<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 2000
REGISTRATION NO. 333-41130
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
LONE STAR TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2085454
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
RHYS J. BEST
CHAIRMAN OF THE BOARD,
15660 NORTH DALLAS PARKWAY, SUITE 500 CHIEF EXECUTIVE OFFICER AND PRESIDENT
DALLAS, TEXAS 75248 LONE STAR TECHNOLOGIES, INC.
P.O. BOX 803546 15660 NORTH DALLAS PARKWAY, SUITE 500
DALLAS, TEXAS 75380 DALLAS, TEXAS 75248
(972) 770-6401 P.O. BOX 803546
DALLAS, TEXAS 75380
(972) 770-6401
(Address, including zip code, and (Name, address, including zip code, and
telephone number, including area code, of telephone number,
registrant's principal executive offices) including area code, of agent for service)
</TABLE>
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID E. MORRISON BRYAN E. BISHOP
JANE E. RAST KENNETH L. BETTS
THOMPSON & KNIGHT L.L.P. JOHN B. MCKNIGHT
1700 PACIFIC AVENUE, SUITE 3300 LOCKE LIDDELL & SAPP LLP
DALLAS, TEXAS 75201 2200 ROSS AVENUE, SUITE 2200
(214) 969-1700 (PHONE) DALLAS, TEXAS 75201
(214) 969-1751 (FAX) (214) 740-8000 (PHONE)
(214) 740-8800 (FAX)
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 2, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
3,750,000 SHARES
[LOGO]
COMMON STOCK
----------------
We are offering 3,000,000 shares of common stock and the selling stockholder is
offering 750,000 shares of common stock in this public offering. Proceeds from
the sale of the shares by the selling stockholder will be paid directly to the
selling stockholder.
Our common stock trades on the New York Stock Exchange under the symbol "LSS."
On August 1, 2000, the last reported sales price of our common stock on the New
York Stock Exchange was $42 3/16 per share.
We manufacture casing, tubing and line pipe used in the oil and gas industry,
finned tubes primarily used in power technology markets and other specialty
tubing and tubular products and flat rolled steel used in various industrial
applications.
See "Risk Factors" beginning on page 7 to read about some of the risks that you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
<TABLE>
<CAPTION>
Per Share Total
-------------- --------------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
Proceeds, before expenses, to the selling stockholder....... $ $
</TABLE>
------------------------
The underwriters may also purchase up to an aggregate of 562,500 additional
shares of our common stock in equal amounts from us and the selling stockholder
at the public offering price less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares to purchasers on , 2000.
------------------------
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
DAIN RAUSCHER WESSELS
THE ROBINSON-HUMPHREY COMPANY
The date of this prospectus is August , 2000.
<PAGE>
DESCRIPTION OF INSIDE FRONT COVER GRAPHIC:
The inside front cover is divided equally into two columns. The left column
has a white background which contains standard text that reads, "Lone Star
Technologies, Inc. is: -- The leading domestic manufacturer of premium welded
steel tubular products used in the completion of and production from oil and
natural gas wells. -- A major manufacturer of line pipe, used in pipelines for
gathering and transmission of oil and gas onshore and offshore. -- One of the
world's largest manufacturers of precision specialty tubing products used in
power technology and services, automotive, construction, agricultural and
industrial applications. Below this text coming across the page and both columns
from left to right is a stylized picture depicting the full body normalization
process used by Lone Star Steel and Bellville. The italicized text located
directly below this picture reads, "Our product innovations have revolutionized
the oil and gas drilling industry. We pioneered the full-body normalizing
process. This, along with other specialized heat-treating technologies, prepares
our tubulars for use in critical applications, such as deep offshore gas wells."
The right column contains pictures of Lone Star's various tubular products
and has a black background. All of the tubulars come across the column from
right to left. Starting from the top of the column, the first graphic consists
of two tubulars. One is threaded casing and the other is line pipe. The second
graphic is a picture of a single Bellville production tube. The third graphic is
a picture of a single finned tubular. The final graphic is a cluster of seven
precision mechanical tubulars.
