<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
COMMISSION FILE NUMBER: 1-12881
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
14681 MIDWAY ROAD, SUITE 200
DALLAS, TEXAS 75244
972/386-3981
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 75-2085454
Indicate by a 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 / /.
As of October 8, 1998, the number of shares of Common Stock outstanding
at $1.00 par value per share was 22,495,748.
- -------------------------------------------------------------------------------
<PAGE>
LONE STAR TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
Results of Operations 7
Financial Condition and Liquidity 8
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
Item 5. OTHER INFORMATION 10
Item 6. REPORTS ON FORM 8-K 10
</TABLE>
In the opinion of management, the unaudited consolidated financial statements
include all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the financial position as of September 30, 1998
and the cash flows and the results of operations for the three months and
nine months ended September 30, 1998 and 1997. Unaudited financial
statements are prepared on a basis substantially consistent with those
audited for the year ended December 31, 1997. The results of operations for
the interim periods presented may not be indicative of total results for the
full year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations promulgated by the Securities and Exchange Commission.
However, management believes that the disclosures contained herein are
adequate to make the information presented not misleading. The unaudited
financial statements should be read in conjunction with the audited financial
statements and accompanying notes in Lone Star Technologies, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997.
2
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 88.9 $ 167.4 $ 368.9 $ 498.9
Cost of goods sold (98.8) (150.7) (355.7) (451.6)
-----------------------------------------------------
Gross earnings (loss) (9.9) 16.7 13.2 47.3
Selling, general and administrative expenses (5.1) (4.9) (15.3) (14.5)
-----------------------------------------------------
Operating earnings (loss) (15.0) 11.8 (2.1) 32.8
Interest income 0.4 0.7 1.4 2.3
Interest expense (1.2) (1.5) (2.8) (5.8)
Other income - - - 0.3
-----------------------------------------------------
Earnings (loss) from continuing operations
before income tax (15.8) 11.0 (3.5) 29.6
Income tax 0.2 (0.3) - (0.8)
-----------------------------------------------------
Net earnings (loss) from continuing operations (15.6) 10.7 (3.5) 28.8
Gain from discontinued operations - 12.4 - 12.4
-----------------------------------------------------
NET EARNINGS (loss) $ (15.6) $ 23.1 $ (3.5) $ 41.2
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Per common share - basic:
Net earnings (loss) from continuing operations (0.69) 0.50 (0.15) 1.37
Gain from discontinued operations - 0.58 - 0.60
-----------------------------------------------------
NET EARNINGS (loss) AVAILABLE TO COMMON SHAREHOLDERS $ (0.69) $ 1.08 $ (0.15) $ 1.97
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Per common share - diluted:
Net earnings (loss) from continuing operations (0.69) 0.48 (0.15) 1.33
Gain from discontinued operations - 0.56 - 0.58
-----------------------------------------------------
NET EARNINGS (loss) AVAILABLE TO COMMON SHAREHOLDERS $ (0.69) $ 1.04 $ (0.15) $ 1.91
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12.7 $ 14.2
Short-term investments 3.2 6.3
Accounts receivable, net 46.4 80.1
Current inventories, net 126.7 102.1
Other current assets 5.0 4.5
------------------------------
TOTAL CURRENT ASSETS 194.0 207.2
Marketable securities 13.0 19.0
Property, plant and equipment, net 165.1 161.4
Other noncurrent assets 17.2 18.2
------------------------------
TOTAL ASSETS $ 389.3 $ 405.8
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 23.8 $ 50.1
Accrued liabilities 20.7 31.2
------------------------------
TOTAL CURRENT LIABILITIES 44.5 81.3
Revolving credit facility 68.0 43.0
Postretirement benefit obligations 39.3 37.8
Other noncurrent liabilities 23.8 26.0
------------------------------
TOTAL LIABILITIES 175.6 188.1
------------------------------
TOTAL SHAREHOLDERS' EQUITY 213.7 217.7
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 389.3 $ 405.8
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------------------------------------------
BEGINNING CASH AND CASH EQUIVALENTS $ 15.9 $ 9.2 $ 14.2 $ 27.3
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) (15.6) 23.1 (3.5) 41.2
