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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
COMMISSION FILE NUMBER 0-14404
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: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $1.00 Nasdaq
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ . No .
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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, 1997, the number of shares of common stock outstanding was
20,720,561. The aggregate market value of common stock (based upon the closing
price on the Nasdaq Stock Market on that date) held by nonaffiliates of the
registrant was approximately $403 million.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of registrant's Proxy Statement for its 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
Page
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PART I
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ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS . . . . . . . . . 10
PART II
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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 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . . . . . 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 35
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . 35
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 35
ITEM 15. SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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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 tubing
(DOM) 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. During
May 1991, a major creditor group received 19.5% of the common stock of Steel,
creating a minority interest in Steel. In November 1993, LST sold the stock of
American Federal Bank (AFB). The accompanying consolidated financial statements
reflect AFB as a discontinued operation. 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 shareholders of Steel were purchased by LST, making Steel a wholly
owned subsidiary of LST.
LINES OF BUSINESS INFORMATION
In the last three years, segment revenues were as follows:
<TABLE>
<CAPTION>
($ in millions)
1996 1995 1994
----------- ----------- -----------
$ % $ % $ %
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Oilfield products revenues 371.0 68 241.6 57 196.6 55
Specialty tubing products revenues 109.8 20 115.2 27 94.8 27
Flat rolled steel and other tubular revenues 68.2 12 69.0 16 65.6 18
----- --- ----- --- ----- ---
Consolidated net revenues 549.0 100 425.8 100 357.0 100
----- --- ----- --- ----- ---
----- --- ----- --- ----- ---
</TABLE>
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 manufactured by Steel includes a wide size and chemistry range of electric
resistance welded (ERW) high-quality prime casing and tubing for oil and gas
drilling and production. Casing, which represents about 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 one of the widest ranges
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of OCTG diameters (2 3/8" to 16 1/8") and grades produced in the industry,
including grades that have been successfully used for drilling at depths of
over 30,000 feet.
Demand for OCTG is affected by drilling activity which is driven by customers'
expectations of future oil and gas prices and political factors such as energy
and trade policies. Domestic drilling activity was up 8% in 1996 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, 1996,
were up 309% from the prior year-end. A significant increase in drilling
activity in 1997 is estimated by Baker Hughes. Also, Steel continues its
efforts to penetrate global markets. Approximately 9% of its shipments in 1996
were used outside the lower 48 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 manufactured by Steel ranges in diameter from 2 3/8" to 16" and is
used to gather and transport oil and gas from the well site to storage or
refining facilities. Approximately 10% of Steel's line pipe shipments were
exported in 1996.
SALES AND DISTRIBUTION. Steel's domestic OCTG sales distribution network
consists of 11 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 of Steel's oilfield products in 1996 accounted for
14% and 11% of total tons shipped, respectively. About 75% of the oil and gas
wells drilled in the United States in 1996 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.
OTHER MARKETING ARRANGEMENTS AND AGREEMENTS. Steel has expanded into other
marketing arrangements to sell steel tubular products manufactured by various
unrelated companies. These arrangements are intended to expand Steel's product
offerings without a substantial investment in plant and equipment and enhance
Steel's marketing competitiveness. These transactions are performed on a
commission basis, through purchase and resale of the products and under
agreements to process flat rolled steel provided by Steel into tubular products.
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 and scrap steel for use in the manufacture of its
products. The availability of steel slabs to meet production needs remained
tight in 1996, and it was often necessary for Steel to commit to purchase slabs
90 to 150 days prior to production. Steel's principal raw material for its
internally produced steel slabs is steel scrap, which is purchased in the spot
market. The price of scrap steel and steel slabs 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.
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Two primary markets exist for OCTG, and Steel serves both. Deep critical wells
require high-performance OCTG that can sustain enormous pressure as measured by
burst strength, collapse strength, and yield strength. Both major and
independent oil companies that conduct drilling programs of this nature
emphasize quality and compliance with specific standards. Steel, with its full-
body normalized ERW manufacturing process that meets American Petroleum
Institute standards, 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 14% of the supply available to the
domestic OCTG market 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 1996.
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. The products are used in the manufacture of
automotive, construction, and farm equipment and in industrial applications such
as hydraulic cylinders, stabilizer tubes and intrusion devices, machine parts,
bearing races, downhole pump barrels, and printing rollers. Because of the wide
range of industrial applications, sales traditionally follow general domestic
economic conditions.
Steel produces most of its specialty tubing by the drawn over mandrel (DOM)
process which uses a drawbench to pull tubing through a die and over a mandrel.
Steel's use of the DOM manufacturing process enables the Company to achieve
higher critical tolerances and dimensional control than other processes. The
Company's 1,000,000 pound drawbench, the largest in the United States, also
enables the Company to manufacture larger diameter, heavier wall products and
thus access a broader market than its competitors. Moreover, Steel is the only
DOM specialty tubing manufacturer 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. The
Company's integration of steelmaking and tube finishing allows for optimal
inventory control, combined with just-in-time customer delivery of tubes with
special steel chemistries and precise dimensional requirements.
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 down
slightly in 1996, as many steel service centers worked to reduce their 1995
year-end inventories. However, open orders were up 14% at year-end 1996 as
compared to 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 1996 accounted
for 13% of total shipments. Internationally, the majority of Steel's specialty
tubing is currently sold directly
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to end users. Exports accounted for approximately 19% and 15% of Steel's DOM
specialty tubing shipments in 1996 and 1995, respectively.
RAW MATERIALS AND INVENTORIES. Raw materials are readily available from
multiple sources. Production is generally scheduled to meet specific orders
and, accordingly, inventory is managed to minimize the amount of finished goods
on hand. Work-in-process inventories are maintained in order to provide
flexibility in responding to customer needs.
Steel purchases steel slabs and scrap steel for use in the manufacture of its
products. The availability of steel slabs to meet production needs remained
tight in 1996, and it was often necessary for Steel to commit to purchase slabs
90 to 150 days prior to production. Steel's principal raw material for its
internally produced steel slabs is steel scrap, which is purchased in the spot
market. The price of scrap steel and steel slabs 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. Steel's specialty tubing sales had been constrained by
capacity limitations in 1994 and 1995. During 1996, Steel completed a capital
expenditure program to address its specialty tubing capacity limitations. Based
on generally available market data, Steel believes it now 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 75% of
Steel's flat rolled steel sales in 1996 as well as substantially all other sales
of secondary 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 9% of Steel's total revenues for 1996.
RAW MATERIALS AND INVENTORIES. Steel produces flat rolled steel from its
internally produced slabs and slabs purchased from unrelated companies. Steel's
principal raw material used in the production of its slabs is steel scrap, which
is purchased in the spot market. 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. Sales
and earnings are affected by the cost of raw
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materials, use of flat rolled steel by Steel in the manufacture of its tubular
products, demand by outside customers, and general economic conditions.
Steel's market for flat rolled steel is generally concentrated in the
southwestern region of the United States.
OTHER SERVICES. Transportation, storage, and other services are provided by
Steel's subsidiaries.
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, 1996, LST and Steel employed a total of 1,941 people, of whom
1,384 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 of 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 $50.0
million, $37.9 million, and $25.5 million for the years 1996, 1995, and 1994,
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
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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.
Emission sources at Steel's facilities are regulated by a combination of
individual permit limitations and statewide standards. Sources which existed
before the implementation of the state permitting requirements are registered
with the TNRCC as "grandfathered sources" and are not required to obtain a
permit. If, however, a grandfathered source is modified in a manner that
increases the amount or changes the character of air contaminants emitted into
the atmosphere, it becomes subject to permitting requirements.
Steel is presently in substantial compliance with the conditions of its permits
and applicable standards.
WATER quality is governed by the federal Clean Water Act, implemented by the
EPA, and the state Water Code, and implemented by the TNRCC. Steel is required
to have two separate permits to discharge wastewater from each of its outfalls:
a National Pollution Discharge Elimination System (NPDES) permit issued by the
EPA and a wastewater discharge permit issued by the TNRCC. The regulatory
emphasis on wastewater is directed at the control of effluent toxicity. Steel
is also required to have a NPDES permit to discharge storm water that is not
commingled with wastewater. Steel's storm water discharges are permitted
through the EPA's NPDES General Permit for Storm Water Discharges Associated
With Industrial Activities.
In the process of manufacturing low alloy carbon grade steel and fabricating
steel pipe and tube, Steel generates wastewater which contains certain
contaminants from the process. Steel is authorized by both a state and a
federal permit to discharge its wastewater to 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 apply to Steel's wastewater.
To comply with these limitations, Steel treats its wastewater before discharge.
The permits require that Steel regularly 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.
Steel's state wastewater discharge permit was renewed effective August 1, 1994,
for a five-year term. Steel is in substantial compliance with that permit.
Although the levels of contaminants in the discharge occasionally exceed the
permit limitations, Steel does not believe that these instances will have any
material consequences to Steel. The only potential issue is the possibility
that the TNRCC will amend Steel's permit to include a whole effluent toxicity
(WET) limit. WET is measured by exposing freshwater organisms, such as fathead
minnow larvae, to various concentrations of effluent for seven days and then
determining the weight and survival of the test organisms. A WET limit is a
legally enforceable limit in a permit that is based on the survival of the test
organism in a stated concentration of the effluent. Without appropriate
modifications to the standard chronic WET test method, Steel does not believe
that, based on existing data, its effluent would be in compliance with a WET
limit during the colder months of the year. The existing data indicate that a
naturally occurring pathogenic bacteria in Steel's effluent and raw water causes
a failure of the WET test during the colder months of the year. Based upon the
extensive studies conducted to date, the test failure does not appear to be due
to Steel's processes. Steel is working to develop a modification of the
standard WET test method that would be acceptable to both the company and the
TNRCC.
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Steel's existing federal NPDES permit for wastewater discharges was scheduled to
expire in June 1995. However, this permit continues in effect until the EPA
takes final action on a renewal NPDES permit. On December 31, 1994, the EPA
published a notice of intent to issue Steel a renewal NPDES permit. Steel
timely filed comments on the draft permit. The EPA and Steel reached agreement
on all issues but one raised by Steel in its comments. As in the TNRCC
permitting process, the outstanding issue concerns whether the proposed WET
limit in the draft permit is legally warranted. For the reason discussed above,
Steel opposes the inclusion of a WET limit in its renewal NPDES permit. The EPA
has not yet issued Steel a final renewal NPDES permit. Steel is therefore not
certain whether the EPA will include a WET limit in its permit. Should the EPA
issue Steel a renewal NPDES permit with a WET limit, Steel plans to pursue all
of its administrative options for review and reconsideration of the WET limit.
If Steel should not prevail in its administrative challenge to a WET limit,
Steel would then consider requesting judicial review of the contested permit
condition. Steel will also continue working to develop a modification of the
standard WET test method that would be acceptable to the EPA as well as the
TNRCC and the company. Should Steel successfully develop such a modified WET
test method, the WET limit issue might be resolvable without any administrative
or judicial action.
Steel has also filed a Petition for Review challenging the rulemaking in which
the EPA adopted the WET test methods. If Steel receives a satisfactory
settlement with the EPA or prevails at trial, the WET limit issue should be
resolved.
Until this issue of the inclusion of a WET limit is resolved through
negotiations with the EPA and the TNRCC, development of an acceptable
modification of the standard WET test method, or final administrative or
judicial action, the need for and nature of control measures, if any, that
Steel might have to implement cannot be accurately predicted.
SOLID AND HAZARDOUS WASTE management is governed by the Texas Solid Waste
Disposal Act and RCRA. The TNRCC has primary responsibility for implementing
and enforcing the federal law through the state program.
Solid waste, some of which is now classified as hazardous, has been generated by
Steel since it began operation. As with similar mills in the industry, Steel's
EAF generates dust containing lead, chromium, and cadmium. Until 1988, Steel
disposed of the EAF dust and other wastes in on-site management units. Steel 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 an acidic waste) and plans to close
it as a nonhazardous facility. Closure is scheduled to begin during 1997. Two
sites subject to RCRA (the plant's landfill and a site that received air
pollution sludge) have been closed as hazardous waste landfills in accordance
with requirements of RCRA and corresponding state regulations. These sites are
subject to post-closure care obligations, including groundwater monitoring, for
up to 30 years. The remaining two sites have been closed by a combination of
removal ("clean closure") and conversion to nonhazardous landfills in
accordance with requirements of RCRA and corresponding state regulations. In
1996, TNRCC accepted the closure certifications for all four units and released
the clean-closed unit from further RCRA requirements. The TNRCC will issue
Steel a permit for the facilities requiring post-closure care. Steel estimates
the actual cost of post-closure care to be approximately $1 million.
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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; 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 productive capacity approximates 480,000 slab tons, 1,250,000
flat rolled tons, and 1,000,000 welded pipe tons. In 1996, the specialty tubing
facilities operated at near 100% of capacity until the expansion of these
facilities was completed late in the third quarter, while the rolling mills,
pipe mills, and EAF's generally operated at 85% of capacity. Based on generally
available market data, Steel believes it now has the largest DOM specialty
tubing production capacity in the United States.
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 minerals have been recovered from these properties for many years
because their use is no longer required in Steel's operations. Steel owns 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 Nasdaq National Market System under the symbol
LSST. The following table summarizes the range of trading prices by quarter for
the last two years (in $):
First Second Third Fourth
----- ------ ----- ------
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
1995 High 8 9 1/8 10 1/4 11 1/4
Low 6 1/2 7 1/8 7 5/8 7 1/2
10
<PAGE>
As of January 31, 1997, LST had approximately 4,700 common shareholders of
record. LST has paid no dividends on its Common Stock since becoming a public
company.
In 1988, LST sold one million shares of Series A nonvoting convertible
cumulative preferred stock, $1.00 par value (Series A Preferred stock), for
$49.6 million in cash. The Series A Preferred stock carried a $50.00 per share
liquidation preference, plus any unpaid dividends, and became redeemable in cash
at the option of LST after September 1993. Dividends were not declared,
accrued, or paid, and cumulative dividends in arrears at January 1, 1994,
approximated $18.8 million. In February 1994, LST redeemed this stock and
extinguished all dividend obligations related to it for $51.7 million.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
($ in millions, except share and employee data)
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Oilfield products revenues 371.0 241.6 196.6 197.0 159.3
Specialty tubing products revenues 109.8 115.2 94.8 72.7 66.6
Flat rolled and other tubular revenues 68.2 69.0 65.6 62.8 51.7
----- ----- ----- ----- -----
Total revenues 549.0 425.8 357.0 332.5 277.6
Gross earnings 48.2 26.2 12.8 6.3 8.7
Selling, general, and administrative expenses (16.4) (14.6) (16.2) (16.9) (17.6)
----- ----- ----- ----- -----
Operating earnings (loss) 31.8 11.6 (3.4) (10.6) (8.9)
Interest income 4.4 5.8 4.3 0.9 0.3
Interest expense (6.8) (8.7) (8.2) (7.0) (5.8)
Other income, net (0.1) 2.4 2.5 0.3 2.7
Minority interest (3.8) (1.5) 1.0 2.3 1.3
----- ----- ----- ----- -----
Earnings (loss) from continuing operations 25.5 9.6 (3.8) (14.1) (10.4)
Net earnings (loss) 24.9 9.6 1.2 (7.2) 0.1
Net earnings (loss) per common share 1.19 0.46 (0.04) (0.35) 0.01
Shares outstanding (millions) 20.7 20.5 20.4 20.3 20.3
Current assets 206.6 194.5 180.8 235.6 87.0
Total assets 396.0 357.7 345.7 411.2 364.1
Current liabilities 74.7 53.5 53.4 57.9 41.5
Total liabilities 267.2 255.5 249.6 267.8 207.2
Shareholders' equity 128.8 102.2 96.1 143.4 156.9
Capital expenditures 20.0 14.9 7.0 5.8 11.5
Depreciation 11.8 11.4 11.4 11.0 9.4
Employees 1,941 1,696 1,592 1,688 1,560
</TABLE>
11
<PAGE>
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 7% to 13% of this segment's shipments during the last three years.