DESCRIPTION OF FOLD-OUT GRAPHICS:
The fold-out graphics consist of two pages. The first page consists of three
graphics. Starting from the top of the page, the first graphic depicts on-land
drilling activity, shallow well drilling activity, and deep offshore well
drilling activity.
The second picture, located on the left side of the page, shows a cluster of
three tubulars: one casing tube, one piece of line pipe and one production tube.
The standard text located directly below this picture reads, "Whether our
customers are drilling a shallow oil well or a deep offshore gas well, or
transporting oil and gas in pipelines to storage facilities or refineries, we
provide all the tubular products needed. We have America's largest size and
chemistry range of electric resistance welded high-quality prime oilfield
tubular products."
The last picture, located at the bottom of the page, depicts an oil and gas
pipeline running along the bottom of the ocean.
The second page is entitled "Specialty Tubing Products." The top half of the
page contains a cluster of a small picture and a large picture. The small
picture depicts part of a finned tubular. Directly below this picture is a large
picture of a combined cycle power generation plant. The standard text located
directly below the large picture reads, "Finned Tubing. We are the leader in the
design and production of finned tubes, which are used in a variety of heat
recovery applications. Our heat recovery steam generation products are the
standard bearer for the industry. Our customers include suppliers of heat
recovery boiler components used in combined cycle electric power generation
plants, considered the new standard in electric power generation. The recently
announced next-generation gas-fired combined cycle power generation systems will
further accelerate the use of this technology around the world."
The bottom half of the page also contains a cluster of a small picture and a
large picture. The small picture consists of a grouping of nineteen precision
mechanical tubulars. The large picture depicts an excavator, which uses
precision mechanical tubulars in its hydraulic cylinders, digging a hole in a
section of earth. The standard text located directly below this graphic reads,
"Precision Mechanical Tubing. Our precision mechanical tubing is used to
manufacture hydraulic cylinders for construction and farm equipment and in the
automotive industry for stabilizers, transmission components and gear parts.
Other uses of our tubing include machine parts, bearing races, printing press
rollers, heavy-lift crane boom chords, drill rods in the mining industry,
tilt-tubes for outboard motors, dampening systems for rail-car
<PAGE>
connections, heavy-duty axles for semi-trailers, tank tracks, motor housings,
communications towers and many other products."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
About This Prospectus....................................... i
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Cautionary Statement Concerning Forward-Looking
Statements................................................ 14
Use of Proceeds............................................. 15
Price Range of Common Stock................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Our Business................................................ 28
Management.................................................. 38
Principal and Selling Stockholders.......................... 40
Description of Capital Stock................................ 41
Underwriting................................................ 44
Legal Matters............................................... 46
Experts..................................................... 46
Where You Can Find More Information......................... 46
Index to Financial Statements............................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission. This prospectus provides you with a general
description of the securities being offered. You should read this prospectus
together with additional information described under the heading "Where You Can
Find More Information" on page 46.
The terms "Lone Star," "we," "our" and "us" refer to Lone Star
Technologies, Inc. and its consolidated subsidiaries unless the context suggests
otherwise. The term "you" refers to a prospective investor. The address of our
principal executive offices is 15660 North Dallas Parkway, Suite 500, Dallas,
Texas 75248, and our telephone number is (972) 770-6401. Our mailing address is
P.O. Box 803546, Dallas, Texas 75380. Our website is located at
www.lonestartech.com. Information contained on our website does not constitute,
and shall not be deemed to constitute, part of this prospectus.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front
cover of this prospectus.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS THE KEY INFORMATION CONTAINED IN THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE SECTION TITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND THE NOTES RELATING TO THOSE STATEMENTS.
OUR COMPANY
We are the leading domestic manufacturer of premium welded "oil country
tubular goods," which are steel tubular products used in the completion and
production of oil and natural gas wells. We are also a major manufacturer of
line pipe, which is used in the gathering and transmission of oil and natural
gas. In addition, we are a leading manufacturer of specialty tubing products
used in power technology, automotive, construction, agricultural and industrial
applications. In January 2000, we acquired the assets of Fintube Limited
Partnership, the largest specialty tubing manufacturer of heat recovery finned
tubulars, which are used in various power technology applications, including in
the construction of gas-fired, combined cycle power generation plants. Also, on
April 1, 2000 we completed an acquisition of the assets of Bellville Tube
Corporation, a manufacturer of casing, tubing and line pipe for the oil and gas
industry.
