Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997
COMMISSION FILE NUMBER 1-12881
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
5501 LBJ FREEWAY, SUITE 1200
DALLAS, TEXAS 75240
972/386-3981
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 75-2085454
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
Common Stock, par value $1.00 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 January 31, 1998, the number of shares of common stock outstanding was
22,503,248. The aggregate market value of common stock (based upon the closing
price on the New York Stock Exchange on that date) held by nonaffiliates of the
registrant was approximately $651 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. . . . . . . . . . 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . 10
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION . . . . . . . . . 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . 17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . 36
ITEM 15. SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2
PART I
ITEM 1. BUSINESS
GENERAL
Lone Star Technologies, Inc. (LST) is a management and holding company that
currently has one principal operating subsidiary, Lone Star Steel Company
(Steel). Steel serves three business segments: oilfield products, specialty
tubing products, and flat rolled steel and other tubular products and services.
Oilfield products are comprised of casing, tubing, and line pipe, that are
manufactured and marketed globally to the oil and gas drilling industry.
Specialty tubing products consist of Drawn Over Mandrel (DOM) tubing and
as-welded tubing that are manufactured and marketed globally to automotive,
fluid power, and other markets for various mechanical applications. Flat rolled
steel and other tubular products and services are manufactured and provided to
general industrial markets. LST's consolidated revenues are not seasonal.
However, Steel's sales of oilfield products 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. In
1988, LST acquired the stock of American Federal Bank (AFB), a federally
chartered savings bank. During May 1991, 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 January 1997, all of the remaining outstanding common stock,
preferred stock and warrants held by the other minority shareholders of Steel
were purchased by LST, making Steel a wholly owned subsidiary of LST. In
November 1993, LST sold the stock of AFB. During August 1997, LST received
$12.4 million as a final payment on the sale of AFB. The accompanying
consolidated financial statements reflect this payment as a gain from
discontinued operations.
LINES OF BUSINESS INFORMATION
In the last three years, segment revenues were as follows:
($ in millions)
1997 1996 1995
---------------- --------------- ---------------
$ % $ % $ %
--- --- --- --- --- ---
Oilfield products revenues 454.1 69 371.0 68 241.6 57
Specialty tubing products revenues 129.0 20 109.8 20 115.2 27
Flat rolled steel and other tubular revenues 71.2 11 68.2 12 69.0 16
----- ---- ------ --- ----- ---
Consolidated net revenues 654.3 100 549.0 100 425.8 100
----- ---- ------ --- ----- ---
----- ---- ------ --- ----- ---
Additional segment information is included in Note B to the consolidated
financial statements.
OILFIELD PRODUCTS. Steel manufactures and markets oil country tubular goods
(OCTG) and line pipe.
OCTG offered by Steel includes the widest size and chemistry range of electric
resistance welded (ERW) high-quality prime casing and tubing for oil and gas
drilling and production in the United States. Casing, which represents about
75% 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
the widest
3
ranges of OCTG diameters (2 1/16" to 20") 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 up 21% in 1997 from the
prior year, according to the average number of rigs operating in the United
States as measured by Baker Hughes. Steel's open orders for OCTG at December
31, 1997, were down 21% from the prior year-end as distributors continued to
work down slightly higher inventory levels at the end of the year.
Approximately 6% of shipments in 1997 were used outside the United States.
Sales and earnings are affected by price, cost, availability of raw materials,
oil and gas drilling activity, general economic conditions, and an equitable
trade environment.
LINE PIPE offered 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 10% of Steel's line pipe shipments were exported in
1997.
SALES AND DISTRIBUTION. Steel's domestic OCTG sales distribution network
consists of 14 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 nonexclusive distributors and
directly to end users. Internationally, OCTG is sold through distributors and
trading companies as well as directly to end users. The largest customer and
the second largest customer, both distributors of Steel's oilfield products in
1997, accounted for 17% and 12% of total tons shipped, respectively. About 77%
of the oil and gas wells drilled in the United States in 1997 were located in
Texas, Oklahoma, Kansas, Louisiana, New Mexico, and the federal waters of the
Gulf of Mexico, all within 750 miles of Steel's mill in Lone Star, Texas. The
majority of Steel's oilfield products were sold for use in these states, as well
as the Gulf of Mexico which is less than 250 miles from Steel's mill.
ALLIANCE MILLS. Steel has expanded into other marketing agreements to sell
steel tubular products manufactured by six 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 a commission basis,
through purchase and resale of the products, and under agreements to process
flat rolled steel provided by Steel into tubular products. These arrangements
accounted for over 20% of Steel's revenues from oilfield products during 1997.
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
delivery demands.
Steel purchases steel slabs, scrap steel, and steel coils for use in the
manufacture of its products. The availability of steel slabs to meet production
needs remained tight in 1997, and it was often necessary for Steel to commit to
purchase slabs 90 to 150 days prior to production. Steel has secured
commitments from a major supplier to be provided most of its steel slab
requirements for 1998. Steel's principal raw material for its internally
produced steel slabs is steel scrap, which is purchased in the spot market and
internally generated from Steel's operations. The price of scrap steel and
steel slabs can be 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. Steel
offers a wide range of sizes and chemistries and, based on generally available
market data, 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,
such as offshore 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
4
with specific standards. Steel, with its full-body normalized ERW manufacturing
process that meets American Petroleum Institute standards, often competes with
seamless OCTG in this market. Operators drilling shallow 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 16% of the apparent supply available to the
domestic OCTG market during 1997 and 14% during 1996 and 1995, as compared to
24% in 1994. A reduction of imported OCTG from levels experienced in the 1992
to 1994 period resulted from the imposition of protective tariffs on certain
foreign countries in 1995. These trade tariffs, which were intended to promote
an equitable trade environment, remained in effect during 1997. Because these
protective tariffs cover significant OCTG producing countries in Asia, the level
of imported OCTG has not substantially changed as a result of currency
devaluations and general slowdowns in certain Asian economies at the end of
1997.
SPECIALTY TUBING PRODUCTS. Steel manufactures and markets specialty tubing.
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. Product uses include the manufacture of
automotive, construction, and farm equipment and industrial applications such as
hydraulic cylinders, stabilizer tubes, 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 believes it has the largest domestic manufacturing capacity for DOM
tubing. The use of the DOM manufacturing process enables Steel to achieve
higher critical tolerances and dimensional control than other processes.
Steel's 1,000,000 pound drawbench, the largest in the United States, also
enables Steel 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 in the U.S. 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. Steel'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.
Steel also produces as-welded specialty tubing which does not utilize the DOM
process. A typical application for this product is trailer axles.
Demand for specialty tubing products, within the traditional markets, was up in
1997 due to strong automotive sales, construction activity, and general economic
conditions. Open orders at year-end 1997 were 56% more than the prior year-end.
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 customer of Steel's specialty tubing in 1997 accounted
for 14% of total shipments. Internationally, the majority of Steel's specialty
tubing is currently sold directly to end users. Exports accounted for
approximately 26% and 19% of Steel's DOM specialty tubing shipments in 1997 and
1996, respectively.
RAW MATERIALS AND INVENTORIES. Raw materials are readily available from
multiple sources. Production is generally
5
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.
Steel purchases steel slabs, scrap steel, and coiled steel for use in the
manufacture of its products. The availability of steel slabs to meet production
needs remained tight in 1997, and it was often necessary for Steel to commit to
purchase slabs 90 to 150 days prior to production. Steel has secured
commitments from a major supplier to be provided most of its steel slab
requirements for 1998. Steel's principal raw material for its internally
produced steel slabs is steel scrap, which is purchased in the spot market and
internally generated from Steel's operations. The price of scrap steel and
steel slabs can be volatile and is influenced by a number of competitive market
conditions beyond the control of Steel.
COMPETITION. The market for specialty tubing is competitive and is served by
several manufacturers. During 1996, Steel completed a capital expenditure
program to expand its specialty tubing capacity. The expansion allowed Steel to
ship 18% more tons in 1997 over 1996. Based on generally available market data,
Steel believes it has the largest production capacity for DOM specialty tubing
products in the United States.
Steel is the only fully integrated DOM producer in the United States. 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 AND OTHER TUBULAR PRODUCTS AND SERVICES. Steel manufactures
and markets flat rolled steel and other miscellaneous tubular products that are
secondary to its manufacture of oilfield and specialty tubing products. Steel's
participation in the flat rolled steel commodity market to some extent involves
its excess capacity for flat rolled steel as related to the manufacture of its
oilfield and specialty tubing products and certain cost considerations
associated with its total manufacturing operations.
FLAT ROLLED STEEL is primarily used by Steel in the manufacture of tubular
products. 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. Flat rolled steel is sold directly to end users and
through service centers, primarily in the southwestern region of the United
States. The largest customer of Steel's flat rolled steel accounted for 80% of
Steel's flat rolled steel sales in 1997 as well as substantially all other sales
of miscellaneous tubular products other than oilfield and specialty tubing
products. This customer has steel processing facilities located adjacent to
Steel's facilities in East Texas, and those facilities purchase most of its flat
rolled steel from Steel. Sales to this customer represented approximately 8% of
Steel's total revenues for 1997.
RAW MATERIALS AND INVENTORIES. Steel produces flat rolled steel from its
internally produced slabs and slabs purchased from unrelated companies. The
availability of steel slabs to meet production needs remained tight in 1997, and
it was often necessary for Steel to commit to purchase slabs 90 to 150 days
prior to production. Steel has secured commitments from a major supplier to be
provided most of its steel slab requirements for 1998. Steel's principal raw
material used in the production of its slabs is steel scrap, which is purchased
in the spot market and internally generated from Steel's operations. The price
of steel scrap can be volatile and is influenced by a number of competitive
market conditions beyond the control of Steel.