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Gain on sale of discontinued operations - (12.4) - (12.4)
Depreciation and amortization 4.0 4.0 11.7 10.4
Accounts receivable, net 26.7 5.7 33.7 (1.9)
Current inventories 6.2 11.9 (24.6) 3.6
Accounts payable and accrued liabilities (27.3) (8.2) (36.8) (13.1)
Other (1.2) (4.0) (1.0) (9.4)
-------------------------------------------------
NET CASH PROVIDED (used) BY OPERATING ACTIVITIES (7.2) 20.1 (20.5) 18.4
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3.7) (6.5) (14.5) (17.2)
Marketable securities 2.0 (1.2) 6.0 1.8
Short-term investments 2.0 (1.6) 3.1 11.5
Proceeds from sale of discontinued operations - 12.4 - 12.4
-------------------------------------------------
NET CASH PROVIDED (used) BY INVESTING ACTIVITIES 0.3 3.1 (5.4) 8.5
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under revolving credit agreement 4.0 (8.1) 25.0 (5.5)
Issuance of common stock 0.1 1.3 1.3 2.2
Treasury stock purchases (0.4) - (1.9) -
Installment note repayment - - - (0.3)
Acquisition of minority interest - - - (25.0)
-------------------------------------------------
NET CASH PROVIDED (used) BY FINANCING ACTIVITIES 3.7 (6.8) 24.4 (28.6)
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3.2) 16.4 (1.5) (1.7)
- ---------------------------------------------------------------------------------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 12.7 $ 25.6 $ 12.7 $ 25.6
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Conversion of subordinated debentures to common stock $ - $ 50.0 $ - $ 50.0
</TABLE>
See accompanying notes.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - LONE STAR STEEL ("STEEL") REVOLVING CREDIT AGREEMENT
Steel has a revolving credit agreement under which it can borrow $100 million
reduced by borrowings and outstanding letters of credit. At September 30, 1998,
borrowings totaled $68.0 million with a remaining availability of $31.6 million.
Under the credit arrangement interest is payable under one of two rate options:
at the London Interbank Offered Rate (LIBOR) plus an index which is based on
quarterly debt ratio calculations or the institution's prime lending rate. At
September 30, 1998 the rate was 6.00% and was indexed at 0.625% over LIBOR.
Steel also pays a fee of 0.175% on the unused portion of the credit facility.
The term of the agreement is through October 2002 and it is collateralized by
the assets of Steel excluding real property. Steel met the existing covenants
under its revolving credit agreement at September 30, 1998. However, Steel
anticipates that it will not be able to meet certain of these covenants at year
end. Management currently believes that its lending group will grant
modifications to the covenants. If modifications are not granted, Steel would
be in default under the terms of the revolving credit agreement and would have
to seek alternative sources of financing which management believes can be
secured.
NOTE 2 - EARNINGS (Loss) PER SHARE
Basic earnings (loss) per share is computed by dividing net income by the
weighted average number of shares of common stock. The numbers of shares used
to compute basic earnings (loss) per share for the three months ended September
30, 1998 and 1997, respectively, were 22.5 million and 21.5 million, and the
nine months ended September 30, 1998 and 1997, were 22.5 million and 21.0
million, respectively. Diluted earnings (loss) per share is computed by
dividing net income by the weighted average number of shares of common stock and
other dilutive securities. The numbers of shares used to compute dilutive
earnings (loss) per share for the three months ended September 30, 1998 and
1997, respectively, were 22.7 million and 22.4 million, and the nine months
ended September 30, 1998 and 1997, were 22.9 million and 21.8 million,
respectively.
NOTE 3 - INVENTORIES
At September 30, 1998, inventories totaled $169.6 million before LIFO reserves
and were composed of finished goods, $41.6 million; work in process, $97.1
million; and raw materials and supplies, $30.9 million. Net of LIFO reserves of
$34.4 million, inventories were $135.2 million, of which $8.5 million
(consisting of supplies and spare parts) were classified as noncurrent assets.
NOTE 4 - CASH, INVESTMENTS, AND MARKETABLE SECURITIES
LST's cash equivalents include U.S. government and related agencies
obligations with original maturities of less than three months. Short-term
investments consist of U.S. government and related agencies obligations with
maturities at purchase greater than three months and up to one year.