Demand for oilfield products is generally affected by customers' expectations of
future oil and gas prices and political factors such as energy and trade
policies. A key indicator of domestic demand is the average number of drilling
rigs operating in the United States which, during the last three years, has been
historically low. According to Baker Hughes, the average United States rig
counts in 1996, 1995, and 1994 were 779, 723, and 775, 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
14% of the total supply 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 1996. The effect of available inventory
has not been a factor in the marketplace in the past three years but could
increase in significance if OCTG mills operate at their full productive capacity
for an extended period of time. The volatility of oil and gas prices creates
uncertainty with respect to the timing and extent of increased activity in the
energy sector. This affects customer confidence in the longer term outlook for
energy prices and as a result some drilling projects may be deferred. However,
international markets strengthened considerably in 1996 as long-postponed
exploration and production projects were started. This trend is expected to
continue in 1997 as companies engaged in exploration and production continue to
seek large reserves in the international arena.
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. 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 was down
slightly in 1996; however, open orders were up 14% at year-end as compared to
year-end 1995. International shipments of DOM specialty tubing were 19%, 15%,
and 17% of shipments in 1996, 1995, and 1994, 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.
12
<PAGE>
MANUFACTURING. The manufacture of Steel's products is capital intensive.
Utilization rates have risen significantly during 1996 at Steel's manufacturing
facilities. The level of production volume through Steel's various facilities
has a significant effect on the cost of manufacturing. Key variable costs
include costs of raw materials, including scrap steel, steel slabs, electricity,
and natural gas. Steel has entered into certain marketing alliances and
manufacturing arrangements with unrelated companies involving the processing of
flat rolled steel provided by Steel into tubular products which provides Steel
access to additional manufacturing capacity.
The completion of Steel's expansion of its specialty tubing facility gives it
what it believes to be the largest DOM manufacturing capacity within the United
States. With the placement of orders for steel coil slitting and handling
equipment, commitments under Steel's 1995 to 1997 $46 million capital
expenditure program are substantially completed. This equipment is intended to
give Steel the ability to obtain and use a wider range of coils in its
production process, thereby increasing Steel's flexibility in procuring the most
economical raw materials. Steel is embarking on a new capital expenditure
program for approximately $47 million designed to improve quality and lower
costs and intends to implement this program in the 1997 to 1998 period with
financing obtained from operating cash flows and available borrowings under
Steel's revolving credit facility.
RESULTS OF OPERATIONS
Consolidated revenues reported in the statements of earnings are as follows:
<TABLE>
<CAPTION>
($ in millions)
1996 1995 1994
----------- ----------- -----------
$ % $ % $ %
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Oilfield products revenues 371.0 68 241.6 57 196.6 55
Specialty tubing products revenues 109.8 20 115.2 27 94.8 27
Flat rolled steel and other tubular revenues 68.2 12 69.0 16 65.6 18
----- --- ----- --- ----- ---
Consolidated net revenues 549.0 100 425.8 100 357.0 100
----- --- ----- --- ----- ---
----- --- ----- --- ----- ---
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
(in tons)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Oilfield products 545,300 363,600 311,600
Specialty tubing products 101,500 103,600 89,200
Flat rolled steel and other tubular products 195,800 190,900 193,900
------- ------- -------
Total tons shipped 842,600 658,100 594,700
------- ------- -------
------- ------- -------
</TABLE>
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.
13
<PAGE>
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.
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 the 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.
NET EARNINGS for 1996 were $24.9 million or $1.19 earnings per share. Earnings
from continuing operations were $25.5 million for 1996. For 1995, net earnings
and earnings from continuous operations were both $9.6 million or $0.46 earnings
per share.
1995 COMPARED WITH 1994
NET REVENUES increased 19.3% to $425.8 million in 1995 from $357.0 million in
1994. Oilfield products revenues increased 22.9% to $241.6 in 1995 from $196.6
million in 1994. Although the average domestic rig count declined to 723 in
1995 from 774 in 1994, shipment volumes and prices increased in 1995 from 1994
levels by 16.7% and 5.3%, respectively.
Specialty tubing products net revenues increased 21.5% to $115.2 million in 1995
from $94.8 million in 1994 as volumes increased 16.1% and prices improved 4.6%
in 1995. These increases were due to improvement in the domestic general
economy.
Flat rolled and other tubular products net revenues were up 5.2% in 1995 to
$69.0 million from $65.6 million in 1994 due to higher average selling prices.
14
<PAGE>
GROSS EARNINGS improved 105% to $26.2 million in 1995 from $12.8 million in
1994. This was primarily attributable to increased shipments and prices of
oilfield and specialty tubing products. However, increases in raw materials,
principally a 9% increase in the cost of scrap steel and steel slabs, offset
some of these margin improvements.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES decreased 9.9% to $14.6 million in
1995 from $16.2 million in 1994, primarily due to lower legal and consulting
fees.
INTEREST INCOME was $1.5 million more in 1995 than in 1994 as short-term
interest rates were higher on the average in 1995 than in 1994.
INTEREST EXPENSE for 1995 increased to $8.7 million from $8.2 million in 1994,
reflecting higher interest rates in 1995 on Steel's revolving credit facility.
OTHER INCOME, NET. Net other income in 1995 of $2.4 million included $3.0
million from the gain on sale of approximately 9,400 acres of land in East
Texas. Net other income in 1994 was $2.5 million and included $1.3 million from
the gain on sale of working interests in oil and gas properties.
NET EARNINGS and earnings from continuing operations for 1995 were both $9.6
million or $0.46 earnings per share. For 1994, there was a loss from continuing
operations of $3.8 million, or $0.19 loss per share. After a $5.0 million gain
on sale of discontinued operations, net earnings in 1994 were $1.2 million, and
after a $0.10 per share downward adjustment for the redemption of preferred
stock, the 1994 amount available to common shareholders was a $0.04 net loss per
share.
FINANCIAL CONDITION AND LIQUIDITY
LST has no direct business operations other than Steel or significant sources of
cash other than from short-term investments or the sale of securities. Steel is
restricted from paying cash dividends under terms of its revolving credit
agreement; however, LST is reimbursed by Steel for a portion of its operating
costs as provided by its cost-sharing agreement with Steel.
At December 31, 1996, LST had available cash, short-term investments and
marketable securities totaling $67.2 million. These available funds were
reduced in January 1997 when LST acquired all of the outstanding common stock,
preferred stock and warrants held by other shareholders of Steel for $25 million
in cash, making Steel a wholly owned subsidiary of LST. As a result all 1,000
outstanding common shares of Steel are owned by LST.
As of January 1997, all outstanding shares of Steel's Series A Preferred stock
are owned by LST. This stock has a stated value of $100,000 per share and pays
dividends quarterly at a rate of 6% per year. The preferred stock is required
to be redeemed by Steel, unless earlier redeemed or converted, on January 3,
2002, in cash, at the designated value plus any unpaid dividends. Prior to
redemption of the stock, dividends may be paid in cash, although currently
prohibited by the terms of the revolving credit agreement, or in additional
preferred shares, which is permitted. To date, quarterly dividends have been
paid in additional preferred shares. These preferred shares are convertible
into Steel common stock prior to redemption at the rate of one share of common
stock for each $10,000 of designated value (subject to antidilution provisions).
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. This program's
structure is consistent with those previously established with third parties.
During 1996, LST's slab purchases amounted to approximately $64 million.
15
<PAGE>
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 and $5 million
in November 1994 and $15 million remains in escrow to pay for certain claims
that may be made by GFB pursuant to the sale agreement. To date, LST has not
paid any claims, but approximately $8 million in claims are pending. Revenue
recognition on the escrowed amounts has been deferred and will be recognized as
gain from discontinued operations as funds are released from escrow.
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 has a revolving credit agreement under which it can borrow the lesser of
$72.5 million or an amount based upon eligible accounts receivable and
inventories that secure the borrowings. The credit line will increase by $2.5
million in March 1997 and March 1998. At December 31, 1996, borrowings totaled
$37.8 million on an available borrowing base of $72.1 million. The interest
rate on borrowings was prime plus 0.75% which, at year-end, was 9.0%. The
interest rate will reduce to 0.25% over the prime rate effective February 1997.
Steel also pays a fee of 0.5% on the unused portion of the credit facility. The
agreement, which extends to March 1999, contains various restrictive covenants,
including requirements to maintain minimum net worth levels and meet other
financial ratios.
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.
LST has outstanding $50 million, 8% convertible subordinated debentures which
are due in 2002 and may be converted at any time into shares of LST common stock
at the holders' option. The conversion price is $24.25 per share, subject to
antidilution provisions.
Steel's operations are subject to restrictive environmental compliance and
permitting requirements of various governmental agencies that include the TNRCC
and the EPA. Steel has entered into specific agreements with these agencies to
conduct numerous environmental studies and to develop plans to ensure continuous
compliance with applicable laws and regulations. Steel believes that the cost
of maintaining compliance with environmental requirements will fall within its
contemplated operating and capital expenditure plans, averaging $2 - $3 million
annually in the foreseeable future.
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
<PAGE>
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, 1996, 1995, and 1994 . . . . . . . 19
Consolidated Balance Sheets at December 31, 1996 and 1995. . . . . . . . . . 20
Consolidated Statements of Cash Flows,
for the years ended December 31, 1996, 1995, and 1994 . . . . . . . 21
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 22
Schedule I - Condensed Financial Information of Registrant . . . . . . . . . 34
17
<PAGE>
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, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
the three years ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for the three years ended December 31, 1996, 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.
Dallas, Texas,
January 23, 1997
18
<PAGE>
<TABLE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT SHARE DATA)
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net revenues $ 549.0 $ 425.8 $ 357.0
Cost of goods sold (500.8) (399.6) (344.2)
------- ------- -------
Gross earnings 48.2 26.2 12.8
Selling, general, and administrative expenses (16.4) (14.6) (16.2)
------- ------- -------
Operating earnings (loss) 31.8 11.6 (3.4)
Interest income 4.4 5.8 4.3
Interest expense (6.8) (8.7) (8.2)
Other income (loss), net (0.1) 2.4 2.5
Minority interest in Steel (3.8) (1.5) 1.0
------- ------- -------
Earnings (loss) from continuing operations before income tax 25.5 9.6 (3.8)
Income tax (0.6) - -
------- ------- -------
Earnings (loss) from continuing operations 24.9 9.6 (3.8)
Gain on sale of discontinued operations - - 5.0
------- ------- -------
NET EARNINGS $ 24.9 $ 9.6 $ 1.2
------- ------- -------
------- ------- -------
Per common share:
Earnings (loss) from continuing operations $ 1.19 $ 0.46 $ (0.19)
Earnings from and gain on sale of discontinued operations - - 0.25
------- ------- -------
Earnings before adjustment for redemption of Series A Preferred stock 1.19 0.46 0.06
Adjustment for redemption of Series A Preferred stock - - (0.10)
------- ------- -------
NET EARNINGS (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 1.19 $ 0.46 $ (0.04)
------- ------- -------
------- ------- -------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20.9 20.6 20.4
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes.
19
<PAGE>
<TABLE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
December 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27.3 $ 40.0
Short-term investments 20.1 32.6
Accounts receivable, net 80.0 64.2
Current inventories, net 76.4 55.7
Other current assets 2.8 2.0
------ ------
TOTAL CURRENT ASSETS 206.6 194.5
Marketable securities 19.8 -
Property, plant, and equipment, net 139.9 132.8
Other noncurrent assets 29.7 30.4
------ ------
TOTAL ASSETS $396.0 $357.7
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 44.8 $ 33.0
Accrued liabilities 29.6 19.2
Current portion of long-term debt 0.3 1.3
------ ------
TOTAL CURRENT LIABILITIES 74.7 53.5
------ ------
Long-term debt 87.8 95.4
Postretirement benefit obligations 41.8 46.1
Other noncurrent liabilities 45.8 48.8
Minority interest in Steel 17.1 11.7
------ ------
TOTAL LIABILITIES 267.2 255.5
------ ------
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: 20,683,261
20,556,816 respectively) 20.7 20.5
Capital surplus 160.1 159.5
Minimum pension liability adjustment (6.8) (7.7)
Retained deficit (44.3) (69.2)
Treasury stock (48,616 shares), at cost (0.9) (0.9)
------ ------
TOTAL SHAREHOLDERS' EQUITY 128.8 102.2
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $396.0 $357.7
------ ------
------ ------
</TABLE>
See accompanying notes.
20
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
For the Years Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS $ 40.0 $ 41.8 $ 140.4
--------- --------- ---------
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) from continuing operations 24.9 9.6 (3.8)
Minority interest in Steel 3.8 1.5 (1.0)
Depreciation and amortization 11.8 11.4 11.4
Accounts receivable, net (15.8) (9.3) (10.8)
Current inventories, net (20.7) (14.3) 7.0
Accounts payable and accrued liabilities 22.2 - (4.6)
Other (6.6) (3.7) (0.4)
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 19.6 (4.8) (2.2)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20.0) (14.9) (7.0)
Short-term investments 12.5 8.4 (41.0)
Sale of discontinued operations - - 5.0
Marketable securities (19.8) - -
Proceeds from sale of assets 1.5 4.5 2.0
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (25.8) (2.0) (41.0)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under revolving credit agreement (7.3) 6.1 (2.8)
Redemption of Series A preferred stock and payment of dividend - - (51.7)
Installment note repayment (1.3) (1.2) (1.0)
Minority interest contributions for preferred stock in Steel 1.3 1.0 -
Acquisition of minority interest - (1.6) -
Issuance of common stock 0.8 0.7 0.1
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (6.5) 5.0 (55.4)
--------- --------- ---------
Net decrease in cash and cash equivalents (12.7) (1.8) (98.6)
--------- --------- ---------
ENDING CASH AND CASH EQUIVALENTS $ 27.3 $ 40.0 $ 41.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
21
<PAGE>
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 1994 relates to the sale
of American Federal Bank.
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 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, 1996, LST's cash
equivalents, short-term investments and marketable securities, which had a
carrying amount that approximated market value, consisted of $63.6 million in
U.S. government and related agencies obligations and $3.6 million in corporate
debt instruments at amortized cost.
INVENTORIES of Steel are stated at the lower of cost (principally last-in,
first-out "LIFO") or market value and include raw materials, labor, and
overhead. Inventories at LST are stated at the lower of cost (principally
first-in, first-out "FIFO") or market value and consist of steel slabs.
PROPERTY, PLANT, AND EQUIPMENT are stated at cost. Depreciation is provided on
the straight-line method 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. Minority ownership in Steel is included in the liabilities
section of LST's consolidated balance sheets, and results are adjusted in the
consolidated statements of earnings to reflect the participation of minority
ownership in Steel's earnings or losses.
USE OF ESTIMATES. Preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities, and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
22
<PAGE>
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 tubing (DOM) 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)
1996 1995 1994
------- ------- -------
OILFIELD PRODUCTS
Net revenues $ 371.0 $ 241.6 $ 196.6
Operating earnings (loss) 17.2 (3.1) (10.3)
Identifiable assets 208.5 163.7 145.0
Capital expenditures 8.7 6.9 4.2
Depreciation and amortization $ 8.1 $ 6.9 $ 6.7
SPECIALTY TUBING PRODUCTS
Net revenues $ 109.8 $ 115.2 $ 94.8
Operating earnings 17.7 17.3 10.7
Identifiable assets 83.3 79.4 71.4
Capital expenditures 11.0 7.5 2.6
Depreciation and amortization $ 2.9 $ 3.3 $ 3.3
FLAT ROLLED AND OTHER TUBULAR PRODUCTS
Net revenues $ 68.2 $ 69.0 $ 65.6
Operating earnings (loss) (1.6) (0.8) (1.5)
Identifiable assets 23.1 28.1 30.3
Capital expenditures 0.3 0.5 0.2
Depreciation and amortization $ 0.8 $ 1.2 $ 1.4
CORPORATE AND OTHER NON-SEGMENTS
Net revenues $ - $ - $ -
Operating earnings (loss) (1.5) (1.8) (2.3)
Identifiable assets $ 81.1 $ 86.5 $ 99.0
TOTAL FROM CONTINUING OPERATIONS
Net revenues $ 549.0 $ 425.8 $ 357.0
Operating earnings (loss) 31.8 11.6 (3.4)
Total assets 396.0 357.7 345.7
Capital expenditures 20.0 14.9 7.0
Depreciation and amortization $ 11.8 $ 11.4 $ 11.4
23
<PAGE>
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.