COMPETITION. Flat rolled steel is sold in highly competitive markets generally
concentrated in the southwestern region of the United States. 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.
OTHER SERVICES. Transportation, storage, and other services are provided by
Steel's subsidiaries.
6
OTHER PRODUCTS. Steel markets its surplus and reject pipe as secondary products
for use in structural and piling applications in the construction industry.
RESEARCH, DEVELOPMENT, AND PATENTS
Steel conducts limited research and development activities at its metallurgical
laboratory on its facilities in East Texas. Its patents do not significantly
affect financial results.
EMPLOYEES
At December 31, 1997, LST and Steel had a total of 2,044 active employees, of
whom 1,390 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 signed in May 1996, which expires on May 31, 2001, with
a provision to reopen the contract for wages but not other benefits or work
conditions after May 31, 1999. Management considers its relationship with its
employees to be good.
FOREIGN OPERATIONS
Steel conducts no manufacturing operations outside the United States. Export
sales to destinations outside the United States were approximately $58.1
million, $50.0 million, and $37.9 million for the years 1997, 1996, and 1995,
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 may impose limitations on emissions. 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.
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.
Recently, the TNRCC adopted rules implementing Title V of the federal Clean Air
Act, which requires subject sources to apply for a general operating permit.
Steel has submitted an abbreviated application for a general
7
operating permit, as required. The TNRCC has not yet set a deadline for subject
sources within the steel industry to submit full applications. Once the TNRCC
issues Steel a general operating permit, Steel will have additional record
keeping obligations.
Emission sources at Steel's facilities are currently 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 Pollutant 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 an 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 either 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 determine the maximum
concentrations of contaminants that may be present in Steel's wastewater. To
comply with these limitations, Steel treats its wastewater before discharge.
The permits require that Steel monitor the concentrations of the contaminants of
concern in its effluent on a regular basis and report the monitoring results to
the TNRCC and the EPA.
The only compliance issue for Steel is the effluent limitations for total lead
at its process discharge outfall. Steel's state wastewater discharge permit was
renewed effective August 1, 1994, for a five-year term. The effluent
limitations for total lead were less stringent for the first three years than
the remaining two years of the permit term because the TNRCC also issued an
order granting Steel a three-year variance from the Texas Surface Water Quality
Standards for dissolved lead. The order was based on scientific evidence that
less stringent, site-specific water quality standards for dissolved lead were
appropriate for the receiving water bodies into which Steel discharges its
wastewater. Thereafter, the TNRCC adopted, and the EPA approved, the
site-specific water quality standards for dissolved lead. Before the temporary
variance expired on August 1, 1997, and in accordance with the terms of the
temporary variance, Steel submitted an application to the TNRCC for an amendment
to its wastewater discharge permit to modify the final effluent limitations for
total lead at its process discharge outfall. Recently, the TNRCC provided to
Steel, for review, a draft proposed permit that contains effluent limitations
for total lead at that outfall based on the site-specific water quality
standards for dissolved lead. The proposed effluent limitations for total lead
are less stringent than those that were authorized by the temporary variance.
Steel anticipates that the TNRCC will issue to Steel the final amended permit
within a few months. Steel further anticipates that it will be able to comply
with all requirements of its state wastewater discharge permit as amended.
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. The draft
NPDES permit contained effluent limitations for total lead that are less
stringent than those in the existing NPDES permit. The EPA based this
modification on the site-specific water quality standards for dissolved lead.
The only requirement in the draft NPDES permit on which the EPA and Steel could
not reach agreement was the inclusion of 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
growth and survival of the test organisms. A WET limit is a legally enforceable
permit limitation that is
8
based on the survival of the test organism in a stated concentration of the
effluent. Steel opposed the inclusion of a WET limit in its renewal NPDES
permit, because its effluent contains naturally occurring bacteria that are
pathogenic to fathead minnow larvae. These pathogenic bacteria interfere with
the WET tests. Steel also later filed a Petition for Review challenging the EPA
final rule adopting the WET test methods for the reason that EPA did not address
in the methods the issue of how to account for adverse influences of pathogens
in the conduct of WET tests. Steel and the EPA have been involved in settlement
negotiations to resolve both the Petition for Review and the NPDES permit issue.
Steel believes that it will be able to settle both matters favorably with the
EPA.
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 is
registered as a large quantity generator and only stores hazardous waste on-site
for periods less than ninety (90) days. Hazardous wastes, and most nonhazardous
wastes, are now shipped off-site to commercial facilities for disposal or
reclamation. EAF dust has been recycled for metals recovery since 1991.
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. In
1996, Steel received TNRCC approval of a closure plan for the site not subject
to RCRA (a pond previously used for storing spent acid and a tarry waste).
Closure began in September 1997. Two sites subject to RCRA (the main plant
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 thirty years. Of the
remaining two sites, one has been closed by a combination of removal (clean
closed) and conversion to nonhazardous landfill and one has been clean closed,
in accordance with requirements of RCRA and corresponding state regulations. In
1996, TNRCC accepted the closure certifications for all four units and released
the clean-closed and nonhazardous units from further RCRA requirements. The
TNRCC will issue Steel a permit for the facilities requiring post-closure care.
Steel estimates the actual cost of RCRA post-closure care for the remaining
twenty-four years to be approximately $350,000.
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 and 1950's have been expanded
and modernized, and include two electric arc furnaces (EAF) equipped with
oxy-fuel burners with a combined capacity of approximately 575,000 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; coil slitting and handling equipment; two pipe welding mills; six
draw benches, 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 rated capacity approximates 480,000 slab tons, 1,250,000 flat
rolled tons, and 1,000,000 welded pipe tons. Steel has access through marketing
arrangements and agreements with alliance mills to additional oilfield pipe
capacity of approximately 250,000 tons. In 1997, the specialty tubing
facilities operated near 80% of capacity. The rolling mills and pipe mills
generally operated at or above 90% of capacity, while the EAF's operated at
about 50% of capacity.
In addition to the manufacturing facilities, Steel owns 8,250 acres in Texas
which were purchased primarily for iron ore or coal reserves, and Steel owns
mineral interests in an additional 12,000 acres in Oklahoma and 60,000 acres in
Texas. No
9
minerals have been recovered from these properties for many years because their
use is no longer required in Steel's operations. Steel owns nominal oil and gas
interests in an additional 9,400 acres in Texas.
ITEM 3. LEGAL PROCEEDINGS
Management does not believe, based upon analysis of known facts and
circumstances and reports from legal counsel, that any pending legal proceeding
will have a material adverse effect on the financial condition of 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 New York Stock Exchange under the symbol LSS. The
following table summarizes the range of trading prices by quarter for the last
two years (in $):
First Second Third Fourth
1997 High 22 28 5/8 52 1/2 59 3/16
Low 15 3/8 18 27 13/16 22 1/4
1996 High 11 5/8 12 7/8 17 1/4 18 7/8
Low 8 7/8 10 3/8 11 13 5/8
As of January 31, 1998, LST had approximately 4,200 common shareholders of
record. LST has paid no dividends on its Common Stock since becoming a public
company.
On July 28, 1997, LST called for redemption of its $50.0 million principal
amount 8% convertible subordinated debentures due 2002. By the end of August
1997, substantially all of the debentures were converted into LST common stock
increasing the total shares outstanding by 2.1 million.
During December 1997, LST purchased 0.5 million shares of its common stock to be
used as treasury stock under a Board of Directors approved plan to buy up to 1
million common shares.
10
ITEM 6. SELECTED FINANCIAL DATA
($ in millions, except share and employee data)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Oilfield products revenues $ 454.1 $ 371.0 $ 241.6 $ 196.6 $ 197.0
Specialty tubing products revenues 129.0 109.8 115.2 94.8 72.7
Flat rolled and other tubular revenues 71.2 68.2 69.0 65.6 62.8
------ ------- ------- ------- -------
Total revenues 654.3 549.0 425.8 357.0 332.5
Gross earnings 64.2 48.2 26.2 12.8 6.3
Selling, general, and administrative expenses (19.6) (16.4) (14.6) (16.2) (16.9)
------ ------- ------- ------- -------
Operating earnings (loss) 44.6 31.8 11.6 (3.4) (10.6)
Interest income 3.0 4.4 5.8 4.3 0.9
Interest expense (6.6) (6.8) (8.7) (8.2) (7.0)
Other income (loss) 0.3 (0.1) 2.4 2.5 0.3
Minority interest in Steel - (3.8) (1.5) 1.0 2.3
Income tax (0.9) (0.6) - - -
------ ------- ------- ------- -------
Earnings (loss) from continuing operations 40.4 24.9 9.6 (3.8) (14.1)
Earnings (loss) from continuing operations
per common share - diluted 1.83 1.19 0.46 (0.19) (0.69)
Net earnings (loss) 53.7 24.9 9.6 1.2 (7.2)
Net earnings (loss) per common share - diluted $ 2.44 $ 1.19 $ 0.46 $ (0.04) $ (0.35)
Common shares used for diluted EPS 22.1 20.9 20.6 20.4 20.3
Current assets $ 207.2 $ 206.6 $ 194.5 $ 180.8 $ 235.6
Total assets 405.8 396.0 357.7 345.7 411.2
Current liabilities 81.3 74.7 53.5 53.4 57.9
Total liabilities 188.1 267.2 255.5 249.6 267.8
Shareholders' equity $ 217.7 $ 128.8 $ 102.2 $ 96.1 $ 143.4
Shares outstanding (millions) 22.5 20.7 20.5 20.4 20.3
Capital expenditures $ 34.7 $ 20.0 $ 14.9 $ 7.0 $ 5.8
Depreciation and amortization $ 14.3 $ 11.8 $ 11.4 $ 11.4 $ 11.0
Active employees 2,044 1,941 1,696 1,592 1,688
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
LST's revenues are derived from Steel's three business segments: oilfield
products, specialty tubing products, and flat rolled steel and other tubular
products and services.