OILFIELD PRODUCTS
We manufacture premium welded oil country tubular goods, including a wide
range of casing and production tubing. Casing acts as a structural retainer wall
in oil and natural gas wellbores, and production tubing transmits hydrocarbons
to the surface. We offer casing and tubing products with the widest variety of
diameters, grades and wall thicknesses in the United States. This variety
provides us with a distinct competitive advantage as a single source supplier of
a complete range of oilfield casing and production tubing. We also manufacture
line pipe, which is used in gathering and transmitting hydrocarbons from the
wellhead to larger transmission pipelines. As a result of our broad product
range and unique heat treating capabilities, we are able to service nearly all
typical drilling applications for oil and natural gas wells. Our oilfield
product operations are conducted primarily through our Lone Star Steel
subsidiary, which has been producing oilfield products for over 45 years.
Historically, our oilfield products have accounted for over 60% of our total
revenues. Demand for our oilfield products depends primarily upon the number of
oil and natural gas wells being drilled, completed and re-worked and the depth
and drilling conditions of these wells. The level of these activities depends
primarily on natural gas and oil prices and industry expectations as to future
prices. During a downturn in oil and gas drilling activity in the first half of
1999, the active rig count in the United States reached a 50 year low of 488
rigs in April 1999. As a result of stronger natural gas and oil prices, which
have encouraged greater spending by oil and gas companies, the domestic active
rig count increased to an average of 942 rigs during July 2000, an increase of
93% from the April 1999 low point. The increased drilling activity has
dramatically improved the demand for our oilfield products, with our first
quarter 2000 shipments of 125,400 tons more than doubling first quarter 1999
shipments. In addition, more of the wells drilled in recent years are deeper
than in the past, increasing the required performance characteristics and
quantity of casing and tubing needed for well completion and, accordingly, the
demand for our premium, high-strength products.
Our premium product line includes tubulars manufactured with the electric
resistance welded, full-body normalized process and other heat treating
techniques that we pioneered. This technology gives our tubes better performance
characteristics than seam-annealed casing and tubing. Our process strengthens
the entire tube and allows our premium products to compete successfully with
seamless oil country tubular goods for critical applications such as deep
natural gas wells and offshore wells. We believe that the seamless manufacturing
process involves higher capital and production costs than our welded process and
that seamless products are generally priced higher than comparable welded
products. Typically, greater
1
<PAGE>
than 40% to 50% of our oil country tubular goods tonnage consists of premium,
high-strength tubular products.
We have expanded our oilfield product offering through commercial alliances
with several mills. These exclusive arrangements enable us to outsource
production of specific products, allowing us to offer a wider variety of
oilfield products, including seam-annealed tubular products used for shallow
wells, without a substantial capital investment. These alliances allow us to
concentrate our capital expenditures and manufacturing expertise on our premium
products, while offering our customers a complete size range of casing, tubing
and line pipe products for the oil and gas industry. Including our alliance
arrangements, we have approximately 25% of the domestic production capacity for
casing and tubing products and approximately 10% of the line pipe production
capacity during typical markets.
On April 1, 2000, we completed the purchase of the assets of Bellville Tube
Corporation, a manufacturer of electric resistance welded, full-body normalized
casing, tubing and line pipe for the oil and gas industry, for approximately
$14.5 million. We believe our acquisition of Bellville, a former alliance mill
which is a leading manufacturer of prime production tubing, will enable us to
better utilize our existing facilities to manufacture premium, high-strength
large diameter casing. In addition, the Bellville acquisition will increase our
production flexibility for precision mechanical tubulars and tubes for use in
our Fintube business.
We are committed to technologically innovative product development. We
collaborate with oilfield customers and industry groups to develop new grades of
oil country tubular goods as well as new products, such as expandable casing.