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 and steel slabs, used in the
manufacture of the Company's products have historically been readily
available from various competitive sources. The manufacture of these
products uses several common facilities and shares administrative support.
Accordingly, 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 the Company also sells 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 10% of net revenues in 1996, 1995,
and 1994. Sales to another significant customer of flat rolled steel and other
tubular products were approximately 9%, 12%, and 12% of net revenues for 1996,
1995, and 1994, respectively. Direct foreign revenues as a percent of total
revenues were approximately 9% of the total in 1996 and 1995, and 7% in 1994.
Of Steel's total labor force, 69% 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.
24
<PAGE>
ADDITIONAL BALANCE SHEET INFORMATION - NOTE C
($ in millions)
1996 1995
------- -------
INVENTORIES
Finished goods $ 28.1 $ 35.2
Work in process 62.2 46.7
Raw materials 7.5 3.1
Materials, supplies, and other 25.3 24.6
------- -------
Total inventories before LIFO valuation reserve 123.1 109.6
Reserve to reduce inventories to LIFO value (36.5) (43.7)
------- -------
Total inventories 86.6 65.9
Amount included in other noncurrent assets (10.2) (10.2)
------- -------
Net current inventories $ 76.4 $ 55.7
------- -------
------- -------
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements $ 11.1 $ 11.6
Buildings, structures, and improvements 13.0 12.9
Machinery and equipment 275.9 260.4
Construction in progress 9.6 8.8
------- -------
Total property, plant, and equipment 309.6 293.7
Less accumulated depreciation and amortization (169.7) (160.9)
------- -------
Property, plant, and equipment, net $ 139.9 $ 132.8
------- -------
------- -------
OTHER NONCURRENT ASSETS
Funds held in escrow $ 15.0 $ 15.0
Inventory (supplies and spare parts) 10.2 10.2
Other 4.5 5.2
------- -------
Total other noncurrent assets $ 29.7 $ 30.4
------- -------
------- -------
ACCRUED LIABILITIES
Accrued compensation $ 7.7 $ 6.4
Property taxes 3.3 3.1
Warranty reserves 2.6 2.1
Environmental reserves 2.0 1.0
Pension obligations 4.5 2.0
Other 9.5 4.6
------- -------
Total accrued liabilities $ 29.6 $ 19.2
------- -------
------- -------
OTHER NONCURRENT LIABILITIES
Environmental reserves $ 13.1 $ 15.2
UMWA obligations 9.7 10.0
Deferred gain on sale of discontinued operations 15.0 15.0
Other 8.0 8.6
------- -------
Total other noncurrent liabilities $ 45.8 $ 48.8
------- -------
------- -------
25
<PAGE>
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 operations. A liability has been
recorded for the total estimated future payments related to this Act. Steel is
making these payments under protest.
Accounts receivable is stated net of allowance for doubtful accounts of $1.4
million and $1.5 million at December 31, 1996 and 1995, respectively.
Approximately $116.8 million and $97.6 million of total inventories before LIFO
valuation reserves were accounted for on the LIFO basis at December 31, 1996 and
1995, respectively. Non-LIFO inventories are stated at the lower of average
cost or market. The total inventories before LIFO valuation reserves
approximate replacement cost of the inventories.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - NOTE D
<TABLE>
($ in millions)
------------------------------------------------------------------------
Minimum
Series A Pension
Preferred Common Capital Liability Retained Treasury
Stock Stock Surplus Adjustment (Deficit) Stock Total
--------- ------ ------- ---------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 49.6 20.4 158.8 (6.6) (77.9) (0.9) 143.4
Employee benefit plan stock issuance - - 0.1 - - - 0.1
Pension liability adjustment - - - 3.1 - - 3.1
Redemption of preferred stock (49.6) - - - (2.1) - (51.7)
Net earnings - - - - 1.2 - 1.2
----- ---- ----- ---- ----- ---- -----
Balance, December 31, 1994 - 20.4 158.9 (3.5) (78.8) (0.9) 96.1
Employee benefit plan stock issuance - 0.1 0.6 - - - 0.7
Pension liability adjustment - - - (4.2) - - (4.2)
Net earnings - - - - 9.6 - 9.6
----- ---- ----- ---- ----- ---- -----
Balance, December 31, 1995 - 20.5 159.5 (7.7) (69.2) (0.9) 102.2
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
----- ---- ----- ---- ----- ---- -----
----- ---- ----- ---- ----- ---- -----
</TABLE>
PREFERRED STOCK. In 1988, LST sold one million shares of Series A nonvoting
convertible cumulative preferred stock, $1.00 par value (Series A Preferred
stock) for $49.6 million. Dividends were not declared, accrued, or paid, and at
January 1, 1994, the cumulative dividends in arrears approximated $18.8 million.
In February 1994, LST redeemed the Series A Preferred stock and extinguished all
dividend obligations related to it for $51.7 million. Earnings per share in
1994 were adjusted downward by $0.10 to reflect the $2.1 million difference
between the amount paid and the carrying amount. Ten million shares remain
authorized and unissued.
26
<PAGE>
CHANGE IN COMMON SHARES OUTSTANDING:
Treasury
Issued Stock Outstanding
---------- ------- -----------
Balance, December 31, 1994 20,460,686 (48,616) 20,412,070
Employee benefit plans 96,130 - 96,130
---------- ------- ----------
Balance, December 31, 1995 20,556,816 (48,616) 20,508,200
Employee benefit plans 126,445 - 126,445
---------- ------- ----------
Balance, December 31, 1996 20,683,261 (48,616) 20,634,645
---------- ------- ----------
---------- ------- ----------
DEBT - NOTE E
At December 31,
($ in millions)
1996 1995
---------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
LST convertible subordinated debentures $50.0 $45.0 $50.0 $42.5
Steel revolving credit 37.8 37.8 45.1 45.1
Steel 48-month installment note 0.3 0.3 1.6 1.6
----- ----- ----- -----
Total debt 88.1 83.1 96.7 89.2
less current installments (0.3) (0.3) (1.3) (1.3)
----- ----- ----- -----
Total long-term debt $87.8 $82.8 $95.4 $87.9
----- ----- ----- -----
----- ----- ----- -----
The $50 million, 8% convertible subordinated debentures are due in 2002 and may
be converted at any time into shares of LST common stock at the holder's option.
The conversion price, initially set at $24.25 per share, is subject to
antidilution provisions. Fair value of the debentures is estimated based upon
quotation from brokers.
Steel has a revolving credit agreement under which it can borrow the lesser of
$72.5 million or an amount based upon eligible accounts receivable and
inventories that secure the borrowings. The credit line will increase by $2.5
million in March of each year during 1997 and 1998. At December 31, 1996,
borrowings totaled $37.8 million on an available borrowing base of
$72.1 million. The interest rate on borrowings was prime plus 0.75% which, at
year-end, was 9.0%. The interest rate will reduce to 0.25% over the prime rate
effective February 1997. Steel also pays a fee of 0.5% on the unused portion of
the credit facility. The agreement, which extends to March 1999, contains
various restrictive covenants, including requirements to maintain minimum net
worth levels and meet certain financial ratios. Steel's ability to pay cash
dividends is, with limited exceptions, prohibited by the agreement and at
December 31, 1996, LST's equity in the net assets of Steel was $85.8 million.
The agreement also restricts Steel's ability to incur additional indebtedness.
In March 1993, Steel also separately borrowed $4.6 million at 8.08% to be repaid
in equal monthly installments through March 1997. At December 31, 1996, the
outstanding balance was $0.3 million.
At December 31, 1996, debt maturities are as follows: 1997, $0.3 million; 1998,
none; 1999, $37.8 million; 2000, none; 2001, none; and thereafter, $50.0
million.
Cash paid for interest during 1996, 1995, and 1994 was $7.2 million, $8.9
million, and $8.1 million, respectively. Interest of $0.4 million was
capitalized into property, plant, and equipment during 1996.
27
<PAGE>
NET EARNINGS PER SHARE - NOTE F
The computation of primary earnings per share is based on the weighted average
number of shares of common stock and common stock equivalents. The numbers of
shares used in 1996, 1995, and 1994 were approximately 20.9 million,
20.6 million, and 20.4 million. For all three years, the effect of potentially
dilutive shares on fully diluted earnings per share was either antidilutive or
not significant. Earnings per share in 1994 were adjusted downward by $0.10 to
reflect the redemption of Series A Preferred stock, described in Note D.
INCOME TAXES - NOTE G
There was a current income tax expense of $0.6 million in 1996 for federal
alternative minimum tax and none in 1995 and 1994. There was no deferred income
tax expense or benefit for 1996, 1995, or 1994. A reconciliation of computed
income taxes to actual income taxes follows:
<TABLE>
($ in millions)
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Earnings (loss) from continuing operations
before income tax $25.5 $ 9.6 $(3.8)
Statutory federal income tax rate 35.% 35.% 35.%
----- ----- -----
----- ----- -----
Income tax expense (benefit) at statutory rate 8.9 3.4 (1.3)
Minority interest (1.3) (0.5) (0.3)
Net operating loss, benefit not recognized (recognized) (7.0) (2.9) 1.6
----- ----- -----
Income taxes $ 0.6 $ -. $ -.
----- ----- -----
----- ----- -----
</TABLE>
The following table discloses the components of the deferred tax amounts at
December 31, 1996 and 1995:
<TABLE>
($ in millions)
1996 1995
------ ------
<S> <C> <C>
DEFERRED TAX ASSETS - temporary differences
Postretirement benefit accruals $ 14.5 $ 14.9
Environmental reserves 5.3 5.5
UMWA liability 3.5 3.6
Deferred gains 5.0 4.9
Other expense accruals and reserves 7.4 6.5
Inventories 4.3 6.1
Other 0.5 0.5
------ ------
Total deferred tax assets - temporary differences 40.5 42.0
Net operating loss carryforwards 86.2 92.3
------ ------
Total deferred tax assets 126.7 134.3
DEFERRED TAX LIABILITY - temporary difference for basis in
and depreciation of property, plant, and equipment (35.6) (35.7)
------ ------
Net deferred tax assets 91.1 98.6
Less valuation allowance (91.1) (98.6)
------ ------
NET DEFERRED TAX AMOUNT $ -. $ -.
------ ------
------ ------
</TABLE>
28
<PAGE>
Valuation allowances were recorded to fully reserve the computed net deferred
tax assets due to the uncertainty regarding their future utilization as Steel's
revenues and earnings are sensitive to the level of domestic drilling activity.
At December 31, 1996, LST had federal tax net operating loss carryforwards
(NOL's) of approximately $246 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 2000 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.
EMPLOYEE BENEFIT PLANS - NOTE H
CAPITAL ACCUMULATION PLAN. 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 $0.8 million in 1996 and
$0.7 million in 1995 and 1994, respectively.
STOCK OPTION PLAN. LST has a long-term incentive plan which provides for the
issuance of up to 2,700,000 shares of common stock to key employees and outside
directors through the granting of incentive (the right to grant further
incentive options expired in 1995) and nonqualified stock options, stock
appreciation rights, restricted stock grants, and performance unit grants. The
option price is the average of the high and low market price on the date of the
grant. Options are generally exercisable for ten years with one-fourth of the
shares becoming exercisable on the one-year anniversary of the grant date and an
additional one-fourth becoming exercisable on the same anniversary date over the
next three years. If a change of control of LST occurs before an option's
fourth anniversary, the option may be exercised in full earlier. Following is a
summary of stock option activity during 1996 and 1995:
<TABLE>
Weighted
Average
Exercise
Shares Under Option Price Range ($) Price ($)
------------------- --------------- ---------
<S> <C> <C> <C>
OUTSTANDING, DECEMBER 31, 1993 865,917 2.59 - 17.38 7.54
Granted in 1994 - - - -
Exercised in 1994 (24,250) 3.06 - 6.81 5.11
Canceled in 1994 (17,020) 3.06 - 16.13 9.79
-------- ----- ----- -----
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
-------- ----- ----- -----
-------- ----- ----- -----
</TABLE>
29
<PAGE>
At December 31, 1996, 1,237,775 shares were available for grant and 532,450
shares were exercisable. The weighted average fair value per option granted in
1996 and 1995 was $5.91 and $4.71, respectively.
LST accounts for this plan under APB Opinion 25, under which no compensation
cost has been recognized. Had compensation cost for this plan been determined
consistent with FASB Statement No. 123, net income and earnings per share would
have been reduced to the following pro forma amounts:
($ in millions)
1996 1995
----- ----
Net income - as reported $24.9 $9.6
- pro forma $24.6 $9.4
Earnings per share - as reported $1.19 $.46
- pro forma $1.18 $.46
Because the Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1996 and 1995, respectively: risk free interest rates
of 5.73% and 6.88%, volatility of 54.4% and 65.5%, expected lives of five years
for both 1996 and 1995 option grants and payment of no dividends.
POSTRETIREMENT BENEFIT PLANS. Steel sponsors an unfunded, defined benefit,
postretirement health care plan ("Health Care Plan") for most of its bargaining
unit employees and a limited number of nonbargaining unit retirees eligible
under special early retirement programs. Health Care Plan benefits are provided
to eligible retirees and their spouses until they reach the age of 65, at which
time coverage terminates. Additionally, Steel provides for certain other
postretirement benefits, primarily life insurance. Steel accrues for the
anticipated cost of these postretirement benefits over the employees' years of
service. Net postretirement benefits expense for 1996, 1995, and 1994 included
the following components:
<TABLE>
($ in millions)
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned $ 0.5 $0.4 $0.5
Interest cost on unfunded accumulated benefit obligation $ 0.8 $0.9 $0.8
Amortization of net gain (0.1) - -
----- ---- ----
Total postretirement benefits expense $ 1.2 $1.3 $1.3
----- ---- ----
----- ---- ----
</TABLE>
The annual rate of the increase in per capita cost of covered health care
benefits was assumed to gradually decrease from 9% to an ultimate trend rate of
6% by the year 2004. An increase of 1% per year in the assumed medical cost
trend rate would have resulted in an additional obligation of $1.1 million for
accumulated benefits at December 31, 1996, and an additional $0.2 million in the
aggregate of the service cost and interest cost components of net benefits
expense for 1996. Weighted average discount rates of 7.5% were used to
determine the accumulated obligation at December 31, 1996 and 1995.
30
<PAGE>
The following table sets forth the unfunded status and the amounts recognized
for postretirement benefits in the consolidated balance sheets at December 31,
1996 and 1995:
<TABLE>
($ in millions)
1996 1995
----- -----
<S> <C> <C>
Accumulated benefit obligation
Retirees $ 1.9 $ 1.1
Active plan participants - fully eligible 0.3 0.2
Active plan participants - not fully eligible 9.7 8.4
----- -----
Unfunded accumulated benefit obligation 11.9 9.7
Unrecognized net gain 0.5 2.2
----- -----
Net benefit obligation recognized in consolidated balance sheet 12.4 11.9
Amount included in accrued liabilities (0.9) (0.8)
----- -----
Amount included in postretirement benefit obligation $11.5 $11.1
----- -----
----- -----
</TABLE>
PENSION PLANS. Steel has three defined benefit pension plans covering
substantially all of its bargaining unit employees. Retirement benefits are
based on years of service at progressively increasing flat-rate amounts. A
special lump-sum payment equal to 13 weeks of vacation pay is made upon
retirement. Steel's policy is to fund the minimum contribution each year as
required by applicable regulations.
