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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, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $1.00 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of January 31, 1999, the number of shares of common stock outstanding was
22,495,748. The aggregate market value of common stock (based upon the closing
price on the New York Stock Exchange on that date) held by nonaffiliates of the
registrant was approximately $291 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I
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<S> <C> <C>
ITEM 1. BUSINESS...........................................................3
ITEM 2. PROPERTIES.........................................................9
ITEM 3. LEGAL PROCEEDINGS..................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS....................9
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS........................................9
ITEM 6. SELECTED FINANCIAL DATA...........................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION..................11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA............................................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................37
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.................................................37
ITEM 11. EXECUTIVE COMPENSATION............................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................37
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K...........................................37
ITEM 15. SIGNATURES........................................................40
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Lone Star Technologies, Inc. (Lone Star) is a management and holding company
that currently has one principal operating subsidiary, Lone Star Steel Company
(Steel). Steel serves three business segments: oilfield products, specialty
tubing products, and flat rolled steel and other tubular products and services.
Oilfield products are comprised of casing, tubing, and line pipe, that are
manufactured and marketed globally to the oil and gas drilling industry.
Specialty tubing products consist of Drawn Over Mandrel (DOM) tubing and
as-welded tubing that are manufactured and marketed globally to automotive,
fluid power, and other markets for various mechanical applications. Flat rolled
steel and other tubular products and services are manufactured and provided to
general industrial markets. Lone Star's consolidated revenues are not seasonal.
However, demand for Steel's oilfield products is subject to significant
fluctuations due to the volatility of oil and gas prices and domestic drilling
activity as well as other factors including competition from imports.
Lone Star was incorporated in Delaware in 1986 and became the holding company of
Steel, pursuant to Steel's merger with a wholly owned subsidiary of Lone Star.
In 1988, Lone Star acquired the stock of American Federal Bank (AFB), a
federally chartered savings bank. In November 1993, Lone Star sold the stock of
AFB. During August 1997, Lone Star received $12.4 million as a final payment on
the sale of AFB. The accompanying consolidated financial statements reflect this
payment as a gain from discontinued operations. During May 1991, a major
creditor group received 19.5% of the common stock of Steel, creating a minority
interest in Steel. In 1995, Lone Star repurchased 4.95% of Steel's common stock
from Steel's minority shareholders. In January 1997, all of the remaining
outstanding common stock, preferred stock, and warrants held by the other
minority shareholders of Steel were purchased by Lone Star, making Steel a
wholly owned subsidiary of Lone Star.
LINES OF BUSINESS INFORMATION
In the last three years, segment revenues were as follows:
<TABLE>
<CAPTION>
($ in millions)
1998 1997 1996
--------------- ----------------- ----------------
$ % $ % $ %
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Oilfield products revenues 255.6 59 454.1 69 371.0 68
Specialty tubing products revenues 123.2 29 129.0 20 109.8 20
Flat rolled steel and other tubular revenues 53.6 12 71.2 11 68.2 12
----- --- ----- --- ----- ---
Consolidated net revenues 432.4 100 654.3 100 549.0 100
----- --- ----- --- ----- ---
----- --- ----- --- ----- ---
</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 offered by Steel includes the widest size and chemistry range of electric
resistance welded (ERW) high-quality prime casing and tubing for oil and gas
drilling and production in the United States. Casing, which historically
represents about 75% of all OCTG tonnage sold by Steel, is the structural
retainer for the walls of oil and gas wells. It also serves to prevent pollution
of nearby water reservoirs and to prevent contamination of a well's production.
Casing is generally not removed after it has been installed. Production tubing
is installed within the casing to convey oil and gas to the surface. Steel
offers the widest ranges of OCTG diameters (1.90" to 20") and grades produced in
the industry, including grades that have been successfully used for drilling at
depths of over 30,000 feet.
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Demand for OCTG is affected by drilling activity which is driven by customers'
expectations of future oil and gas prices and political factors such as energy
and trade policies. Domestic drilling activity was down 13% in 1998 from the
prior year, according to the average number of rigs operating in the United
States as measured by Baker Hughes. However, the decline in drilling activity
accelerated in the second half of 1998 and by year-end only 621 rigs were
active, compared to 1,007 at the end of 1997. Steel's open orders for OCTG at
December 31, 1998, were down 78% from the prior year-end due to the decline in
drilling activity and high industry wide OCTG inventories. Approximately 7% of
shipments in 1998 were to destinations outside the United States. Sales and
earnings are affected by price, cost, availability of raw materials, oil and gas
drilling activity, general economic conditions, and an equitable trade
environment. Because of volatility of oil and gas prices and related drilling
activity as well as other factors such as competition from foreign imports,
demand for oilfield products can be subject to significant fluctuations.
LINE PIPE offered by Steel ranges in diameter from 2 3/8" to 16" and is used to
gather and transport oil and gas from the well site to storage or refining
facilities. Approximately 4% of Steel's line pipe shipments were exported in
1998.
SALES AND DISTRIBUTION. Steel's domestic OCTG sales distribution network
consists of 14 nonexclusive distributors that maintain and deliver product
inventory to major and independent oil and gas companies that explore for oil
and natural gas. Line pipe is also sold through nonexclusive distributors and
directly to end users. Internationally, OCTG is sold through distributors and
trading companies as well as directly to end users. The largest customer and the
second largest customer, both distributors of Steel's oilfield products in 1998,
accounted for 13% and 12% of total OCTG tons shipped, respectively. About 77% of
the oil and gas wells drilled in the United States in 1998 were located in
Texas, Oklahoma, Kansas, Louisiana, New Mexico, and the federal waters of the
Gulf of Mexico, all within 750 miles of Steel's mill in Lone Star, Texas. The
majority of Steel's oilfield products were sold for use in these states, as well
as the Gulf of Mexico which is less than 250 miles from Steel's mill.
ALLIANCE MILLS. In addition to production from its mill, Steel has marketing
agreements to sell other steel tubular products manufactured by six unrelated
companies. These arrangements are intended to expand Steel's product offerings
without a substantial investment in plant and equipment and enhance Steel's
marketing competitiveness. These transactions are performed on a commission
basis, through purchase and resale of the products, and under agreements to
process flat rolled steel provided by Steel into tubular products. These
arrangements accounted for over 15% of Steel's revenues from oilfield products
during 1998. Steel has commitments to buy tubular products from certain of its
alliance mills. Certain costs related to these commitments have been included as
part of the special charge related to supplier contracts discussed in Note C to
the consolidated financial statements.
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 can use steel slabs, scrap steel, and steel coils in the manufacture of
its products. Steel primarily purchased steel slabs to meet production needs in
1998, and it was often necessary for Steel to commit to purchase slabs 90 to 150
days prior to production. Steel anticipates again using steel slabs for most of
its production needs in 1999 and has secured commitments from a major supplier
to be provided most of its steel slab requirements for 1999. Steel's principal
raw material for its internally produced steel slabs is steel scrap, which is
internally generated from Steel's operations or could be 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 the widest range of sizes and chemistries in the United States and, based
on generally available market data, Steel believes that it is one of the largest
domestic suppliers of OCTG. Users of OCTG base their purchase decisions on four
factors: availability, price, quality, and service. Steel believes that it is
competitive in all of these areas.
Two primary markets exist for OCTG, and Steel serves both. Deep critical wells,
such as offshore wells, require high-
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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-Registration 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 24% of the apparent supply available to the
domestic OCTG market during 1998, 16% during 1997, 14% during 1996 and 1995,
as compared to 24% in 1994. The level of imported OCTG increased during 1998
due to dislocations of inventories from certain foreign competitors whose
traditional markets were encroached upon by other foreign manufacturers,
particularly those subject to U.S. trade tariffs, as global drilling activity
declined. A reduction of imported OCTG in the 1995 to 1997 period 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 1998.
Trade tariffs on OCTG from certain countries will be subject to sunset review
beginning in May 1999. By law, the orders cannot be terminated prior to
January 1, 2000. Trade tariffs on OCTG from more significant importers will
be subject to review in August 2000. Under schedules proposed by the U.S.
International Trade Commission, decisions in cases should be made
approximately one year after initiation. Steel intends to join with other
members of the U.S. industry to pursue its legal rights to continued relief
from unfair trade practices.
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 have the widest size range from 1/2" to 15" in outside diameter in
North America and are made from a variety of combinations of chemical
compositions, thermal treatments, mechanical properties, and surface
finishes. Product uses include the manufacture of automotive, construction,
and farm equipment and industrial applications such as hydraulic cylinders,
stabilizer tubes, intrusion tubes, machine parts, bearing races, downhole
pump barrels, heavy-lift crane boom chords, drill rods, and printing press
rolls. Because of the wide range of industrial applications, sales
traditionally follow general domestic economic conditions.
Steel produces most of its specialty tubing by the drawn over mandrel (DOM)
process which uses a drawbench to pull tubing through a die and over a
mandrel. Steel believes it has the second largest manufacturing capacity for
DOM tubing in the world. The use of the DOM manufacturing process enables
Steel to achieve higher critical tolerances and dimensional control than
other processes. Steel's production facilities include seven drawbenches.
It's 1,000,000 pound drawbench, the largest in the United States, and its
800,000 pound drawbench enable Steel to access broader markets through the
manufacture of larger diameter, thicker wall products. DOM specialty tubing
order quantities are typically small (usually less than 50,000 pounds) and
made to exact customer specifications.
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 in 1998. Demand from certain Asian countries was lower due to Asian
economic issues. Demand for hydraulic cylinders used in agricultural and
construction related equipment declined as domestic farming activity
decreased and building activity slowed in certain Asian economies.
Open orders at year-end 1998 were down 28% from the prior year-end.
SALES AND DISTRIBUTION. Domestically, specialty tubing is marketed and sold
through 19 nonexclusive steel service centers and directly to end users.
Specialty tubing products have detailed design specifications and in some cases
long lead times, making annual contracts an efficient mechanism for large
purchasers. The largest customer of Steel's specialty tubing in
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1998 accounted for 13% of specialty tubing shipments. Internationally, the
majority of Steel's specialty tubing is currently sold directly to end users.
Exports accounted for approximately 19% and 26% of Steel's DOM specialty tubing
shipments in 1998 and 1997, 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 can use steel slabs, scrap steel, and steel coils in the manufacture of
its products. Steel primarily purchased steel slabs to meet production needs in
1998, and it was often necessary for Steel to commit to purchase slabs 90 to 150
days prior to production. Steel anticipates again using steel slabs for most of
its production needs in 1999 and has secured commitments from a major supplier
to provide most of its steel slab requirements for 1999. Steel's principal raw
material for its internally produced steel slabs is steel scrap, which is
internally generated from Steel's operations or could be 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. During 1996, Steel completed a capital expenditure
program to expand its specialty tubing capacity. Based on generally available
market data, Steel believes it has the second largest production capacity for
DOM specialty tubing products in the world.
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. Due to an influx of inexpensive imported flat rolled steel during 1998,
markets for flat rolled steel experienced excess supply and lower pricing. As a
result, Steel's shipment volumes were down in 1998. However, preliminary
antidumping tariffs on certain foreign countries were imposed shortly after
year-end which should provide some relief to domestic markets. The largest
customer of Steel's flat rolled steel accounted for 89% of Steel's flat rolled
steel sales in 1998 as well as substantially all other sales of miscellaneous
tubular products other than oilfield and specialty tubing products. This
customer has steel processing facilities located adjacent to Steel's facilities
in East Texas, and those facilities purchase most of its flat rolled steel from
Steel. Sales to this customer represented approximately 10% of Steel's total
revenues for 1998.
RAW MATERIALS AND INVENTORIES. Steel produces flat rolled steel from its
internally produced slabs and slabs purchased from unrelated companies. Steel
can use steel slabs, scrap steel, and steel coils in the manufacture of its
products. Steel primarily purchased steel slabs to meet production needs in
1998, and it was often necessary for Steel to commit to purchase slabs 90 to 150
days prior to production. Steel anticipates again using steel slabs for most of
its production needs in 1999 and has secured commitments from a major supplier
to be provided most of its steel slab requirements for 1999. Steel's principal
raw material for its internally produced steel slabs is steel scrap, which is
internally generated from Steel's operations or could be purchased in the spot
market. The price of scrap steel and steel slabs can be volatile and is
influenced
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by a number of competitive market conditions beyond the control of Steel.
COMPETITION. Flat rolled steel is sold in highly competitive markets generally
concentrated in the southwestern region of the United States. Sales and earnings
are affected by the cost of raw materials, use of flat rolled steel by Steel in
the manufacture of its tubular products, demand by outside customers, and
general economic conditions.
OTHER SERVICES. Transportation, storage, and other services are provided by
Steel's subsidiaries.
OTHER PRODUCTS. Steel markets its 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, 1998, Lone Star and Steel had a total of 938 active employees,
of whom 480 were members of two unions represented by three bargaining units.
The majority of union workers are represented by the United Steelworkers of
America under a contract signed in May 1996, which expires on May 31, 2001, with
a provision to reopen the contract for wages but not other benefits or work
conditions after May 31, 1999. The other two agreements expire in 2000.
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 $33.8
million, $58.1 million, and $50.0 million for the years 1998, 1997, and 1996,
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 the state
can demonstrate that its 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), the federal air quality
program under the Clean Air Act, and the federal water quality program under the
Clean Water Act. In addition, Texas has state environmental programs that
supplement and operate independently of the federal environmental programs.
AIR quality is governed by the federal Clean Air Act and the Texas Clean Air
Act. The Texas State Implementation Plan implements, maintains, and enforces the
federal air quality programs. The TNRCC rules implementing Title V of the
federal Clean Air Act require subject sources to apply for a general operating
permit. As required, Steel has submitted an abbreviated application for a
general operating permit. The TNRCC set July 22, 1999, as the deadline for
subject sources within the steel industry to submit full Title V applications;
this deadline applies to Steel and Steel intends to timely file the application.
Once the TNRCC issues Steel a Title V general operating permit, Steel will have
additional recordkeeping obligations.
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Emission sources at Steel's facilities are currently regulated by a combination
of individual state 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 state 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 the state permitting
requirements. Steel is presently in substantial compliance with the conditions
of its state permits and applicable standards.
WATER quality is governed by the federal Clean Water Act and the state Water
Code. On September 14, 1998, EPA authorized the State of Texas to implement the
National Pollutant Discharge Elimination System (NPDES) through its state
program, the Texas Pollutant Discharge Elimination System (TPDES). Before
delegation, Steel was required to have two separate permits to discharge
wastewater from each of its outfalls: an NPDES permit issued by the EPA and a
wastewater discharge permit issued by the TNRCC. After delegation, Steel
continues to be required to have both permits until they are consolidated in a
permit renewal or permit amendment process into a single TPDES permit. Steel is
also required to have an NPDES permit to discharge storm water that is not
commingled with wastewater. Steel's storm water discharges are permitted through
the EPA's NPDES General Permit for Storm Water Discharges Associated With
Industrial Activities. The EPA will continue to administer this permit until it
expires on September 29, 2000, before which time, Steel will need to renew the
permit with the TNRCC.
Steel's NPDES permit was renewed on August 28, 1998, for a five-year term. In
Steel's renewal NPDES permit, EPA modified the lead limitations at Steel's major
process discharge to be consistent with the Texas Surface Water Quality
Standards for dissolved lead, which favorably addressed Steel's challenge to its
former NPDES permit. In addition, EPA removed from Steel's renewal NPDES permit
the whole effluent toxicity (WET) limits at Steel's major process discharge that
it had initially proposed to include in the permit. EPA took this latter action
pursuant to the Settlement Agreement that EPA and Steel entered on March 4,
1998, in partial settlement of Steel's Petition for Review of the WET test
method rule that EPA had adopted.
Steel's state wastewater discharge permit was amended effective September 14,
1998, to revise the lead limitations at its major process discharge to be
consistent with the Texas Surface Water Quality Standards for dissolved lead. On
January 8, 1999, the TNRCC issued Steel another amended permit that further
modified these lead limitations to be the same as those in Steel's NPDES permit.
Steel recently submitted an application to the TNRCC to renew and further amend
its state wastewater discharge permit, which will expire August 1, 1999. The
TNRCC will issue Steel a TPDES permit that will consolidate Steel's state and
federal permits.
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 onsite management units. 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: (1) two
closed RCRA landfills; (2) two former RCRA units that were clean-closed or
closed as nonhazardous waste units and no longer require monitoring; and (3) one
unit that predates RCRA which was closed as a nonhazardous landfill, with
certification of closure submitted to the TNRCC in December 1998. The two RCRA
units require a post-closure care permit; the application is pending with the
TNRCC. The permit will specify the amount of financial assurance required for
post-closure care and what, if any, corrective action is required to address
Steel's remaining non-RCRA solid waste management units. Steel estimates the
actual cost of RCRA post-closure care to be approximately $310,000.
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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; coil slitting and handling equipment; two pipe welding mills;
seven 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 Lone Star's headquarters are located in leased
facilities in Dallas, Texas.
Steel's annual rated capacity approximates 480,000 slab tons, 1,400,000 flat
rolled tons, and 1,000,000 welded pipe tons. Steel has access through marketing
arrangements and agreements with alliance mills which provide additional
oilfield pipe capacity of approximately 250,000 tons. In 1998, the specialty
tubing facilities operated near 80% of capacity. The rolling mills and pipe
mills generally operated at approximately 50% of capacity, while the EAF's
operated at about 30% of capacity.
In addition to the manufacturing facilities, Steel owns 8,250 acres in Texas
which were purchased primarily for iron ore or coal reserves, and Steel owns
mineral interests in an additional 12,000 acres in Oklahoma and 60,000 acres in
Texas. No minerals have been recovered from these properties for many years
because their use is no longer required in Steel's operations. Steel owns
nominal oil and gas interests in an additional 9,400 acres in Texas.
ITEM 3. LEGAL PROCEEDINGS
Management does not believe, based upon analysis of known facts and
circumstances and reports from legal counsel, that any pending legal proceeding
will have a material adverse effect on the financial condition of Lone Star 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
Lone Star's Common Stock trades on the New York Stock Exchange under the symbol
LSS. The following table summarizes the range of trading prices by quarter for
the last two years (in $):
<TABLE>
<CAPTION>
First Second Third Fourth
------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
1998 High 33 7/16 25 1/8 16 15/16 13 1/4
Low 23 1/8 14 3/4 8 7/8 8 5/8
1997 High 22 28 5/8 52 1/2 59 3/16
Low 15 3/8 18 27 13/16 22 1/4
</TABLE>
As of January 31, 1999, Lone Star had approximately 3,800 common shareholders of
record. Lone Star has paid no dividends on its Common Stock since becoming a
public company.
