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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
COMMISSION FILE NUMBER 1-12881
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
15660 N. DALLAS PARKWAY, SUITE 500
DALLAS, TEXAS 75248
972/770-6401
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 75-2085454
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, par value $1.00 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X. No ---.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
As of April 30, 2000, the number of shares of common stock outstanding was
23,501,485. The aggregate market value of common stock (based upon the closing
price on the New York Stock Exchange on that date) held by nonaffiliates of the
registrant, including Alpine Capital, L.P. and related entities, was
approximately $1.1 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
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EXPLANATORY NOTE
Items 6, 7 and 8 to Lone Star Technologies, Inc.'s ("Lone Star") Form 10-K are
being amended herein to restate the Consolidated Financial Statements of Lone
Star for the year ended December 31, 1999.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART II
<S> <C> <C>
ITEM 6. SELECTED FINANCIAL DATA.............................................3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION....................3
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.............................................10
</TABLE>
2
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PART II
ITEM 6. SELECTED FINANCIAL DATA
The information below reflects matters discussed in Note N to the consolidated
financial statements.
<TABLE>
<CAPTION>
($ in millions, except share and employee data)
1999 1998 1997 1996 1995
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Oilfield products revenues $ 185.1 $ 255.6 $ 454.1 $ 371.0 $ 241.6
Specialty tubing products revenues 120.5 123.2 129.0 109.8 115.2
Flat rolled and other tubular revenues 47.8 53.6 71.2 68.2 69.0
-------- --------- --------- -------- --------
Total revenues 353.4 432.4 654.3 549.0 425.8
Gross profits 12.8 4.4 64.2 48.2 26.2
Special charges - (14.5) - - -
Selling, general, and administrative expenses (15.5) (20.0) (19.6) (16.4) (14.6)
-------- --------- --------- -------- --------
Operating income (loss) (2.7) (30.1) 44.6 31.8 11.6
Interest income 1.8 2.0 3.0 4.4 5.8
Interest expense (4.6) (4.0) (6.6) (6.8) (8.7)
Other income (expense) - (0.2) 0.3 (0.1) 2.4
Minority interest in Steel - - - (3.8) (1.5)
Income tax - - (0.9) (0.6) -
-------- --------- --------- -------- --------
Income (loss) from continuing operations (5.5) (32.3) 40.4 24.9 9.6
Income (loss) from continuing operations
per common share - diluted (0.24) (1.43) 1.83 1.19 0.46
Net income (loss) $ (5.5) $ (24.9) $ 53.7 $ 24.9 $ 9.6
Net income (loss) per common share - diluted (0.24) (1.10) 2.44 1.19 0.46
Common shares used for diluted EPS (millions) 22.5 22.5 22.1 20.9 20.6
Current assets $ 172.1 $ 152.9 $ 207.2 $ 206.6 $ 194.5
Total assets 351.1 335.8 405.8 396.0 357.7
Current liabilities 86.0 41.4 81.3 74.7 53.5
Total liabilities 156.0 146.7 188.1 267.2 255.5
Shareholders' equity $ 195.9 $ 189.1 $ 217.7 $ 128.8 $ 102.2
Shares outstanding (millions) 22.6 22.5 22.5 20.7 20.5
Capital expenditures $ 7.2 $ 17.6 $ 34.7 $ 20.0 $ 14.9
Depreciation and amortization $ 16.7 $ 15.8 $ 14.3 $ 11.8 $ 11.4
Active employees 1,554 938 2,044 1,941 1,696
</TABLE>
ITEM 7. MANAGEMENT's DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Lone Star is the leading United States manufacturer of welded Aoil country
tubular goods,s' which are steel tubular products used in the completion and
production of oil and natural gas wells. Lone Star is also a major manufacturer
of line pipe, which is used in the transportation of oil and gas. In addition,
Lone Star is a leading manufacturer of specialty tubing products used in
automotive, construction, agricultural and industrial applications. In January
2000, Lone Star augmented its specialty tubing products by acquiring the assets
of Fintube Limited Partnership, the largest specialty tubing manufacturer of
heat recovery finned tubes, which are primarily used in combined-cycle power
generation plants.
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Historically, over 60% of Lone Star's revenues have been generated through the
sale of oilfield products. As a result, Lone Star's revenues are largely
dependent upon the state of the oil and gas industry, which has historically
been volatile. Downturns in the oil and gas markets cause demand for Lone Star's
principal products to decrease. As a result, Lone Star's historical operating
results have fluctuated based on the demand for its products. Lone Star had an
operating loss in 1999 due to the low level of oil and gas drilling activity
that resulted from low oil and gas prices in the first half of the year. Lone
Star also sustained an operating loss from continued operations in 1998,
principally as a result of a continued decline in oil and gas drilling activity
which reduced demand and prices for Lone Star's oil and gas casing and tubing
products. Lone Star's future operating results may fluctuate significantly
depending upon a number of factors, including industry conditions, the level of
oil and gas drilling activity and competition from imports, in the case of its
Steel subsidiary, and continuing domestic and foreign demand for power
generation, in the case of its Fintube subsidiary.
OILFIELD PRODUCTS. Steel's oilfield products consist of (i) casing, which acts
as the structural walls of oil and natural gas wells, (ii) production tubing,
which transmits hydrocarbons to the surface, and (iii) line pipe, which is used
in gathering and transmitting hydrocarbons from the wellhead to larger
transmission pipelines.
Demand for oilfield products is affected by drilling activity, which is driven
by customers' expectations of future oil and gas prices and political factors
such as energy and trade policies. Domestic drilling activity was down 24% in
1999 from the prior year, according to industry reports. However, drilling
activity accelerated in the second half of 1999 and by year-end 771 rigs were
active, compared to 621 at the end of 1998. Steel's open orders for OCTG at
December 31, 1999, were up 75% from the prior year-end due to the increase in
drilling activity and demand attributable to reduced industry-wide OCTG
inventories.
SPECIALTY TUBING PRODUCTS. As a result of the January 2000 Fintube acquisition
(see subsequent events Note M to the consolidated financial statements), Lone
Star's specialty tubing product segment now includes finned tubular products
manufactured by Fintube, in addition to the Drawn Over Mandrel, or DOM, tubing
manufactured by Steel. Finned tubular products are used in heat recovery steam
generation applications such as combined-cycle power generation plants and, to a
lesser extent, in industrial processing plants and petrochemical plants. Steel's
specialty tubing consists of a wide array of high-quality, custom-made steel
tubular products requiring critical tolerances, precise dimensional control, and
special metallurgical properties. These products are used in the further
manufacture of automotive, construction, and other industrial equipment such as
hydraulic cylinders, stabilizer tubes and intrusion tubes, and machine parts.
Demand for DOM specialty tubing products, within the traditional markets, was
down slightly in 1999. Demand from certain Asian countries was lower due to
Asian economic issues. Demand for hydraulic cylinders used in agricultural and
construction related equipment was down due to decreased domestic farming
activity and reduced building activity in certain Asian economies. Steel's open
orders at year-end 1999 for DOM products and as-welded specialty tubing were up
46% from the prior year-end, due to increased demand for as-welded specialty
tubing resulting from significantly increased demand in 1999 for axle and other
applications.
OTHER TUBULAR PRODUCTS AND FLAT ROLLED STEEL. Flat rolled steel is steel coils
manufactured by Steel primarily for use in the production of its tubular
products, although Steel also sells flat rolled steel to fabricators of
large-diameter transmission pipe, storage tanks, rail cars and a variety of
other construction and industrial products. Steel's other tubular products are
principally used for structural and piling applications in the construction
industry. Steel's participation in the flat rolled steel commodity market is
generally concentrated in the Southwestern region of the United States and is
affected by factors such as price, capacity utilization, and raw material costs.
Flat rolled steel is sold in highly competitive markets, with price, quality,
and availability primarily determining customer purchase decisions. Due to an
influx of inexpensive imported flat rolled steel during 1998 and early 1999,
markets for flat rolled steel experienced excess supply and lower pricing. As a
result, Steel's shipment volumes were down in 1998 and 1999. However, during the
first half of 1999, antidumping duties and quotas were established for suppliers
from certain foreign countries which reduced the amount of imported foreign
coils, resulting in increased shipments of coils produced by Steel during the
second half of 1999.
Fintube conducts a steel coil slitting storage processing business, where it (i)
acts as a toll slitting agent for major steel customers, and (ii) provides steel
storage and custom slitting.
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MANUFACTURING. The manufacture of Steel's and Fintube's products is capital
intensive. Utilization rates were low during the first half of 1999 and
expanded significantly during the second half of 1999 at Steel's manufacturing
facilities. The level of production volume through Steel's various facilities
has a significant effect on the cost of manufacturing. Key variable costs
include costs of raw materials, including scrap steel, steel slabs, coils,
electricity, and natural gas. Fintube's production volumes also affect its
cost of manufacturing. Unlike Steel, most of Fintube's products are
manufactured in specific configurations as ordered. Accordingly, Fintube's
manufacturing costs are to some extent factored into product prices on an
order-by-order basis.
Steel has entered into certain marketing alliances and manufacturing
arrangements with unrelated companies involving the marketing of their
products and processing of flat rolled steel provided by Steel into tubular
products which provide Steel access to additional manufacturing capacity.
Fintube has licensed its manufacturing technology to licensees in India,
Italy, Japan and Korea.
FINTUBE ACQUISITION AND OVERVIEW OF PRO FORMA INFORMATION. On January 3, 2000,
Lone Star's newly formed Fintube subsidiary purchased substantially all of the
assets of Fintube Limited Partnership and its subsidiaries for a purchase
price of approximately $85 million, which included the issuance of
approximately 760,000 shares of Lone Star common stock valued at $20 million
(see subsequent events Note M to the consolidated financial statements).
Fintube's business primarily involves the production of finned tubes, boiler
tubes and other products which are used in a variety of heat recovery
applications. In addition to heat recovery product operations, the Fintube
business includes storage and processing of steel coils for other steel
manufacturers. The Fintube business also includes a proprietary manufacturing
process for flattening steel rod into narrow bands of thin-gauge steel.
The Fintube acquisition is expected to significantly increase Lone Star's
consolidated revenues and cash flows beginning in 2000. Lone Star's revenues
in 1999, on a pro forma basis after giving effect to the Fintube acquisition,
increases by $80.7 million to $434.1 million. Additionally, the net loss of
$5.5 million, or $0.24 per diluted share, incurred by Lone Star during 1999
becomes a net income of $4.0 million, or $0.17 per diluted share, on a pro
forma basis.