Our expandable casing product was developed for a joint venture between Shell
Oil Company and Halliburton Company and was first successfully installed in late
1999 in the Gulf of Mexico. We are currently the only supplier of this product.
Our technical knowledge and high-performance casing products are being applied
in an innovative method for drilling wells using casing instead of drill pipe.
The first commercial well using casing drilling was completed in August 1999. We
also have used our expertise to develop high-strength, thick wall line pipe for
offshore applications and have developed ultrasonic testing methods which ensure
the quality of our tubular products.
SPECIALTY TUBING PRODUCTS
We manufacture both finned tubulars and precision mechanical tubulars. Our
custom-made specialty tubing products are sold to power technology markets for
heat recovery applications and to automotive, fluid power and other markets for
various mechanical applications.
FINNED TUBULARS. On January 3, 2000, we purchased the assets of Fintube
Limited Partnership, a privately held North American manufacturer of
custom-engineered finned tubes used in a variety of heat recovery applications.
Fintube is the leader in the design and production of finned tubes for heat
recovery steam generation and has a majority of the domestic manufacturing
capacity for these tubes. Heat recovery steam generation tube systems are used
in gas-fired, combined cycle power generating plants. Finned tubes raise the
efficiency of electric plants by more than 30% by converting exhaust heat into
steam to generate additional electricity. The Energy Information Administration
expects the amount of new combined cycle generating capacity additions to
increase by 540% between 2001 and 2005, and for these additions to represent 55%
of the projected 110 gigawatts of all new power generating capacity additions
during that period. Accordingly, we expect the heat recovery steam generation
market to grow rapidly over the next several years if, as expected, construction
of combined cycle power generating plants accelerates. Our heat recovery
products also serve the petrochemical and food processing industries. We also
design and manufacture enhanced surface tubing and other products such as
economizers and boiler tubes.
PRECISION MECHANICAL TUBULARS. Our precision mechanical tubular product
line includes a wide array of high-quality, custom-made steel tubular products
with precise dimensional control and special metallurgical properties. Our
precision mechanical tubular products are used for many industrial applications,
including the manufacture of hydraulic cylinders for construction and farm
equipment; automotive
2
<PAGE>
applications, such as stabilizers and intrusion tubes; and other uses, including
machine parts, bearing races, down-hole pump barrels, heavy-lift crane boom
chords, drill rods and liner hangers.
We have the second largest production capacity in the world for precision
mechanical tubulars using the Drawn Over Mandrel manufacturing process. This
process allows us to achieve higher critical tolerances and dimensional control
than other processes.
FLAT ROLLED STEEL AND OTHER PRODUCTS
We also manufacture and market flat rolled steel, which is primarily used in
the manufacture of our oil country tubular goods, and other miscellaneous
tubular products. Our participation in the flat rolled steel market allows us to
maintain flexibility in the procurement of steel required to manufacture our
tubular products.
RECENT CAPITAL IMPROVEMENTS AND STEEL SOURCING FLEXIBILITY
We believe we are one of the lowest cost producers of premium, high-strength
tubulars. Since 1995, we have invested over $100 million in a capital
improvements program focused on technology enhancements and various
manufacturing upgrades. We believe this program will lower costs by improving
productivity and increasing our steel sourcing flexibility. As a result of our
steel sourcing flexibility, which allows us to use steel slabs, coils or scrap
to manufacture our tubular products, we can access the source of steel that
provides us with the lowest cost of steel supply. Our capital improvement
program also substantially increased our precision mechanical tubular capacity.
We plan to increase our Fintube manufacturing capacity over the next two years.
OUR STRATEGY
Our goal is to be the leading provider of both oilfield tubular products and
specialty tubing products and to increase our market presence in order to
benefit from favorable market conditions. The key elements of our strategy to
achieve commercial leadership and operational excellence are:
- Achieving increased production, greater productivity and penetration into
new markets through capital investment and commercial alliance expansion;
- Continuing to develop and market new product applications and technology;
and
- Growing through strategic acquisitions.
