily in the southwestern region of the United States.
RAW MATERIALS AND INVENTORIES. Raw materials are readily available from
multiple sources. Production is generally scheduled to meet specific orders
and, accordingly, inventory is managed to minimize the amount of finished goods
on hand. Work-in-process inventories are maintained in order to provide
flexibility in responding to customer needs.
COMPETITION. The market for specialty tubing is competitive. Currently,
however, Steel's specialty tubing sales are primarily constrained by the
capacity limitations of its facilities rather than by competitive factors.
Steel has commenced a capital expenditure program to address its specialty
tubing capacity limitations.
Based on shipment data available and other generally available market data,
Steel believes it is one of the three largest producers of DOM specialty tubing
products. Steel is the only fully integrated DOM producer in the United States.
One of Steel's drawbenches, among the largest in the world, enables it to
produce DOM products in a greater size range than
5
its competitors. Because these products are made to end-user specification
and often require just-in-time delivery, only small quantities are imported
into the United States. In contrast to the OCTG market, seamless and ERW
specialty tubing products differ in their applications. ERW is preferred for
many mechanical tubing applications because its consistent wall thickness
requires less machining in the finishing process. Seamless tubes are used
primarily in heavy gauge applications such as boiler and pressure tubing.
Flat rolled steel is sold in highly competitive markets. Sales and earnings are
affected by the cost of raw materials, use of flat rolled steel by Steel in the
manufacture of its tubular products, demand by outside customers, and general
economic conditions. Steel's market for flat rolled steel is generally
concentrated in the southwestern region of the United States where customers use
it in the manufacture of a variety of commercial and industrial products.
RESEARCH, DEVELOPMENT, AND PATENTS
Steel conducts limited research and development activities at its metallurgical
laboratory in East Texas. Its patents do not significantly affect financial
results.
EMPLOYEES
At December 31, 1995, LST and Steel employed a total of 1,696 people, of whom
1,158 were members of two unions represented by three bargaining units. The
majority of union workers are represented by the United Steelworkers of America
under a contract which expires in June 1996, and a new contract will have to be
negotiated. Management considers its relationship with the steelworkers to be
good.
FOREIGN OPERATIONS
Steel conducts no manufacturing operations outside the United States. Export
sales to destinations outside the United States were approximately $37.9
million, $25.5 million, and $20.6 million for the years 1995, 1994, and 1993,
respectively.
ENVIRONMENTAL
Steel's operating activities are governed by numerous environmental laws, which
are regulated by state and federal agencies. The three major areas of
regulation are air quality, water quality, and solid and hazardous waste
management.
RELATIONSHIP OF FEDERAL AND STATE REGULATION. The United States Environmental
Protection Agency (EPA) is responsible for implementing and enforcing federal
environmental laws. In Texas, the environmental regulatory agency is the Texas
Natural Resource Conservation Commission (TNRCC). Most federal environmental
statutes expressly provide for state assumption of responsibility when it can be
demonstrated that the state program is as stringent as the federal program;
however, the EPA retains authority to enforce the program if the state fails to
do so. Texas is authorized to implement the federal hazardous waste program
under the Resource Conservation and Recovery Act (RCRA) and the federal air
quality program under the Clean Air Act. The Texas air quality program also
requires all new or modified facilities that may emit any air contaminant to
obtain a permit which imposes limitations on each emission. Texas has not yet
been delegated authority to implement the federal water quality program under
the Clean Water Act. Therefore, dual federal and state water quality programs
exist in Texas, requiring companies such as Steel to obtain both a federal
permit and a state permit to discharge wastewater into state waters. In
addition, Texas has state environmental programs that supplement and operate
independently of the federal environmental programs. Texas has established its
own program for the regulation of municipal and industrial solid wastes under
the Texas Solid Waste Disposal Act. Steel's operations generate wastes that are
regulated as industrial solid waste under this program.
6
AIR quality is governed by the federal Clean Air Act and the Texas Clean Air
Act. The TNRCC has primary responsibility for implementing and enforcing the
federal law through the state program. The Texas State Implementation Plan
implements, maintains, and enforces the National Ambient Air Quality Standards
established by the EPA, as well as the other federal air quality programs.
Emission sources at Steel's facilities are regulated by a combination of
individual permit limitations and statewide standards. Sources which existed
before the implementation of the state permitting requirements are registered
with the TNRCC as "grandfathered sources" and are not required to obtain a
permit. If, however, a grandfathered source is modified in a manner that
increases the amount or changes the character of air contaminants emitted into
the atmosphere, it becomes subject to permitting requirements.
Steel is presently in substantial compliance with the conditions of its permits
and applicable standards.
WATER quality is governed by the federal Clean Water Act, implemented by the
EPA, and the state Water Code, implemented by the TNRCC. Steel is required to
have two separate permits to discharge wastewater from each of its outfalls: a
National Pollution Discharge Elimination System (NPDES) permit issued by the EPA
and a wastewater discharge permit issued by the TNRCC. The regulatory emphasis
on wastewater is directed at the control of effluent toxicity. Steel is also
required to have a NPDES permit to discharge storm water that is not commingled
with wastewater. Steel's storm water discharges are permitted through the EPA's
NPDES General Permit for Storm Water Discharges Associated With Industrial
Activities.
In the process of manufacturing low alloy carbon grade steel and fabricating
steel pipe and tube, Steel generates wastewater which contains certain
contaminants from the process. Steel is authorized by both a state and a
federal permit to discharge its wastewater to one of two receiving water bodies,
Ellison Creek Reservoir or Big Cypress Creek. Each permit contains effluent
limitations for the contaminants of concern that might be present in Steel's
wastewater. The effluent limitations are usually the same in both permits, but
if not, the more stringent limitations apply to Steel's wastewater. In order to
comply with these limitations, Steel treats its wastewater before discharge.
The permits require that Steel monitor on a regular basis the concentrations of
the contaminants of concern in its effluent and report the monitoring results to
the TNRCC and the EPA.
Steel's state wastewater discharge permit was renewed effective August 1, 1994,
for a five-year term. Steel is in substantial compliance with that permit.
Although the level of contaminants in the discharge occasionally exceeds the
permit limitations, Steel does not believe that these instances will have any
material consequences to Steel. The only potential issue is the possibility
that the TNRCC will amend Steel's permit to include a whole effluent toxicity
(WET) limit. WET is measured by exposing freshwater organisms, such as fathead
minnow larvae, to various concentrations of effluent for seven days and then
determining the weight and survival of the test organisms. A WET limit is a
legally enforceable limit in a permit that is based on the survival of the test
organism in a stated concentration of the effluent. Without appropriate
modifications to the standard chronic WET test method, Steel does not believe
that, based on existing data, its effluent would be in compliance with a WET
limit during the colder months of the year. The existing data indicate that a
naturally occurring pathogenic bacteria in Steel's effluent causes a failure of
the WET test when the test is performed using effluent collected during the
colder months of the year. Based upon the extensive studies conducted to date,
the test failure does not appear to be due to Steel's process. Therefore, Steel
has been engaged in discussions with the TNRCC concerning the appropriateness of
amending its permit to include a WET limit. In addition, Steel is working to
develop a modification of the standard WET test method that would be acceptable
to both the company and the TNRCC.
Steel's existing federal NPDES permit for wastewater discharges was scheduled to
expire in June 1995. However, this permit continues in effect until the EPA
takes final action on a renewal NPDES permit. On December 31, 1994, the EPA
published a notice of intent to issue Steel a renewal NPDES permit. Steel
timely filed comments on the draft permit. The EPA and Steel reached agreement
on all issues but one raised by Steel in its comments. As in the TNRCC
permitting process, the outstanding issue concerns whether the proposed WET
limit in the draft permit is legally warranted. For the reason discussed above,
Steel opposes the inclusion of a WET limit in its renewal NPDES permit. The EPA
has not yet issued Steel a final renewal NPDES permit. Steel is therefore not
certain whether the EPA will include a WET limit in its permit. Should the EPA
issue Steel a renewal NPDES permit with a WET limit, Steel plans to pursue all
of its administrative options for review and reconsideration of the WET limit.
If Steel should not prevail in its administrative challenge to a WET limit,
Steel would then consider requesting judicial review of the contested permit
condition. Steel
7
will also continue working to develop a modification of the standard WET test
method that would be acceptable to the EPA as well as the TNRCC and the company.
Should Steel successfully develop such a modified WET test method, the WET limit
issue might be resolvable without any administrative or judicial action.
Until this issue of the inclusion of a WET limit is resolved through
negotiations with the EPA and the TNRCC, development of an acceptable
modification of the standard WET test method, or final administrative or
judicial action, the need for and nature of control measures, if any, that
Steel might have to implement cannot be accurately predicted.
SOLID AND HAZARDOUS WASTE management is governed by the Texas Solid Waste
Disposal Act and RCRA. The TNRCC has primary responsibility for implementing
and enforcing the federal law through the state program.
Solid waste, some of which is now classified as hazardous, has been generated by
Steel since it began operation. As with similar mills in the industry, Steel's
EAF generates dust containing lead, chromium, and cadmium. Until 1988, Steel
disposed of the EAF dust and other wastes in on-site management units. Steel
does not store hazardous waste and no longer disposes of waste on site. Wastes
are now shipped off-site to commercial facilities for disposal or reclamation.
In the past, Steel operated solid waste management units for the storage and
disposal of nonhazardous and hazardous wastes. These sites include four land-
based RCRA waste management units and a fifth site which predates RCRA. Steel
has submitted to the TNRCC a closure plan for the site not subject to RCRA (a
pond previously used for storing an acidic waste) and plans to close it as a
nonhazardous facility. Two sites subject to RCRA (the plant's landfill and a
site that received air pollution sludge) have been closed as hazardous waste
landfills in accordance with requirements of RCRA and corresponding state
regulations. These sites are subject to post-closure care obligations,
including groundwater monitoring, for up to 30 years. The remaining two sites
have been closed by a combination of removal ("clean closure") and conversion to
nonhazardous landfills in accordance with requirements of RCRA and
corresponding state regulations. Steel is seeking to limit the duration of
future post-closure groundwater monitoring at these facilities based on the
clean closure and nonhazardous status. The TNRCC will issue Steel a permit for
the facilities requiring post-closure care. Steel estimates the actual cost of
post-closure care to be approximately $1 million.
ITEM 2. PROPERTIES
Steel conducts its operations at facilities on a 2,000-acre site in East Texas.
The original facilities, constructed in the 1940's, have been expanded and
modernized, and include two EAF's with a combined capacity of approximately
500,000 ingot tons per year; two rolling mills, a "two-high" mill that rolls the
EAF ingots into slabs and a "four-high" single stand reversing Steckel mill that
produces flat rolled coils; two pipe welding mills; six drawbenches, including
the largest specialty tubing drawbench in the United States; heat treating
facilities; numerous types of ultrasonic and electromagnetic testing and
inspection equipment; finishing facilities at which tubular goods are threaded
and couplings are applied; and, various support facilities including a shortline
railroad and other transportation and storage facilities. Steel's and LST's
headquarters are located in leased facilities in Dallas, Texas.