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 over three-fourths of Steel's
oilfield products volume as measured in tonnage, and exports have ranged from
approximately 6% to 12% 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. According to Baker Hughes, the average
United States rig counts in 1997, 1996, and 1995 were 943, 779, and 723,
respectively. Demand is also affected by the amount of oilfield products
imported into this country as well as available industry inventories. Imported
OCTG represented approximately 16% of the apparent supply in 1997 and 14% in
1996 and 1995, as compared to 24% in 1994. A reduction of imported OCTG from
levels experienced in the 1992 to 1994 period resulted from the imposition of
protective tariffs on certain foreign countries in 1995. These trade tariffs,
which were intended to promote an equitable trade environment, remained in
effect during 1997. Because these protective tariffs cover significant OCTG
producing countries in Asia, the level of imported OCTG has not substantially
changed as a result of currency devaluations and general slowdowns in certain
Asian economies at the end of 1997. The effect of available inventory increased
in significance last year as OCTG mills operated near their full productive
capacity. 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, domestic markets
strengthened considerably in 1997 as oil and gas prices were at levels needed to
justify additional exploration and production spending while efficiencies from
new oilfield technologies continued to lower costs associated with these
activities.
Steel's specialty tubing products segment includes two product groups: Drawn
Over Mandrel (DOM) tubing and as-welded tubing. 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.
Specialty tubing is used in a wide range of industrial applications and,
therefore, demand is sensitive to general economic conditions. Demand increased
during 1997 and open orders were up 56% at year-end as compared to year-end
1996. International shipments of DOM specialty tubing were 26%, 19%, and 15% of
shipments in 1997, 1996, and 1995, 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 is primarily used by Steel in the manufacture of
tubular products, but is also sold to customers for the manufacture of a variety
of commercial and industrial products. Flat rolled steel is sold in highly
competitive markets, with price, quality, and availability primarily determining
customer purchase decisions.
MANUFACTURING. The manufacture of Steel's products is capital intensive.
Utilization rates rose significantly during 1997
12
at Steel's manufacturing facilities. Certain facilities were utilized in excess
of 90% of capacity for significant periods during 1997. 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, coils, electricity, and natural gas. Steel has
entered into certain marketing alliances and manufacturing arrangements with
unrelated companies involving the marketing of their products and processing of
flat rolled steel provided by Steel into tubular products which provides Steel
access to additional manufacturing capacity.
Steel is under a capital expenditure program for the 1997 to 1998 period
totaling approximately $70.0 million. This program is designed to improve
quality and lower costs and will be financed from operating cash flows and
available borrowings under Steel's revolving credit facility.
RESULTS OF OPERATIONS
Consolidated revenues reported in the statements of earnings are as follows:
($ in millions)
1997 1996 1995
-------------- --------------- --------------
$ % $ % $ %
--- --- --- --- --- ---
Oilfield products revenues 454.1 69 371.0 68 241.6 57
Specialty tubing products revenues 129.0 20 109.8 20 115.2 27
Flat rolled steel and other tubular revenues 71.2 11 68.2 12 69.0 16
----- ---- ----- --- ----- ---
Consolidated net revenues 654.3 100 549.0 100 425.8 100
----- ---- ----- --- ----- ---
----- ---- ----- --- ----- ---
Shipments of products by segment are as follows:
(in tons)
1997 1996 1995
------- ------- -------
Oilfield products 632,600 545,300 363,600
Specialty tubing products 119,800 101,500 103,600
Flat rolled steel and other tubular products 194,100 195,800 190,900
------- ------- -------
Total tons shipped 946,500 842,600 658,100
------- ------- -------
------- ------- -------
1997 COMPARED WITH 1996
NET REVENUES of $654.3 million increased 19.2% over 1996. Net revenues from
oilfield products improved 22.4% to $454.1 million in 1997. Shipment volumes
and prices were up from 1996 levels by 16.0% and 5.5%, respectively. Demand for
Steel's OCTG rose as land based drilling increased in 1997. This was reflected
in the average domestic rig count which increased to 943 in 1997 from 779 in
1996. Demand was also favorably impacted by the reduction in imported OCTG
resulting from the continuation of duties imposed on products from certain
countries.
Specialty tubing products revenues increased by 17.5% to $129.0 million from
higher shipment volumes with flat prices. Shipment volumes were up 18.0% due to
additional automotive sales, robust construction activity, and strengthening
demand in the overall economy. Steel achieved higher shipments with new
capacity from the expansion of its specialty tubing facilities in late 1996.
Flat rolled and other tubular products net revenues were up 4.4% to $71.2
million due to higher realized prices with flat shipment volumes.
13
GROSS EARNINGS improved 33.2% to $64.2 million in 1997 from $48.2 million in
1996. The improvement was due to higher shipments of oilfield and specialty
tubing products combined with small price increases for oilfield products and
flat rolled steel. Increased production volumes also resulted in improved gross
margins as raw material costs were essentially unchanged from 1996.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES increased to $19.6 million from
$16.4 million in 1996 due to additional selling expenses associated with higher
sales and continued modernization of computer systems.
INTEREST INCOME decreased $1.4 million in 1997 from 1996 to $3.0 million
primarily due to usage of $25.0 million of invested funds in January to buy the
remaining minority interest in Steel.
INTEREST EXPENSE of $6.6 million was $0.2 million less than 1996 due to the
conversion of LST's $50.0 million subordinated debentures at the end of August
into 2.1 million shares of LST's common stock.
OTHER INCOME, NET. Net other income of $0.3 million and $0.1 million for 1997
and 1996, respectively, consisted of nonrecurring miscellaneous items.
EARNINGS FROM CONTINUING OPERATIONS for 1997 improved to $40.4 million, or $1.83
per diluted share, from $24.9 million, or $1.19 per diluted share, in 1996. The
improvement was due to higher shipment volumes, small price increases for
oilfield products and better gross margins.
EXTRAORDINARY ITEMS totaling $0.9 million, or $.04 per diluted share, reflect a
$1.1 million prepayment charge on the refinancing of Steel's revolving credit
facility and a $2.0 million gain related to reduction of prior reserves for
United Mine Worker's claims.
GAIN FROM DISCONTINUED OPERATIONS of $12.4 million, or $.57 per diluted share,
resulted from receipt of escrowed proceeds of $12.4 million from the prior sale
of American Federal Bank.
NET EARNINGS of $53.7 million, or $2.44 per diluted share, included earnings
from continuing operations of $40.4 million, extraordinary items of $0.9 million
and gain from discontinued operations of $12.4 million.
1996 COMPARED WITH 1995
NET REVENUES increased 28.9% to $549.0 million in 1996 from $425.8 million in
1995. Net revenues of oilfield products increased 53.6% to $371.0 in 1996 from
$241.6 million in 1995. Shipment volumes and prices increased in 1996 from 1995
levels by 50% and 2.4%, respectively, as the average domestic rig count
increased to 779 in 1996 from 723 in 1995. As in 1995, demand for Steel's OCTG
was favorably impacted due to the reduction in imported OCTG resulting from the
continuation of protective tariffs on imported products from certain countries,
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.
Specialty tubing products net revenues decreased by 4.7% to $109.8 million in
1996 from $115.2 million in 1995 primarily attributable to weak demand from
steel service centers which was partially offset by increased demand from
automobile manufacturers. For the specialty tubing product group, 1996 shipment
volume and price decreased by 2.0% and 2.7%, respectively.
Flat rolled and other tubular products net revenues were down 1.2% to $68.2
million in 1996 from $69.0 million in 1995 due to lower average selling prices.
14
GROSS EARNINGS improved 84.0% to $48.2 million in 1996 from $26.2 million in
1995. This was attributable to increased shipments and prices of oilfield
products and a 12.2% decrease in the cost of steel slabs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES increased to $16.4 million in 1996
from $14.6 million in 1995, primarily due to additional sales expenses as
product sales increased and additional spending to modernize management
information systems.
INTEREST INCOME was $1.4 million less in 1996 than in 1995 as short-term
interest rates were lower on average in 1996 than in 1995.
INTEREST EXPENSE for 1996 decreased $1.9 million from $8.7 million in 1995,
reflecting average lower borrowings in 1996 on Steel's revolving credit facility
compared to 1995.
OTHER INCOME, NET. Net other loss in 1996 consisted of miscellaneous items
totaling of $0.1 million. Net other income in 1995 was $2.4 million and
included $3.0 million from the gain on sale of approximately 9,400 acres of land
in East Texas.
EARNINGS FROM CONTINUING OPERATIONS AND NET EARNINGS for 1996 were both $24.9
million or $1.19 per diluted share. For 1995, net earnings and earnings from
continuing operations were both $9.6 million or $0.46 per diluted share.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 1997, LST had available cash and cash equivalents, short-term
investments, and marketable securities totaling $39.5 million.
Also, at year-end Steel had a $100.0 million revolving credit facility, under
which it had $56.6 million of availability, after reduction for borrowings and
outstanding letters of credit. This $100.0 million facility replaced another
$75.0 million credit facility from other lenders in October 1997. Under the new
credit facility interest is payable under one of two rate options: at the
London Interbank Offered Rate (LIBOR) plus an index which is based on quarterly
debt ratio calculations or the institution's prime lending rate. At December
31, 1997, the rate was 6.47% and was indexed at 0.50% over LIBOR. Steel also
pays an indexed rate on the unused portion of the credit facility, which at
December 31, 1997 was 0.15% per annum. The term of the agreement is through
October 2002. The revolving credit agreement also includes requirements to
maintain minimum net worth levels, meet certain financial ratios and restricts
Steel's ability to incur additional indebtedness.
On August 28, 1997, LST's $50.0 million 8% subordinated debentures were
converted into 2.1 million shares of LST common stock.