Marketable securities consist of U.S. government and related agencies
obligations with maturities at purchase greater than one year and up to two
years. LST's total cash equivalents, short-term investments and marketable
securities, the weighted average maturity of which is less than one year, are
classified as held-to-maturity because LST has the intent and ability to hold
them to maturity.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Steel has various commitments for the purchase of raw materials, supplies,
services, and energy arising in the ordinary course of business. The majority
of these commitments are for a period of less than one year.
Steel's operations are subject to numerous environmental laws. The three major
areas of regulation are air quality, water quality, and solid and hazardous
waste management. The primary governmental oversight agencies include the Texas
Natural Resource Conservation Commission and the Environmental Protection
Agency. Steel has agreements with these agencies to conduct numerous
environmental studies and to develop plans to ensure continuous compliance with
applicable laws and regulations. Steel is engaged in various ongoing
environmental studies, monitoring programs, and capital projects. Steel
believes that its environmental expenditures will continue to fall within its
contemplated operating and capital plans.
NOTE 6 - INCOME TAXES
LST had federal tax net operating loss carryforwards of approximately $223.1
million at December 31, 1997, a portion of which may be related to American
Federal Bank (AFB), a previous subsidiary of LST, 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.
6
<PAGE>
No provision for tax has been recognized for the nine months ended September 30,
1998. If not utilized, the net operating loss carryforwards will expire between
years 2002 and 2010.
NOTE 7 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
LST has adopted SFAS No. 130, "Reporting Comprehensive Income", as of January 1,
1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. LST did not realize any
non-owner changes in equity for the three months and nine months ended
September 30, 1998. Therefore, total comprehensive income for the quarter
ended and nine months ended September 30, 1998 is equal to net income.
However, LST has postretirement benefit obligations including pension
liabilities, for which the company has a minimum pension liability.
Adjustments to the minimum pension liability and any other non-owner changes
will be reflected in comprehensive income and cumulative comprehensive income
that will be reported in a consolidated statement of shareholders' equity in
LST's Form 10-K.
LST has adopted SFAS No. 131, "Disclosure about Segments of An Enterprise and
Related Information", as of January 1, 1998. This pronouncement changes the
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments.
SFAS No. 131 requires companies to select segments based on their internal
reporting system. LST's current segments, as reported herein, are consistent
with the company's internal reporting systems. As required by SFAS No. 131,
compliance with the respective reporting requirements will be reflected in LST's
1998 Form 10-K.
LST has adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," as of January 1, 1998. This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans, however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis. LST will
present revised disclosures related to its benefit plans in its Form 10-K for
the year ended December 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 consisting of casing, tubing and line
pipe 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.
RESULTS OF OPERATIONS
Revenues of $88.9 million for the three months ended September 30, 1998
decreased 47% from the third quarter of 1997. Revenues comprised $46.8 million
from oilfield products, $30.2 million from specialty tubing products, and $11.9
million from flat rolled steel and other tubular products, down 61%, 2% and 33%,
respectively, from the same 1997 quarter.
Revenues for the first nine months of 1998 of $368.9 million were 26% lower than
the same 1997 period. Oilfield and flat rolled steel and other tubular products
revenues declined 35% and 17%, respectively, while revenues from specialty
tubing products increased 2%.
Third quarter 1998 shipments decreased 46% from the same period in 1997 to
130,900 tons and consisted of 70,100 tons of oilfield products, 27,600 tons of
specialty tubing products and 33,200 tons of flat rolled steel and other tubular
products, decreased 57%, 4% and 31%, respectively, from the three months ended
September 30, 1997.
Shipments for the nine months ended September 30, 1998 decreased 26% to 534,500
tons from the same 1997 period.
7
<PAGE>
Oilfield and flat rolled steel and other tubular products shipments decreased
34% and 16%, respectively, while shipments of specialty tubing products were
unchanged.