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During 1998, Lone Star purchased 110,000 shares of its common stock to be used
as treasury stock under a Board of Directors approved plan to buy up to 1
million common shares.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
($ in millions, except share and employee data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Oilfield products revenues $255.6 $454.1 $371.0 $241.6 $196.6
Specialty tubing products revenues 123.2 129.0 109.8 115.2 94.8
Flat rolled and other tubular revenues 53.6 71.2 68.2 69.0 65.6
------ ------ ------ ------ ------
Total revenues 432.4 654.3 549.0 425.8 357.0
Gross earnings 4.4 64.2 48.2 26.2 12.8
Special charges (14.5) - - - -
Selling, general, and administrative expenses (20.0) (19.6) (16.4) (14.6) (16.2)
------ ------ ------ ------ ------
Operating earnings (loss) (30.1) 44.6 31.8 11.6 (3.4)
Interest income 2.0 3.0 4.4 5.8 4.3
Interest expense (4.0) (6.6) (6.8) (8.7) (8.2)
Other income (expense) (0.2) 0.3 (0.1) 2.4 2.5
Minority interest in Steel - - (3.8) (1.5) 1.0
Income tax - (0.9) (0.6) - -
------ ------ ------ ------ ------
Earnings (loss) from continuing operations (32.3) 40.4 24.9 9.6 (3.8)
Earnings (loss) from continuing operations
per common share - diluted (1.43) 1.83 1.19 0.46 (0.19)
Net earnings (loss) (24.9) 53.7 24.9 9.6 1.2
Net earnings (loss) per common share - diluted $(1.10) $ 2.44 $ 1.19 $ 0.46 $(0.04)
Common shares used for diluted EPS 22.5 22.1 20.9 20.6 20.4
Current assets $152.9 $207.2 $206.6 $194.5 $180.8
Total assets 335.8 405.8 396.0 357.7 345.7
Current liabilities 41.4 81.3 74.7 53.5 53.4
Total liabilities 146.7 188.1 267.2 255.5 249.6
Shareholders' equity $189.1 $217.7 $128.8 $102.2 $ 96.1
Shares outstanding (millions) 22.5 22.5 20.7 20.5 20.4
Capital expenditures $ 17.6 $ 34.7 $ 20.0 $ 14.9 $ 7.0
Depreciation and amortization $ 15.8 $ 14.3 $ 11.8 $ 11.4 $ 11.4
Active employees 938 2,044 1,941 1,696 1,592
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Lone Star'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,
marketing and sales 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. Historically, OCTG has represented
approximately three-fourths of Steel's oilfield products volume as measured in
tonnage, and exports have ranged from approximately 7% to 9% of this segment's
shipments during the last three years.
Demand for oilfield products is generally affected by customers' expectations of
future oil and gas prices and political factors such as energy and trade
policies. A key indicator of domestic demand is the average number of drilling
rigs operating in the United States. According to Baker Hughes, the average
United States rig counts in 1998, 1997, and 1996 were 827, 943, and 779,
respectively. However, the decline in drilling activity accelerated in the
second half of 1998 and by year-end only 621 rigs were active compared to 1,007
at the end of 1997. Steel's open orders for OCTG at December 31, 1998 were down
78% from the prior year due to the decline in drilling activity and high
industry-wide OCTG inventories. Demand is also affected by the amount of
oilfield products imported into this country as well as available industry
inventories. Imported OCTG accounted for approximately 24% of the apparent
supply available to the domestic OCTG market during 1998, 16% during 1997, 14%
during 1996 and 1995, as compared to 24% in 1994. The level of imported OCTG
increased during 1998 due to dislocations of inventories from certain foreign
competitors whose traditional markets were encroached upon by other foreign
manufacturers, particularly those subject to U.S. trade tariffs, as global
drilling activity declined. A reduction of imported OCTG in the 1995 to 1997
period 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 1998.
The effect of available inventory was significant last year as new mill
production of OCTG was largely displaced during the second half of the year by
consumption of excess industry wide inventories. The volatility of oil and gas
prices creates uncertainty with respect to the timing and extent of activity in
the energy sector. This affects customer confidence in the longer term outlook
for energy prices and directly affects drilling activity. Consequently, domestic
markets deteriorated in 1998 as oil and gas prices declined to levels that did
not justify additional exploration and production spending. Substantial
uncertainty exists regarding the future levels of oil and gas prices and related
drilling activity. Therefore, no assurance can be given regarding the extent of
future demand for Steel's OCTG products.
Steel's specialty tubing products segment includes two product groups: Drawn
Over Mandrel (DOM) tubing and as-welded tubing. Specialty tubing consists of a
wide array of high-quality, custom-made steel tubular products requiring
critical tolerances, precise dimensional control, and special metallurgical
properties. These products are used in the further manufacture of automotive,
construction, and other industrial equipment such as hydraulic cylinders,
stabilizer tubes and intrusion tubes, and machine parts.
Specialty tubing is used in a wide range of industrial applications and,
therefore, demand is sensitive to general economic conditions. Demand decreased
during 1998 and open orders were down 28% at year-end as compared to year-end
1997. International shipments were lower in 1998 due to lower economic activity
in certain Asian countries. Also, orders for specialty tubing used as hydraulic
cylinders were lower due to reduced demand for construction equipment in certain
Asian countries and decreased domestic agricultural equipment demand.
International shipments of DOM specialty tubing were 19%, 26%, and 19% of
shipments in 1998, 1997, and 1996, 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
11
<PAGE>
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. Due to an influx of
inexpensive imported flat rolled steel during 1998, markets for flat rolled
steel experienced excess supply and lower pricing. As a result, Steel's
shipment volumes were down in 1998. However, preliminary antidumping tariffs
on certain foreign countries were imposed shortly after year-end which should
provide some relief to domestic markets.
MANUFACTURING. The manufacture of Steel's products is capital intensive.
Utilization rates declined significantly during 1998 at Steel's manufacturing
facilities. Operations of certain facilities were curtailed for significant
periods during the second half of 1998. The level of production volume through
Steel's various facilities has a significant effect on the cost of
manufacturing. Key variable costs include costs of raw materials, including
scrap steel, steel slabs, coils, electricity, and natural gas. Steel has entered
into certain marketing alliances and manufacturing arrangements with unrelated
companies involving the marketing of their products and processing of flat
rolled steel provided by Steel into tubular products which provides Steel access
to additional manufacturing capacity.
RESULTS OF OPERATIONS
Consolidated revenues reported in the statements of earnings are as follows:
<TABLE>
<CAPTION>
($ in millions)
1998 1997 1996
---------------- ---------------- ----------------
$ % $ % $ %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Oilfield products revenues 255.6 59 454.1 69 371.0 68
Specialty tubing products revenues 123.2 29 129.0 20 109.8 20
Flat rolled steel and other tubular revenues 53.6 12 71.2 11 68.2 12
------ ---- ------ ---- ------ ----
Consolidated net revenues 432.4 100 654.3 100 549.0 100
------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ----
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
<CAPTION>
(in tons)
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Oilfield products 372,500 632,600 545,300
Specialty tubing products 111,900 119,800 101,500
Flat rolled steel and other tubular products 144,700 194,100 195,800
--------- --------- ---------
Total tons shipped 629,100 946,500 842,600
--------- --------- ---------
--------- --------- ---------
</TABLE>
1998 COMPARED WITH 1997
NET REVENUES of $432.4 million were 33.9% lower than 1997. Net revenues from
oilfield products declined 43.7% to $255.6 million in 1998. Shipment volumes and
prices were down from 1997 levels 41.1% and 4.4%, respectively. Demand for
Steel's OCTG decreased as drilling activities declined precipitously in the
second half of 1998. The average rig count was down 116 to 827 in 1998 with only
621 rigs operating at year-end, compared to 1,007 at the end of 1997. Demand was
also detrimentally impacted as new mill production was replaced by the
consumption of excess industry wide OCTG inventories. Also, demand declined due
to increased competition from imported OCTG which grew to 24% of the apparent
supply available to the domestic market from 16% in 1997.
Specialty tubing products revenues decreased by 4.5% to $123.2 million from
lower shipment volumes with slightly higher prices. Shipment volumes were down
6.6% due to reduced sales for hydraulic cylinder applications in agricultural
and construction related equipment and reduced international sales to certain
Asian countries.
12
<PAGE>
Flat rolled steel and other tubular products revenues were down 24.7% to $53.6
million. Shipments were 25.4% lower due to a dramatic increase in inexpensive
imported foreign coils during 1998 that resulted in an excess supply of flat
rolled steel in domestic markets.
GROSS EARNINGS decreased from $64.2 million in 1997 to $4.4 million in 1998 due
to reduced shipment volumes in all products coupled with lower prices for
oilfield products and slightly higher prices for specialty tubing products.
Also, significantly decreased production volumes negatively impacted gross
margins as fixed and semi-fixed costs were absorbed by fewer units of
production.
SPECIAL CHARGES. In response to late 1998 and expected 1999 market conditions,
Steel has restructured and downsized its operations. The lower operating rates
resulted in the need to reduce employment levels and initiate other actions. As
a result of these actions, special charges of $14.5 million have been recognized
in the 1998 consolidated statement of operations, which include the following
items in millions:
<TABLE>
<S> <C>
Write-down of property, plant, and equipment and related supplies to fair value $ 8.1
Renegotiated or cancelled contractual obligations 4.4
Employee severance cost ($1.1 million of which has been paid) 2.0
-------
Total special charges $14.5
</TABLE>
Certain facilities are expected to permanently reduce or eliminate their
operations, relying instead on alternative production or procurement methods.
This includes a reduction in the production level of the electric-arc furnace
steelmaking facilities, with heavier reliance to be placed on purchased steel in
coil and slab form. Additionally, some finishing processes and infrastructure
utility services have or are expected to be permanently abandoned and be
completely replaced through outside procurement. These actions triggered an
assessment of the recoverability of the asset carrying costs and the resulting
recognition of an impairment loss. The determination of the impairment loss was
based on an evaluation of future cash flows from operation of the steelmaking
facilities and estimated salvage values of the steelmaking facilities and those
facilities to be abandoned. The net book value of these assets, which included
property, plant and equipment supplies inventory, totaled $12.6 million, of
which $8.1 million is included in the special charges.
Certain existing supplier contracts are also being renegotiated or cancelled to
accommodate the lower operating levels. Estimated costs of $4.4 million
associated with renegotiating or cancelling these obligations that will provide
no future benefit have been included in the special charges and accrued at
December 31, 1998.
Steel has terminated employees or identified certain positions for elimination
as of December 31, 1998. Payments made to terminated employees are based on
Steel's standard severance package. Total employee severance costs included in
special charges totaled $2.0 million, of which $1.1 million had been paid by
December 31, 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES increased 2.0% to $20.0 million
due primarily to continued higher spending related to year 2000 readiness
initiatives partially offset by lower selling expenses.
INTEREST INCOME decreased from $3.0 million in 1997 to $2.0 million in 1998 due
to lower average interest rates on invested cash, short-term investments and
marketable securities.
INTEREST EXPENSE decreased from $6.6 million in 1997 to $4.0 million in 1998 due
to the conversion of Lone Star's $50.0 million principal amount 8% convertible
subordinated debentures into common stock in August of 1997. Also, Steel's
revolving credit facility during 1998 had lower average interest rates which
were offset by higher average borrowings than in 1997.
OTHER EXPENSE. During 1998, other expense of $0.2 million was primarily related
to write-off of prepaid bank fees on the restructuring of Steel's revolving
credit facility partially offset by gains from nonrecurring miscellaneous items.
In 1997 other income of $0.3 million consisted of nonrecurring miscellaneous
items.
13
<PAGE>
LOSS FROM CONTINUING OPERATIONS of $32.3 million, or $1.43 per diluted share,
included $14.5 million, or $.65 per diluted share, in special charges. Excluding
special charges, the loss from continuing operations was $17.8 million, or $.78
per diluted share, compared to 1997 earnings from continuing operations of $40.4
million, or $1.83 per diluted share. The loss was due to lower shipment volumes
for all products, particularly oilfield products, coupled with lower prices for
oilfield products partially offset by slightly higher prices for specialty
tubing products. Also, significantly decreased production volumes negatively
impacted operating margins as fixed and semi-fixed costs were absorbed by fewer
units of production.
EXTRAORDINARY ITEM of $7.4 million, or $.33 per diluted share, was realized on
the gain from cancellation of all future obligations under the Coal Industry
Retiree Health Benefit Act of 1992 (Act). During 1997 extraordinary items
totaling a net gain of $0.9 million, or $.04 per diluted share, consisted of a
gain of $2.0 million for the downward adjustment of obligations under the Act,
partially offset by an extraordinary prepayment charge of $1.1 million on the
refinancing of Steel's credit facility.
NET LOSS of $24.9 million, or $1.10 per diluted share, included special charges
of $14.5 million which were reflected in the loss from continuing operations of
$32.3 million, or $1.43 per diluted share, and partially offset by an
extraordinary gain of $7.4 million, or $.33 per diluted share.
1997 COMPARED WITH 1996
NET REVENUES of $654.3 million increased 19.2% over 1996. Net revenues from
oilfield products improved 22.4% to $454.1 million in 1997. Shipment volumes and
prices were up from 1996 levels by 16.0% and 5.5%, respectively. Demand for
Steel's OCTG rose as land based drilling increased in 1997. This was reflected
in the average domestic rig count which increased to 943 in 1997 from 779 in
1996. Demand was also favorably impacted by the reduction in imported OCTG
resulting from the continuation of duties imposed on products from certain
countries.
Specialty tubing products revenues increased by 17.5% to $129.0 million from
higher shipment volumes with flat prices. Shipment volumes were up 18.0% due to
additional automotive sales, robust construction activity, and strengthening
demand in the overall economy. Steel achieved higher shipments with new capacity
from the expansion of its specialty tubing facilities in late 1996.
Flat rolled and other tubular products net revenues were up 4.4% to $71.2
million due to higher realized prices with flat shipment volumes.
GROSS EARNINGS improved 33.2% to $64.2 million in 1997 from $48.2 million in
1996. The improvement was due to higher shipments of oilfield and specialty
tubing products combined with small price increases for oilfield products and
flat rolled steel. Increased production volumes also resulted in improved gross
margins as raw material costs were essentially unchanged from 1996.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES increased to $19.6 million from
$16.4 million in 1996 due to additional selling expenses associated with higher
sales and continued modernization of computer systems.
INTEREST INCOME decreased $1.4 million in 1997 from 1996 to $3.0 million
primarily due to usage of $25.0 million of invested funds in January to buy the
remaining minority interest in Steel.
INTEREST EXPENSE of $6.6 million was $0.2 million less than 1996 due to the
conversion of Lone Star's $50.0 million subordinated debentures at the end of
August into 2.1 million shares of Lone Star's common stock.
OTHER INCOME, NET. Net other income of $0.3 million and $0.1 million for 1997
and 1996, respectively, consisted of nonrecurring miscellaneous items.
EARNINGS FROM CONTINUING OPERATIONS for 1997 improved to $40.4 million, or $1.83
per diluted share, from $24.9 million,
14
<PAGE>
or $1.19 per diluted share, in 1996. The improvement was due to higher shipment
volumes, small price increases for oilfield products and better gross margins.
EXTRAORDINARY ITEMS totaling $0.9 million, or $.04 per diluted share, reflect a
$1.1 million prepayment charge on the refinancing of Steel's revolving credit
facility and a $2.0 million gain related to reduction of prior reserves for
United Mine Worker's claims.
GAIN FROM DISCONTINUED OPERATIONS of $12.4 million, or $.57 per diluted share,
resulted from receipt of escrowed proceeds of $12.4 million from the prior sale
of American Federal Bank.
NET EARNINGS of $53.7 million, or $2.44 per diluted share, included earnings
from continuing operations of $40.4 million, extraordinary items of $0.9 million
and gain from discontinued operations of $12.4 million.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 1998, Lone Star had available cash and cash equivalents,
short-term investments, and marketable securities totaling $33.0 million.
Also at year-end, Steel had a $100.0 million revolving credit facility, under
which it had $46.0 in borrowings and $12.4 million in availability after
reduction for borrowings and outstanding letters of credit. Under this facility,
Steel could borrow an amount based on a percentage of eligible accounts
receivable and inventories, reduced by outstanding letters of credit. The total
available borrowing base was $58.4 million at December 31, 1998. Interest was
payable under one of two rate options: at the London Inter Bank Offer Rate
(LIBOR) plus an index which is based on quarterly debt ratio calculations or the
institution's prime lending rate plus 0.75%. At December 31, 1998, the rate was
8.28% and was indexed at 2.75% over LIBOR. The rate was 6.47% at December 31,
1997. Steel also paid an indexed rate on the unused portion of the credit
facility, which was 0.50% per annum at December 31, 1998. The term of the
agreement was through October 2002. The loan was secured by Steel's assets other
than real estate.
As a result of Steel's operating environment and resulting losses, the revolving
credit agreement was amended in December 1998 to provide for the aforementioned
borrowing base provisions, adjust the interest rate index and to amend various
restrictive financial covenants contained in the agreement.
This $100.0 million credit facility replaced another $75.0 million credit
facility from other lenders in October 1997. In connection with early
termination of the $75.0 million credit facility, a prepayment fee of $1.1
million was incurred and recognized as an extraordinary loss in the 1997
consolidated statement of operations.
On March 16, 1999, Steel refinanced its revolving credit facility with a new
three year $90.0 million revolving line of credit and a three year $10.0 million
term loan with a new lender. The new revolving credit facility is similar to the
refinanced facility in that Steel can borrow an amount based on a percentage of
eligible accounts receivable and inventories, reduced by outstanding letters of
credit. However, the borrowing capacity is increased under the new facility due
to higher borrowing base percentages and less restrictive limitations on the
inventory portion of the borrowing base. As of March 16, 1999, the total
available borrowing base including the term loan was approximately $83.3
million. At Steel's option, the interest rate is the prime lending rate plus
1.0% or the LIBOR plus 3.0%. Steel also pays a 0.375% per annum fee on the
unused portion of the credit facility. The term loan is repayable in quarterly
installments of $0.5 million, plus interest at the prime lending rate plus 1.5%
or the LIBOR plus 3.5%. Steel's assets other than real estate secure these
loans.
The loan agreements contain various restrictive covenants which require Steel to
meet specified quarterly financial ratios, including cash flow and net worth
measurements, which Steel anticipates achieving. Steel's ability to incur
additional indebtedness is also restricted under the agreements.
Steel requires capital primarily to fund general working capital needs and
capital expenditures. Principal sources of funds
15
<PAGE>
include cash generated by operations, borrowings under Steel's revolving credit
facility and from Lone Star. Steel believes that its borrowing capacity under
the revolving credit agreement will provide the liquidity necessary to fund its
cash requirements during 1999.