Steel requires capital primarily to fund general working capital needs and
capital expenditures. Principal sources of funds include cash generated by
operations and borrowings. Steel believes that funds generated by operations
and its borrowing capacity under the revolving credit agreement will provide the
liquidity necessary to fund its cash requirements during 1997.
Steel's operations are subject to restrictive environmental compliance and
permitting requirements of various governmental agencies that include the TNRCC
and the EPA. Steel believes that the cost of maintaining compliance with
environmental requirements will fall within its contemplated operating and
capital expenditure plans, averaging $1 - $3 million annually in the foreseeable
future.
LST and Steel have completed an assessment of certain year 2000 issues on
various computer related systems. Necessary changes outlined in an
implementation plan for corrective actions are being made. It is expected that
the required changes will be made by year 2000 to preclude any material adverse
consequences. Corrective actions are estimated to cost $1 - $1.5 million in
1998 and are being funded primarily from ongoing computer systems operating
budgets. LST and Steel are in
15
the process of conducting an additional assessment of certain year 2000 issues
on Steel's manufacturing equipment, time based operating equipment, and
significant suppliers, which will be completed in 1998. It is anticipated that
corrective actions, if any, will be made by year 2000.
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. LST is
reimbursed by Steel for most of its operating costs as provided by its
cost-sharing agreement with Steel. Under Steel's revolving credit agreement,
funds can be distributed to LST from unrestricted net worth, which at December
31, 1997 was $54.7 million. Unrestricted net worth increases by 50% of Steel's
future net earnings less distributions. At 1997 year-end, restricted net worth
was $108.4 million.
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 plus interest on
unpaid amounts. During 1997, LST's slab purchases amounted to approximately
$113.3 million.
In November 1993, LST sold the stock of AFB, one of its operating subsidiaries,
to Guaranty Federal Bank, F.S.B. (GFB). The sale price was $155.7 million; of
that, LST received $135.7 million in cash on the date of the sale, $5.0 million
in November 1994, and $15.0 million was in escrow to pay for certain GFB claims
pursuant to the sale agreement. During August of 1997, LST received $12.4
million from the escrow in final settlement of all outstanding claims and
recognized the same amount as gain from discontinued operations.
RECENT ACCOUNTING PRONOUNCEMENTS
LST will adopt SFAS No. 130, "Reporting Comprehensive Income" effective January
1, 1998. SFAS No. 130 established standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. LST's only non-owner change
in equity at December 31, 1997, is a minimum pension liability adjustment. Upon
adoption, comprehensive income and the cumulative other comprehensive income
will be reported in a consolidated statement of shareholders' equity which is
currently shown in Note D, to the consolidated financial statements.
LST will adopt SFAS No. 131, "Disclosure about Segments of An Enterprise and
Related Information", effective January 1, 1998. This pronouncement changes the
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments.
SFAS No. 131 will require companies to select segments based on their internal
reporting system. LST's current segments, as reported herein, are consistent
with the company's internal reporting systems. Therefore, adoption of this
pronouncement will not have a significant impact on LST's financial statement
disclosures.
FORWARD LOOKING INFORMATION
The statements included in this Annual Report regarding future financial
performance and results and the other statements that are not historical facts
are forward-looking statements. The words "believes," "intends," "expects,"
"anticipates," "projects," "estimates," "predicts," and similar expressions are
also intended to identify forward-looking statements. Such statements involve
risks, uncertainties and assumptions, including, but not limited to, industry
and market conditions, environmental liabilities, competitive pricing, practices
and conditions, availability and pricing of raw materials, fluctuations in
prices of crude oil and natural gas, the trade environment, the impact of
current and future laws and governmental regulations (particularly environmental
laws and regulations) and other factors discussed in this Annual Report and in
other filings with the Securities and Exchange Commission. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual outcomes may vary materially from those indicated.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LST and its subsidiaries do not invest in commodities or foreign currencies.
LST's investments in cash equivalents, short-term investments and marketable
securities, the weighted average maturity of which is less than one year, are
held to maturity. Therefore, interest rate risk is not considered to be
material. Information regarding LST's investments is included in Note A to the
consolidated financial statements.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Earnings,
for the years ended December 31, 1997, 1996, and 1995. . . . . . . 19
Consolidated Balance Sheets at December 31, 1997 and 1996. . . . . . . . . . 20
Consolidated Statements of Cash Flows,
for the years ended December 31, 1997, 1996, and 1995. . . . . . . 21
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 22
Schedule I - Condensed Financial Information of Registrant . . . . . . . . . 35
17
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, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the three years ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for the three years ended December 31, 1997, 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.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
January 20, 1998
18
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT SHARE DATA)
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
Net revenues $ 654.3 $ 549.0 $ 425.8
Cost of goods sold (590.1) (500.8) (399.6)
------- ------- -------
Gross earnings 64.2 48.2 26.2
Selling, general, and administrative expenses (19.6) (16.4) (14.6)
------- ------- -------
Operating earnings 44.6 31.8 11.6
Interest income 3.0 4.4 5.8
Interest expense (6.6) (6.8) (8.7)
Minority interest in Steel - (3.8) (1.5)
Other income (loss) 0.3 (0.1) 2.4
------- ------- -------
Earnings from continuing operations before income tax 41.3 25.5 9.6
Income tax (0.9) (0.6) -
------- ------- -------
Earnings from continuing operations 40.4 24.9 9.6
Extraordinary items 0.9 - -
------- ------- -------
Earnings before gain from discontinued operations 41.3 24.9 9.6
Gain from discontinued operations 12.4 - -
------- ------- -------
NET EARNINGS $ 53.7 $ 24.9 $ 9.6
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
PER COMMON SHARE - BASIC:
Net earnings from continuing operations $ 1.88 $ 1.21 $ 0.47
Extraordinary items 0.04 - -
Gain from discontinued operations 0.58 - -
-------------------------------------
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $ 2.50 $ 1.21 $ 0.47
PER COMMON SHARE - DILUTED:
Net earnings from continuing operations $ 1.83 $ 1.19 $ 0.46
Extraordinary items 0.04 - -
Gain from discontinued operations 0.57 - -
-------------------------------------
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $ 2.44 $ 1.19 $ 0.46
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
See accompanying notes. 19
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
December 31,
-----------------------
1997 1996
-----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14.2 $ 27.3
Short-term investments 6.3 20.1
Accounts receivable, net 80.1 80.0
Current inventories, net 102.1 76.4
Other current assets 4.5 2.8
-----------------------
TOTAL CURRENT ASSETS 207.2 206.6
Marketable securities 19.0 19.8
Property, plant, and equipment, net 161.4 139.9
Other noncurrent assets 18.2 29.7
-----------------------
TOTAL ASSETS $ 405.8 $ 396.0
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 50.1 $ 46.7
Accrued liabilities 31.2 27.7
Current portion of long-term debt - 0.3
-----------------------
TOTAL CURRENT LIABILITIES 81.3 74.7
-----------------------
Subordinated debentures - 50.0
Revolving credit facility 43.0 37.8
Postretirement benefit obligations 37.8 41.8
Other noncurrent liabilities 26.0 45.8
Minority interest in Steel - 17.1
-----------------------
TOTAL LIABILITIES 188.1 267.2
-----------------------
Commitments and Contingencies (See Note I) - -
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: 23,059,864,
20,683,261, respectively) 23.1 20.7
Capital surplus 209.9 160.1
Minimum pension liability adjustment (9.7) (6.8)
Retained earnings (deficit) 9.4 (44.3)
Treasury stock (548,616 and 48,616 common shares,
respectively, at cost) (15.0) (0.9)
-----------------------
TOTAL SHAREHOLDERS' EQUITY 217.7 128.8
-----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 405.8 $ 396.0
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
See accompanying notes. 20
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
BEGINNING CASH AND CASH EQUIVALENTS $ 27.3 $ 40.0 $ 41.8
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings 53.7 24.9 9.6
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Minority interest in Steel - 3.8 1.5
Gain on sale of discontinued operations (12.4) - -
Depreciation and amortization 14.3 11.8 11.4
Extraordinary item - UMWA liability (2.0) - -
Accounts receivable, net (0.1) (15.8) (9.3)
Current inventories, net (25.7) (20.7) (14.3)
Accounts payable and accrued liabilities 6.9 22.2 -
Other (8.8) (6.6) (3.7)
-------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 25.9 19.6 (4.8)
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (34.7) (20.0) (14.9)
Short-term investments 13.8 12.5 8.4
Proceeds from sale of discontinued operations 12.4 - -
Marketable securities 0.8 (19.8) -
Proceeds from sale of assets - 1.5 4.5
-------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (7.7) (25.8) (2.0)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial borrowings under new revolving credit facility 50.0 - -
Net payments under new revolving credit facility (7.0) - -
Net change in borrowings under old revolving credit facility (37.8) (7.3) 6.1
Installment note repayment (0.3) (1.3) (1.2)
Minority interest contributions for preferred stock in Steel - 1.3 1.0
Treasury stock purchases (14.1) - -
Acquisition of minority interest (25.0) - (1.6)
Issuance of common stock 2.9 0.8 0.7
-------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (31.3) (6.5) 5.0
-------------------------------------
Net decrease in cash and cash equivalents (13.1) (12.7) (1.8)
-------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 14.2 $ 27.3 $ 40.0
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Conversion of subordinated debentures to common stock $ 50.0 - -
See accompanying notes. 21
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 globally markets oilfield products to the oil and gas drilling industry,
specialty tubing products to automotive, fluid power, and other markets for
various mechanical applications, and flat rolled steel and other tubular
products to domestic industrial markets.
ACCOUNTING POLICIES - NOTE A
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of LST and its subsidiaries. Intercompany transactions are eliminated
in consolidation. Gain from discontinued operations in 1997 relates to the
final settlement of the 1993 sale of American Federal Bank (see Note J).