The pro forma column in the following table sets forth consolidated financial
information for Lone Star on a pro forma basis for the Fintube acquisition,
which gives effect to (i) the acquisition of the assets of Fintube Limited
Partnership as though the acquisition occurred on January 1, 1999; (ii) the
issuance of 760,237 shares of Lone Star Common Stock as partial consideration
for the Fintube acquisition as though the stock was issued on that date; and
(iii) the borrowing of $46 million by Lone Star's Fintube subsidiary under its
new credit facility as though the borrowing occurred on that date.
<TABLE>
<CAPTION>
($ in millions, except per share data)
Historical Pro Forma
1999 1999
---- ----
(unaudited)
<S> <C> <C>
Revenues $ 353.4 $ 434.1
Gross Profits $ 12.8 $ 40.2
SG&A $ (15.5) $ (29.6)
-------- ---------
Operating Income $ (2.7) $ 10.6
Interest Income $ 1.8 $ 1.8
Interest Expense $ (4.6) $ (10.4)
Other Income (Expense) - $ 2.2
Income (Loss) from continuing operations $ (5.5) $ 4.0
Net income (Loss) $ (5.5) $ 4.0
Diluted Earnings (Loss) per share $ (0.24) $ 0.17
</TABLE>
5
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HISTORICAL RESULTS OF OPERATIONS
Lone Star's revenues are derived from three business segments: oilfield
products, specialty tubing products, and flat rolled steel and other tubular
products and services.
Consolidated revenues reported in the statements of earnings are as follows:
<TABLE>
<CAPTION>
($ in millions)
1999 1998 1997
------------------ ------------------ -----------
$ % $ % $ %
- - - - - -
<S> <C> <C> <C> <C> <C> <C>
Oilfield products revenues 185.1 52 255.6 59 454.1 69
Specialty tubing products revenues 120.5 34 123.2 29 129.0 20
Flat rolled steel and other tubular revenues 47.8 14 53.6 12 71.2 11
---- -- ---- -- ---- --
Consolidated net revenues 353.4 100 432.4 100 654.3 100
===== === ===== === ===== ===
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
<CAPTION>
(in tons)
1999 1998 1997
--------- --------- ---------
<C> <C> <C> <C>
Oilfield products 336,100 372,500 632,600
Specialty tubing products 116,700 111,900 119,800
Flat rolled steel and other tubular 144,600 144,700 194,100
------- ------- -------
Total tons shipped 597,400 629,100 946,500
======= ======= =======
</TABLE>
1999 COMPARED WITH 1998
Subsequent to the issuance of the Company's Consolidated Financial Statements
for the year ended December 31, 1999, it was determined that the remaining
$800,000 of Lone Star's reserve for an inventory purchase commitment should
have been fully utilized in the fourth quarter of 1999. The effect of
relieving the additional $800,000 in the fourth quarter of 1999 was to
increase gross profit and decrease net loss by $800,000 and decrease the net
loss $.04 per share. (See Note N to the Consolidated Financial Statements.)
NET REVENUES of $353.4 million in 1999 were 18% lower than 1998. Net revenues
from oilfield products declined 28% to $185.1 million in 1999. Shipment
volumes and prices were down from 1998 levels 10% and 20%, respectively.
Demand for Steel's OCTG decreased as drilling activities declined to an
historical low of 488 active rigs in April 1999, and the average rig count was
down 24% to 625 in 1999 compared to the preceding year. Demand was also
detrimentally impacted as new mill production was replaced by the consumption
of excess industry wide OCTG inventories during the first half of 1999.
Specialty tubing products revenues decreased in 1999 by 2% to $120.5 million
on 4% higher shipment volumes to 116,700 tons offset by lower prices. Selling
prices were 6% less due to a higher percentage of as-welded tubular sales,
reduced international sales, and slightly reduced prices for DOM specialty
tubing due to increased capacity in the industry. Shipment volumes were up 4%
due to increased sales of new heavy wall products used in axle and other
applications.
Flat rolled steel and other tubular products revenues were down 11% to $47.8
million. Selling prices were 11% lower due to the impact on the first half of
1999 from illegal dumping of foreign coils during 1998 that resulted in an
excess supply of flat rolled steel in domestic markets. Shipments in 1999 were
flat compared to 1998.
GROSS PROFITS increased from $4.4 million in 1998 to $12.8 million in 1999 due
to a 17% reduction in costs of goods sold per ton related to lower slab costs,
reduced overall spending and increased productivity.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES decreased 23% in 1999 to $15.5
million due to significant spending and salaried workforce reductions made
during the second half of 1998.
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INTEREST INCOME decreased from $2.0 million in 1998 to $1.8 million in 1999
due to lower average interest rates on invested cash, short-term investments
and marketable securities.
INTEREST EXPENSE increased from $4.0 million in 1998 to $4.6 million in 1999.
Steel's revolving credit facility during 1999 had higher average interest
rates which were offset by lower average borrowings than in 1998.
LOSS FROM CONTINUING OPERATIONS for 1999 was $5.5 million, or $0.24 per
diluted share, a 69% improvement compared to $17.8 million, or $0.78 per
diluted share in 1998, excluding special charges in 1998 of $14.5 million, or
$0.65 per diluted share. A reduced loss in 1999 was due to lower slab costs,
reduced spending, increased productivity and salaried workforce reductions
offset partially by lower shipment volumes and pricing.
NET OPERATING LOSS CARRY-FORWARDS at December 31, 1999 totaled $263.2 million
(see Note H to the consolidated financial statements).
NET LOSS of $5.5 million, or $0.24 per diluted share, improved 78% relative to
1998 due to lower costs of goods sold in 1999. Also, the net loss for 1998
included a $14.5 million special charge.
1998 COMPARED WITH 1997
NET REVENUES of $432.4 million in 1998 were 34% lower than 1997. Net revenues
from oilfield products declined 44% to $255.6 million in 1998. Shipment
volumes and prices in 1998 were down from 1997 levels by 41% and 4%,
respectively. Demand for Steel's OCTG decreased as drilling activities
declined precipitously in the second half of 1998. The average rig count was
down 116 to 827 in 1998 with only 621 rigs operating at year-end, compared to
1,007 at the end of 1997. Demand was also detrimentally impacted as new mill
production was replaced by the consumption of excess industry-wide OCTG
inventories. Also, demand declined due to increased competition from imported
OCTG which grew to 24% of the apparent supply available to the domestic market
from 16% in 1997.
Specialty tubing products revenues decreased by 4% in 1998 to $123.2 million
because of lower shipment volumes despite slightly higher prices. Shipment
volumes were down 7% due to reduced sales for hydraulic cylinder applications
in agricultural and construction related equipment and reduced international
sales to certain Asian countries.
Flat rolled steel and other tubular products revenues were down 25% in 1998 to
$53.6 million. Shipments were 25% lower due to a dramatic increase in
inexpensive imported foreign coils during 1998 that resulted in an excess
supply of flat rolled steel in domestic markets.
GROSS PROFITS decreased from $64.2 million in 1997 to $4.4 million in 1998 due
to reduced shipment volumes in all products coupled with lower prices for
oilfield products and slightly higher prices for specialty tubing products.
Also, significantly decreased production volumes negatively impacted gross
margins as fixed and semi-fixed costs were absorbed by fewer units of
production.
SPECIAL CHARGES. In response to 1998 market conditions, Steel restructured and
downsized its operations. Lower operating rates resulted in the need to reduce
employment levels and initiate other actions. As a result, special charges of
$14.5 million were recognized in the 1998 consolidated statement of
operations, which included the following items in millions:
<TABLE>
<S> <C>
Write-down of property, plant, and equipment and related supplies to fair value $ 8.1
Renegotiated or canceled contractual obligations 4.4
Employee severance cost 2.0
-------
Total special charges $ 14.5
</TABLE>
Certain facilities permanently reduced or eliminated their operations, relying
instead on alternative production or procurement methods. This included a
reduction in the production level of the electric-arc furnace steelmaking
facilities, with heavier reliance placed on purchased steel in coil and slab
form. Additionally, some finishing processes and infrastructure utility
services were permanently abandoned and completely replaced through outside
procurement. These actions triggered an assessment of the recoverability of
the asset carrying costs and the resulting recognition of an
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impairment loss. The determination of the impairment loss was based on an
evaluation of future cash flows from operation of the steelmaking facilities
and estimated salvage values of the steelmaking facilities and those
facilities to be abandoned. The net book value of these assets, which included
property, plant and equipment supplies inventory, totaled $12.6 million, of
which $8.1 million was written down.
Certain supplier contracts were renegotiated or canceled to accommodate the
lower operating levels resulting in a loss accrual of $4.4 million at December
31, 1998.
Steel terminated employees or identified certain positions for elimination as
of December 31, 1998. Payments made to terminated employees were based on
Steel's standard severance package. Approximately 200 employees covered by the
severance package were ultimately terminated. Total employee severance costs
included in special charges totaled $2.0 million, of which $1.1 million was
paid in 1998 and $0.9 million in 1999.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES increased 2.0% in 1998 to $20.0
million due primarily to continued higher spending related to year 2000
readiness initiatives partially offset by lower selling expenses.
INTEREST INCOME decreased from $3.0 million in 1997 to $2.0 million in 1998
due to lower average interest rates on invested cash, short-term investments
and marketable securities.
INTEREST EXPENSE decreased from $6.6 million in 1997 to $4.0 million in 1998
due to the conversion of Lone Star's $50.0 million principal amount 8%
convertible subordinated debentures into common stock in August 1997. Also,
Steel's revolving credit facility during 1998 had lower average interest rates
which were offset by higher average borrowings than in 1997.
OTHER EXPENSE. During 1998, other expense of $0.2 million was primarily
related to the write-off of prepaid bank fees on the restructuring of Steel's
revolving credit facility partially offset by gains from nonrecurring
miscellaneous items. In 1997 other income of $0.3 million consisted of
nonrecurring miscellaneous items.
LOSS FROM CONTINUING OPERATIONS in 1998 of $32.3 million, or $1.43 per diluted
share, included $14.5 million, or $0.65 per diluted share, in special charges.
