-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PX9q/GYCxbNFSm47rWJTZRKZCXedCk3IC6VwX7VFKWONBZ/IV6oyNVYeYSvAA9gn vWI7LRYKGUKIZ2aOMw3ffw== 0000950123-99-001893.txt : 19990308 0000950123-99-001893.hdr.sgml : 19990308 ACCESSION NUMBER: 0000950123-99-001893 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONE STAR INDUSTRIES INC CENTRAL INDEX KEY: 0000060195 STANDARD INDUSTRIAL CLASSIFICATION: CEMENT, HYDRAULIC [3241] IRS NUMBER: 130982660 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06124 FILM NUMBER: 99558260 BUSINESS ADDRESS: STREET 1: 300 FIRST STAMFORD PL STREET 2: P O BOX 120014 CITY: STAMFORD STATE: CT ZIP: 06912 BUSINESS PHONE: 2039698600 MAIL ADDRESS: STREET 1: 300 FIRST STAMFORD PLACE STREET 2: P.O. BOX 120014 CITY: STAMFORD STATE: CT ZIP: 06912-0014 FORMER COMPANY: FORMER CONFORMED NAME: LONE STAR CEMENT CORP DATE OF NAME CHANGE: 19720404 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL CEMENT CORP DATE OF NAME CHANGE: 19710901 10-K405 1 LONE STAR INDUSTRIES, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-06124 LONE STAR INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE NO. 13-0982660 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 300 FIRST STAMFORD PLACE STAMFORD, CT 06912-0014 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 969-8600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH EACH CLASS REGISTERED ------------------- ------------------------------ Common Stock, par value $1.00 New York Stock Exchange per share Common Stock Purchase Rights New York Stock Exchange Common Stock Purchase Warrants 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 (or for such shorter period that the registrant was required to file such reports), 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. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant at March 1, 1999: approximately $601,938,000. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of Securities under a plan confirmed by a court. Yes [X] No [ ] The number of shares outstanding of each of the registrant's classes of common stock as of March 1, 1999: Common Stock, par value $1.00 per share, -- 20,159,413 shares. PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 13, 1999 ARE INCORPORATED IN PART III OF THIS REPORT. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 7 Item 4. Submission of Matters to a Vote of Security Holders......... 7 PART II Item 5. Market for the Registrant's Common Equity and Related 9 Stockholder Matters....................................... Item 6. Selected Financial Data..................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition 11 and Results of Operations................................. Item 7A. Quantitative and Qualitative Disclosures about Market 16 Risk...................................................... Item 8. Consolidated Financial Statements and Supplementary Data.... 17 Item 9. Changes in and Disagreements with Accountants on Accounting 39 and Financial Disclosure.................................. PART III Item 10. Directors and Executive Officers of the Registrant.......... 39 Item 11. Executive Compensation...................................... 39 Item 12. Security Ownership of Certain Beneficial Owners and 39 Management................................................ Item 13. Certain Relationships and Related Transactions.............. 39 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 40 8-K.......................................................
3 PART I ITEM 1. BUSINESS. THE COMPANY Lone Star is a cement and ready-mixed concrete company with operations in the midwestern and southern United States. Lone Star's cement operations consist of five portland cement plants in the Midwest and Southwest, a slag cement grinding facility in New Orleans and a 25% interest in Kosmos Cement Company, a partnership which owns and operates one portland cement plant in Kentucky and one in Pennsylvania ("Kosmos"). The Company's five wholly-owned portland cement plants produced approximately 4.0 million tons of cement during 1998, which approximates the rated capacity of the plants. In addition, the Company's New Orleans facility produced 237,600 tons of slag cement during 1998. The Company's ready-mixed concrete business owns or leases and operates several facilities in the Memphis, Tennessee area. In 1998, the Company had net sales of approximately $347.1 million. Lone Star Industries, Inc. was incorporated in 1919. In early 1994, the Company emerged from proceedings under Chapter 11 of the United States Bankruptcy Code. The Company's executive offices are located at 300 First Stamford Place, Stamford, Connecticut 06912, and its telephone number is (203) 969-8600. Unless the context otherwise requires, as used herein "Company" and "Lone Star" mean Lone Star Industries, Inc. together with its consolidated subsidiaries. CEMENT OPERATIONS Portland cement is the primary binding material used in the production of concrete. The principal raw materials used in the manufacture of cement are limestone or other calciferous materials, shale or clay, and sand. These raw materials are crushed, ground, mixed together and then introduced into a rotary kiln where they are heated to approximately 2700 degrees Fahrenheit. The resultant marble-sized intermediate material produced by this process is known as clinker. Clinker is then cooled, blended with a small amount of gypsum, and ground in a plant's finish mill to produce cement, a dry powder. Clinker generally is produced utilizing either of two basic methods, a "wet" or a "dry" process. In a wet process plant, raw materials are mixed with water to form a slurry which is fed into the kiln. This process has the advantage of greater ease in the handling and mixing of the raw materials, however additional heat, and therefore fuel, is required to evaporate the moisture before the raw materials can react to form clinker. The dry process, a newer more fuel efficient technology, excludes the addition of water into the process. Dry process plants are either pre-heater plants, in which recycled hot air is used to heat materials before they are fed into the kiln, or are precalciner plants, which have separate burners to accomplish a significant portion of the chemical reaction of the raw materials before they are fed into the kiln. The Company recently announced a planned expansion at its Greencastle, Indiana plant which will convert to a semi-dry manufacturing technology. This technology has certain features of both the wet and dry processes. While having somewhat higher fuel needs than traditional dry process plants, the capital expenditures required for the expansion will be lower than those required for a dry process. Whether a wet, dry or semi-dry method is utilized, the manufacture of cement is energy intensive, and the cost of such energy accounts for approximately one fourth of a cement plant's total manufacturing costs. Energy cost, and in particular coal, varies on a regional basis due in large part to transportation costs. In addition, the low value-to-weight ratio of cement and its constituent raw materials results in relatively high transportation costs, creating a largely regional business. As a result, proximity to sources of fuel and raw materials, as well as markets, are important aspects in the profitability of a cement plant. While subject to fluctuation and interruption resulting from adverse weather and other factors, distribution by water is generally the least expensive method of transporting cement. Lone Star's cement operations consist principally of the production of Type I portland cement at the Company's five owned cement plants and the distribution of that cement through the Company's 15 owned or leased distribution terminals. Other products manufactured at certain of these plants include Type III portland 4 cement, which is a high early strength cement required in certain applications, and specialty cements, such as masonry and oil well cement. Slag cement, a by-product of iron blast furnaces that may be utilized in certain instances in lieu of portland cement, is ground and distributed from the Company's New Orleans facility. The Company also purchases cement from both domestic and international sources for domestic resale. In addition, Lone Star owns a 25% interest in Kosmos, which owns and operates one cement plant in Kentucky and one in Pennsylvania. All of Lone Star's five portland cement plants are fully integrated from limestone mining through cement production, and the Company estimates that it has limestone reserves sufficient to permit operation of these plants at current levels of production for periods ranging from 30 to 100 years. Adequate supplies of other raw materials such as gypsum, shale, clay and sand are owned, leased or available for purchase by Lone Star. The Company believes that its plants have adequate sources from which to purchase power and fuel. The following table sets forth certain information regarding Lone Star's portland and slag cement plants and their markets.
TONS OF RATED ANNUAL PLANT LOCATION CEMENT CAPACITY PROCESS FUEL PRINCIPAL MARKET AREA - -------------- --------------- --------------- --------------------- --------------------- (IN THOUSANDS) PORTLAND CEMENT - ------------------------------- Cape Girardeau, Missouri....... 1,300 Dry/Precalciner Coal-Waste-Tires E. Missouri; Central and N.E. Arkansas; Mississippi; S. Louisiana; N. Alabama; Tennessee; N.W. Kentucky; S.W. Illinois Greencastle, Indiana........... 750* Wet* Coal-Waste Indianapolis and other areas of Indiana; S.E. Illinois; N. Central Kentucky Pryor, Oklahoma................ 725 Dry Coal-Coke-Natural Gas W. Arkansas; Oklahoma; Dallas, Texas; Kansas; W. Missouri Oglesby, Illinois.............. 600 Dry Coal-Coke-Tires Chicago and other areas of Northern and Central Illinois; S. Wisconsin Maryneal, Texas................ 520 Dry/Preheater Coal-Coke-Natural Gas W. Texas; Dallas, Texas; Eastern New Mexico Kosmos Cement Company: Kosmosdale, Kentucky......... 875** Dry/Preheater Coal-Oil Kentucky; S. Indiana; S. Ohio; W. Virginia Pittsburgh, Pennsylvania..... 400 Wet Coal W. Pennsylvania; W. Virginia; E. Ohio SLAG CEMENT - ------------------------------- New Orleans, Louisiana......... 600 Grinding Natural Gas S. Alabama; S.W. Facility Georgia; Louisiana; Mississippi; Dallas and Houston, Texas; Florida Panhandle
- --------------- * Capital projects have been announced to increase the rated production capacity of this plant by 600,000 short tons to 1.35 million short tons. Upon completion of this project, the plant will convert to a semi-dry manufacturing technology. ** Capital projects have been announced to increase the rated production capacity of this plant by 700,000 short tons to 1.575 million short tons. 2 5 Cape Girardeau Complex. Lone Star's Cape Girardeau, Missouri plant is located on the Mississippi River, and its related terminals are located along the Mississippi and certain of its tributaries. Approximately 80% of the plant's cement production is shipped up and down these rivers via 19 owned barges, enabling the plant to serve a relatively wide market. Trucks and rail are also available to transport product. The Cape Girardeau plant includes a modern dry/precalciner kiln and burns hazardous waste fuels. See "Business -- Environmental Regulation". The distribution terminals and warehouse supporting the Cape Girardeau plant are located in St. Louis, Missouri; Paducah, Kentucky; and Nashville, Knoxville and Memphis, Tennessee. In addition to its other customers, this complex supplies cement to Lone Star's ready-mixed concrete operations in Memphis, Tennessee. Greencastle Complex. Lone Star's Greencastle plant is located approximately 40 miles southwest of Indianapolis, Indiana and is the nearest cement plant to this market, providing a freight cost advantage. Product is transported by truck to Indianapolis and by truck or rail to other markets. A portion of the Greencastle plant's production is a high quality Type III portland cement which commands a premium price relative to Type I portland cement, the Company's primary product. The Company has announced a planned 600,000 short ton rated annual production capacity increase at this plant which will convert to a semi-dry manufacturing technology. This project is expected to come on line in the first half of 2000 and is expected to cost approximately $75.0 million, $45.0 million of which is expected to be spent in 1999. The Greencastle complex has distribution terminals located in Fort Wayne and Elkhart, Indiana; and has a warehousing and distribution arrangement in Itasca, Illinois. Pryor Complex. The Pryor plant is located approximately 50 miles northeast of Tulsa, Oklahoma and serves its markets by truck and rail. A portion of the plant's product is transported by barge. This plant produces both portland and oil well cement. The plant has relatively low power costs due to its proximity to two low-cost sources. The complex has distribution terminals located near Wichita and Kansas City, Kansas; near Oklahoma City, Oklahoma; and in Dallas, Texas. Oglesby Complex. The Oglesby plant is located approximately 100 miles from Chicago and serves that and other northern and central Illinois construction markets by truck and rail. The complex has a distribution terminal located in Milwaukee, Wisconsin. Maryneal Complex. The Maryneal plant produces both portland and oil well cement and serves the western Texas market by truck and rail. The complex has a distribution terminal located in Amarillo, Texas and also shares the use of the Dallas, Texas terminal with the Company's Pryor plant. Kosmos Cement Company. Lone Star owns a 25% interest in Kosmos, which owns and operates a cement plant in Kosmosdale, Kentucky and one in Pittsburgh, Pennsylvania. Southdown, Inc., a publicly-traded cement company, owns the remaining 75% interest and is responsible for managing day-to-day operations. All major decisions relating to Kosmos, however, require unanimous approval of its management committee which includes a Lone Star representative. Kosmos has announced a planned expansion of its Kentucky plant, which will add 700,000 short tons of rated production capacity at an estimated total cost of approximately $93.0 million, financed with capital contributions from the partners. The expansion is expected to come on line during the year 2000. New Orleans Facility. The New Orleans facility, located on a canal off the Gulf Intercoastal Waterway, consists of a slag cement grinding and storage facility with 600,000 tons of capacity, a distribution terminal used for receiving and storing cement from the Company's Cape Girardeau and Pryor plants as well as from international sources, and a stevedoring operation which includes a transloading system for moving phosphate materials between barges and railcars. Cement is sold directly from the facility and through terminals in Atlanta, Georgia; Bonner Springs, Kansas; Brandon and Vicksburg, Mississippi; St. Louis, Missouri; Memphis and Nashville, Tennessee; and Dallas, Texas. READY-MIXED CONCRETE OPERATIONS Ready-mixed concrete, a versatile building material used in almost all construction, is produced by mixing stone, sand, water and admixtures with cement. Lone Star's ready-mix operations are located in Memphis, Tennessee, and much of the cement used in these operations comes from the Company's Cape 3 6 Girardeau, Missouri plant via the Mississippi River. This vertical integration has enabled the Company to become a major supplier of ready-mixed concrete to this market. CONSTRUCTION INDUSTRY CONDITIONS The markets for the Company's products are highly competitive. Portland cement is largely a commodity product, and due to this lack of product differentiation, the Company competes with domestic and international sources of cement largely on the basis of price. Accordingly, cement prices and the level of the Company's profitability are very sensitive to shifts in supply and demand in the Company's markets, and the Company's ability to compete effectively is dependent on its operating costs being at acceptable levels. To a lesser extent, other competitive factors such as service, delivery time and proximity to customers affect the Company's performance. Construction spending and cement consumption historically have fluctuated widely. Demand for cement is derived primarily from public (infrastructure) construction, residential construction and commercial/industrial construction, which are cyclical and, in turn, are influenced by prevailing economic conditions, including availability of public funds and interest rate levels. Moreover, due to cement's low value-to-weight ratio, the industry is largely regional, with sales in a given market dependent on regional demand which is tied to local economic factors that may fluctuate more widely than those of the United States as a whole. In addition, the supply of cement from domestic and foreign sources can vary from region to region and over time. As a result, even though the Company sells in more than one area of the country, its operating results are subject to significant fluctuation. While sales by Lone Star directly to federal, state and local governmental agencies are not significant, customers of Lone Star are engaged in a substantial amount of construction in which government funding is a component. According to published sources, in 1997 (the last year for which such figures are available) the United States had 43 companies able to produce clinker with an aggregate production capacity of approximately 85 million tons of clinker. During 1997, domestic demand for portland cement totaled approximately 102 million tons, with foreign imports contributing approximately 19 million tons either of cement or clinker which was ground at domestic grinding facilities. Imports during 1997 were approximately 24 percent higher than during 1996. The ten largest companies account for approximately 60% of the total domestic clinker capacity. The supply of cement in many areas is affected by the levels of cement imports from international sources. Factors that typically affect the level of these imports include ocean shipping rates, excess foreign capacity and access by importers to domestic distribution channels. Despite current excess foreign capacity, the Company believes that import levels, while growing in recent years, have not had a serious detrimental effect on domestic producers in large part due to anti-dumping orders that were imposed on cement imported from Mexico and Japan and a suspension agreement signed by Venezuelan exporters requiring them not to export to the United States at dumped prices. The Company believes that U.S. anti-dumping law currently provides effective remedies against unfairly priced imports, improving the condition of the U.S. cement industry. The anti-dumping orders and the suspension agreement are scheduled to remain in effect at least until the year 2000 and may continue thereafter if petitioners prevail in "sunset reviews" before the Commerce Department and the U.S. International Trade Commission currently scheduled to begin in August 1999. Due to strong cement demand, as well as existing anti-dumping relief, the Company and many other cement producers have announced projects that, if implemented, could increase domestic cement production capacity by approximately 20 million tons over the next several years through modifications to existing facilities and the construction of new plants. The Company continues to believe that significant new domestic production capacity (and in particular greenfield capacity) is costly to producers. No assurances, however, can be given as to the long-term effects of either increased domestic production or increased imports and, due to the regionalized nature of the industry, certain markets could be affected more than other markets. The Company has implemented price increases in recent years, and has announced modest cement price increases effective April 1999; however, these and future prices will be subject to the market forces described above. 