Steel's annual productive capacity approximates 425,000 slab tons, 1,250,000
coil tons, and 1,000,000 pipe tons. In 1995, the EAF and specialty tubing
facilities operated at near 100% of capacity, while the rolling mills and pipe
mills generally operated at 60% or less of capacity.
In addition to the manufacturing facilities, Steel owns 10,500 acres in Texas
and 3,000 acres in Oklahoma which were purchased primarily for iron ore or coal
reserves, and Steel owns mineral interests on an additional 12,000 acres in
Oklahoma and 60,000 acres in Texas. No minerals have been recovered from these
properties for many years because their use is no longer required in Steel's
operations and significant portions of this land are held for sale. Steel sold
approximately 9,400 acres in East Texas during August 1995.
8
ITEM 3. LEGAL PROCEEDINGS
LST and its subsidiaries are parties to a number of lawsuits and controversies
which are not discussed in this document. As to the legal proceedings not
discussed, management does not believe, based upon analysis of known facts and
circumstances and reports from legal counsel, that any such matter could have a
material adverse effect upon LST and its subsidiaries taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
LST's Common Stock trades on Nasdaq National Market System under the symbol
LSST. The following table summarizes the range of trading prices by quarter for
the last two years (in $):
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
1995 High 8 9 1/8 10 1/4 11 1/4
Low 6 1/2 7 1/8 7 5/8 7 1/2
1994 High 9 1/8 8 1/2 7 1/4 7 7/8
Low 7 3/8 6 3/4 6 5 3/4
As of March 15, 1996, LST had approximately 5,000 common shareholders of record.
LST has paid no dividends on its Common Stock since becoming a public company.
In 1988, LST sold one million shares of Series A nonvoting convertible
cumulative preferred stock, $1.00 par value (Series A Preferred stock), for
$49.6 million in cash. The Series A Preferred stock carried a $50.00 per share
liquidation preference, plus any unpaid dividends, and became redeemable in cash
at the option of LST after September 1993. Dividends were not declared,
accrued, or paid, and cumulative dividends in arrears at January 1, 1994,
approximated $18.8 million. In February 1994, LST redeemed this stock and
extinguished all dividend obligations related to it for $51.7 million.
9
ITEM 6. SELECTED FINANCIAL DATA
($ IN MILLIONS, EXCEPT SHARE AND EMPLOYEE DATA)
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
Revenues 425.8 357.0 332.5 277.6 318.9
Oilfield revenues 265.6 215.2 210.8 171.0 218.3
Industrial revenues 160.2 141.8 121.7 106.6 100.6
Gross earnings 26.2 12.8 6.3 8.7 28.7
Selling, general and
administrative expenses (14.6) (16.2) (16.9) (17.6) (27.8)
----- ----- ----- ----- -----
Operating earnings (loss) 11.6 (3.4) (10.6) (8.9) 0.9
Interest income 5.8 4.3 0.9 0.3 3.9
Interest expense (8.7) (8.2) (7.0) (5.8) (4.9)
Other income, net 2.4 2.5 0.3 2.7 1.9
Minority interest (1.5) 1.0 2.3 1.3 0.2
----- ----- ----- ----- -----
Earnings (loss) from
continuing operations 9.6 (3.8) (14.1) (10.4) 2.0
Net earnings (loss) 9.6 1.2 (7.2) 0.1 2.0
Net earnings (loss) per
common share 0.46 (0.04) (0.35) 0.01 0.10
Shares outstanding (millions) 20.5 20.4 20.3 20.3 20.3
Current assets 194.5 180.8 235.6 87.0 72.5
Total assets 357.7 345.7 411.2 364.1 341.0
Current liabilities 53.5 53.4 57.9 41.5 40.5
Total liabilities 255.5 249.6 267.8 207.2 184.2
Shareholders' equity 102.2 96.1 143.4 156.9 156.8
Capital expenditures 14.9 7.0 5.8 11.5 12.4
Depreciation 11.4 11.4 11.0 9.4 8.2
Employees 1,696 1,592 1,688 1,560 1,392
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
LST's revenues are derived from Steel's two business segments: oilfield
products and services and industrial products.
PRODUCTS AND MARKETS. The oilfield products business includes the manufacture
and marketing of OCTG, the casing and tubing used in oil and gas well drilling
and production, and line pipe that is used to gather and transport oil and gas
from the well site to storage or refining facilities. Steel is one of the
largest domestic producers and suppliers of OCTG, based on data compiled by the
American Iron & Steel Institute. OCTG represents three-fourths of Steel's
oilfield products volume as measured in tonnage, and exports have ranged from
approximately 7% to 13% of this segment's shipments during the last three years.
Demand for oilfield products is generally affected by customers' expectations of
future oil and gas prices and political factors such as energy and trade
policies. A key indicator of domestic demand is the average number of drilling
rigs operating in the United States which, during the last three years, has been
historically low. According to Baker Hughes, the average United States rig
counts in 1995, 1994, and 1993 were 723, 775, and 755, respectively. Demand is
also affected by the amount of oilfield products imported into this country as
well as available industry inventories. Imported OCTG has represented
approximately 14% of the total supply in 1995, down from 24% in 1994 and 1993.
In 1995, the United States Department of Commerce prevailed in trade cases
instituted against several foreign manufacturers alleging they were being
illegally subsidized on the manufacture of tubular goods and were held to have
dumped their products in the United States market, which resulted in the
imposition of protective tariffs on imports from certain countries. As
10
a result of reduced import competition, the supply of imported OCTG in the
United States is expected to remain comparable to lower levels experienced in
the last half of 1995 for at least the next 12 months. The effect of
available inventory, which is believed to be low, has been insignificant in
the marketplace in the past three years. The volatility of oil and gas
prices creates uncertainty with respect to the timing and extent of increased
activity in the energy sector. This affects customer confidence in the longer
term outlook for energy prices and as a result some drilling projects may be
deferred. However, international markets strengthened considerably in 1995
as long-postponed exploration and production projects were started. This
trend is expected to continue in 1996 as companies engaged in exploration and
production continue to seek large reserves in the international arena.
Steel's industrial products segment includes two product groups: specialty
tubing and flat rolled steel. Specialty tubing consists of a wide array of
high-quality, custom-made steel tubular products requiring critical tolerances,
precise dimensional control, and special metallurgical properties. These
products are used in the further manufacture of automotive, construction, and
other industrial equipment such as hydraulic cylinders, stabilizer tubes and
intrusion devices, and machine parts.
Steel's primary emphasis in the industrial products segment is the specialty
tubing market. Specialty tubing is used in a wide range of industrial
applications and demand is therefore sensitive to general economic conditions.
Demand was down slightly in the second half of 1995; however, Steel has
continued to identify new market applications which enabled it to increase both
volume and price. Steel is one of the largest domestic producers of specialty
tubing, based on shipment data compiled by the Steel Tube Institute.
International shipments of specialty tubing were 15%, 17%, and 11% of shipments
in 1995, 1994, and 1993, respectively.
Steel's participation in the flat rolled steel commodity market is generally
concentrated in the southwestern region of the United States and is affected by
factors such as price, capacity utilization, and raw material costs. Flat
rolled steel produced by Steel either is further processed by Steel in the
manufacture of tubular products or shipped to customers for the manufacture of a
variety of commercial and industrial products. Flat rolled steel is sold in
highly competitive markets, with price and availability primarily determining
customer purchase decisions.
MANUFACTURING. The manufacture of Steel's products is capital intensive.
Utilization rates are generally below capacity at Steel's manufacturing
facilities, and therefore, Steel has downsized its operations over the past ten
years, adjusting its cost structure to reflect current production levels.
However, there does exist excess capacity that may be used in the future as
needed. Steel is also expanding its specialty tubing facilities, a product line
that has been subject to production constraints. The level of production volume
through Steel's various facilities has a significant effect on the cost of
manufacturing. Key variable costs include costs of raw materials, including
scrap steel, steel slabs, electricity, and natural gas.
As part of Steel's overall capital outlays, LST and the minority shareholders of
Steel have agreed to fund up to $28 million for a capital expenditure program
during 1995 and 1996. Included in the program is a significant expansion of
Steel's capacity to manufacture specialty tubing products. The balance of the
expenditures is being used to upgrade Steel's capability to manufacture tubular
products for use in the energy sector. At the end of 1995, $9.8 million had
been funded for this capital expenditure program.
RESULTS OF OPERATIONS
Consolidated revenues reported in the statements of earnings are as follows:
($ IN MILLIONS)
1995 1994 1993
---------- ---------- ----------
$ % $ % $ %
----- --- ----- --- ----- ---
Oilfield products and services 265.6 62 215.2 60 210.8 63
Industrial products 160.2 38 141.8 40 121.7 37
----- --- ----- --- ----- ---
Consolidated total 425.8 100 357.0 100 332.5 100
----- --- ----- --- ----- ---
----- --- ----- --- ----- ---
11
1995 COMPARED WITH 1994
NET REVENUES increased 19% to $425.8 million in 1995 from $357.0 million in
1994. Net revenues of oilfield products increased 23% to $265.6 in 1995 from
$215.2 million in 1994. Shipment volumes and prices increased in 1995 from 1994
levels by 17% and 5%, respectively. Although the average domestic rig count
declined to 723 in 1995 from 774 in 1994, demand for Steel's OCTG was favorably
impacted due to the reduction in imported OCTG caused by the imposition of
protective tariffs on imported products from certain countries in 1995, and by
the types of drilling being conducted, such as deep water drilling in the Gulf
of Mexico, which increased the industry's requirements for larger diameter,
higher grade products for which Steel is most competitive. Export sales of
oilfield products also increased in 1995 from 1994 as international markets
strengthened from long-postponed exploration and production projects that were
started.
Industrial products net revenues increased by 13% to $160.2 million in 1995 from
$141.8 million in 1994. This comprised a 22% increase in specialty tubing net
revenues and was partially offset by a 4% reduction in flat rolled revenues.
For the specialty tubing product group, 1995 volume and price increased by 16%
and 8%, respectively. These increases are generally attributable to the
improvement in the domestic general economy. Flat rolled shipments were down 9%
in volume, although a price increase of 4% was realized for 1995 over 1994.
GROSS EARNINGS improved 105% to $26.2 million in 1995 from $12.8 million in
1994. This was primarily attributable to increased shipments and prices of
oilfield and specialty tubing products. However, increases in raw materials,
principally a 9% increase in the cost of scrap steel and steel slabs, offset
some of these margin improvements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased 10% to $14.6 million in
1995 from $16.2 million in 1995, primarily due to lower legal and consulting
fees.
INTEREST INCOME was $1.5 million more in 1995 than in 1994 as short-term
interest rates were higher on the average in 1995 than in 1994.
INTEREST EXPENSE for 1995 increased to $8.7 million from $8.2 million in 1994,
reflecting higher interest rates in 1995 on Steel's revolving credit facility.
OTHER INCOME, NET. Net other income in 1995 of $2.4 million included $3.0
million from the gain on sale of approximately 9,400 acres of land in East
Texas. Net other income in 1994 was $2.5 million and included $1.3 million from
the gain on sale of working interests in oil and gas properties.