Excluding special charges, the loss from continuing operations was $17.8
million, or $0.78 per diluted share, compared to 1997 income from continuing
operations of $40.4 million, or $1.83 per diluted share. The loss was due to
lower shipment volumes for all products, particularly oilfield products,
coupled with lower prices for oilfield products partially offset by slightly
higher prices for specialty tubing products. Also, significantly decreased
production volumes negatively impacted operating margins as fixed and
semi-fixed costs were absorbed by fewer units of production.
EXTRAORDINARY ITEM of $7.4 million, or $.33 per diluted share, was realized in
1998 on the gain from cancellation of future obligations under the Coal
Industry Retiree Health Benefit Act of 1992 (Act). During 1997 extraordinary
items totaling a net gain of $0.9 million, or $.04 per diluted share,
consisted of a gain of $2.0 million for the downward adjustment of obligations
under the Act, partially offset by an extraordinary prepayment charge of $1.1
million on the refinancing of Steel's credit facility.
NET LOSS of $24.9 million, or $1.10 per diluted share, in 1998 included
special charges of $14.5 million, or $0.65 per diluted share, which were
reflected in the loss from continuing operations of $32.3 million, or $1.43
per diluted share, and partially offset by an extraordinary gain of $7.4
million, or $.33 per diluted share.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 1999, Lone Star had $38.8 million in cash and short term
investments and $86.1 million in working capital.
Cash provided by operating activities was $28.1 million, $8.6 million and
$25.9 million for fiscal 1999, 1998 and 1997, respectively. Cash provided by
operations in 1999 increased to $28.1 million from $8.6 million in 1998 due to
the reduced net loss. In fiscal 1999, net cash provided by operations was used
to fund capital expenditures and reduce revolving credit facilities. In 1998,
the net cash provided by operations was primarily used to upgrade property,
plant and equipment. Cash provided by operations in 1997 was used in part to
purchase the minority interest in Steel and for purchase of treasury stock.
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Cash used in investing activities was $11.7 million, $4.3 million and $7.7
million for fiscal 1999, 1998 and 1997, respectively, which was primarily used
for capital expenditures.
Cash provided (used) by financing activities was ($15.1) million, $2.4 million
and ($31.3) million in 1999, 1998 and 1997, respectively. Cash used by
financing activities for fiscal 1999 was primarily attributable to increased
working capital needs due to increased operations in the second half of the
year. Cash provided by financing activities in 1998 was from issuance of stock
and borrowings under the revolving credit facility. Cash used by financing
activities in 1997 was used primarily to purchase the minority interest in
Steel and purchase treasury stock.
On March 16, 1999, Steel refinanced the $100.0 million revolving credit
facility that it had in place at year-end 1998 with a $90.0 million revolving
line of credit and a three-year $10.0 million term loan. Under the new
revolving credit facility, Steel can borrow an amount based on a percentage of
eligible accounts receivable and inventories, reduced by outstanding letters
of credit. At December 31, 1999, borrowings totaled $30.0 million including
$9.0 million on the term loan with a remaining availability of $61.7 million.
At Steel's option, the interest rate is the prime lending rate plus 1.0% or
the LIBOR plus 3.0%. Steel pays a 0.375% per annum fee on the unused portion
of the credit facility. The term loan is repayable in quarterly installments
of $0.5 million, together with interest at the prime lending rate plus 1.5% or
the LIBOR plus 3.5%. Steel's assets other than real estate secure these loans.
In connection with Lone Star's purchase through its Fintube subsidiary of
assets from Fintube Limited Partnership on January 3, 2000, Steel borrowed $20
million under its present credit facility to repay $20 million of its
subordinated loan to Lone Star, Lone Star guaranteed $20 million of Steel's
credit facility and Lone Star used the loan repayment to fund a portion of the
purchase price payable in the Fintube acquisition. At January 3, 2000,
borrowings by Steel totaled $50 million, including the term loan, with a
remaining availability of $41.7 million.
On January 3, 2000, Lone Star's Fintube subsidiary entered into a new senior
credit facility providing a $20 million revolving line of credit and a $39
million term loan used to pay part of the cash portion of the purchase price
in its acquisition of substantially all of the assets of Fintube Limited
Partnership. Under the revolving line of credit, Fintube can borrow an amount
based on a percentage of eligible accounts receivable and eligible inventory,
reduced by outstanding letters of credit. As of January 3, 2000, borrowings by
the Fintube subsidiary totaled approximately $46 million, including the term
loan, with a remaining availability, based on eligible accounts receivable and
inventory on such date, of approximately $6 million.
Steel's loan agreements at December 31, 1999 contain various restrictive
covenants which require Steel to meet specified quarterly financial ratios,
including cash flow and net worth measurements, all of which Steel met at
December 31, 1999 and which Steel expects to meet during fiscal year 2000.
Steel's ability to incur additional indebtedness and to pay cash dividends to
Lone Star is also restricted under the agreements.
During 1999, Steel entered into slab consignment and sales agreements with
third parties. These inventory financing transactions have been accounted for
as product financing arrangements. Inventory purchases financed under these
arrangements have been recorded as inventory by Steel. At December 31, 1999,
there was $30.8 million included in accounts payable under these financing
arrangements.
Lone Star's two subsidiaries, Steel and Fintube, operate in capital intensive
businesses. Steel has made, and Lone Star expects Fintube will be required to
make, significant capital expenditures each year both for recurring
maintenance necessary to keep manufacturing facilities operational and to
comply with environmental and other legal requirements. Additionally, Lone
Star periodically makes capital expenditures for technological improvements
and for research and development projects. Lone Star's borrowing capacity and
the borrowing capacity of its subsidiaries are interrelated and substantially
used. If funding is insufficient at any time in the future, Lone Star may be
unable to develop or enhance its products or services, take advantage of
business opportunities or respond to competitive pressures.
Lone Star's capital budget for 2000 is approximately $20 million. Steel
requires capital primarily to fund general working capital needs and capital
expenditures. Principal sources of funds include cash generated by operations,
borrowings under Steel's and Fintube's credit facilities and from Lone Star.
Steel believes that cash generated by operations and its borrowing capacity
under the revolving credit agreement will provide the liquidity necessary to
fund its cash requirements during 2000.
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<PAGE>
Steel's operations are subject to restrictive environmental compliance and
permitting requirements of various governmental agencies that include the
TNRCC and the EPA. Steel believes that the cost of maintaining compliance with
environmental requirements will fall within its contemplated operating and
capital expenditure plans, averaging $1 - $2 million annually in the
foreseeable future.
Fintube believes that its resources, including cash generated by operations
and borrowings under Fintube's credit facility and from Lone Star, will
provide the liquidity and resources necessary to meet Fintube's cash needs for
working capital and other capital expenditures during 2000.
Lone Star had no direct business operations other than Steel in 1999 (see
subsequent events Note M to the consolidated financial statements regarding
Fintube) or significant sources of cash other than from short-term investments
or the sale of securities. Lone Star is reimbursed by Steel for most of its
operating costs as provided by its cost-sharing agreement with Steel. Under
Steel's new revolving credit agreement, Lone Star's operating costs and
Steel's portion of Lone Star's consolidated taxes are the only funds that can
be distributed by Steel to Lone Star. Beginning in 2000 Fintube will pay Lone
Star an overhead fee of $1.0 million per year, which is the maximum amount
permitted by Fintube's loan agreements.
Lone Star believes that reimbursements by Steel and Fintube for most of their
operating costs and funds generated by cash and investments will be adequate
to fund its cash requirements during 2000.
FORWARD-LOOKING INFORMATION
The statements included in this Annual Report regarding future financial
performance and results and the other statements that are not historical facts
are forward-looking statements. The words "believes," "intends," "expects,"
"anticipates," "projects," "estimates," "predicts," and similar expressions
are also intended to identify forward-looking statements. Such statements
involve risks, uncertainties and assumptions, including, but not limited to,
industry and market conditions, the ability of Lone Star to successfully
manage its recently acquired Fintube business, environmental liabilities,
competitive pricing, practices and conditions, availability and pricing of raw
materials, fluctuations in prices of crude oil and natural gas, the trade
environment, the impact of current and future laws and governmental
regulations (particularly environmental laws and regulations) and other
factors discussed in this Annual Report and in other filings with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants ................................ 11
Consolidated Statements of Income,
for the years ended December 31, 1999, 1998, and 1 ................... 12
Consolidated Balance Sheets at December 31, 1999 and 1998 ............... 13
Consolidated Statements of Shareholders' Equity
at December 31, 1999, 1998, 1997 and 1996 ............................. 14
Consolidated Statements of Cash Flows,
for the years ended December 31, 1999, 1998, and 1997 ................ 15
Notes to Consolidated Financial Statements .............................. 16
Schedule I - Condensed Financial Information of Registrant .............. 29
Schedule II - Valuation and Qualifying Accounts ......................... 30
10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Lone Star Technologies, Inc.
(Lone Star):
We have audited the accompanying consolidated balance sheets of Lone Star (a
Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the three years ended December 31, 1999 as restated. These financial
statements and the schedules referred to below are the responsibility of Lone
Star's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As explained in Note N, the Company has restated the consolidated financial
statements and schedules as of December 31, 1999 and for the year then ended.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Lone Star and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the three years ended
December 31, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in
the index to consolidated financial statements are presented for the purpose
of complying with the Securities and Exchange Commission's rules and are not a
part of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 20, 2000 (except with respect to certain information in Note M as
to which the date is March 8, 2000 and Note N as to which
the date is May 31, 2000)
11
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues $ 353.4 $ 432.4 $ 654.3
Cost of goods sold (340.6) (428.0) (590.1)
-------- -------- --------
Gross profit 12.8 4.4 64.2
Special charges - (14.5) -
Selling, general and administrative expenses (15.5) (20.0) (19.6)
-------- -------- --------
Operating income (loss) (2.7) (30.1) 44.6
Interest income 1.8 2.0 3.0
Interest expense (4.6) (4.0) (6.6)
Other income (expense) - (0.2) 0.3
-------- -------- --------
Income (loss) from continuing operations before income tax (5.5) (32.3) 41.3
Income tax - - (0.9)
-------- -------- --------
Income (loss) from continuing operations (5.5) (32.3) 40.4
Extraordinary items - 7.4 0.9
-------- -------- --------
Income (loss) before gain from discontinued operations (5.5) (24.9) 41.3
Gain from discontinued operations - - 12.4
-------- -------- --------
NET INCOME (LOSS) $ (5.5) $ (24.9) $ 53.7
======== ======== ========
PER COMMON SHARE - BASIC:
Net income (loss) from continuing operations $ (0.24) $ (1.43) $ 1.88
Extraordinary items - 0.33 0.04
Gain from discontinued operations - - 0.58
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (0.24) $ (1.10) $ 2.50
PER COMMON SHARE - DILUTED:
Net income (loss) from continuing operations $ (0.24) $ (1.43) $ 1.83
Extraordinary items - 0.33 0.04
Gain from discontinued operations - - 0.57
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (0.24) $ (1.10) $ 2.44
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 22.5 22.5 21.5
Diluted 22.5 22.5 22.1
</TABLE>
See accompanying notes.