4 7 Construction spending and cement consumption are seasonal, particularly in the Company's northern markets where colder weather affects construction activity. Other adverse weather conditions such as flooding, which can interrupt production and transportation of cement, and extreme heat, which makes pouring concrete difficult, also affect the Company's operations. CUSTOMERS AND MARKETING; BACKLOG The Company's customer base primarily consists of ready-mixed concrete producers, prestressed and other concrete product producers, and highway construction firms. Taken as a whole, no single customer of the Company accounted for more than 10% of total sales during 1998. The Company's marketing effort is handled by local sales forces. Most purchases of the Company's products are done on a spot basis, and accordingly, order backlogs are not significant. ENVIRONMENTAL REGULATION The Company is subject to extensive, stringent and complex federal, state and local laws, regulations and ordinances pertaining to the quality and the protection of the environment and human health and safety, requiring the Company to devote substantial time and resources in an effort to maintain continued compliance. Many of the laws and regulations apply to the Company's former activities, properties and facilities as well as its current operations. There can be no assurances that judicial or administrative proceedings, seeking penalties or injunctive relief, will not be brought against the Company for alleged non-compliance with applicable environmental laws and regulations relating to matters as to which the Company is currently unaware. For instance, if releases of hazardous substances are discovered to have occurred at facilities currently or previously owned or operated by the Company, or at facilities to which the Company has sent waste materials, the Company may be subject to liability for the investigation and remediation of such sites. In addition, changes to such regulations or the enactment of new regulations in the future could require the Company to undertake capital improvement projects or to cease or curtail certain operations or could otherwise substantially increase the capital, operating and other costs associated with compliance. For example, recent worldwide initiatives for limitations on carbon dioxide emissions could result in the promulgation of statutes or regulations that would adversely affect certain aspects of United States manufacturing, including the cement industry. The Clean Water Act provides a comprehensive federal regulatory scheme governing the discharge of pollutants to waters of the United States. This regulatory scheme requires that permits be secured for discharges of wastewater, including stormwater runoff associated with industrial activity, to waters of the United States. The Company has secured or has applied for all required permits in connection with its wastewater and stormwater discharges. The Clean Air Act provides for a uniform federal regulatory scheme governing the control of air pollutant emissions and permit requirements. In addition, certain states in which the Company operates have enacted laws and regulations governing the emission of air pollutants and requiring permits for sources of air pollutants. The Company is required to apply for federal operating permits for each of its cement manufacturing facilities. All of these applications have been made. As part of the permitting process, the Company may be required to install equipment to monitor emissions of air pollutants from its facilities. In addition, the United States Environmental Protection Agency ("EPA") is required to develop regulations directed at reducing emissions of toxic air pollutants from a variety of industrial sources, including the portland cement manufacturing industry. As part of this process, the EPA has announced proposed maximum available control technology ("MACT") standards for cement manufacturing facilities (like Lone Star's Greencastle and Cape Girardeau plants) that burn hazardous waste fuels ("HWF") and other MACT standards for facilities burning fossil fuels. These MACT standards are anticipated by the Company to be effective in 1999 and implemented over a three-year period. The Company currently anticipates that it will be able to achieve these MACT standards. The EPA has also promulgated under the Clean Air Act new standards for small particulate matter and ozone emissions, and related testing will be carried out over the next several years. Depending on the result of this testing, additional regulatory burdens could be imposed on the cement industry by states not in compliance with the regulations. The EPA has promulgated new regulations to reduce nitrogen oxide emissions 5 8 substantially over the next eight years. These rules would affect 22 states including three in which the Company has cement plants: Indiana, Illinois and Missouri. Depending on state implementation, this emissions reduction could adversely affect the cement industry in these states. The Resource Conservation and Recovery Act ("RCRA") establishes a cradle-to-grave regulatory scheme governing the generation, treatment, storage, handling, transportation and disposal of solid wastes. Solid wastes which are classified as hazardous wastes pursuant to RCRA, as well as facilities that treat, store or dispose of such hazardous wastes, are subject to stringent regulatory requirements. Generally, wastes produced by the Company's operations are not classified as hazardous wastes and are subject to less stringent federal and state regulatory requirements. Cement kiln dust ("CKD"), a by-product of cement manufacturing, is currently exempted from regulation as a hazardous waste pursuant to the Bevill Amendment to RCRA. However, in 1995, the EPA issued a regulatory determination regarding the need for regulatory controls on the management, handling and disposal of CKD. Generally, the EPA regulatory determination provides that the EPA intends to draft and promulgate regulations imposing controls on the management, handling and disposal of CKD that will be based largely on selected components of the existing RCRA hazardous waste regulatory program, tailored to address the specific regulatory concerns posed by CKD. The EPA regulatory determination further provides that new CKD regulations will be designed both to be protective of the environment and to minimize the burden on cement manufacturers. It is not possible to predict at this time precisely what new regulatory controls on the management, handling and disposal of CKD or what increased costs (or range of costs) would be incurred by the Company to comply with these requirements. These regulations will be promulgated through a rulemaking scheduled to be completed shortly. These rules will be implemented over a three-year period following promulgation. The types of controls being considered by the EPA include fugitive dust emission controls, restrictions for landfills located in sensitive areas, groundwater monitoring, standards for liners and caps, metals limits and corrective action for currently active units. In 1995, the State of Indiana made a determination that the CKD stored at the Company's Greencastle plant is a Type I waste and requested that the Company apply for a formal permit for an on-site landfill for the CKD. The Company understands that similar notices were sent to other cement manufacturers in the State of Indiana. The Company is protesting this determination through legal channels and has received a stay to allow it to demonstrate that current management practices pose no threat to the environment. The Company believes that the State's determination ultimately will be reversed or the Company will receive the needed permit or other adequate relief, such as an agreed order requiring certain additional waste management procedures that are less stringent than those generally required for Type I wastes. If the Company is not successful in this regard, however, like other Indiana cement producers, the Greencastle plant could incur substantially increased operating and capital costs. The Cape Girardeau, Missouri and Greencastle, Indiana plants, which are the Company's two cement manufacturing facilities using HWF as a cost-saving energy source, are subject to strict federal, state and local requirements governing hazardous waste treatment, storage and disposal facilities, including those contained in the federal Boiler and Industrial Furnace Regulations promulgated under RCRA (the "BIF Rules"). The Company has secured the permit required under RCRA and the BIF Rules for the Cape Girardeau plant, and the Greencastle plant also will go through this permitting process and has completed a three-year recertification of its existing interim status. The Greencastle permit is a requirement to enable Lone Star to continue the use of HWF at the plant. The permitting process is lengthy and complex, involving the submission of extensive technical data, and there can be no assurances that the plant will be successful in securing its final RCRA permit. In addition, if received, the permit could contain terms and conditions with which the Company cannot comply or could require the Company to install and operate costly control technology equipment. While Lone Star believes that it is currently in compliance with the extensive and complex technical requirements of the BIF Rules, there can be no assurances that the Company will be able to maintain compliance with the BIF Rules or that changes to such rules or their interpretation by the relevant agencies or courts might not make it more difficult or cost-prohibitive to continue to burn HWF. The federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), as well as many comparable state statutes, creates a joint and several liability scheme for the 6 9 investigation and remediation of facilities where releases of hazardous substances are found to have occurred. Liability may be imposed upon current owners and operators of the facility, upon owners and operators of the facility at the time of the release and upon generators and transporters of hazardous substances released at the facility. While, as noted above, wastes produced by the Company generally are not classified as hazardous wastes, many of the raw materials, by-products and wastes currently and previously produced, used or disposed of by the Company or its predecessors contain chemical elements or components that have been designated as hazardous substances or which otherwise may cause environmental contamination. Hazardous substances are or have been used or produced by the Company in connection with its cement manufacturing operations (e.g. grinding compounds, refractory bricks), quarrying operations (e.g. blasting materials), equipment operation and maintenance (e.g. lubricants, solvents, grinding aids, cleaning aids, used oils), and hazardous waste fuel burning operations. Past operations of the Company have resulted in releases of hazardous substances at sites currently or formerly owned by the Company and at disposal sites owned by others. CKD and other materials were placed in depleted quarries and other locations for many years. The Company has been named by the EPA as a potentially responsible party for the investigation and remediation of several Superfund sites, although it does not currently contemplate that future costs relating to such sites will be material. The Company's operations are subject to federal and state laws and regulations designed to protect worker health and safety. Worker protection at the Company's cement manufacturing facilities is governed by the federal Mine Safety and Health Act ("MSHA") and at other Company operations is governed by the federal Occupational Safety and Health Act ("OSHA"). EMPLOYEES As of December 31, 1998, the Company had approximately 1,077 employees, of which approximately 670 are hourly paid and located at the Company's various operations. Except at certain distribution terminals and the New Orleans facility, all hourly employees are represented by labor unions. There have been no labor disruptions at any of the Company's facilities, and the Company believes that its relationship with its employees generally has been good. The agreements covering hourly-paid employees at the Cape Girardeau, Missouri plant and at certain distribution terminals expire during the second half of 1999. The Company does not anticipate any disruption of its operations in connection with the renegotiation of these agreements; however, there can be no assurances in this regard. ITEM 2. PROPERTIES. Lone Star's main operations are conducted at its plants and distribution terminals described in Item 1 above. Lone Star owns its five portland cement plants, its slag grinding and storage facility and a majority of the distribution terminals supporting these plants. With respect to those distribution terminals not owned, Lone Star holds a land lease for the underlying real property and owns the facilities located on such property. There is one additional distribution terminal that is leased to a third party. The ready-mixed concrete plants are located on owned land or sites held under leases for varying terms. No difficulty is anticipated in renewing leases as they expire or finding satisfactory alternative sites. The Company leases executive offices in Stamford, Connecticut and owns or leases certain sales and other offices in various locations within its market areas in the United States. ITEM 3. LEGAL PROCEEDINGS. From time to time the Company is named as a defendant in lawsuits asserting, among other things, products liability. The Company maintains such liability insurance coverage for its operations as it deems reasonable. The Company does not expect the effect of such matters to have a material effect on the financial condition of the Company. For information concerning certain environmental matters involving the Company, see "Business -- Environmental Regulation". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 7 10 EXECUTIVE OFFICERS OF REGISTRANT The following table sets forth certain information regarding the executive officers of the Company.
NAME AGE OFFICE AND YEAR IN WHICH INDIVIDUAL FIRST BECAME AN EXECUTIVE OFFICER - ---- --- --------------------------------------------------------------------- David W. Wallace..................... 75 Chairman of the Board (1991) William M. Troutman.................. 58 President and Chief Executive Officer (1983) Roger J. Campbell.................... 62 Vice President -- Cement Operations (1986) William J. Caso...................... 54 Vice President -- Taxes and Insurance (1994) Thomas S. Hoelle..................... 47 Vice President -- General Manager, Slag Operations (1994) Gerald F. Hyde, Jr. ................. 56 Vice President -- Personnel and Labor Relations (1983) James W. Langham..................... 39 Vice President, General Counsel and Secretary (1995) Harry M. Philip...................... 50 Vice President -- Cement Manufacturing (1994) Michael W. Puckett................... 54 Vice President -- Cement Sales and Concrete Operations (1985) William E. Roberts................... 59 Vice President, Chief Financial Officer, Controller and Treasurer (1988)
All of the executive officers' terms of office continue until the next annual meeting of the Company's stockholders and until their successors have been elected and qualified. All of the executive officers have been employed by the Company as an officer or in an executive capacity for more than five years, except for Mr. Langham, who for more than five years prior to joining the Company was an attorney in New York City. 8 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock and related purchase rights and its warrants are listed on the New York Stock Exchange ("NYSE"). The following table sets forth the high and low sales prices for the common stock and warrants in composite transactions as reported on the NYSE as well as per share dividend information relating to the common stock.