NET EARNINGS and earnings from continuing operations for 1995 were both $9.6
million, or $0.46 earnings per share. For 1994, there was a loss from
continuing operations of $3.8 million, or $0.19 loss per share. After a $5.0
million gain on sale of discontinued operations, net earnings in 1994 were $1.2
million, and after a $0.10 per share downward adjustment for the redemption of
preferred stock, the 1994 amount available to common shareholders was a $0.04
net loss per share.
1994 COMPARED WITH 1993
NET REVENUES in total increased 7% to $357.0 million in 1994 from $332.5 million
in 1993. Oilfield products and services revenues increased 2% to $215.2 in 1994
from $210.8 million in 1993. Both 1994 shipment volumes and prices were
relatively flat compared with 1993 levels. This corresponds with the domestic
average rig count remaining relatively stable at 775 in 1994 versus 755 in 1993.
Industrial products net revenues increased 17% to $141.8 million in 1994 from
$121.7 million in 1993. This included a 30% increase in specialty tubing net
revenues, reduced by a 4% decrease in flat rolled net revenues. For the
specialty tubing product group, 1994 volume increased 25% and prices improved
5%. These increases were due to improvement in the domestic general economy.
Flat rolled shipments were down 14% in volume, although prices improved 13% in
1994 over 1993.
12
GROSS EARNINGS increased 103% to $12.8 million in 1994 from $6.3 million in
1993. This was due to an improvement in revenue levels and a better mix of
higher margin products, but was offset by increased steel costs of 9% in 1994
compared to 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to $16.2 million in 1994
from $16.9 million in 1993.
INTEREST INCOME in 1994 was $4.3 million compared to $0.9 million in 1993 and
was due to earning a full year of interest on investments resulting from the
sale of AFB in November 1993.
INTEREST EXPENSE in 1994 increased to $8.2 million from $7.0 million in 1993,
primarily due to higher average borrowings under Steel's revolving credit
agreement.
OTHER INCOME, NET. Net other income of $2.5 million in 1994 primarily included
nonrecurring gains on sales of Steel's nonstrategic assets. In 1993, there
were fewer sales of such assets.
NET EARNINGS for 1994 were $1.2 million, which included a $5.0 million gain on
sale of discontinued operations. The net loss for 1993 was $7.2 million, which
included $16.5 million for earnings on and gain on sale of AFB's discontinued
operations, and an extraordinary charge of $9.6 million to record Steel's
obligation under the Coal Industry Retiree Health Benefit Act of 1992 to fund
medical and death benefits of assigned retirees and eligible dependents of the
United Mine Workers of America.
On a per share basis, the loss from continuing operations was $0.19 and $0.69
per share for 1994 and 1993, respectively. After adjusting for discontinued
operations, the extraordinary item, and the 1994 $0.10 adjustment for the
redemption of preferred stock, the net loss available to common shareholders was
$0.04 and $0.35 per share for 1994 and 1993, respectively.
Prior to the 1993 sale, AFB earned $21.2 million. As a result of recognizing
only the $135.7 million in proceeds received at the time of the sale, LST
experienced a loss of $4.7 million on the disposition that reduced the reported
1993 earnings from discontinued operations to $16.5 million. The remaining $20
million in sale proceeds was placed in escrow to provide for possible future
claims by GFB that are permitted under the sale agreement. In 1994, LST
received $5 million of the escrowed funds, and $15 million remains in escrow
subject to contested pending claims.
FINANCIAL CONDITION AND LIQUIDITY
LST has no direct business operations other than Steel or significant sources of
cash other than from short-term investments or the sale of securities. Steel is
restricted from paying cash dividends under terms of its revolving credit
agreement; however, LST is reimbursed by Steel for a portion of its operating
costs as provided by its cost-sharing agreement with Steel.
In November 1993, LST sold the stock of AFB, one of its operating subsidiaries,
to Guaranty Federal Bank, F.S.B. (GFB). The accompanying consolidated financial
statements have been restated to reflect AFB as a discontinued operation. The
sale price was $155.7 million; of that, LST received $135.7 million in cash on
the date of the sale and $5 million in November 1994 and $15 million remains in
escrow to pay for certain claims that may be made by GFB pursuant to the sale
agreement. To date, LST has not paid any claims, but approximately $6 million
in claims are pending.
At December 31, 1995, LST had available cash and short-term investments of $72.6
million.
Steel has embarked on a capital expenditure program for the years 1995 through
1997 that is designed to increase the productive capacity for specialty tubing
and make other improvements that will lower operating costs and improve the
quality and precision of Steel's production process. As part of Steel's overall
capital outlays, in November 1994, LST and certain minority shareholders of
Steel agreed to fund up to $23 million for the capital expenditure program. In
October 1995, the minority shareholders agreed to increase this funding up to
$28 million. Steel issues 6% cumulative convertible preferred stock to its
participating shareholders as funds are advanced to finance the program. The
Steel preferred stock
13
to be issued to LST and the other participating shareholders has a designated
value equal to the amount of the funds advanced and pays quarterly dividends
at the rate of 6% per year. The preferred stock is required to be redeemed
by Steel, unless earlier redeemed or converted, on January 3, 2002, in cash,
at the designated value plus any unpaid dividends. Prior to redemption of the
stock, dividends may be paid in cash, although currently prohibited by the
terms of the revolving credit agreement, or in additional preferred shares,
which is permitted. To date, quarterly dividends have been paid in
additional preferred shares.
These preferred shares are convertible into Steel common stock prior to
redemption at the rate of one share of common stock for each $10,000 of
designated value (subject to antidilution provisions).
In addition, as a result of an earlier unrelated transaction, LST holds warrants
to purchase 241.5 shares of Steel common stock, and other Steel shareholders
hold warrants to purchase 58.5 shares for $33,358 per share (subject to
antidilution provisions). The warrants are exercisable at any time until
December 31, 1998.
Steel presently has a total of 1,000 shares of common stock outstanding. In
November 1995, LST purchased for $1.65 million 49.5 shares of Steel from certain
minority holders. This increased LST's ownership percentage of Steel to 85.45%.
Depending upon warrant exercises and preferred share conversions, this
percentage could change.
LST periodically purchases steel slabs which are consigned to Steel for use in
its production process and thereby affords Steel somewhat longer payment periods
for this raw material. Steel pays LST as the slabs are used or within 90 days,
whichever occurs first. This program's structure is consistent with those
previously established with third parties. During 1995, LST's slab purchases
amounted to approximately $73.1 million.
It is currently anticipated that the remainder of the proceeds from the sale of
AFB will be used by LST for general corporate purposes, which could include
further investment in Steel or such other uses as may reasonably be determined
by the Board of Directors to be in the best interest of LST and its
shareholders. LST believes it has and will continue to have adequate funds to
meet its operating requirements.
Steel requires capital primarily to fund general working capital needs and
capital expenditures. Principal sources of funds include cash generated by
operations, borrowings, and equity financing.
Steel has a revolving credit agreement under which it can borrow the lesser of
$70.0 million or an amount based upon eligible accounts receivable and
inventories that secure the borrowings. The credit line will increase by $2.5
million in March of each of the next three years. At December 31, 1995,
borrowings totaled $45.1 million on an available borrowing base of $69.6
million. The interest rate on borrowings was prime plus 0.75% which, at year-
end, was 9.5%. Steel also pays a fee of 0.5% on the unused portion of the
credit facility. The agreement, which extends to March 1999, contains various
restrictive covenants, including requirements to maintain minimum net worth
levels and meet other financial ratios.
In March 1993, Steel also borrowed $4.6 million at 8.08% to be repaid in equal
monthly installments through March 1997.
Steel believes that funds generated by operations, its borrowing capacity under
the revolving credit agreement, and capital contributions from its shareholders
will provide the liquidity necessary to fund its cash requirements during 1996.
Steel's defined benefit pension plans cover its bargaining unit employees. At
December 31, 1995, the projected benefit obligation exceeded the plans' assets
by $37.9 million. Steel's annual pension expense, including amortization of the
excess obligation, approximates $4.6 million.
The Coal Industry Retiree Health Benefit Act of 1992 required Steel to fund
future medical and death benefits of certain UMWA retirees and dependents. An
extraordinary charge of $9.6 million, net of minority interest, was recognized
in 1993 to reflect future payments which are assessed annually. The 1995
payment amounted to approximately $.5 million, and the 1994 payment amounted to
approximately $1.0 million. Steel is making these payments under protest and
has filed suit in Federal District Court.
14
Steel's operations are subject to restrictive environmental compliance and
permitting requirements of various governmental agencies that include the
TNRCC and the EPA. Steel has entered into specific agreements with these
agencies to conduct numerous environmental studies and to develop plans to
ensure continuous compliance with applicable laws and regulations. Steel
believes that the cost of maintaining compliance with environmental
requirements will fall within its contemplated operating and capital
expenditure plans, averaging $2-$3 million annually in the foreseeable future.
The matters discussed or incorporated by reference in this Report on Form
10-K that are forward-looking statements involve risks and uncertainties
including, but not limited to, economic conditions, product demand and
industry capacity, competitive products and pricing, manufacturing
efficiencies, availability of raw materials and critical manufacturing
equipment, the regulatory and trade environment, and other risks indicated in
filings with the Securities and Exchange Commission.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flows, for the years ended
December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Earnings, for the years ended
December 31, 1995, 1994, and 1993 . . . . . . . . . . . . . . . . . . 18
Consolidated Balance Sheets at December 31, 1995 and 1994. . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 20
Schedule I - Condensed Financial Information of Registrant . . . . . . 30
15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Lone Star Technologies, Inc. (LST):
We have audited the accompanying consolidated balance sheets of LST (a
Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of earnings, shareholders' equity, and
cash flows for the three years ended December 31, 1995. These financial
statements and the schedule referred to below are the responsibility of LST's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of LST and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the three years ended December 31,
1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements is presented for the purpose
of complying with the Securities and Exchange Commission's rules and is not a
part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
[SIGCUT]
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 30, 1996
16
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- -------- -------
Beginning cash and cash equivalents $ 41.8 $140.4 $ 11.5
------ ------ ------
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) from continuing operations
before income tax 9.6 (3.8) (14.1)
Minority interest in Steel 1.5 (1.0) (2.3)
Depreciation and amortization 11.4 11.4 11.0
Accounts receivable, net (9.3) (10.8) (6.2)
Current inventories, net (14.3) 7.0 (13.9)
Accounts payable and accrued liabilities - (4.6) 16.4
Other (3.7) (0.4) (6.2)
------ ------ ------
NET CASH USED BY OPERATING ACTIVITIES (4.8) (2.2) (15.3)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14.9) (7.0) (5.8)
Short-term investments 8.4 (41.0) -
Sale of discontinued operations - 5.0 135.7
Proceeds from sale of assets 4.5 2.0 (0.6)
------ ------ ------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (2.0) (41.0) 129.3
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under revolvoing
credit agreement 6.1 (2.8) 10.8
Redemption of Series A Preferred stock and
payment of dividend - (51.7) -
Installment note borrowing - - 4.6
Installment note repayment (1.2) (1.0) (0.8)
Minority interest contributions for
Preferred stock in Steel 1.0 - -
Acquisition of minority interest (1.6) - -
Issuance of common stock 0.7 0.1 0.3
------ ------ ------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 5.0 (55.4) 14.9
------ ------ ------
Net increase (decrease) in cash and cash
equivalents (1.8) (98.6) 128.9
------ ------ ------
ENDING CASH AND CASH EQUIVALENTS $ 40.0 $ 41.8 $140.4
------ ------ ------
------ ------ ------
See accompanying notes.