OUR EXECUTIVE OFFICES
Our principal executive offices are located at 15660 North Dallas Parkway,
Suite 500, Dallas, Texas 75248. Our mailing address is P.O. Box 803546, Dallas,
Texas 75380, and our phone number is (972) 770-6401.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
Us................................................. 3,000,000 shares (1)
The selling stockholder............................ 750,000 shares (2)
Total shares outstanding after this offering......... 26,561,610 shares (1) (2) (3)
Use of proceeds...................................... We intend to use the net proceeds from this
offering to repay a substantial portion of
our indebtedness, including our indebtedness
relating to our recent acquisitions; to fund
capital expenditures and for general
corporate purposes.
New York Stock Exchange trading symbol............... LSS
</TABLE>
------------------------
(1) Excludes 30-day option granted by Lone Star to the underwriters to purchase
up to 281,250 additional shares of common stock to cover over-allotments, if
any.
(2) Excludes 30-day option granted by the selling stockholder to the
underwriters to purchase up to 281,250 additional shares of common stock to
cover over-allotments, if any.
(3) Excludes, as of July 31, 2000, 1,744,875 shares issuable upon exercise of
options outstanding under our stock option plan, 628,650 shares reserved for
issuance upon the exercise of options that may be granted in the future
under our stock option plan and 200,000 shares reserved for issuance under
our employee stock purchase plan.
RISK FACTORS
For a description of some of the risks you should consider before buying
shares of our common stock, see "Risk Factors" beginning on page 7.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following tables give a summary of our historical and pro forma
consolidated financial information. The pro forma 1999 column included in Income
Data and Other Data reflects adjustments made to our historical numbers for the
year ended December 31, 1999 to give effect to our Fintube and Bellville
acquisitions as if the acquisitions had occurred on January 1, 1999. The first
quarter 2000 pro forma column included in Income Data, Other Data and Balance
Sheet Data reflects adjustments made to our historical numbers for the three
months ended March 31, 2000 to give effect to our Bellville acquisition as if
the acquisition had occurred on January 1, 2000 for Income Data and Other Data
and at March 31, 2000 for Balance Sheet Data. The pro forma as adjusted column
included in the Balance Sheet Data reflects adjustments made to our pro forma
numbers to give effect to this offering and the application of the net proceeds
to Lone Star as described under "Use of Proceeds," assuming a public offering
price of $44 5/8 and no exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31, FOR THE THREE FOR THE
-------------------------------------------- MONTHS ENDED THREE MONTHS
MARCH 31, ENDED
PRO FORMA ------------------- MARCH 31,
1997 1998 1999(1) 1999(1)(2) 1999 2000(1) 2000(3)
-------- -------- -------- ----------- -------- -------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME DATA:
Revenues:
Oilfield products............. $ 454.1 $ 255.6 $ 185.1 $ 186.8 $ 30.0 $ 81.5 $ 81.7
Specialty tubing products..... 129.0 123.2 120.5 199.0 26.7 56.7 56.7
Flat rolled steel and other
products.................... 71.2 53.6 47.8 50.0 7.0 15.7 15.7
-------- -------- -------- -------- -------- -------- ------
Total revenues.............. 654.3 432.4 353.4 435.8 63.7 153.9 154.1
Cost of goods sold.............. (590.1) (428.0) (340.6) (393.1) (65.9) (136.0) (134.9)
-------- -------- -------- -------- -------- -------- ------
Gross profit.................... 64.2 4.4 12.8 42.7 (2.2) 17.9 19.2
Special charges(4).............. -- (14.5) -- -- -- -- --
Selling, general and
administrative expenses....... (19.6) (20.0) (15.5) (30.6) (3.8) (8.1) (8.8)
-------- -------- -------- -------- -------- -------- ------
Operating income (loss)......... 44.6 (30.1) (2.7) 12.1 (6.0) 9.8 10.4
Net income (loss) from
continuing operations......... 40.4 (32.3) (5.5) 4.6 (6.6) 7.1 7.5
Net income (loss) (5)(6)........ $ 53.7 $ (24.9) $ (5.5) $ 4.6 $ (6.6) $ 7.1 $ 7.5
======== ======== ======== ======== ======== ======== ======