During 1996, the largest of Steel's three plans was amended so that new
employees hired on or after June 4, 1996, do not participate in the defined
benefit plan. Such new employees are eligible to participate in one of Steel's
defined contribution retirement plans, as are substantially all other employees.
The amendment also provided for increased benefits to plan participants retiring
on or after June 1, 1996.
November 30th was the measurement date for determining the plans' assets and
obligations for 1996 and 1995. At December 31, 1996 and 1995, the plans' funded
status and amounts recognized in the consolidated balance sheets were as
follows:
<TABLE>
($ in millions)
1996 1995
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 76.2 $ 74.6
------ ------
------ ------
Accumulated benefit obligation $ 78.8 $ 77.0
------ ------
------ ------
Projected benefit obligation $ 79.4 $ 77.7
Plans' assets at fair value (44.0) (39.8)
------ ------
Projected benefit obligation in excess of plans' assets 35.4 37.9
Unrecognized net loss (8.7) (10.4)
Prior service cost not yet recognized in net pension expense (1.5) -
Unrecognized net obligation at January 1, 1986 (4.0) (5.1)
Adjustment required to recognize minimum liability 13.6 14.6
------ ------
Pension liability recognized in consolidated balance sheet 34.8 37.0
Amount recorded in accrued liabilities (4.5) (2.0)
------ ------
Amount included in postretirement benefit obligation $ 30.3 $ 35.0
------ ------
------ ------
</TABLE>
31
<PAGE>
In determining the projected benefit obligation, the weighted average discount
rate was assumed to be 7.5% at December 31, 1996 and 1995. 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 1996 and 5% for
1995. Steel has recorded an adjustment, as shown in the above table, to
recognize a minimum pension liability. Offsetting this liability at December
31, 1996, was a noncurrent intangible asset of $5.6 million and a reduction of
shareholders' equity of $6.8 million net of minority interest. The December 31,
1995, adjustment resulted in an offsetting $5.3 million intangible asset and a
$7.7 million net equity reduction. The plans' assets consist primarily of
short-term money market investments, government and corporate obligations, real
estate, and public market equity securities.
Net pension expense in 1996, 1995, and 1994 was as follows:
($ in millions)
1996 1995 1994
----- ----- -----
Service cost - benefits earned $ 0.9 $ 0.7 $ 0.9
Interest cost on projected benefit obligation 5.6 5.7 5.5
Return on plan assets (6.2) (6.8) 0.9
Net amortization and deferral 4.1 5.0 (3.1)
----- ----- -----
Total pension expense $ 4.4 $ 4.6 $ 4.2
----- ----- -----
----- ----- -----
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 $2.7 million,
$0.6 million, and $0.1 million for 1996, 1995, and 1994, respectively.
COMMITMENTS AND CONTINGENCIES - NOTE I
Steel's operations are subject to numerous environmental laws. The three major
areas of regulation are air quality, water quality, and solid and hazardous
waste management. The primary governmental oversight agencies include the Texas
Natural Resource Conservation Commission and the Environmental Protection
Agency. Steel has agreements with these agencies to conduct numerous
environmental studies and to develop plans to ensure continuous compliance with
applicable laws and regulations. Steel is engaged in various ongoing
environmental studies, monitoring programs, and capital projects. Estimated
expenditures for certain remediation programs are included in accrued
liabilities and other noncurrent liabilities as shown in Note C. Steel believes
that its environmental expenditures will continue to fall within its
contemplated operating and capital plans.
Steel leases equipment under various operating leases. Rental expense totaled
$3.7 million, $3.5 million, and $3.3 million in 1996, 1995, and 1994,
respectively. Future minimum lease payments under noncancellable operating
leases are as follows: 1997, $1.3 million; 1998, $0.9 million; 1999, $0.5
million; 2000, $0.2 million; and 2001, $0.1 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.
32
<PAGE>
SALE OF AFB - NOTE J
In November 1993, LST sold the stock of AFB, one of its operating subsidiaries,
to Guaranty Federal Bank, F.S.B. (GFB). The accompanying consolidated financial
statements have been restated to reflect AFB as a discontinued operation. The
sale price was $155.7 million; of that, LST received $135.7 million in cash on
the sale date and $5 million in November 1994 and $15 million remains in escrow
to pay for claims that may be made by GFB pursuant to the sale agreement. As
these funds are released to LST, they are recognized as income in the periods
received. To date, LST has not paid any claims, but approximately $8 million in
claims are pending.
QUARTERLY FINANCIAL SUMMARY - NOTE K
<TABLE>
<CAPTION>
($ in millions, except share amounts;
quarterly amounts unaudited):
Quarter
------------------------------------
1996 First Second Third Fourth Total Year
- ---- ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
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:
- -----------------
Net earnings available to common
shareholders $ 0.13 $ 0.34 $ 0.34 $ 0.38 $ 1.19
1995
- ----
Net revenues $ 97.0 $101.0 $111.8 $116.0 $425.8
Gross earnings 6.0 6.9 6.3 7.0 26.2
Net earnings $ 1.5 $ 2.2 $ 3.6 $ 2.3 $ 9.6
PER COMMON SHARE:
- -----------------
Net earnings available to common
shareholders $ 0.07 $ 0.11 $ 0.17 $ 0.11 $ 0.46
</TABLE>
SUBSEQUENT EVENT - NOTE L
In January 1997, all of the outstanding common stock, preferred stock, and
warrants held by other shareholders of Steel were purchased for $25 million in
cash, making Steel a wholly owned subsidiary of LST.
33
<PAGE>
LONE STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
($ in millions, except share data)
Year ended December 31,
----------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net earnings $ 24.9 $ 9.6 $ 1.2
Undistributed equity in Steel's losses (earnings) (22.7) (6.6) 3.9
Other 3.5 (3.4) (16.2)
------- ------- -------
Net cash provided (used) by operating activities 5.7 (0.4) (11.1)
Net cash used by investing activities (19.2) (2.0) (36.0)
Net cash provided (used) by financing activities 0.8 0.7 (51.6)
------- ------- -------
Net decrease in cash and cash equivalents (12.7) (1.7) (98.7)
Beginning cash and cash equivalents 40.0 41.7 140.4
------- ------- -------
Ending cash and cash equivalents $ 27.3 $ 40.0 $ 41.7
------- ------- -------
------- ------- -------
Years ended December 31,
---------------------------------
CONDENSED STATEMENTS OF EARNINGS 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
General and administrative expenses $ (1.5) $ (1.8) $ (2.3)
Steel cost sharing 1.5 1.5 1.5
Equity in Steel's earnings (losses) 22.7 6.6 (3.9)
Interest income 4.4 5.8 4.3
Interest expense (4.0) (4.0) (4.0)
Other income from Steel 1.8 1.5 0.6
Earnings from and gain on sale of discontinued operations - - 5.0
------- ------- -------
Net earnings $ 24.9 $ 9.6 $ 1.2
------- ------- -------
------- ------- -------
Cash dividends received from Steel $ - $ - $ -
------- ------- -------
------- ------- -------
As of December 31, 1996
-----------------------
CONDENSED BALANCE SHEETS 1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27.3 $ 40.0
Short-term investments 20.1 32.6
Due from Steel 11.4 10.1
Inventories - 5.1
Other current assets 0.1 0.2
------- -------
Total current assets 58.9 88.0
Investment in Steel 108.0 72.1
Marketable securities 19.8 -
Other noncurrent assets 13.7 13.8
------- -------
Total assets $ 200.4 $ 173.9
------- -------
------- -------
Current liabilities $ 1.7 $ 1.8
Long-term debt 50.0 50.0
Other noncurrent liabilities 19.9 19.9
------- -------
Total liabilities 71.6 71.7
------- -------
Shareholders' equity:
Series A Preferred stock (authorized: 10,000,000 shares,
issued: none) - -
Common stock, $1 par value (authorized: 40,000,000 shares,
issued: 20,683,261 and 20,556,816, respectively) 20.7 20.5
Capital surplus 160.1 159.5
Minimum pension liability adjustment (6.8) (7.7)
Retained deficit (44.3) (69.2)
Treasury stock (48,616 common shares, at cost) (0.9) (0.9)
------- -------
Total shareholders' equity 128.8 102.2
------- -------
Total liabilities and shareholders' equity $ 200.4 $ 173.9
------- -------
------- -------
</TABLE>
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item is contained in LST's proxy statement for
the 1997 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 1997 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 1997 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 1997 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, 1996, 1995, and 1994
- Consolidated Balance Sheets at December 31, 1996 and 1995
- Consolidated Statements of Cash Flows -
for the years ended December 31, 1996, 1995, and 1994
- Notes to Consolidated Financial Statements
2. Schedule I - Condensed Financial Information of Registrant
Note: All schedules not filed herein for which provision is made under rules
of Regulation S-X have been omitted as not applicable or not required or
the information required has been included in the notes to the
consolidated financial statements.
35
<PAGE>
3. Index to Exhibits
DESCRIPTION
3.1 Certificate of Incorporation of Registrant (incorporated by reference to
Exhibit 3(a) to Form S-4 Registration Statement of LST as filed on April
4, 1986, File No. 33-4581); Certificate of Amendment to Certificate of
Incorporation dated September 30, 1986 (incorporated by reference to
Exhibit 3(b) of Form 10-K of LST as filed on April 7, 1989).
3.2 Agreement and Plan of Merger dated March 6, 1986, among Steel, a Texas
corporation, LST, a Delaware corporation, and Lone Star Steel Company
Merging Corporation, a Delaware corporation (incorporated by reference
to Exhibit II to Form S-4 Registration Statement of LST as filed on
April 4, 1986, File No. 33-4581).
3.3 By-Laws as adopted March 6, 1986, as amended effective September 30,
1986 (incorporated by reference to Exhibit 3(d) of Form 10-K of LST as
filed on April 7, 1989).
4.1 Statement of Resolution establishing Cumulative Preferred Stock, Series
A (par value $1 per share), dated September 9, 1988 (incorporated by
reference to Exhibit 3-C- of Form 10-K of LST as filed on April 7,
1989).
4.2 LST Indenture with Bankers Trust Company, Trustee, with respect to
$50,000,000 8% Convertible Subordinated Debentures Due 2002 (Eurobonds),
dated August 26, 1987 (incorporated by reference to Exhibit 4-C- of Form
10-K of LST as filed on April 7, 1989).
10.1 Amended 1985 Long-Term Incentive Plan (incorporated by reference to
Exhibit A of Proxy Statement of LST as filed on October 22, 1993).*
10.2 LST Corporate Improvement Incentive Program adopted October 9, 1990
(incorporated by reference to Exhibit 10(s) to Form 10-K as filed on
March 15, 1991).*
10.3 Contingent Severance Policy agreement dated October 23, 1989, between
LST and Rhys J. Best, Vice President and Treasurer (incorporated by
reference to Exhibit 10.3 to Form 10-K as filed on February 27, 1995).*
10.4 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.
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.
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 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);
36
<PAGE>
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.
10.22 Assignment, Termination and Release dated January 21, 1997, among Steel,
LST, and the minority shareholders of Steel.
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.
37
<PAGE>
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, 1997 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.
<TABLE>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John P. Harbin , Chairman, Director, and February 20, 1997
- -------------------------- Chief Executive Officer
(John P. Harbin) (Principal Executive Officer)
/s/ Charles J. Keszler , Vice President-Finance and February 20, 1997
- --------------------------- Treasurer (Principal Financial
(Charles J. Keszler) and Accounting Officer)
/s/ Charles L. Blackburn *, Director February 20, 1997
- ---------------------------
(Charles L. Blackburn)
/s/ Dean P. Guerin *, Director February 20, 1997
- ---------------------------
(Dean P. Guerin)
/s/ Frederick B. Hegi, Jr.*, Director February 20, 1997
- ---------------------------
(Frederick B. Hegi, Jr.)
/s/ William C. McCord *, Director February 20, 1997
- ---------------------------
(William C. McCord)
/s/ James E. McCormick *, Director February 20, 1997
- ---------------------------
(James E. McCormick)
/s/ Thomas M. Mercer, Jr. *, Director February 20, 1997
- ---------------------------
(Thomas M. Mercer, Jr.)
*By: /s/ Charles J. Keszler
- --------------------------------------
(Charles J. Keszler, Attorney-in-Fact)
</TABLE>
38
<PAGE>
EXHIBIT 10.7
[LETTERHEAD]
AMENDMENT AGREEMENT
March 4, 1996
Lone Star Steel Company
5501 LBJ Freeway, Suite 1200
Dallas, TX 75380-3546
Gentlemen:
Reference is made to the Financing Agreement between us dated March 2, 1993,
as amended, (herein the "Financing Agreement"). Capitalized terms used herein
and defined in the Financing Agreement shall have the same meanings as set
forth therein unless otherwise specifically defined herein.
Pursuant to mutual understanding, effective immediately, the Financing
Agreement shall be, and hereby is, amended as follows:
1. Section 7, Paragraph 9 of the Financing Agreement shall be, and hereby
is, amended by deleting the entries under the headings "Fiscal Period" and
"Net Worth" for all periods commencing on or after January 1, 1996 and
inserting the following in lieu thereof:
"From 1/1/96 through and including
3/31/96 $81,000,000
From 4/1/96 through and including
6/30/96 $82,000,000
From 7/1/96 through and including
9/30/96 $84,000,000
From 10/1/96 through and including
12/31/96 $88,000,000
<PAGE>
From 1/1/97 through and including
3/31/97 $86,000,000
From 4/1/97 through and including
6/30/97 $87,000,000
From 7/1/97 through and including
9/30/97 $89,000,000
From 10/1/97 through and including
12/31/97 $93,000,000
From 1/1/98 through and including
3/31/98 $91,000,000
From 4/1/98 through and including
6/30/98 $92,000,000
From 7/1/98 through and including
9/30/98 $94,000,000
From 10/1/98 through and including
12/31/98 and at all times thereafter $98,000,000"
2. Section 7, Paragraph 11(b) of the Financing Agreement shall be, and
hereby is, amended by deleting the entries under the headings "Period" and
"Amount" for all periods commencing on or after January 1, 1996 and adding
the following:
"1/1/96 through and including
12/31/96 $28,000,000
1/1/97 through and including
12/31/97 $20,000,000
1/1/98 through and including
12/31/98 and during each calendar
year thereafter $16,000,000"
3. Section 7, Paragraph 12 of the Financing Agreement shall be, and hereby
is, amended by deleting the entries under the headings "Fiscal Period" and
"Working Capital" for all periods commencing on or after 1/1/96 and adding
the following in lieu thereof:
"From 1/1/96 and at all times thereafter Negative ($5,000,000)"
-2-
<PAGE>
4. Section 7, Paragraph 15 of the Financing Agreement shall be, and hereby
is, amended in its entirety to read as follows:
"15. The Company shall not permit earnings of the Company from
operations (which shall exclude all other income and other expenses)
before all (i) interest and tax obligations of the Company,
(ii) depreciation and (iii) amortization, determined in accordance with
GAAP and calculated on a cumulative basis for the period from the beginning
of the fiscal year in which the calculation date occurs to such
calculation date) to be less than the applicable amount specified below
for such period:
Period Ending EBITDA
------------- -------
Three (3) month ending 3/31/96 $2,600,000
Six (6) month ending 6/30/96 $7,800,000
Nine (9) month ending 9/30/96 $14,900,000
Twelve (12) month ending 12/31/96 $23,100,000
Three (3) month ending 3/31/97 $2,600,000
Six (6) month ending 6/30/97 $7,800,000
Nine (9) month ending 9/30/97 $14,900,000
Twelve (12) month ending 12/31/97 $23,100,000
Three (3) month ending 3/31/98 and 3/31 of each
fiscal year thereafter $2,600,000
Six (6) month ending 6/30/98 and 6/30 of each
fiscal year thereafter $7,800,000
Nine (9) month ending 9/30/98 and 9/30 of each
fiscal year thereafter $14,900,000
Twelve (12) month 12/31/98 and 12/31 of each
fiscal year thereafter $23,100,000"
5. (a) The definitions of "Net Worth" and "Working Capital" shall be, and
each hereby is, amended to by the addition thereto of the following proviso
at the end thereof immediately prior to the period:
", provided that for the purposes of this definition the effect of any
LIFO reserve shall be excluded."