17
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except share data)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- -------- -------
Net revenues $ 425.8 $ 357.0 $ 332.5
Cost of goods sold (399.6) (344.2) (326.2)
------- ------- -------
Gross earnings 26.2 12.8 6.3
Selling, general, and administrative expenses (14.6) (16.2) (16.9)
------- ------- -------
Operating earnings (loss) 11.6 (3.4) (10.6)
Interest income 5.8 4.3 0.9
Interest expense (8.7) (8.2) (7.0)
Other income, net 2.4 2.5 0.3
Minority interest in Steel (1.5) 1.0 2.3
------- ------- -------
Earnings (loss) from continuing operations
before income tax 9.6 (3.8) (14.1)
Income tax - - -
------- ------- -------
Earnings (loss) from continuing operations 9.6 (3.8) (14.1)
Earnings from and gain on sale of
discontinued operations - 5.0 16.5
------- ------- -------
Earnings before extraordinary item 9.6 1.2 2.4
Extraordinary item - - (9.6)
------- ------- -------
NET EARNINGS (LOSS) $ 9.6 $ 1.2 $ (7.2)
------- ------- -------
------- ------- -------
Per common share:
Earnings (loss) from continuing operations $ 0.46 $ (0.19) $ (0.69)
Earnings from and gain on sale of
discontinued operations - 0.25 0.81
------- ------- -------
Earnings before extraordinary item 0.46 0.06 0.12
Extraordinary item - - (0.47)
Adjustment for redemption of Series A
Preferred stock - (0.10) -
------- ------- -------
NET EARNINGS (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 0.46 $ (0.04) $ (0.35)
------- ------- -------
------- ------- -------
See accompanying notes.
18
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
DECEMBER 31,
-----------------
1995 1994
------ ------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 40.0 $ 41.8
Short-term investments 32.6 41.0
Accounts receivable, net 64.2 54.9
Current inventories, net 55.7 41.4
Other current assets 2.0 1.7
------ ------
TOTAL CURRENT ASSETS 194.5 180.8
Property, plant, and equipment, net 132.8 130.7
Other noncurrent assets 30.4 34.2
------ ------
TOTAL ASSETS $357.7 $345.7
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 33.0 $ 31.2
Accrued liabilities 19.2 21.0
Current portion of long-term debt 1.3 1.2
------ ------
Total current liabilities 53.5 53.4
------ ------
Long-term debt 95.4 90.6
Postretirement benefit obligations 46.1 42.0
Other noncurrent liabilities 48.8 49.8
Minority interest in Steel 11.7 13.8
------ ------
TOTAL LIABILITIES $255.5 $249.6
------ ------
Commitments and Contingencies (See Note J) - -
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value (authorized:
10,000,000 shares, issued: none) - -
Common stock, $1 par value (authorized:
40,000,000 shares, issued: 20,556,816 and
20,460,686 respectively) 20.5 20.4
Capital surplus 159.5 158.9
Minimum pension liability adjustment (7.7) (3.5)
Retained deficit (69.2) (78.8)
Treasury stock (48,616 shares), at cost (0.9) (0.9)
------ ------
TOTAL SHAREHOLDERS' EQUITY 102.2 96.1
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $357.7 $345.7
------ ------
------ ------
See accompanying notes.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Technologies, Inc. (LST) is a management and holding company whose
principal operating subsidiary, Lone Star Steel Company (Steel), manufactures
and markets products and services to the oil and gas drilling industry and the
general industrial sector.
ACCOUNTING POLICIES - NOTE A
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of LST and its subsidiaries. American Federal Bank, F.S.B. (AFB) is
presented as a discontinued operation due to its sale in November 1993.
Intercompany transactions are eliminated in consolidation.
INVESTMENTS IN DEBT SECURITIES. LST's cash equivalents include U.S. government
debt obligations and corporate debt obligations rated A-1, P-1 or higher with
original maturities of less than three months. Short-term investments consist
of U.S. government debt obligations with original maturities of up to one year.
Investments are classified as held-to-maturity and recorded at cost or
classified as held for sale or trading securities and recorded at market value.
LST's cash equivalents and short-term investments are classified as held-to-
maturity because LST has the intent and ability to hold them to maturity. At
December 31, 1995, LST's carrying amounts of cash equivalents and short-term
investments approximated market value. LST does not invest in or hedge
exposures through the use of derivative financial instruments. At December 31,
1995, investments in debt securities at amortized cost consisted of $62.3
million in U.S. government debt obligations and $10.3 million in corporate debt
obligations.
INVENTORIES of Steel are stated at the lower of cost (principally last-in,
first-out "LIFO") or market value and include raw materials, labor, and
overhead. Inventories at LST are stated at the lower of cost (principally
first-in, first-out "FIFO") or market value and consist of steel slabs.
PROPERTY, PLANT, AND EQUIPMENT are stated at cost. Depreciation is provided on
the straight-line method.
INCOME TAXES. LST files a consolidated federal income tax return. LST
utilizes an asset and liability approach for financial accounting and income tax
reporting. Deferred tax liabilities or assets are recognized for the estimated
future tax effects attributable to temporary differences and carryforwards and
are adjusted whenever tax rates or other provisions of income tax statutes
change.
MINORITY INTEREST. Minority ownership in Steel is included in the liabilities
section of LST's consolidated balance sheets, and results are adjusted in the
consolidated statements of earnings to reflect the participation of minority
ownership in Steel's earnings or losses.
USE OF ESTIMATES. Preparation of the consolidated 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, disclosures of contingent assets and liabilities, and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
20
LINES OF BUSINESS AND CURRENT OPERATING ENVIRONMENT - NOTE B
Steel manufactures and markets steel products for the oil and gas industry and
the general industrial sector. Oil and gas industry products include casing and
tubing, used in the drilling and production of wells, and line pipe, used for
the transmission of oil and natural gas. OCTG and line pipe sales are greatly
impacted by the level of domestic oil and gas drilling, which in turn is
primarily dependent on oil and natural gas prices. Because of the volatility of
both prices and drilling activity as well as other factors, demand for these
steel products can be subject to significant fluctuations. General industrial
products include specialty tubing and flat rolled steel. This sector is more
diversified, and sales traditionally follow general domestic economic
conditions.
Steel's primary manufacturing facilities are located in East Texas. Raw
materials and supplies, principally scrap steel and steel slabs, used in the
manufacture of the Company's products have historically been readily available
from various competitive sources. The manufacture of these products uses
several common facilities and shares administrative support. Accordingly,
certain costs and assets are allocated and may not reflect each line of business
as if it were operated separately.
YEARS ENDED DECEMBER 31,
($ IN MILLIONS; UNAUDITED)
1995 1994 1993
------- ------- -------
OILFIELD PRODUCTS AND SERVICES
Net revenues $265.6 $215.2 $210.8
Operating losses (5.4) (12.1) (13.4)
Identifiable assets 169.2 149.2 162.8
Capital expenditures 6.9 4.3 3.8
Depreciation and amortization $ 7.3 $ 7.1 $ 7.3
INDUSTRIAL PRODUCTS
Net revenues $160.2 $141.8 $121.7
Operating earnings 15.7 8.9 4.3
Identifiable assets 96.9 91.5 86.6
Capital expenditures 8.0 2.7 2.0
Depreciation and amortization $ 4.1 $ 4.3 $ 3.7
CORPORATE AND OTHER NON-SEGMENTS
Net revenues $ 0.0 $ 0.0 $ 0.0
Operating earnings (loss) 1.3 (0.2) (1.5)
Identifiable assets $ 91.6 $105.0 $161.8
TOTAL FROM CONTINUING OPERATIONS
Net revenues $425.8 $357.0 $332.5
Operating earnings (loss) 11.6 (3.4) (10.6)
Total assets 357.7 345.7 411.2
Capital expenditures 14.9 7.0 5.8
Depreciation and amortization $ 11.4 $ 11.4 $ 11.0
Steel's principal market is domestic, although the Company also sells into
international markets. The majority of sales of pipe products occur through
networks of sales distributors, although some pipe sales and most flat rolled
steel sales are made directly to end users. Sales to the two largest
distributors represented approximately 12% and 10% of total 1995, 1994, and
1993 revenues. Direct foreign revenues as a percent of total revenues were
approximately 9% of the total in 1995, 7% in 1994, and 6% in 1993.
Of Steel's total labor force, 68% are represented by three collective
bargaining agreements. One of these agreements, representing 61% of the
total labor force, will expire in June 1996.
21
ADDITIONAL BALANCE SHEET INFORMATION - NOTE C
($ IN MILLIONS)
1995 1994
------- -------
INVENTORIES
Finished goods $ 35.2 $ 28.6
Work in process 46.7 36.2
Raw materials 3.1 3.5
Materials, supplies and other 24.6 23.0
------- -------
Total inventories before LIFO valuation reserve 109.6 91.3
Reserve to reduce inventories to LIFO value (43.7) (39.7)
------- -------
Total inventories 65.9 51.6
Amount included in other noncurrent assets (10.2) (10.2)
------- ------
Net current inventories $ 55.7 $ 41.4
------- -------
------- -------
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements $ 11.6 $ 12.0
Buildings, structures, and improvements 12.9 12.4
Machinery and equipment 260.4 249.8
Construction in progress 8.8 7.0
------- -------
Total property, plant, and equipment 293.7 281.2
Less accumulated depreciation and amortization (160.9) (150.5)
------- -------
Property, plant, and equipment, net $ 132.8 $ 130.7
------- -------
------- -------
OTHER NONCURRENT ASSETS
Funds held in escrow $ 15.0 $ 15.0
Inventory (supplies and spare parts) 10.2 10.2
Other 5.2 9.0
------- -------
Total other noncurrent assets $ 30.4 $ 34.2
------- -------
------- -------
ACCRUED LIABILITIES
Accrued compensation $ 6.4 $ 6.1
Property taxes 3.1 3.8
Warranty reserves 2.1 2.4
Environmental reserves 1.0 2.0
Pension obligations 2.0 1.4
Other 4.6 5.3
------- -------
Total accrued liabilities $ 19.2 $ 21.0
------- -------
------- -------
OTHER NONCURRENT LIABILITIES
Environmental reserves $ 15.2 $ 14.7
UMWA obligations 10.0 10.4
Deferred gain on sale of discontinued operations 15.0 15.0
Other 8.6 9.7
------- -------
Total other noncurrent liabilities $ 48.8 $ 49.8
------- -------
------- -------
Accounts receivable is stated net of allowance for doubtful accounts of $1.5
million and $1.9 million at December 31, 1995 and 1994, respectively.
Approximately $97.6 million and $78.8 million of total inventories before
LIFO valuation reserves were accounted for on the LIFO basis at December 31,
1995 and 1994, respectively. Non-LIFO inventories are stated at the lower of
average cost or market. The total inventories before LIFO valuation reserves
approximate replacement cost of the inventories. During 1994, a reduction in
inventory resulted in the depletion of previous LIFO inventory layers. The
financial effect of this reduction was not significant to net results.