12
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22.2 $ 20.9
Short-term investments 1.2 3.1
Accounts receivable, net 56.1 36.3
Current inventories, net 88.9 88.9
Other current assets 3.7 3.7
--------------------------------
TOTAL CURRENT ASSETS 172.1 152.9
Marketable securities 15.4 9.0
Property, plant, and equipment, net 149.5 157.8
Other noncurrent assets 14.1 16.1
--------------------------------
TOTAL ASSETS $ 351.1 $ 335.8
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Current installments on long-term debt $ 2.0 $ -
Accounts payable 57.0 15.8
Accrued liabilities 26.2 25.6
--------------------------------
TOTAL CURRENT LIABILITIES 85.2 41.4
--------------------------------
Term loan 7.0 -
Revolving credit facility 21.0 46.0
Postretirement benefit obligations 26.1 41.5
Other noncurrent liabilities 15.9 17.8
--------------------------------
TOTAL LIABILITIES 155.2 146.7
--------------------------------
Commitments and contingencies (See Note J) - -
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value
(authorized: 10,000,000 shares, issued: none) - -
Common stock, $1 par value
(authorized: 80,000,000 shares, issued: 23,061,864,
23,061,864 respectively) 23.1 23.1
Capital surplus 209.9 209.9
Accumulated other comprehensive loss (1.4) (12.8)
Retained deficit (21.0) (15.5)
Treasury stock (462,991 and 566,116 common shares, respectively) (14.7) (15.6)
--------------------------------
TOTAL SHAREHOLDERS' EQUITY 195.9 189.1
--------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 351.1 $ 335.8
============================================================================================================
</TABLE>
See accompanying notes.
13
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
Accumulated
Other Accumulated
Common Capital Treasury Comprehensive Income
Stock Surplus Stock Income (Loss) (Deficit) Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 20.7 160.1 (0.9) (6.8) (44.3) $ 128.8
Net income - - - - 53.7 53.7
Other comprehensive loss:
Minimum pension liability adjustment - - - (2.9) - (2.9)
------
Comprehensive income 50.8
Conversion of subordinated debentures 2.1 47.2 - - - 49.3
Treasury stock purchases - - (14.1) - - (14.1)
Employee benefit plan stock issuance 0.3 2.6 - - - 2.9
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 23.1 209.9 (15.0) (9.7) 9.4 217.7
Net loss - - - - (24.9) (24.9)
Other comprehensive loss:
Minimum pension liability adjustment - - - (3.1) - (3.1)
------
Comprehensive loss (28.0)
Treasury stock purchases - - (1.9) - - (1.9)
Employee benefit plan stock issuance - - 1.3 - - 1.3
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 23.1 209.9 (15.6) (12.8) (15.5) 189.1
Net loss - - - - (5.5) (5.5)
Other comprehensive income:
Minimum pension liability adjustment - - - 11.4 - 11.4
------
Comprehensive income 5.9
Employee benefit plan stock issuance - - 0.9 - - 0.9
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 23.1 209.9 (14.7) (1.4) (21.0) $ 195.9
--------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
14
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS $ 20.9 $ 14.2 $ 27.3
========= ========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (5.5) (24.9) 53.7
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Gain on sale of discontinued operations - - (12.4)
Depreciation and amortization 16.7 15.8 14.3
Extraordinary item - UMWA liability - (7.4) (2.0)
Special charges - write-down of assets - 8.1 -
Accounts receivable, net (19.8) 43.8 (0.1)
Current inventories, net - 13.2 (25.7)
Accounts payable and accrued liabilities 41.8 (39.9) 6.9
Other (5.1) (0.1) (8.8)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28.1 8.6 25.9
Cash flows from investing activities:
Capital expenditures (7.2) (17.6) (34.7)
Short-term investments 1.9 3.2 13.8
Proceeds from sale of discontinued operations - - 12.4
Marketable securities (6.4) 10.0 0.8
Proceeds from sale of assets - 0.1 -
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (11.7) (4.3) (7.7)
Cash flows from financing activities:
Initial borrowings under new revolving credit facility 34.5 - 50.0
Net borrowings (payments) under revolving credit facility (13.5) 3.0 (7.0)
Net payments under old revolving credit facility (46.0) - (37.8)
Issuance of term note 10.0 - -
Term note repayment (1.0) - (0.3)
Treasury stock purchases - (1.9) (14.1)
Acquisition of minority interest - - (25.0)
Issuance of common stock 0.9 1.3 2.9
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (15.1) 2.4 (31.3)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1.3 6.7 (13.1)
--------- --------- ---------
ENDING CASH AND CASH EQUIVALENTS $ 22.2 $ 20.9 $ 14.2
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Conversion of subordinated debentures to common stock $ - $ - $ 50.0
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 6.7 $ 5.4 $ 9.4
Income taxes paid $ - $ 0.3 $ 1.3
</TABLE>
15
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Technologies, Inc. (Lone Star) is a management and holding company
that had one principal operating subsidiary, Lone Star Steel Company (Steel), at
December 31, 1999. On January 3, 2000, Lone Star's new subsidiary, Fintube
Technologies, Inc. (Fintube), acquired the assets of Fintube Limited Partnership
(see subsequent events Note M) and became Lone Star's other principal operating
subsidiary.
Steel and Fintube together serve three business segments: oilfield products,
specialty tubing products, and flat rolled steel and other tubular products and
services. Oilfield products are comprised of casing, tubing and line pipe that
are manufactured and marketed globally to the oil and gas drilling industry.
Historically, Lone Star's specialty tubing products have included Drawn Over
Mandrel (DOM) tubing and as-welded tubing that are manufactured and marketed
globally to automotive, fluid power and other markets for various mechanical
applications. After the Fintube acquisition, Lone Star's specialty tubing
products now also include specialty finned tubular products used in a variety of
heat recovery applications. Flat rolled steel and other tubular products and
services are manufactured and provided to general industrial markets. Additional
segment information is included in Note B to the consolidated financial
statements.
Lone Star's consolidated revenues are not seasonal. However, demand for Steel's
oilfield products is subject to significant fluctuations due to the volatility
of oil and gas prices and domestic drilling activity as well as other factors
including competition from imports.
Lone Star was incorporated in Delaware in 1986 and became the holding company of
Steel, pursuant to Steel's merger with a wholly owned subsidiary of Lone Star.
ACCOUNTING POLICIES - NOTE A
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Lone Star and its subsidiaries. Intercompany transactions are
eliminated in consolidation. Gain from discontinued operations in 1997 relates
to the final settlement of the 1993 sale of American Federal Bank (AFB) (see
Note K).
CASH, INVESTMENTS, AND MARKETABLE SECURITIES. Lone Star's cash equivalents
include highly liquid investments in a fund consisting of U. S. government and
related agencies obligations with original maturities of less than three months.
Short-term investments consist of U. S. government and related agencies debt
obligations with maturities at purchase greater than three months and up to one
year. Marketable securities consist of U. S. government and related agencies
debt obligations with maturities at purchase greater than one year and up to two
years. Lone Star's total cash equivalents, short-term investments and marketable
securities, the weighted average maturity of which is less than one year, are
classified as held-to-maturity because Lone Star has the intent and ability to
hold them to maturity. At December 31, 1999, Lone Star's cash and cash
equivalents, short-term investments, and marketable securities, which had a
carrying amount that approximated market value, consisted of $38.8 million in U.
S. government and related agencies obligations at amortized cost.
INVENTORIES are stated at the lower of cost (principally on the last-in,
first-out "LIFO" method of accounting) or market value and include raw
materials, labor, and overhead.
PROPERTY, PLANT, AND EQUIPMENT are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of depreciable assets.
Long-lived assets including property, plant, and equipment are periodically
evaluated to determine whether events or changes in circumstances have occurred
that indicate the remaining asset balances may not be recoverable and an
impairment loss should be recorded.
INCOME TAXES. Lone Star files a consolidated federal income tax return. Lone
Star utilizes an asset and liability approach for financial accounting and
income tax reporting. Deferred tax liabilities or assets are recognized for the
estimated future tax effects attributable to temporary differences and
carryforwards and are adjusted whenever tax rates or other provisions of income
tax statutes change.
USE OF ESTIMATES. Preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities,
16
<PAGE>
disclosures of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
CURRENT OPERATING ENVIRONMENT AND BUSINESS SEGMENTS - NOTE B
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
($ in millions; unaudited)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OILFIELD PRODUCTS(a)
Net revenues $ 185.1 $ 255.6 $ 454.1
Noncash portion of special charges - 4.5 -
Operating income (loss) (5.8) (17.2) 36.1
Identifiable assets 158.8 170.8 238.0
Capital expenditures 3.6 9.3 22.1
Depreciation and amortization 9.1 8.9 9.0
SPECIALTY TUBING PRODUCTS
Net revenues $ 120.5 $ 123.2 $ 129.0
Noncash portion of special charges - 3.1 -
Operating income (loss) 10.6 (4.6) 12.3
Identifiable assets 127.4 110.9 103.4
Capital expenditures 3.6 8.1 12.2
Depreciation and amortization 6.6 6.0 4.6
FLAT ROLLED AND OTHER TUBULAR PRODUCTS
Net revenues $ 47.8 $ 53.6 $ 71.2
Noncash portion of special charges - 0.5 -
Operating income (loss) (4.5) (4.9) (1.1)
Identifiable assets 20.9 16.3 20.4
Capital expenditures - 0.2 0.4
Depreciation and amortization 1.0 0.9 0.7
CORPORATE AND OTHER NON-SEGMENTS
Net revenues $ - $ - $ -
Operating loss (3.0) (3.4) (2.7)
Identifiable assets 44.0 37.8 44.0
CONSOLIDATED TOTALS FROM CONTINUING OPERATIONS(a)
Net revenues $ 353.4 $ 432.4 $ 654.3
Operating income (loss) (2.7) (30.1) 44.6
Total assets 351.1 335.8 405.8
Capital expenditures 7.2 17.6 34.7
Depreciation and amortization 16.7 15.8 14.3
</TABLE>
(a) See Note N with respect to the restatement of the consolidated
financial statements for the fourth quarter of 1999 and the year
ended December 31, 1999.