Consolidated revenues reported in the statements of earnings are as follows:
<TABLE>
<CAPTION>
($ in millions)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
1998 % 1997 % 1998 % 1997 %
---- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield products revenues 46.8 53 118.9 71 225.7 61 348.3 70
Specialty tubing products revenues 30.2 34 30.7 18 97.8 27 95.9 19
Flat rolled steel and other tubular
revenues 11.9 13 17.8 11 45.4 12 54.7 11
---- --- ----- --- ----- --- ----- ---
Consolidated net revenues 88.9 100 167.4 100 368.9 100 498.9 100
---- --- ----- --- ----- --- ----- ---
---- --- ----- --- ----- --- ----- ---
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
<CAPTION>
(in tons)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
1998 % 1997 % 1998 % 1997 %
------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield products 70,100 54 164,800 68 321,500 60 487,900 67
Specialty tubing products 27,600 21 28,700 12 89,000 17 89,000 12
Flat rolled steel and other tubular
products 33,200 25 48,100 20 124,000 23 148,500 21
------- --- ------- --- ------- --- ------- ---
Total tons shipped 130,900 100 241,600 100 534,500 100 725,400 100
------- --- ------- --- ------- --- ------- ---
------- --- ------- --- ------- --- ------- ---
</TABLE>
Oilfield products revenues continued to decline from lower shipments and
product prices due to curtailment of drilling and excess industry wide OCTG
and line pipe inventories. The number of active domestic rigs drilling for
oil is down 42% while active rigs drilling for gas are down 9% from one year
ago. Also, imported OCTG primarily from Asia has ranged between 22-31% of
estimated domestic supply this year as compared to 16% a year ago. Specialty
tubing orders and shipments remain soft due to efforts by steel service
centers to reduce inventories and weak global demand for mechanical tubing.
Revenues for flat rolled steel and other tubular products were down due to
decreased shipment volumes and product prices resulting from a substantial
increase of inexpensive imported coils.
For the three months ended September 30, 1998 the gross loss was $9.9 million
compared to gross earnings of $16.7 million for the same 1997 period and the
operating loss was $15.0 million compared to operating earnings of $11.8
million. The gross and operating losses were due to reduced shipment volumes
in LST's three business segments, combined with lower prices for oilfield and
flat rolled steel and other tubular products. Gross margins were also
negatively impacted by sharply reduced production volumes at Steel where
operations were reduced through extended mill outages for much of the third
quarter. The above factors caused a net loss from continuing operations for
the third quarter of 1998 of $15.6 million, or $.69 per diluted share,
compared to net earnings from continuing operations of $10.7 million, or $.48
per diluted share, in the same period in 1997.
Net current inventories increased 24% from December 31, 1997 due to reduced
shipments of oilfield products attributable to a decline in exploration and
production programs and excess distributor inventory levels.
FINANCIAL CONDITION AND LIQUIDITY
LST has no direct business operations other than Steel or significant sources
of cash other than from investments or the sale of securities. Steel may pay
dividends to LST provided it meets certain covenants of its revolving credit
facility. LST is reimbursed by Steel for its operating costs as provided by
its cost sharing agreement with Steel.
8
<PAGE>
At September 30, 1998, LST had available cash and cash equivalents,
short-term investments, and marketable securities of $28.9 million, down from
$39.5 million at December 31, 1997, primarily due to purchases of slabs for
use by Steel. LST has no immediate cash requirements as Steel reimburses LST
for those expenses incurred for Steel's benefit under a cost sharing plan.
LST has no debt.
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 $100 million
reduced by borrowings and outstanding letters of credit. At September 30,
1998, borrowings totaled $68.0 million with a remaining availability of $31.6
million. Under the credit arrangement interest is payable under one of two
rate options: at the London Interbank Offered Rate (LIBOR) plus an index
which is based on quarterly debt ratio calculations or the institution's
prime lending rate. At September 30, 1998 the rate was 6.00% and was indexed
at 0.625% over LIBOR. Steel also pays a fee of 0.175% on the unused portion
of the credit facility. The term of the agreement is through October 2002 and
it is collateralized by the assets of Steel excluding real property. Steel
met the existing covenants under its revolving credit agreement at September
30, 1998. However, Steel anticipates that it will not be able to meet
certain of these covenants at year end. Management currently believes that
its lending group will grant modifications to the covenants. If
modifications are not granted, Steel would be in default under the terms of
the revolving credit agreement and would have to seek alternative sources of
financing which management believes can be secured.