22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - NOTE D
($ IN MILLIONS)
----------------------------------------------------------------------
MINIMUM
SERIES A PENSION
PREFERRED COMMON CAPITAL LIABILITY RETAINED TREASURY
STOCK STOCK SURPLUS ADJUSTMENT (DEFICIT) STOCK TOTAL
--------- ------ ------- ---------- --------- --------- -----
Balance, December 31, 1992 49.6 20.4 158.5 - (70.7) (0.9) 156.9
Net loss - - - - (7.2) - (7.2)
Employee benefit plan
stock issuance - - 0.3 - - - 0.3
Pension liability adjustment -. -. -. (6.6) -. -. (6.6)
----- ---- ----- ---- ----- ---- -----
Balance, December 31, 1993 49.6 20.4 158.8 (6.6) (77.9) (0.9) 143.4
Employee benefit plan
stock issuance - - 0.1 - - - 0.1
Pension liability adjustment - - - 3.1 - - 3.1
Redemption of preferred stock (49.6) - - - (2.1) - (51.7)
Net earnings -. -. -. -. 1.2 -. 1.2
----- ---- ----- ---- ----- ---- -----
Balance, December 31, 1994 - 20.4 158.9 (3.5) (78.8) (0.9) 96.1
Employee benefit plan
stock issuance - 0.1 0.6 - - - 0.7
Pension liability adjustment - - - (4.2) - - (4.2)
Net earnings -. -. -. -. 9.6 -. 9.6
----- ---- ----- ---- ----- ---- -----
Balance, December 31, 1995 -. 20.5 159.5 (7.7) (69.2) (0.9) 102.2
----- ---- ----- ---- ----- ---- -----
----- ---- ----- ---- ----- ---- -----
PREFERRED STOCK. In 1988, LST sold one million shares of Series A nonvoting
convertible cumulative preferred stock, $1.00 par value (Series A Preferred
stock) for $49.6 million. Dividends were not declared, accrued, or paid, and at
January 1, 1994, the cumulative dividends in arrears approximated $18.8 million.
In February 1994, LST redeemed the Series A Preferred stock and extinguished all
dividend obligations related to it for $51.7 million. Earnings per share in
1994 were adjusted downward by $0.10 to reflect the $2.1 million difference
between the amount paid and the carrying amount. Ten million shares remain
authorized and unissued.
CHANGE IN COMMON SHARES OUTSTANDING:
TREASURY
ISSUED STOCK OUTSTANDING
---------- -------- -----------
Balance, December 31, 1993 20,436,436 (48,616) 20,387,820
Employee benefit plans 24,250 - 24,250
---------- ------- ----------
Balance, December 31, 1994 20,460,686 (48,616) 20,412,070
Employee benefit plans 96,130 - 96,130
---------- ------- ----------
Balance, December 31, 1995 20,556,816 (48,616) 20,508,200
---------- ------- ----------
---------- ------- ----------
DEBT - NOTE E
AT DECEMBER 31,
($ IN MILLIONS)
1995 1994
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
LST convertible subordinated debentures $50.0 $42.5 $50.0 $40.0
Steel revolving credit 45.1 45.1 39.0 39.0
Steel 48-month installment note 1.6 1.6 2.8 2.8
----- ----- ----- -----
Total debt 96.7 89.2 91.8 81.8
less current installments (1.3) (1.3) (1.2) (1.2)
----- ----- ----- -----
Total long-term debt $95.4 $87.9 $90.6 $80.6
----- ----- ----- -----
----- ----- ----- -----
23
The $50 million, 8% convertible subordinated debentures are due in 2002 and may
be converted at any time into shares of LST common stock. The conversion price,
initially set at $24.25 per share, is subject to antidilution provisions. Fair
value of the debentures is estimated based upon quotation from brokers.
Steel has a revolving credit agreement under which it can borrow the lesser of
$70.0 million or an amount based upon eligible accounts receivable and
inventories that secure the borrowings. The credit line will increase by $2.5
million in March of each of the next three years. At December 31, 1995,
borrowings totaled $45.1 million on an available borrowing base of
$69.6 million. The interest rate on borrowings was prime plus 0.75% which, at
year-end, was 9.5%. Steel also pays a fee of 0.5% on the unused portion of the
credit facility. The agreement, which extends to March 1999, contains various
restrictive covenants, including requirements to maintain minimum net worth
levels and meet certain financial ratios. Steel's ability to pay cash dividends
is, with limited exceptions, prohibited by the agreement and at December 31,
1995, LST's equity in the net assets of Steel was $63.1 million. The agreement
also restricts Steel's ability to incur additional indebtedness.
In March 1993, Steel also separately borrowed $4.6 million at 8.08% to be repaid
in equal monthly installments through March 1997.
Steel believes that funds generated by operations, its borrowing capacity under
the revolving credit agreement, and temporary advances from its shareholders or
other sources will provide the liquidity necessary to fund operations and
certain capital expenditures in the short term.
At December 31, 1995, debt maturities are as follows: 1996, $1.3 million; 1997,
$0.3 million; 1998, none; 1999, $45.1 million; and thereafter, $50.0 million.
Cash paid for interest during 1995, 1994, and 1993 was $4.9 million, $4.1
million, and $2.9 million, respectively, by Steel; and $4.0 million in each of
the last three years by LST. Interest of $0.3 million was capitalized into
property, plant, and equipment during 1995.
NET EARNINGS PER SHARE - NOTE F
The computation of primary earnings per share is based on the weighted average
number of shares of common stock and common stock equivalents. The numbers of
shares used in 1995, 1994, and 1993 were approximately 20.6 million,
20.4 million, and 20.4 million. For all three years, the effect of potentially
dilutive shares on fully diluted earnings per share was either antidilutive or
not significant. Earnings per share in 1994 were adjusted downward by $0.10 to
reflect the redemption of Series A Preferred stock, described in Note D.
24
INCOME TAXES - NOTE G
There was not a current or deferred income tax expense or benefit for 1995,
1994, or 1993. A reconciliation of computed income taxes to actual income taxes
follows:
($ IN MILLIONS)
1995 1994 1993
----- ----- ------
Earnings (loss) from continuing operations
before income tax $ 9.6 $(3.8) $(14.1)
Statutory federal income tax rate 35.% 35.% 35.%
----- ----- ------
----- ----- ------
Income tax expense (benefit) at statutory rate 3.4 (1.3) (4.9)
Minority interest (0.5) (0.3) (0.8)
Net operating loss, benefit not recognized (recognized) (2.9) 1.6 5.7
----- ----- ------
Income taxes $ 0.0 $ 0.0 $ 0.0
----- ----- ------
----- ----- ------
The following table discloses the components of the deferred tax amounts at
December 31, 1995 and 1994:
($ IN MILLIONS)
1995 1994
------ ------
DEFERRED TAX ASSETS - temporary differences
Postretirement benefit accruals $ 14.9 $ 12.9
Environmental reserves 5.5 5.7
UMWA liability 3.6 3.7
Deferred gains 4.9 4.9
Other expense accruals and reserves 6.5 7.1
Inventories 6.1 7.4
Other 0.5 0.6
------ ------
Total deferred tax assets - temporary differences 42.0 42.3
Net operating loss carryforwards 92.3 92.3
------ ------
Total deferred tax assets 134.3 134.6
DEFERRED TAX LIABILITY - temporary difference
for basis in and depreciation of property,
plant, and equipment (35.7) (35.4)
------ ------
Net deferred tax assets 98.6 99.2
Less valuation allowance (98.6) (99.2)
------ ------
NET DEFERRED TAX AMOUNT $ 0.0 $ 0.0
------ ------
------ ------
At December 31, 1995, LST had federal tax net operating loss carryforwards
(NOL's) of approximately $272 million, a portion of which is related to AFB and
subject to regulatory audit by the Federal Deposit Insurance Corporation. If
not utilized, the NOL's will expire between years 2000 and 2009, and their
future availability may be limited if LST or a member of the consolidated group
experiences an ownership change of more than 50 percentage points, as defined by
IRS regulations. LST's common stock is publicly traded, and management cannot
assure that future trading will not result in an ownership change, as defined,
which would limit availability of the NOL's.
EXTRAORDINARY ITEM - NOTE H
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT OF 1992
In October 1993, Steel was notified by the United Mine Workers of America
Combined Benefit Fund that, under the Coal Industry Retiree Health Benefit Act
of 1992, Steel is required to pay premiums in connection with medical and death
benefits for certain of its former employees who worked in Steel's now-
discontinued coal mining operations. An extraordinary charge of $9.6 million,
net of minority interest, was recognized in 1993 for the total estimated future
payments related to the Act. Payments are assessed annually and will be made
over an extended period for as long as there may be eligible beneficiaries.
Steel is making these payments under protest and has filed suit in Federal
District Court.
25
EMPLOYEE BENEFIT PLANS - NOTE I
CAPITAL ACCUMULATION PLAN. LST and Steel have defined contribution plans
available to substantially all full-time employees. Participants may make
voluntary pretax contributions to the plans, and LST and Steel make matching
contributions within specified limits. Matching contributions totaled $0.7
million in each of the last three years.
STOCK OPTION PLAN. LST has a long-term incentive plan which provides for the
issuance of up to 2,700,000 shares of common stock to key employees and outside
directors through the granting of incentive (the right to grant further
incentive options expired in 1995) and nonqualified stock options, stock
appreciation rights, restricted stock grants, and performance unit grants. The
option price is not less than the market price on the date of the grant.
Options are generally exercisable for ten years with one-fourth of the shares
becoming exercisable on the one-year anniversary of the grant date and an
additional one-fourth becoming exercisable on the same anniversary date over the
next three years. If a change of control of LST occurs before an option's
fourth anniversary, the option may be exercised in full earlier. Following is a
summary of stock option activity during 1995 and 1994:
SHARES UNDER OPTION PRICE RANGE ($)
------------------- ---------------
OUTSTANDING, DECEMBER 31, 1993 865,917 2.59 -17.38
Granted in 1994 - - -
Exercised in 1994 (24,250) 3.06 - 6.81
Canceled in 1994 (17,020) 3.06 -16.13
------- -----------
OUTSTANDING, DECEMBER 31, 1994 824,647 2.59 -17.38
Granted in 1995 232,500 6.88 - 8.13
Exercised in 1995 (96,130) 3.06 - 8.50
Canceled in 1995 (68,161) 5.88 -16.13
------- -----------
OUTSTANDING, DECEMBER 31, 1995 892,856 2.59 -17.38
------- -----------
------- -----------
At December 31, 1995, 1,323,439 shares were available for grant and 503,606
shares were exercisable.