Oilfield products are comprised of casing, tubing, and line pipe, that are
manufactured and marketed globally to the oil and gas drilling industry.
Specialty tubing products consist of Drawn Over Mandrel (DOM) tubing and
as-welded tubing that are manufactured and marketed globally to automotive,
fluid power, and other markets for various mechanical applications. After the
Fintube acquisition (see subsequent events Note M), Lone Star's specialty tubing
products now also include
17
<PAGE>
specialty finned tubular products used in a variety of heat recovery
applications. Flat rolled steel and other tubular products and services are
manufactured and provided to general industrial markets.
Sales of oilfield products are greatly impacted by the level of domestic oil
and gas drilling, which in turn is primarily dependent on oil and natural gas
prices. Because of the volatility of oil and gas prices and drilling activity
as well as other factors, such as competition from foreign imports, demand for
these steel products can be subject to significant fluctuations.
At December 31, 1999, Steel's specialty tubing products segment included two
product groups: DOM tubing and as-welded tubing. Specialty tubing consists of
a wide array of high-quality, custom-made steel tubular products requiring
critical tolerances, precise dimensional control, and special metallurgical
properties. Specialty tubing is used in a wide range of industrial
applications and, therefore, demand is sensitive to general economic
conditions. The acquired operations of Fintube manufacture and market
specialty tubing consisting of finned tubes used in a variety of heat recovery
applications (see subsequent event Note M to the consolidated financial
statements).
Steel's participation in the flat rolled steel commodity market to some extent
involves its excess capacity for flat rolled steel as related to the
manufacture of its oilfield and specialty tubing products and certain cost
considerations associated with its total manufacturing operations. Steel's
flat rolled steel commodity market is generally concentrated in the
southwestern region of the United States. Flat rolled steel is sold in highly
competitive markets, with price, quality, and availability primarily
determining customer purchase decisions.
The corporate segment is responsible for financial operations including
investing and managing financial assets, financing of product purchases,
shareholder relations, and assessing and evaluating strategic alternatives.
Steel's primary manufacturing facilities are located in East Texas. Raw
materials and supplies, principally steel slabs and steel coils used in the
manufacture of Steel's products have historically been readily available from
various competitive sources. The manufacture of Steel's products uses several
common facilities and shares administrative support. Accordingly, the segment
information contains certain costs and assets which are allocated and may not
reflect each line of business as if it were operated separately. Fintube
conducts its operations on several owned and leased facilities in the Tulsa,
Oklahoma metropolitan area and in Pryor, Oklahoma. Fintube owns manufacturing
facilities in Quebec, Canada and Veracruz, Mexico.
Steel's principal market is domestic, although sales are also made into
international markets. The majority of sales of tubular products occur through
networks of sales distributors, although some tubular product sales and most
flat rolled steel sales are made directly to end users. Sales to the largest
oilfield products customer were $28.1 million or approximately 8% of net
revenues in 1999, $29.9 million or 7% in 1998, and $83.1 million or 13% in
1997. Sales to another significant customer of flat rolled steel and other
tubular products were $36.4 million or 10%, $43.3 million or 10%, and $53.3
million or 8% of net revenues for 1999, 1998, and 1997, respectively. Direct
foreign revenues as a percent of total revenues were approximately 6% of the
total in 1999.
Of Steel's total active labor force, 69% are represented by three collective
bargaining agreements. The majority of union workers are represented by the
United Steelworkers of America under a contract signed in May 1997, which
expires on May 31, 2001. The two other agreements expire in 2000. Fintube had
409 employees on December 31, 1999. Of these employees, 35 were members of two
unions covering employees in Quebec, Canada and Veracruz, Mexico.
For the year ended December 31, 1999, Lone Star had net sales of $353.4
million and an operating loss of $2.7 million. This compares to net sales of
$432.4 million and an operating loss of $30.1 million for 1998. The most
significant reason for the decline in revenue was the decrease in demand for
oilfield products, which was driven by a 24% decrease in the average number of
domestic rigs drilling for oil and natural gas during 1999. However, drilling
activity accelerated in the second half of 1999 as oil and gas prices
recovered and at year-end 771 rigs were active compared to 621 at the end of
1998. Consequently, Steel's open orders for OCTG at December 31, 1999, were up
75% from the prior year. The operating loss was significantly reduced
principally due to 17% lower costs of goods sold per ton related to lower slab
costs, reduced overall spending and increased productivity. However,
uncertainty continues to exist regarding the future levels of oil and gas
prices and related drilling activity. Therefore, no assurance can be given
regarding the extent of future demand for Steel's OCTG products, or that
profitability can be achieved until these markets improve.
18
<PAGE>
The pro forma column in the following table sets forth consolidated financial
information for Lone Star on a pro forma basis for the Fintube acquisition,
which gives effect to (i) the acquisition of the assets of Fintube Limited
Partnership as though the acquisition occurred on January 1, 1999; (ii) the
issuance of 760,237 shares of Lone Star Common Stock as partial consideration
for the Fintube acquisition as though the stock was issued on that date; and
(iii) the borrowing of $46 million by Lone Star's Fintube subsidiary under its
new credit facility as though the borrowing occurred on that date.
<TABLE>
<CAPTION>
($ in millions, except per share data)
Historical Pro Forma
1999 1999
---- ----
(unaudited)
<S> <C> <C>
Revenues $ 353.4 $ 434.1
Gross Profits $ 12.8 $ 40.2
SG&A $ (15.5) $ (29.6)
Operating Income $ (2.7) $ 10.6
Interest Income $ 1.8 $ 1.8
Interest Expense $ (4.6) $ (10.4)
Other Income (Expense) - $ 2.2
Income (Loss) from continuing operations $ (5.5) $ 4.0
Net income (Loss) $ (5.5) $ 4.0
Diluted Earnings (Loss) per share $ (0.24) $ 0.17
</TABLE>
Steel and Fintube require capital primarily to fund general working capital
needs and capital expenditures. Principal sources of funds include cash
generated by operations, borrowings under Steel's and Fintube's revolving
credit facilities (Note F) and from Lone Star. Steel and Fintube believe that
operating cash flows and borrowing capacity under the revolving credit
agreements will provide the liquidity necessary to fund cash requirements
during 2000.
Lone Star had no direct business operations other than Steel in 1999 (see
subsequent events Note M) or significant sources of cash other than from
short-term investments or the sale of securities. Lone Star is reimbursed by
Steel for most of its operating costs as provided by its cost-sharing
agreement with Steel. Under Steel's new revolving credit agreement, Lone
Star's operating costs and Steel's portion of Lone Star's consolidated taxes
are the only funds that can be distributed to Lone Star. Beginning in 2000
Fintube will pay Lone Star an overhead fee of $1.0 million per year, which is
the maximum amount permitted by Fintube's loan agreements.
Lone Star believes that reimbursements by Steel and Fintube for most of its
operating costs and funds generated by cash and investments will be adequate
to fund its cash requirements during 2000.
SPECIAL CHARGES (1998) - NOTE C
In response to 1998 market conditions, Steel restructured and downsized its
operations. Lower operating rates resulted in the need to reduce employment
levels and initiate other actions. As a result, special charges of $14.5
million were recognized in the 1998 consolidated statement of operations,
which included the following items in millions:
<TABLE>
<S> <C>
Write-down of property, plant, and equipment and related supplies to fair value $ 8.1
Renegotiated or cancelled contractual obligations 4.4
Employee severance cost 2.0
------
Total special charges $ 14.5
</TABLE>
Certain facilities permanently reduced or eliminated their operations, relying
instead on alternative production or procurement methods. This included a
reduction in the production level of the electric-arc furnace steelmaking
facilities, with heavier reliance placed on purchased steel in coil and slab
form. Additionally, some finishing processes and infrastructure utility
services were permanently abandoned and completely replaced through outside
procurement. These actions triggered an assessment of the recoverability of
the asset carrying costs and the resulting recognition of an
19
<PAGE>
impairment loss. The determination of the impairment loss was based on an
evaluation of future cash flows from operation of the steelmaking facilities
and estimated salvage values of the steelmaking facilities and those
facilities to be abandoned. The net book value of these assets, which included
property, plant and equipment and related supplies inventory, totaled $12.6
million, of which $8.1 million was written down.
Certain supplier contracts were also renegotiated or cancelled to accommodate
the lower operating levels resulting in a loss accrual of $4.4 million at
December 31, 1998.
Steel terminated employees or identified certain positions for elimination as
of December 31, 1998. Payments made to terminated employees were based on
Steel's standard severance package. Approximately 200 employees, covered by
the severance package, were ultimately terminated. Total employee severance
costs included in special charges totaled $2.0 million, of which $1.1 million
was paid in 1998 and $0.9 million in 1999.
<TABLE>
<CAPTION>
($ in millions)
Charged
Balance at to costs Charged Balance
beginning and to other at end
of period expenses accounts Deductions(b) of period
------------ ------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Reserves for special charges(a) $ - 6.4 - (1.1) 5.3
YEAR ENDED DECEMBER 31, 1999
Reserves for special charges(a) $ 5.3 - - (5.3) -
</TABLE>
(a) Does not include special charge associated with the write-down of property,
plant, and equipment.
(b) Includes write-offs of accounts receivable and utilization of reserves for
special charges.