Steel's operations are subject to restrictive environmental compliance and
permitting requirements of various governmental agencies that include the TNRCC
and the EPA. Steel believes that the cost of maintaining compliance with
environmental requirements will fall within its contemplated operating and
capital expenditure plans, averaging $1 - $2 million annually in the foreseeable
future.
Lone Star has no direct business operations other than Steel or significant
sources of cash other than from short-term investments or the sale of
securities. Lone Star is reimbursed by Steel for most of its operating costs as
provided by its cost- sharing agreement with Steel. Under Steel's new revolving
credit agreement, Lone Star's operating costs and Steel's portion of Lone Star's
consolidated taxes are the only funds that can be distributed to Lone Star.
Lone Star believes that reimbursements by Steel for most of its operating costs
and funds generated by cash and investments will be adequate to fund its cash
requirements during 1999.
YEAR 2000. In order to prepare Lone Star and Steel for the Year 2000, a plan has
been implemented detailing a process 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. Software applications for the business systems
were substantially completed through the verification stage at year-end and
implementation is scheduled to be completed during the first quarter of 1999.
The hardware applications related to business systems and the communication
equipment have been completed through the verification stage and substantially
implemented at the end of 1998, with complete implementation expected by the end
of the first quarter 1999. Approximately half of the manufacturing equipment had
been assessed at year-end 1998, with no changes required. The remaining
assessment is expected to be completed by April 1999 and, although no changes
are expected to be necessary, remediation, verification and implementation
processes will be developed at that time if needed.
This plan also entails assessing certain Year 2000 risks related to third party
relationships through communications with key suppliers and customers. The
processes described above will be performed on identified third party issues
that are correctable. For those suppliers and customers that may be identified
as a concern, such concerns will be addressed in Lone Star and Steel's
contingency plan. Lone Star 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 December 31, 1998 to achieve Year
2000 compliance are approximately $1.2 million, and are estimated to total $1.5
million upon completion in 1999.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Lone Star and its subsidiaries do not invest in commodities or foreign
currencies. Lone Star's investments in cash equivalents, short-term investments
and marketable securities, the weighted average maturity of which is less than
one year, are held to maturity. Therefore, interest rate risk is not considered
to be material. Information regarding Lone Star's investments is included in
Note A to the consolidated financial statements.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . 18
Consolidated Statements of Earnings,
for the years ended December 31, 1998, 1997, and 1996 . . . . . . . 19
Consolidated Balance Sheets at December 31, 1998 and 1997 . . . . . . . 20
Consolidated Statements of Shareholders' Equity
at December 31, 1998, 1997, 1996, and 1995 . . . . . . . . . . . . . . 21
Consolidated Statements of Cash Flows,
for the years ended December 31, 1998, 1997, and 1996 . . . . . . . 22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 23
Schedule I - Condensed Financial Information of Registrant . . . . . . . 35
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . 36
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Lone Star Technologies, Inc. (Lone
Star):
We have audited the accompanying consolidated balance sheets of Lone Star (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for the three years ended December 31, 1998. These financial statements
and the schedules referred to below are the responsibility of Lone Star's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 Lone
Star and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the three years ended December 31, 1998, 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 schedules listed in the
index to consolidated financial statements are 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. These schedules have been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
Dallas, Texas,
January 22, 1999, except with respect
to Note F as to which the date is
March 16, 1999.
18
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Net revenues $ 432.4 $ 654.3 $ 549.0
Cost of goods sold (428.0) (590.1) (500.8)
-----------------------------------------
Gross earnings 4.4 64.2 48.2
Special charges (14.5) - -
Selling, general and administrative expenses (20.0) (19.6) (16.4)
-----------------------------------------
Operating earnings (loss) (30.1) 44.6 31.8
Interest income 2.0 3.0 4.4
Interest expense (4.0) (6.6) (6.8)
Minority interest in Steel - - (3.8)
Other income (expense) (0.2) 0.3 (0.1)
-----------------------------------------
Earnings (loss) from continuing operations before income tax (32.3) 41.3 25.5
Income tax - (0.9) (0.6)
-----------------------------------------
Earnings (loss) from continuing operations (32.3) 40.4 24.9
Extraordinary items 7.4 0.9 -
-----------------------------------------
Earnings (loss) before gain from discontinued operations (24.9) 41.3 24.9
Gain from discontinued operations - 12.4 -
-----------------------------------------
NET EARNINGS (LOSS) $ (24.9) $ 53.7 $ 24.9
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
PER COMMON SHARE - BASIC:
Net earnings (loss) from continuing operations $ (1.43) $ 1.88 $ 1.21
Extraordinary items 0.33 0.04 -
Gain from discontinued operations - 0.58 -
-----------------------------------------
NET EARNINGS (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (1.10) $ 2.50 $ 1.21
PER COMMON SHARE - DILUTED:
Net earnings (loss) from continuing operations $ (1.43) $ 1.83 $ 1.19
Extraordinary items 0.33 0.04 -
Gain from discontinued operations - 0.57 -
-----------------------------------------
NET EARNINGS (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (1.10) $ 2.44 $ 1.19
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
19
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20.9 $ 14.2
Short-term investments 3.1 6.3
Accounts receivable, net 36.3 80.1
Current inventories, net 88.9 102.1
Other current assets 3.7 4.5
--------------------
TOTAL CURRENT ASSETS 152.9 207.2
Marketable securities 9.0 19.0
Property, plant, and equipment, net 157.8 161.4
Other noncurrent assets 16.1 18.2
--------------------
TOTAL ASSETS $335.8 $405.8
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 15.8 $ 50.1
Accrued liabilities 25.6 31.2
--------------------
TOTAL CURRENT LIABILITIES 41.4 81.3
--------------------
Revolving credit facility 46.0 43.0
Postretirement benefit obligations 41.5 37.8
Other noncurrent liabilities 17.8 26.0
--------------------
TOTAL LIABILITIES 146.7 188.1
--------------------
Commitments and Contingencies (See Note J) - -
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value
(authorized: 10,000,000 shares, issued: none) - -
Common stock, $1 par value
(authorized: 80,000,000 shares, issued: 23,061,864,
23,059,864, respectively) 23.1 23.1
Capital surplus 209.9 209.9
Accumulated other comprehensive loss (12.8) (9.7)
Retained earnings (deficit) (15.5) 9.4
Treasury stock (566,116 and 548,616 common shares, respectively) (15.6) (15.0)
--------------------
TOTAL SHAREHOLDERS' EQUITY 189.1 217.7
--------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $335.8 $405.8
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
Accumulated
Other Retained
Common Capital Treasury Comprehensive Earnings
Stock Surplus Stock Income (Loss) (Deficit) Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $20.5 159.5 (0.9) (7.7) (69.2) $102.2
Net earnings - - - - 24.9 24.9
Other comprehensive loss:
Minimum pension liability adjustment - - - 0.9 - 0.9
-----
Comprehensive income 25.8
Employee benefit plan stock issuance 0.2 0.6 - - - 0.8
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 20.7 160.1 (0.9) (6.8) (44.3) 128.8
Net earnings - - - - 53.7 53.7
Other comprehensive loss:
Minimum pension liability adjustment - - - (2.9) - (2.9)
-----
Comprehensive income 50.8
Conversion of subordinated debentures 2.1 47.2 - - - 49.3
Treasury stock purchases - - (14.1) - - (14.1)
Employee benefit plan stock issuance 0.3 2.6 - - - 2.9
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 23.1 209.9 (15.0) (9.7) 9.4 217.7
Net loss - - - - (24.9) (24.9)
Other comprehensive loss:
Minimum pension liability adjustment - - - (3.1) - (3.1)
-----
Comprehensive loss (28.0)
Treasury stock purchases - - (1.9) - - (1.9)
Employee benefit plan stock issuance - - 1.3 - - 1.3
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $23.1 209.9 (15.6) (12.8) (15.5) $189.1
----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
21
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS $ 14.2 $ 27.3 $ 40.0
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) (24.9) 53.7 24.9
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Gain on sale of discontinued operations - (12.4) -
Depreciation and amortization 15.8 14.3 11.8
Extraordinary item - UMWA liability (7.4) (2.0) -
Special charges - write-down of assets 8.1 - -
Minority interest in Steel - - 3.8
Accounts receivable, net 43.8 (0.1) (15.8)
Current inventories, net 13.2 (25.7) (20.7)
Accounts payable and accrued liabilities (39.9) 6.9 22.2
Other (0.1) (8.8) (6.6)
-----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8.6 25.9 19.6
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17.6) (34.7) (20.0)
Short-term investments 3.2 13.8 12.5
Proceeds from sale of discontinued operations - 12.4 -
Marketable securities 10.0 0.8 (19.8)
Proceeds from sale of assets 0.1 - 1.5
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4.3) (7.7) (25.8)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial borrowings under new revolving credit facility - 50.0 -
Net borrowings (payments) under revolving credit facility 3.0 (7.0) -
Net payments under old revolving credit facility - (37.8) (7.3)
Installment note repayment - (0.3) (1.3)
Minority interest contributions for preferred stock in Steel - - 1.3
Treasury stock purchases (1.9) (14.1) -
Acquisition of minority interest - (25.0) -
Issuance of common stock 1.3 2.9 0.8
-----------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2.4 (31.3) (6.5)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 6.7 (13.1) (12.7)
-----------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 20.9 $ 14.2 $ 27.3
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Conversion of subordinated debentures to common stock $ - $ 50.0 $ -
</TABLE>
See accompanying notes.
22
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Technologies, Inc. (Lone Star) is a management and holding company
whose one 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 Lone Star and its subsidiaries. Intercompany transactions are
eliminated in consolidation. Gain from discontinued operations in 1997 relates
to the final settlement of the 1993 sale of American Federal Bank (AFB) (see
Note K).
CASH, INVESTMENTS, AND MARKETABLE SECURITIES. Lone Star's cash equivalents
include highly liquid investments in a fund consisting of 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 debt
obligations with maturities at purchase greater than three months and up to one
year. Marketable securities consist of U. S. government and related agencies
debt obligations with maturities at purchase greater than one year and up to two
years. Lone Star'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 Lone Star has the intent and ability to
hold them to maturity. At December 31, 1998, Lone Star's cash and cash
equivalents, short-term investments, and marketable securities, which had a
carrying amount that approximated market value, consisted of $33.0 million in U.
S. government and related agencies obligations at amortized cost.
INVENTORIES are stated at the lower of cost (principally last-in, first-out
"LIFO") or market value and include raw materials, labor, and overhead.
PROPERTY, PLANT, AND EQUIPMENT are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of depreciable assets.
Long-lived assets including property, plant, and equipment are periodically
evaluated 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. Lone Star files a consolidated federal income tax return. Lone
Star utilizes an asset and liability approach for financial accounting and
income tax reporting. Deferred tax liabilities or assets are recognized for the
estimated future tax effects attributable to temporary differences and
carryforwards and are adjusted whenever tax rates or other provisions of income
tax statutes change.
MINORITY INTEREST. In January 1997, all of the outstanding common stock,
preferred stock, and warrants held by other shareholders of Steel were purchased
by Lone Star, making Steel a wholly owned subsidiary. This acquisition was
accounted for under the purchase method of accounting. The results for the year
ended December 31, 1996, were adjusted in the consolidated statements of
earnings to reflect the participation of minority ownership in Steel's earnings.
USE OF ESTIMATES. Preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities, and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
RECLASSIFICATIONS. Certain 1997 balances have been reclassified to conform to
current year presentation.
23
<PAGE>
CURRENT OPERATING ENVIRONMENT AND BUSINESS SEGMENTS - NOTE B
Effective January 1, 1998, Lone Star adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." SFAS No. 131 requires
companies to identify their operating segments based upon the internal financial
information reported to the company's chief operating decision maker. Lone
Star's chief operating decision maker is its Chief Executive Officer (CEO).
Financial information reported to the CEO reflects three business segments:
oilfield products, specialty tubing products, flat rolled steel and other
tubular products, and corporate and other non-segments. The CEO evaluates the
performance of each segment based upon operating earnings (loss) as reported in
accordance with generally accepted accounting principles and operational data.
The accounting policies of the segments are the same as those described in the
summary of accounting policies in Note A to the consolidated financial
statements except that Lone Star allocates certain assets, capital expenditures,
depreciation and other items common to all segments based upon segment revenues
or manufacturing costs.
<TABLE>
<CAPTION>
Years ended December 31,
($ in millions; unaudited)
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OILFIELD PRODUCTS
Net revenues $ 255.6 $ 454.1 $ 371.0
Noncash portion of special charges 4.5 - -
Operating earnings (loss) (17.2) 36.1 17.2
Identifiable assets 170.8 238.0 208.5
Capital expenditures 9.3 22.1 8.7
Depreciation and amortization 8.9 9.0 8.1
SPECIALTY TUBING PRODUCTS
Net revenues $ 123.2 $ 129.0 $ 109.8
Noncash portion of special charges 3.1 - -
Operating earnings (loss) (4.6) 12.3 17.7
Identifiable assets 110.9 103.4 83.3
Capital expenditures 8.1 12.2 11.0
Depreciation and amortization 6.0 4.6 2.9
FLAT ROLLED AND OTHER TUBULAR PRODUCTS
Net revenues $ 53.6 $ 71.2 $ 68.2
Noncash portion of special charges 0.5 - -
Operating loss (4.9) (1.1) (1.6)
Identifiable assets 16.3 20.4 23.1
Capital expenditures 0.2 0.4 0.3
Depreciation and amortization 0.9 0.7 0.8
CORPORATE AND OTHER NON-SEGMENTS
Net revenues $ - $ - $ -
Operating loss (3.4) (2.7) (1.5)
Identifiable assets 37.8 44.0 81.1
CONSOLIDATED TOTALS FROM CONTINUING OPERATIONS
Net revenues $ 432.4 $ 654.3 $ 549.0
Operating earnings (loss) (30.1) 44.6 31.8
Total assets 335.8 405.8 396.0
Capital expenditures 17.6 34.7 20.0
Depreciation and amortization 15.8 14.3 11.8
</TABLE>
24
<PAGE>
Oilfield products are comprised of casing, tubing, and line pipe, that are
manufactured and marketed globally to the oil and gas drilling industry.
Specialty tubing products consist of Drawn Over Mandrel (DOM) tubing and
as-welded tubing that are manufactured and marketed globally to automotive,
fluid power, and other markets for various mechanical applications. Flat rolled
steel and other tubular products and services are manufactured and provided to
general industrial markets.
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 oil and gas 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.
The corporate segment is responsible for financial operations including
investing and managing financial assets, financing of product purchases,
shareholder relations, and assessing and evaluating strategic alternatives.
Steel's primary manufacturing facilities are located in East Texas. Raw
materials and supplies, principally steel slabs and steel coils used in the
manufacture of Steel's products have historically been readily available from
various competitive sources. The manufacture of Steel's products uses several
common facilities and shares administrative support. Accordingly, the segment
information contains certain costs and assets which are allocated and may not
reflect each line of business as if it were operated separately.
Steel's principal market is domestic, although sales are also made into
international markets. The majority of sales of tubular products occur through
networks of sales distributors, although some tubular product sales and most
flat rolled steel sales are made directly to end users. Sales to the largest
oilfield products customer were $29.9 million or approximately 7% of net
revenues in 1998, $83.1 million or 13% in 1997, and $53.2 million or 10% in
1996. Sales to another significant customer of flat rolled steel and other
tubular products were $43.3 million or 10%, $53.3 million or 8%, and $49.1
million or 9% of net revenues for 1998, 1997, and 1996, respectively. Direct
foreign revenues as a percent of total revenues were approximately 8% of the
total in 1998 and 9% in 1997 and 1996.
Of Steel's total active labor force, 52% 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. The two other
agreements expire in 2000.
For the year ended December 31, 1998, Lone Star had net sales of $432.4 million
and an operating loss of $30.1 million, which included $14.5 million of special
charges. This compares to net sales of $654.3 million and an operating profit of
$44.6 million for 1997. The most significant reason for these declines was the
decrease in demand for oilfield products, which was driven by a decrease in the
number of domestic rigs drilling for oil and natural gas during 1998. At
year-end, 621 rigs were active compared to 1,007 at the end of 1997. Steel's
open orders for OCTG at December 31, 1998, were down 78% from the prior year due
to the decline in drilling activity and high industry-wide OCTG inventories.
This reduced drilling activity was principally caused by declining crude oil
prices that reached recent historic lows in late 1998 and lower gas prices. In
addition, demand decreased for specialty tubing products and flat rolled steel
due to reduced demand for specialty tubing in certain Asian economies and
increased competition from an influx of inexpensive foreign coils into the
domestic market. Substantial uncertainty exists regarding the future levels of
oil and gas prices and related drilling activity. Therefore,
25
<PAGE>
no assurance can be given regarding the extent of future demand for Steel's OCTG
products, or that profitability can be achieved until these markets improve.
Steel requires capital primarily to fund general working capital needs and
capital expenditures. Principal sources of funds include cash generated by
operations, borrowings under Steel's revolving credit facility (Note F) and from
Lone Star. Steel believes that its borrowing capacity under the revolving credit
agreement will provide the liquidity necessary to fund its cash requirements
during 1999.
Lone Star has no direct business operations other than Steel or significant
sources of cash other than from short-term investments or the sale of
securities. Lone Star is reimbursed by Steel for most of its operating costs as
provided by its cost-sharing agreement with Steel. Under Steel's new revolving
credit agreement, Lone Star's operating costs and Steel's portion of Lone Star's
consolidated taxes are the only funds that can be distributed to Lone Star.
Lone Star believes that reimbursements by Steel for most of its operating costs
and funds generated by cash and investments will be adequate to fund its cash
requirements during 1999.
SPECIAL CHARGES - NOTE C
In response to late 1998 and expected 1999 market conditions, Steel has
restructured and downsized its operations. The lower operating rates resulted in
the need to reduce employment levels and initiate other actions. As a result of
these actions, special charges of $14.5 million have been recognized in the 1998
consolidated statement of operations, which include the following items in
millions:
<TABLE>
<S> <C>
Write-down of property, plant, and equipment and related supplies to fair value $ 8.1
Renegotiated or cancelled contractual obligations 4.4
Employee severance cost ($1.1 million of which has been paid) 2.0
-------
Total special charges $14.5
</TABLE>
Certain facilities are expected to permanently reduce or eliminate their
operations, relying instead on alternative production or procurement methods.
This includes a reduction in the production level of the electric-arc furnace
steelmaking facilities, with heavier reliance to be placed on purchased steel in
coil and slab form. Additionally, some finishing processes and infrastructure
utility services have or are expected to be permanently abandoned and be
completely replaced through outside procurement. These actions triggered an
assessment of the recoverability of the asset carrying costs and the resulting
recognition of an impairment loss. The determination of the impairment loss was
based on an evaluation of future cash flows from operation of the steelmaking
facilities and estimated salvage values of the steelmaking facilities and those
facilities to be abandoned. The net book value of these assets, which included
property, plant and equipment supplies inventory, totaled $12.6 million, of
which $8.1 million is included in the special charges.