POSTRETIREMENT HEALTH CARE PLAN. Steel sponsors an unfunded, defined benefit,
postretirement health care plan ("Health Care Plan") for most of its bargaining
unit employees and a limited number of nonbargaining unit retirees eligible
under special early retirement programs. Health Care Plan benefits are provided
to eligible retirees until they reach the age of 65, at which time coverage
terminates. Steel accrues for the anticipated cost of retirees' health care
benefits in accordance with Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS
No. 106). Net retiree health care benefits expense for 1995, 1994, and 1993
included the following components:
($ IN MILLIONS)
1995 1994 1993
---- ---- ----
Service cost - health care benefits earned $0.4 $0.5 $0.4
Interest cost on unfunded accumulated
benefit obligation 0.9 0.8 0.8
---- ---- ----
Total retiree health care benefits expense $1.3 $1.3 $1.2
---- ---- ----
---- ---- ----
The annual rate of the increase in per capita cost of covered health care
benefits was assumed to gradually decrease from 9% to an ultimate trend rate of
6% by the year 2004. An increase of 1% per year in the assumed medical cost
trend rate would have resulted in an additional obligation of $1.1 million for
accumulated benefits at December 31, 1995, and an additional $0.2 million in
health care benefits expense in 1995. Weighted average discount rates of 7.5%
at December 31, 1995, and 8.5% at December 31, 1994, were used to determine the
accumulated obligation.
26
The following table sets forth the Health Care Plan's unfunded status and the
amounts recognized in the consolidated balance sheets at December 31, 1995 and
1994:
($ IN MILLIONS)
1995 1994
----- -----
Accumulated benefit obligation
Retirees $ 1.1 $ 1.8
Active plan participants - fully eligible 0.2 0.3
Active plan participants - not fully eligible 8.4 8.3
----- -----
Unfunded accumulated benefit obligation 9.7 10.4
Unrecognized net gain 2.2 0.8
----- -----
Net benefit obligation recognized in consolidated balance sheet 11.9 11.2
Amount included in accrued liabilities (0.8) (0.8)
----- -----
Amount included in postretirement benefit obligation $11.1 $10.4
----- -----
----- -----
PENSION PLANS. Steel has defined benefit pension plans covering its bargaining
unit employees. Retirement benefits are based on years of service at
progressively increasing flat-rate amounts. A special lump-sum payment equal to
13 weeks of vacation pay is made upon retirement. Steel's policy is to fund the
minimum contribution each year as required by applicable regulations. November
30th was the measurement date for determining the plans' assets and obligations
for 1995 and 1994. At December 31, 1995 and 1994, the plans' funded status and
amounts recognized in the consolidated balance sheets were as follows:
($ IN MILLIONS)
1995 1994
------ ------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 74.6 $ 64.5
------ ------
------ ------
Accumulated benefit obligation $ 77.0 $ 68.1
------ ------
------ ------
Projected benefit obligation $ 77.7 $ 68.8
Plans' assets at fair value (39.8) (35.1)
------ ------
Projected benefit obligation in excess of plans' assets 37.9 33.7
Unrecognized net gain (loss) (10.4 (5.3)
Unrecognized net obligation at January 1, 1986 (5.1) (6.1)
Adjustment required to recognize minimum liability 14.6 10.7
------ ------
Pension liability recognized in consolidated balance sheet 37.0 33.0
Amount recorded in accrued liabilities (2.0) (1.4)
------ ------
Amount included in postretirement benefit obligation $ 35.0 $ 31.6
------ ------
------ ------
In determining the projected benefit obligation, the weighted average
discount rate was assumed to be 7.5% at December 31, 1995, and 8.5% at
December 31, 1994. The expected long-term rate of return on assets was
assumed to be 9% and the annual rate of increase in compensation was assumed
to be 5% for both years. In accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions," Steel has
recorded an adjustment, as shown in the above table, to recognize a minimum
pension liability. Offsetting this liability at December 31, 1995, was a
noncurrent intangible asset of $5.3 million and a reduction of shareholders'
equity of $7.7 million net of minority interest, with no recorded tax benefit
assumed. The December 31, 1994, adjustment resulted in an offsetting $6.3
million intangible asset and a $3.5 million net equity reduction. The plans'
assets consist primarily of short-term money market investments, government
and corporate obligations, real estate, and public market equity securities.
27
Net pension expense in 1995, 1994, and 1993 was as follows:
($ IN MILLIONS)
1995 1994 1993
----- ----- -----
Service cost - benefits earned $ 0.7 $ 0.9 $ 0.7
Interest cost on projected benefit obligation 5.7 5.5 5.6
Return on plan assets (6.8) 0.9 (3.9)
Gain (loss) deferred 4.0 (4.1) 0.7
Amortization of initial unrecognized obligation 1.0 1.0 1.0
----- ----- -----
Total pension expense $ 4.6 $ 4.2 $ 4.1
----- ----- -----
----- ----- -----
PROFIT SHARING PLAN. Steel has a profit sharing plan for substantially all
employees which provides for payment of a specified percentage of Steel's
quarterly operating earnings. Steel's payments to employees were as follows:
1995, $0.6 million; 1994, $0.1 million; and 1993, none.
COMMITMENTS AND CONTINGENCIES - NOTE J
Steel's operations are subject to numerous environmental laws. The three major
areas of regulation are air quality, water quality, and solid and hazardous
waste management. The primary governmental oversight agencies include the Texas
Natural Resource Conservation Commission and the Environmental Protection
Agency. Steel has agreements with these agencies to conduct numerous
environmental studies and to develop plans to ensure continuous compliance with
applicable laws and regulations. Steel is engaged in various ongoing
environmental studies, monitoring programs, and capital projects. Estimated
expenditures for certain remediation programs are included in accrued
liabilities and other noncurrent liabilities as shown in Note C. Steel believes
that its environmental expenditures will continue to fall within its
contemplated operating and capital plans.
Steel leases equipment under various operating leases. Rental expense totaled
$3.5 million, $3.3 million, and $3.0 million in 1995, 1994, and 1993,
respectively. Future minimum lease payments under noncancellable operating
leases are as follows: 1996, $1.3 million; 1997, $1.0 million; 1998, $0.6
million; and 1999, $0.3 million.
LST and its subsidiaries are parties to a number of lawsuits and controversies
which are not discussed herein. Management of LST and its operating companies,
based upon their analysis of known facts and circumstances and reports from
legal counsel, does not believe that any such matter will have a material
adverse effect on the results of operations or financial condition of LST and
its subsidiaries, taken as a whole.
SALE OF AFB - NOTE K
In November 1993, LST sold the stock of AFB, one of its operating subsidiaries,
to Guaranty Federal Bank, F.S.B. (GFB). The accompanying consolidated financial
statements have been restated to reflect AFB as a discontinued operation. The
sale price was $155.7 million; of that, LST received $135.7 million in cash on
the sale date and $5 million in November 1994 and $15 million remains in escrow
to pay for claims that may be made by GFB pursuant to the sale agreement. As
these funds are released to LST, they are recognized as income in the periods
received. To date, LST has not paid any claims, but approximately $6 million in
claims are pending.
Prior to the sale, AFB earned $21.2 million in 1993. As a result of recognizing
only the $135.7 million received at the time of the sale, LST experienced a loss
of $4.7 million on the disposition that reduced the reported 1993 earnings from
discontinued operations to $16.5 million.
28
QUARTERLY FINANCIAL SUMMARY - NOTE L
($ IN MILLIONS, EXCEPT SHARE AMOUNTS;
QUARTERLY AMOUNTS UNAUDITED):
QUARTER
---------------------------------
FIRST SECOND THIRD FOURTH TOTAL YEAR
----- ------ ------ ------ ----------
1995
Net revenues $97.0 $101.0 $111.8 $116.0 $425.8
Gross earnings 6.0 6.9 6.3 7.0 26.2
Net earnings $ 1.5 $ 2.2 $ 3.6 $ 2.3 $ 9.6
PER COMMON SHARE:
Net earnings available to common
shareholders 0.07 0.11 0.17 0.11 0.46
1994
Net revenues $81.1 $84.8 $ 89.2 $101.9 $357.0
Gross earnings 1.6 2.0 1.3 7.9 12.8
Earnings (loss) from continuing operations (2.6) (2.6) (1.3) 2.7 (3.8)
Gain on sale of discontinued operations 0.0 0.0 0.0 5.0 5.0
Net earnings (loss) $(2.6) $(2.6) $ (1.3) $ 7.7 $ 1.2
PER COMMON SHARE:
Earnings (loss) from continuing operations (0.13) (0.13) (0.06) 0.13 (0.19)
Gain on sale of discontinued operations 0.0 0.0 0.0 0.25 0.25
Adjustment for redemption of Series A
Preferred stock (0.10) 0.0 0.0 0.0 (0.10)
Net earnings (loss) available to common
shareholders (0.23) (0.13) (0.06) 0.38 (0.04)
RELATED-PARTY TRANSACTIONS - NOTE M
LST and minority shareholders of Steel have agreed to fund up to $28 million for
a capital expenditure program at Steel's East Texas facilities. Steel issues 6%
cumulative convertible preferred stock to its participating shareholders as
funds are advanced. Included in the program is a significant expansion of
Steel's capacity to manufacture specialty tubing products. The balance of the
expenditures is being used to upgrade Steel's capability to manufacture tubular
products for use in the energy sector and to make general improvements
throughout the mill. The two-year program began in early 1995.
The Steel preferred stock issued to LST and the other participating shareholders
has a designated value equal to the amount of the funds advanced, pays quarterly
dividends at the rate of 6% per year on that value, and requires mandatory
redemption by Steel, unless earlier redeemed or converted, on January 3, 2002,
in cash, at the designated value plus any unpaid dividends. Prior to redemption
of the stock, dividends may be paid in cash, although currently prohibited by
the terms of the revolving credit agreement, or in additional preferred shares.
Steel has issued additional preferred shares as stock dividends on a quarterly
basis during 1995.
LST periodically purchases steel slabs which are consigned to Steel to be used
in its production process. Steel pays LST as the slabs are used or within 90
days, whichever occurs first. This program's structure is consistent with those
previously established with third parties. LST's slab purchases amounted to
approximately $73.1 million in 1995 and $38 million in 1994. Intercompany
transactions related to this program are eliminated in consolidation.