CASH, INVESTMENTS, AND MARKETABLE SECURITIES. LST's cash equivalents include
U.S. government and related agencies obligations and corporate debt instruments
rated A-1, P-1 or higher with original maturities of less than three months.
Short-term investments consist of U. S. government and related agencies debt
obligations and corporate debt instruments with maturities at purchase greater
than three months and up to one year. Marketable securities consist of U. S.
government and related agencies debt obligations with maturities at purchase
greater than one year and up to two years. LST's total cash equivalents, short-
term investments and marketable securities, the weighted average maturity of
which is less than one year, are classified as held-to-maturity because LST has
the intent and ability to hold them to maturity. At December 31, 1997, LST's
cash and cash equivalents, short-term investments and marketable securities,
which had a carrying amount that approximated market value, consisted of $30.0
million in U. S. government and related agencies obligations and $9.5 million in
corporate debt instruments at amortized cost.
INVENTORIES are stated at the lower of cost (principally last-in, first-out
"LIFO") or market value and include raw materials, labor, and overhead.
PROPERTY, PLANT, AND EQUIPMENT are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of depreciable assets.
Long-lived assets including property, plant and equipment are periodically
evaluated in accordance with Statement of Financial Accounting Standards No. 121
to determine whether events or changes in circumstances have occurred that
indicate the remaining asset balances may not be recoverable and an impairment
loss should be recorded.
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. In January 1997, all of the outstanding common stock,
preferred stock, and warrants held by other shareholders of Steel were purchased
by LST, making Steel a wholly owned subsidiary. This acquisition was accounted
for under the purchase method of accounting. Prior to 1997, minority ownership
in Steel was included in the liabilities section of LST's consolidated balance
sheets, and results for the years ended December 31, 1996 and 1995 were adjusted
in the consolidated statements of earnings to reflect the participation of
minority ownership in Steel's earnings.
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.
22
RECLASSIFICATIONS. Certain 1996 balances have been reclassified to conform to
current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS. LST will adopt SFAS No. 130, "Reporting
Comprehensive Income" effective January 1, 1998. SFAS No. 130 established
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income is
defined as the total of net income and all other non-owner changes in equity.
LST's only non-owner change in equity at December 31, 1997, is a minimum pension
liability adjustment. Upon adoption, comprehensive income and the cumulative
other comprehensive income will be reported in a consolidated statement of
shareholders' equity which is currently shown in Note D, to the consolidated
financial statements.
LST will adopt SFAS No. 131, "Disclosure about Segments of An Enterprise and
Related Information", effective January 1, 1998. This pronouncement changes the
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments.
SFAS No. 131 will require companies to select segments based on their internal
reporting system. LST's current segments, as reported herein, are consistent
with the company's internal reporting systems. Therefore, adoption of this
pronouncement will not have a significant impact on LST's financial statement
disclosures.
23
LINES OF BUSINESS AND CURRENT OPERATING ENVIRONMENT - NOTE B
Steel serves three business segments: oilfield products, specialty tubing
products, and flat rolled steel and other tubular products and services.
Oilfield products are comprised of casing, tubing, and line pipe, that are
manufactured and marketed globally to the oil and gas drilling industry.
Specialty tubing products consist of Drawn Over Mandrel (DOM) tubing and as-
welded tubing that are manufactured and marketed globally to automotive, fluid
power, and other markets for various mechanical applications. Flat rolled steel
and other tubular products and services are manufactured and provided to general
industrial markets.
Years ended December 31,
($ in millions; unaudited)
1997 1996 1995
---------- ---------- ----------
OILFIELD PRODUCTS
Net revenues $ 454.1 $ 371.0 $ 241.6
Operating earnings (loss) 36.1 17.2 (3.1)
Identifiable assets 238.0 208.5 163.7
Capital expenditures 22.1 8.7 6.9
Depreciation and amortization $ 9.0 $ 8.1 $ 6.9
SPECIALTY TUBING PRODUCTS
Net revenues $ 129.0 $ 109.8 $ 115.2
Operating earnings 12.3 17.7 17.3
Identifiable assets 103.4 83.3 79.4
Capital expenditures 12.2 11.0 7.5
Depreciation and amortization $ 4.6 $ 2.9 $ 3.3
FLAT ROLLED AND OTHER TUBULAR PRODUCTS
Net revenues $ 71.2 $ 68.2 $ 69.0
Operating loss (1.1) (1.6) (0.8)
Identifiable assets 20.4 23.1 28.1
Capital expenditures 0.4 0.3 0.5
Depreciation and amortization $ 0.7 $ 0.8 $ 1.2
CORPORATE AND OTHER NON-SEGMENTS
Net revenues $ - $ - $ -
Operating loss (2.7) (1.5) (1.8)
Identifiable assets $ 44.0 $ 81.1 $ 86.5
TOTAL FROM CONTINUING OPERATIONS
Net revenues $ 654.3 $ 549.0 $ 425.8
Operating earnings 44.6 31.8 11.6
Total assets 405.8 396.0 357.7
Capital expenditures 34.7 20.0 14.9
Depreciation and amortization $ 14.3 $ 11.8 $ 11.4
Sales of oilfield products 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, such as competition from foreign imports, demand for these
steel products can be subject to significant fluctuations.
24
Steel's specialty tubing products segment includes two product groups: DOM
tubing and as-welded tubing. 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. Specialty
tubing is used in a wide range of industrial applications and, therefore, demand
is sensitive to general economic conditions.
Steel's participation in the flat rolled steel commodity market to some extent
involves its excess capacity for flat rolled steel as related to the manufacture
of its oilfield and specialty tubing products and certain cost considerations
associated with its total manufacturing operations. Steel's flat rolled steel
commodity market is generally concentrated in the southwestern region of the
United States. Flat rolled steel is sold in highly competitive markets, with
price, quality, and availability primarily determining customer purchase
decisions.
Steel's primary manufacturing facilities are located in East Texas. Raw
materials and supplies, principally scrap steel, steel slabs, and steel coils
used in the manufacture of Steel's products have historically been readily
available from various competitive sources. The manufacture of Steel's products
uses several common facilities and shares administrative support. Accordingly,
the segment information contains certain costs and assets which are allocated
and may not reflect each line of business as if it were operated separately.
Steel's principal market is domestic, although sales are also made into
international markets. The majority of sales of tubular products occur through
networks of sales distributors, although some tubular product sales and most
flat rolled steel sales are made directly to end users. Sales to the largest
oilfield products customer were approximately 13% of net revenues in 1997, and
10% in both 1996, and 1995. Sales to another significant customer of flat
rolled steel and other tubular products were approximately 8%, 9%, and 12% of
net revenues for 1997, 1996, and 1995, respectively. Direct foreign revenues as
a percent of total revenues were approximately 9% of the total in 1997, 1996,
and 1995.
Of Steel's total labor force, 68% are represented by three collective bargaining
agreements. The majority of union workers are represented by the United
Steelworkers of America under a contract signed in May 1996, which expires on
May 31, 2001, with a provision to reopen the contract for wages but not other
benefit or work conditions after May 31, 1999.
LST and Steel have completed an assessment of certain year 2000 issues on
various computer related systems. Necessary changes outlined in an
implementation plan for corrective actions are being made. It is expected that
the required changes will be made by year 2000 to preclude any material adverse
consequences. Corrective actions are estimated to cost $1 - $1.5 million in
1998 and are being funded primarily from ongoing computer systems operating
budgets. LST and Steel are in the process of conducting an additional
assessment of certain year 2000 issues on Steel's manufacturing equipment, time
based operating equipment, and significant suppliers, which will be completed in
1998. It is anticipated that corrective actions, if any, will be made by year
2000.
25
ADDITIONAL BALANCE SHEET INFORMATION - NOTE C
($ in millions)
1997 1996
---------- ----------
INVENTORIES
Finished goods $ 40.1 $ 28.1
Work in process 77.0 62.2
Raw materials 4.1 7.5
Materials, supplies, and other 27.5 25.3
---------- ----------
Total inventories before LIFO valuation reserve 148.7 123.1
Reserve to reduce inventories to LIFO value (37.4) (36.5)
---------- ----------
Total inventories 111.3 86.6
Amount included in other noncurrent assets (9.2) (10.2)
---------- ----------
Net current inventories $ 102.1 $ 76.4
---------- ----------
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements $ 11.2 $ 11.1
Buildings, structures, and improvements 13.3 13.0
Machinery and equipment 291.9 275.9
Construction in progress 26.4 9.6
---------- ----------
Total property, plant, and equipment 342.8 309.6
Less accumulated depreciation and amortization (181.4) (169.7)
---------- ----------
Property, plant, and equipment, net $ 161.4 $ 139.9
---------- ----------
---------- ----------
OTHER NONCURRENT ASSETS
Funds held in escrow $ - $ 15.0
Inventory (supplies and spare parts) 9.2 10.2
Other 9.0 4.5
---------- ----------
Total other noncurrent assets $ 18.2 $ 29.7
---------- ----------
---------- ----------
ACCRUED LIABILITIES
Accrued compensation $ 8.4 $ 7.7
Property taxes 4.1 3.3
Warranty reserves 2.6 2.6
Environmental reserves 2.0 2.0
Pension obligations 3.0 4.5
Other 11.1 7.6
---------- ----------
Total accrued liabilities $ 31.2 $ 27.7
---------- ----------
---------- ----------
OTHER NONCURRENT LIABILITIES
Environmental reserves $ 11.1 $ 13.1
UMWA obligations 7.3 9.7
Deferred gain on sale of discontinued operations - 15.0
Other 7.6 8.0
---------- ----------
Total other noncurrent liabilities $ 26.0 $ 45.8
---------- ----------
---------- ----------
The Coal Industry Retiree Health Benefit Act of 1992 ("Act") created a benefit
plan fund to provide medical and death benefits to certain United Mine Workers
of America ("UMWA") retirees and eligible dependents. Steel is required to pay
premiums assessed annually under the Act for the benefit of former employees who
worked in Steel's now-discontinued coal mining
26
operations. A liability has been recorded for the total estimated future
payments related to this Act. Steel is making these payments under protest.