COMMON STOCK(I) WARRANTS ------------------------------ -------------- HIGH LOW DIVIDENDS HIGH LOW ---- --- --------- ---- --- 1997 First Quarter............ $22 5/8 $17 7/16 $0.05 $28 5/8 $18 1/4 Second Quarter........... 22 25/32 18 5/8 0.05 28 21 Third Quarter............ 27 1/8 22 5/8 0.05 36 1/2 28 1/2 Fourth Quarter........... 30 5/8 24 7/16 0.05 43 3/8 31 3/4 1998 First Quarter............ $34 13/16 $25 5/8 $0.05 $51 1/8 $33 1/2 Second Quarter........... 42 7/16 33 1/4 0.05 66 48 1/4 Third Quarter............ 41 27/32 26 1/4 0.05 64 1/2 34 1/2 Fourth Quarter........... 39 7/16 28 0.05 60 38 1/8
- --------------- (i) Common stock prices have been restated to reflect the Company's recent two-for-one stock split. The Company's financing agreements contain certain restrictive covenants which, among other things, could have the effect of limiting the payment of dividends and the repurchase of common stock and warrants. Approximately $54 million is currently available for such payments under the most restrictive of such covenants. As of March 1, 1999, the Company had approximately 2,060 holders of record of common stock and 2,857 holders of record of warrants. 9 12 ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data are derived from the Consolidated Financial Statements of the Company. The data should be read in conjunction with the Consolidated Financial Statements, related Notes and other financial information included herein:
PREDECESSOR SUCCESSOR COMPANY COMPANY -------------------------------------------------------- ------------ FOR THE NINE FOR THE MONTHS THREE MONTHS FOR THE YEARS ENDED DECEMBER 31, ENDED ENDED ----------------------------------------- DECEMBER 31, MARCH 31, 1998 1997 1996 1995 1994 1994 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ---- ---- ---- ---- ------------ ------------ Net sales......................... $347,065 $357,565 $367,673 $323,008 $261,645 $ 33,709 Net income (loss)................. $ 76,282 $ 65,413 $ 54,160 $ 35,762 $ 29,333 $(23,118)(3) - ----------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE(1): Basic............................. $ 3.68 $ 2.99 $ 2.40 $ 1.49 $ 1.22 n/m(3) Diluted........................... $ 2.88 $ 2.44 $ 2.04 $ 1.40 $ 1.22 n/m(3) - ----------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING(1): Basic............................. 20,745 21,881 22,581 23,981 24,000 n/m Diluted........................... 26,516 26,857 26,493 25,483 24,088 n/m - ----------------------------------------------------------------------------------------------------------------- Shares outstanding at December 31(1)... 20,123 21,452 21,426 22,953 24,000 n/m - ----------------------------------------------------------------------------------------------------------------- Cash dividends per common share(1)... $ 0.10 $ 0.10 $ 0.10 $ 0.075 -- -- - -----------------------------------------------------------------------------------------------------------------
SUCCESSOR COMPANY ---------------------------------------------------------------- DECEMBER 31, ---------------------------------------------------- MARCH 31, 1998 1997 1996 1995 1994 1994 ---- ---- ---- ---- ---- --------- FINANCIAL POSITION AT END OF PERIOD: Total assets....................... $588,514 $598,977 $562,151 $477,465 $553,320 $579,411 Long-term debt: Senior notes(2).................. $ 50,000 $ 50,000 $ 50,000 $ 78,000 $ 78,000 $ 78,000 Asset proceeds notes............. -- -- -- $ 4,399 $ 87,000 $112,000 Production payment................. -- -- -- -- $ 19,966 $ 20,963 Common shareholders' equity........ $324,316 $333,634 $264,282 $159,740 $122,463 $ 93,313
- --------------- (1) Earnings per share, shares outstanding and cash dividends per share for prior years have been restated to reflect the two-for-one stock split effected in the form of a stock dividend in December 1998 (See Notes 1 and 13 of Notes to Financial Statements). (2) See Note 9 of Notes to Financial Statements. (3) The Company adopted "fresh-start" reporting as of March 31, 1994. Accordingly, the Company's financial information presented for periods prior to March 31, 1994 is not comparable to that presented on or subsequent to March 31, 1994. A black line has been drawn to distinguish the pre-reorganization from the post-reorganization company. Earnings per share for the three months ended March 31, 1994 are not meaningful and are not comparable to the successor company per share amounts due to the emergence from Chapter 11 proceedings. 10 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION The Company believes that cash and marketable securities on hand of $120.2 million and funds generated by operations will be adequate to cover current working capital and capital expenditure needs. The Company's financing agreement and the revolving credit facility contain certain restrictive covenants which, among other things, could have the effect of limiting the payment of dividends and the repurchase of common stock and warrants. Approximately $54.0 million is currently available for such payments under the most restrictive of such covenants. During 1998, the Company purchased 2,823,400 shares and 179,400 warrants at a cost of $98.6 million. Since the inception of its repurchase program in late 1995, the Company has purchased 6,544,100 shares and 179,400 warrants at a cost of $160.3 million. The Company is currently authorized to purchase an additional $40.0 million of common stock and warrants. In November 1998, the Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend. The additional shares were issued on December 28, 1998 to stockholders of record at the close of business on December 14, 1998. The Company intends to maintain its $0.05 per share quarterly dividend, which will effectively double the amount of cash dividends the Company pays to its stockholders. Analysis of Cash Flows and Working Capital Cash flows from operating activities of $99.9 million for the year ended December 31, 1998 primarily reflect income from operations and changes in working capital. The utilization in 1998 of net operating loss carryforwards and other deferred tax assets reduced cash taxes otherwise payable by $15.6 million. At December 31, 1998, the Company had net operating loss carryforwards of approximately $75.0 million and alternative minimum tax credits of $19.7 million, which are expected to reduce future cash taxes by an additional $46.0 million over time. During the year ended December 31, 1998, cash outflows from investing activities were $47.4 million, primarily representing $52.1 million for capital expenditures, offset by $4.7 million received for the sales of surplus parcels of real estate and miscellaneous property and equipment. Net cash outflows from financing activities of $86.4 million for the year ended December 31, 1998 primarily reflect the repurchase of 2.8 million shares of common stock for $90.0 million, the purchase of warrants for $8.6 million and $2.1 million of dividends paid. These cash outflows were partly offset by proceeds of $14.1 million received from the exercise of warrants. Working capital on December 31, 1998 was $143.4 million as compared to $169.6 million on December 31, 1997. Current assets decreased $27.1 million primarily due to lower short-term investment balances, offset by higher accounts and notes receivable and inventory balances. Current liabilities at December 31, 1998 were consistent with the prior year. The $16.1 million decrease in the Company's long-term deferred tax asset is primarily due to the utilization of a portion of the tax assets in 1998. Investments in joint ventures increased $1.2 million as the Company's share of equity earnings exceeded cash distributions paid from Kosmos Cement Company. Net property, plant and equipment increased $29.4 million reflecting capital expenditures partly offset by depreciation. Capital Expenditures In 1998, the Company invested $52.1 million in capital projects and expects to spend an additional $103 million in 1999. The projects completed in 1998 include a 100,000-ton expansion at the Cape Girardeau, Missouri cement plant, and the expansion of slag cement production capacity from 225,000 tons to 600,000 tons and the installation of a state-of-the-art ship and barge unloading system at the New Orleans facility. In 11 14 addition, the Company expanded its Memphis, Tennessee distribution terminal and constructed a slag cement distribution terminal in Atlanta, Georgia. Other projects that were started in 1998 and are expected to be completed in 1999 include doubling the size of the existing distribution system at the New Orleans facility by adding more than 50,000 tons of new storage capacity and constructing another slag cement terminal in Northern Florida. New capital projects for 1999 include the expansion of the Greencastle, Indiana cement plant that will increase the plant's production capacity by 600,000 tons to a total capacity of 1,350,000 tons. The $75 million plant expansion is expected to be completed by mid-2000. In addition, the Company's 25% owned joint venture, Kosmos Cement Company, will expand and modernize its Louisville, Kentucky cement plant. This project will increase the plant's production capacity by 700,000 tons to approximately 1.6 million tons per year. The $93 million project is expected to be completed in the year 2000. Both projects are expected to provide future earnings growth from increased sales volume and lower unit cement manufacturing costs. Additional capital projects for 1999 include the relocation of the Oglesby, Illinois quarry. The project is expected to cost $18 million and be completed in 2001. The Company has started activities leading to designing, permitting and constructing a second quarry near its cement plant at Cape Girardeau, Missouri. This quarry is expected to be operational in 2002 or 2003, and the preliminary estimate of the project's cost is $35 million. Eventually, this quarry will become the Cape Girardeau plant's primary source of limestone. In conjunction with this project, the Company has undertaken a study exploring the feasibility of increasing the annual cement production capacity at this plant by one million tons. Other Information The Company is subject to extensive, stringent and complex federal, state and local laws, regulations and ordinances pertaining to the quality and the protection of the environment and human health and safety, requiring the Company to devote substantial time and resources in an effort to maintain continued compliance. Many of the laws and regulations apply to the Company's former activities, properties and facilities as well as its current operations. There can be no assurances that judicial or administrative proceedings, seeking penalties or injunctive relief, will not be brought against the Company for alleged non-compliance with applicable environmental laws and regulations relating to matters as to which the Company is currently unaware. For instance, if releases of hazardous substances are discovered to have occurred at facilities currently or previously owned or operated by the Company, or at facilities to which the Company has sent waste materials, the Company may be subject to liability for the investigation and remediation of such sites. In addition, changes to such regulations or the enactment of new regulations in the future could require the Company to undertake capital improvement projects or to cease or curtail certain operations or could otherwise substantially increase the capital, operating and other costs associated with compliance (See Note 21). The Company believes that it has adequately provided for costs related to its ongoing obligations with respect to known environmental liabilities. Expenditures for environmental liabilities during 1998 did not have a material effect on the financial condition or cash flows of the Company. During 1998, the collective bargaining agreements covering hourly-paid employees at the Company's ready-mixed concrete division and at one of its alternate fuels facilities were successfully renegotiated for four-year terms. The agreements covering hourly-paid employees at the Cape Girardeau, Missouri plant and at certain distribution terminals expire during the second half of 1999. The Company does not anticipate any disruption of its operations in connection with the renegotiation of these agreements; however, there can be no assurances in this regard. Year 2000 The Company is in the process of conducting a company-wide assessment of its computer systems and operations to identify computer hardware and software and process control systems that are not Year 2000 compliant. The Company expects that the identification and repair of any problems will be successfully completed during 1999. The Company's goal is to have its remediated and replaced systems operational by the 12 15 end of the second quarter of 1999 to allow time for testing and verification. In particular, the Company will perform tests of its cement plants' operations during their normal maintenance shutdowns in the first half of 1999. Expenses incurred to date have not been material, and the Year 2000 issue has had no known effect on the Company to date. Future costs are not expected to be material. Since 1990, the Company has been replacing and upgrading its corporate and plant computer systems, including its maintenance tracking system, sales order entry system, treasury system and other financial programs. The Company has replaced all employee desktop computer systems within the past several years. Such improvements have been made in the normal course of business. Vendors have assured the Company that all of these recently purchased machines and software programs are Year 2000 compliant. The Company has initiated communications with third parties such as critical vendors and major service suppliers, communications providers and banks whose system failures potentially could have a material impact on the Company. No single customer accounts for more than 10% of the Company's total sales and the Company has no executory contracts to sell cement that extend past December 31, 1999. Accordingly, the Company is not canvassing its customers as to their Year 2000 compliance. There can be no guarantee that customer and vendor systems will be Year 2000 compliant. Moreover, the potential effect of such noncompliance cannot be quantified because of the impossibility of estimating the magnitude, duration, or ultimate impact of noncompliance by others. If the Company is unsuccessful in identifying or fixing all Year 2000 problems in its critical operations, or if it is affected by the inability of suppliers or customers to continue operations due to such a problem, the results of operations or financial condition could be materially impacted. In the event of the failure to correct all compliance issues related to manufacturing control systems, the plants have the ability, in many instances, to continue operations mechanically, rather than electronically. However, operations at a plant would shut down if that plant's power suppliers failed to deliver electricity due to a Year 2000 problem. Failure of other major third parties, such as coal and gas suppliers and railroads, to correct Year 2000 problems could also affect the Company's business. The Company anticipates developing a contingency plan that would be designed to mitigate in part the impact on its business of certain Year 2000 problems. This plan, however, cannot cover all eventualities, such as a power outage. The Company expects this plan to be in place by mid-1999. Market Risk The Company does not enter into derivative or interest rate transactions. In addition, the carrying value of other financial instruments, including cash and cash equivalents, accounts and notes receivable, and accounts and notes payable approximate fair value due to the short-term nature of their maturity. The Company is exposed to interest rate changes primarily as a result of its fixed rate senior notes and its variable rate revolving credit facility. However, since the revolving credit facility has never been utilized by the Company and due to the low level of outstanding debt at December 31, 1998, the impact of interest rate changes on the Company's financial statements would not be material. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this annual report and Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current expectations, estimates and projections concerning the general state of the economy and the industry and market conditions in certain geographic locations in which the Company operates. Words such as "expects", "anticipates", "intends", "plans", "believes", "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual results and outcomes may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or other factors. 