29
LONE STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
($ IN MILLIONS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------ ------- -------
CONDENSED STATEMENTS OF CASH FLOWS
Net earnings (loss) $ 9.6 $ 1.2 $ (7.2)
Undistributed equity in Steel's losses (earnings) (6.6) 3.9 19.1
Other (3.4) (16.2) (19.0)
------ ------- -------
Net cash used by operating activities (0.4) (11.1) (7.1)
Net cash provided (used) by investing activities (2.0) (36.0) 135.7
Net cash provided (used) by financing activities 0.7 (51.6) 0.3
------ ------- -------
Net increase (decrease) in cash and cash equivalents (1.7) (98.7) 128.9
Beginning cash and cash equivalents 41.7 140.4 11.5
------ ------- -------
Ending cash and cash equivalents $ 40.0 $ 41.7 $ 140.4
------ ------- -------
------ ------- -------
YEARS ENDED DECEMBER 31,
CONDENSED STATEMENTS OF EARNINGS 1995 1994 1993
------ ------- -------
General and administrative expenses $ (1.8) $ (2.3) $ (3.0)
Steel cost sharing 1.5 1.5 1.5
Equity in Steel's earnings (losses) 6.6 (3.9) (19.1)
Interest income 5.8 4.3 0.9
Interest expense (4.0) (4.0) (4.0)
Other income from Steel 1.5 0.6 -
Earnings from and gain on sale of discontinued operations - 5.0 16.5
------ ------- -------
Net earnings (loss) $ 9.6 $ 1.2 $ (7.2)
------ ------- -------
------ ------- -------
Cash dividends received from Steel $ 0.0 $ 0.0 $ 0.0
------ ------- -------
------ ------- -------
AS OF DECEMBER 31, 1995
CONDENSED BALANCE SHEETS 1995 1994
------ -------
Current assets:
Cash and cash equivalents $ 40.0 $ 41.7
Short-term investments 32.6 41.0
Due from Steel 10.1 6.6
Inventories 5.1 6.0
Other current assets 0.2 0.3
------- -------
Total current assets 88.0 95.6
Investment in Steel 72.1 57.1
Other noncurrent assets 13.8 15.9
------- -------
Total assets $ 173.9 $ 168.6
------- -------
------- -------
Current liabilities $ 1.8 $ 1.9
Long-term debt 50.0 50.0
Other noncurrent liabilities 19.9 20.6
------- -------
Total liabilities 71.7 72.5
------- -------
Shareholders' equity:
Series A Preferred stock (authorized: 10,000,000 shares,
issued: none) 0.0 0.0
Common stock, $1 par value (authorized: 40,000,000 shares,
issued: 20,556,816 and 20,460,686, respectively) 20.5 20.4
Capital surplus 159.5 158.9
Minority pension liability adjustment (7.7) (3.5)
Retained deficit (69.2) (78.8)
Treasury stock (48,616 common shares, at cost) (0.9) (0.9)
------- -------
Total shareholders' equity 102.2 96.1
------- -------
Total liabilities and shareholders' equity $ 173.9 $ 168.6
------- -------
------- -------
30
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 required under this item is contained in LST's proxy statement
for the 1996 Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in LST's proxy statement
for the 1996 Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item with respect to beneficial owners of
more than 5 percent of outstanding common stock and to directors and
executive officers is contained in LST's proxy statement for the 1996 Annual
Meeting of Shareholders, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item with respect to directors and executive
officers is contained in LST's proxy statement for the 1996 Annual Meeting of
Shareholders, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements - The following Consolidated Financial
Statements are filed as part of this report:
- Report of Independent Public Accountants
- Consolidated Statements of Cash Flows -
for the years ended December 31, 1995, 1994, and 1993
- Consolidated Statements of Earnings -
for the years ended December 31, 1995, 1994, and 1993
- Consolidated Balance Sheets at December 31, 1995 and 1994
- Notes to Consolidated Financial Statements
2. Schedule I - Condensed Financial Information of Registrant
Note: All schedules not filed herein for which provision is made under
rules of Regulation S-X have been omitted as not applicable or not
required or the information required has been included in the notes
to the consolidated financial statements.
31
3. Index to Exhibits
DESCRIPTION
3.1 Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3(a) to Form S-4 Registration Statement of
LST as filed on April 4, 1986, File No. 33-4581); Certificate of
Amendment to Certificate of Incorporation dated September 30,
1986 (incorporated by reference to Exhibit 3(b) of Form 10-K of
LST as filed on April 7, 1989).
3.2 Agreement and Plan of Merger dated March 6, 1986, among Steel, a
Texas corporation, LST, a Delaware corporation, and Lone Star
Steel Company Merging Corporation, a Delaware corporation
(incorporated by reference to Exhibit II to Form S-4 Registration
Statement of LST as filed on April 4, 1986, File No. 33-4581).
3.3 By-Laws as adopted March 6, 1986, as amended effective September
30, 1986 (incorporated by reference to Exhibit 3(d) of Form 10-K
of LST as filed on April 7, 1989).
4.1 Statement of Resolution establishing Cumulative Preferred Stock,
Series A (par value $1 per share), dated September 9, 1988
(incorporated by reference to Exhibit 3(c) of Form 10-K of LST as
filed on April 7, 1989).
4.2 LST Indenture with Bankers Trust Company, Trustee, with respect
to $50,000,000 8% Convertible Subordinated Debentures Due 2002
(Eurobonds), dated August 26, 1987 (incorporated by reference to
Exhibit 4(c) of Form 10-K of LST as filed on April 7, 1989).
10.1 Amended 1985 Long-Term Incentive Plan (incorporated by reference
to Exhibit A of Proxy Statement of LST as filed on October 22,
1993).
10.2 LST Corporate Improvement Incentive Program adopted October 9,
1990 (incorporated by reference to Exhibit 10(s) to Form 10-K as
filed on March 15, 1991).
10.3 Contingent Severance Policy agreement dated October 23, 1989,
between LST and Rhys J. Best, Vice President and Treasurer
(incorporated by reference to Exhibit 10.3 to Form 10-K as filed
on February 27, 1995).
10.4 Contingent Severance Policy agreement dated October 23, 1989,
between LST and Judith A. Murrell, Vice President - Corporate
Relations (incorporated by reference to Exhibit 10(k) to
Form 10-K as filed on April 2, 1990).
10.5 Employment and Contingent Severance Policy agreements dated
November 20, 1989, between LST and James T. Dougherty, Vice
President and General Counsel (incorporated by reference to
Exhibit 10(l) to Form 10-K as filed on April 2, 1990).
10.6 Employment Agreement dated June 2, 1989, between LST and John P.
Harbin, Chairman of the Board, President, and Chief Executive
Officer (incorporated by reference to Exhibit 10(m) to Form 10-K
as filed on April 2, 1990).
10.7 Steel Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10(m) of Amendment No. 1 to Form S-1 Registration
Statement of Steel as filed on April 15, 1985, File No. 2-95858).
10.8 Financing Agreement dated March 2, 1993, between The CIT
Group/Business Credit, Inc. and Steel (incorporated by reference
to Exhibit 10(af) to Form 10-K as filed on March 15, 1993);
Amendment agreement dated February 14, 1994 (related to Financing
Agreement dated March 2, 1993).
10.9 Amendment Agreement dated February 14, 1994 (related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business
Credit, Inc. and Steel incorporated by reference to Exhibit
10(af) to Form 10-K as filed on March 15, 1993).
10.10 Amendment Agreement dated September 25, 1995 (related to
Financing Agreement dated March 2, 1993, between The CIT
Group/Business Credit, Inc. and Steel, incorporated by reference
to Exhibit 10(af) to Form 10-K as filed on March 15, 1993).
10.11 Loan and Security Agreement dated March 22, 1993, between Steel
and the CIT Group Equipment Financing, Inc. (incorporated by
reference to Exhibit 10.9 to Form 10-K as filed on February 27,
1995).
10.12 Agreement dated November 2, 1994, among Steel, LST, and certain
minority holders of Steel regarding participation in the First
Capital Project by acquiring convertible preferred stock of Steel
(incorporated by reference to Exhibit 10.11 to Form 10-K as filed
on February 27, 1995).
10.13 Stockholders and Registration Rights Agreement among Steel, LST,
and Minority Shareholders of Steel, dated May 16, 1991
(incorporated by reference to Exhibit 10(p) to Form 10-K filed on
March 5, 1992).
10.14 Cost Sharing Agreement between Steel and LST, dated May 16, 1991
(incorporated by reference to Exhibit 10(p) to Form 10-K filed on
March 5, 1992); Amendment to the Cost Sharing Agreement dated May
16, 1991, between LST and Steel dated March 2, 1993 (incorporated
by reference to Exhibit 10(ai) to Form 10-K as filed on March 15,
1993).
32
10.15 Tax Allocation and Indemnification Agreement dated May 16, 1991,
between Steel and LST (incorporated by reference to Exhibit 10(r)
to Form 10-K filed on March 5, 1992); Amendment to Tax Allocation
and Indemnification Agreement dated May 16, 1991, among LST,
Steel, and Steel subsidiaries dated March 2, 1993 (incorporated
by reference to Exhibit 10(ah) to Form 10-K as filed on March 15,
1993).
10.16 Asset Purchase Agreement by and among Zink and Affiliates, the
Sellers, and Koch Engineering Company, Inc., Buyer, dated
September 18, 1989 (incorporated by reference to Exhibit 7(c) of
Form 8-K as filed on October 19, 1989).
10.17 Stock Purchase Agreement, Assistance Agreement, Capital
Maintenance Agreement, and Subordination Agreement regarding the
acquisition by LST of AFB dated August 18, 1988 (incorporated by
reference to Form 8 (Amendment No. 3 to Form 8-K) dated January
11, 1989); Amendment No. 1 to the Assistance Agreement of August
18, 1988, dated August 31, 1990 (incorporated by reference to
Exhibit 10(q) to Form 10-K as filed on March 15, 1991);
Settlement Agreement and Second Amendment to Assistance Agreement
dated September 30, 1992, among the FDIC, as Manager, the RTC,
AFB, and LSST (incorporated by reference to Exhibit 10(ab) to
Form 10-K as filed on March 15, 1993).
10.18 Agreement and Plan of Merger dated March 25, 1992, as amended by
First Amendment to Agreement and Plan of Merger dated April 15,
1992, between AFB and Americity (incorporated by reference to
Form 8-K dated July 14, 1992).
10.19 Holdback Escrow Agreement dated July 1, 1992, among Americity,
AFB, Bank One, Texas, as Agent, and James C. Jarocki, as
Shareholder Representative (incorporated by reference to Exhibit
10(x) to Form 10-K as filed on March 15, 1993).
10.20 Letter Agreement dated July 1, 1992, among AFB, Americity, and
the FDIC, as Manager (regarding assignment and assumption of the
Termination Agreement and Tax Benefits Cancellation Agreement)
(incorporated by reference to Exhibit 10(y) to Form 10-K as filed
on March 15, 1993); Termination Agreement dated December 18,
1991, among Americity, the FDIC, as Manager, and the RTC
(terminating Assistance Agreement of November 18, 1988, between
Americity and the FSLIC) (incorporated by reference to Exhibit
10(z) to Form 10-K as filed on March 15, 1993); Tax Benefits
Cancellation Agreement dated December 18, 1991, among Americity,
the FDIC, as Manager, and the RTC (incorporated by reference to
Exhibit 10(aa) to Form 10-K as filed on March 15, 1993).
10.21 Stock Purchase Agreement and Agreement and Plan of Reorganization
by and among Guaranty Federal Bank, F.S.B., Guaranty Holdings,
Inc. I, LST, and LSST Financial Services Corporation, dated
February 16, 1993, First Amendment to Stock Purchase Agreement
and Agreement and Plan of Reorganization, dated April 2, 1993,
Second Amendment to Stock Purchase Agreement and Agreement and
Plan of Reorganization, dated August 31, 1993, and Third
Amendment to Stock Purchase Agreement and Agreement and Plan of
Reorganization, dated September 30, 1993 (incorporated by
reference to Exhibit B of Proxy Statement of LST as filed October
22, 1993).
10.22 Holdback Escrow Agreement to Stock Purchase Agreement and
Agreement and Plan of Reorganization, dated November 12, 1993
(incorporated by reference to Exhibit C of Proxy Statement of LST
as filed October 22, 1993).
10.23 Agreement dated October 31, 1995, among Steel, LST and the
minority shareholders of Steel regarding participation in capital
projects not to exceed $5,000,000 by acquiring convertible
preferred stock of Steel.
10.24 Agreement dated December 18, 1995, between Steel and Praxair,
Inc. with respect to construction and operation of an oxygen
plant by Praxair at Steel's Lone Star, Texas, facilities and
purchase of oxygen produced at the same oxygen plant by Steel
from Praxair.