During 1997, the estimated UMWA liability was adjusted downward resulting in a
$2.0 million extraordinary gain.
Accounts receivable is stated net of allowance for doubtful accounts of $1.4
million both at December 31, 1997 and 1996. Approximately $140.8 million and
$116.8 million of total inventories before LIFO valuation reserves were
accounted for on the LIFO basis at December 31, 1997 and 1996, respectively.
Non-LIFO inventories are stated at the lower of average cost or market. The
total inventories before LIFO valuation reserves approximate replacement cost of
the inventories.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - NOTE D
($ in millions)
------------------------------------------------------------------------------------------
Minimum
Pension Retained
Common Capital Liability Earnings Treasury
Stock Surplus Adjustment (Deficit) Stock Total
---------- ---------- ---------- ---------- ---------- ----------
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
Employee benefit plan stock issuance 0.2 0.6 - - - 0.8
Pension liability adjustment - - 0.9 - - 0.9
Net earnings - - - 24.9 - 24.9
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 20.7 160.1 (6.8) (44.3) (0.9) 128.8
Employee benefit plan stock issuance 0.3 2.6 - - - 2.9
Acquisition of minority interest - - (1.2) - - (1.2)
Pension liability adjustment - - (1.7) - - (1.7)
Conversion of subordinated debentures 2.1 47.2 - - - 49.3
Treasury stock purchases - - - - (14.1) (14.1)
Net earnings - - - 53.7 - 53.7
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 23.1 209.9 (9.7) 9.4 (15.0) 217.7
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
CHANGE IN COMMON SHARES OUTSTANDING:
Treasury
Issued Stock Outstanding
------------ ------------ ------------
Balance, December 31, 1995 20,556,816 (48,616) 20,508,200
Employee benefit plans 126,445 - 126,445
------------ ------------ ------------
Balance, December 31, 1996 20,683,261 (48,616) 20,634,645
Employee benefit plans 316,200 - 316,200
Subordinated debenture conversion 2,060,403 - 2,060,403
Treasury share purchases - (500,000) (500,000)
------------ ------------ ------------
Balance, December 31, 1997 23,059,864 (548,616) 22,511,248
------------ ------------ ------------
------------ ------------ ------------
27
DEBT - NOTE E
At December 31,
($ in millions)
1997 1996
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
LST convertible subordinated debentures $ - $ - $ 50.0 $ 45.0
Steel revolving credit facilities 43.0 43.0 37.8 37.8
Steel 48-month installment note - - 0.3 0.3
-------- -------- -------- --------
Total debt 43.0 43.0 88.1 83.1
Less current installments - - (0.3) (0.3)
-------- -------- -------- --------
Total long-term debt $ 43.0 $ 43.0 $ 87.8 $ 82.8
-------- -------- -------- --------
-------- -------- -------- --------
On July 28, 1997, LST called for redemption of its $50.0 million principal
amount 8% convertible subordinated debentures due 2002. By the end of August
1997, substantially all of the debentures were converted into LST common stock,
increasing the total shares outstanding by 2.1 million.
At December 31, 1997, Steel had a $100.0 million revolving credit facility,
under which it had $56.6 million of availability after reduction for borrowings
and outstanding letters of credit. This $100.0 million facility replaced
another $75.0 million credit facility from other lenders in October 1997. A
$1.1 million prepayment penalty was recognized as an extraordinary item on
retirement of the old credit agreement (see Note J). Under the new credit
arrangement interest is payable under one of two rate options: at the London
Interbank Offered Rate (LIBOR) plus an index which is based on quarterly debt
ratio calculations or the institution's prime lending rate. At December 31,
1997 the rate was 6.47% and was indexed at 0.50% over LIBOR. Steel also pays an
indexed rate on the unused portion of the credit facility, which at December 31,
1997 was 0.15% per annum. The term of the agreement is through October 2002 and
it is collateralized by the assets of Steel excluding real property. Other
requirements include meeting minimum net worth levels and certain financial
ratios, and restrictions on Steel's ability to incur additional indebtedness.
Under the agreement, Steel can distribute funds to LST from unrestricted net
worth, which at December 31, 1997 was $54.7 million. Unrestricted net worth
increases by 50% of LSS's future net earnings, less distributions. At 1997 year
end, restricted net worth of Steel was $108.4 million.
Cash paid for interest during 1997, 1996, and 1995 was $9.4 million, $7.2
million, and $8.9 million, respectively. Interest of $0.4 million was
capitalized into property, plant, and equipment during 1996.
NET EARNINGS PER SHARE - NOTE F
During 1997 LST adopted SFAS No. 128, "Earnings Per Share." Under SFAS No. 128
basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock. The numbers of shares used to compute
basic earnings per share in 1997, 1996, and 1995 were approximately 21.5
million, 20.6 million, and 20.4 million, respectively. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock and other dilutive securities. The number of shares used
to compute diluted earnings per share in 1997, 1996, and 1995 were approximately
22.1 million, 20.9 million, and 20.6 million, respectively.
INCOME TAXES - NOTE G
There was a current income tax expense for federal alternative minimum tax of
$0.9 million in 1997, $0.6 million in 1996, and
28
none in 1995. Cash paid for income taxes was $1.3 million in 1997, and none in
1996 and 1995. There was no deferred income tax expense or benefit for 1997,
1996, or 1995. A reconciliation of computed income taxes to actual income taxes
follows:
($ in millions)
1997 1996 1995
-------- -------- --------
Earnings from continuing operations before income tax $ 41.3 $ 25.5 $ 9.6
Statutory federal income tax rate 35% 35% 35%
-------- -------- --------
Income tax expense at statutory rate 14.5 8.9 3.4
Minority interest in Steel - (1.3) (0.5)
Net operating loss, benefit recognized (13.6) (7.0) (2.9)
-------- -------- --------
Income taxes (federal alternative minimum tax) $ 0.9 $ 0.6 $ -
-------- -------- --------
-------- -------- --------
The following table discloses the components of the deferred tax amounts at
December 31, 1997 and 1996:
($ in millions)
1997 1996
-------- --------
DEFERRED TAX ASSETS - temporary differences
Postretirement benefit accruals $ 13.0 $ 14.5
Environmental reserves 4.6 5.3
UMWA liability 2.7 3.5
Deferred gains - 5.0
Other expense accruals and reserves 7.5 7.4
Inventories 4.3 4.3
Other 0.5 0.5
-------- --------
Total deferred tax assets - temporary differences 32.6 40.5
Net operating loss carryforwards 78.1 86.2
-------- --------
Total deferred tax assets 110.7 126.7
DEFERRED TAX LIABILITY - temporary difference for basis in
and depreciation of property, plant, and equipment (35.7) (35.6)
-------- --------
Net deferred tax assets 75.0 91.1
Less valuation allowance (75.0) (91.1)
-------- --------
NET DEFERRED TAX AMOUNT $ - $ -
-------- --------
-------- --------
At December 31, 1997, LST had federal tax net operating loss carryforwards
(NOL's) of approximately $223.1 million, a portion of which may be related to
AFB and subject to an agreement with the Federal Deposit Insurance Corporation
(FDIC) whereby LST may be required to pay the FDIC for certain tax benefits. If
not utilized, the NOL's will expire between years 2002 and 2010, 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. Due to these uncertainties
regarding possible utilization of NOL's and the sensitivity of Steel's earnings
to the level of domestic drilling activity, valuation allowances were recorded
to fully reserve the computed net deferred tax assets.
EMPLOYEE BENEFIT PLANS - NOTE H
DEFINED CONTRIBUTION PLANS. LST and Steel have defined contribution plans
available to substantially all full-time employees under which participants can
make voluntary pretax contributions. For nonbargaining unit employees, LST and
Steel make matching contributions within specified limits. Steel makes
contributions at rates specified under collective agreements for its bargaining
unit employees. Steel and LST contributions totaled $1.5 million in 1997, $0.8
million in 1996, and $0.7 million in 1995.
29
STOCK OPTION PLAN. LST has a long-term incentive plan which provides for the
issuance of up to 2,700,000 shares of common stock to key employees and outside
directors through the granting of incentive (the right to grant further
incentive options expired in 1995) and nonqualified stock options, stock
appreciation rights, restricted stock grants, and performance unit grants. The
option price is the average of the high and low market price on the date of the
grant. Options are generally exercisable for ten years with one-fourth of the
shares becoming exercisable on the one-year anniversary of the grant date and an
additional one-fourth becoming exercisable on the same anniversary date over the
next three years. If a change of control of LST occurs before an option's
fourth anniversary, the option may be exercised in full earlier. Also,
accelerated vesting of options can occur upon death or retirement from
employment of an option holder. Following is a summary of stock option activity
during 1997, 1996, and 1995:
Weighted
Average
Exercise
Shares Under Option Price Range ($) Price ($)
------------------- --------------- ---------
OUTSTANDING, DECEMBER 31, 1994 824,647 2.59 - 17.38 7.56
Granted in 1995 232,500 6.88 - 8.13 7.68
Exercised in 1995 (96,130) 3.06 - 8.50 7.17
Canceled in 1995 (68,161) 5.88 - 16.13 7.99
-------- ----- ----- --------
OUTSTANDING, DECEMBER 31, 1995 892,856 2.59 - 17.38 7.60
Granted in 1996 105,000 11.06 - 11.06 11.06
Exercised in 1996 (126,445) 2.59 - 8.31 5.27
Canceled in 1996 (19,336) 6.00 - 11.06 7.73
-------- ----- ----- --------
OUTSTANDING, DECEMBER 31, 1996 852,075 2.59 - 17.38 8.37
Granted in 1997 390,000 19.06 - 19.75 19.33
Exercised in 1997 (316,200) 3.06 - 17.38 9.13
-------- ----- ----- --------
OUTSTANDING, DECEMBER 31, 1997 925,875 2.59 - 19.75 12.73
-------- ----- ----- --------
-------- ----- ----- --------
At December 31, 1997, 847,775 shares were available for grant and 354,625 shares
were exercisable.