Certain existing supplier contracts are also being renegotiated or cancelled to
accommodate the lower operating levels. Estimated costs of $4.4 million
associated with renegotiating or cancelling these obligations that will provide
no future benefit have been included in the special charges and accrued at
December 31, 1998.
Steel has terminated employees or identified certain positions for elimination
as of December 31, 1998. Payments made to terminated employees are based on
Steel's standard severance package. Total employee severance costs included in
special charges totaled $2.0 million, of which $1.1 million had been paid by
December 31, 1998.
26
<PAGE>
ADDITIONAL BALANCE SHEET INFORMATION - NOTE D
<TABLE>
<CAPTION>
($ in millions)
1998 1997
---- ----
<S> <C> <C>
INVENTORIES
Finished goods $ 30.8 $ 40.1
Work in process 33.1 51.4
Raw materials 29.2 29.7
Materials, supplies, and other 27.3 27.5
-------- -------
Total inventories before LIFO valuation reserve 120.4 148.7
Reserve to reduce inventories to LIFO value (23.5) (37.4)
-------- -------
Total inventories 96.9 111.3
Amount included in other noncurrent assets (8.0) (9.2)
-------- -------
Net current inventories $ 88.9 $ 102.1
-------- -------
-------- -------
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements $ 10.9 $ 11.2
Buildings, structures, and improvements 6.0 13.3
Machinery and equipment 297.9 291.9
Construction in progress 7.5 26.4
-------- -------
Total property, plant, and equipment 322.3 342.8
Less accumulated depreciation and amortization (164.5) (181.4)
-------- -------
Property, plant, and equipment, net $ 157.8 $ 161.4
-------- -------
-------- -------
OTHER NONCURRENT ASSETS
Inventory (supplies and spare parts) $ 8.0 $ 9.2
Other 8.1 9.0
-------- -------
Total other noncurrent assets $ 16.1 $ 18.2
-------- -------
-------- -------
ACCRUED LIABILITIES
Accrued compensation $ 5.9 $ 8.4
Property taxes 5.2 4.1
Warranty reserves 2.0 2.6
Environmental reserves 0.5 2.0
Pension obligations - 3.0
Supplier contract reserves 4.3 -
Other 7.7 11.1
-------- -------
Total accrued liabilities $ 25.6 $ 31.2
-------- -------
-------- -------
OTHER NONCURRENT LIABILITIES
Environmental reserves $ 10.9 $ 11.1
UMWA obligations - 7.3
Other 6.9 7.6
-------- -------
Total other noncurrent liabilities $ 17.8 $ 26.0
-------- -------
-------- -------
</TABLE>
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. A liability had been
recorded for the total estimated future payments related to this Act. During
1998, Steel's obligations under the Act were cancelled resulting in a $7.4
million extraordinary gain. During 1997, the estimated UMWA liability was
adjusted downward resulting in a $2.0 million extraordinary gain.
Accounts receivable is stated net of allowance for doubtful accounts of $1.4
million both at December 31, 1998 and 1997.
27
<PAGE>
Approximately $110.8 million and $140.8 million of total inventories before LIFO
valuation reserves were accounted for on the LIFO basis at December 31, 1998 and
1997, respectively. During 1998, Steel experienced a reduction of inventory
which resulted in the depletion of previous inventory LIFO layers, the financial
effect of which was not significant to net reported results of operations.
Non-LIFO inventories are stated at the lower of average cost or market. The
total inventories before LIFO valuation reserves approximates replacement cost
of the inventories.
CHANGE IN COMMON SHARES OUTSTANDING - NOTE E
<TABLE>
<CAPTION>
Treasury
Issued Stock Outstanding
----------- ---------- ------------
<S> <C> <C> <C>
Balance, December 31, 1996 20,683,261 (48,616) 20,634,645
Employee benefit plans 316,200 - 316,200
Subordinated debenture conversion 2,060,403 - 2,060,403
Treasury share purchases - (500,000) (500,000)
----------- ---------- ------------
Balance, December 31, 1997 23,059,864 (548,616) 22,511,248
Employee benefit plans 2,000 92,500 94,500
Treasury share purchases - (110,000) (110,000)
----------- ---------- ------------
Balance, December 31, 1998 23,061,864 (566,116) 22,495,748
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
DEBT - NOTE F
YEAR-END BALANCES. Steel's long-term debt of $46.0 million and $43.0 million at
December 31, 1998 and 1997, respectively, consisted of borrowings under a $100.0
million revolving credit facility. The fair value of Steel's long-term debt at
December 31, 1998 and 1997, approximated the recorded amounts. Under this
facility, Steel could borrow an amount based on a percentage of eligible
accounts receivable and inventories, reduced by outstanding letters of credit.
The available borrowing base was $58.4 million at December 31, 1998. Interest
was payable under one of two rate options: at the London Inter Bank Offer Rate
(LIBOR) plus an index which is based on quarterly debt ratio calculations or the
institution's prime lending rate plus 0.75%. At December 31, 1998, the rate was
8.28% and was indexed at 2.75% over LIBOR. The rate was 6.47% at December 31,
1997. Steel also paid an indexed rate on the unused portion of the credit
facility, which was 0.50% per annum at December 31, 1998. The term of the
agreement was through October 2002. The loan was secured by Steel's assets other
than real estate.
As a result of Steel's operating environment and resulting losses described in
Note B, the revolving credit agreement was amended in December 1998 to provide
for the aforementioned borrowing base provisions, adjust the interest rate index
and to amend various restrictive financial covenants contained in the agreement.
This $100.0 million credit facility replaced another $75.0 million credit
facility from other lenders in October 1997. In connection with early
termination of the $75.0 million credit facility, a prepayment fee of $1.1
million was incurred and recognized as an extraordinary loss in the 1997
consolidated statement of operations.
SUBSEQUENT REFINANCING IN 1999. On March 16, 1999, Steel refinanced its
revolving credit facility with a new three year $90.0 million revolving line of
credit and a three year $10.0 million term loan with a new lender. The new
revolving credit facility is similar to the refinanced facility in that Steel
can borrow an amount based on a percentage of eligible accounts receivable and
inventories, reduced by outstanding letters of credit. However, the borrowing
capacity is increased under the new facility due to higher borrowing base
percentages and less restrictive limitations on the inventory portion of the
borrowing base. As of March 16, 1999, the amount of the total available
borrowing base including the term loan was approximately $83.3 million. At
Steel's option, the interest rate is the prime lending rate plus 1.0% or the
LIBOR plus 3.0%. Steel also pays a 0.375% per annum fee on the unused portion of
the credit facility. The term loan is repayable in quarterly installments of
$0.5 million, plus interest at the prime lending rate plus 1.5% or the LIBOR
plus 3.5%. Steel's assets other than real estate secure these loans.
The loan agreements contain various restrictive covenants which requires Steel
to meet specified quarterly financial ratios, including cash flow and net worth
measurements, which Steel anticipates achieving. Steel's ability to incur
additional
28
<PAGE>
indebtedness is also restricted under the agreements, and Steel can repay a
$25.0 million loan from Lone Star only if certain conditions are met after
March 12, 2002. In addition, Steel's ability to pay cash dividends is
prohibited by the agreement. At December 31, 1998, Lone Star's equity in the
net assets of Steel was $132.0 million.
Cash paid for interest during 1998, 1997, and 1996 was $5.4 million, $9.4
million, and $7.2 million, respectively. Interest of $0.4 million was
capitalized into property, plant, and equipment during 1996.
NET EARNINGS PER SHARE - NOTE G
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock. The numbers of shares used to compute
basic earnings per share in 1998, 1997, and 1996 were approximately 22.5
million, 21.5 million, and 20.6 million, respectively. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock and other dilutive securities. The number of shares used
to compute diluted earnings per share in 1998, 1997, and 1996 were approximately
22.5 million, 22.1 million, and 20.9 million, respectively.
INCOME TAXES - NOTE H
There was no current income tax expense in 1998. Current income tax expense was
recognized for federal alternative minimum taxes of $0.9 million in 1997 and
$0.6 million in 1996. Cash paid for income taxes was $0.3 million in 1998, $1.3
million in 1997, and none in 1996. There was no deferred income tax expense or
benefit for 1998, 1997, or 1996. A reconciliation of computed income taxes to
actual income taxes follows:
<TABLE>
<CAPTION>
($ in millions)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Earnings (loss) from continuing operations before income tax $ (32.3) $ 41.3 $ 25.5
Statutory federal income tax rate 35% 35% 35%
-------- -------- --------
-------- -------- --------
Income tax (benefit) expense at statutory rate (11.3) 14.5 8.9
Minority interest in Steel - - (1.3)
Net operating loss, benefit not recognized (recognized) 11.3 (13.6) (7.0)
-------- -------- --------
Income taxes (federal alternative minimum tax) $ - $ 0.9 $ 0.6
-------- -------- --------
-------- -------- --------
</TABLE>
The following table discloses the components of the deferred tax amounts at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
($ in millions)
1998 1997
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS - temporary differences
Postretirement benefit accruals $ 13.5 $ 13.0
Environmental reserves 4.0 4.6
UMWA liability - 2.7
Other expense accruals and reserves 7.1 7.5
Inventories 6.0 4.3
Other 0.6 0.5
------- -------
Total deferred tax assets - temporary differences 31.2 32.6
Net operating loss carryforwards 86.0 78.1
Alternative minimum tax credit carryforward 1.0 -
------- -------
Total deferred tax assets 118.2 110.7
DEFERRED TAX LIABILITY - temporary difference for basis in
and depreciation of property, plant, and equipment (33.3) (35.7)
------- -------
Net deferred tax assets 84.9 75.0
Less valuation allowance (84.9) (75.0)
------- -------
NET DEFERRED TAX AMOUNT $ - $ -
------- -------
------- -------
</TABLE>
29
<PAGE>
At December 31, 1998, Lone Star had federal tax net operating loss carryforwards
(NOL's) of approximately $245.6 million, a portion of which may be related to
AFB and subject to an agreement with the Federal Deposit Insurance Corporation
(FDIC) whereby Lone Star may be required to pay the FDIC for certain tax
benefits. If not utilized, the NOL's will expire between years 2003 and 2013,
and their future availability may be limited if Lone Star or a member of the
consolidated group experiences an ownership change of more than 50 percentage
points, as defined by IRS regulations. Lone Star's common stock is publicly
traded, and management cannot assure that future trading will not result in an
ownership change, as defined by IRS regulations, which would limit availability
of the NOL's. Due to these uncertainties regarding possible utilization of NOL's
and the sensitivity of Steel's earnings to the level of domestic drilling
activity, valuation allowances were recorded to fully reserve the computed net
deferred tax assets.
EMPLOYEE BENEFIT PLANS - NOTE I
DEFINED CONTRIBUTION PLANS. Lone Star 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, Lone Star
and Steel make matching contributions within specified limits. Steel makes
contributions at rates specified under collective agreements for its bargaining
unit employees. Lone Star and Steel contributions totaled $1.3 million in 1998,
$1.5 million in 1997, and $0.8 million in 1996.
STOCK OPTION PLAN. Lone Star has a long-term incentive plan which provides for
the issuance of up to 2,700,000 shares of common stock to key employees and
outside directors through the granting of incentive (the right to grant further
incentive options expired in 1995) and nonqualified stock options, stock
appreciation rights, restricted stock grants, and performance unit grants. The
option price is the average of the high and low market price on the date of the
grant. Options are generally exercisable for ten years with one-fourth of the
shares becoming exercisable on the one-year anniversary of the grant date and an
additional one-fourth becoming exercisable on the same anniversary date over the
next three years. If the optionee's employment is terminated under certain
circumstances after a change of control of Lone Star occurs before an option's
fourth anniversary, the option may be exercised in full earlier. Also,
accelerated vesting of options can occur upon death or retirement from
employment of an option holder. Following is a summary of stock option activity
during 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Under Option Price Range ($) Price ($)
------------------- --------------- ----------
<S> <C> <C> <C> <C>
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
Cancelled in 1996 (19,336) 6.00 - 11.06 7.73
--------- ---- ----- ------
OUTSTANDING, DECEMBER 31, 1996 852,075 2.59 - 17.38 8.37
Granted in 1997 390,000 19.06 - 19.75 19.33
Exercised in 1997 (316,200) 3.06 - 17.38 9.13
--------- ---- ----- ------
OUTSTANDING, DECEMBER 31, 1997 925,875 2.59 - 19.75 12.73
Granted in 1998 257,500 22.56 - 31.28 24.68
Exercised in 1998 (94,500) 3.06 - 19.75 13.41
Cancelled in 1998 (27,000) 6.88 - 31.28 20.14
--------- ---- ----- -----
OUTSTANDING, DECEMBER 31, 1998 1,061,875 2.59 - 31.28 16.46
--------- ---- ----- -----
--------- ---- ----- -----
</TABLE>
At December 31, 1998, 617,275 shares were available for grant and 450,625 shares
were exercisable.
The weighted average fair value per option granted in 1998, 1997, and 1996 was
$14.28, $9.72, and $5.91, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for grants in 1998, 1997, and 1996,
respectively: risk-free interest rates of 5.60%, 6.36%, and 5.73%; volatility of
48.83%, 47.94%, and 54.4%; and expected lives of five years for all 1998, 1997,
and 1996 option grants with payment of no dividends.
30
<PAGE>
Lone Star accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for this plan been
determined consistent with SFAS No. 123, net income and earnings per share would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
($ in millions)
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income - as reported $(24.9) $53.7 $24.9
- pro forma $(27.0) $52.6 $24.6
Basic earnings per share - as reported $(1.10) $2.50 $1.21
- pro forma $(1.19) $2.45 $1.20
Diluted earnings per share - as reported $(1.10) $2.44 $1.19
- pro forma $(1.19) $2.39 $1.18
</TABLE>
Because the SFAS No. 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.
DEFINED BENEFIT PENSION AND HEALTH CARE PLANS. Steel has three defined benefit
pension plans covering a substantial portion of its bargaining unit employees.
Retirement benefits are based on years of service at progressively increasing
flat- rate amounts. A special initial lump-sum pension payment equal to 13 weeks
of vacation pay is also paid following retirement. Steel funds the minimum
required contributions each year as required by applicable regulations.
During 1996, the largest of the three pension plans was amended so that new
employees do not participate in the defined benefit plan. During 1998, the other
two plans were similarly amended. New employees are eligible to participate in
one of the defined contribution retirement plans, as are substantially all other
employees. The amendments also provided for increased benefits to newly retiring
plan participants.
Steel also sponsors an unfunded defined benefit postretirement health care plan
for eligible bargaining unit employees and a limited number of other retirees
eligible under special early retirement programs. These health care plan
benefits are limited to eligible retirees and their spouses until age 65, at
which time coverage terminates. Certain other postretirement benefits, primarily
life insurance are also provided. The anticipated costs of these postretirement
benefits are accrued over the employees' years of service.
31
<PAGE>
The measurement dates for determining the assets and obligations of these plans
were November 30, 1998, 1997, and 1996. The following table sets forth the
changes in the plans' benefit obligation and plan assets, the funded status
amounts recognized in the consolidated balance sheets at December 31, 1998,
1997, and 1996:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------------------- ---------------------------------------
CHANGE IN BENEFIT OBLIGATION 1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 82.7 79.4 77.7 $ 12.3 11.9 9.7
Service cost 0.9 0.9 0.9 0.5 0.5 0.5
Interest cost 5.4 5.5 5.6 0.8 0.9 0.8
Plan participants' contributions - - - - 0.1 -
Amendments 0.5 - 1.6 - - -
Actuarial loss (gain) 1.2 3.5 0.1 1.2 (0.4) 1.7
Benefits paid (6.7) (6.6) (6.5) (0.9) (0.7) (0.8)
----------- ----------- ----------- ----------- ----------- -----------
Benefit obligation at end of year $ 84.0 82.7 79.4 $ 13.9 12.3 11.9
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 53.2 44.0 39.8 $ - - -
Actual return on plan assets 2.8 5.0 5.0 - - -
Employer contributions 5.0 10.8 5.7 0.9 0.6 0.7
Plan participants' contributions - - - - 0.1 0.1
Benefits paid (6.7) (6.6) (6.5) (0.9) (0.7) (0.8)
----------- ----------- ----------- ----------- ----------- -----------
Fair value of plan assets at end of year $ 54.3 53.2 44.0 $ - - -
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
RECONCILIATION OF FUNDED STATUS
Unfunded status - obligation in excess of assets $ 29.7 29.5 35.4 $ 13.9 12.3 11.9
Unrecognized actuarial gain (loss) (13.7) (10.7) (8.7) (0.3) 0.8 0.5
Unrecognized net obligation at January 1, 1986 (2.1) (3.1) (4.0) - - -
Unrecognized prior service cost (1.7) (1.3) (1.5) - - -
----------- ----------- ----------- ----------- ----------- -----------
Net amount recognized $ 12.2 14.4 21.2 $ 13.6 13.1 12.4
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
AMOUNTS RECOGNIZED IN CONSOLIDATED
BALANCE SHEETS
Postretirement benefit obligations - current $ - 3.0 4.5 $ 1.0 0.8 0.9
Postretirement benefit obligations - noncurrent 28.9 25.5 30.3 12.6 12.3 11.5
Other noncurrent assets - intangible asset (3.9) (4.4) (5.6) - - -
Minority interest in minimum pension
liability adjustment - - (1.2) - - -
Accumulated other comprehensive loss (12.8) (9.7) (6.8) - - -
----------- ----------- ----------- ----------- ----------- -----------
Net amount recognized $ 12.2 14.4 21.2 $ 13.6 13.1 12.4
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
In determining the benefit obligation, weighted average discount rates of 6.5%,
7.0%, and 7.5% were used for 1998, 1997, and 1996, respectively. Other
assumptions utilized for all three years included a 9.0% expected long-term rate
of return on plan assets and a 4.0% annual increase in the compensation rate.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The annual rate of increase in the per
capita costs of covered health care benefits is assumed to decrease gradually
from 8.0% to an ultimate trend rate of 6.0% by the year 2004. Increasing the
assumed medical cost trend rates by one percentage point in each year would have
resulted in a $1.4 million increase in the benefit obligation as of December 31,
1998 and a $0.2 million increase in the aggregate of the service cost and
interest cost components of net periodic benefit expense for 1998. A 1.0%
decrease in the assumed trend rates would have resulted in a $1.2 million
decrease in the benefit obligation and a $0.2 million decrease in expense.