13 16 The Company's business is cyclical and seasonal, the effects of which cannot be accurately predicted (See "Business-Construction Industry Conditions" of Item 1). Risks and uncertainties include changes in general economic conditions (such as changes in interest rates), changes in economic conditions specific to any one or more of the Company's markets (such as the strength of local real estate markets and the availability of public funds for construction), adverse weather, unexpected operational difficulties, changes in governmental and public policy including increased environmental regulation, the outcome of pending and future litigation, the successful negotiation of labor contracts, unforeseen operational difficulties including difficulties relating to the construction and installation of improvements to property, plant and equipment, financial losses due to Year 2000 computer problems, and the continued availability of financing in the amounts, at the times, and on the terms required to support the Company's future business. Other risks and uncertainties could also affect the outcome of the forward-looking statements. RESULTS OF OPERATIONS 1998 COMPARED TO 1997 Net Sales Consolidated net sales of $347.1 million during 1998 were $10.5 million lower than the prior-year results. The decrease in net sales primarily reflects the sales of the Company's central Illinois ready-mixed concrete operations and its New York construction aggregates operations during 1997. In each of the years 1998 and 1997, the Company sold the approximate rated capacity of its cement plants. Cement and ongoing ready-mixed concrete operations reported net sales of $347.1 million for 1998 which were $29.8 million higher than 1997. This increase is due to 4% higher average net realized cement selling prices in 1998 combined with a 6% increase in cement shipments during the year. In 1998, the Company shipped approximately 4.5 million tons of cement. The increase in shipments is attributable to continued strong demand for cement in the Company's major markets and mild weather conditions. The 1997 full year results include net sales of $40.3 million from the construction aggregates and central Illinois ready-mixed concrete operations which were sold in 1997. Net sales of cement and ready-mixed concrete and other construction products were 94% and 6%, respectively, of total net sales in 1998. Gross Profit Gross profit from the cement and ongoing ready-mixed concrete operations of $124.9 million for 1998 was $13.5 million higher than 1997. The increase in gross profit reflects higher average net realized cement and ready-mix selling prices and higher overall shipments for the year. These results exclude gross profit of $3.7 million for 1997 related to the Company's central Illinois ready-mixed concrete operations and New York construction aggregates operations, which were sold in 1997. Included in the calculation of gross profit are sales less cost of sales including depreciation related to cost of sales (which excludes depreciation on office equipment, furniture and fixtures which are not related to the cost of sales). Joint Ventures Pre-tax income from joint ventures of $8.2 million during 1998 reflects the results of the Kosmos Cement Company, a partnership in which the Company has a 25% interest. The results for 1998 were $0.4 million lower than the prior year. Other Income Other income of $10.6 million in 1998 increased $2.7 million from 1997, primarily reflecting higher interest income earned on higher short-term investment balances. Other income for the full year 1998 includes 14 17 gains totaling $3.3 million on the sale of two parcels of surplus real estate as compared with a gain of $3.1 million from the sale of a surplus parcel of real estate in 1997. Selling, General and Administrative Expenses Selling, general and administrative expenses of $25.9 million during 1998 was $2.9 million lower than that of the prior-year, reflecting lower pension expense, and lower expense related to the Company's central Illinois ready-mixed concrete operations and its New York construction aggregates operations which were sold in 1997. Interest Expense Interest expense of $2.4 million in 1998 represents a decrease of $1.2 million over the prior-year expense. Capitalized interest of $1.4 million in 1998 was consistent with the prior-year amount. The reduction in interest expense reflects the debt reduction and refinancing accomplished in March and April of 1997. Income Taxes The income tax expense of $38.9 million during 1998, an increase of $5.5 million from the prior-year expense, primarily reflects higher pre-tax earnings in 1998. Net Income Net income of $76.3 million during 1998 was $10.9 million higher than the prior-year results. On a per share basis, basic and diluted earnings for 1998 were $3.68 and $2.88, respectively, compared to $2.99 and $2.44, respectively, for 1997. This improvement is primarily due to higher average selling prices and increased shipments of cement. Also contributing to the favorable increase in net income for 1998 over the prior-year results were higher interest income reflecting higher short-term investment balances, lower selling, general and administrative expense and lower interest expense. These favorable results were partly offset by increased income tax expense due to higher pre-tax earnings. 1997 COMPARED TO 1996 Net Sales Consolidated net sales of $357.6 million during 1997 were $10.1 million lower than the prior-year results. The decrease in net sales primarily reflects the dispositions of the Company's central Illinois ready-mixed concrete operations and its New York construction aggregates operations during 1997. Cement and ongoing ready-mixed concrete operations reported net sales of $317.2 million for 1997 which were $19.4 million higher than 1996. This increase is due to 5% higher average net realized cement selling prices in 1997 combined with a 2% increase in cement shipments during the year. In 1997, the Company shipped more than 4.2 million tons of cement. The increase in shipments is attributable to continued strong demand for cement in the Company's major markets. These results exclude sales of $40.3 million and $69.7 million for 1997 and 1996, respectively, related to the Company's central Illinois ready-mixed concrete and New York construction aggregates operations which were sold in 1997. Net sales of cement, construction aggregates and ready-mixed concrete and other products were 83%, 11% and 6%, respectively, of total net sales in 1997. Gross Profit Gross profit from the ongoing cement and ready-mixed concrete operations of $111.4 million for 1997 was $14.1 million higher than 1996. The increase in gross profit reflects higher average net realized cement and ready-mix selling prices and higher overall shipments for the year. These results exclude gross profit of $3.7 million for 1997 and $9.7 million for 1996 related to the Company's central Illinois ready-mixed concrete and New York construction aggregates operations which were sold in 1997. 15 18 Joint Ventures Pre-tax income from joint ventures of $8.6 million during 1997 reflects the results of the Kosmos Cement Company, a partnership in which the Company has a 25% interest. The results for 1997 were $1.2 million higher than the prior year reflecting higher net realized selling prices and higher shipments. Other Income Other income of $7.9 million in 1997 increased $4.9 million from 1996, primarily reflecting a gain of $3.1 million on the sale of a surplus parcel of real estate and higher interest income earned on higher short-term investment balances. Selling, General and Administrative Expenses Selling, general and administrative expenses of $28.9 million during 1997 approximated the prior-year expense, reflecting lower pension expense and lower expense related to the Company's central Illinois ready-mixed concrete operations which were sold in March 1997 and its New York construction aggregates operations which were sold in October 1997. These savings were offset by higher selling and administrative expenses related to the Company's cement operations. Interest Expense Interest expense of $3.6 million in 1997 represents a decrease of $3.0 million over the prior-year expense. Capitalized interest was $1.4 million in 1997 and $1.3 million in 1996. The reduction in interest expense reflects the Company's redemption of $28.0 million of its 10% senior notes in March 1997 and the redemption of the remaining $50.0 million through a 7.31% private placement in April 1997. Income Taxes The income tax expense of $33.3 million during 1997, an increase of $5.7 million from the prior-year expense, primarily reflects higher pre-tax earnings in 1997. Net Income Net income of $65.4 million during 1997 was $11.3 million higher than the prior-year results. On a per share basis, basic and diluted earnings for 1997 were $2.99 and $2.44, respectively, compared to $2.40 and $2.04, respectively, for 1996. This improvement is primarily due to higher average selling prices and increased shipments of cement. Also contributing to the favorable increase in net income for 1997 over the prior-year results were a gain on the sale of surplus real estate, higher interest income reflecting higher investment balances, higher joint venture income and lower interest expense. These favorable results were partly offset by increased income tax expense due to higher pre-tax earnings. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk" for disclosures about market risk. 16 19 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. LONE STAR INDUSTRIES, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- Report of Independent Accountants........................... 18 Consolidated Financial Statements: Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996............................... 19 Balance Sheets -- December 31, 1998 and 1997........... 20 Statements of Changes in Common Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996.................................................. 21 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............................... 22 Notes to Financial Statements.......................... 23 Schedule: II Valuation and Qualifying Accounts................... 43 Consent of Independent Accountants.......................... 44
The foregoing supporting schedule should be read in conjunction with the consolidated financial statements and notes thereto in this 1998 annual report on Form 10-K. The presentation of individual condensed financial information of the Company is omitted because the restricted net assets of the consolidated subsidiaries do not exceed twenty-five percent of total consolidated net assets at December 31, 1998 and 1997. Separate financial statements for the Company's fifty percent or less owned affiliate are omitted because such subsidiary individually does not constitute a significant subsidiary at December 31, 1998 and 1997. Schedules other than those listed above are omitted because the information required is not applicable or is included in the financial statements or notes thereto. Columns omitted from schedules filed are omitted because the information is not applicable. 17 20 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS LONE STAR INDUSTRIES, INC. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Lone Star Industries, Inc. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Stamford, Connecticut January 27, 1999 18 21 LONE STAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ------------ ------------ ------------ Revenues: Net sales........................................ $347,065 $357,565 $367,673 Joint venture income............................. 8,191 8,571 7,378 Other income, net................................ 10,601 7,923 3,007 -------- -------- -------- 365,857 374,059 378,058 -------- -------- -------- Deductions from revenues: Cost of sales.................................... 200,564 219,290 237,114 Selling, general and administrative expenses..... 25,935 28,857 28,508 Depreciation and depletion....................... 21,837 23,591 24,060 Interest expense................................. 2,379 3,585 6,606 -------- -------- -------- 250,715 275,323 296,288 -------- -------- -------- Income before income taxes......................... 115,142 98,736 81,770 Provision for income taxes......................... (38,860) (33,323) (27,610) -------- -------- -------- Net income applicable to common stock.............. $ 76,282 $ 65,413 $ 54,160 ======== ======== ======== Weighted average common shares outstanding: Basic............................................ 20,745 21,881 22,581 ======== ======== ======== Diluted.......................................... 26,516 26,857 26,493 ======== ======== ======== Earnings per common share: Basic............................................ $ 3.68 $ 2.99 $ 2.40 ======== ======== ======== Diluted.......................................... $ 2.88 $ 2.44 $ 2.04 ======== ======== ========
The accompanying Notes to Financial Statements are an integral part of the Financial Statements. 19 22 LONE STAR INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- 1998 1997 (DOLLARS IN THOUSANDS) ---- ---- ASSETS CURRENT ASSETS Cash, including cash equivalents of $119,896 in 1998 and $152,775 in 1997.......................................... $120,161 $154,080 Accounts and notes receivable, net.......................... 32,164 28,217 Inventories................................................. 45,733 43,103 Deferred tax asset.......................................... 4,052 3,825 Other current assets........................................ 3,736 3,751 -------- -------- TOTAL CURRENT ASSETS.............................. 205,846 232,976 Joint ventures.............................................. 21,517 20,326 Property, plant and equipment, net.......................... 328,663 299,255 Deferred tax asset.......................................... 21,593 37,661 Other assets and deferred charges........................... 10,895 8,759 -------- -------- TOTAL ASSETS...................................... $588,514 $598,977 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................ $ 16,087 $ 13,400 Accrued liabilities......................................... 44,276 46,417 Other current liabilities................................... 2,091 3,565 -------- -------- TOTAL CURRENT LIABILITIES......................... 62,454 63,382 Senior notes payable........................................ 50,000 50,000 Postretirement benefits other than pensions................. 123,428 123,728 Other liabilities........................................... 28,316 28,233 Contingencies (Notes 21 and 22) -------- -------- TOTAL LIABILITIES................................. 264,198 265,343 -------- -------- Common stock, $1 par value. Authorized: 50,000,000 shares Shares issued: 1998 -- 25,691,546; 1997 -- 12,091,866..... 25,692 12,092 Warrants to purchase common stock........................... 11,792 15,554 Additional paid-in capital.................................. 171,276 174,915 Retained earnings........................................... 252,671 178,444 Treasury stock, at cost..................................... (137,115) (47,371) -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ 324,316 333,634 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $588,514 $598,977 ======== ========
The accompanying Notes to Financial Statements are an integral part of the Financial Statements. 20 23 LONE STAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 (IN THOUSANDS) ------------ ------------ ------------ COMMON STOCK Balance at beginning of period.................. $ 12,092 $ 12,087 $ 12,081 December 1998 stock split..................... 12,092 -- -- Exercise of warrants to purchase common stock...................................... 1,508 5 6 -------- -------- -------- Balance at end of period........................ 25,692 12,092 12,087 -------- -------- -------- WARRANTS TO PURCHASE COMMON STOCK Balance at beginning of period.................. 15,554 15,574 15,597 Exercise of warrants to purchase common stock...................................... (2,941) (20) (23) Purchase of warrants.......................... (700) -- -- Other......................................... (121) -- -- -------- -------- -------- Balance at end of period........................ 11,792 15,554 15,574 -------- -------- -------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of period.................. 174,915 163,664 82,709 December 1998 stock split..................... (12,092) -- -- Exercise of warrants to purchase common stock...................................... 15,568 116 122 Purchase of warrants.......................... (7,884) -- -- Exercise of stock options, net of tax benefit.................................... (96) (1,771) (1,059) Reduction of tax valuation allowance.......... -- 12,893 81,889 Other......................................... 865 13 3 -------- -------- -------- Balance at end of period........................ 171,276 174,915 163,664 -------- -------- -------- RETAINED EARNINGS Balance at beginning of period.................. 178,444 115,228 63,315 Net income.................................... 76,282 65,413 54,160 Dividends..................................... (2,055) (2,197) (2,247) -------- -------- -------- Balance at end of period........................ 252,671 178,444 115,228 -------- -------- -------- TREASURY STOCK Balance at beginning of period.................. (47,371) (42,271) (13,962) Repurchase of shares.......................... (90,020) (14,069) (33,719) Stock options exercised....................... 243 8,944 5,399 Other......................................... 33 25 11 -------- -------- -------- Balance at end of period........................ (137,115) (47,371) (42,271) -------- -------- -------- TOTAL COMMON SHAREHOLDERS' EQUITY, END OF PERIOD........................................ $324,316 $333,634 $264,282 ======== ======== ========
The accompanying Notes to Financial Statements are an integral part of the Financial Statements. 21 24 LONE STAR INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 (IN THOUSANDS) ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................... $ 76,282 $ 65,413 $ 54,160 Adjustments to arrive at net cash provided by operating activities: Depreciation and depletion................. 21,837 23,591 24,060 Tax benefit realized from utilization of deferred tax assets...................... 15,617 25,147 25,419 Changes in operating assets and liabilities: Accounts and notes receivable......... (3,907) (4,649) (2,227) Inventories and other current assets.............................. (2,713) (2,370) 3,713 Accounts payable and accrued expenses............................ (1,219) 4,708 967 Equity income, net of dividends received... (1,191) (821) 1,772 Pension funding in excess of expense....... -- (1,056) (12,986) Gain on sale of a surplus property......... (3,300) (3,110) -- Other, net................................. (1,524) 575 1,324 -------- -------- -------- Net cash provided by operating activities....... 99,882 107,428 96,202 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................ (52,125) (41,977) (42,640) Proceeds from sales of assets................... 4,701 56,998 319 -------- -------- -------- Net cash (used) provided by investing activities.................................... (47,424) 15,021 (42,321) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term senior notes......................................... -- 50,000 -- Redemption of long-term senior notes............ -- (78,000) -- Purchase of treasury stock...................... (90,020) (14,069) (33,719) Proceeds from exercise of stock options......... 147 4,581 3,145 Purchase of warrants............................ (8,584) -- -- Proceeds from exercise of warrants.............. 14,135 101 106 Dividends paid.................................. (2,055) (2,197) (2,247) -------- -------- -------- Net cash used by financing activities........... (86,377) (39,584) (32,715) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................... (33,919) 82,865 21,166 Cash and cash equivalents, beginning of period........................................ 154,080 71,215 50,049 -------- -------- -------- Cash and cash equivalents, end of period........ $120,161 $154,080 $ 71,215 ======== ======== ========