The weighted average fair value per option granted in 1997, 1996, and 1995 was
$9.72, $5.91, and $4.71, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for grants in 1997, 1996, and 1995,
respectively: risk free interest rates of 6.36%, 5.73%, and 6.88%; volatility of
47.94%, 54.4%, and 65.5%; and expected lives of five years for all 1997, 1996,
and 1995 option grants with payment of no dividends.
LST accounts for this plan under APB Opinion 25, under which no compensation
cost has been recognized. Had compensation cost for this plan been determined
consistent with FASB Statement No. 123, net income and earnings per share would
have been reduced to the following pro forma amounts:
($ in millions)
1997 1996 1995
------ ------ ------
Net income - as reported $ 53.7 $ 24.9 $ 9.6
- pro forma $ 52.6 $ 24.6 $ 9.4
Basic earnings per share - as reported $ 2.50 $ 1.21 $ .47
- pro forma $ 2.45 $ 1.20 $ .46
Diluted earnings per share - as reported $ 2.44 $ 1.19 $ .46
- pro forma $ 2.39 $ 1.18 $ .46
30
Because the Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
POSTRETIREMENT BENEFIT PLANS. 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 and their spouses until they reach the age of 65, at which
time coverage terminates. Additionally, Steel provides for certain other
postretirement benefits, primarily life insurance. Steel accrues for the
anticipated cost of these postretirement benefits over the employees' years of
service. Net postretirement benefits expense for 1997, 1996, and 1995 included
the following components:
($ in millions)
1997 1996 1995
------ ------ ------
Service cost - benefits earned $ 0.5 $ 0.5 $ 0.4
Interest cost on unfunded accumulated
benefit obligation $ 0.9 $ 0.8 $ 0.9
Amortization of net gain - (0.1) -
------ ------ ------
Total postretirement benefits expense $ 1.4 $ 1.2 $ 1.3
------ ------ ------
------ ------ ------
The following table sets forth the unfunded status and the amounts recognized
for postretirement benefits in the consolidated balance sheets at December 31,
1997 and 1996:
($ in millions)
1997 1996
---------- ----------
Accumulated benefit obligation
Retirees $ 1.7 $ 1.9
Active plan participants - fully eligible 0.4 0.3
Active plan participants - not fully eligible 10.2 9.7
---------- ----------
Unfunded accumulated benefit obligation 12.3 11.9
Unrecognized net gain 0.8 0.5
---------- ----------
Net benefit obligation recognized in consolidated
balance sheet 13.1 12.4
Amount included in accrued liabilities (0.8) (0.9)
---------- ----------
Amount included in postretirement benefit obligations $ 12.3 $ 11.5
---------- ----------
---------- ----------
The annual rate of the increase in per capita cost of covered health care
benefits was assumed to gradually decrease from 8% 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 $1.2 million for
accumulated benefits at December 31, 1997, and an additional $0.2 million in the
aggregate of the service cost and interest cost components of net benefits
expense for 1997. A weighted average discount rate of 7% and 7.5% was used to
determine the accumulated obligation at December 31, 1997 and 1996,
respectively.
PENSION PLANS. Steel has three defined benefit pension plans covering
substantially all of its bargaining unit employees. Retirement benefits are
based on years of service at progressively increasing flat-rate amounts. A
special lump-sum payment equal to 13 weeks of vacation pay is made upon
retirement. Steel's policy is to fund the minimum contribution each year as
required by applicable regulations.
During 1996, the largest of Steel's three plans was amended so that new
employees hired on or after June 4, 1996, do not participate in the defined
benefit plan. Such new employees are eligible to participate in one of Steel's
defined contribution retirement plans, as are substantially all other employees.
The amendment also provided for increased benefits to plan participants retiring
on or after June 1, 1996.
31
November 30th was the measurement date for determining the plans' assets and
obligations for 1997 and 1996. At December 31, 1997 and 1996, the plans' funded
status and amounts recognized in the consolidated balance sheets were as
follows:
($ in millions)
1997 1996
-------- --------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 79.1 $ 76.2
-------- --------
-------- --------
Accumulated benefit obligation $ 81.9 $ 78.8
-------- --------
-------- --------
Projected benefit obligation $ 82.7 $ 79.4
Plans' assets at fair value (53.2) (44.0)
-------- --------
Projected benefit obligation in excess of plans' assets 29.5 35.4
Unrecognized net loss (10.7) (8.7)
Prior service cost not yet recognized in net pension expense (1.3) (1.5)
Unrecognized net obligation at January 1, 1986 (3.1) (4.0)
Adjustment required to recognize minimum liability 14.1 13.6
-------- --------
Pension liability recognized in consolidated balance sheet 28.5 34.8
Amount included in accrued liabilities (3.0) (4.5)
-------- --------
Amount included in postretirement benefit obligations $ 25.5 $ 30.3
-------- --------
-------- --------
In determining the projected benefit obligation, weighted average discount rates
of 7% and 7.5% were used for 1997 and 1996, respectively. The expected
long-term rate of return on assets was assumed to be 9% for both years. The
annual rate of increase in compensation was assumed to be 4% for both 1997 and
1996. Steel has recorded an adjustment, as shown in the above table, to
recognize a minimum pension liability. Offsetting this liability at December
31, 1997, was a noncurrent intangible asset of $4.4 million and a reduction of
shareholders' equity of $9.7 million, with no recorded tax benefit assumed. The
December 31, 1996 balance sheet reflected an offsetting $5.6 million intangible
asset and a reduction of shareholders' equity of $6.8 million, net of minority
interest. The plans' assets consist primarily of short-term money market
investments, government and corporate obligations, real estate, and public
market equity securities.
Net pension expense in 1997, 1996, and 1995 was as follows:
($ in millions)
1997 1996 1995
-------- -------- --------
Service cost - benefits earned $ 0.9 $ 0.9 $ 0.7
Interest cost on projected benefit obligation 5.5 5.6 5.7
Return on plan assets (6.6) (6.2) (6.8)
Net amortization and deferral 4.2 4.1 5.0
-------- -------- --------
Total pension expense $ 4.0 $ 4.4 $ 4.6
-------- -------- --------
-------- -------- --------
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 $3.9 million,
$2.7 million, and $0.6 million for 1997, 1996, and 1995, respectively.
32
COMMITMENTS AND CONTINGENCIES - NOTE I
Steel has various commitments for the purchase of raw materials, supplies,
services, and energy arising in the ordinary course of business. The majority
of these commitments are for a period of less than one year.
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 and are computed
on a non-discounted basis. 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
$3.9 million, $3.7 million, and $3.5 million in 1997, 1996, and 1995,
respectively. Future minimum lease payments under noncancellable operating
leases are as follows: 1998, $1.7 million; 1999, $1.6 million; 2000, $1.1
million; 2001, $0.6 million; and 2002, $0.4 million, and thereafter,
$0.9 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.
GAIN FROM DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEMS - NOTE J
In November 1993, LST sold the stock of AFB, one of its operating subsidiaries.
The sale price was $155.7 million; of that, LST received $135.7 million in cash
on the sale date. Additional payments were received of $5.0 million in November
1994 and $12.4 million in August 1997, and recognized as gains from discontinued
operations. There were no income tax effects recognized for these items.
Extraordinary items recognized in 1997 include a gain of $2.0 million related to
reduction of the UMWA liability (Note C), reduced by a loss of $1.1 million for
the early prepayment fee in connection with the refinancing of Steel's revolving
credit facility (Note E). There were no income tax effects recognized for these
items.