32
<PAGE>
The pension plans' assets consist primarily of short-term money market
investments, government and corporate obligations, real estate, and public
market equity securities:
Net periodic benefit expense for 1998, 1997, and 1996 included the following
components:
<TABLE>
<CAPTION>
($ in millions)
Pension Benefits Other Benefits
-------------------------- ------------------------
1998 1997 1996 1998 1997 1996
------ ------- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 0.9 0.9 0.9 $0.5 0.5 0.5
Interest cost 5.4 5.5 5.6 0.8 0.9 0.8
Amortization of net gain - - - - - (0.1)
Expected return on plan assets (4.7) (3.6) (3.3) - - -
Amortization of net obligation at January 1, 1996 1.0 1.0 1.0 - - -
Amortization of prior service cost 0.1 0.1 0.1 - - -
Recognized net actuarial loss 0.1 0.1 0.1 - - -
------ ------- ----- ------ ------ -----
Net periodic benefit expense $ 2.8 4.0 4.4 $1.3 1.4 1.2
------ ------- ----- ------ ------ -----
------ ------- ----- ------ ------ -----
</TABLE>
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 $1.5 million,
$3.9 million, and $2.7 million for 1998, 1997, and 1996, respectively.
COMMITMENTS AND CONTINGENCIES - NOTE J
Steel has various commitments for the purchase of raw materials, certain tubular
goods, supplies, services, and energy arising in the ordinary course of
business. The majority of these commitments are for a period of less than one
year.
Steel's operations are subject to numerous environmental laws. The three major
areas of regulation are air quality, water quality, and solid and hazardous
waste management. The primary governmental oversight agencies include the Texas
Natural Resource Conservation Commission and the Environmental Protection
Agency. Steel has agreements with these agencies to conduct numerous
environmental studies and to develop plans to ensure continuous compliance with
applicable laws and regulations. Steel is engaged in various ongoing
environmental studies, monitoring programs, and capital projects. Estimated
expenditures for certain remediation programs are included in accrued
liabilities and other noncurrent liabilities as shown in Note D and are computed
on a non-discounted basis. Steel believes that its environmental expenditures
will continue to fall within its contemplated operating and capital plans.
Steel leases equipment under various operating leases. Rental expense totaled
$3.7 million, $3.9 million, and $3.7 million in 1998, 1997, and 1996,
respectively. Future minimum lease payments under noncancellable operating
leases are as follows: 1999, $1.4 million; 2000, $1.1 million; 2001, $0.6
million; 2002, $0.5 million; 2003, $0.4 million; and thereafter, $0.5 million.
Lone Star and its subsidiaries are parties to a number of lawsuits and
controversies which are not discussed herein. Management of Lone Star 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
Lone Star and its subsidiaries, taken as a whole.
EXTRAORDINARY ITEMS AND GAIN FROM DISCONTINUED OPERATIONS - NOTE K
During 1992, 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. In
1993, Steel recorded a liability for the total estimated future payments related
to this Act. During 1997, the estimated liability was adjusted downward,
resulting in an extraordinary gain of $2.0 million. During 1998, as a result of
a decision by the United States Supreme Court, Steel was relieved from making
payments under the Act. Accordingly, the remaining UMWA liability
33
<PAGE>
(Note D) was reversed in 1998, resulting in a $7.4 million extraordinary gain.
In addition to the $2.0 million UMWA liability adjustment in 1997, an
extraordinary loss of $1.1 million was recognized for the early prepayment fee
in connection with the refinancing of Steel's revolving credit facility in 1997
(Note F), resulting in a net extraordinary gain of $0.9 million for 1997. There
were no income tax effects recognized for these extraordinary items.
In November 1993, Lone Star sold the stock of AFB, one of its operating
subsidiaries. The sale price was $155.7 million; of that, Lone Star received
$135.7 million in cash on the sale date. Additional payments were received of
$5.0 million in November 1994 and $12.4 million in August 1997, and recognized
as gains from discontinued operations. There were no income tax effects
recognized for these items.
QUARTERLY FINANCIAL SUMMARY - NOTE L
<TABLE>
<CAPTION>
($ in millions, except share amounts; quarterly amounts unaudited):
Quarter
------------------------------------
1998 First Second Third Fourth Total Year
- ---- ------- ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Net revenues $151.0 $129.0 $ 88.9 $ 63.5 $ 432.4
Gross earnings (loss) 15.4 7.7 (9.9) (8.8) 4.4
Special charges - - - (14.5) (14.5)
Earnings (loss) from continuing operations 9.9 2.2 (15.6) (28.8) (32.3)
Extraordinary items - - - 7.4 7.4
Net earnings (loss) $ 9.9 $ 2.2 $(15.6) $(21.4) $ (24.9)
PER COMMON SHARE - BASIC:
Earnings (loss) from continuing operations $ 0.44 $ 0.09 $(0.69) $(1.28) $ (1.43)
Extraordinary items - - - 0.33 0.33
------- ------ ------ ------ ----------
Net earnings (loss) available to common shareholders $ 0.44 $ 0.09 $(0.69) $(0.95) $ (1.10)
PER COMMON SHARE - DILUTED:
Earnings (loss) from continuing operations $ 0.43 $ 0.09 $(0.69) $(1.28) $ (1.43)
Extraordinary items - - - 0.33 0.33
------- ------ ------ ------ ----------
Net earnings (loss) available to common shareholders $ 0.43 $ 0.09 $(0.69) $(0.95) $ (1.10)
1997
Net revenues $159.2 $172.3 $167.4 $155.4 $ 654.3
Gross earnings 14.3 16.3 16.7 16.9 64.2
Earnings from continuing operations 7.8 10.3 10.7 11.6 40.4
Extraordinary items - - - 0.9 0.9
Gain from discontinued operations - - 12.4 - 12.4
Net earnings $ 7.8 $ 10.3 $ 23.1 $ 12.5 $ 53.7
PER COMMON SHARE - BASIC:
Earnings from continuing operations $ 0.38 $ 0.50 $ 0.50 $ 0.51 $ 1.88
Extraordinary items - - - 0.04 0.04
Gain from discontinued operations - - 0.58 - 0.58
------- ------ ------ ------ ----------
Net earnings available to common shareholders $ 0.38 $ 0.50 $ 1.08 $ 0.55 $ 2.50
PER COMMON SHARE - DILUTED:
Earnings from continuing operations $ 0.37 $ 0.48 $ 0.48 $ 0.49 $ 1.83
Extraordinary items - - - 0.04 0.04
Gain from discontinued operations - - 0.56 - 0.57
------- ------ ------ ------ ----------
Net earnings available to common shareholders $ 0.37 $ 0.48 $ 1.04 $ 0.53 $ 2.44
</TABLE>
34
<PAGE>
LONE STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
($ in millions, except share data)
Years ended December 31,
-------------------------------------
CONDENSED STATEMENTS OF EARNINGS 1998 1997 1996
- -------------------------------- --------- --------- ---------
<S> <C> <C>
General and administrative expenses $ (3.4) $ (2.8) $ (1.5)
Steel cost sharing 3.3 2.3 1.5
Equity in Steel's earnings (loss) (28.0) 39.9 22.7
Interest income 1.7 2.9 4.4
Interest expense - (2.7) (4.0)
Other intercompany income from Steel 1.5 1.7 1.8
Gain on sale of discontinued operations - 12.4 -
--------- --------- ---------
Net earnings (loss) $ (24.9) $ 53.7 $ 24.9
--------- --------- ---------
--------- --------- ---------
Cash dividends received from Steel $ - $ - $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------
CONDENSED BALANCE SHEETS 1998 1997
- ------------------------- ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20.2 $ 4.7
Short-term investments 3.1 6.3
Due from Steel 25.4 30.2
Other current assets 0.6 0.1
--------- ---------
Total current assets 49.3 41.3
Investment in Steel 132.0 163.1
Marketable securities 9.0 19.0
Other noncurrent assets 4.2 4.5
--------- ---------
Total assets $ 194.5 $ 227.9
--------- ---------
--------- ---------
Current liabilities: $ 1.0 $ 5.3
Other noncurrent liabilities 4.4 4.9
--------- ---------
Total liabilities 5.4 10.2
--------- ---------
Shareholders' equity:
Preferred stock, $1 par value (authorized: 10,000,000 shares, issued: none) - -
Common stock, $1 par value (authorized: 80,000,000 shares, issued:
23,061,864 and 23,059,864, respectively) 23.1 23.1
Capital surplus 209.9 209.9
Minimum pension liability adjustment (12.8) (9.7)
Retained earnings (15.5) 9.4
Treasury stock (566,116 and 548,616 common shares, respectively, at cost) (15.6) (15.0)
--------- ---------
Total shareholders' equity 189.1 217.7
--------- ---------
Total liabilities and shareholders' equity $ 194.5 $ 227.9
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Net earnings (loss) $ (24.9) $ 53.7 $ 24.9
Undistributed equity in Steel's earnings 28.0 (39.9) (22.7)
Gain on sale of discontinued operations - (12.4) -
Other (0.2) (14.8) 3.5
--------- --------- ---------
Net cash provided (used) by operating activities 2.9 (13.4) 5.7
Net cash provided (used) by investing activities 13.2 27.0 (19.2)
Net cash provided (used) by financing activities (0.6) (36.2) 0.8
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 15.5 (22.6) (12.7)
Beginning cash and cash equivalents 4.7 27.3 40.0
--------- --------- ---------
Ending cash and cash equivalents $ 20.2 $ 4.7 $ 27.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
35
<PAGE>
LONE STAR TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996, 1997, AND 1998
($ IN MILLIONS)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
beginning costs and other end
Description of period expenses accounts Deductions(b) of period
- ----------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts 1.5 - - (0.1) 1.4
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts 1.4 - - - 1.4
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts 1.4 - - - 1.4
Reserves for special charges (a) - 6.4 - (1.1) 5.3
</TABLE>
(a) Does not include special charge associated with the write-down of property,
plant, and equipment.
(b) Includes write-offs of accounts receivable and utilization of reserves for
special charges.
36
<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 Lone Star's proxy statement
for the 1999 Annual Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in Lone Star's proxy statement
for the 1999 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 Lone Star's proxy statement for the 1999 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 Lone Star's proxy statement for the 1999 Annual Meeting
of Shareholders, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(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, 1998, 1997, and 1996
- Consolidated Balance Sheets at December 31, 1998 and 1997
- Consolidated Statements of Shareholders' Equity -
at December 31, 1998, 1997, 1996, and 1995
- Consolidated Statements of Cash Flows -
for the years ended December 31, 1998, 1997, and 1996
- Notes to Consolidated Financial Statements
2. Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
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.
37
<PAGE>
<S> <C>
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 Lone Star 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 Lone Star as filed on April
7, 1989).
3.2 Agreement and Plan of Merger dated March 6, 1986, among Steel, a Texas
corporation, Lone Star, 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 Lone
Star 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 Lone Star as
filed on April 7, 1989).
3.4 Certificate of Amendment to Certificate of Incorporation dated May 20,
1998 (incorporated by reference to same numbered Exhibit to Form 10-Q
for the quarter ended June 30, 1998).
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 Lone Star
as filed on April 7, 1989).
4.2 Lone Star 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 Lone Star as filed on April 7, 1989).
10.1 Amended 1985 Long-Term Incentive Plan (incorporated by reference to
Exhibit A of Proxy Statement of Lone Star as filed on October 22,
1993).*
10.1(a) Amendments to the Amended 1985 Long-Term Incentive Plan adopted on
May 8, 1997 (incorporated by reference to Exhibit 10.1(a) to Form
10-Q of Lone Star for the quarter ended June 30, 1997).*
10.1(b) Amendments to the Amended 1985 Long-Term Incentive Plan adopted on
May 14, 1998 (incorporated by reference to same numbered Exhibit
to Form 10-Q for the quarter ended June 30, 1998).*
10.2 Lone Star Corporate Improvement Incentive Program adopted October 9,
1990 (incorporated by reference to Exhibit 10(s) to Form 10-K as
filed on March 15, 1991).*
10.3 Employment Retention Policy adopted May 8, 1997, letter agreements
dated May 22, 1997 between Lone Star and John P. Harbin, Charles J.
Keszler and Robert F. Spears and between Steel and W. Byron Dunn and
letter agreement dated September 25, 1997 between Lone Star and Rhys
J. Best (incorporated by reference to same numbered Exhibit to Form
10-K for the year ended December 31, 1997).*
10.4 Financing Agreement dated March 2, 1993, between The CIT
Group/Business Credit, Inc. and Steel (incorporated by reference to
Exhibit 10(af) to Form 10-K as filed on March 15, 1993); Amendment
agreement dated February 14, 1994 (related to Financing Agreement
dated March 2, 1993).
10.5 Amendment Agreement dated February 14, 1994, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business Credit,
Inc. and Steel (incorporated by reference to Exhibit 10.9 to Form 10-K
as filed on March 28, 1996).
10.6 Amendment Agreement dated September 25, 1995, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business Credit,
Inc. and Steel (incorporated by reference to Exhibit 10.10 to Form
10-K as filed on March 28, 1996).
10.7 Amendment Agreement dated March 4, 1996, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business Credit,
Inc. and Steel (incorporated by reference to same numbered Exhibit to
Form 10-K for the year ended December 31, 1996).
10.8 Amendment Agreement dated January 17, 1997, related to Financing
Agreement dated March 2, 1993, between The CIT Group/Business Credit,
Inc. and Steel (incorporated by reference to same numbered Exhibit to
Form 10-K for the year ended December 31, 1996).
10.9 Loan and Security Agreement dated March 22, 1993, between Steel and
the CIT Group Equipment Financing, Inc. (incorporated by reference to
Exhibit 10.9 to Form 10-K as filed on February 27, 1995).
10.10 Agreement dated November 2, 1994, among Steel, Lone Star, 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, Lone
Star, 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 Lone Star, 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 Lone Star 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 Lone Star (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
Lone Star, 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
38
<PAGE>
regarding the acquisition by Lone Star of AFB dated August 18, 1988
(incorporated by reference to Form 8 (Amendment No. 3 to Form 8-K)
dated January 11, 1989); Amendment No. 1 to the Assistance Agreement
of August 18, 1988, dated August 31, 1990 (incorporated by reference
to Exhibit 10(q) to Form 10-K as filed on March 15, 1991); Settlement
Agreement and Second Amendment to Assistance Agreement dated
September 30, 1992, among the FDIC, as Manager, the RTC, AFB, and
LSST (incorporated by reference to Exhibit 10(ab) to Form 10-K as
filed on March 15, 1993).
10.15 Agreement and Plan of Merger dated March 25, 1992, as amended by
First Amendment to Agreement and Plan of Merger dated April 15, 1992,
between AFB and Americity (incorporated by reference to Form 8-K
dated July 14, 1992).
10.16 Holdback Escrow Agreement dated July 1, 1992, among Americity, AFB,
Bank One, Texas, as Agent, and James C. Jarocki, as Shareholder
Representative (incorporated by reference to Exhibit 10(x) to Form
10-K as filed on March 15, 1993).
10.17 Letter Agreement dated July 1, 1992, among AFB, Americity, and the
FDIC, as Manager (regarding assignment and assumption of the
Termination Agreement and Tax Benefits Cancellation Agreement)
(incorporated by reference to Exhibit 10(y) to Form 10-K as filed on
March 15, 1993); Termination Agreement dated December 18, 1991, among
Americity, the FDIC, as Manager, and the RTC (terminating Assistance
Agreement of November 18, 1988, between Americity and the FSLIC)
(incorporated by reference to Exhibit 10(z) to Form 10-K as filed on
March 15, 1993); Tax Benefits Cancellation Agreement dated December
18, 1991, among Americity, the FDIC, as Manager, and the RTC
(incorporated by reference to Exhibit 10(aa) to Form 10-K as filed on
March 15, 1993).
10.18 Stock Purchase Agreement and Agreement and Plan of Reorganization
by and among Guaranty Federal Bank, F.S.B., Guaranty Holdings, Inc.
I, Lone Star, 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 Lone Star 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 Lone Star as filed
October 22, 1993).
10.20 Agreement dated October 31, 1995, among Steel, Lone Star and the
minority shareholders of Steel regarding participation in capital
projects not to exceed $5,000,000 by acquiring convertible preferred
stock of Steel (incorporated by reference to Exhibit 10.23 to Form
10-K as filed on March 28, 1996).
10.21 Contract for Electric Service dated September 30, 1996 between
Southwestern Electric Power Company and Steel (incorporated by
reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1996).
10.22 Assignment, Termination and Release dated January 21, 1997, among
Steel, Lone Star, and the minority shareholders of Steel (incorporated
by reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1996).
10.23 Credit Agreement dated as of October 2, 1997 by and among Steel and
the banks named therein (incorporated by reference to same numbered
Exhibit to Form 10-K for the year ended December 31, 1997).
10.24 Cost Sharing Agreement dated as of July 1, 1997 between Lone Star and
Steel, replacing Cost Sharing Agreement dated May 16, 1991 (Exhibit
10.12 to this Form 10-K) (incorporated by reference to same numbered
Exhibit to Form 10-K for the year ended December 31, 1997).
10.25 Termination Agreement dated as of July 1, 1997 between Lone Star and
Steel, terminating Tax Allocation and Indemnification Agreement dated
May 16, 1991 (Exhibit 10.13 to this Form 10-K) (incorporated by
reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1997).
10.26 Compromise and Settlement Agreement and Release dated July 31, 1997
between Lone Star and Guaranty Federal Bank, F.S.B. (incorporated by
reference to same numbered Exhibit to Form 10-K for the year ended
December 31, 1997).
10.27 Consulting Agreement dated as of July 23, 1998 between Lone Star and
John P. Harbin (incorporated by reference to same numbered Exhibit to
Form 10-Q for the quarter ended September 30, 1998).*
10.28 Phantom Stock Deferred Compensation Plan adopted on September 22, 1998
(incorporated by reference to same numbered Exhibit to Form 10-Q for
the quarter ended September 30, 1998).*
10.29 First Amendment dated as of December 24, 1998 to Credit Agreement
dated as of October 2, 1997 by and among Steel and the banks named
therein.
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
24 Powers of Attorney.
</TABLE>
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
<TABLE>
DATE OF REPORT DATE FILED DESCRIPTION
<S> <C> <C> <C>
None.
</TABLE>
39
<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: March 17, 1999 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>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Rhys J. Best , Chairman, Director, Chief March 17, 1999
- ------------------------------
(Rhys J. Best) Executive Officer and President
(Principal Executive Officer)
/s/ Charles J. Keszler , Vice President-Finance and March 17, 1999
- ------------------------------
(Charles J. Keszler) Treasurer (Principal Financial
and Accounting Officer)
/s/ Charles L. Blackburn *, Director March 17, 1999
- -------------------------------
(Charles L. Blackburn)
/s/ Dean P. Guerin *, Director March 17, 1999
- -------------------------------
(Dean P. Guerin)
/s/ Frederick B. Hegi, Jr. *, Director March 17, 1999
- -------------------------------
(Frederick B. Hegi, Jr.)