Basic earnings (loss) per
share......................... $ 2.50 $ (1.10) $ (0.24) $ 0.20 $ (0.29) $ 0.30 $ 0.32
======== ======== ======== ======== ======== ======== ======
Diluted earnings (loss) per
share......................... $ 2.44 $ (1.10) $ (0.24) $ 0.20 $ (0.29) $ 0.29 $ 0.31
======== ======== ======== ======== ======== ======== ======
Weighted average common shares
outstanding--
basic......................... 21.5 22.5 22.5 23.3 22.5 23.4 23.4
diluted....................... 22.1 22.5 22.5 23.6 22.5 24.0 24.0
OTHER DATA:
Net cash provided by (used in)
operating activities.......... $ 25.9 $ 8.6 $ 28.1 $ 50.0 $ 9.9 $ (10.7) $(11.9)
Net cash provided by (used in)
investing activities.......... (7.7) (4.3) (11.7) (15.7) 2.6 (90.8) (9.1)
Net cash provided by (used in)
financing activities.......... (31.3) 2.4 (15.1) (33.2) 10.3 86.4 15.3
EBITDA(7)....................... 58.9 (14.3) 14.0 34.2 (1.8) 14.9 15.8
Depreciation.................... 13.3 14.8 15.7 18.8 3.9 4.3 4.5
Amortization.................... 1.0 1.0 1.0 3.3 0.3 0.8 0.9
Capital expenditures............ 34.7 17.6 7.2 11.2 1.4 4.0 4.0
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(SHIPMENTS IN TONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Oilfield products.................................. 632,600 372,500 336,100 55,900 125,400
Speciality tubing products......................... 119,800 111,900 116,700 24,500 50,300
Flat rolled steel and other products............... 194,100 144,700 144,600 23,300 42,200
------- ------- ------- ------- -------
Total tons shipped................................. 946,500 629,100 597,400 107,700 217,900
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------------------
PRO FORMA
HISTORICAL(1) PRO FORMA(1)(3) AS ADJUSTED(8)
------------- --------------- --------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 7.1 $ 7.1 $ 7.1
Short-term investments.................................. 1.3 1.3 1.3
Net working capital..................................... 105.9 106.1 138.4
Marketable securities................................... 20.4 20.4 20.4
Total assets............................................ 487.6 487.8 487.8
Long-term debt.......................................... 107.3 107.3 20.9
Total debt.............................................. 115.3 115.3 20.9
Shareholders' equity.................................... 224.1 224.1 350.8
</TABLE>
--------------------------
(1) Lone Star's historical December 31, 1999 and March 31, 2000 financial
statements were restated to reflect the utilization of an $800,000 reserve
previously set aside for an inventory purchase commitment.
(2) The pro forma amounts reflect adjustments made to our historical 1999
numbers to give effect to our Fintube and/or Bellville acquisitions. See our
Unaudited Pro Forma Consolidated Financial Statements included in this
prospectus and incorporated by reference into this prospectus from our
Current Reports on Form 8-K, as amended, filed on June 1, 2000 and June 14,
2000.
(3) The pro forma amounts reflect adjustments to our first quarter 2000 numbers
to give effect to our Bellville acquisition. See our Unaudited Pro Forma
Consolidated Financial Statements incorporated by reference into this
prospectus from our Current Report on Form 8-K filed on June 14, 2000.
(4) In response to 1998 market conditions, our Lone Star Steel subsidiary
restructured and downsized its operations. As a result, special charges of
$14.5 million were recognized in operating income (loss) to write down
property, plant and equipment and related supplies to fair value
($8.1 million), renegotiate or cancel contractual obligations
($4.4 million) and to recognize employee severance cost ($2.0 million).
(5) In 1997, an extraordinary loss of $1.1 million was recognized for an early
prepayment penalty fee in connection with the refinancing of our Lone Star
Steel subsidiary's credit facility. Also in 1997, an extraordinary gain of
$2.0 million was recognized for a reduction in Lone Star Steel's obligation
to provide medical and death benefits under the Coal Industry Retiree Health
Benefit Act of 1992. During 1998, Lone Star Steel was relieved of its
obligation under this act and recognized an extraordinary gain from
reversing its liability.