33
QUARTERLY FINANCIAL SUMMARY - NOTE K
($ in millions, except share amounts; quarterly amounts unaudited):
Quarter
-----------------------------------------------------
1997 First Second Third Fourth Total Year
- ---- -------- -------- -------- -------- ----------
Net revenues $ 159.2 $ 172.3 $ 167.4 $ 155.4 $ 654.3
Gross earnings 14.3 16.3 16.7 16.9 64.2
Earnings from continuing operations 7.8 10.3 10.7 11.6 40.4
Extraordinary items - - - 0.9 0.9
Gain from discontinued operations - - 12.4 - 12.4
Net earnings $ 7.8 $ 10.3 $ 23.1 $ 12.5 $ 53.7
PER COMMON SHARE - BASIC:
- -------------------------
Earnings from continuing operations $ 0.38 $ 0.50 $ 0.50 $ 0.51 $ 1.88
Extraordinary items - - - 0.04 0.04
Gain from discontinued operations - - 0.58 - 0.58
-------- -------- -------- -------- --------
Net earnings available to common shareholders $ 0.38 $ 0.50 $ 1.08 $ 0.55 $ 2.50
PER COMMON SHARE - DILUTED:
- ---------------------------
Earnings from continuing operations $ 0.37 $ 0.48 $ 0.48 $ 0.49 $ 1.83
Extraordinary items - - - 0.04 0.04
Gain from discontinued operations - - 0.56 - 0.57
-------- -------- -------- -------- --------
Net earnings available to common shareholders $ 0.37 $ 0.48 $ 1.04 $ 0.53 $ 2.44
1996
- ----
Net revenues $ 112.5 $ 141.9 $ 143.0 $ 151.6 $ 549.0
Gross earnings 7.3 13.2 12.9 14.8 48.2
Net earnings $ 2.6 $ 7.1 $ 7.2 $ 8.0 $ 24.9
PER COMMON SHARE - BASIC:
- -------------------------
Net earnings available to common shareholders $ 0.13 $ 0.35 $ 0.35 $ 0.39 $ 1.21
PER COMMON SHARE - DILUTED:
- ---------------------------
Net earnings available to common shareholders $ 0.13 $ 0.34 $ 0.34 $ 0.38 $ 1.19
34
LONE STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
($ in millions, except share data)
Year ended December 31,
--------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1997 1996 1995
- ---------------------------------- -------- -------- --------
Net earnings $ 53.7 $ 24.9 $ 9.6
Undistributed equity in Steel's earnings (39.9) (22.7) (6.6)
Gain on sale of discontinued operations (12.4) - -
Other (14.8) 3.5 (3.4)
-------- -------- --------
Net cash provided (used) by operating activities (13.4) 5.7 (0.4)
Net cash provided (used) by investing activities 27.0 (19.2) (2.0)
Net cash provided (used) by financing activities (36.2) 0.8 0.7
-------- -------- --------
Net decrease in cash and cash equivalents (22.6) (12.7) (1.7)
Beginning cash and cash equivalents 27.3 40.0 41.7
-------- -------- --------
Ending cash and cash equivalents $ 4.7 $ 27.3 $ 40.0
-------- -------- --------
-------- -------- --------
Years ended December 31,
--------------------------------------
CONDENSED STATEMENTS OF EARNINGS 1997 1996 1995
- -------------------------------- -------- -------- --------
General and administrative expenses $ (2.8) $ (1.5) $ (1.8)
Steel cost sharing 2.3 1.5 1.5
Equity in Steel's earnings 39.9 22.7 6.6
Interest income 2.9 4.4 5.8
Interest expense (2.7) (4.0) (4.0)
Other income from Steel 1.7 1.8 1.5
Gain on sale of discontinued operations 12.4 - -
-------- -------- --------
Net earnings $ 53.7 $ 24.9 $ 9.6
-------- -------- --------
-------- -------- --------
Cash dividends received from Steel $ - $ - $ -
-------- -------- --------
-------- -------- --------
As of December 31, 1997
-----------------------
CONDENSED BALANCE SHEETS 1997 1996
- ------------------------ -------- --------
Current assets:
Cash and cash equivalents $ 4.7 $ 27.3
Short-term investments 6.3 20.1
Due from Steel 30.2 11.4
Other current assets 0.1 0.1
-------- --------
Total current assets 41.3 58.9
Investment in Steel 163.1 108.0
Marketable securities 19.0 19.8
Other noncurrent assets 4.5 13.7
-------- --------
Total assets $ 227.9 $ 200.4
-------- --------
-------- --------
Current liabilities $ 5.3 $ 1.7
Long-term debt - 50.0
Other noncurrent liabilities 4.9 19.9
-------- --------
Total liabilities 10.2 71.6
-------- --------
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:
23,059,864 and 20,683,261, respectively) 23.1 20.7
Capital surplus 209.9 160.1
Minimum pension liability adjustment (9.7) (6.8)
Retained earnings 9.4 (44.3)
Treasury stock (548,616 and 48,616 common shares,
respectively, at cost) (15.0) (0.9)
-------- --------
Total shareholders' equity 217.7 128.8
-------- --------
Total liabilities and shareholders' equity $ 227.9 $ 200.4
-------- --------
-------- --------
35
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 1998 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 1998 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 1998 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 1998 Annual Meeting of
Shareholders, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements - The following Consolidated Financial Statements
are filed as part of this report:
- Report of Independent Public Accountants
- Consolidated Statements of Earnings - for the years ended
December 31, 1997, 1996, and 1995
- Consolidated Balance Sheets at December 31, 1997 and 1996
- Consolidated Statements of Cash Flows - for the years ended
December 31, 1997, 1996, and 1995
- 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.
36
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).*
10.1(a) Amendments to the Amended 1985 Long-Term Incentive Plan adopted on May
8, 1997 (incorporated by reference to Exhibit 10.1(a) to Form 10-Q of
LST for the quarter ended June 30, 1997).*
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 Employment Retention Policy adopted May 8, 1997, letter agreements
dated May 22, 1997 between LST and John P. Harbin, Charles J. Keszler
and Robert F. Spears and between Steel and W. Byron Dunn and letter
agreement dated September 25, 1997 between LST and Rhys J. Best.*
10.4 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).
10.5 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 10.9 to Form 10-K
as filed on March 28, 1996).
10.6 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 10.10 to Form
10-K as filed on March 28, 1996).
10.7 Amendment Agreement dated March 4, 1996, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business Credit,
Inc. and Steel (incorporated by reference to same numbered Exhibit to
Form 10-K for the year ended December 31, 1996).
10.8 Amendment Agreement dated January 17, 1997, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business Credit,
Inc. and Steel (incorporated by reference to same numbered Exhibit to
Form 10-K for the year ended December 31, 1996).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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
37
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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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
(incorporated by reference to Exhibit 10.23 to Form 10-K as filed on
March 28, 1996).
10.21 Contract for Electric Service dated September 30, 1996 between
Southwestern Electric Power Company and Steel (incorporated by
reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1996).
10.22 Assignment, Termination and Release dated January 21, 1997, among
Steel, LST, and the minority shareholders of Steel (incorporated by
reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1996).
10.23 Credit Agreement dated as of October 2, 1997 by and among Steel and
the banks named therein.
10.24 Cost Sharing Agreement dated as of July 1, 1997 between LST and Steel,
replacing Cost Sharing Agreement dated May 16, 1991 (Exhibit 10.12 to
this Form 10-K).
10.25 Termination Agreement dated as of July 1, 1997 between LST and Steel,
terminating Tax Allocation and Indemnification Agreement dated May 16,
1991 (Exhibit 10.13 to this Form 10-K).
10.26 Compromise and Settlement Agreement and Release dated July 31, 1997
between LST and Guaranty Federal Bank, F.S.B.
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
24 Powers of Attorney.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
Date of Report Date Filed Description
-------------- ---------- ------------------------------
None.
38
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: February 20, 1998 By: /s/ Charles J. Keszler
-----------------------------------
(Charles J. Keszler)
Vice President - Finance
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ----------- ----- ----
/s/ John P. Harbin , Chairman, Director, and February 20, 1998
- ---------------------------------------- Chief Executive Officer
(John P. Harbin) (Principal Executive Officer)
/s/ Charles J. Keszler , Vice President-Finance and February 20, 1998
- ---------------------------------------- Treasurer (Principal Financial
(Charles J. Keszler) and Accounting Officer)
/s/ Rhys J. Best *, Director February 20, 1998
- ----------------------------------------
(Rhys J. Best)
/s/ Charles L. Blackburn *, Director February 20, 1998
- ----------------------------------------
(Charles L. Blackburn)
/s/ Dean P. Guerin *, Director February 20, 1998
- ----------------------------------------
(Dean P. Guerin)
/s/ Frederick B. Hegi, Jr. *, Director February 20, 1998
- ----------------------------------------
(Frederick B. Hegi, Jr.)
/s/ James E. McCormick *, Director February 20, 1998
- ----------------------------------------
(James E. McCormick)
/s/ Thomas M. Mercer, Jr. *, Director February 20, 1998
- ----------------------------------------
(Thomas M. Mercer, Jr.)
*By: /s/ Charles J. Keszler
-----------------------------------
(Charles J. Keszler, Attorney-in-Fact)
39
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).*
10.1(a) Amendments to the Amended 1985 Long-Term Incentive Plan adopted on
May 8, 1997 (incorporated by reference to Exhibit 10.1(a) to Form
10-Q of LST for the quarter ended June 30, 1997).*
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 Employment Retention Policy adopted May 8, 1997, letter agreements
dated May 22, 1997 between LST and John P. Harbin, Charles J. Keszler
and Robert F. Spears and between Steel and W. Byron Dunn and letter
agreement dated September 25, 1997 between LST and Rhys J. Best.*
10.4 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).
10.5 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 10.9 to
Form 10-K as filed on March 28, 1996).
10.6 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 10.10
to Form 10-K as filed on March 28, 1996).
10.7 Amendment Agreement dated March 4, 1996, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business
Credit, Inc. and Steel (incorporated by reference to same numbered
Exhibit to Form 10-K for the year ended December 31, 1996).
10.8 Amendment Agreement dated January 17, 1997, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business
Credit, Inc. and Steel (incorporated by reference to same numbered
Exhibit to Form 10-K for the year ended December 31, 1996).
10.9 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).
10.10 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).
10.11 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 15, 1992).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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
(incorporated by reference to Exhibit 10.23 to Form 10-K as filed on
March 28, 1996).
10.21 Contract for Electric Service dated September 30, 1996 between
Southwestern Electric Power Company and Steel (incorporated by
reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1996).
10.22 Assignment, Termination and Release dated January 21, 1997, among
Steel, LST, and the minority shareholders of Steel (incorporated by
reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1996).
10.23 Credit Agreement dated as of October 2, 1997 by and among Steel and
the banks named therein.
10.24 Cost Sharing Agreement dated as of July 1, 1997 between LST and
Steel, replacing Cost Sharing Agreement dated May 16, 1991 (Exhibit
10.12 to this Form 10-K).
10.25 Termination Agreement dated as of July 1, 1997 between LST and Steel,
terminating Tax Allocation and Indemnification Agreement dated May 16,
1991 (Exhibit 10.13 to this Form 10-K).
10.26 Compromise and Settlement Agreement and Release dated July 31, 1997
between LST and Guaranty Federal Bank, F.S.B.
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
24 Powers of Attorney.
* Management contract or compensatory plan or arrangement.