10.25 Contract for the sale of approximately 9,432 acres of land in
East Texas from Steel and Texas and Northern Railway Company to
Prudential Timber Investments, Inc. dated April 27, 1995,
amendment to the same aforementioned April 27, 1995, contract for
sale dated August 31, 1995, and assignment and assumption of
aforementioned contract and amendment by Prudential Timber
Investments, Inc. and Prutimber Fund Two Limited Partnership
dated August 31, 1995.
21 List of Subsidiaries.
24 Powers of Attorney.
(b) Reports on Form 8-K:
DATE OF REPORT DATE FILED DESCRIPTION
None.
33
ITEM 15. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LONE STAR TECHNOLOGIES, INC.
Date: March 21, 1996 By: /s/ Charles J. Keszler
------------------------------------
(Charles J. Keszler)
Vice President - Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ John P. Harbin,
- ----------------------------- Chairman, Director, and March 21, 1996
(John P. Harbin) Chief Executive Officer
/s/ Charles L. Blackburn*,
- ----------------------------- Director March 21, 1996
(Charles L. Blackburn)
/s/ Dean P. Guerin*,
- ----------------------------- Director March 21, 1996
(Dean P. Guerin)
/s/ Frederick B. Hegi, Jr.*,
- ----------------------------- Director March 21, 1996
(Frederick B. Hegi, Jr.)
/s/ William C. McCord*, Director March 21, 1996
- -----------------------------
(William C. McCord)
/s/ James E. McCormick*, Director March 21, 1996
- -----------------------------
(James E. McCormick)
/s/ Thomas M. Mercer, Jr.*, Director March 21, 1996
- -----------------------------
(Thomas M. Mercer, Jr.)
*By: /s/ Charles J. Keszler
- --------------------------------------
(Charles J. Keszler, Attorney-in-Fact)
34
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3(a) to Form S-4 Registration Statement of
LST as filed on April 4, 1986, File No. 33-4581); Certificate of
Amendment to Certificate of Incorporation dated September 30,
1986 (incorporated by reference to Exhibit 3(b) of Form 10-K of
LST as filed on April 7, 1989).
3.2 Agreement and Plan of Merger dated March 6, 1986, among Steel, a
Texas corporation, LST, a Delaware corporation, and Lone Star
Steel Company Merging Corporation, a Delaware corporation
(incorporated by reference to Exhibit II to Form S-4 Registration
Statement of LST as filed on April 4, 1986, File No. 33-4581).
3.3 By-Laws as adopted March 6, 1986, as amended effective September
30, 1986 (incorporated by reference to Exhibit 3(d) of Form 10-K
of LST as filed on April 7, 1989).
4.1 Statement of Resolution establishing Cumulative Preferred Stock,
Series A (par value $1 per share), dated September 9, 1988
(incorporated by reference to Exhibit 3(c) of Form 10-K of LST as
filed on April 7, 1989).
4.2 LST Indenture with Bankers Trust Company, Trustee, with respect
to $50,000,000 8% Convertible Subordinated Debentures Due 2002
(Eurobonds), dated August 26, 1987 (incorporated by reference to
Exhibit 4(c) of Form 10-K of LST as filed on April 7, 1989).
10.1 Amended 1985 Long-Term Incentive Plan (incorporated by reference
to Exhibit A of Proxy Statement of LST as filed on October 22,
1993).
10.2 LST Corporate Improvement Incentive Program adopted October 9,
1990 (incorporated by reference to Exhibit 10(s) to Form 10-K as
filed on March 15, 1991).
10.3 Contingent Severance Policy agreement dated October 23, 1989,
between LST and Rhys J. Best, Vice President and Treasurer
(incorporated by reference to Exhibit 10.3 to Form 10-K as filed
on February 27, 1995).
10.4 Contingent Severance Policy agreement dated October 23, 1989,
between LST and Judith A. Murrell, Vice President - Corporate
Relations (incorporated by reference to Exhibit 10(k) to
Form 10-K as filed on April 2, 1990).
10.5 Employment and Contingent Severance Policy agreements dated
November 20, 1989, between LST and James T. Dougherty, Vice
President and General Counsel (incorporated by reference to
Exhibit 10(l) to Form 10-K as filed on April 2, 1990).
10.6 Employment Agreement dated June 2, 1989, between LST and John P.
Harbin, Chairman of the Board, President, and Chief Executive
Officer (incorporated by reference to Exhibit 10(m) to Form 10-K
as filed on April 2, 1990).
10.7 Steel Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10(m) of Amendment No. 1 to Form S-1 Registration
Statement of Steel as filed on April 15, 1985, File No. 2-95858).
10.8 Financing Agreement dated March 2, 1993, between The CIT
Group/Business Credit, Inc. and Steel (incorporated by reference
to Exhibit 10(af) to Form 10-K as filed on March 15, 1993);
Amendment agreement dated February 14, 1994 (related to Financing
Agreement dated March 2, 1993).
10.9 Amendment Agreement dated February 14, 1994 (related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business
Credit, Inc. and Steel incorporated by reference to Exhibit
10(af) to Form 10-K as filed on March 15, 1993).
10.10 Amendment Agreement dated September 25, 1995 (related to
Financing Agreement dated March 2, 1993, between The CIT
Group/Business Credit, Inc. and Steel, incorporated by reference
to Exhibit 10(af) to Form 10-K as filed on March 15, 1993).
10.11 Loan and Security Agreement dated March 22, 1993, between Steel
and the CIT Group Equipment Financing, Inc. (incorporated by
reference to Exhibit 10.9 to Form 10-K as filed on February 27,
1995).
10.12 Agreement dated November 2, 1994, among Steel, LST, and certain
minority holders of Steel regarding participation in the First
Capital Project by acquiring convertible preferred stock of Steel
(incorporated by reference to Exhibit 10.11 to Form 10-K as filed
on February 27, 1995).
10.13 Stockholders and Registration Rights Agreement among Steel, LST,
and Minority Shareholders of Steel, dated May 16, 1991
(incorporated by reference to Exhibit 10(p) to Form 10-K filed on
March 5, 1992).
10.14 Cost Sharing Agreement between Steel and LST, dated May 16, 1991
(incorporated by reference to Exhibit 10(p) to Form 10-K filed on
March 5, 1992); Amendment to the Cost Sharing Agreement dated May
16, 1991, between LST and Steel dated March 2, 1993 (incorporated
by reference to Exhibit 10(ai) to Form 10-K as filed on March 15,
1993).
INDEX TO EXHIBITS (CONTINUED)
EXHIBIT NO. DESCRIPTION
10.15 Tax Allocation and Indemnification Agreement dated May 16, 1991,
between Steel and LST (incorporated by reference to Exhibit 10(r)
to Form 10-K filed on March 5, 1992); Amendment to Tax Allocation
and Indemnification Agreement dated May 16, 1991, among LST,
Steel, and Steel subsidiaries dated March 2, 1993 (incorporated
by reference to Exhibit 10(ah) to Form 10-K as filed on March 15,
1993).
10.16 Asset Purchase Agreement by and among Zink and Affiliates, the
Sellers, and Koch Engineering Company, Inc., Buyer, dated
September 18, 1989 (incorporated by reference to Exhibit 7(c) of
Form 8-K as filed on October 19, 1989).
10.17 Stock Purchase Agreement, Assistance Agreement, Capital
Maintenance Agreement, and Subordination Agreement regarding the
acquisition by LST of AFB dated August 18, 1988 (incorporated by
reference to Form 8 (Amendment No. 3 to Form 8-K) dated January
11, 1989); Amendment No. 1 to the Assistance Agreement of August
18, 1988, dated August 31, 1990 (incorporated by reference to
Exhibit 10(q) to Form 10-K as filed on March 15, 1991);
Settlement Agreement and Second Amendment to Assistance Agreement
dated September 30, 1992, among the FDIC, as Manager, the RTC,
AFB, and LSST (incorporated by reference to Exhibit 10(ab) to
Form 10-K as filed on March 15, 1993).
10.18 Agreement and Plan of Merger dated March 25, 1992, as amended by
First Amendment to Agreement and Plan of Merger dated April 15,
1992, between AFB and Americity (incorporated by reference to
Form 8-K dated July 14, 1992).
10.19 Holdback Escrow Agreement dated July 1, 1992, among Americity,
AFB, Bank One, Texas, as Agent, and James C. Jarocki, as
Shareholder Representative (incorporated by reference to Exhibit
10(x) to Form 10-K as filed on March 15, 1993).
10.20 Letter Agreement dated July 1, 1992, among AFB, Americity, and
the FDIC, as Manager (regarding assignment and assumption of the
Termination Agreement and Tax Benefits Cancellation Agreement)
(incorporated by reference to Exhibit 10(y) to Form 10-K as filed
on March 15, 1993); Termination Agreement dated December 18,
1991, among Americity, the FDIC, as Manager, and the RTC
(terminating Assistance Agreement of November 18, 1988, between
Americity and the FSLIC) (incorporated by reference to Exhibit
10(z) to Form 10-K as filed on March 15, 1993); Tax Benefits
Cancellation Agreement dated December 18, 1991, among Americity,
the FDIC, as Manager, and the RTC (incorporated by reference to
Exhibit 10(aa) to Form 10-K as filed on March 15, 1993).
10.21 Stock Purchase Agreement and Agreement and Plan of Reorganization
by and among Guaranty Federal Bank, F.S.B., Guaranty Holdings,
Inc. I, LST, and LSST Financial Services Corporation, dated
February 16, 1993, First Amendment to Stock Purchase Agreement
and Agreement and Plan of Reorganization, dated April 2, 1993,
Second Amendment to Stock Purchase Agreement and Agreement and
Plan of Reorganization, dated August 31, 1993, and Third
Amendment to Stock Purchase Agreement and Agreement and Plan of
Reorganization, dated September 30, 1993 (incorporated by
reference to Exhibit B of Proxy Statement of LST as filed October
22, 1993).
10.22 Holdback Escrow Agreement to Stock Purchase Agreement and
Agreement and Plan of Reorganization, dated November 12, 1993
(incorporated by reference to Exhibit C of Proxy Statement of LST
as filed October 22, 1993).
10.23 Agreement dated October 31, 1995, among Steel, LST and the
minority shareholders of Steel regarding participation in capital
projects not to exceed $5,000,000 by acquiring convertible
preferred stock of Steel.
10.24 Agreement dated December 18, 1995, between Steel and Praxair,
Inc. with respect to construction and operation of an oxygen
plant by Praxair at Steel's Lone Star, Texas, facilities and
purchase of oxygen produced at the same oxygen plant by Steel
from Praxair.
10.25 Contract for the sale of approximately 9,432 acres of land in
East Texas from Steel and Texas and Northern Railway Company to
Prudential Timber Investments, Inc. dated April 27, 1995,
amendment to the same aforementioned April 27, 1995, contract for
sale dated August 31, 1995, and assignment and assumption of
aforementioned contract and amendment by Prudential Timber
Investments, Inc. and Prutimber Fund Two Limited Partnership
dated August 31, 1995.
21 List of Subsidiaries.
24 Powers of Attorney.