20
<PAGE>
ADDITIONAL BALANCE SHEET INFORMATION - NOTE D
<TABLE>
<CAPTION>
($ in millions)
1999 1998
---- ----
<S> <C> <C>
INVENTORIES
Finished goods $ 24.5 $ 30.8
Work in process 36.4 33.1
Raw materials 30.4 29.2
Materials, supplies, and other 25.4 27.3
------------ -------------
Total inventories before LIFO valuation reserve 116.7 120.4
Reserve to reduce inventories to LIFO value (20.8) (23.5)
------------ -------------
Total inventories 95.9 96.9
Amount included in other noncurrent assets (7.0) (8.0)
------------ -------------
Net current inventories $ 88.9 $ 88.9
============ =============
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements $ 12.0 $ 10.9
Buildings, structures, and improvements 6.0 6.0
Machinery and equipment 305.2 297.9
Construction in progress 6.3 7.5
------------ -------------
Total property, plant, and equipment 329.5 322.3
Less accumulated depreciation and amortization (180.0) (164.5)
------------ -------------
Property, plant, and equipment, net $ 149.5 $ 157.8
============ =============
OTHER NONCURRENT ASSETS
Inventory (supplies and spare parts) $ 7.0 $ 8.0
Other 7.1 8.1
------------ -------------
Total other noncurrent assets $ 14.1 $ 16.1
============ =============
ACCRUED LIABILITIES
Accrued compensation $ 7.4 $ 5.9
Property taxes 4.3 5.2
Warranty reserves 2.5 2.0
Environmental reserves 0.5 0.5
Pension obligations 4.9 -
Supplier contract reserves - 4.3
Other 6.6 7.7
------------ -------------
Total accrued liabilities $ 26.2 $ 25.6
============ =============
OTHER NONCURRENT LIABILITIES
Environmental reserves $ 10.7 $ 10.9
Other 5.2 6.9
------------ -------------
Total other noncurrent liabilities $ 15.9 $ 17.8
============ =============
</TABLE>
Accounts receivable is stated net of allowance for doubtful accounts of $1.3
million at December 31, 1999 and $1.4 million at December 31, 1998.
Approximately $108.2 million and $110.8 million of total inventories before
LIFO valuation reserves were accounted for on the LIFO basis at December 31,
1999 and 1998, respectively. During 1999 and 1998, Steel experienced a
reduction of inventory which resulted in the depletion of previous inventory
LIFO layers, the financial effect of which was not significant to net reported
results of operations. Non-LIFO inventories are stated at the lower of average
cost or market. The total inventories before LIFO valuation reserves
approximates replacement cost of the inventories.
21
<PAGE>
CHANGE IN COMMON SHARES OUTSTANDING - NOTE E
<TABLE>
<CAPTION>
Issued Treasury Stock Outstanding
---------- -------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1997 23,059,864 (548,616) 22,511,248
Employee benefit plans 2,000 92,500 94,500
Treasury share purchases - (110,000) (110,000)
---------- -------------- -----------
Balance, December 31, 1998 23,061,864 (566,116) 22,495,748
---------- -------------- -----------
Employee benefit plans - 103,125 103,125
---------- -------------- -----------
Balance, December 31, 1999 23,061,864 (462,991) 22,598,873
========== ============== ===========
</TABLE>
DEBT - NOTE F
Aggregate maturities of long-term debt are as follows: 2,000, $2.0 million;
2001, $2.0 million; 2002, $23.0 million; 2003, $2.0 million; and 2004, $1.0
million.
On March 16, 1999, Steel refinanced the $100.0 million revolving credit facility
that it had in place at year-end 1998 with a $90.0 million revolving line of
credit and a three-year $10.0 million term loan. Under the new revolving credit
facility, Steel can borrow an amount based on a percentage of eligible accounts
receivable and inventories, reduced by outstanding letters of credit. At
December 31, 1999, borrowings totaled $30.0 million including $9.0 million on
the term loan with a remaining availability of $61.7 million. At Steel's option,
the interest rate is the prime lending rate plus 1.0% or the LIBOR plus 3.0%.
Steel pays a 0.375% per annum fee on the unused portion of the credit facility.
The term loan is repayable in quarterly installments of $0.5 million, together
with interest at the prime lending rate plus 1.5% or the LIBOR plus 3.5%.
Steel's assets other than real estate secure these loans. In connection with
Lone Star's purchase through its Fintube subsidiary of assets from Fintube
Limited Partnership on January 3, 2000, Steel borrowed $20 million under its
present credit facility to repay $20 million of its subordinated loan to Lone
Star, Lone Star guaranteed $20 million of Steel's credit facility and Lone Star
used the loan repayment to fund a portion of the purchase price payable in the
Fintube acquisition. At January 3, 2000, borrowings by Steel totaled $50
million, including the term loan, with a remaining availability of $41.7
million.
On January 3, 2000, Lone Star's Fintube subsidiary entered into a new senior
credit facility providing a $20 million revolving line of credit and a $39
million term loan used to pay part of the cash portion of the purchase price in
its acquisition of substantially all of the assets of Fintube Limited
Partnership. Under the revolving line of credit, Fintube can borrow an amount
based on a percentage of eligible accounts receivable and eligible inventory,
reduced by outstanding letters of credit. As of January 3, 2000, borrowings by
the Fintube subsidiary totaled approximately $46 million, including the term
loan, with a remaining availability, based on eligible accounts receivable and
inventory on such date, of approximately $6 million.
Steel's loan agreements at December 31, 1999 contain various restrictive
covenants which require Steel to meet specified quarterly financial ratios,
including cash flow and net worth measurements, all of which Steel met at
December 31, 1999 and which Steel expects to meet during fiscal year 2000.
Steel's ability to incur additional indebtedness and to pay cash dividends to
Lone Star is also restricted under the agreements.
During 1999, Steel entered into slab consignment and sales agreements with third
parties. These inventory financing transactions have been accounted for as
product financing arrangements. Inventory financed under these arrangements have
been recorded as inventory by Steel. At December 31, 1999, there was $30.8
million included in accounts payable under these financing arrangements.
The interest rates at December 31, 1999 were 10.0% for the term loan and 9.48%
for the revolving line of credit.
NET EARNINGS PER SHARE - NOTE G
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock. The numbers of shares used to compute
basic earnings per share in 1999, 1998, and 1997 were 22.5 million, 22.5
million, and 21.5 million, respectively. Diluted earnings per share is computed
by dividing net income by the weighted average number of shares of common stock
and other dilutive securities. The numbers of shares used to compute diluted
earnings
22
<PAGE>
per share in 1999, 1998, and 1997 were 22.5 million, 22.5 million, and 22.1
million, respectively. Dilutive securities (stock options) equivalent to 0.3
million shares of common stock were outstanding at December 31, 1999. These
shares were not included in the computation of diluted earnings per share.
Lone Star had losses in those periods and the effect of including the
dilutive securities in earnings per share would have been anti-dilutive.
INCOME TAXES - NOTE H
There was no current income tax expense in 1999 or 1998. Current income tax
expense was recognized for federal alternative minimum taxes of $0.9 million in
1997. There was no deferred income tax expense or benefit for 1999, 1998, or
1997. A reconciliation of computed income taxes to actual income taxes follows:
<TABLE>
<CAPTION>
($ in millions)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income (loss) from continuing operations before income tax $ (5.5) $ (32.3) $ 41.3
Statutory federal income tax rate 35% 35% 35%
======= ======= =======
Income tax (benefit) expense at statutory rate $ (1.9) $ (11.3) $ 4.5
Net operating loss, benefit not recognized (benefit recognized) 1.9 11.3 (13.6)
------- ------- -------
Income taxes (federal alternative minimum tax) $ - $ - $ 0.9
======= ======= =======
</TABLE>
The following table discloses the components of the deferred tax amounts at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
($ in millions)
1999 1998
------ ------
<S> <C> <C>
DEFERRED TAX ASSETS - temporary differences
Postretirement benefit accruals $ 10.3 $ 13.5
Environmental reserves 3.9 4.0
Other expense accruals and reserves 5.9 7.1
Inventories 5.3 6.0
Other 0.4 0.6
------ ------
Total deferred tax assets - temporary differences 25.8 31.2
Net operating loss carryforwards 91.8 86.0
Alternative minimum tax credit carryforward 1.0 1.0
------ ------
Total deferred tax assets 118.6 118.2
DEFERRED TAX LIABILITY - temporary difference for basis in
and depreciation of property, plant, and equipment (34.9) (33.3)
------ ------
Net deferred tax assets 83.7 84.9
Less valuation allowance (83.7) (84.9)
------ ------
NET DEFERRED TAX AMOUNT $ - $ -
====== ======
</TABLE>
At December 31, 1999, Lone Star had federal tax net operating loss carryforwards
(NOL's) of approximately $261.60 million, a portion of which may be related to
AFB and subject to an agreement with the Federal Deposit Insurance Corporation
(FDIC) whereby Lone Star may be required to pay the FDIC for certain tax
benefits. If not utilized, the NOL's will expire between years 2003 and 2014,
and their future availability may be limited if Lone Star or a member of the
consolidated group experiences an ownership change of more than 50 percentage
points, as defined by IRS regulations. Lone Star's common stock is publicly
traded, and management cannot assure that future trading will not result in an
ownership change, as defined by IRS regulations, which would limit availability
of the NOL's. Due to these uncertainties regarding possible utilization of NOL's
and the sensitivity of Steel's income to the level of domestic drilling
activity, valuation allowances were recorded to fully reserve the computed net
deferred tax assets.
EMPLOYEE BENEFIT PLANS - NOTE I
DEFINED CONTRIBUTION PLANS. Lone Star and Steel have defined contribution plans
available to substantially all full-time employees under which participants can
make voluntary pretax contributions. For nonbargaining unit employees, Lone Star
and Steel make matching contributions within specified limits. Steel makes
contributions at rates specified under
23
<PAGE>
collective agreements for its bargaining unit employees. Lone Star and Steel
contributions totaled $1.2 million in 1999, $1.3 million in 1998, and $1.5
million in 1997. Fintube also has a defined contribution plan.