-3-
<PAGE>
(b) The definition of "Net Worth" shall be, and hereby is, amended by
deleting the "notwithstanding clause" which appears at the end thereof and
inserting the following in lieu thereof:
"Notwithstanding any provision to the contrary contained herein, solely
with respect to any period commencing on or after January 1, 1995, Net
Worth shall be determined excluding the effect of any preferred stock
issued and outstanding during such period to evidence a cash contribution
to capital and any preferred stock issued as a stock dividend on any
preferred stock during such period, but including the minimum pension
liability reserve value up to a maximum amount of $15,000,000.00."
6. It is understood that the Company will prepare the 1999 Lone Star Steel
Base Operating Plan (the Company's projections prepared for the Company's
performance for the fiscal year ending December 31, 1999), which plan must be
delivered to us no later than December 1, 1998 and be satisfactory to us in
our sole discretion. Based upon such plan and subject to the terms of the
Financing Agreement (including, without limitation, the termination
provisions thereof) the financial covenants for such fiscal year and
thereafter may be revised in a letter agreement to be executed between you
and us. Each of us further agrees to negotiate the revision of such
financial covenants in good faith; however, in the event you and we cannot
mutually agree upon new financial covenants for such fiscal year and
thereafter, the financial covenants in effect as of the date hereof shall
continue in full force and effect unless otherwise amended.
In consideration of the preparation of this agreement by our-in-house legal
department you agree to pay to us a Documentation Fee of $390. Such fee shall
be due and payable in full on the date hereof and may, at our option, be
charged to your Revolving Loan Account on the due date thereof.
Except as set forth above no other change in or waiver of the terms,
provisions or conditions of the Financing Agreement is intended or implied.
If the foregoing is in accordance with your understanding of our agreement,
kindly so indicate by signing and returning to us the enclosed copy of this
letter. In addition, each of your subsidiaries who has executed a Subsidiary
Guaranty and Security Agreement has signed below to confirm that such
documents shall continue in full force and effect notwithstanding the
foregoing amendments.
-4-
<PAGE>
Very truly yours,
THE CIT GROUP/BUSINESS
CREDIT, INC.
By: /s/ Pamela Wynick
------------------------------------
Title: Assistant Secretary
Read and Agreed to:
LONE STAR STEEL COMPANY
By: R.W. Arp
----------------------------
Title: Executive Vice President
-5-
<PAGE>
Confirmed:
LONE STAR LOGISTICS, INC.
T&N LONE STAR WAREHOUSE CO.
TEXAS & NORTHERN RAILWAY COMPANY
FORT COLLINS PIPE COMPANY
LONE STAR STEEL SALES COMPANY, Formerly known as
TEXAS SPECIALTY FLAT-ROLLED, INC.
LONE STAR STEEL INTERNATIONAL, INC.
By: /s/ R.W. Arp
------------------------------
Title: Director
Of each of the above
-6-
<PAGE>
EXHIBIT 10.8
[LETTERHEAD]
AMENDMENT AGREEMENT
January 17, 1997
Lone Star Steel Company
5501 LBJ Freeway, Suite 1200
Dallas, TX 75380-3546
Gentlemen:
Reference is made to the Financing Agreement between us dated March 2, 1993,
as amended, (herein the "Financing Agreement"). Capitalized terms used herein
and defined in the Financing Agreement shall have the same meanings as set
forth therein unless otherwise specifically defined herein.
Pursuant to mutual understanding, effective immediately, the Financing
Agreement shall be, and hereby is, amended as follows:
1. Section 7, Paragraph 9 of the Financing Agreement shall be, and hereby
is, amended by deleting the entries under the headings "Fiscal Period" and
"Net Worth" for all periods commencing on or after January 1, 1997 and
inserting the following in lieu thereof:
From 1/1/97 through and including
12/31/97 and at all times thereafter $100,000,000"
2. Section 7, Paragraph 11(a) of the Financing Agreement shall be and hereby
is, amended by amending the dollar amount set forth therein to be "$6,000,000".
3. Section 7, Paragraph 11(b) of the Financing Agreement shall be, and
hereby is, amended by deleting the entries under the headings "Period" and
"Amount" for all periods commencing on or after January 1, 1997 and adding
the following:
"1/1/97 through and including
12/31/97 $ 35,000,000
1/1/98 through and including
12/31/98 $ 32,000,000
<PAGE>
1/1/99 through and including
12/31/99 and during each calendar
year thereafter $ 30,000,000"
4. Section 7, Paragraph 12 of the Financing Agreement shall be, and hereby
is, amended by deleting the entries under the headings "Fiscal Period" and
"Working Capital" for all periods commencing on or after 1/1/97 and adding
the following in lieu thereof:
"From 1/1/97 and at all times thereafter $ 5,000,000"
5. Section 7, Paragraph 15 of the Financing Agreement shall be, and hereby
is, amended in its entirety to read as follows:
"15. The Company shall not permit earnings of the Company from operations
(which shall exclude all other income and other expenses) before all (i)
interest and tax obligations of the Company, (ii) depreciation and (iii)
amortization, determined in accordance with GAAP and calculated on a
cumulative basis for the period from the beginning of the fiscal year in
which the calculation date occurs to such calculation date) to be less than
the applicable amount specified below for such period:
Period Ending EBITDA
- ------------- -----------
Three (3) month ending 3/31/97 $ 5,000,000
Six (6) month ending 6/30/97 $10,000,000
Nine (9) month ending 9/30/97 $15,000,000
Twelve (12) month ending 12/31/97 $30,000,000
Three (3) month ending 3/31/98 $ 5,000,000
Six (6) month ending 6/30/98 $10,000,000
Nine (9) month ending 9/30/98 $15,000,000
Twelve (12) month ending 12/31/98 $30,000,000
Three (3) month ending 3/31/99 and 3/31
of each fiscal year thereafter $ 5,000,000
Six (6) month ending 6/30/99 and 6/30
of each fiscal year thereafter $10,000,000
-2-
<PAGE>
Period Ending EBITDA
- ------------- -----------
Nine (9) month ending 9/30/99 and 9/30
of each fiscal year thereafter $15,000,000
Twelve (12) month 12/31/99 and 12/31 of
each fiscal year thereafter $30,000,000"
In consideration of the preparation of this agreement by our-in-house legal
department you agree to pay to us a Documentation Fee of $390. Such fee shall
be due and payable in full on the date hereof and may, at our option, be
charged to your Revolving Loan Account on the due date thereof.
Except as set forth above no other change in or waiver of the terms,
provisions or conditions of the Financing Agreement is intended or implied.
If the foregoing is in accordance with your understanding of our agreement,
kindly so indicate by signing and returning to us the enclosed copy of this
letter. In addition, each of your subsidiaries who has executed a Subsidiary
Guaranty and Security Agreement has signed below to confirm that such
documents shall continue in full force and effect notwithstanding the
foregoing amendments.
Very truly yours,
THE CIT GROUP/BUSINESS
CREDIT, INC.
By: /s/ PAMELA WYNICK
-------------------------
Title: Assistant Secretary
Read and Agreed to:
LONE STAR STEEL COMPANY
By: /s/ R.W. ARP
---------------------------
Title: Executive Vice President
-3-
<PAGE>
Confirmed:
LONE STAR LOGISTICS, INC.
T&N LONE STAR WAREHOUSE CO.
TEXAS & NORTHERN RAILWAY COMPANY
FORT COLLINS PIPE COMPANY
LONE STAR STEEL SALES COMPANY, Formerly known as
TEXAS SPECIALTY FLAT-ROLLED, INC.
LONE STAR STEEL INTERNATIONAL, INC.
By: /s/ R.W. Arp
------------------------------
Title: Director
Of each of the above
-4-
<PAGE>
EXHIBIT 10.21
This contract cancels and supersedes previous contract with (name, date,
contract number): Amended Agreement for Electric Service between Lone Star
Steel Company and SWEPCO, dated October 1, 1976
- -------------------------------------------------------------------------------
FORM 702-T Southwestern Electric Power Company
- ----------------- CONTRACT FOR ELECTRIC SERVICE
CONTRACT NUMBER
42827 Texas
- -----------------
Lone Star Steel Company, P.O. Box 1000, Hwy. 259 South, Lone Star, Texas
75668-1000 hereinafter called "Customer", and Southwestern Electric Power
Company, hereinafter called "Company", enter into the following contract:
The Company will sell and deliver to the the Customer at SWEPCO's Lone
Star South Substation located along Highway 259 South near Lone Star, Texas
and the Customer will receive and pay for electric service for a period of 10
years beginning the later of October 1, 1996, or approval by the
Commission(1), and thereafter, in automatically recurring yearly periods, (2)
terminated by (3) prior written notice from either party to the other.
Electric service will be delivered and received hereunder in accordance with
the standard Terms and Conditions which are printed on the reverse side
hereof and made a part of this contract, and Customer agrees to observe and
be bound by them.
Electric service delivered by the Company to the Customer will be 3 wire
3 phase, 60 cycle, alternating current at a nominal voltage of 138,000, in
the amount of approximately 120,000 kilowatts, and will be metered at 138,000
volts.
The Customer will use such electric service in the operation of Steel
Mill and will be billed and will pay for this service in accordance with the
rate schedule attached to this contract and made a part hereof.
The following rate schedule and any special terms are applicable to this
contract: Contract with Lone Star Steel Company (LSS); Attachment to the
Contract for Electric Service between Lone Star Steel Company and
Southwestern Electric Power Company.
In consideration of the investment on the part of the Company to make
electric service available under this contract, the minimum monthly billing
provision of the aforementioned rate schedule applies, but will not be less
than the charge for 40,000(4) kw plus the fuel and tax adjustment clauses
provided in the rate schedule.
In the event a new or revised rate schedule applicable to service under
this contract is authorized and made effective by the duly constituted
regulatory authority or authorities having jurisdiction in the premises,
which said rate schedule supersedes or modifies the rate schedule which is
attached to this contract or printed on the reverse side hereof, then from
and after the date upon which said new or revised rate schedule becomes
authorized and effective, electric service to Customer will be billed and
Customer will pay for such service in accordance with such new or revised
rate schedule.
If Customer fails to perform any of his obligations under this contract,
including the prompt payment of monthly bills, or fails to observe or comply
with any of the Terms and Conditions as printed on the reverse side of this
sheet, the Company may suspend delivery of electric service and will not be
liable in any manner for loss or damage arising through such suspension. No
such suspension will interfere with the enforcement by the Company of any
other legal right or remedy nor relieve the Customer from liability to pay
the minimum charge during any suspension. No delay by the Company in
enforcing any of its rights hereunder will be deemed a waiver of such rights
nor will waiver by the Company of any default by Customer be deemed a waiver
of any other or subsequent default.
The Customer will indemnify and save the Company harmless from all loss
on account of injury, or damage to persons or property on the Customer's
premises, and at and from the point of delivery of power if such point is
located off the Customer's premises, growing out of any accident or mishap.
This agreement may be assigned by the Customer only with the written
consent of the Company. This contract will bind and benefit the successors
and assigns of the Company, and, at the option of the Company, the
successors and assigns of the Customer. This contract supersedes all prior
agreements between the Customer and the Company for the service specified
herein.
In witness whereof, the parties hereto have caused this contract to be
executed on (X) September 30, 1996.
<TABLE>
<S> <C>
Lone Star Steel Company
---------------------------------------------------------
Customer
Witness (X) Barbara J. Griffin By (X) John G. Shivers
------------------------------------ -------------------------------------------------------
(For the Customer)
(X) Vice President, Engineering & Services
---------------------------------------------------------
Official Capacity
SOUTHWESTERN ELECTRIC POWER COMPANY
Witness Andrew Rambin By Millard D. Smith
------------------------------------ -------------------------------------------------------
(For the Company)
1. See Attachment, Article VII
2. At any time during its term, this /X/ President / / Vice President / / Division Manager
Agreement may be ---------------------------------------------------------
3. Twenty-Four Months Official Capacity
4. See Attachment, Article I.
</TABLE>
<PAGE>
STANDARD TERMS AND CONDITIONS
- --------------------------------------------------------------------------------
1. APPLICABLE TO ALL CLASSES OF ELECTRIC SERVICE
-------------------------------------------------
In order that all Customers may receive uniform, efficient, and
adequate service, electric service will be supplied to and accepted
by all Customers receiving service from the Company in accordance
with these Terms and Conditions.
2. ORDER FOR SERVICE
---------------------
Contract and Agreement For Electric Service Form CA-101 and other
applicable Contract For Electric Service forms are provided by the
Company to show the agreement under which the Customer receives and
the Company delivers electric service. Appropriate arrangements
will be completed with Customer, or his duly-authorized agent,
before service is supplied by the Company. A separate contract will
be in effect for each class of service at each separate location.
Refusal of service by the Company is governed by the Company's
Service Refusal Policy, Sheet No. 101.
3. OPTIONAL RATES
------------------
The Company's published rate schedules state the conditions under
which each is available for electric service. When two or more
rates are applicable to a certain class of service, the choice of
such rates lies with the Customer.
The Company, at any time upon request, will determine for any
Customer the rate best adapted to existing or anticipated service
requirements as defined by the Customer, but the Company does not
assume responsibility for the selection of such rate or for the
continuance of the lowest annual cost under the rate selected.
The Company, lacking knowledge of changes that may occur at any
time in the Customer's operating conditions, does not assume
responsibility that Customer will be served under the most
favorable rate; nor will the Company make refunds covering the
difference between the charges under the rate in effect and those
under any other rate applicable to the same service.
Rates are normally established on a twelve-month basis and a
Customer having selected a rate adapted to his service may not
change to another rate within a twelve-month period unless there is
a substantial change in the character or conditions of his service.
A new Customer will be given reasonable opportunity to determine
his service requirements before definitely selecting the most
favorable rate therefor.
4. DEPOSIT
-----------
The Customer, if requested by the Company to do so, will make and
maintain a reasonable deposit to secure payment of bills. Rules and
<PAGE>
regulations governing the requirement for and refundability of
deposits are contained in the Company's Deposit Policy, Sheet
No. 102.
5. MONTHLY BILLS
-----------------
Bills for service will be rendered monthly, unless otherwise
specified. The term "month" for billing purposes will mean the
period between any two consecutive readings of the meters by the
Company, such readings to be taken as nearly as practicable every
thirty days.
Failure to receive a bill in no way exempts Customers from payment
for electric service.
When there is good reason for doing so, estimated bills may be
submitted provided that an actual meter reading is taken every six
(6) months. In months when the meter reader is unable to gain
access to the premises to read the meter on regular meter-reading
trips, or in months when meters are not read, Company will provide
the Customer with a postcard and request the Customer to read the
meter and return the card to Company. If such postcard is not
received by Company in time for billing, Company may estimate meter
reading and render bill accordingly.
<PAGE>
When a bill rendered to a Commercial or Industrial Customer is paid after
the due date, a one-time penalty in an amount set forth in the applicable rate
schedule will be added to the amount owed the Company.
6. DISCONTINUANCE OF SERVICE
-----------------------------
A customer's utility service may be disconnected and the Company's
property removed from the Customer's premises if the bill has not been paid by
the due date and proper notice has been given in accordance with the Company's
Collection and Disconnect Policy, Sheet No. 103. No such suspension of
electric service will interfere with the enforcement by the Company of any
other legal right or remedy nor relieve the Customer from liability to pay the
minimum charge during any suspension. No delay by the Company in enforcing any
of its rights will be deemed a waiver of such rights nor will waiver by the
Company of any default by the Customer be deemed a waiver of any other
subsequent default.