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. Steel believes that its environmental
expenditures will continue to fall within its contemplated operating and
capital plans.
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 for the remainder of 1998.
In order to prepare LST and Steel for the Year 2000, a plan has been
implemented to ensure that its various computer systems are or become Year
2000 compliant. This plan encompasses three primary areas: business systems
(both hardware and software), communications equipment, and manufacturing
equipment. The various stages in this process include assessment
(identifying systems which need change), remediation (making changes in the
software or hardware), verification (testing the changes), and implementation
of the Year 2000 compliant systems. Substantial progress has been achieved in
the software applications for the business systems, which are currently in
the remediation and verification stages, with completion expected at the end
of 1998 and implementation expected in the first quarter of 1999. The
assessment of business system hardware, communications equipment and
manufacturing equipment is substantially complete. The remediation,
verification and implementation processes are ongoing and are expected to be
completed by the second quarter of 1999. The remediation effort required for
this hardware and equipment is not expected to be significant.
This plan also entails assessing third party relationships through
communication with key suppliers and customers. For issues identified, the
Year 2000 correcting process steps are taking place. For those suppliers and
customers which may be identified as a concern, such concerns will be
addressed in LST and Steel's contingency plan. At this date, LST and Steel
have not identified the "most reasonably likely worst case Year 2000
scenarios"; however, risks identified through the process described above
will be analyzed and evaluated. A contingency plan will be developed in the
second quarter of 1999 on how those identified risks will be handled. The
cumulative costs incurred through September 30, 1998 to achieve Year 2000
compliance are approximately $1.0 million, and are estimated to total $1.5
million upon completion in 1999.
The matters discussed or incorporated by reference in this report on Form
10-Q that are forward-looking statements involve risks and uncertainties
including, but not limited to, economic conditions, product demand, the
regulatory and trade environment, and other risks indicated in other filings
with the Securities and Exchange Commission.
9
<PAGE>
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No. 10.27 Consulting Agreement dated as of July 23, 1998 between LST
and John P. Harbin.
No. 10.28 Phantom Stock Deferred Compensation Plan adopted September
22, 1998.
No. 27 Financial Data Schedule
(b) Reports on Form 8-K: none.
SIGNATURES
Pursuant to the requirements 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.
By: /s/ Charles J. Keszler
----------------------
(Charles J. Keszler)
Vice President - Finance
Dated: October 15, 1998
10
<PAGE>
Exhibit 10.27
CONSULTING AGREEMENT
THIS AGREEMENT by and between LONE STAR TECHNOLOGIES, INC., a Delaware
corporation ("LST"), and JOHN P. HARBIN ("Harbin") dated as of July 23, 1998.
WITNESSETH THAT:
WHEREAS, Harbin has served LST as its Chief Executive Officer without any
retirement or other customary employee benefits;
WHEREAS, Harbin has informed the Corporation of his intention to retire as
Chief Executive Officer on July 1, 1998 and as Chairman and a director on
December 31, 1998;
WHEREAS, the Board of Directors and Compensation Committee of LST have
considered the accomplishments of LST and its subsidiaries under Harbin's
leadership and the great benefits that they have received from his extraordinary
services;
WHEREAS, the Board of Directors and Compensation Committee of LST have also
considered Harbin's good health and vitality, excellent reputation and valuable
relationships in the oil and gas industry and broad business experience and wise
judgment that LST could continue to benefit from;
WHEREAS, at the meetings of the Compensation Committee of LST on April 15,
1998 and the Board of Directors of LST on May 14, 1998, it was unanimously
decided that LST pay success and consulting fees of $3 million to Harbin or his
estate over a five-year period and that LST should retain Harbin to consult with
and advise the management and the Board of Directors of LST and enter into a
five-year consulting agreement with Harbin providing for the payment of the
success and consulting fees and his office expenses;
NOW, THEREFORE, it is hereby agreed as follows:
1. During the five-year term of this Agreement, commencing on January 1,
1999 and ending on December 31, 2003 (the "Term"), LST will pay Harbin the total
sum of Three Million Dollars ($3,000,000.00), payable as follows: One Million
Dollars ($1,000,000.00) on January 2, 1999 and the remaining Two Million Dollars
($2,000,000.00) in 60 monthly installments of $33,333.33 each, beginning on
January 31, 1999 and ending on December 31, 2003. If Harbin should die before
the end of the Term of this Agreement, his estate shall be entitled to receive,
in the amounts and the times
<PAGE>
specified above, the compensation provided under this paragraph 1 to be paid
during the remaining portion of the Term. If a Change in Control of LST, as
defined in the 1985 Long-Term Incentive Plan of LST, as amended, occurs
before the end of the Term of this Agreement, all remaining payments under
this paragraph 1 shall be immediately paid by LST to Harbin or his estate.