/s/ James E. McCormick *, Director March 17, 1999
- -------------------------------
(James E. McCormick)
/s/ Thomas M. Mercer, Jr. *, Director March 17, 1999
- -------------------------------
(Thomas M. Mercer, Jr.)
*By: /s/ Charles J. Keszler
- --------------------------------------
(Charles J. Keszler, Attorney-in-Fact)
</TABLE>
40
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment") dated as of
December 24, 1998, and is made by and among Lone Star Steel Company, a Delaware
corporation (the "Borrower"), each of the Guarantors and the BANKS (referred to
in the Credit Agreement as hereinafter defined), and PNC BANK, NATIONAL
ASSOCIATION, in its capacity as agent for the Banks under the Credit Agreement
(hereinafter referred to in such capacity as the "Agent") and Bank of America
National Trust and Savings Association, N.A., as Co-Agent, and joined by Lone
Star Technologies, Inc. ("Lone Star Technologies").
WITNESSETH:
WHEREAS, the parties hereto are parties to that certain Credit Agreement
dated as of October 2, 1997 (the "Credit Agreement") and desire to amend the
terms thereof as set forth herein;
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. DEFINITIONS.
Defined terms used herein unless otherwise defined herein shall have the
meanings ascribed to them in the Credit Agreement as amended by this Amendment.
2. AMENDMENT OF CREDIT AGREEMENT.
2.1 NEW DEFINITIONS. The following new defined terms are hereby added
in alphabetical order in Section 1.1 of the Credit Agreement to read as follows:
"ACCOUNT shall mean any account, contract right, general
intangible, chattel paper, instrument or document representing any right to
payment for goods sold or services rendered, whether or not earned by
performance and whether or not evidenced by a contract, instrument or
document, which is now owned or hereafter acquired by any Loan Party. All
Accounts, whether Qualified Accounts or not, shall be subject to the Banks'
Prior Security Interest.
ACCOUNT DEBTOR shall mean any Person who is or who may
become obligated to any Loan Party under, with respect to, or on account
of, an Account.
APPLICABLE INVENTORY LIMITATION PERCENTAGE shall mean (i)
175% from the First Amendment Effective Date through March 30, 1999, (ii)
135% from March 31, 1999 through June 29, 1999 and (iii) 100% on and after
June 30, 1999.
<PAGE>
APPLICABLE INVENTORY INCLUSION PERCENTAGE shall mean (i) 60%
from the First Amendment Effective Date through March 30, 1999, (ii) 55%
from March 31, 1999 through June 29, 1999 and (iii) 50% on and after June
30, 1999.
BORROWING BASE shall mean at any time the sum of (i) 85% of
Qualified Accounts ("Accounts Portion"), plus (ii) the lesser of (A) the
Applicable Inventory Inclusion Percentage times the amount of Qualified
Inventory, or (B) the Applicable Inventory Limitation Percentage times the
Accounts Portion. Notwithstanding anything to the contrary herein, the
Required Banks may, in their sole discretion, at any time hereafter,
decrease the advance percentage for Qualified Accounts and Qualified
Inventory, or increase the level of any reserves or ineligibles, or define
or maintain such other reserves or ineligibles, as the Required Banks may
deem necessary or appropriate. Any such change shall become effective
immediately upon written notice from the Agent to the Borrower for the
purpose of calculating the Borrowing Base hereunder.
BORROWING BASE CERTIFICATE shall have the meaning assigned
to such term in Section 8.3.4A.
EBIT for any period of determination shall mean (i) the sum
of net income, other non-cash charges to net income, interest expense and
income tax expense minus (ii) non-cash credits to net income, in each case
of the Borrower and its Subsidiaries for such period determined and
consolidated in accordance with GAAP.
FIRST AMENDMENT EFFECTIVE DATE shall mean the effective date
of the First Amendment to this Agreement.
INTEREST EXPENSE shall mean for any period of determination,
the interest expense of the Borrower and its Subsidiaries, determined and
consolidated in accordance with GAAP.
INTEREST COVERAGE RATIO (FOR PRICING) shall mean for any
period of determination the ratio of(i) EBIT to (ii) interest expense of
the Borrower and its Subsidiaries for such period
INVENTORY shall mean any and all goods, merchandise and
other personal property, including, without limitation, goods in transit,
wheresoever located and whether now owned or hereafter acquired by any Loan
Party which are or may at any time be held as raw materials, finished
goods, work-in-process, supplies or materials used or consumed in such Loan
Party's business or held for sale or lease, including, without limitation,
(a) all such property the sale or other disposition of which has given rise
to Accounts and which has been returned to or repossessed or stopped in
transit by such Loan Party, and (b) all packing, shipping and advertising
materials relating to all or any such property. All Inventory, whether
Qualified Inventory or not, shall be subject to the Banks' Prior Security
Interest.
QUALIFIED ACCOUNTS shall mean any Accounts which the Agent
in its sole discretion determines to have met all of the minimum
requirements set forth on SCHEDULE 1.1(Q)(1).
<PAGE>
QUALIFIED INVENTORY shall mean any Inventory which the Agent
in its sole discretion determines to have met all of the minimum
requirements set forth on SCHEDULE 1.1(Q)(2).
SCHEDULE OF ACCOUNTS shall mean a detailed aged trial
balance of all then existing Accounts in form and substance satisfactory to
Agent, specifying in each case the names, addresses, face amount and dates
of invoice(s) for each Account Debtor obligated on an Account so listed
and, if reasonably requested by the Agent in connection with an audit or
after conclusion of an audit, copies of proof of delivery and customer
statements and the original copy of all documents, including, without
limitation, repayment histories and present status reports, and such other
matters and information relating to the status of the Accounts and/or the
Account Debtors so scheduled as the Agent may from time to time reasonably
request.
SCHEDULE OF INVENTORY shall mean a current schedule of
Inventory in form and substance satisfactory to the Agent, itemizing and
describing the kind, type, quantity of Inventory, as confirmed from time to
time by physical counts taken, the Loan Parties' costs therefor.
SCHEDULE OF PAYABLES shall mean a detailed listing of Loan
Parties' existing accounts payable, specifying the names of each creditor
and the amount owed to such creditor and such matters and information
relating to the status of the Loan Parties' accounts payable so scheduled
as the Agent may from time to time reasonably request.
TOTAL LIABILITIES shall mean the total liabilities of the
Loan Parties and their Subsidiaries as determined by GAAP."
2.2 EXISTING DEFINITIONS. The following defined terms in Section 1.1
of the Credit Agreement are hereby amended and restated to read as set forth
below:
"APPLICABLE COMMITMENT FEE RATE shall mean the
percentage rate per annum based on the Interest Coverage Ratio (For
Pricing) then in effect according to the pricing grid on SCHEDULE 1.1
(A) below the heading "Commitment Fee." The Applicable Commitment Fee
Rate shall be computed in accordance with the parameters set forth on
SCHEDULE 1.1 (A).
APPLICABLE MARGIN shall mean, as applicable:
(A) the percentage spread to be added to Base Rate
under the Base Rate Option based on the Interest Coverage Ratio (For
Pricing) then in effect according to the pricing grid on SCHEDULE 1.1
(A) below the heading "Base Rate Spread," or
(B) the percentage spread to be added to Euro-Rate
under the Euro-Rate Option based on the Interest Coverage Ratio (For
Pricing) then in effect according to the pricing grid on SCHEDULE 1.1
(A) below the heading "Euro-Rate Spread."
<PAGE>
The Applicable Margin shall be computed in
accordance with the parameters set forth on SCHEDULE 1.1(A).
BASE NET WORTH shall mean the following amount:
(i) $124,000,000, PLUS
(ii) 50% of consolidated net income of the
Borrower and its Subsidiaries for each fiscal quarter in which net income
was earned (as opposed to a net loss) during the period from January 1,
2000 through the date of determination,
PLUS
(iii) the amount of any contributions made to the
capital of the Borrower after January 1, 2000 or proceeds received by the
Borrower after the January 1, 2000 from the sale of its capital stock, net
of ordinary and reasonable expenses directly related to such sale, and
MINUS
(iv) the amount of payments made by the Borrower
after January 1, 2000 to redeem its Preferred Stock to the extent that such
payments reduce the Consolidated Tangible Net Worth of the Borrower and are
permitted hereunder.
INTEREST COVERAGE RATIO (FOR COVENANTS) shall mean for
any period of determination the ratio of(i) EBITDA to (ii) the sum of (A)
interest expense of the Borrower and its Subsidiaries for such period plus
(B) cash dividend payments or other cash distributions paid by the Borrower
or cash or other consideration paid to purchase whether by way of
redemption or otherwise capital stock of the Borrower during such period,
excluding cash payments made by the Borrower to redeem the Preferred Stock
of the Borrower.
LEVERAGE RATIO shall be computed as of the end of each
fiscal quarter of the Borrower ending on or after March 31, 2000 as the
ratio of consolidated Indebtedness on such quarter-end to the EBITDA for
the four fiscal quarters ending on such quarter-end.
SLAB FINANCING ARRANGEMENT shall mean Borrower's
Product Financing Agreement with Lone Star Technologies dated as of
November 23, 1998, as hereafter amended or replaced from time to time,
provided that the Borrower's Obligations thereunder must be subject to the
Intercompany Subordination Agreement and the maximum principal amount owing
thereunder must not exceed $25,000,000 without the consent of the Required
Banks.
2.3 REVOLVING CREDIT COMMITMENTS.
Section 2..1.1 (Revolving Credit Loans) is hereby amended and restated
to read as set forth below.
"2.1.1 REVOLVING CREDIT LOANS.
<PAGE>
Subject to the terms and conditions hereof and relying
upon the representations and warranties herein set forth, each Bank
severally agrees to make Revolving Credit Loans to the Borrower at any time
or from time to time on or after the date hereof to the Expiration Date
provided that (i) after giving effect to such Loan the aggregate amount of
Loans from such Bank shall not exceed such Bank's Revolving Credit
Commitment minus such Bank's Ratable Share of the Letters of Credit
Outstanding, and (ii) the Revolving Facility Usage shall not exceed the
Borrowing Base. Within such limits of time and amount and subject to the
other provisions of this Agreement, the Borrower may borrow, repay and
reborrow pursuant to this Section 2.1.1.
2.4 ISSUANCE OF LETTERS OF CREDIT. Section 2.10.1 (Issuance of
Letters of Credit) is hereby amended and restated to read as set forth below.
"2.10.1 ISSUANCE OF LETTERS OF CREDIT
Borrower may request the issuance of a letter of credit
(each a "Letter of Credit") on behalf of itself or another Loan Party by
delivering to the Agent a completed application and agreement for letters
of credit in such form as the Agent may specify from time to time by no
later than Noon Pittsburgh time, at least five (5) Business Days, or such
shorter period as may be agreed to by the Agent, in advance of the proposed
date of issuance. Each Letter of Credit shall be either a Standby Letter of
Credit or a Commercial Letter of Credit. Subject to the terms and
conditions hereof and in reliance on the agreements of the other Banks set
forth in this Section 2.10, the Agent will issue a Letter of Credit
provided that each Letter of Credit shall (A) have a maximum maturity of
twenty four (24) months from the date of issuance, and (B) in no event
expire later than ten (10) Business Days prior to the Expiration Date and
providing that in no event shall (i) the Letters of Credit Outstanding
exceed, at any one time, $20,000,000, (ii) the Revolving Facility Usage
exceed, at any one time, the Revolving Credit Commitments (for purposes of
this computation, PNC Bank's Swing Loans shall be deemed to be borrowed
amounts under its Revolving Credit Commitment), or (iii) the Revolving
Facility Usage exceed, at any one time, the Borrowing Base."
2.5 MANDATORY PREPAYMENTS WHEN THE BORROWING BASE IS EXCEEDED. A new
Section 5.7 (Mandatory Prepayments When the Borrowing Base is Exceeded) is
hereby added to Section 5.6 of the Credit Agreement to follow immediately after
Section 5. (Settlement Date Procedures) to read as follows:
"5.7 MANDATORY PREPAYMENTS WHEN THE BORROWING BASE IS EXCEEDED.
Whenever the outstanding principal balance of Revolving
Credit Loans by the Banks plus the aggregate undrawn face amount of
outstanding Letters of Credit issued pursuant to Section 2.10 exceed the
Borrowing Base, the Borrower shall make, within one (1) Business Day after
the Borrower learns of such excess and whether or not the Agent has given
notice to such effect, a mandatory prepayment of Revolving Credit Loans
equal to the excess of the outstanding principal balance over the Borrowing
Base, together with accrued interest on such Loans."
<PAGE>
2.6 REPRESENTATIONS AND WARRANTIES. A new Section 6.1.26 (Year 2000)
is hereby added to Section 6 of the Credit Agreement to follow immediately after
Section 6.1.25 (Senior Debt Status) to read as follows:
"6.1.26 YEAR 2000.
The Borrower and its Subsidiaries have reviewed the
areas within their business and operations which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the risk that certain computer applications used by the
Borrower or its Subsidiaries (or any of their respective material
suppliers, customers or vendors) may be unable to recognize and perform
properly date-sensitive functions involving dates prior to and after
December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem will not
result in any Material Adverse Change.
2.7 AFFIRMATIVE COVENANTS--VISITATION. Section 8.1.6 (Visitation
Rights) is hereby amended and restated to read as set forth below.
"8.1.6 VISITATION RIGHTS.
Each Loan Party shall, and shall cause each of its
Subsidiaries to, permit any of the officers or authorized employees or
representatives of the Agent or any of the Banks to visit and inspect any
of its properties and to examine and make excerpts from its books and
records and discuss its business affairs, finances and accounts with its
officers, all in such detail and at such times and as often as any of the
Banks may reasonably request, PROVIDED that each Bank shall provide the
Borrower and the Agent with reasonable notice prior to any visit or
inspection. The Borrower shall reimburse (i) the Agent for reasonable
expenses associated with up to two audits in each year prior to an Event of
Default and prior to the making of an Audit Request (as defined below), and
(ii) the Agent for more than two audits and the Banks for audits if either
an Event of Default exists and is continuing or the Required Banks request
that such audits be undertaken. In the event any Bank desires to conduct an
audit of any Loan Party, such Bank shall make a reasonable effort to
conduct such audit contemporaneously with any audit to be performed by the
Agent."
2.8 NEGATIVE COVENANTS--INDEBTEDNESS. Clause (v) of Section 8.2.1
(Indebtedness) is hereby amended and restated to read as set forth below.
"(v) Indebtedness of a Loan Party to Lone Star Technologies
provided that
(a) such Indebtedness shall be subordinated in
accordance with the provisions of Section 8.1.12 [Subordination of
Intercompany Loans];
(b) no Potential Default or Event of Default shall
exist immediately prior to and after giving effect to the incurrence of
such Indebtedness; and
(c) the Borrower shall (A) if such Indebtedness is
incurred before March 31, 2000, demonstrate that it shall be in compliance
with the covenant
<PAGE>
contained in Section 8.2.21 [Maximum Total Liabilities to Consolidated
Tangible Net Worth] after giving effect to such Indebtedness, and (B) if
such Indebtedness is incurred on or after March 31, 2000, demonstrate that
it shall be in compliance with the covenant contained in Section 8.2.16
[Maximum Leverage Ratio], provided that (i) Borrower shall compute the
numerator of such Leverage Ratio (Indebtedness) as of the date on which
Borrower incurs such Indebtedness and the denominator of Leverage Ratio as
of the four quarters ending on the last day of the quarter preceding such
date of incurrence. Borrower shall deliver to the Agent and the Banks at
least five (5) Business Days prior to the date on which Borrower incurs
such Indebtedness a certificate in the form of EXHIBIT 8.2.5 evidencing
such compliance; and"
2.9 NEGATIVE COVENANTS--DIVIDENDS AND ACQUISITIONS. Sections 8.2.5
(Dividends and Related Distributions) and 8.2.6 (Liquidations, Mergers, etc.)
are hereby amended and restated to read as set forth below.
"8.2.5 DIVIDENDS AND RELATED DISTRIBUTIONS.
Except as provided in this Section 8.2.5 below,
each of the Loan Parties shall not, and shall not permit any of its
Subsidiaries to:
(A) make or pay, or agree to become or remain
liable to make or pay, any dividend or other distribution of any nature
(whether in cash, property, securities or otherwise) on account of or in
respect of its shares of capital stock, partnership interests or limited
liability company interests or make any payments on account of the
purchase, redemption, retirement or acquisition of its shares of capital
stock (or warrants, options or rights therefor), partnership interests or
limited liability company interests, or
(B) make or pay any amounts, whether principal,
interest or otherwise, on or in respect of loans or other obligations of a
Loan Party to Lone Star Technologies or otherwise make payments, transfer
assets or pay or provide any consideration (including incurring or assuming
debt or other obligations) to Lone Star Technologies or any Affiliates of
Lone Star Technologies other than the Loan Parties.
Notwithstanding the preceding sentence, the Loan
Parties may
(i) make regularly scheduled payments of
principal or interest under the Slab Financing Arrangement provided that no
Potential Default or Event of Default shall exist immediately prior to and
after giving effect to such payment; or
(i) pay dividends or make other distributions or
payments to another Loan Party, or
(ii) pay a dividend or make a payment on
Indebtedness incurred in accordance with Section 8.2.1(v) to Lone Star
Technologies, provided that
(a) no Potential Default or Event of Default
shall exist immediately prior to and after giving effect to such dividend;
<PAGE>
(b) the Borrower shall demonstrate that it
shall be in compliance with the covenants contained in the sections listed
in the grid on Exhibit 8.2 hereof computed as of the dates and subject to
the adjustments set forth in such grid. Borrower shall deliver to the Agent
and the Banks at least five (5) Business Days prior to the date on which
Borrower pays such dividend (the "Dividend Payment Date") a certificate in
the form of EXHIBIT 8.2.5 evidencing such compliance.