7. EXCLUSIVE SERVICE ON INSTALLATION CONNECTED TO
--------------------------------------------------
COMPANY'S SYSTEM
----------------
Except as may be specifically permitted under tariffs governing the
interconnection or provision of service to small power producers or
cogenerators, standard electric rate schedules are based on exclusive use of
Company's service.
Except in cases where the Customer has a contract with the Company for
breakdown or standby service, no other electric light or power service will
<PAGE>
be used by the Customer on the same installation in conjunction with the
Company's service, either by means of a throw-over switch or any other
connection.
The Company will not be required to supply or continue to supply service
to any Customer where a portion of Customer's service requirement is obtained
from other sources, except when such service is covered by a contract under
Standby Service Schedule (S).
The Customer will not sell the electricity purchased from the Company to
any other customer, company, or person, and Customer will not deliver
electricity purchased from the Company to any connection wherein said
electricity is to be used off of the Customer's premises on which the meter
is located.
8. CUSTOMER'S INSTALLATION
---------------------------
Customer is responsible for installing and maintaining such protective
devices as are recommended or required by the then current edition of the
National Electrical Code or as may be necessary to protect Customer's
equipment or process during abnormal service conditions or the failure of all
or a part of the electric service provided by the Company. All wiring and
other electrical equipment furnished by the Customer will be installed,
operated, and maintained by the Customer at all times in conformity with good
electrical practice and with the requirements of the constituted authorities
and these Terms and Conditions. Where no public authorities have jurisdiction,
Company, for Customer's protection, may require Customer to furnish Company a
certificate from wiring electrician that Customer's installation conforms to
the National Electrical Code and/or the National Electrical Safety Code. The
Company does not assume responsibility for the design, operation, or condition
of the Customer's installation.
Service will be delivered to Customer for each premise at one point of
delivery to be designated by Company and to conform to Company's service
standards. For mutual protection of Customer and Company, only authorized
employees of Company are permitted to make and energize the connection between
Company's service wire and Customer's service entrance conductors. The
Customer will indemnify and save the Company harmless from all loss on account
of injury or damage to persons or property on the Customer's premises, and at
and from the point of delivery of power if such point is located off the
Customer's premises, growing out of any accident or mishap.
<PAGE>
9. OWNER'S CONSENT TO OCCUPY
-----------------------------
The Company shall have the right to install and maintain equipment in,
over and under the Customer's property and shall have access to the Customer's
premises for any other purpose necessary for supplying electric service to the
Customer. In case the Customer is not the owner of the premises or of the
intervening property between the premises and the Company's lines, the
Customer will obtain from the property owner or owners the easements or
right-of-way necessary to install and maintain in, over or under said premises
all such wires and electrical equipment as are necessary or convenient for
supplying electric service to the Customer.
10. MOTOR INSTALLATIONS
------------------------
For mutual protection of service to all customers, all motor
installations will be as follows:
(a) All motors rated in horsepower up to and including 7-1/2 HP and
individual air conditioning units with ratings of 65,000 BTUH (ARI rating) or
less will be single phase, unless otherwise agreed to by the Company or served
in conjunction with other larger three phase loads.
(b) All three phase motors will be equipped with approved starting
equipment having low voltage release attachment and properly sized
over-current protection in each of the three phases.
11. POWER FACTOR
-----------------
Where Customer has power or heating equipment installed that operates at
low power factor, Customer will furnish, at his own expense, suitable
corrective equipment to maintain a power factor of 90% lagging, or higher.
Customer will install and maintain in conjunction with any fluorescent
lighting, neon lighting, or other lighting equipment having similar load
characteristics, auxiliary or other corrective apparatus that will correct the
power factor of such lighting equipment to not less than 90% lagging.
12. PROTECTION OF SERVICE
--------------------------
Where the Customer's use of any devices that have a detrimental effect
upon the service rendered to other Customers or upon Company equipment and
causes voltage fluctuation of the 60 Hertz wave, clipping of the current, or
voltage wave - thereby producing harmonics or a cyclic pulsation between one
and sixty Hertz (1 and 60 Hertz), Customer will furnish at his own expense
necessary equipment to limit such voltage fluctuation, harmonics, or
pulsations so that they will not interfere with other Customers or Company
<PAGE>
equipment. Where the interference cannot be corrected, the use of such
devices must be discontinued.
13. CONTINUOUS SERVICE
-----------------------
Company will make reasonable provisions to insure satisfactory and
continuous service, but does not guarantee a continuous supply of electric
energy or that the voltage, wave form or frequency of the supply will not
fluctuate. The Company shall not be liable for damages occasioned by
interruption, failure to commence delivery, or voltage, wave form or frequency
fluctuation caused by interruption or failure of service or delay in
commencing service due to accident to or breakdown of plant, lines, or
equipment, strike, riot, act of God, order of any court or judge granted in
any bonafide adverse legal proceedings or action or any order of any
commission or tribunal having jurisdiction; or, without limitation by the
preceding enumeration, any other act or things due to causes beyond its
control, to the negligence of the Company, its employees, or contractors,
except to the extent that the damages are occasioned by the gross negligence
or willful misconduct of the Company.
In like manner, should the Customer's premises be rendered wholly unfit
for the continued operation of the Customer's plant or business, due to any of
the causes mentioned above, the Customer's contract, if any, will thereupon be
suspended until such time as the plant or premises will have been
reconstructed, reconditioned, and reoccupied by the Customer for the purpose of
his business.
14. INTENTIONAL INTERRUPTION OF SERVICE
----------------------------------------
The Company may without notice and without liability to Customer
interrupt service to Customer when in the Company's sole judgment such
interruption:
(a) Will prevent or alleviate an emergency threatening to disrupt the
operation of the Company's system; or
(b) Will lessen or remove possible danger to life or property; or
(c) Will aid in the restoration of electric service; or
(d) Is required to make necessary repairs to or changes in the Company's
facilities.
<PAGE>
Customer may request, in writing, that Company provide notice of intentional
interruption of service by contact at an address and telephone number provided
in such written request by Customer and Company will exercise reasonable
diligence to give such notice but does not warrant that notice will be given
in every case of intentional interruption.
15. METERING
-------------
The electricity used will be measured by a meter or meters to be
furnished and installed by the Company at its expense and bills will be
calculated upon the registration of such meters. Meters include all measuring
instruments. Meter installations will be made in accordance with the service
standards set forth in the Company's Meter and Service Installations
Handbook. Customer will provide a sufficient and proper space in a clean and
safe place, accessible at all times and free from vibration, for the
installation of Company's meters. Company will furnish all meter bases
and/or metering enclosures to be installed by Customer on supply side of
service equipment to be metered.
Meters will be tested as reasonably necessary in accordance with the
Company's Meter Testing Policy, Sheet No. 104.
16. PROTECTION OF COMPANY'S PROPERTY AND ACCESS TO PREMISES
------------------------------------------------------------
The Customer will protect the Company's property on the Customer's
premises from loss or damage and will permit no one who is not an agent of
the Company to remove or tamper with the Company's property.
The Company will have the right of access to the Customer's premises at
all reasonable times for the purpose of installing, reading, inspecting, or
repairing any meters or devices owned by Company or for the purpose of
removing its property.
17. AGENTS CANNOT MODIFY AGREEMENT
-----------------------------------
No agent has power to amend, modify, or waive any of these Terms and
Conditions, or to bind the Company by making any promises or representations
not contained herein.
18. SUPERSEDE PREVIOUS TERMS AND CONDITIONS
--------------------------------------------
These Terms and Conditions supersede all Terms and Conditions under which
the Company has previously supplied electric service.
<PAGE>
ATTACHMENT TO THE
CONTRACT FOR ELECTRIC SERVICE
BETWEEN
LONE STAR STEEL COMPANY
AND
SOUTHWESTERN ELECTRIC POWER COMPANY
This Attachment appended to and made a part of the Contract for Electric
Service (Contract) between Lone Star Steel Company ("Lone Star") and
Southwestern Electric Power Company ("SWEPCO"), dated September 30, 1996.
I. Rates
-----
Lone Star will be billed for and will pay for electric service hereunder
in accordance with Rate Schedule LSS of SWEPCO's Manual of Tariffs, as
approved from time-to-time by the Public Utility Commission of Texas
("Commission"). The current version of Rate Schedule LSS is attached to the
Contract. If the Commission revises or supersedes Rate Schedule LSS, the
attached rate schedule will be revised accordingly, and the revised or
superseded schedule will apply to service hereunder from the date it is made
effective by the Commission.
The Minimum Kilowatts of Billing Demand will be determined pursuant to
the provisions of Rate Schedule LSS. In the event Lone Star decreases its
specified Firm Load pursuant to Section I.B.1 of Rate Schedule LSS, it is
agreed that for billing purposes, such a decrease shall not reduce the amount
of Firm Load by more than 20 percent when used in allocating Kilowatts of
Billing Demand among Firm Load, Curtailable Load, and Off-Peak Load for the
subsequent 12-month period.
<PAGE>
Lone Star may elect to take service under any other Rate Schedule or
tariff provision in SWEPCO's Manual of Tariffs, as approved from time-to-time
by the Commission, that by its terms indicates it is available to a customer
served under Rate Schedule LSS or under any Commission-approved tariff that
supersedes Rate Schedule LSS. In the event Lone Star elects to take service
under such other applicable Rate Schedule or tariff provision approved by the
Commission, the attached rate schedule will be revised as appropriate, and
the Contract modified appropriately.
II. Availability of Power
---------------------
SWEPCO currently has three sources of supply to the Lone Star South
Substation and will make reasonable effort to maintain two-way service to the
Lone Star South Substation. SWEPCO's obligation under the Contract to
provide electric power is limited to the following aggregate levels:
- -------------------------------------------------------------------------------
Lone Star Lone Star
Based on SWEPCO 1997 Summer Projected Peak Load 87% 98%
Flows
Power Factor Power Factor
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Normal System Conditions 200 MW 235 MW
- -------------------------------------------------------------------------------
One Transmission Line to the Lone Star South 140 MW 160 MW
Substation Out of Service
- -------------------------------------------------------------------------------
One Autotransformer at the Diana Substation Out of 115 MW 115 MW
Service*
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
*Should one autotransformer at the Diana Substation fail, SWEPCO will
make a reasonable effort to install a spare autotransformer within 30
days.
SWEPCO will reasonably notify Lone Star should SWEPCO's projections of
customer demands indicate that any significant changes in these limits are
expected to occur.
<PAGE>
In the event Lone Star notifies SWEPCO that Lone Star's needs are
projected to exceed the levels set forth above, SWEPCO will consult with Lone
Star with respect to the installation of additions or modifications to
SWEPCO's system and the terms and conditions upon which such additions or
modifications will be installed. Installation of any such additions or
modifications will be contingent on: (i) receipt of all required permits and
approvals; (ii) availability of materials and rights-of-way; and (iii)
Commission approval of any compensation from Lone Star to SWEPCO for Lone
Star's reasonably apportioned share of the cost of the additions or
modifications installed. At this time, SWEPCO has no plans for construction
of additions or modifications to its system for which Lone Star would be
expected to share the cost.
To assist in SWEPCO's planning, Lone Star will provide SWEPCO a written
load forecast for a minimum of three calendar years by March 1 of each year.
Lone Star shall use its best efforts to inform SWEPCO as soon as possible of
any substantial changes in these forecasts.
III. Limitation of Amount of Curtailable Load
----------------------------------------
Due to Lone Star's and other customers' potential for load growth,
Curtailable Load shall be provided consistent with transmission system
delivery capability, including but not limited to the limitations set forth
in Section II above. The amount of Curtailable Load available will change
from time to time and shall be specified by SWEPCO. A limited amount of
Curtailable Load is available to all SWEPCO customers. Curtailable Load
available to Lone Star shall be 120,000 kilowatts subject to the following:
(1) In the event Lone Star's use of Curtailable Load does not exceed 90,000
kilowatts at any time prior to June 1, 1997, or during any three-year period
<PAGE>
thereafter, SWEPCO shall have the right to make any Curtailable Load or
interruptible power in excess of 10,000 kilowatts over the highest prior
usage of Curtailable Load by Lone Star available to other customers; and
(2) SWEPCO shall allow the use of more Curtailable Load to the extent it
deems such allowance consistent with its system's demands and capability.
IV. Metering
--------
The kilowatt-hours associated with each type of load shall be determined
by one set of electronic metering. In the event of a failure in metering,
billing shall be estimated on the best information available or Lone Star's
metering. Metering equipment shall be tested at intervals not exceeding one
year with a representative of each party present. If as a result of such
tests the metering equipment is found to be inaccurate, it shall be restored
to a condition of accuracy. If inaccuracy is found outside of the accuracy
standards of the American National Standards Institute, Incorporated, bill
adjustments will be made in accordance with the Meter Policy of SWEPCO's
Manual of Tariffs.
V. Lone Star Generating Equipment and
Interconnection with SWEPCO System
----------------------------------
Lone Star currently has 34.3 MW of generating equipment installed at the
facility served hereunder. Lone Star has installed and agrees to maintain in
good working order necessary interconnection equipment, including protective
devices and equipment, meeting SWEPCO's standards and specifications to allow
the operation of such generating equipment in parallel with
<PAGE>
the SWEPCO system in a manner that does not adversely affect either the
reliability or safety of the SWEPCO system. Should SWEPCO's standards and
specifications be revised in the future, Lone Star agrees at its expense to
make any modifications to such interconnection equipment that may be
reasonably necessary to comply with such revised standards and specifications
to assure the continued operation of Lone Star's generating equipment in
parallel with the SWEPCO system without adversely affecting either the safety
or reliability of the SWEPCO system.
In the event Lone Star plans to make any change to such generating
equipment or to the interconnection equipment which could reasonably be
expected to affect the SWEPCO system or plans any increase in the amount of
generating capability installed, Lone Star agrees to notify SWEPCO and
provide SWEPCO with information sufficient for SWEPCO to evaluate the
potential effects on the SWEPCO system. Lone Star agrees at its expense to
install such interconnection equipment, including protective devices or
equipment, as SWEPCO reasonably specifies to ensure that any modifications to
Lone Star's equipment or increases in the capability of Lone Star's
generation do not adversely affect either the safety or reliability of the
SWEPCO system.
Lone Star's generating equipment may be utilized by Lone Star for
purposes of supplying part of its total electric capacity and energy needs.
Because Rate Schedule LSS is a special tariff applicable to Lone Star alone
and provides for breakdown and standby service, the provisions of Section 7
of SWEPCO's Standard Terms and Conditions do not affect Lone Star's ability
to use its installed generation to supply part of its total electric capacity
and energy needs and the reference in such Section 7 to Rate Schedule (S)
Standby Service does not apply to service to Lone Star.
<PAGE>
VI. Motor Installation
------------------
In accordance with Section 10 of SWEPCO's Standard Terms and Conditions
as approved by the Commission, SWEPCO recognizes that Lone Star has installed
some three-phase motors that are rated less than 7.5 HP.
VII. Term of Contract and Effective Date
-----------------------------------
The Contract will be filed with the Commission. The Contract will be in
effect for ten years beginning on the later of (i) October 1, 1996, or (ii)
should the Commission deem approval of the Contract to be necessary, the date
of the earlier of interim or permanent approval by the Commission. After the
initial ten year term, the Contract shall continue in effect in automatically
recurring yearly periods. During its term, the contract can be terminated by
either party by written notice given to the other not less than twenty-four
months prior to the termination date designated in such notice.