The accompanying Notes to Financial Statements are an integral part of the Financial Statements. 22 25 NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Description of Operations -- The Company is a cement and ready-mixed concrete company with operations in the United States (principally in the Midwest and Southwest). Lone Star's cement operations consist of five cement plants in the midwestern and southwestern regions of the United States, a slag cement facility in Louisiana and a 25% interest in Kosmos Cement Company, a partnership which operates one cement plant in each of Kentucky and Pennsylvania. The five wholly-owned cement plants produced approximately 4.0 million tons of cement in 1998, which approximates the rated capacity of such plants. The Company's construction aggregates operations, prior to its sale in October 1997, primarily served the construction markets in the New York metropolitan area. The ready-mixed concrete business operates in the Memphis, Tennessee area and during 1996, in central Illinois (which operations were sold in March 1997). The Company had approximately $347,100,000 in net sales in 1998, with cement and ready-mixed concrete and other construction products operations representing approximately 94% and 6%, respectively, of such net sales. Demand for cement is derived primarily from residential construction, commercial and industrial construction, and public (infrastructure) construction which are highly cyclical and are influenced by prevailing economic conditions including interest rates and availability of public funds. Due to cement's low value-to-weight ratio, the industry is largely regional and regional demand is tied to local economic factors that may fluctuate more widely than those of the nation as a whole. The markets for the Company's products are highly competitive and portland cement is largely a commodity product. The Company competes with domestic and international sources largely on the basis of price. To a lesser extent, other competitive factors such as service, delivery time and proximity to customers affect the Company's performance. Basis of Presentation -- The consolidated financial statements include the accounts of Lone Star Industries, Inc. and all subsidiaries. All intercompany transactions have been eliminated. The Company's joint venture is accounted for using the equity method. Certain prior-period amounts have been reclassified to conform with current-period presentation. In November 1998, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend. Shareholders' equity, common stock and stock option activity for 1998 have been restated to give retroactive recognition to the stock split. In addition, all references in the financial statements and notes to financial statements, to weighted average number of shares, per share amounts and market prices of the Company's common stock have been restated to give retroactive recognition to the stock split. Upon emergence from its Chapter 11 proceedings in April 1994, the Company adopted "fresh-start" reporting in accordance with AICPA Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP No. 90-7"), as of March 31, 1994. The Company's emergence from these proceedings resulted in a new reporting entity with no retained earnings or accumulated deficit as of March 31, 1994. Accordingly, the Company's financial information shown for periods prior to March 31, 1994 is not comparable to consolidated financial statements presented on or subsequent to March 31, 1994. Cash and Cash Equivalents -- Cash equivalents include short-term, highly liquid investments with original maturities of three months or less, and are recorded at cost, which approximates market value. Inventories -- Inventories are stated at the lower of cost or market. Cost is determined principally by the weighted average cost method. Property, Plant and Equipment -- Property, plant and equipment were stated at fair market value as of March 31, 1994. Additions subsequent to March 31, 1994 are stated at cost. Property, plant and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. Useful lives for 23 26 property, plant and equipment are as follows: buildings-10 to 40 years; machinery and equipment-3 to 30 years; automobile and trucks-3 to 10 years. Significant expenditures which extend the useful lives of existing assets are capitalized. Maintenance and repair costs are charged to current earnings. Cost depletion related to limestone reserves is calculated using the units-of-production method. The cost of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings. Income Taxes -- Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. In accordance with SOP No. 90-7, income tax benefits recognized from preconfirmation net operating loss carryforwards were used first to reduce reorganization value in excess of amounts allocable to identifiable assets and then to increase additional paid-in capital (See Notes 7 and 19). Pension Plans -- The Company and certain of its consolidated subsidiaries have a number of retirement plans which cover substantially all of its employees. Defined benefit plans for salaried employees provide benefits based on employees' years of service and five-year final overall base compensation. Defined benefit plans for hourly-paid employees, including those covered by multi-employer pension plans under collective bargaining agreements, generally provide benefits of stated amounts for specified periods of service. The Company's policy is to fund at a minimum, amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Assets of the plans are administered by an independent trustee and are invested principally in fixed income securities, equity securities and real estate. Postretirement Benefits Other Than Pensions -- The Company provides retiree life insurance and health plan coverage to qualifying employees. The Company accounts for these benefits on an accrual basis, under the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions". These plans are unfunded; however, the Company makes defined quarterly contributions to the salaried retirees' Voluntary Employees Beneficiary Association ("VEBA") trust per the settlement agreement reached in the Company's bankruptcy proceedings (See Note 12). Earnings Per Common Share -- In December 1998, the Company issued a two-for-one stock split effected in the form of a 100% stock dividend. Previously reported share and earnings per share amounts have been restated. Basic earnings per common share for the years ended December 31, 1998, 1997 and 1996 are calculated by dividing net income by weighted average common shares outstanding during the period. Diluted earnings per common share for the years ended December 31, 1998, 1997 and 1996 are calculated by dividing net income by weighted average common shares outstanding during the period plus dilutive potential common shares which are determined as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 ---- ---- ---- Weighted average common shares............... 20,745,232 21,881,422 22,580,540 Effect of dilutive securities: Warrants................................... 5,550,858 4,734,450 3,315,326 Options to purchase common stock........... 219,919 241,516 596,758 ---------- ---------- ---------- Dilutive potential common shares............. 26,516,009 26,857,388 26,492,624 ========== ========== ==========
Dilutive potential common shares are calculated in accordance with the treasury stock method which assumes that proceeds form the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. The increasing number of warrants used in the calculation is a result of the increasing market value of the Company's common stock. Options to purchase 12,000 shares of common stock at $38.641 were outstanding during the second half of 1998 and options to purchase 12,000 shares of common stock at $17.15625 were outstanding during the 24 27 second half of 1996, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. Environmental Matters -- Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, or if an amount is likely to fall within a range and no amount within that range can be determined to be the better estimate, the minimum amount of the range is recorded. Accruals for environmental matters exclude claims for recoveries from insurance carriers and other third parties until it is probable that such recoveries will be realized. Recently Issued Accounting Pronouncements -- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. The statement is effective for periods beginning after June 15, 1999. The Company does not expect adoption of this statement to affect the Company's financial statements. Use of Estimates -- The preparation of 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 and disclosure of contingent liabilities at the date of the financial statements and revenue and expenses during the periods reported. Estimates are used when accounting for allowance for uncollectable accounts receivable, inventory obsolescence, depreciation, employee benefit plans, environmental accruals, taxes and contingencies, among others. Actual results could differ from these estimates. 2. ACCOUNTS AND NOTES RECEIVABLE Receivables consist of the following (in thousands):
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Trade accounts and notes receivable........................ $33,458 $30,554 Other receivables.......................................... 2,241 1,501 ------- ------- 35,699 32,055 Less: allowance for doubtful accounts...................... (3,535) (3,838) ------- ------- $32,164 $28,217 ======= =======
Due to the nature of the Company's products, a majority of the Company's accounts receivable are from businesses in the construction industry. Although the Company's customer base is geographically diversified, collection of receivables is partially dependent on the economics of the construction industry. 3. INVENTORIES Inventories consist of the following (in thousands):
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Finished goods............................................. $15,228 $14,850 Work in process and raw materials.......................... 6,657 6,417 Supplies and fuel.......................................... 23,848 21,836 ------- ------- $45,733 $43,103 ======= =======
25 28 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands):
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Land....................................................... $ 29,028 $ 29,680 Buildings and equipment.................................... 334,641 295,891 Construction in progress................................... 21,179 15,028 Automobiles and trucks..................................... 33,636 27,649 -------- -------- 418,484 368,248 Less accumulated depreciation and depletion................ (89,821) (68,993) -------- -------- $328,663 $299,255 ======== ========
5. INTEREST COSTS Interest costs incurred during the years ended December 31, 1998, 1997 and 1996 were $3,780,000, $5,027,000 and $7,931,000, respectively. Interest capitalized during the years ended December 31, 1998, 1997 and 1996 was $1,401,000, $1,442,000 and $1,325,000, respectively. Interest paid during the years ended December 31, 1998, 1997 and 1996 was $3,760,000, $7,292,000 and $7,931,000, respectively. 6. KOSMOS CEMENT COMPANY The Company's investment in and advances to joint ventures at December 31, 1998 and 1997 consists of its 25% investment in Kosmos Cement Company ("Kosmos"). Kosmos is a partnership with cement plants in Kosmosdale, Kentucky and Pittsburgh, Pennsylvania. The amount of cumulative unremitted earnings of joint ventures included in consolidated retained earnings at December 31, 1998 was $3,892,000. During the years ended December 31, 1998, 1997 and 1996, $7,000,000, $7,750,000 and $9,150,000, respectively, of distributions were received from Kosmos. Summarized financial information of Kosmos as of and for the years ended December 31, 1998, 1997 and 1996 is as follows (in thousands):
AS OF AND FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ---- ---- ---- Current assets............................................. $ 31,595 $ 30,341 $ 27,368 Property, plant and equipment, net......................... 75,902 73,098 74,038 Cost in excess of net assets of businesses acquired........ 20,914 21,765 22,485 Current liabilities........................................ (6,013) (4,581) (4,893) Other liabilities.......................................... (4,270) (4,091) (2,581) -------- -------- -------- Net assets................................................. $118,128 $116,532 $116,417 ======== ======== ======== Net sales.................................................. $100,274 $ 94,653 $ 88,300 Gross profit............................................... $ 32,070 $ 33,484 $ 26,935 Net income................................................. $ 29,596 $ 31,115 $ 26,345
At December 31, 1998, 1997 and 1996, the Company's share of the underlying net assets of Kosmos Cement Company exceeded its investment by $8,015,000, $8,807,000 and $9,600,000, respectively, and is being amortized over the estimated remaining life of the assets. In late 1997, the State of Kentucky proposed a deficiency assessment against Kosmos for severance tax payments related to limestone mined at a Kentucky quarry. The total assessment is approximately $3,700,000, including penalty and interest. Kosmos is contesting the assessment and met with the Kentucky Revenue Cabinet in January 1998 to discuss the disputed assessments. Discussions are still ongoing and Kosmos is unable to evaluate whether an unfavorable outcome is either probable or remote. In addition to limestone mined for the production of cement, Kosmos mines limestone specifically for use by a local utility company. Kosmos believes that, under the terms of a supply agreement, the utility is responsible for severance taxes on limestone provided to it. A major portion of the Kentucky severance tax assessment relates to this specifically mined limestone. For the amounts not paid by the local utility, the Company would indirectly bear 25% of any settlement and legal costs through its ownership interest in Kosmos. 26 29 7. DEFERRED TAX ASSET As of December 31, 1995, the Company had various net deferred tax assets made up primarily of the expected future tax benefit of net operating loss carryforwards, various credit carryforwards and reserves not yet deductible for tax purposes. A valuation allowance was provided in full against these net deferred tax assets upon the Company's emergence from bankruptcy when "fresh-start" reporting was adopted. During 1997 and 1996, the Company reduced the valuation allowance related to the remaining net tax assets by $12,893,000 and $81,889,000, respectively. The reduction reflects the Company's expectation that it is more likely than not that it will generate future taxable income to utilize this amount of net deferred tax assets. The benefit from this reduction was recorded as an increase in additional paid-in capital in accordance with SOP No. 90-7. During 1998, 1997 and 1996, approximately $16,000,000, $25,000,000 and $25,000,000, respectively, of net deferred tax assets were utilized. 8. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Payroll, vacation pay and other compensation............... $ 6,669 $ 6,228 Postretirement benefits other than pensions................ 6,225 7,563 Taxes other than income taxes.............................. 3,348 3,480 Insurance.................................................. 2,735 3,726 Interest................................................... 1,025 1,005 Other...................................................... 24,274 24,415 ------- ------- $44,276 $46,417 ======= =======
9. SENIOR NOTES PAYABLE In April 1994, the Company issued $78,000,000 of ten-year senior unsecured notes due July 31, 2003, which bore interest at a rate of 10% per annum. In March 1997, the Company redeemed $28,000,000 of these senior notes and called for the early redemption of the remaining $50,000,000 in the second quarter of 1997. In April 1997, the remaining $50,000,000 of the 10% senior notes were redeemed at par plus accrued interest of $1,125,000. In March 1997, the Company issued $50,000,000 of 7.31% senior notes due in 2007. The note purchase agreement imposes certain operating and financial restrictions on the Company. Such restrictions limit, among other things, the ability of the Company to incur additional indebtedness, create liens, engage in mergers and acquisitions, purchase the Company's capital stock and warrants or pay dividends. Commencing in the year 2001, the Company is required to make annual principal payments of $7,142,857. 10. CREDIT AGREEMENT In March 1997, the Company entered into a $100,000,000 unsecured revolving credit facility. Advances under this agreement bear interest at a rate which, at the Company's option, is either prime or LIBOR plus 37.5 to 75 basis points. A fee of 12.5 to 25 basis points is charged on the unused portion of the credit line. The number of basis points used in both the LIBOR interest rate and the commitment fee is determined by the Company's capital structure. The credit agreement expires on April 30, 2002. Although the Company has used the letter of credit facility provided by the credit agreement, it has never borrowed under the credit agreement. 11. LEASES Net rental expense for the years ended December 31, 1998, 1997 and 1996 was $3,754,000, $3,593,000 and $3,344,000, respectively. Minimum rental commitments under all non-cancelable leases principally pertaining to land, buildings and equipment are as follows: 1999 -- $1,193,000; 2000 -- $1,006,000; 27 30 2001 -- $883,000; 2002 -- $869,000; 2003 -- $865,000; after 2003 -- $1,806,000. Certain leases include options for renewal or purchase of leased property. 12. EMPLOYEE BENEFIT PLANS Changes in benefit obligations and plan assets for pension and postretirement obligations are as follows (in thousands):
POSTRETIREMENT PENSION BENEFITS BENEFITS -------------------- ---------------------- DECEMBER 31, DECEMBER 31, -------------------- ---------------------- 1998 1997 1998 1997 ---- ---- ---- ---- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year................................ $153,732 $144,968 $ 94,308 $ 103,196 Service cost.......................... 1,780 1,793 1,041 1,264 Interest cost......................... 10,303 10,489 6,329 7,364 Plan amendments....................... -- 194 -- -- Actuarial (gain) loss................. 2,523 7,175 2,454 (2,972) Benefits paid......................... (11,771) (10,887) (6,172) (6,639) Settlements........................... (6,539) -- -- (7,905) -------- -------- --------- --------- Benefit obligation at end of year..... 150,028 153,732 97,960 94,308 -------- -------- --------- --------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year............................. 192,954 172,715 -- -- Actual return on plan assets.......... 15,078 29,361 -- -- Employer contribution................. -- 1,765 6,171 6,639 Employee contribution................. -- -- 109 65 Benefits paid......................... (11,771) (10,887) (6,280) (6,704) Settlements........................... (6,539) -- -- -- -------- -------- --------- --------- Fair value of plan assets at end of year................................ 189,722 192,954 -- -- -------- -------- --------- --------- Funded status......................... 39,694 39,222 (97,960) (94,308) Unrecognized net actuarial gain....... (38,330) (42,039) (31,693) (36,983) Unrecognized prior service cost....... 3,817 4,190 -- -- -------- -------- --------- --------- Prepaid (accrued) benefit cost........ $ 5,181 $ 1,373 $(129,653) $(131,291) ======== ======== ========= =========
All of the Company's pension plans are overfunded as of December 31, 1998 and 1997. None of the Company's postretirement benefit plans are funded.