STOCK OPTION PLAN. Lone Star has a long-term incentive plan which provides for
the issuance of up to 2,700,000 shares of common stock to key employees and
outside directors through the granting of incentive (the right to grant further
incentive options expired in 1995) and nonqualified stock options, stock
appreciation rights, restricted stock grants, and performance unit grants. The
option price is the average of the high and low market price on the date of the
grant. Options are generally exercisable for ten years with one-fourth of the
shares becoming exercisable on the one-year anniversary of the grant date and an
additional one-fourth becoming exercisable on the same anniversary date over the
next three years. If the optionee's employment is terminated under certain
circumstances after a change of control of Lone Star occurs before an option's
fourth anniversary, the option may be exercised in full earlier. Also,
accelerated vesting of options can occur upon death or retirement from
employment of an option holder. Following is a summary of stock option activity
during 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Under Option Price Range ($) Price ($)
------------------- --------------- ----------
<S> <C> <C> <C>
OUTSTANDING, DECEMBER 31, 1996 852,075 2.59 - 17.38 8.37
Granted in 1997 390,000 19.06 - 19.75 19.33
Exercised in 1997 (316,200) 3.06 - 17.38 9.13
--------- ----- ----- -----
OUTSTANDING, DECEMBER 31, 1997 925,875 2.59 - 19.75 12.73
Granted in 1998 257,500 22.56 - 31.28 24.68
Exercised in 1998 (94,500) 3.06 - 19.75 13.41
Cancelled in 1998 (27,000) 6.88 - 31.28 20.14
--------- ----- ----- -----
OUTSTANDING, DECEMBER 31, 1998 1,061,875 2.59 - 31.28 16.46
Granted in 1999 424,375 13.00 - 16.75 13.57
Exercised in 1999 (103,125) 3.06 - 19.75 8.80
Cancelled in 1999 (75,000) 19.06 - 19.06 19.06
--------- ----- ----- -----
OUTSTANDING, DECEMBER 31, 1999 1,308,125 2.59 - 31.28 15.98
========= ===== ===== =====
</TABLE>
At December 31, 1999, 1,267,900 shares were available for grant and 564,375
shares were exercisable.
The weighted average fair value per option granted in 1999, 1998, and 1997 was
$6.68, $14.28, and $9.72, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for grants in 1999, 1998, and 1997,
respectively: risk-free interest rates of 5.37%, 5.60%, and 6.36%; volatility of
48.53%, 48.83%, and 47.94%; and expected lives of five years for all 1999, 1998,
and 1997 option grants with payment of no dividends.
Lone Star accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for this plan been
determined consistent with SFAS No. 123, net income and earnings per share would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) - as reported ($ in millions) $ (5.5) $(24.9) $ 53.7
- pro forma ($ in millions) $ (8.1) $(27.0) $ 52.6
Basic earnings per share - as reported $(0.24) $(1.10) $ 2.50
- pro forma $(0.35) $(1.19) $ 2.45
Diluted earnings per share - as reported $(0.24) $(1.10) $ 2.44
- pro forma $(0.35) $(1.19) $ 2.39
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
DEFINED BENEFIT PENSION AND HEALTH CARE PLANS. Steel has three defined benefit
pension plans covering a substantial portion of its bargaining unit employees.
Retirement benefits are based on years of service at progressively increasing
flat-rate amounts. A special initial lump-sum pension payment equal to 13 weeks
of vacation pay is also paid following retirement. Steel funds the minimum
required contributions each year as required by applicable regulations.
24
<PAGE>
During 1996, the largest of the three pension plans was amended so that new
employees do not participate in the defined benefit plan. During 1998, the other
two plans were similarly amended. New employees are eligible to participate in
one of the defined contribution retirement plans, as are substantially all other
employees. The amendments also provided for increased benefits to newly retiring
plan participants. Steel also sponsors an unfunded defined benefit
postretirement health care plan for eligible bargaining unit employees and a
limited number of other retirees eligible under special early retirement
programs. These health care plan benefits are limited to eligible retirees and
their spouses until age 65, at which time coverage terminates. Certain other
postretirement benefits, primarily life insurance, are also provided. The
anticipated costs of these postretirement benefits are accrued over the
employees' years of service.
The measurement dates for determining the assets and obligations of these plans
were November 30, 1999, 1998, and 1997. The following table sets forth the
changes in the plans' benefit obligation and plan assets, the funded status
amounts recognized in the consolidated balance sheets at December 31, 1999,
1998, and 1997:
<TABLE>
<CAPTION>
($ in millions)
Pension Benefits Other Benefits
------------------------------- -------------------------------
CHANGE IN BENEFIT OBLIGATION 1999 1998 1997 1999 1998 1997
-------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 84.0 82.7 79.4 $ 13.9 12.3 11.9
Service cost 1.0 0.9 0.9 0.6 0.5 0.5
Interest cost 5.3 5.4 5.5 0.9 0.8 0.9
Plan participants' contributions - - - - - 0.1
Amendments - 0.5 - - - -
Actuarial loss (gain) (7.0) 1.2 3.5 (2.1) 1.2 (0.4)
Benefits paid (6.5) (6.7) (6.6) (0.7) (0.9) (0.7)
-------- ------- ------- -------- ------ --------
Benefit obligation at end of year $ 76.8 84.0 82.7 $ 12.6 13.9 12.3
======== ======= ======= ======== ====== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 54.3 53.2 44.0 $ - - -
Actual return on plan assets 8.7 2.8 5.0 - - -
Employer contributions 2.1 5.0 10.8 0.7 0.9 0.6
Plan participants' contributions - - - - - 0.1
Benefits paid (6.5) (6.7) (6.6) (0.7) (0.9) (0.7)
-------- ------- ------- -------- ------ --------
Fair value of plan assets at end of year $ 58.6 54.3 53.2 $ - - -
======== ======= ======= ======== ====== ========
RECONCILIATION OF FUNDED STATUS
Unfunded status - obligation in excess of assets $ 18.2 29.7 29.5 $ 12.6 13.9 12.3
Unrecognized actuarial gain (loss) (2.1) (13.7) (10.7) 1.8 (0.3) 0.8
Unrecognized net obligation at January 1, 1986 (1.0) (2.1) (3.1) - - -
Unrecognized prior service cost (1.6) (1.7) (1.3) - - -
-------- ------- ------- -------- ------ --------
Net amount recognized $ 13.5 12.2 14.4 $ 14.4 13.6 13.1
======== ======= ======= ======== ====== ========
AMOUNTS RECOGNIZED IN CONSOLIDATED
BALANCE SHEETS
Postretirement benefit obligations - current $ 4.9 - 3.0 $ 0.9 1.0 0.8
Postretirement benefit obligations - noncurrent 12.6 28.9 25.5 13.5 12.6 12.3
Other noncurrent assets - intangible asset (2.6) (3.9) (4.4) - - -
Accumulated other comprehensive loss (1.4) (12.8) (9.7) - - -
-------- ------- ------- -------- ------ --------
Net amount recognized $ 13.5 12.2 14.4 $ 14.4 13.6 13.1
======== ======= ======= ======== ====== ========
</TABLE>
In determining the benefit obligation, weighted average discount rates of 7.5%,
6.5%, and 7.0% were used for 1999, 1998, and 1997, respectively. Other
assumptions utilized for all three years included a 9.0% expected long-term rate
of return on plan assets and a 4.0% annual increase in the compensation rate.
The pension plans' assets consist primarily of short-term money market
investments, government and corporate obligations, real estate, and public
market equity securities:
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The annual rate of increase in the per
capita costs of covered health care benefits is assumed to decrease gradually
from 8.0% to an
25
<PAGE>
ultimate trend rate of 6.0% by the year 2004. Increasing the assumed medical
cost trend rates by one percentage point in each year would have resulted in a
$1.1 million increase in the benefit obligation as of December 31, 1999 and a
$0.2 million increase in the aggregate of the service cost and interest cost
components of net periodic benefit expense for 1999. A 1.0% decrease in the
assumed trend rates would have resulted in a $1.0 million decrease in the
benefit obligation and a $0.2 million decrease in expense.
Net periodic benefit expense for 1999, 1998, and 1997 included the following
components:
<TABLE>
<CAPTION>
($ in millions)
Pension Benefits Other Benefits
----------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1.0 0.9 0.9 $ 0.6 0.5 0.5
Interest cost 5.3 5.4 5.5 0.9 0.8 0.9
Expected return on plan asset (4.6) (4.7) (3.6) - - -
Amortization of net obligation at January 1, 1986 1.0 1.0 1.0 - - -
Amortization of prior service cost 0.2 0.1 0.1 - - -
Recognized net actuarial loss 0.5 0.1 0.1 - - -
------- ------ ------ ------ ------ ------
Net periodic benefit expense $ 3.4 2.8 4.0 $ 1.5 1.3 1.4
======= ====== ====== ====== ====== ======
</TABLE>
PROFIT SHARING PLAN. Steel has a profit sharing plan for substantially all
employees which provides for payment of a specified percentage of Steel's
quarterly operating income and certain minimum payments to bargaining unit
employees. Steel's payments to employees were $0.7 million, $1.5 million, and
$3.9 million for 1999, 1998, and 1997, respectively.
COMMITMENTS AND CONTINGENCIES - NOTE J
Steel has various commitments for the purchase of raw materials, certain
tubular goods, supplies, services, and energy arising in the ordinary course
of business. The majority of these commitments are for a period of less than
one year.
Steel's operations are subject to numerous environmental laws. The three major
areas of regulation are air quality, water quality, and solid and hazardous
waste management. The primary governmental oversight agencies include the
Texas Natural Resource Conservation Commission and the Environmental
Protection Agency. Steel has agreements with these agencies to conduct
numerous environmental studies and to develop plans to ensure continuous
compliance with applicable laws and regulations. Steel is engaged in various
ongoing environmental studies, monitoring programs, and capital projects.
Estimated expenditures for certain remediation programs are included in
accrued liabilities and other noncurrent liabilities as shown in Note D and
are computed on a non-discounted basis. Steel believes that its environmental
expenditures will continue to fall within its contemplated operating and
capital plans.
Steel leases equipment under various operating leases. Rental expense totaled
$3.6 million, $3.7 million, and $3.9 million in 1999, 1998, and 1997,
respectively. Future minimum lease payments under noncancellable operating
leases are as follows: 2000, $1.6 million; 2001, $1.1 million; 2002, $1.0
million; 2003, $0.3 million; 2004, $0.3 million; and thereafter, $0.5 million.
Lone Star and its subsidiaries are parties to a number of lawsuits and
controversies which are not discussed herein. Management of Lone Star and its
operating companies, based upon their analysis of known facts and
circumstances and reports from legal counsel, does not believe that any such
matter will have a material adverse effect on the results of operations or
financial condition of Lone Star and its subsidiaries, taken as a whole.