No interest shall be accrued or paid with respect to any amount paid to
Harbin hereunder. The obligation of LST to make the payments specified in
this paragraph 1 to Harbin or his estate is absolute and shall not be
affected by Harbin's inability to perform any services hereunder or by any
set-off, counterclaim, recoupment, defense or other claim, right or action
that LST may have against Harbin or others. LST and Harbin recognize that
the payments provided for in this paragraph 1 are in consideration of the
valuable services that Harbin has rendered and continues to render as an
officer of LST and that while the value to LST of the consulting services
that Harbin provides pursuant to this Agreement may be considerable, those
payments are not conditioned on Harbin's providing those consulting services
to LST.
2. During the Term of this Agreement, Harbin will serve as independent
contractor and not as an employee of LST and, as requested by LST at any time
and from time to time, will consult with LST during ordinary business hours with
regard to LST's business and operations. The services which Harbin shall
perform and render hereunder shall include advice and consultation and the
performance of such other duties and services as shall be requested by LST
relating to:
(a) The maintenance and furtherance of satisfactory relationships
between LST and its existing and prospective customers and others having
business relationships with LST;
(b) Representing LST with trade groups and other organizations; and
(c) Generally, the business and affairs of LST.
3. LST shall pay for Harbin's office expenses in an amount not to exceed
$25,000 per year during the Term of this Agreement.
4. The relationship created between LST and Harbin by this Agreement is
that of independent contractors. Harbin shall not be, by reason hereof or any
action taken hereunder or pursuant hereto, an agent or representative of LST and
shall have no power or authority to assume or incur any liability or obligation
on behalf of LST or to bind LST in any respect.
5. During the term of this Agreement Harbin shall not, within the
"Restricted Geographic Area," directly or indirectly serve as a director,
officer or employee of or consultant to any person or entity that manufactures
or sells oil country tubular goods, specialty tubing or other products
competitive with those manufactured and/or sold by
2
<PAGE>
LST (collectively, "Products"). For purposes of this paragraph 5,
Restricted Geographic Area means Dallas and Morris Counties, Texas and any
area within a 25-mile radius of any customer or dealer to which LST sells or
ships Products during 1998. Harbin shall hold in a fiduciary capacity for
the benefit of LST all secret or confidential information relating to LST and
its business that Harbin obtains during his employment as an officer of LST
and his retention as a consultant to LST hereunder. LST's sole remedy for
any breach of Harbin's obligations under this Agreement shall be to obtain
injunctive relief to restrain any such breach or specific enforcement of this
Agreement. In no event shall any asserted violation of this Agreement
constitute a basis for deferring or withholding any amounts otherwise payable
to Harbin under paragraph 1 of this Agreement. If any of the covenants in
this paragraph 5, or any part thereof, is held to be unenforceable because of
the duration of such provision or the area covered thereby, the parties agree
that the court making such determination shall reduce the duration and/or
areas of such provision such that, in its reduced form, said provision shall
then be enforceable.
6. No interest or right of Harbin under this Agreement may be assigned,
anticipated, alienated or subject to attachment, garnishment, levy, execution or
other legal or equitable process except as required by law. Any attempt by
Harbin to assign, anticipate, alienate, pledge or encumber the same shall be
void. The obligations of LST to make payments to Harbin under this Agreement
are unfunded, and no provisions of this Agreement shall be deemed or construed
to create a trust fund or to grant Harbin a security interest. All payments
under this Agreement shall be made by LST out of its general assets, and the
right of Harbin or his estate to receive payments from LST hereunder shall be no
greater than the right of any unsecured general creditor of LST.