PENSION POSTRETIREMENT BENEFITS BENEFITS ------------ -------------- DECEMBER 31, DECEMBER 31, ------------ -------------- 1998 1997 1998 1997 ---- ---- ----- ----- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate........................................... 6.75% 7.00% 6.75% 7.00% Expected return on plan assets.......................... 8.00 8.00 8.00 8.00 Rate of compensation increase........................... 4.50 4.50 4.50 4.50
28 31
PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------ --------------------------- FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------ --------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost....................... $ 1,780 $ 1,793 $ 1,938 $ 1,041 $ 1,264 $ 1,603 Interest cost...................... 10,303 10,489 10,214 6,329 7,364 7,618 Expected return on plan assets..... (13,442) (11,762) (10,140) -- -- -- Amortization of prior service cost............................. 374 382 356 -- -- -- Recognized net actuarial gain...... (777) (332) -- (2,836) (2,575) (1,783) -------- -------- -------- ------- ------- ------- Net periodic benefit (income) cost............................. $ (1,762) $ 570 $ 2,368 $ 4,534 $ 6,053 $ 7,438 ======== ======== ======== ======= ======= =======
In 1997, the Company recorded a $7,905,000 postretirement settlement gain related to the sale of the Company's New York construction aggregates operations. For measurement purposes, a 9.5% annual medical rate of increase is assumed for 1999 for both pre-medicare and post-medicare claims; the rate is assumed to decrease 1/2% each year to 6% per year after 2005. The health care cost trend rate assumption has a significant effect on the amounts reported for the health care plans. To illustrate, a one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT INCREASE DECREASE --------------------------- --------------------------- Effect on total of service and interest cost components........................ $ 558 $ (401) Effect on postretirement benefit obligation............................. $5,235 $(5,862)
Certain union employees are covered under union sponsored multi-employer pension plans pursuant to collective bargaining agreements. Multi-employer pension expenses and contributions to the plans in the years ended December 31, 1998, 1997 and 1996, were approximately $130,000, $140,000 and $300,000, respectively. As part of its emergence from Chapter 11 proceedings, the Company reached settlements with the salaried and union retirees with respect to reductions and modifications of retiree medical and life insurance benefits. As part of the settlement with salaried retirees, the Company established a Voluntary Employees Beneficiary Association ("VEBA"), a tax-exempt trust, and agreed to make defined quarterly contributions to the trust. The Company has the option to prepay all future quarterly contributions to the VEBA in a single cash amount equal to 110% of the discounted present value (using an 8.5% discount factor) of all future quarterly contributions. The Company made contributions of $4,318,000, $4,425,000 and $4,428,000 to the VEBA during the years ended December 31, 1998, 1997 and 1996, respectively. 29 32 13. COMMON STOCK The Company has authorized 50,000,000 shares of $1.00 par value common stock. Transactions in common stock are as follows:
COMMON TREASURY SHARES SHARES ------ -------- Balance, December 31, 1995.................................. 12,080,844 604,157 Exercise of warrants...................................... 5,666 -- Exercise of options....................................... -- (204,565) Purchase of shares........................................ -- 974,317 Stock issued under compensation plans..................... -- (400) ---------- --------- Balance, December 31, 1996.................................. 12,086,510 1,373,509 Exercise of warrants...................................... 5,356 -- Exercise of options....................................... -- (290,500) Purchase of shares........................................ -- 283,800 Stock issued under compensation plans..................... -- (800) ---------- --------- Balance, December 31, 1997.................................. 12,091,866 1,366,009 Effect of 2-for-1 stock split in December 1998............ 12,091,866 1,366,009 Exercise of warrants...................................... 1,507,814 -- Exercise of options....................................... -- (14,100) Purchase of shares........................................ -- 2,823,390 Stock issued under compensation plans..................... -- (1,600) Return of shares from Chapter 11 distribution agent....... -- 29,144 ---------- --------- Balance, December 31, 1998.................................. 25,691,546 5,568,852 ========== =========
At December 31, 1998, the Company has reserved 9,389,006 shares of its authorized but unissued common stock for possible future issuance in connection with the exercise of the warrants to purchase common stock (6,047,606 shares) and the exercise of stock options (3,341,400 shares). Since the second quarter of 1995, the Company has paid a $0.05 per share quarterly cash dividend. In addition, on February 18, 1999, the Board of Directors declared a $0.05 dividend per common share, payable on March 15, 1999 to shareholders of record as of March 1, 1999. The Company's financing agreements and the revolving credit facility contain certain restrictive covenants which, among other things, could have the effect of limiting the payment of dividends and the repurchase of common stock and warrants. Approximately $54,000,000 is currently available for such payments under the most restrictive of such covenants (See Notes 9 and 10). On November 19, 1998, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend to shareholders of record on December 14, 1998, to be distributed on December 28, 1998. Shareholders' equity for 1998 has been restated to give retroactive recognition to the stock split. In addition, all references in the financial statements and accompanying notes to financial statements, to weighted average number of shares, 1998 stock activity, per share amounts, 1998 stock option data and market prices of the Company's common stock have been restated. As part of a stock repurchase program, in 1998 the Company purchased 1,912,200 shares of treasury stock in open market transactions for $59,856,000 and purchased 911,190 shares of its common stock in private transactions for $30,164,000. In 1997 the Company purchased 283,800 shares of treasury stock in open market transactions for $14,069,000. In 1996, the Company purchased 272,401 shares of treasury stock in open market transactions for $8,457,000 and purchased 700,000 shares of its common stock in private transactions for $25,200,000. An additional 1,916 shares were received, in lieu of cash, by the Company in connection with the exercise of certain employee stock options. 30 33 In January 1998, pursuant to an order signed by the U.S. Bankruptcy Court, 29,144 shares of common stock were returned to the Company from the Chapter 11 distribution agent. These shares were recorded as treasury shares and had no effect on total equity of the Company. In February 1999, the Company announced a program which will provide shareholders owning fewer than 100 shares of common stock the opportunity to sell all of their shares to the Company. The program is to run from February 5, 1999 through March 8, 1999, unless extended by the Company. The purchase price under the program will be equal to the average of the closing market prices of the Company's common stock for all trading days during the period the program is in effect. 14. WARRANTS TO PURCHASE COMMON STOCK In April 1994, the Company issued 4,003,333 warrants to purchase common stock at an exercise price of $18.75 per share. The number of shares of common stock purchasable upon the exercise of each warrant and the exercise price of the warrant are subject to adjustment if the Company (i) pays a dividend in shares of common stock, (ii) subdivides its outstanding shares of common stock, (iii) combines its outstanding shares of common stock into a smaller number of shares of common stock, or issues by reclassification or recapitalization of its shares of common stock, other securities of the Company or (iv) issues certain stock rights convertible into, or exchangeable for, common stock. An adjustment will not result from the Company's sale of common stock on the open market or from the declaration of regular cash dividends. The warrants are non-callable, non-redeemable and expire on December 31, 2000. As of December 31, 1998, there were 3,023,803 warrants outstanding. In December 1998, the Company issued a two-for-one stock split effected in the form of a 100% stock dividend. The stock split increased the number of shares of common stock a warrant holder is entitled to purchase from one to two at $9.375 per share. In 1998, the Company purchased 179,405 of its warrants in private transactions for $8,584,000. In January 1998, pursuant to an order signed by the U.S. Bankruptcy Court, 31,033 warrants were returned to the Company from the Chapter 11 distribution agent. The returned warrants were cancelled. 15. STOCKHOLDER RIGHTS PLAN In November 1994, the Board of Directors adopted a Stockholder Rights Plan ("rights plan") under which stock purchase rights were distributed as a dividend to holders of common stock payable to the shareholders of record on December 19, 1994. Management believes that the rights plan represents a means of deterring abusive and coercive takeover tactics not offering an adequate price to all stockholders, and seeks to ensure that stockholders realize the long-term value of their investments. The rights plan provides that if, subject to certain exemptions, any person or group acquires 15% or more of the Company's common stock, each right not owned by the 15% or more stockholder or related parties will entitle its holder to purchase, at the right's then current exercise price, shares of common stock having a value of twice the right's then current exercise price. This right to purchase common stock at a discount will not be triggered by a person's or group's acquisition of 15% or more of the common stock pursuant to a tender or exchange offer which is for all outstanding shares at a price and on terms that the Board of Directors determines (prior to acquisition) to be adequate and in the best interests of the Company and its stockholders. Under the rights plan, holders of the rights will initially be entitled to buy one-tenth of a share of the Company's common stock at an exercise price of $35.00 (which was adjusted from $70.00 as a result of the Company's recent two-for-one stock split) for each whole share which a holder of rights may purchase. Until a person or group acquires 15% or more of the common stock or commences a tender or exchange offer for 15% or more of the common stock, the rights will attach to and trade with the common stock. As a result, each of the new shares issued in the two-for-one stock split included one right. The rights will expire in the year 2004. The Company may redeem the rights, at the option of the Board of Directors, at a redemption price of $0.01 per right at any time prior to the acquisition by any person or group of 15% or more of the common stock. In addition, after a person or group has acquired 15% or more of the common stock but before any 31 34 person or group has acquired 50% or more of the common stock, the Company may exchange shares of common stock for rights. 16. STOCK COMPENSATION PLANS At December 31, 1998, the Company had three stock-based compensation plans, which are described below. As of January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The Company has chosen to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net income for the years ended December 31, 1998, 1997 and 1996 would have been $76,165,000, $65,347,000 and $54,082,000, respectively. Pro forma basic and diluted earnings per share for the years ended December 31, 1998, 1997 and 1996 would have been $3.67, $2.99 and $2.40, and $2.87, $2.43 and $2.04, respectively. The pro forma effect of stock option grants on net income for 1998, 1997 and 1996 may not be representative of the pro forma effect on net income in future years due to the small number of options granted during 1998, 1997 and 1996 and the exclusion of option grants made prior to 1995. 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 used for grants in 1998, 1997, 1996, 1995 (Directors Plan) and 1995 (Management Plan), respectively: dividend yield of 0.52, 0.52, 0.58, 0.96 and 0.93 percent; expected volatility of 43, 31, 28, 23 and 27 percent; risk-free interest rates of 4.77, 5.44, 6.29, 5.30 and 5.30 percent; and expected lives of 4 years for all grants. Under the Management Stock Option Plan ("Management Plan"), the Company has granted options to its employees for 1,400,000 shares of common stock. Under the Directors Stock Option Plan ("Directors Plan"), the Company may grant options to its Directors for up to 100,000 shares of common stock. Under the 1996 Long Term Incentive Plan ("Incentive Plan"), the Company may grant up to 3,000,000 stock options and/or stock appreciation rights to its employees. No options were granted under the Incentive Plan in 1998, 1997 or 1996. Under all plans, the exercise price of each option must be equal to or greater than the market price of the Company's stock on the date of grant, and an option's maximum term is ten years. Options granted under the Management Plan vest over a three-year period and options granted under the Directors Plan become vested after six months. Options granted under the Incentive Plan become vested after a minimum of one year from the grant date. 32 35 A summary of the status of the Company's Management and Directors Plans as of and for the years ended December 31, 1998, 1997 and 1996 is presented below:
WEIGHTED- AVERAGE EXERCISE OPTIONS OPTIONS PRICE OUTSTANDING EXERCISABLE --------- ----------- ----------- Balance, December 31, 1995........................ $15.6700 634,815 404,073 Options granted................................. $34.3130 6,000 -- Options exercised............................... $15.3750 (204,565) (204,565) Options which became exercisable................ $16.5980 -- 124,242 -------- -------- Balance, December 31, 1996........................ $16.0650 436,250 323,750 Options granted................................. $38.3750 6,000 -- Options exercised............................... $15.7700 (290,500) (290,500) Options which became exercisable................ $16.9450 -- 112,250 -------- -------- Balance, December 31, 1997........................ $17.5100 151,750 145,500 Effect of 2-for-1 stock split in December 1998......................................... 151,750 145,500 Options granted................................. $38.6405 12,000 -- Options exercised............................... $10.4025 (14,100) (14,100) Options which became exercisable................ $24.4107 -- 24,500 -------- -------- Balance, December 31, 1998........................ $ 9.8680 301,400 301,400 ======== ========
Options available for future grants under the Directors Plan were 40,000 and 26,000 (pre-split) at December 31, 1998 and 1997, respectively. Options available for future grants under the Incentive Plan were 3,000,000 and 1,500,000 (pre-split) at December 31, 1998 and 1997, respectively. The following table summarizes information about stock options outstanding at December 31, 1998:
WEIGHTED-AVERAGE DECEMBER 31, 1998 --------------------------------------- ------------------------- REMAINING OPTION EXERCISE PRICES NUMBER NUMBER CONTRACTUAL ------------------------- RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE - ------------------------ ----------- ----------- ----------- ----------- ----------- $7.6875-$7.84375 253,400 253,400 5.5 years $ 7.6949 $ 7.6949 $10.3750 12,000 12,000 7.0 years $10.3750 $10.3750 $17.1565 12,000 12,000 7.5 years $17.1565 $17.1565 $19.1875 12,000 12,000 8.5 years $19.1875 $19.1875 $38.6405 12,000 12,000 9.5 years $38.6405 $38.6405 ------- ------- 301,400 301,400 ======= =======
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 (in thousands).