(6) We recognized a gain from discontinued operations of $12.4 million in 1997
for payments received from the 1993 sale of our stock in American Federal
Bank, F.S.B.
(7) EBITDA consists of earnings (loss) from operations plus depreciation and
amortization. EBITDA does not represent funds available for our
discretionary use and is not intended to represent cash flow from operations
as measured under generally accepted accounting principles. EBITDA should
not be considered as an alternative to net loss or net cash used in
operating activities, but may be useful to investors as an indication of
operating performance. Our calculations of EBITDA may not be consistent with
calculations of EBITDA used by other companies.
(8) As adjusted to take into account the expected application of the net
proceeds to us from this offering. See "Use of Proceeds" on page 15.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES RISKS. IN ADDITION TO THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING WHETHER AN
INVESTMENT IN OUR COMMON STOCK IS SUITABLE FOR YOU.
THE VOLATILITY OF OIL AND GAS MARKETS AFFECTS DEMAND FOR OUR PRINCIPAL PRODUCTS,
AND DOWNTURNS IN THESE MARKETS COULD CAUSE OUR REVENUES TO DECREASE.
The sale of casing, tubing and line pipe to the oil and gas industry
constitutes the most significant source of our revenues. As a percentage of our
total revenues, revenues from the sales of these products accounted for
approximately 52% in 1999, 59% in 1998 and 69% in 1997. The oil and gas industry
has historically been volatile. Downturns in the oil and gas markets and general
economic conditions could cause demand for our principal products to decrease,
which would adversely affect our revenues and results of operations.
Demand for our oilfield products depends primarily upon the number of oil
and natural gas wells being drilled, completed and re-worked and the depth and
drilling conditions of these wells. The level of these activities depends
primarily on natural gas and oil industry expectations as to future prices.
Natural gas and oil prices are subject to significant fluctuations in response
to relatively minor changes in supply, market uncertainty and a variety of
additional factors that are beyond our control. These factors include:
- worldwide and domestic supplies of and demand for oil and natural gas;
- the volatility of natural gas and oil prices;
- the instability of domestic and foreign natural gas and oil production;
- political instability or armed conflict in oil and gas producing regions;
- the price and level of imports of oil and gas casing, tubing and line
pipe;
- the level of consumer and industrial demand;
- the price and availability of alternative fuels;
- the availability of pipeline capacity;
- weather conditions;
- domestic and foreign governmental regulations, especially trade laws and
taxes; and
- the overall economic environment including the demand for electricity.
We expect natural gas and oil prices to continue to be volatile in the
future. We cannot predict future natural gas and oil price movements, and we
cannot give you any assurances as to the level of future demand for our
products.
THE COMPETITION FOR RAW MATERIALS WE USE IN OUR BUSINESS AND THE VOLATILITY OF
OUR RAW MATERIAL COSTS COULD ADVERSELY AFFECT OUR OPERATIONS.
Purchased steel represents approximately 60% to 65% of our cost of goods
sold. The price and availability of steel slabs, coils, scrap and wire rod that
we use in our manufacturing processes are highly competitive and volatile.
Various factors, most of which are beyond our control, affect the supply and
price of steel. These factors include:
- supply and demand factors;
- freight costs and transportation availability;
- inventory levels of brokers and distributors;
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- the price and availability of imported steel pipe and tubing;
- trade duties and taxes; and
- labor disputes.
Changes in steel prices can affect the pricing levels of our products. We
seek to maintain our profit margin by attempting to increase the price of our
products in response to an increase in steel costs. Frequently, increases in the
prices of our products do not fully compensate us for steel price increases and
generally lag behind increases in steel prices. As a result, we typically have a
limited ability to recover increases in steel costs. We cannot predict whether
the availability of steel slabs and coils will constrain our Lone Star Steel
subsidiary's operations or the operations of our recently acquired Fintube and
Bellville businesses.
OUR ACQUISITION OF FINTUBE'S AND BELLVILLE'S BUSINESSES AND ANY OTHER
ACQUISITIONS MIGHT DISRUPT OUR BUSINESS IF OUR EXPECTATIONS ARE NOT MET OR IF WE
ARE UNABLE TO OPERATE ANY ACQUIRED BUSINESS SUCCESSFULLY.