7. This Agreement is personal to Harbin and his rights hereunder can be
transferred only by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Harbin and his
legal representatives, successors, heirs, devisees and legatees. This Agreement
shall inure to the benefit of and be binding upon LST and its successors and
assigns. References to LST in this Agreement shall include any successor to the
business and/or assets of LST that assumes LST's obligations under this
Agreement, by operation of law or otherwise.
8. LST may withhold from amounts payable under this Agreement all taxes
that are required to be withheld by applicable laws or regulations.
9. This Agreement has been executed and delivered in the State of Texas
and shall be construed in accordance with and governed by the laws of that
State.
10. The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
3
<PAGE>
11. This Agreement constitutes the entire agreement between LST and
Harbin with respect to the subject matter hereof and supersedes all other prior
agreements, both written and oral, between the parties with respect to such
subject matter. This Agreement may be amended by the parties hereto and the
terms and conditions hereof may be waived only by an instrument in writing
signed by each of the parties or, in the case of a waiver, by an instrument
signed by the party waiving compliance. This Agreement may be executed in
several counterparts, each of which shall be deemed an original, and said
counterparts shall constitute one and the same instrument.
IN WITNESS WHEREOF, Harbin has executed this Agreement and, pursuant to the
authorization of its Board of Directors and Compensation Committee, LST has
caused this Agreement to be executed on its behalf by a duly authorized officer,
all as of the date above written.
/s/ John P. Harbin
-------------------------------------
John P. Harbin
LONE STAR TECHNOLOGIES, INC.
By: /s/ Rhys J. Best
----------------------------------
Name: Rhys J. Best
--------------------------------
Title: President
-------------------------------
4
<PAGE>
Exhibit 10.28
LONE STAR TECHNOLOGIES, INC.
PHANTOM STOCK DEFERRED COMPENSATION PLAN
PURPOSE: The purpose of the Plan is to set forth the terms and conditions of
the phantom stock deferred compensation arrangement that Lone Star Technologies,
Inc. (the "Company") has made available to its non-employee directors since
1986. The Plan and the attached form of deferred compensation agreement
incorporated herein in its entirety fix in advance the specific terms of the
grant and cash settlement of phantom stock rights in satisfaction of the
requirements of Rule 16b-3 of the Securities and Exchange Commission. That rule
exempts all transactions contemplated by the Plan from the short-swing profits
liability provisions of Section 16(b) of the Securities Exchange Act of 1934.
PARTICIPATION: Any director of the Company who is entitled to receive
compensation from the Company for serving on its Board of Directors may
participate in the Plan. An eligible director who elects to have his
compensation deferred under the Plan shall notify the Company's Secretary of his
election. The first calendar quarter's compensation that can be deferred by an
electing director will be the calendar quarter in which that director gives his
notification to the Secretary; provided, however, that if the notification is
given after the date of the last scheduled Board of Directors meeting in a
calendar quarter, the director's compensation for the next calendar quarter will
be the first to be deferred under the Plan. Upon receiving the director's
notification, the Company and the director will enter into a deferred
compensation agreement in the form attached to the Plan (the "Agreement"), all
of the terms and conditions of which are hereby incorporated into the Plan. The
form of the Agreement shall not be modified in any way without the prior
approval of the Board of Directors.
DIRECTOR'S ACCOUNT AND DIRECTOR'S ACCOUNT PAYMENTS: A Director's Account, as
defined in the Agreement, shall be credited with deferred compensation units
("Units") in the manner set forth in the Agreement, and adjustments to the Units
in the event of a stock split, dividend, combination or reclassification shall
be made in accordance with the Agreement. Payments to a director or his estate
upon his ceasing to be a director of the Company shall be made in accordance
with the Agreement.
CESSATION OF DEFERRALS: A director may elect to cease deferring his
compensation under the Plan in the manner specified in the Agreement.