DECEMBER 31, 1998 -------------------- CARRYING FAIR AMOUNT VALUE -------- ----- Financial assets: Cash and cash equivalents............................ $120,161 $120,161 Financial liabilities: Senior notes payable................................. $ 50,000 $ 50,652
33 36 The carrying amounts shown in the table are included in the accompanying consolidated balance sheet under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents -- the carrying amount approximates fair value because of the short maturity of those instruments. Senior notes payable -- the fair value of this privately-placed long-term debt is based on the change in the fair value of similar issues of publicity traded debt. 18. OTHER INCOME, NET Other income, net, consists of the following (in thousands):
FOR THE YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ---- ---- ---- Interest income on investments.......................... $ 7,674 $4,892 $2,552 Gain on sale of surplus property........................ 3,300 3,110 -- Other, net.............................................. (373) (79) 455 ------- ------ ------ $10,601 $7,923 $3,007 ======= ====== ======
19. INCOME TAXES Provision for income taxes consists of the following (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ---- ---- ---- Federal income tax provision: Current.......................................... $21,166 $ 7,301 $ 1,314 ------- ------- -------- Deferred: Difference between tax and book depreciation................................ 717 1,008 3,402 Sale of assets................................ 122 (918) 2,467 Alternative minimum tax and other credits..... (5,375) (7,301) 1,139 Net operating loss carryforward............... 14,246 22,151 8,453 Other reserves................................ 2,883 7,132 6,204 Change in valuation allowance................. -- (9,346) (75,109) Other, net.................................... (1,628) (1,656) 3,543 ------- ------- -------- Total deferred................................... 10,965 11,070 (49,901) ------- ------- -------- Increase in additional paid-in capital........... -- 9,346 71,289 ------- ------- -------- Total federal income tax provision................. 32,131 27,717 22,702 ------- ------- -------- State and local income tax provision: Current.......................................... 2,077 875 877 Deferred......................................... 4,652 4,731 4,031 Change in valuation allowance.................... -- (3,547) (10,600) Increase in additional paid-in capital........... -- 3,547 10,600 ------- ------- -------- Total state and local income tax provision......... 6,729 5,606 4,908 ------- ------- -------- Provision for income taxes......................... $38,860 $33,323 $ 27,610 ======= ======= ========
34 37 As of December 31, 1998, the Company has regular tax net operating loss carryforwards of approximately $75,000,000 that expire at various dates through 2009 and an alternative minimum tax credit carryforward of $19,700,000. The Internal Revenue Code of 1986, as amended (the "Code"), imposes limitations under certain circumstances on the use of carryforwards upon the occurrence of an "ownership change" (as defined in Section 382 of the Code). An "ownership change" resulted from the issuance of equity securities by the Company as part of its plan of reorganization. Such an "ownership change" limits the use of a portion of the Company's carryforwards in any one year. The Company believes it is more likely than not that all of its carryforwards will be utilized prior to their expiration. The following is a schedule of consolidated pre-tax income and a reconciliation of income taxes computed at the U.S. statutory rate to the provision for income taxes (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ---- ---- ---- Income before income taxes......................... $115,142 $98,736 $81,770 -------- ------- ------- Tax provision computed at statutory rates.......... 40,300 34,558 28,620 Differences resulting from: State tax, net................................... 4,375 3,669 3,190 Other, including percentage depletion............ (5,815) (4,904) (4,200) -------- ------- ------- Provision for income taxes......................... $ 38,860 $33,323 $27,610 ======== ======= =======
Components of net deferred tax assets as of December 31, 1998 and 1997 are as follows (in thousands):
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Current tax assets related to: Reserves not yet deducted................................ $ 4,052 $ 3,825 -------- -------- Non-current tax assets related to: Reserves not yet deducted................................ 4,773 2,744 Reserve for retiree benefits............................. 42,777 42,893 Loss carryforwards....................................... 26,353 40,252 Alternative minimum tax and other credits................ 19,660 18,849 Net state................................................ 774 3,888 -------- -------- 94,337 108,626 Non-current tax liabilities related to: Fixed assets............................................. (58,239) (53,320) Other.................................................... (11,056) (14,490) Domestic joint ventures.................................. (3,449) (3,155) -------- -------- (72,744) (70,965) -------- -------- Total long-term net deferred tax assets.................... 21,593 37,661 -------- -------- Total net deferred tax assets.............................. $ 25,645 $ 41,486 ======== ========
Net income taxes paid during the years ended December 31, 1998, 1997 and 1996, were $25,209,000, $7,187,000 and $812,000, respectively. Income taxes payable at December 31, 1998 and 1997 are $2,086,000 and $3,559,000, respectively. 35 38 20. ASSET DISPOSITIONS In February and September 1998, the Company received $1,500,000 and $1,800,000 from the sale of surplus real estate in Massachusetts and Texas, respectively. The gain on the sales is included in other income on the accompanying consolidated statement of operations. In October 1997, the Company sold its New York construction aggregates operations, including working capital, for $43,186,000, which approximated book value. In September 1997, the Company received $3,110,000 from the sale of a parcel of surplus real estate in Massachusetts. The gain on the sale is included in other income on the accompanying consolidated statement of operations. In March 1997, the Company sold its central Illinois ready-mixed and other concrete operations, including inventories, for proceeds equal to book value of $10,500,000. The operations sold in 1997 contributed the following results for the period through their respective dates of disposition (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ------------------ 1997 1996 ---- ---- Net sales................................................... $40,326 $69,848 Pre-tax income.............................................. $ 1,011 $ 5,467
21. ENVIRONMENTAL REGULATION The Company is subject to extensive, stringent and complex federal, state and local laws, regulations and ordinances pertaining to the quality and the protection of the environment and human health and safety, requiring the Company to devote substantial time and resources in an effort to maintain continued compliance. Many of the laws and regulations apply to the Company's former activities, properties and facilities as well as its current operations. There can be no assurances that judicial or administrative proceedings, seeking penalties or injunctive relief, will not be brought against the Company for alleged non-compliance with applicable environmental laws and regulations relating to matters as to which the Company is currently unaware. For instance, if releases of hazardous substances are discovered to have occurred at facilities currently or previously owned or operated by the Company, or at facilities to which the Company has sent waste materials, the Company may be subject to liability for the investigation and remediation of such sites. In addition, changes to such regulations or the enactment of new regulations in the future could require the Company to undertake capital improvement projects or to cease or curtail certain operations or could otherwise substantially increase the capital, operating and other costs associated with compliance. For example, recent worldwide initiatives for limitations on carbon dioxide emissions could result in the promulgation of statutes or regulations that would adversely affect certain aspects of United States manufacturing, including the cement industry. The Clean Water Act provides a comprehensive federal regulatory scheme governing the discharge of pollutants to waters of the United States. This regulatory scheme requires that permits be secured for discharges of wastewater, including stormwater runoff associated with industrial activity, to waters of the United States. The Company has secured or has applied for all required permits in connection with its wastewater and stormwater discharges. The Clean Air Act provides for a uniform federal regulatory scheme governing the control of air pollutant emissions and permit requirements. In addition, certain states in which the Company operates have enacted laws and regulations governing the emission of air pollutants and requiring permits for sources of air pollutants. The Company is required to apply for federal operating permits for each of its cement manufacturing facilities. All of these applications have been made. As part of the permitting process, the Company may be required to install equipment to monitor emissions of air pollutants from its facilities. In addition, the United States 36 39 Environmental Protection Agency ("EPA") is required to develop regulations directed at reducing emissions of toxic air pollutants from a variety of industrial sources, including the portland cement manufacturing industry. As part of this process, the EPA has announced proposed maximum available control technology ("MACT") standards for cement manufacturing facilities (like Lone Star's Greencastle and Cape Girardeau plants) that burn hazardous waste fuels ("HWF") and other MACT standards for facilities burning fossil fuels. These MACT standards are anticipated by the Company to be effective in 1999 and implemented over a three-year period. The Company currently anticipates that it will be able to achieve these MACT standards. The EPA has also promulgated under the Clear Air Act new standards for small particulate matter and ozone emissions, and related testing will be carried out over the next several years. Depending on the result of this testing, additional regulatory burdens could be imposed on the cement industry by states not in compliance with the regulations. The EPA has promulgated new regulations to reduce nitrogen oxide emissions substantially over the next eight years. These rules would affect 22 states including three in which the Company has cement plants: Indiana, Illinois and Missouri. Depending on state implementation, this emissions reduction could adversely affect the cement industry in these states. The Resource Conservation and Recovery Act ("RCRA") establishes a cradle-to-grave regulatory scheme governing the generation, treatment, storage, handling, transportation and disposal of solid wastes. Solid wastes which are classified as hazardous wastes pursuant to RCRA, as well as facilities that treat, store or dispose of such hazardous wastes, are subject to stringent regulatory requirements. Generally, wastes produced by the Company's operations are not classified as hazardous wastes and are subject to less stringent federal and state regulatory requirements. Cement kiln dust ("CKD"), a by-product of cement manufacturing, is currently exempted from regulation as a hazardous waste pursuant to the Bevill Amendment to RCRA. However, in 1995, the EPA issued a regulatory determination regarding the need for regulatory controls on the management, handling and disposal of CKD. Generally, the EPA regulatory determination provides that the EPA intends to draft and promulgate regulations imposing controls on the management, handling and disposal of CKD that will be based largely on selected components of the existing RCRA hazardous waste regulatory program, tailored to address the specific regulatory concerns posed by CKD. The EPA regulatory determination further provides that new CKD regulations will be designed both to be protective of the environment and to minimize the burden on cement manufacturers. It is not possible to predict at this time precisely what new regulatory controls on the management, handling and disposal of CKD or what increased costs (or range of costs) would be incurred by the Company to comply with these requirements. These regulations will be promulgated through a rulemaking scheduled to be completed shortly. These rules will be implemented over a three-year period following promulgation. The types of controls being considered by the EPA include fugitive dust emission controls, restrictions for landfills located in sensitive areas, groundwater monitoring, standards for liners and caps, metals limits and corrective action for currently active units. In 1995, the State of Indiana made a determination that the CKD stored at the Company's Greencastle plant is a Type I waste and requested that the Company apply for a formal permit for an on-site landfill for the CKD. The Company understands that similar notices were sent to other cement manufacturers in the State of Indiana. The Company is protesting this determination through legal channels and has received a stay to allow it to demonstrate that current management practices pose no threat to the environment. The Company believes that the State's determination ultimately will be reversed or the Company will receive the needed permit or other adequate relief, such as an agreed order requiring certain additional waste management procedures that are less stringent than those generally required for Type I wastes. If the Company is not successful in this regard, however, like other Indiana cement producers, the Greencastle plant could incur substantially increased operating and capital costs. The Cape Girardeau, Missouri and Greencastle, Indiana plants, which are the Company's two cement manufacturing facilities using HWF as a cost-saving energy source, are subject to strict federal, state and local requirements governing hazardous waste treatment, storage and disposal facilities, including those contained in the federal Boiler and Industrial Furnace Regulations promulgated under RCRA (the "BIF Rules"). The Company has secured the permit required under RCRA and the BIF Rules for the Cape Girardeau plant, and the Greencastle plant also will go through this permitting process and has completed a three-year recertification of its existing interim status. The Greencastle permit is a requirement to enable Lone Star to continue the 37 40 use of HWF at the plant. The permitting process is lengthy and complex, involving the submission of extensive technical data, and there can be no assurances that the plant will be successful in securing its final RCRA permit. In addition, if received, the permit could contain terms and conditions with which the Company cannot comply or could require the Company to install and operate costly control technology equipment. While Lone Star believes that it is currently in compliance with the extensive and complex technical requirements of the BIF Rules, there can be no assurances that the Company will be able to maintain compliance with the BIF Rules or that changes to such rules or their interpretation by the relevant agencies or courts might not make it more difficult or cost-prohibitive to continue to burn HWF. The federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), as well as many comparable state statutes, creates a joint and several liability scheme for the investigation and remediation of facilities where releases of hazardous substances are found to have occurred. Liability may be imposed upon current owners and operators of the facility, upon owners and operators of the facility at the time of the release and upon generators and transporters of hazardous substances released at the facility. While, as noted above, wastes produced by the Company generally are not classified as hazardous wastes, many of the raw materials, by-products and wastes currently and previously produced, used or disposed of by the Company or its predecessors contain chemical elements or components that have been designated as hazardous substances or which otherwise may cause environmental contamination. Hazardous substances are or have been used or produced by the Company in connection with its cement manufacturing operations (e.g. grinding compounds, refractory bricks), quarrying operations (e.g. blasting materials), equipment operation and maintenance (e.g. lubricants, solvents, grinding aids, cleaning aids, used oils), and hazardous waste fuel burning operations. Past operations of the Company have resulted in releases of hazardous substances at sites currently or formerly owned by the Company and certain of its subsidiaries or where waste materials generated by the Company have been disposed. CKD and other materials were placed in depleted quarries and other locations for many years. The Company has been named by the EPA as a potentially responsible party for the investigation and remediation of several Superfund sites, although it does not currently contemplate that future costs relating to such sites will be material. The Company's operations are subject to federal and state laws and regulations designed to protect worker health and safety. Worker protection at the Company's cement manufacturing facilities is governed by the federal Mine Safety and Health Act ("MSHA") and at other Company operations is governed by the federal Occupational Safety and Health Act ("OSHA"). The December 31, 1998 consolidated balance sheet includes accruals of $6,300,000 which represent the Company's current estimate of its liability related to future remediation costs at sites where known environmental conditions exist. The Company believes these reserves to be adequate for known environmental matters. 