VIII. Notices
-------
Statements or notices under the Contract shall be mailed to Vice
President-Engineering and Services, Lone Star Steel Company, Lone Star, Texas
75668, and to President, Southwestern Electric Power Company, P.O. Box 21106,
Shreveport, Louisiana 71156.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
SECTION TITLE RATES, CHARGES, AND FEES
----------------------------------------------------------------
SECTION NUMBER 4.04 EFFECTIVE DATE 08/01/85
----------------------------- -------------
APPLICABLE LONE STAR STEEL COMPANY ORIGINAL REVISION NUMBER 4
--------------------------------- ---
- -----------------------------------------------------------------------------
CONTRACT WITH LONE STAR STEEL COMPANY (LSS)
- -----------------------------------------------------------------------------
AVAILABILITY
------------
This rate is available to Lone Star Steel Company for service provided under
a contract specifying the limits and conditions of service as a rate that is
subject to change by the regulatory authority having jurisdiction during the
course of any rate proceeding.
I. BASIC RATES FOR ELECTRIC SERVICE
A. Rate Determination
------------------
1. Firm Load:
Kilowatt Charge:
----------------
$4.62 per Kilowatt for the Firm Load Kilowatts of Billing Demand.
Kilowatt-hour Charge:
---------------------
0.48c per Kilowatt-hour for all Firm Load Kilowatt-hours with
Kilowatt-hours from metered data for usage levels up to the Firm
Load Kilowatts of Billing Demand.
2. Rates for Turbine-Generator Overhaul and Emergency Power are
applicable only when this type of power is used with kilowatt-
hours from metered data for the usage levels specified. Turbine
Generator overhaul kilowatt-hours will be at the firm load rate.
Emergency Power kilowatt-hours will be at the Power Emergency rate.
3. Curtailable Load:
Kilowatt Charge:
----------------
$3.46 per Kilowatt for the Curtailable Load Kilowatts of Billing
Demand.
<PAGE>
Kilowatt-hour Charge:
---------------------
0.42c per Kilowatt-hour with the kilowatt-hours metered for
usage between the Firm Load Kilowatts of Billing Demand and the
Curtailable Load Kilowatts of Billing Demand.
4. Off-Peak Load:
KILOWATT CHARGE:
$2.31 per Kilowatt for the Off-Peak Kilowatts of Billing Demand.
Kilowatt-hour Charge:
---------------------
0.42c per Kilowatt-hour with the kilowatt-hours metered for
usage between the Curtailable Load Kilowatts of Billing Demand and
the Off-Peak Kilowatts of Billing Demand.
B. Determination of Kilowatts of Billing Demand: The Kilowatts of
Billing Demand for each month will be the average kilowatt load used
by the Customer during the 30-minute period of maximum use comprised
of two consecutive 15-minute periods (with each clock hour being
divided into quarter hours) during the on-peak and off-peak hours of
the month and will be determined in the following manner and sequence:
1. Firm Load Kilowatts of Billing Demand: will be specified from
time to time by Customer within the contract constraints. Any
change in Firm Load requires at least 72 hours prior notice to
Company with written confirmation being sent within 24 hours of
such notice. An increase will be effective for the entire month
in which requested to be effective and a decrease will be
effective after the end of such month.
2. Turbine-Generator Overhaul Kilowatts of Billing Demand: will be
specified in advance by Customer and shall be considered as Firm
Load Kilowatts of Billing Demand during the agreed upon period and
shall not be used in the Determination of Minimum Kilowatts of
Billing Demand.
<PAGE>
3. Emergency Power Kilowatts of Billing Demand: will be specified, at
the beginning of Emergency Power use by Customer with written
confirmation within 24 hours. Customer will notify Company when the
emergency has been completed with written confirmation within 24
hours. Emergency Power Kilowatts of Billing Demand as specified
will be in addition to the Firm Load Kilowatts of Billing Demand
but will be considered as Firm Load Kilowatts of Billing Demand in
determining Curtailable and off-peak Kilowatts of Billing Demand.
Emergency Power Kilowatts of Billing Demand shall not be used in the
Determination of Minimum Kilowatts of Billing Demand.
4. Curtailable Load Kilowatts of Billing Demand: will be the on-peak
hours determination of Kilowatts of Billing Demand less the Firm Load
Kilowatts of Billing Demand.
5. Off-Peak Kilowatts of Billing Demand: will be the off-peak hours
determination of Kilowatts of Billing Demand less the on-peak hours
determination of Kilowatts of Billing Demand and shall not be used
in the Determination of Minimum Kilowatts of Billing Demand.
C. Monthly Kilowatt Charge: The monthly kilowatt charge will be the charge
for the Kilowatts of Billing Demand for the current month or the Minimum
Kilowatts of Billing Demand, whichever is greater as determined in the
following manner and sequence:
1. Firm load kilowatts of billing demand at the firm load rate, plus
2. Turbine-Generator or Emergency Power Kilowatts of Billing Demand
are applicable only when the power is utilized (not to be used in
Minimum Kilowatts of Billing Demand), plus
3. Curtailable load kilowatts of billing demand at the rate for
curtailable load, plus
4. Off-Peak Load Kilowatts of Billing Demand at the rate for off-peak
load (not to be used in Minimum Kilowatts of Billing Demand).
<PAGE>
D. Firm Load - Demand and energy used regularly on an as needed basis not
subject to normal interruption for load management by Company.
E. Curtailable Load - Demand and energy used in addition to firm load used
regularly on an as needed basis within limits of the contract but subject
to interruption for up to 30 times during the curtailable year for a total
of 150 hours. Curtailable load will be subject to immediate interruption
for emergency system conditions in addition to the above.
F. Curtailable Year - Beginning June 1 and Ending May 31 of the following
year.
G. Interruption Procedure for Curtailable Load: The interruption procedure
will be in the following order:
1. Company's system dispatcher will request Customer's designated
representative(s) to reduce load to an amount that is not less than
firm load amount. Company will attempt to provide at least 30
minutes notice but will provide not less than a minimum of 15 minutes
notice to Customer to reduce its load to the requested load amount.
Interruptions for emergency system conditions as noted previously
shall be subject to immediate interruption.
2. If Customer's demand exceeds the predetermined level after actions
in step 1 of the interruption procedure, Company shall interrupt
total plant service.
H. Off-Peak Load - Demand and energy used in addition to firm or
curtailable load only during the off-peak hours subject to the following
limitations. The average kilowatt load during the off-peak hours will
not exceed the on-peak demand by more than 50,000 kilowatts; provided
however, the off-peak demand shall not exceed the on-peak demand by more
than 30,000 kilowatts during the hours from 6:00 A.M. to 7:30 A.M. in the
months of October, November, December, January, February, March and April.
<PAGE>
The Off-Peak Demand limitation of 30,000 kilowatts shall not apply on
Saturday or Sunday or the day of a National Holiday. Any Demand in
excess of the maximum Off-Peak Demands specified above shall be
considered as On-Peak Demands and billed accordingly. Provided further
however, Company shall have the right of normal interruption back to the
Firm Load during the hours from 3:30 P.M. to 8:00 P.M. in the months of
October through April of any calendar year and during the hours from
8:00 A.M. to 2:00 P.M. in the months of May through September of any
calendar year.
I. Off-Peak Hours and On-Peak Hours:
---------------------------------
In the months of May through September of any calendar year, the On-Peak
Hours are those hours between 2:00 P.M. and 10:00 P.M., Monday through
Friday; the Off-Peak Hours are those between 10:00 P.M. on one day to
2:00 P.M. on the following day, Monday through Thursday and 10:00 P.M.
on Friday to 2:00 P.M. the following Monday. In the months of October
through April of any calendar year, the On-Peak Hours are those hours
between 7:30 A.M. and 3:30 P.M., Monday through Friday; the Off-Peak
Hours are those between 3:30 P.M. on one day to 7:30 A.M. on the
following day, Monday through Thursday and 3:30 P.M. on Friday to
7:30 A.M. the following Monday. The On-Peak Hours of the following
National Holidays shall be considered Off-Peak Hours in this Agreement:
New Year's Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Should any of these days fall on Sunday, the
following Monday shall be considered a National Holiday, likewise should
any of these days fall on Saturday, the preceding Friday shall be
considered a National Holiday.
J. The combined total amount of Curtailable and Off-Peak Load will be
limited to the Curtailable Load plus 50,000 KW. Any demand during
Off-Peak Hours in excess of Curtailable Load plus 50,000 KW will be
considered Firm Load Demand.
II. Minimum Kilowatts of Billing Demand:
------------------------------------
The Minimum Kilowatts of Billing Demand will be higher of (a) the
charge for the On-Peak Demand of the current month, but not less than
the charge for 40,000 kilowatts, or (b) any contract provisions.
III. Determination of Kilovar Charge:
--------------------------------
The reactive demand in kilovars will be recorded by SWEPCO. In
each month a charge of 35 cents per month shall be made for each kilovar
by which Lone Star's maximum 30 minute reactive demand in kilovars is
greater than 50 percent of Lone Star's maximum 30 minute kilowatt demand
during the same time period in that month.
<PAGE>
IV. Fuel Cost Component of Base Rates:
----------------------------------
In addition to all other charges, the amount of the bill will be
increased by an amount per KWH calculated in accordance with Schedule FC.
V. Tax Adjustment
--------------
Total billing will be decreased or increased by the proportionate
part of any new tax or change in rate of tax as provided in the Tax
Adjustment Rider.
VI. Turbine-Generator Overhaul
--------------------------
It is recognized that it will be necessary for the integrated
operation of the turbine-generators of LONE STAR and power service of
SWEPCO, that schedule overhaul periods on the equipment of LONE STAR
must be fitted into the similar schedules of SWEPCO as determined by
SWEPCO's Chief System Operator. During the agreed upon period of
overhaul, the Turbine-Generator Overhaul Kilowatts of Billing Demand
shall be determined in accordance with the provisions as stated in the
"Determination of Kilowatts of Billing Demand" section, except that the
Kilowatts of Billing Demand in excess of the Kilowatts of Billing Demand
established under normal operations, shall be prorated on a daily basis
during the billing periods when such overhauls are being accomplished.
The Turbine-Generator Overhaul Kilowatts of Billing Demand established
during the overhaul period shall not be used in the Minimum Kilowatts of
Minimum Billing Demand and shall only be applicable during the actual
period of overhaul.
VII. Emergency Power and Energy
--------------------------
It is recognized that emergencies may arise in operation of LONE
STAR's plant occasioned by a breakdown of the existing generating plant
of LONE STAR whereby additional power is required. Therefore, SWEPCO, on
request of LONE STAR, agrees to furnish as it has available such
emergency power and corresponding energy as may be required by LONE
STAR. In addition to normal billing, additional power and energy
furnished in an emergency shall be on the following basis:
<PAGE>
EMERGENCY POWER AND ENERGY
--------------------------
0.23c per kilowatt-hour plus the Fuel Cost Component
Of Base Rates (Schedule FC) or 110 percent (110%) of
SWEPCO's cost of energy whichever is the greater amount
for all emergency kilowatt-hours supplied to LONE STAR
plus 19.5 CENTS per kilowatt per day for each Kilowatt
of Billing Demand established above the Firm Load
Kilowatts of Billing Demand.
The Kilowatts of Billing Demand established during periods of
emergency shall not be used in the Determination of Kilowatts of
Minimum Billing Demand and shall only be applicable during the
month(s) that the emergency power and energy is supplied.
VIII. Billing and Payments
--------------------
Bills for services furnished are rendered monthly and are
due and payable within sixteen (16) days of date of bill. A sum
equivalent to 1% of the total bill will be added to LONE STAR's
total monthly bill, but will be collected only in the event LONE
STAR fails to pay in full on or before the due date shown on
the bill.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
GENERAL OFFICES - SHREVEPORT, LOUISIANA
TEXAS
Approved By: Docket No. 14819 January 8, 1996
- --------------------------------------------------------------------------------
FIXED FUEL FACTOR
(FUEL COST COMPONENT OF BASE RATES)
(SCHEDULE FC)
Applicable to all standard rates and all kilowatt-hours sold thereunder. For
electric service billed under applicable rate schedules for which there is no
metering, the monthly usage shall be estimated by the Company and the fuel
factors shall be applied. The following fuel factors adjusted by the
appropriate loss multiplier will be included in each rate schedule to recover
fuel costs:
Applicable Period Fixed Fuel Factor
----------------- -----------------
December, January, February $ .01800 per kilowatt-hour
March, April, May $ .01893 per kilowatt-hour
June, July, August $ .01907 per kilowatt-hour
September, October, November $ .01744 per kilowatt-hour
The cost of fuel included within the Fixed Fuel Factor is comprised of the
following items:
1. Cost of fuel consumed in Company's generating plants, plus
2. Cost of purchased economy energy and power and energy purchased from
small power production and cogeneration facilities, plus
3. Cost of other purchased energy (excluding capacity charges), plus
4. Cost of small power production and cogeneration, wheeling and other costs
associated with generated or purchased power as approved by the Public
Utility Commission of Texas, less
5. Cost of energy (excluding capacity charges) sold outside the retail
jurisdictional system.
The cost of fuel consumed in the Company's generating plants shall include
only these items includible in FERC Accounts 501 and 547 less those costs
determined in Docket No. 5301 to be nonrecoverable and/or nonreconcilable
through the Fixed Fuel Factor.
11.01
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
GENERAL OFFICES - SHREVEPORT, LOUISIANA
TEXAS
Continuation of Schedule
- --------------------------------------------------------------------------------
FIXED FUEL FACTOR
(FUEL COST COMPONENT OF BASE RATES)
(SCHEDULE FC) (Continued)
The Fixed Fuel Factor for the applicable period will be adjusted by the
appropriate loss multiplier to account for differences in line losses
corresponding to the voltage level of service. The line loss multipliers are
as follows:
Transmission
138 KV .95407
69 KV .96427
Substation * .97075
Primary .98144
Secondary 1.01638
* Applicable to Primary Service supplied from the substation bus for
customers served on the LLP rate schedule.
The Company will maintain up-to-date monthly and cumulative records of fuel
costs, fuel revenues and the difference between them. When permitted in
accordance with Public Utility Commission of Texas Substantive Rule
23.23(b)(2), Rate Design, the Company will reconcile any cumulative over- or
under-recovery of fuel cost and will either credit or surcharge, whichever
is appropriate, the over- or under-recovered fuel costs with interest at the
rate established by the Commission for overbilling and underbilling.
The Fixed Fuel Factor is subject to change by the Commission in accordance
with Substantive Rule 23.23 (b)(2), Rate Design.
11.01 A
<PAGE>
EXHIBIT 10.22
ASSIGNMENT, TERMINATION AND RELEASE
1. Sale of Securities. In consideration of the payment by Lone Star
-------------------
Technologies, Inc. ("Purchaser") to each of the parties listed on Schedule A
("Sellers") of the sum of money set forth opposite the name of the respective
Seller on Schedule A, each Seller hereby sells, assigns and transfers to
Purchaser the securities ("Securities") issued by Lone Star Steel Company
("LSS") and identified on Schedule A as owned by such Seller.
2. Representations and Warranties of Each Seller. Each Seller hereby
----------------------------------------------
represents and warrants to Purchaser that such Seller owns the Securities
identified on Schedule A as owned by such Seller, free and clear of all
security interests, liens, claims, options, charges, encumbrances and, except
as provided in the Agreements (as defined below) or the restrictive legends
appearing on some of the Securities' certificates, restrictions on the
transferability thereof, that such Seller has full legal power, right and
authority and all authorizations and approvals to sell, assign and transfer
such Securities to Purchaser and that the Securities identified on Schedule A
as owned by Seller are all of the securities of LSS owned by Seller.
3. Representations and Warranties of Purchaser. Purchaser hereby
--------------------------------------------
represents and warrants to each Seller that the Securities that Purchaser is
acquiring from such Seller are being acquired solely for Purchaser's own
account, for investment, and not with a view to, or for resale in connection
with, any distribution thereof within the meaning of the Securities Act of
1933, as amended.