EXTRAORDINARY ITEMS (1998, 1997) AND GAIN FROM DISCONTINUED OPERATIONS (1997) -
NOTE K
During 1992, The Coal Industry Retiree Health Benefit Act of 1992 ("Act")
created a benefit plan fund to provide medical and death benefits to certain
United Mine Workers of America ("UMWA") retirees and eligible dependents. In
1993, Steel recorded a liability for the total estimated future payments
related to this Act. During 1997, the estimated liability was adjusted
downward, resulting in an extraordinary gain of $2.0 million. During 1998, as
a result of a decision by the United States Supreme Court, Steel was relieved
from making payments under the Act. Accordingly, the remaining UMWA liability
was reversed in 1998, resulting in a $7.4 million extraordinary gain. In
addition to the $2.0 million UMWA liability adjustment in 1997, an
extraordinary loss of $1.1 million was recognized for the early prepayment fee
in
26
<PAGE>
connection with the refinancing of Steel's revolving credit facility in 1997,
resulting in a net extraordinary gain of $0.9 million for 1997. There were no
income tax effects recognized for these extraordinary items.
In November 1993, Lone Star sold the stock of AFB, one of its operating
subsidiaries. The sale price was $155.7 million; of that, Lone Star received
$135.7 million in cash on the sale date. Additional payments were received of
$5.0 million in November 1994 and $12.4 million in August 1997, and recognized
as gains from discontinued operations. There were no income tax effects
recognized for these items.
QUARTERLY FINANCIAL SUMMARY - NOTE L
<TABLE>
<CAPTION>
($ in millions, except share amounts; quarterly amounts unaudited):
Quarter
----------------------------------------------------------------------
1999(a) First Second Third Fourth Total Year
---- -------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 63.70 $ 77.2 $ 99.5 $ 113.0 $ 353.4
Gross profit (loss) (2.20) (0.5) 6.9 8.6 12.8
Net income (loss) $ (6.60 $ (4.8) $ 2.0 $ 3.9 $ (5.5)
PER COMMON SHARE - BASIC
Net income (loss) available to common shareholders $ (0.29) $ (0.21) $ 0.09 $ 0.17 $ (0.24)
PER COMMON SHARE - DILUTED
Net income (loss) available to common shareholders $ (0.29) $ (0.21) $ 0.09 $ 0.17 $ (0.24)
1998
----
Net revenues $ 151.00 $ 129.0 $ 88.9 $ 63.5 $ 432.4
Gross profit (loss) 15.40 7.7 (9.9) (8.8) 4.4
Special charges $ - $ - $ - $ (14.5) $ (14.5)
Income (loss) from continuing operations 9.9 2.2 (15.6) (28.8) (32.3)
Extraordinary items - - - 7.4 7.4
Net income (loss) $ 9.9 $ 2.2 $ (15.6) $ (21.4) $ (24.9)
PER COMMON SHARE - BASIC
Income (loss) from continuing operations $ 0.44 $ 0.09 $ (0.69) $ (1.28) $ (1.43)
Extraordinary items - - - 0.33 0.33
---------- ---------- ---------- ---------- ----------
Net income (loss) available to common shareholders $ 0.44 $ 0.09 $ (0.69) $ (0.95) $ (1.10)
PER COMMON SHARE - DILUTED
Income (loss) from continuing operations $ 0.43 $ 0.09 $ (0.69) $ (1.28) $ (1.43)
Extraordinary items - - - 0.33 0.33
---------- ---------- ---------- ---------- ----------
Net income (loss) available to common shareholders $ 0.43 $ 0.09 $ (0.69) $ (0.95) $ (1.10)
</TABLE>
(a) See Note N with respect to the restatement of
the consolidated financial statements for the
fourth quarter of 1999 and the year ended
December 31, 1999.
SUBSEQUENT EVENT - NOTE M
On January 3, 2000, Lone Star completed the purchase of the assets of Fintube
Limited Partnership, a privately held, Tulsa-based manufacturer of finned
tubes. The purchase price was approximately $85 million, which included the
issuance of approximately 760,000 shares of Lone Star common stock valued at
$20 million. The assets were purchased by Fintube Technologies, Inc.
(Fintube), a new wholly owned subsidiary of Lone Star. While the new Fintube
subsidiary assumed
27
<PAGE>
substantially all of the contractual obligations of Fintube Limited
Partnership and its subsidiaries, certain liabilities were not assumed. The
excluded liabilities included, among other things, the partnership's bank debt
($17.9 million as of December 31, 1999); Fintube's litigation; brokers',
accounting and legal fees and expenses incurred by Fintube in connection with
the sale of its assets to Lone Star; and various non-assumed pre-closing
liabilities. Fintube also executed a new $59 million credit agreement with a
bank group. The initial funding under the credit agreement was approximately
$49 million with the balance available for working capital, and new capital
investments subject to borrowing base limitations. The balance of the purchase
price was provided by Lone Star from the repayment of intracompany debt by
Steel using the proceeds of additional borrowings.
Fintube manufactures and markets finned tubes used in a variety of heat
recovery applications. Its customers include suppliers of heat recovery boiler
sections used in gas-fired, combined cycle power generating plants. Fintube
also designs and manufactures other products, such as boiler economizers,
boiler tubing and enhanced-surface tubing.
March 8, 2000, Lone Star announced that it signed a definitive agreement to
purchase the assets of Bellville Tube Corporation (Bellville), a privately
held Houston-area based tubular goods manufacturer, for a cash purchase price
of approximately $14.5 million. The acquisition is expected to close on or
near March 31, 2000.
NOTE N - RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's Consolidated Financial Statements
for the year ended December 31, 1999, it was determined that the remaining
$800,000 of Lone Star's reserve for an inventory purchase commitment should
have been fully utilized in the fourth quarter of 1999. The reserve was
originally recorded in fiscal 1998. As a result, the accompanying consolidated
financial statements as of December 31, 1999 and for the year then ended,
present the restated results. A summary of the effect of the restatement is as
follows (in millions, except per share data):
<TABLE>
<CAPTION>
As Reported As Restated
<S> <C> <C>
Revenues $353.4 $353.4
Gross profit 12.0 12.8
SG&A (15.5) (15.5)
Operating Loss (3.5) (2.7)
Other income/expense (2.8) (2.8)
Net loss (6.3) (5.5)
Net loss per share-basic (0.28) (0.24)
Net loss per share-diluted (0.28) (0.24)
</TABLE>
In addition, the Company's accrued liabilities were reduced from $27.0 million
to $26.2 million and shareholder's equity was increased from $195.1 million to
$195.9 million.
28
<PAGE>
LONE STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (1)
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
($ in millions, except share data)
Years ended December 31,
----------------------------------
CONDENSED STATEMENTS OF INCOME 1999 1998 1997
------------------------------ -------- -------- --------
<S> <C> <C> <C>
General and administrative expenses $ (3.0) $ (3.4) $ (2.8)
Steel cost sharing 3.0 3.3 2.3
Equity in Steel's income (loss) (9.4) (28.0) 39.9
Interest income 1.7 1.7 2.9
Interest expense - - (2.7)
Other intercompany income from Steel 2.2 1.5 1.7
Gain on sale of discontinued operations - - 12.4
------- ------- -------
Net income (loss) $ (5.5) $ (24.9) $ 53.7
======= ======= =======
Cash dividends received from Steel $ - $ - $ -
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------
CONDENSED BALANCE SHEETS 1999 1998
------------------------ ------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18.1 $ 20.2
Short-term investments 1.2 3.1
Due from Steel 25.6 25.4
Other current assets 1.1 0.6
Total current assets 46.0 49.3
Investment in Steel 134.1 132.0
Marketable securities 15.4 9.0
Other noncurrent assets 3.9 4.2
------- -------
Total assets $ 199.4 $ 194.5
======= =======
Current liabilities: $ 0.6 $ 1.0
Other noncurrent liabilities 2.9 4.4
------- -------
Total Liabilities
3.5 5.4
Shareholders' equity:
Preferred stock, $1 par value
(authorized: 10,000,000 shares,
issued: none)
Common stock, $1 par value
(authorized: 80,000,000 shares, issued:
23,061,864 and 23,061,864, respectively) 23.1 23.1
Capital surplus 209.9 209.9
Minimum pension liability adjustment (1.4) (12.8)
Retained deficit (21.0) (15.5)
Treasury stock (462,991 and 566,116
common shares, respectively, at cost) (14.7) (15.6)
------- -------
Total shareholders' equity 195.9 189.1
======= =======
Total liabilities and shareholders' equity $ 199.4 $ 194.5
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997
---------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net income (loss) $ (5.5) $ (24.9) $ 53.7
Undistributed equity in Steel's income (loss) 9.4 28.0 (39.9)
Gain on sale of discontinued operations - - (12.4)
Other (2.4) (0.2) (14.8)
Net cash provided (used) by operating activities 1.5 2.9 (13.4)
Net cash provided (used) by investing activities (4.5) 13.2 27.0
Net cash provided (used) by financing activities 0.9 (0.6) (36.2)
Net increase (decrease) in cash and cash equivalents (2.1) 15.5 (22.6)
Beginning cash and cash equivalents 20.2 4.7 27.3
------- ------- -------
Ending cash and cash equivalents $ 18.1 $ 20.2 $ 4.7
======= ======= =======
</TABLE>
(1) See Note N to the Consolidated Financial Statements
29
<PAGE>
LONE STAR TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997, 1998, AND 1999
($ IN MILLIONS)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
beginning costs and other end
of period expenses accounts Deductions(b) of period
--------- -------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
----------------------------
Allowance for doubtful accounts $1.4 - - - $1.4
Year ended December 31, 1998
----------------------------
Allowance for doubtful accounts 1.4 - - - 1.4
Reserves for special charges (a) - 6.4 - (1.1) 5.3
Year ended December 31, 1999
----------------------------
Allowance for doubtful accounts 1.4 - - (0.1) 1.3
Reserves for special charges (a) $5.3 - - (5.3)(c) $ -
</TABLE>
(a) Does not include special charge associated with the write-down of property,
plant, and equipment.
(b) Includes write-offs of accounts receivable and utilization of reserves for
special charges.
(c) See Note N to Consolidated Financial Statements.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
LONE STAR TECHNOLOGIES, INC.
Date: June 1, 2000 By: /s/ CHARLES J. KESZLER
-------------------------
(Charles J. Keszler)
Vice President - Finance
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: June 1, 2000 By: /s/ RHYS J. BEST
-------------------------
Chairman of the Board, Chief
Executive Officer and President
Date: June 1, 2000 By: /s/ CHARLES J. KESZLER
-------------------------
(Charles J. Keszler)
Vice President - Finance
and Treasurer
31