22. LEGAL PROCEEDINGS From time to time the Company is named as a defendant in lawsuits asserting, among other things, products liability. The Company maintains such liability insurance coverage for its operations as it deems reasonable. The Company does not expect the effect of such matters to have a material effect on the financial condition of the Company. 38 41 23. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1998 and 1997 is as follows (in thousands except per share data):
QUARTER --------------------------------------- 1998 FIRST SECOND THIRD FOURTH - ---- ----- ------ ----- ------ Net sales....................................... $57,794 $ 97,702 $104,010 $87,559 Gross profit.................................... $13,612 $ 36,459 $ 43,543 $31,321 Net income...................................... $ 7,061 $ 22,412 $ 28,750 $18,059 ------- -------- -------- ------- Basic earnings per common share................. $ 0.33 $ 1.05 $ 1.39 $ 0.93 ------- -------- -------- ------- Diluted earnings per common share............... $ 0.26 $ 0.81 $ 1.08 $ 0.73 ------- -------- -------- -------
QUARTER --------------------------------------- 1997 FIRST SECOND THIRD FOURTH - ---- ----- ------ ----- ------ Net sales....................................... $60,836 $104,618 $111,775 $80,336 Gross profit.................................... $ 8,516 $ 36,241 $ 41,868 $28,468 Net income...................................... $ 264 $ 20,181 $ 27,722 $17,246 ------- -------- -------- ------- Basic earnings per common share................. $ 0.01 $ 0.92 $ 1.26 $ 0.79 ------- -------- -------- ------- Diluted earnings per common share............... $ 0.01 $ 0.76 $ 1.02 $ 0.63 ------- -------- -------- -------
- --------------- (1) Gross profit is net of depreciation expense relating to cost of sales of $21,566,000 and $23,182,000 in the years ended December 31, 1998 and 1997, respectively. (2) Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share in 1998 and 1997 does not equal the total computed for the year. (3) Previously reported earnings per share amounts have been restated to give effect to the two-for-one stock split in December 1998 (See Notes 1 and 13). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III The information required by Part III (Items 10-13) is incorporated herein by reference to the captions "Election of Directors", "Executive Compensation" and "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive proxy statement which pursuant to Regulation 14A will be filed not later than 120 days after the end of the year covered by this Report. Certain information relating to the Company's executive officers is included in Part I of this Report under the caption "Executive Officers of Registrant". 39 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this Report: 1. FINANCIAL STATEMENTS AND SCHEDULE: See Index to Financial Statements and Schedule on page 17 of this Report. 2. EXHIBITS: 3.1 -- Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 3.2 -- Certificate of Amendment of Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). 3.3 -- Amended By-Laws (incorporated herein by reference to Exhibit 3(ii) of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.1 -- Form of Note Purchase Agreement, dated as of March 10, 1997, relating to the Company's $50 million principal amount of 7.31% Senior Notes Due 2007 (incorporated herein by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4.2 -- Credit Agreement by and among the Registrant, NBD Bank, N.A. (as Agent) and the Lenders that are signatories thereto, dated as of June 30, 1997 (incorporated herein by reference to Exhibit 4.4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 4.3 -- Warrant Agreement, dated April 13, 1994, between Lone Star Industries, Inc. and Chemical Bank, as Warrant Agent (incorporated herein by reference to Exhibit 4B of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). 4.4 -- Rights Agreement, dated as of November 10, 1994, between Lone Star Industries, Inc. and Chemical Bank (incorporated herein by reference to the Registrant's Form 8-A, dated November 17, 1994). 4.5 -- Letter regarding adjustment under Rights Agreement, dated February 2, 1999 (filed herewith). 10.1 -- Settlement Agreement, dated as of February 4, 1994, between Lone Star Industries, Inc., et al. and the Official Committee of Retired Employees of Lone Star Industries, Inc., et al. (incorporated herein by reference to Exhibit 10.23 of the Registrant's Registration Statement on Form S-1, File Number 33-55377). 10.2 -- Agreement, dated as of March 11, 1994, by and between the Debtors and the Unions (incorporated herein by reference to Exhibit 10.25 of the Registrant's Registration Statement on Form S-1, File Number 33-55377). 10.3 -- Registration Rights Agreement, dated as of July 18, 1994, among Lone Star Industries, Inc., Metropolitan Life Insurance Company, Metropolitan Insurance and Annuity Company and TCW Special Credits, as Agent and Nominee (incorporated herein by reference to Exhibit 10.22 of the Registrant's Registration Statement on Form S-1, File Number 33-55377). *10.4 -- Second Amended and Restated Employment Agreement, dated as of May 1, 1998, between David W. Wallace and Lone Star Industries, Inc. (incorporated by reference to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). *10.5 -- Second amended and Restated Employment Agreement, dated as of May 1, 1998, between William M. Troutman and Lone Star Industries, Inc. (incorporated by reference to Exhibit 10.6 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
40 43 *10.6 -- Second amended and Restated Agreement, dated May 1, 1998, between William M. Troutman and Lone Star Industries, Inc. (incorporated herein by reference to Exhibit 10.7 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). *10.8 -- Stock Option Agreement, dated as of June 8, 1994, between William M. Troutman and Lone Star Industries, Inc. (incorporated herein by reference to Exhibit 10E(iii) of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). *10.9 -- Form of Indemnification Agreement entered into between Lone Star Industries, Inc. and directors and an executive officer (incorporated herein by reference to Exhibit 10G of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). *10.10 -- Form of "Change of Control" agreement for certain executive officers of Lone Star Industries, Inc. (incorporated herein by reference to Exhibit 10.10 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). *10.11 -- Form of stock option agreement for certain executive officers of Lone Star Industries, Inc. (incorporated herein by reference to Exhibit 10J of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994). *10.12 -- Lone Star Industries, Inc. Management Stock Option Plan (incorporated herein by Reference to Appendix A of the Registrant's Definitive Proxy Statement, dated May 11, 1994). *10.13 -- Lone Star Industries, Inc. Directors Stock Option Plan (incorporated herein by Reference to Appendix B of the Registrant's Definitive Proxy Statement, dated May 11, 1994). *10.14 -- Lone Star Industries, Inc. Employees Stock Purchase Plan (incorporated herein by Reference to Appendix C of the Registrant's Definitive Proxy Statement, dated May 11, 1994). *10.15 -- Lone Star Industries, Inc. 1996 Long Term Incentive Plan (incorporated herein by Reference to Appendix A of the Registrant's Definitive Proxy Statement, dated April 1, 1996). *10.16 -- Lone Star Industries, Inc. Supplemental Executive Retirement Plan, effective July 1, 1996 (incorporated by reference to Exhibit 10.18 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). *10.17 -- Lone Star Industries, Inc. Amended and Restated Executive Incentive Plan (incorporated herein by reference to Exhibit 10.19 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). *10.18 -- Lone Star Industries, Inc. Voluntary Deferred Compensation Plan for Non-Employee Directors (incorporated herein by reference to Appendix B of the Registrant's Definitive Proxy Statement, dated April 1, 1996). 21 -- Subsidiaries of the Company (incorporated herein by reference to Exhibit 21 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 23 -- Consent of PricewaterhouseCoopers LLP (filed herewith). 27 -- Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K. Form 8-K, November 19, 1998 -- Item 5 -- Other Events. Form 8-K, December 9, 1998, -- Item 5 -- Other Events. - --------------- * Indicates management contract or compensatory plan or arrangement. 41 44 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 INDUSTRIES, INC. By: /s/ JAMES W. LANGHAM --------------------------------- JAMES W. LANGHAM Vice President, General Counsel and Secretary Date: March 5, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE OR CAPACITY DATE --------- ----------------- ---- /s/ DAVID W. WALLACE Director and Chairman of the Board March 5, 1999 - --------------------------------------------- DAVID W. WALLACE /s/ JAMES E. BACON Director March 5, 1999 - --------------------------------------------- JAMES E. BACON /s/ THEODORE F. BROPHY Director March 5, 1999 - --------------------------------------------- THEODORE F. BROPHY /s/ ARTHUR B. NEWMAN Director March 5, 1999 - --------------------------------------------- ARTHUR B. NEWMAN Director - --------------------------------------------- ALLEN E. PUCKETT /s/ ROBERT G. SCHWARTZ Director March 5, 1999 - --------------------------------------------- ROBERT G. SCHWARTZ /s/ WILLIAM M. TROUTMAN Director, President and Chief March 5, 1999 - --------------------------------------------- Executive Officer WILLIAM M. TROUTMAN /s/ JACK R. WENTWORTH Director March 5, 1999 - --------------------------------------------- JACK R. WENTWORTH /s/ WILLIAM E. ROBERTS Vice President, Chief Financial March 5, 1999 - --------------------------------------------- Officer, WILLIAM E. ROBERTS Controller and Treasurer
42 45 LONE STAR INDUSTRIES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
ADDITIONS BALANCE ------------------------ AT CHARGED TO CHARGED BALANCE AT BEGINNING COSTS AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) PERIOD ----------- --------- ---------- ----------- ------------- ---------- FOR THE YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts deducted from notes and accounts receivable.......................... $3,838 48 7 358 $3,535 ====== ===== ===== ===== ====== FOR THE YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts deducted from notes and accounts receivable.......................... $5,099 124 364 1,749 $3,838 ====== ===== ===== ===== ====== FOR THE YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts deducted from notes and accounts receivable.......................... $5,936 270 1,401 2,508 $5,099 ====== ===== ===== ===== ======
- ------------------------ (1) Deductions in the years ended December 31, 1998, 1997 and 1996 primarily represent uncollectible accounts charged off. Deductions in the year ended December 31, 1997 partly represent the allowance related to the New York construction aggregates operations which were sold in 1997. (2) Represents recoveries of accounts previously charged off, and reserves related to dispositions. 43 EX-4.5 2 LETTER REGARDING ADJUSTMENT UNDER RIGHTS AGREEMENT 1 EXHIBIT 4.5 February 2, 1999 ChaseMellon Shareholder Services L.L.C. 450 West 33rd Street 15th Floor New York, New York 10001 Attn: Vice President -- Stock Transfer Administration Dear Sir/Madam: This letter will serve as your certification, pursuant to Sections 12 and 26 of the Rights Agreement, dated as of November 10, 1994 (the "Rights Agreement"), between the undersigned and ChaseMellon Shareholder Services, L.L.C., as successor to Chemical Bank, as follows: (i) Pursuant to Section 11(a)(i) of the Rights Agreement, effective December 14, 1998, the record date of the undersigned's recent two-for-one stock split (the "Stock Split"), the Purchase Price set forth in Section 7(b) of the Rights Agreement became $35.00. Since a new Right was issued in connection with each share of Common Stock issued in the Stock Split, no adjustment is required to be made to the number of Rights or the shares of Common Stock for which such Rights are exercisable. (ii) To fulfill the Company's requirement to notify Rights holders of the adjustment under Sections 12 and 26 of the Rights Agreement, a description of this adjustment will be included in the undersigned's Form 10-K for 1998 which will be sent to all holders of Common Stock in early 1999. (iii) To the extent that the foregoing is deemed to supplement or amend the Rights Agreement under Section 27, this letter shall effect and reflect such supplement or amendment and I hereby certified that such supplement or amendment is in compliance with Section 27 of the Rights Agreement. Very truly yours, LONE STAR INDUSTRIES, INC. By: /s/ JAMES W. LANGHAM ------------------------------------ Name: James W. Langham Title: Vice President, General Counsel and Secretary AGREED TO: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By: /s/ FRANK R. MISCIAGNA ---------------------------------- Name: Frank R. Misciagna Title: Assistant Vice President EX-23 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Lone Star Industries, Inc. on Form S-3 (File No. 33-55377) and on Form S-8 (File Nos. 33-55277, 33-55261, 33-55229, 333-11057 and 333-11059) of our report, dated January 27, 1999, accompanying the consolidated financial statements and financial statement schedule of Lone Star Industries, Inc. and Subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Stamford, Connecticut March 4, 1999 44 EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's Statement of Operations and Balance Sheet and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 DEC-31-1998 265 119,896 35,699 3,535 45,733 205,846 418,484 89,821 588,514 62,454 50,000 0 0 25,692 298,624 588,514 347,065 365,857 200,564 248,336 0 0 2,379 115,142 38,860 76,282 0 0 0 76,282 3.68 2.88
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