4. Termination of Agreements. In consideration of the premises and the
--------------------------
mutual agreements herein contained, Purchaser, Sellers and LSS hereby
terminate the Stockholders and Registration Rights Agreement among
Purchaser, Sellers, LSS and the other stockholders of LSS named therein dated
as of May 16, 1991, the agreement among Purchaser, Sellers and LSS dated
October 31, 1995, the agreement among Purchaser, Sellers and LSS dated
November 2, 1994 and any other agreements by or among the parties hereto
relating to LSS (the "Agreements").
5. Mutual Releases. In consideration of the premises and the mutual
----------------
agreements herein contained, each Seller hereby irrevocably and
unconditionally releases, relinquishes and forever discharges Purchaser and
LSS and their stockholders, predecessors, successors, assigns, advisors,
directors, officers and employees from any and all claims, demands, actions
and causes of actions, known or unknown, relating to or arising out of the
Agreements or the business, financial condition, results of operations or
securities of LSS which such Seller may have against any such released
party, including, but not limited to, any rights arising out of any tort,
including any claim of negligence,
<PAGE>
gross negligence, or willful misconduct, or any alleged violation of any
contract, express or implied, any covenant of good faith and fair dealing,
express or implied, or any federal, state or other governmental statute,
regulation or ordinance; and Purchaser and LSS hereby irrevocably and
unconditionally release, relinquish and forever discharge each Seller and its
owners, trustees, partners, stockholders, predecessors, successors, assigns,
advisors, directors, officers and employees from any and all claims, demands,
actions and causes of actions, known or unknown, relating to or arising out
of the Agreements or the business, financial condition, results of operations
or securities of LSS which Purchaser or LSS may have against any such
released party, including, but not limited to, any rights arising out of any
tort, including any claim of negligence, gross negligence, or willful
misconduct, or any alleged violation of any contract, express or implied, any
covenant of good faith and fair dealing, express or implied, or any federal,
state or other governmental statute, regulation or ordinance; provided,
however, that no party hereto releases, relinquishes or discharges any other
party hereto from any claim, demand, action or cause of action which may
arise out of any breach of such other party's representations, warranties or
agreements contained in this Assignment, Termination and Release ("ATR").
6. Counterparts. This ATR may be executed in two or more
-------------
counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same agreement. Upon (i) each Seller providing
to Purchaser and LSS by facsimile transmission a counterpart of this ATR
signed by such Seller and (ii) Purchaser and LSS providing to each Seller by
facsimile transmission a counterpart of this ATR signed by Purchaser and
LSS, this ATR shall become a legal and binding agreement among the parties
hereto.
7. Governing Law. This ATR shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware applicable to agreements
made and to be performed entirely in such State.
8. Closing. The parties hereto agree to consummate the sale of the
-------
Securities by Sellers to Purchaser and the payment of the purchase price for
the Securities by Purchaser to Sellers (the "Closing") on January 22, 1997
and to conduct the Closing at the offices of Bank One, Texas, N.A. (the
"Bank") at 1717 Main Street, Dallas, Texas 75201. At the Closing, Purchaser
and LSS will deliver to Sellers counterparts of this ATR executed by
Purchaser and LSS, Sellers will deliver to Purchaser and LSS counterparts of
this ATR executed by Sellers, Sellers will deliver to Purchaser the
certificates representing all of the Securities with stock powers executed by
Sellers, and Purchaser will cause the Bank to wire transfer to each Seller
the amount set forth opposite such Seller's name on Schedule A hereto in
accordance with such Seller's wire transfer instructions set forth opposite
such Seller's name on Schedule B hereto.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this ATR as of
January 21, 1997.
LONE STAR TECHNOLOGIES, INC.
By: JOHN P. HARBIN
-----------------------------------
John P. Harbin
Chairman and Chief Executive Officer
LONE STAR STEEL COMPANY
By: ROBERT F. SPEARS
------------------------------------
Name: Robert F. Spears
Title: Secretary
TCW SPECIAL CREDITS
As Agent for:
Weyerhaeuser Company Master
Pension Trust
Inland Steel Industries Pension Trust
As General Partner of:
TCW Special Credits Fund
TCW Special Credits Fund II
TCW Special Credits Fund IIb
By: TCW Asset Management Company,
its Managing Partner
By: BRUCE A. KARSH
------------------------------------
Name: Bruce A. Karsh
Title: Authorized Signatory
By: KENNETH LIANG
------------------------------------
Name: Kenneth Liang
Title: Authorized Signatory
3
<PAGE>
MERCED PARTNERS LIMITED
PARTNERSHIP
By: Global Capital Management, Inc.
General Partner
By: JOHN D. BRANDENBORG
------------------------------------
Name: John D. Brandenborg
Title: Vice President
CARGILL FINANCIAL SERVICES
CORPORATION
By: PATRICK J. HALLORAN
------------------------------------
Name: Patrick J. Halloran
Title: Vice President
4
<PAGE>
SCHEDULE A
----------
STOCKHOLDER AND SECURITIES OWNED PURCHASE PRICE
- -------------------------------- --------------
TCW Special Credits Fund I
60.4322 shares of Common Stock, par value
$1.00 per share, of LSS (Certificate No. 15)
14.9041 shares of Preferred Stock, Series A,
(par value $1.00 per share) of LSS (Certificate
Nos. 2, 9, 16, 23, 30, 37, 44 and 51); and
Stock Purchase Warrant dated as of February 15,
1994 evidencing the right to purchase 18.135
shares of Common Stock, par value $1.00 per
share, of LSS (Certificate No. W-02).
$12,698,801
TCW Special Credits Fund II
13.0952 shares of Common Stock, par value
$1.00 per share, of LSS (Certificate No. 16);
3.1615 shares of Preferred Stock, Series A,
(par value $1.00 per share) of LSS (Certificate
Nos. 3, 10, 17, 24, 31, 38, 45 and 52); and
Stock Purchase Warrant dated as of February 15,
1994 evidencing the right to purchase 4.095
shares of Common Stock, par value $1.00 per
share, of LSS (Certificate No. W-03).
$ 2,716,658
A-1
<PAGE>
STOCKHOLDER AND SECURITIES OWNED PURCHASE PRICE
- -------------------------------- --------------
TCW Special Credits Fund IIb
9.6655 shares of Common Stock, par value
$1.00 per share, of LSS (Certificate No. 17);
2.4841 shares of Preferred Stock, Series A,
(par value $1.00 per share) of LSS (Certificate
Nos. 4, 11, 18, 25, 32, 39, 46 and 53); and
Stock Purchase Warrant dated as of February 15,
1994 evidencing the right to purchase 2.925
shares of Common Stock, par value $1.00 per
share, of LSS (Certificate No. W-04).
$ 2,090,145
Weyerhaeuser Company Master Pension Trust
4.5210 shares of Common Stock, par value
$1.00 per share, of LSS (Certificate No. 18);
1.1291 shares of Preferred Stock, Series A,
(par value $1.00 per share) of LSS (Certificate
Nos. 5, 12, 19, 26, 33, 40, 47 and 54); and
Stock Purchase Warrant dated as of February 15,
1994 evidencing the right to purchase 32.175
shares of Common Stock, par value $1.00 per
share, of LSS (Certificate No. W-05).
$ 1,811,787
A-2
<PAGE>
STOCKHOLDER AND SECURITIES OWNED PURCHASE PRICE
- -------------------------------- --------------
Inland Steel Industries Pension Trust
3.8974 shares of Common Stock, par value
$1.00 per share, of LSS (Certificate No. 19);
.9032 share of Preferred Stock, Series A,
(par value $1.00 per share) of LSS (Certificate
Nos. 6, 13, 20, 27, 34, 41, 48 and 55); and
Stock Purchase Warrant dated as of February 15,
1994 evidencing the right to purchase 1.170
shares of Common Stock, par value $1.00 per
share, of LSS (Certificate No. W-06).
$ 785,216
Cargill Financial Services Corporation
46.0822 shares of Common Stock, par value
$1.00 per share, of LSS (Certificate No. 20).
$ 2,683,125
Merced Partners Limited Partnership
7.7977 shares of Common Stock, par value
$1.00 per share, of LSS (Certificate No. 23); and
2.6797 shares of Preferred Stock, Series A,
(par value $1.00 per share) of LSS (Certificate
Nos. 7, 14, 21, 28, 35, 42, 49 and 56).
$ 2,014,268
TCW Special Credits $ 200,000
-----------
TOTAL PURCHASE PRICE $25,000,000
A-3
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF LONE STAR TECHNOLOGIES, INC.
--------------------------------------------
I. Environmental Holdings, Inc.
A. Zinkanada, Inc.
B. Zinklahoma, Inc.
II. Lone Star Steel Company
A. Fort Collins Pipe Company
B. Lone Star Logistics, Inc.
C. Lone Star Steel International, Inc.
D. Lone Star Steel Sales Company
E. Rotac, Inc.
F. T & N Lone Star Warehouse Company
G. Texas & Northern Railway Company
III. Conexas, Inc.
IV. Extrusion Research Institute, Ltd.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statement on Form S-8 (No. 33-64805) of Lone
Star Technologies, Inc. of our report dated January 23, 1997 appearing
elsewhere in this Form 10-K.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
February 20, 1997
<PAGE>
Exhibit 24
Page 1 of 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints JOHN P.
HARBIN, CHARLES J. KESZLER and ROBERT F. SPEARS, or any of them, as the true
and lawful agents and attorneys-in-fact of the undersigned (the
"Attorneys-in-Fact"), each with full power to appoint a substitute or
substitutes to act hereunder, to execute and deliver for and on behalf of the
undersigned the Annual Report of Lone Star Technologies, Inc. on Form 10-K
(including any amendments thereto) to be filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 1996. The undersigned hereby ratifies and
confirms all that the Attorneys-in-Fact, or any substitute or substitutes,
may do by virtue of this Power of Attorney.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
at Dallas, Texas on this 20th day of February, 1997.
/s/ Dean P. Guerin
------------------------------
Dean P. Guerin
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, SHARON E. GOODRICH, a Notary Public in and for the State of
Texas, on this day did personally appear Dean P. Guerin, known to me to be
the person whose name is subscribed to the foregoing Power of Attorney, and
acknowledged to me that he executed such Power of Attorney for the purposes
and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of February, 1997.
/s/ Sharon E. Goodrich
------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/98
<PAGE>
Exhibit 24
Page 2 of 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints JOHN P.
HARBIN, CHARLES J. KESZLER and ROBERT F. SPEARS, or any of them, as the true
and lawful agents and attorneys-in-fact of the undersigned (the
"Attorneys-in-Fact"), each with full power to appoint a substitute or
substitutes to act hereunder, to execute and deliver for and on behalf of the
undersigned the Annual Report of Lone Star Technologies, Inc. on Form 10-K
(including any amendments thereto) to be filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 1996. The undersigned hereby ratifies and
confirms all that the Attorneys-in-Fact, or any substitute or substitutes,
may do by virtue of this Power of Attorney.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
at Dallas, Texas on this 20th day of February, 1997.
/s/ William C. McCord
------------------------------
William C. McCord
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, SHARON E. GOODRICH, a Notary Public in and for the State of
Texas, on this day did personally appear William C. McCord, known to me to be
the person whose name is subscribed to the foregoing Power of Attorney, and
acknowledged to me that he executed such Power of Attorney for the purposes
and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of February, 1997.
/s/ Sharon E. Goodrich
------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/98
<PAGE>
Exhibit 24
Page 3 of 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints JOHN P.
HARBIN, CHARLES J. KESZLER and ROBERT F. SPEARS, or any of them, as the true
and lawful agents and attorneys-in-fact of the undersigned (the
"Attorneys-in-Fact"), each with full power to appoint a substitute or
substitutes to act hereunder, to execute and deliver for and on behalf of the
undersigned the Annual Report of Lone Star Technologies, Inc. on Form 10-K
(including any amendments thereto) to be filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 1996. The undersigned hereby ratifies and
confirms all that the Attorneys-in-Fact, or any substitute or substitutes,
may do by virtue of this Power of Attorney.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
at Dallas, Texas on this 20th day of February, 1997.
/s/ Charles L. Blackburn
-------------------------------
Charles L. Blackburn
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, SHARON E. GOODRICH, a Notary Public in and for the State of
Texas, on this day did personally appear Charles L. Blackburn, known to me to
be the person whose name is subscribed to the foregoing Power of Attorney,
and acknowledged to me that he executed such Power of Attorney for the
purposes and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of February, 1997.
/s/ Sharon E. Goodrich
-------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/98
<PAGE>
Exhibit 24
Page 4 of 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints JOHN P.
HARBIN, CHARLES J. KESZLER and ROBERT F. SPEARS, or any of them, as the true
and lawful agents and attorneys-in-fact of the undersigned (the
"Attorneys-in-Fact"), each with full power to appoint a substitute or
substitutes to act hereunder, to execute and deliver for and on behalf of the
undersigned the Annual Report of Lone Star Technologies, Inc. on Form 10-K
(including any amendments thereto) to be filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 for the fiscal year
ended December 31, 1996. The undersigned hereby ratifies and confirms all that
the Attorneys-in-Fact, or any substitute or substitutes, may do by virtue of
this Power of Attorney.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
at Dallas, Texas on this 20th day of February, 1997.
/s/ Frederick B. Hegi, Jr.
-------------------------------
Frederick B. Hegi, Jr.
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, SHARON E. GOODRICH, a Notary Public in and for the State of
Texas, on this day did personally appear Frederick B. Hegi, Jr., known to me to
be the person whose name is subscribed to the foregoing Power of Attorney, and
acknowledged to me that he executed such Power of Attorney for the purposes and
consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of February, 1997.
/s/ Sharon E. Goodrich
-------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/98
<PAGE>
Exhibit 24
Page 5 of 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints
JOHN P. HARBIN, CHARLES J. KESZLER and ROBERT F. SPEARS, or any of them,
as the true and lawful agents and attorneys-in-fact of the undersigned
(the "Attorneys-in-Fact"), each with full power to appoint a substitute or
substitutes to act hereunder, to execute and deliver for and on behalf of
the undersigned the Annual Report of Lone Star Technologies, Inc. on
Form 10-K (including any amendments thereto) to be filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934 for
the fiscal year ended December 31, 1996. The undersigned hereby ratifies and
confirms all that the Attorneys-in-Fact, or any substitute or substitutes,
may do by virtue of this Power of Attorney.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
at Dallas, Texas on this 20th day of February, 1997.
/s/ James E. McCormick
-----------------------------
James E. McCormick
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, SHARON E. GOODRICH, a Notary Public in and for the State of
Texas, on this day did personally appear James E. McCormick, known to me to
be the person whose name is subscribed to the foregoing Power of Attorney,
and acknowledged to me that he executed such Power of Attorney for the
purposes and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of February, 1997.
/s/ Sharon E. Goodrich
-----------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/98
<PAGE>
Exhibit 24
Page 6 of 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints
JOHN P. HARBIN, CHARLES J. KESZLER and ROBERT F. SPEARS, or any of them,
as the true and lawful agents and attorneys-in-fact of the undersigned
(the "Attorneys-in-Fact"), each with full power to appoint a substitute or
substitutes to act hereunder, to execute and deliver for and on behalf of
the undersigned the Annual Report of Lone Star Technologies, Inc. on
Form 10-K (including any amendments thereto) to be filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934 for
the fiscal year ended December 31, 1996. The undersigned hereby ratifies and
confirms all that the Attorneys-in-Fact, or any substitute or substitutes,
may do by virtue of this Power of Attorney.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
at Dallas, Texas on this 20th day of February, 1997.
/s/ Thomas M. Mercer, Jr.
-----------------------------
Thomas M. Mercer, Jr.
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, SHARON E. GOODRICH, a Notary Public in and for the State of
Texas, on this day did personally appear Thomas M. Mercer, Jr., known to me
to be the person whose name is subscribed to the foregoing Power of Attorney,
and acknowledged to me that he executed such Power of Attorney for the
purposes and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 20th day of February, 1997.
/s/ Sharon E. Goodrich
-----------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/98
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