AMENDMENT AND TERMINATION OF THE PLAN: The Board of Directors of the Company
reserves the right at any time to modify or terminate the Plan, except that the
Board of Directors may not impair any deferrals of compensation already made
under the Plan.
Adopted by LST Board on September 22, 1998.
<PAGE>
PHANTOM STOCK
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, made and executed to be effective as of ____________,
_____, by and between LONE STAR TECHNOLOGIES, INC., a Delaware corporation (the
"Company"), and _________________________ ("Director"), sets out the terms and
conditions for the deferred payment by the Company to Director of compensation
Director is to receive for his services as a member of the Board of Directors of
the Company after ____________________, ______. This Agreement is subject to
all of the terms and conditions of the Lone Star Technologies, Inc. Phantom
Stock Deferred Compensation Plan, as it may be modified from time to time or
terminated at any time by the Board of Directors of the Company.
1. DIRECTOR'S ACCOUNT. Company shall establish and maintain on its books
a deferred compensation account in the name of Director (the "Director's
Account"). On ____________________, _____, and on the last day of each
succeeding calendar quarter with respect to which Director's compensation is
deferred, Director's Account shall be credited with the number of deferred
compensation units ("Units") which results from dividing all of the compensation
Director is entitled to receive for his services rendered during the calendar
quarter then ended as a member of the Board of Directors, including Board and
committee meeting fees, by the closing price per share of the Company's Common
Stock in the open market as of such date (if such stock was traded in the open
market on such date, but if not, then the closing price per share of such stock
in the open market as of the earliest preceding date such stock was traded in
the open market). If the Company effects a split of its shares of Common Stock
or pays a dividend in the form of shares of the Company's Common Stock, or if
the outstanding shares of the Company's Common Stock are combined into a smaller
number of shares, the Units then credited to Director's Account shall be
increased or decreased to reflect proportionately the increase or decrease in
the number of outstanding shares of the Company's Common Stock resulting from
such split, dividend or combination. In the event of a reclassification of
shares of the Company's Common Stock not covered by the foregoing, or in the
event of the liquidation or reorganization of the Company, the Board of
Directors of the Company shall make such adjustments, if any, to Director's
Account as such Board may deem appropriate.
2. DIRECTOR'S ACCOUNT PAYMENTS. On the last day of the calendar quarter
during which Director ceases to be a member of the Board of Directors, the
Company shall pay to Director (or his estate, in the event of his death) the
value of all Units then credited to Director's Account. For the purposes of
this Agreement, the value on a specified date of a Unit credited to Director's
Account shall be equal to the closing price per share of the Company's Common
Stock in the open market on such date (if such stock was traded in the open
market on such date, but if not, then the closing price per share of
<PAGE>
such stock in the open market as of the earliest preceding date such stock
was traded in the open market).
3. CESSATION OF DEFERRALS. Before the last day of any calendar quarter
Director may elect to cease deferring his compensation which would otherwise
become subject to this Agreement by filing written notice of such election with
the Company's Secretary. Such an election shall cease the deferral of
compensation under this Agreement, effective as of the first day of the calendar
quarter in which the election is made, but shall not affect the terms and
conditions of this Agreement with respect to the Units credited to Director's
Account as of the date such election becomes effective.
4. NONASSIGNABILITY. No right or interest of Director under this
Agreement may be assigned, transferred or alienated, in whole or in part, either
directly or by operation of law, and no such right or interest shall be liable
for or subject to any debt, obligation or liability of Director.
5. NATURE OF AGREEMENT. The Units credited to Director's Account under
this Agreement are only fictional devices for determining an amount of
compensation to be paid in cash to or with respect to Director. The obligation
to pay such compensation to or with respect to Director which arises under this
Agreement is unfunded and no provision of this Agreement shall be deemed or
construed to create a trust fund of any kind or to grant Director an actual
interest in any share of the Company's Common Stock or a security interest of
any kind. All payments under this Agreement shall be made by the Company out of
its general assets, and to the extent that Director or his estate acquires any
right to receive payments from the Company hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Company.
IN WITNESS WHEREOF, this Agreement has been executed on _________________,
_____, to be effective as of the date first written above.
LONE STAR TECHNOLOGIES, INC.
By
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
---------------------------------------
[Name of Director]
2
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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