(iii) make reimbursements to Lone Star
Technologies for costs and expenses, including payroll expenses for
employees of Lone Star Technologies, incurred by Lone Star Technologies
provided that the aggregate amount per year shall not exceed $4,000,000 and
provided that one of the following ((A), (B) or (C) below) is true:
(A) If Lone Star Technologies has not formed
or acquired any Subsidiaries (each an "Affiliate Subsidiary") other than
the Borrower and the Loan Parties, and is not undertaking to form or
acquire, or investigating the formation or acquisition of, an Affiliate
Subsidiary, then all such costs and expenses incurred shall be for the
benefit of the Loan Parties, or
(B) If Lone Star Technologies has not formed
or acquired any Affiliate Subsidiary but is undertaking to form or acquire,
or investigating the formation or acquisition of, an Affiliate Subsidiary,
then all such costs and expenses shall either be for the benefit of the
Loan Parties or for such undertaking or investigation and for no other
purpose (including the making of a dividend to the shareholders of Lone
Star Technologies) and shall be allocated to the Loan Parties and to such
undertaking or investigation in a reasonable and customary manner, or
(C) if Lone Star Technologies has formed or
acquired any Affiliate Subsidiaries, then Lone Star Technologies may
allocate such costs and expenses between such Affiliate Subsidiaries and
the Loan Parties pursuant to a cost sharing agreement provided that
(1) such agreement is reasonable as
determined by the Agent prior to such time as such agreement is entered
into, and
(2) all such costs and expenses so incurred
and allocated to the Loan Parties and the Affiliate Subsidiaries shall be
for the benefit of the Loan Parties or such Affiliate Subsidiaries and for
no other purpose.
(iv) redeem by cash payment the Borrower's
Preferred Stock (including cash dividends payable on such Preferred Stock
that are accrued but not paid on the date of such redemption), provided
that:
(a) no Potential Default or Event of Default
shall exist immediately prior to and after giving effect to such
redemption;
(b) the Borrower shall demonstrate that it
shall be in compliance with the covenants contained in the sections listed
in the grid on Exhibit 8.2
<PAGE>
computed as of the dates and subject to the adjustments set forth in such
grid. Borrower shall deliver at least five (5) Business Days prior to the
date on which Borrower makes such redemption payment (the "Redemption
Payment Date") a certificate in the form of EXHIBIT 8.2.5 evidencing such
compliance.
(v) pay dividends in the form of Borrower's
common stock or the Borrower's Preferred Stock.
8.2.6 LIQUIDATIONS, MERGERS, CONSOLIDATIONS, ACQUISITIONS.
Each of the Loan Parties shall not, and shall not
permit any of its Subsidiaries to, dissolve, liquidate or wind-up its
affairs, or become a party to any merger or consolidation, or (except as
provided under Section 8.2.7) acquire by purchase, lease or otherwise all
or substantially all of the assets or capital stock of any other Person,
PROVIDED that
(1) any Loan Party or Subsidiary other than the
Borrower may consolidate or merge into or be dissolved into the Borrower or
another Loan Party which is wholly-owned by one or more of the other Loan
Parties, and
(2) any Loan Party may acquire, whether by
purchase or by merger, whether accounted for as a purchase or a pooling or
otherwise (A) ownership interests of another Person or (B) substantially
all of the assets of another Person or of a business or division of another
Person (each a "Permitted Acquisition"), PROVIDED that each of the
following requirements is met:
(i) if the Loan Parties are acquiring the
ownership interests in such Person, such interest shall include a majority
of each class of voting securities and the power to elect a majority of the
directors or other equivalent governing individuals with respect to such
Person;
(ii) if the Loan Parties are acquiring the
ownership interests in such Person, such Person shall execute a Guarantor
Joinder and join this Agreement as a Guarantor pursuant to Section 11.18
[Joinder of Guarantors] on or before the date of such Permitted
Acquisition;
(iii) the Loan Parties, such Person and its
owners, as applicable, shall grant Liens in the assets of or acquired from
and stock or other ownership interests in such Person and otherwise comply
with Section 11.18 [Joinder of Guarantors] on or before the date of such
Permitted Acquisition;
(iv) the board of directors or other
equivalent governing body of such Person shall have approved such Permitted
Acquisition and, if the Loan Parties shall use any portion of the Loans to
fund such Permitted Acquisition, the Loan Parties also shall have delivered
to the Banks written evidence of the approval of the board of directors (or
equivalent body) of such Person for such Permitted Acquisition;
(v) the business acquired, or the business
conducted by the Person whose ownership interests are being acquired, as
applicable, shall be substantially
<PAGE>
the same as one or more line or lines of business conducted by the Loan
Parties and shall comply with Section 8.2.10 [Continuation of or Change in
Business], EXCEPT that the Loan Parties may make an acquisition of assets
or stock of a Person in another line of business provided that total
Consideration paid or incurred in connection therewith does not exceed
$5,000,000 (the "Permitted Other Line of Business Acquisition");
(vi) no Potential Default or Event of Default
shall exist immediately prior to and after giving effect to such Permitted
Acquisition;
(vii) the Borrower shall demonstrate that it
shall be in compliance with the covenants contained in the sections listed
in the grid attached to as Exhibit 8.2 as of the dates and subject to the
adjustments set forth in such grid. Borrower shall deliver at least five
(5) Business Days prior to the date on which Borrower makes such Permitted
Acquisition payment (the "Acquisition Date") a certificate in the form of
EXHIBIT 8.2.6 evidencing such compliance.
(viii) the Loan Parties shall deliver to the
Agent at least five (5) Business Days before such Permitted Acquisition
then current drafts (with the executed versions to be delivered promptly
after their execution) of any agreements entered into or proposed to be
entered into by such Loan Parties in connection with such Permitted
Acquisition and shall deliver to the Agent such other information about
such Person or its assets as any Loan Party may reasonably require.
2.10 NEGATIVE COVENANTS--EXISTING FINANCIAL COVENANTS. Sections 8.2.15
(Minimum Interest Coverage Ratio) through 8.2.18 (Minimum Working Capital) are
hereby amended and restated to read as set forth below.
"8.2.15 MINIMUM INTEREST COVERAGE RATIO.
The Loan Parties shall not permit the Interest
Coverage Ratio (For Covenants), calculated as of the end of the fiscal
quarter ending March 31, 2000, and at the end of each fiscal quarter
thereafter, for the period of four (4) fiscal quarters then ended, to be
less than 4.0 to 1.0.
8.2.16 MAXIMUM LEVERAGE RATIO.
The Loan Parties shall not permit the Leverage
Ratio to exceed 3.0 to 1.0 at the end of the fiscal quarter ending March
31, 2000, and at the end of each fiscal quarter thereafter.
8.2.17 MINIMUM TANGIBLE NET WORTH.
The Borrower shall not at any time on or after
January 1, 2000 permit Consolidated Tangible Net Worth to be less than Base
Net Worth.
8.2.18 MINIMUM WORKING CAPITAL.
<PAGE>
The Loan Parties shall not at any time on or after
March 31, 2000 permit the difference between the amounts in the following
clauses (i) and (ii) to be less than $75,000,000: (i) consolidated current
assets (excluding cash and marketable securities to the extent that the
amount thereof does not exceed the amount of the Revolving Credit Loans
outstanding at such time) of the Borrower and its Subsidiaries and (ii)
consolidated current liabilities of the Borrower and its Subsidiaries
(excluding from current liabilities the amount of the Revolving Credit
Loans outstanding, whether or not normally required to be included or
excluded under GAAP)."
2.11 NEGATIVE COVENANTS--NEW FINANCIAL COVENANTS. New Sections 8.2.21
(Maximum Total Liabilities to Consolidated Tangible Net Worth) through 8.2.22
(Minimum EBITDA) are hereby added to Section 8 of the Credit Agreement at the
end thereof and immediately following the text of Section 8.2.20 (Slab Financing
Agreement) to read as follows:
"8.2.21 MAXIMUM TOTAL LIABILITIES TO CONSOLIDATED TANGIBLE
NET WORTH.
The Loan Parties shall not permit the ratio of
Total Liabilities to Consolidated Tangible Net Worth, calculated as of the
end of each fiscal quarter beginning with the fiscal quarter ending
December 31, 1998 and ending with the fiscal quarter ending December 31,
1999, to be greater than 2.0 to 1.0.
"8.2.22 MINIMUM EBITDA.
The Loan Parties shall not permit the EBITDA of
the Loan Parties and their Subsidiaries to be less than the amount set
forth in the grid below as of the dates set forth in such grid for the
periods set forth in such grid.
<TABLE>
<CAPTION>
MINIMUM PERMITTED
PERIODS INCLUDED IN EBITDA (NEGATIVE
DATE CALCULATION NUMBERS IN BRACKETS)
<S> <C> <C>
12-31-98 Four quarters then ended [$9,759,000]
3-31-99 One quarter then ended [$1,000,000]
6-30-99 Two quarters then ended $2,735,000
9-30-99 Three quarters then $10,314,000
ended
12-31-99 Four quarters then ended $21,406,000
</TABLE>
<PAGE>
2.12 FIRST AMENDMENT FEE. A new Section 8.2.23 (First Amendment Fee)
is hereby added to Section 8 of the Credit Agreement, immediately following the
text of new Section 8.2.22, to read as follows:
"The Borrower shall pay to the Agent for the benefit of
the banks a fee in the amount of $250,000 on or before 12:00 pm (Noon) on
January 4, 1999."
2.13 REPORTING REQUIREMENTS--MONTHLY FINANCIAL STATEMENTS. A new
Section 8.3.1A is hereby added to Section 8.3 of the Credit Agreement at the
beginning thereof and immediately preceding the text of Section 8.3.1 (Quarterly
Financial Statements) to read as follows:
"8.3.1A MONTHLY FINANCIAL STATEMENTS.
As soon as available and in any event within
fifteen (15) calendar days after the end of each of month in each fiscal
year, financial statements of the Borrower, consisting of a consolidating
and consolidated balance sheet as of the end of such month and related
consolidating and consolidated statements of income, stockholders' equity
and cash flows for the month then ended and the fiscal year through that
date, all in reasonable detail and certified (subject to normal year-end
audit adjustments) by the Chief Executive Officer, President or Chief
Financial Officer of the Borrower as having been prepared in accordance
with GAAP, consistently applied, and setting forth in comparative form the
respective financial statements for the corresponding date and period in
the previous fiscal year.
2.14 REPORTING REQUIREMENTS--WEEKLY BORROWING BASE CERTIFICATES, ETC.
A new Section 8.3.4A is hereby added to Section 8.3 of the Credit Agreement
immediately preceding the text of Section 8.3.4 (Notice of Default) to read as
follows:
"8.3.4A WEEKLY BORROWING BASE CERTIFICATES; MONTHLY SCHEDULES
OF ACCOUNTS, INVENTORY AND PAYABLES.
(i) On or before 10:00 am on the second Business Day
of each week, a Borrowing Base Certificate (the "Borrowing Base
Certificate") as of the end of the immediately preceding week in the form
of EXHIBIT 8.3.4A hereto, appropriately completed, executed and delivered
by an Authorized Officer,
(ii) As soon as available by the fifteenth calendar day
of each month a Schedule of Accounts and Schedule of Inventory as of the
end of the immediately preceding month.
(iii) Upon request by the Agent any of the following
reports: a detailed sales register, a cash receipts journal or a purchase
journal showing sales, receipts and purchases for the preceding month or a
Schedule of Payables as of the end of such month"
<PAGE>
2.15 REPORTING REQUIREMENTS--BUDGET AND PROJECTIONS. Section 8.3.7
(Budgets, Forecasts, Other Reports and Information) is hereby amended and
restated to read as follows:
"8.3.7 BUDGETS, FORECASTS, OTHER REPORTS AND INFORMATION.
8.3.7.1 On or before January 15, 1999, the
annual budget and operating projections (showing projections on a month by
month basis) for the 1999 fiscal year
8.3.7.2 Promptly upon their becoming available
to the Borrower:
(i) the annual budget and any forecasts or
projections of the Borrower for years after 1999, to be supplied prior to
commencement of the fiscal year to which any of the foregoing may be
applicable,
(ii) any press releases relating to the
Borrower or any other Loan Party;
(iii) any management letters submitted to the
Borrower by independent accountants in connection with any annual, interim
or special audit,
(iv) any reports, notices or proxy statements
generally distributed by Lone Star Technologies to its stockholders on a
date no later than the date supplied to such stockholders,
(v) regular or periodic reports, including
Forms 10-K, 10-Q and 8-K, registration statements and prospectuses, filed
by Lone Star Technologies with the Securities and Exchange Commission,
(vi) a copy of any final order or judgment in
any proceeding to which the Borrower or any of its Subsidiaries is a party
issued by any Official Body, and
(vii) such other reports and information as
any of the Banks may from time to time reasonably request."
2.16 EXISTING SCHEDULES--CHANGE IN PRICING. Schedule 1.1(A) is hereby
amended and restated as set forth on Schedule 1.1(A) hereto and the Applicable
Margins related to interest rates Commitment Fees set forth on such Schedule
shall go into effect on the effective date of this Amendment.
2.17 NEW SCHEDULES. The following new Schedules are hereby added to
the Credit Agreement in the forms attached hereto:
Schedule 1.1(Q)(1) - Qualified Accounts
Schedule 1.1(Q)(2) - Qualified Inventory
<PAGE>
2.18 EXISTING EXHIBITS TO CREDIT AGREEMENT. The following exhibits to
the Credit Agreement are hereby amended and restated to read in the forms
attached hereto:
Exhibit 8.2.5 - Dividend, Preferred Stock Redemption And
Intercompany Indebtedness Compliance
Certificate
Exhibit 8.2.6 - Acquisition Compliance Certificate
Exhibit 8.3.3 - Quarterly Compliance Certificate
2.19 NEW EXHIBITS TO CREDIT AGREEMENT. The following new exhibits are
hereby added to the Credit Agreement in the forms attached hereto:
Exhibit 8.2 - Covenants To Be Tested When Borrower Pays A
Dividend Or Redeems Its Stock Or Makes A
Permitted Acquisition
Exhibit 8.3.4A - Borrowing Base Certificate
3. AMENDMENT TO INTERCOMPANY SUBORDINATION AGREEMENT. Exhibit A to the
Intercompany Subordination Agreement between the Agent and Lone Star
Technologies is hereby amended and restated to read as set forth on Exhibit A
hereto. Lone Star Technologies joins this Amendment for the purpose of
confirming and agreeing to such amendment.
4. REPRESENTATIONS AND WARRANTIES. The Loan Parties hereby represent and
warrant to Agent and to the Bank as follows:
4.1 The representations and warranties of Borrower contained in the
Credit Agreement are true and correct on and as of the date hereof with the same
force and effect as though made by Borrower on such date, except to the extent
that any such representation or warranty expressly relates solely to a previous
date; and
4.2 The Borrower is in compliance with all terms, conditions,
provisions, and covenants contained in the Credit Agreement and the other Loan
Documents and the execution, delivery, and performance of this Amendment have
been duly authorized by all necessary corporate action, require no governmental
approval, and will neither contravene, conflict with, nor result in the breach
of any law, charter, articles, or certificate of incorporation, bylaws, or
agreement governing or binding upon Borrower or any of its property; and, no
Event of Default or Potential Default has occurred and is continuing or would
result from the making of this Amendment.
<PAGE>
5. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective on
the date set forth above subject to the satisfaction of each of the following
conditions precedent:
5.1 OFFICER'S CERTIFICATE.
There shall be delivered to the Agent for the benefit of
each Bank a certificate of each of the Loan Parties, dated the Closing Date and
signed by the Chief Executive Officer, President or Chief Financial Officer of
each of the Loan Parties, to each such effect.
5.2 SECRETARY'S CERTIFICATE.
There shall be delivered to the Agent for the benefit of
each Bank a certificate dated the Closing Date and signed by the Secretary or an
Assistant Secretary of each of the Loan Parties, certifying as appropriate as
to:
(i) the directors' resolutions or similar action taken
by each Loan Party in connection with this Amendment; and
(ii) the names of the officer or officers authorized to
sign this Amendment and the true signatures of such officer or officers and
specifying the Authorized Officers permitted to act on behalf of each Loan Party
for purposes of this Amendment and the true signatures of such officers, on
which the Agent and each Bank may conclusively rely.
5.3 DELIVERY OF BORROWING BASE CERTIFICATE.
The Borrower shall deliver a Borrowing Base Certificate
prepared as of the date of this Amendment in substantially the form of EXHIBIT
8.3.4A, showing that the Revolving Facility Usage as of such date does not
exceed the Borrowing Base as of such date.
5.4 OPINION OF COUNSEL.
There shall be delivered to the Agent for the benefit of
each Bank written opinions of counsel for the Loan Parties and Lone Star
Technologies, dated the date hereof and in form and substance satisfactory to
the Agent and its counsel:
(i) as to the matters set forth in EXHIBIT 5.4; and
(ii) as to such other matters incident to the
transactions contemplated herein as the Agent may reasonably request.
<PAGE>
5.5 PAYMENT OF FEES.
The Borrower shall have paid or caused to be paid to the
Agent for itself and for the account of the Banks to the extent not previously
paid all fees accrued through the Closing Date and the costs and expenses for
which the Agent and the Banks are entitled to be reimbursed and submitted bills
for reimbursement, if applicable.
<PAGE>
6. AMENDMENT. The Credit Agreement and other Loan Documents referred to
herein and certain of the exhibits and schedules thereto are hereby amended in
accordance with the terms hereof and any reference to the Credit Agreement or
other Loan Documents in any document, instrument, or agreement shall hereafter
mean and include the Credit Agreement or such Loan Document, including such
schedules and exhibits, as amended hereby. In the event of irreconcilable
inconsistency between the terms or provisions hereof and the terms or provisions
of the Credit Agreement or such Loan Document, including such schedules and
exhibits, the terms and provisions hereof shall control.
7. FORCE AND EFFECT. The Borrower reconfirms, restates, and ratifies the
Credit Agreement and all other documents executed in connection therewith except
to the extent any such documents are expressly modified by this Amendment and
Borrower confirms that all such documents have remained in full force and effect
since the date of their execution.
8. GOVERNING LAW. This Amendment shall be deemed to be a contract under
the laws of the Commonwealth of Pennsylvania and for all purposes shall be
governed by and construed and enforced in accordance with the internal laws of
the Commonwealth of Pennsylvania without regard to its conflict of laws
principles.
9. COUNTERPARTS; EFFECTIVE DATE. This Amendment may be signed in any
number of counterparts each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Amendment is
effective on the date first written above.
[SIGNATURES BEGIN ON NEXT PAGE]
<PAGE>
[SIGNATURE PAGE 1 OF 2 TO FIRST AMENDMENT]
IN WITNESS WHEREOF and intending to be legally bound hereby, the parties
hereto have executed this Amendment as of the date first above written.
LONE STAR STEEL COMPANY
By: /s/ R.W. Arp
------------------------------------
Title: Executive Vice President
---------------------------------
PNC BANK, NATIONAL ASSOCIATION, individually
and as Agent
By: /s/ Lynn Koncz
------------------------------------
Title: Vice President
---------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, N.A., individually and as
Co-Agent
By: /s/ June Courtney
------------------------------------
Title: Vice President
---------------------------------
THE SANWA BANK, LTD.
By: /s/ Lawrence Murphy
------------------------------------
Title: Senior Vice President
---------------------------------
BNY FINANCIAL CORPORATION
By: /s/ Frank Imperato
------------------------------------
Title: Vice President
---------------------------------
<PAGE>
[SIGNATURE PAGE 2 OF 2 TO FIRST AMENDMENT]
GUARANTORS:
LONE STAR LOGISTICS, INC.
By: /s/ R.W. Arp
------------------------------------
Title: Treasurer
---------------------------------
T & N LONE STAR WAREHOUSE CO.
By: /s/ R.W. Arp
------------------------------------
Title: Treasurer
---------------------------------
TEXAS & NORTHERN RAILWAY COMPANY
By: /s/ R.W. Arp
------------------------------------
Title: Treasurer
---------------------------------
JOINED BY LONE STAR TECHNOLOGIES, INC. FOR
THE LIMITED PURPOSE OF CONFIRMING THE MATTERS
ADDRESSED IN SECTION 3 (AMENDMENT TO
INTERCOMPANY SUBORDINATION AGREEMENT) OF THIS
AMENDMENT:
LONE STAR TECHNOLOGIES, INC.
By: /s/ Rhys J. Best
------------------------------------
Title: President
---------------------------------
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
Schedules
- ---------
Schedule 1.1(A) - Pricing Grid
Schedule 1.1(Q)(1) - Qualified Accounts
Schedule 1.1(Q)(2) - Qualified Inventory
Exhibits
- --------
Exhibit 5.4 - Opinion of Counsel
Exhibit 8.2 - Covenants To Be Tested When Borrower Pays A Dividend Or
Redeems Its Stock Or Makes A Permitted Acquisition
Exhibit 8.2.5 - Dividend, Preferred Stock Redemption And Intercompany
Indebtedness Compliance Certificate
Exhibit 8.2.6 - Acquisition Compliance Certificate
Exhibit 8.3.3 - Quarterly Compliance Certificate
Exhibit 8.3.4A - Borrowing Base Certificate
Exhibit A to Slab
Financing Agr - List of Agreements
All of the Schedules and the first two Exhibits follow this List. The other
Exhibits are not filed with this First Amendment to Credit Agreement.
Registrant agrees to furnish supplementally a copy of any omitted Exhibit to the
Commission upon request.
<PAGE>
SCHEDULE 1.1(A)
PRICING GRID-
VARIABLE PRICING AND FEES BASED ON THE INTEREST COVERAGE RATIO
(FOR PRICING)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INTEREST COVERAGE RATIO COMMITMENT BASE RATE EURO-RATE
LEVEL (FOR PRICING) FEE SPREAD SPREAD
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Greater than or equal to
I 2.5 to 1.0 .25% 0 1.50%
- -------------------------------------------------------------------------------
Greater than or equal to
2.0 to 1.0 but less than
II 2.5 to 1.0 .25% 0 2.00%
- -------------------------------------------------------------------------------
Greater than or equal to
1.5 to 1.0 but less than
III 2.0 to 1.0 .375% .25 2.25%
- -------------------------------------------------------------------------------
Greater than or equal to
1.0 to 1.0 but less than
IV 1.5 to 1.0 .375% .50 2.50%
- -------------------------------------------------------------------------------
V Less than 1.0 to 1.0 .50% .75 2.75%
- -------------------------------------------------------------------------------
</TABLE>
For purposes of determining the Applicable Margin and the Applicable Commitment
Fee Rate:
(a) The Applicable Margin and the Applicable Commitment Fee Rate each
shall be the rate corresponding to Level V in the grid above on and after the
First Amendment Closing Date and until it is modified pursuant to clause (b)
below.
(b) The Applicable Margin and the Applicable Commitment Fee Rate shall be
recomputed as of the end of each fiscal quarter ending on or after December 31,
1999 based on the Interest Coverage Ratio (For Pricing) as of such quarter end.
Any increase or decrease in the Applicable Margin or the Applicable Commitment
Fee Rate computed as of a quarter end shall be effective on the date on which
the Compliance Certificate evidencing such computation is due to be delivered
under Section 8.3.3.
<PAGE>
SCHEDULE 1.1(Q)(1)
QUALIFIED ACCOUNTS
Upon delivery to the Agent of each Schedule of Accounts, the Agent shall
make a determination, in its sole discretion, as to which Accounts listed
thereon shall be deemed Qualified Accounts. An Account shall not be considered a
Qualified Account unless the Agent determines, in its sole discretion, that such
Account has met the following minimum requirements:
(i) the Account represents a complete bona fide transaction for goods
sold and delivered or services rendered (but excluding any amounts in the
nature of a service charge added to the amount due on an invoice because
the invoice has not been paid when due) which requires no further act under
any circumstances on the part of the applicable Loan Party to make such
Account payable by the Account Debtor; the Account arises from an
arm's-length transaction in the ordinary course of such Loan Party's
business between such Loan Party and an Account Debtor which is not an
Affiliate of any Loan Party or an officer, stockholder or employee of any
Loan Party or any Affiliate of any Loan Party, or a member of the family of
an officer, stockholder or employee of any Loan Party or any Affiliate of
any Loan Party;
(ii) the Account shall not (a) be or have been unpaid more than ninety
(90) days from the invoice date, (b) be delinquent more than sixty (60)
days, or (c) be payable by an Account Debtor (1) more than 50% of whose
Accounts have remained unpaid for more than ninety (90) days from the
invoice date or are delinquent more than sixty (60) days, or (2) whose
Accounts constitute, in the Agent's determination, an unduly high
percentage of the aggregate amount of all outstanding Accounts;
(iii) the goods the sale of which gave rise to the Account were
shipped or delivered or provided to the Account Debtor on an absolute sale
basis and not on a bill and hold sale basis, a consignment sale basis, a
guaranteed sale basis, a sale or return basis, or on the basis of any other
similar understanding, and no part of such goods has been returned or
rejected;
(iv) the Account is not evidenced by chattel paper or an instrument of
any kind;
(v) the Account Debtor with respect to the Account (a) is solvent,
(b) is not the subject of any bankruptcy or insolvency proceedings of any
kind or of any other proceeding or action, threatened or pending, which
might have a materially adverse effect on its business, and (c) is not, in
the sole discretion of the Agent, deemed ineligible for credit for other
reasons (including, without limitation, unsatisfactory past experiences of
any Loan Party or any of the Banks with the Account Debtor or
unsatisfactory reputation of the Account Debtor);
(vi) the Account Debtor is not located outside Canada or the
continental United States of America, provided that if the Account Debtor
is located in Canada, the
<PAGE>
Account is supported by a letter of credit or FICA insurance deemed
adequate and acceptable by the Agent;
(vii) the Account Debtor is not the government of the United States of
America, or any department, agency or instrumentality thereof, or (b) if
the Account Debtor is an entity mentioned in clause (vii)(a), the Federal
Assignment of Claims Act (or applicable similar legislation) has been fully
complied with so as to validly perfect the Banks' Prior Security Interest
to the Agent's satisfaction;
(viii) the Account is a valid, binding and legally enforceable
obligation of the Account Debtor with respect thereto and is not subject to
any dispute, condition, contingency, offset, recoupment, reduction, claim
for credit, allowance, adjustment, counterclaim or defense on the part of
such Account Debtor, and no facts exist which may provide a basis for any
of the foregoing in the present or future;
(ix) the Account is subject to the Agent's and the Banks' Prior
Security Interest and is not subject to any other Lien, claim, encumbrance
or security interest whatsoever;
(x) the Account is evidenced by an invoice or other documentation and
arises from a contract which is in form and substance satisfactory to the
Agent;
(xi) the applicable Loan Party has observed and complied with all laws
of the state in which the Account Debtor or the Account is located which,
if not observed and complied with, would deny to such Loan Party access to
the courts of such state;
(xii) the Account is not subject to any provision prohibiting its
assignment or requiring notice of or consent to such assignment;
(xiii) the goods giving rise to the Account were not, at the time of
sale thereof, subject to any Lien or encumbrance except the Agent and the
Banks' Prior Security Interest;
(xiv) the Account is payable in freely transferable United States
Dollars; and
(xv) the Account is not, or should not be, disqualified for any other
reason generally accepted in the commercial finance business.
In addition to the foregoing requirements, Accounts of any Account Debtor which
are otherwise Qualified Accounts shall be reduced to the extent of any accounts
payable (including, without limitation, the Agent's estimate of any contingent
liabilities) by any Loan Party to such Account Debtor ("Contras"); provided that
the Agent, in its sole discretion, may determine that none of the Accounts in
respect to such Account Debtor shall be Qualified Accounts in the event that
there exists an unreasonably large amount of payables owing to such Account
Debtor.]
Notwithstanding the qualification standards specified above, upon prior notice
to the Borrower, the Agent may at any time or from time to time revise such
qualification standards or, in its sole discretion, determine that one or more
Accounts are not eligible to be Qualified Accounts.
<PAGE>
SCHEDULE 1.1(Q)(2)
QUALIFIED INVENTORY
Upon delivery to the Agent of each Schedule of Inventory, the Agent shall
make a determination, in its sole discretion, as to which Inventory listed
thereon shall be deemed Qualified Inventory. Inventory shall not be considered
Qualified Inventory unless the Agent determines, in its sole discretion, that
such Inventory has met the following minimum requirements:
(i) the Inventory is either (a) finished goods; (b) raw materials
other than supplies; or (c) work-in-process; including coils, slab steel,
ingots, two-thread tubulars, but excluding in all cases any goods which
have been shipped, delivered, sold by, purchased by or provided to, a Loan
Party on a bill and hold, consignment sale, guaranteed sale, or sale or
return basis, or any other similar basis or understanding other than an
absolute sale;
(ii) the Inventory is new, of good and merchantable quality, and
represents no more than a twelve (12) month supply of such finished goods
or raw materials;
(iii) the Inventory is located on premises listed on Schedule A to the
Security Agreement and, with respect to inventory locations at facilities
leased to such Loan Party Borrower, the Agent has received a landlord's
waiver in favor of the Agent in a form acceptable to the Agent, or is
Inventory which is in transit and is so identified on the relevant Schedule
of Inventory;
(iv) the Inventory is not stored with a bailee, warehouseman,
consignee or similar party unless the Agent has given its prior written
consent and such Loan Party has caused such bailee, warehouseman, consignee
or similar party to issue and deliver to the Agent, in form and substance
acceptable to the Agent, a bailee's, warehouseman's, or consignee's waiver
or similar documentation in a form reasonably acceptable to the Agent;
(v) the Inventory is subject to the Agent's and the Banks' Prior
Security Interest and is not subject to any other Lien;
(vi) the Inventory has not been manufactured in violation of any
federal minimum wage or overtime laws, including, without limitation, the
Fair Labor Standards Act, 29 U.S.C. Section 215(a)(1); and
(vii) the Inventory is not, and should not be, disqualified for any
other reason generally accepted in the commercial finance business.
Notwithstanding the qualification standards specified above, upon prior notice
to the Borrower, the Agent may at any time or from time to time revise such
qualification standards or, in its sole discretion, determine that certain
Inventory is not eligible to be Qualified Inventory.
<PAGE>
EXHIBIT 5.4
OPINION OF COUNSEL
Opinions addressing the following warranties in the Credit Agreement with
references to the Credit Agreement and Loan Documents deemed to apply to this
Amendment and the documents related thereto and the Credit Agreement as amended
by this Amendment:
6.1.1 Organization and Qualification.
6.1.2 Capitalization and Ownership.
6.1.3 Subsidiaries
6.1.4 Power and Authority
6.1.5 Validity and Binding Effect
6.1.6 No Conflict.
6.1.7 Litigation.
6.1.13 Consents and Approvals
6.1.19 Compliance with Laws
<PAGE>
EXHIBIT 8.2
COVENANTS TO BE TESTED WHEN BORROWER PAYS A DIVIDEND OR REDEEMS
ITS STOCK (SECTION 8.2.5) OR MAKES A PERMITTED
ACQUISITION (SECTION 8.2.6)
A. THE FOLLOWING GRID APPLIES IF THE DIVIDEND, REDEMPTION OR PERMITTED
ACQUISITION IS PAID OR MADE BEFORE MARCH 31, 2000.
<TABLE>
<CAPTION>
Covenant - Section Covenant - Title Date of Computation; Adjustments
- ------------------
<S> <C> <C>
Section 8.2.19 Maximum Total FOR ALL DIVIDENDS, REDEMPTIONS AND PERMITTED ACQUISITIONS:
Liabilities to Computed as of the Dividend Payment Date, Redemption Payment
Consolidated Tangible Date or Acquisition Date, as the case may be, after giving effect
Net Worth to any Indebtedness incurred and payments made on such date
Section 8.2.20 Minimum EBITDA FOR ALL DIVIDENDS, REDEMPTIONS AND PERMITTED ACQUISITIONS: Four
quarters ending on the quarter preceding the Dividend Payment Date,
Redemption Payment Date or Acquisition Date, as the case may be
Section 8.2.17 Minimum Tangible FOR DIVIDENDS, REDEMPTIONS AND PERMITTED
Net Worth ACQUISITIONS PAID OR MADE ON OR AFTER JANUARY 1, 2000:
Base Net Worth--computed as of the end of the quarter preceding
the date of the dividend, redemption or acquisition, as the case
may be but decreased by the amount of the redemption payment if
the payment is a redemption
Consolidated Tangible Net Worth--computed as of the end of the
quarter preceding the Dividend Payment Date, Redemption Payment
Date or Acquisition Date, but decreased by the amount of the
dividend or redemption payment or adjusted for transactions
relating to the acquisition, as the case may be.
</TABLE>
<PAGE>
B. THE FOLLOWING GRID APPLIES IF THE DIVIDEND, REDEMPTION OR
PERMITTED ACQUISITION IS PAID OR MADE ON OR AFTER MARCH 31, 2000.
<TABLE>
<CAPTION>
Covenant - Section Covenant - Title Date of Computation; Adjustments
- ------------------
<S> <C> <C>
Section 8.2.15 Minimum Interest FOR DIVIDENDS: Four quarters ending on the
Coverage Ratio (For quarter preceding the Dividend Payment Date,
Covenants) except that the denominator (clause (ii) in the definition of
"Interest Coverage Ratio(For Covenants)") shall be increased by the
amount of such dividend.
FOR REDEMPTIONS: Four quarters ending on the quarter preceding the
Redemption Payment Date, except that the denominator (clause (ii)
in the definition of "Interest Coverage Ratio (For Covenants)")
shall be increased by the amount of such redemption. This covenant
is to be tested in connection with a redemption, only if the
Borrower shall pay accrued cash dividends in connection with such
redemption.
FOR PERMITTED ACQUISITIONS: This covenant is not to be tested in
connection with Permitted Acquisitions.
Section 8.2.16 Maximum Leverage FOR DIVIDENDS, REDEMPTIONS AND PERMITTED
Ratio ACQUISITIONS: Numerator (Indebtedness)--As of the Dividend Payment
Date, Redemption Payment Date or Acquisition Date, as the case
may be, after giving effect to any Indebtedness incurred on such
date
Denominator--Four quarters ending on the quarter preceding the
Dividend Payment Date, Redemption Payment Date or Acquisition Date,
as the case may be
Section 8.2.17 Minimum Tangible FOR DIVIDENDS, REDEMPTIONS AND PERMITTED
Net Worth ACQUISITIONS:
Base Net Worth--computed as of the end of the quarter preceding the
date of the dividend, redemption or acquisition, as the case may be
but decreased by the amount of the redemption payment if the
payment is a redemption
<PAGE>
Consolidated Tangible Net Worth--computed as of the end of the
quarter preceding the Dividend Payment Date, Redemption Payment
Date or Acquisition Date, but decreased by the amount of the
dividend or redemption payment or adjusted for transactions
relating to the acquisition, as the case may be.
Section 8.2.18 Minimum Working FOR DIVIDENDS, REDEMPTIONS AND PERMITTED
Capital ACQUISITIONS:
Computed as of the Dividend Payment Date
Redemption Payment Date or Acquisition
Date, as the case may be, in each case after
giving effect thereto
</TABLE>
<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. Lone Star Logistics, Inc.
B. Lone Star Steel International, Inc.
C. Lone Star Steel Sales Company
D. Rotac, Inc.
E. T & N Lone Star Warehouse Company
F. Texas & Northern Railway Company
<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 our
report dated January 22, 1999, except with respect to Note F as to which the
date is March 16, 1999, included in this Form 10-K. It should be noted that
we have not audited any financial statements of the company subsequent to
December 31, 1998 or performed any audit procedures subsequent to the date of
our report.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
March 24, 1999
<PAGE>
Exhibit 24
Page 1 of 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints RHYS J.
BEST, 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, 1998. 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 8th day of March, 1999.
/s/ Charles L. Blackburn
------------------------------------
Charles L. Blackburn
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
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 8th day of March, 1999.
/s/ Sharon E. Goodrich
------------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/02
<PAGE>
Exhibit 24
Page 2 of 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints RHYS J.
BEST, 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, 1998. 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 9th day of March, 1999.
/s/ Dean P. Guerin
------------------------------------
Dean P. Guerin
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
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 9th day of March, 1999.
/s/ Sharon E. Goodrich
------------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/02
<PAGE>
Exhibit 24
Page 3 of 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints RHYS J.
BEST, 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, 1998. 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 9th day of March, 1999.
/s/ Frederick B. Hegi, Jr.
------------------------------------
Frederick B. Hegi, Jr.
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
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 9th day of March, 1999.
/s/ Sharon E. Goodrich
------------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/02
<PAGE>
Exhibit 24
Page 4 of 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints RHYS J.
BEST, 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, 1998. 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 9th day of March, 1999.
/s/ James E. McCormick
------------------------------------
James E. McCormick
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
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 9th day of March, 1999.
/s/ Sharon E. Goodrich
------------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/02
<PAGE>
Exhibit 24
Page 5 of 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned hereby irrevocably constitutes and appoints RHYS J.
BEST, 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, 1998. 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 9th day of March, 1999.
/s/ Thomas M. Mercer, Jr.
------------------------------------
Thomas M. Mercer, Jr.
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
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 9th day of March, 1999.
/s/ Sharon E. Goodrich
------------------------------------
Notary Public, State of Texas
(SEAL)
My Commission Expires: 9/14/02
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 21
<SECURITIES> 3
<RECEIVABLES> 37
<ALLOWANCES> 1
<INVENTORY> 89
<CURRENT-ASSETS> 153
<PP&E> 319
<DEPRECIATION> 161
<TOTAL-ASSETS> 336
<CURRENT-LIABILITIES> 41
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 166
<TOTAL-LIABILITY-AND-EQUITY> 336
<SALES> 432
<TOTAL-REVENUES> 432
<CGS> 428
<TOTAL-COSTS> 428
<OTHER-EXPENSES> 35
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> (32)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32)
<DISCONTINUED> 0
<EXTRAORDINARY> 7
<CHANGES> 0
<NET-INCOME> (25)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