On January 3, 2000, we purchased the assets of Fintube Limited Partnership.
We have retained Fintube's personnel to conduct its business in generally the
same manner as it was conducted prior to the acquisition. We cannot assure you,
however, that we will be successful in maintaining this continuity or that our
plans regarding the operation of the acquired Fintube business or our existing
business will not change. Any disruptions in personnel or operations could be
compounded by our lack of familiarity with the finned tube business and could
result in quality problems, inefficiencies in production or dissatisfied or lost
customers.
Similarly, we have retained Bellville Tube Corporation's personnel since our
completed acquisition of Bellville's assets on April 1, 2000. Any loss of key
Bellville personnel could be disruptive to our business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Fintube and Bellville Acquisitions and Overview of Pro
Forma Information" on page 21 of this prospectus for more information regarding
the Bellville acquisition and Bellville's business.
We may consider other strategic acquisitions from time to time. We can give
you no assurance that our acquisition activities will perform in accordance with
our expectations. We must necessarily base any assessment of potential
acquisitions on inexact and incomplete information and assumptions with respect
to operations, profitability and other matters that may prove to be incorrect.
We cannot assure you that our management would recognize the risks and
uncertainties associated with any future acquisitions or that we recognized all
the risks and uncertainties in the Fintube and Bellville acquisitions.
MARKET VOLATILITY AND DOWNTURNS OF INDUSTRIES WHICH USE OUR FINTUBE PRODUCTS FOR
HEAT RECOVERY APPLICATIONS COULD REDUCE DEMAND FOR THOSE PRODUCTS AND ADVERSELY
AFFECT OUR REVENUES.
Our Fintube subsidiary produces boiler tubes, finned tubes and other
products used in a variety of heat recovery applications, including power
generation, industrial plant processing and petrochemical businesses. Our
Fintube business is therefore dependent on power plant construction, the cost of
alternative fuels for power generation and other factors. To a lesser extent,
our Fintube business is dependent on industrial plant processing and
petrochemical plant construction. This construction activity and the
corresponding demand for our Fintube products are also related to natural gas
and oil prices and are therefore subject to the volatility of the oil and gas
market. Demand for these products fluctuates significantly in response to a
number of economic, market and other factors, most of which are beyond our
control. A decrease in demand for these products could adversely affect our
results of operations. Some of the factors affecting demand are:
- the level of consumer and industrial demand for electrical power
generation;
- instability and volatility of oil prices and domestic and foreign oil
production levels, which factors can affect investment in petrochemical
plants;
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- the price and level of imports of foreign products;
- worldwide and domestic supplies of natural gas;
- construction of new gas-fired power generation plants;
- the price and availability of alternative fuels;
- weather conditions;
- domestic and foreign governmental regulations and taxes; and
- the overall economic environment.
We cannot predict future economic and market movements, and we cannot give
you any assurances as to the level of future demand for our Fintube products.
EXCESSIVE INDUSTRY CAPACITY OF OIL AND GAS CASING AND TUBING PRODUCTS AND LINE
PIPE COULD ADVERSELY AFFECT OUR SALES.
Industry-wide inventory levels of tubular goods for the oil and gas industry
can vary significantly from period to period. These changes can have a direct
adverse effect on the demand for new production of tubular goods when customers
draw from existing inventory rather than purchase new products. As a result, our
oil and gas casing and tubing sales and results of operations may vary
significantly from period to period. Excessive inventories could have a material
adverse effect on price levels and the quantity of oil and gas casing and tubing
and line pipe products sold by us. We cannot assure you that any excess domestic
capacity will be substantially absorbed during periods of increased domestic
drilling activity since foreign producers of oil and gas casing and tubing and
line pipe may increase their exports to the United States market.
EASING OF UNITED STATES GOVERNMENT IMPORT TRADE RESTRICTIONS COULD INCREASE
FOREIGN COMPETITION IN OUR INDUSTRY AND HARM OUR BUSINESS, PARTICULARLY IN THE
CASE OF OIL AND GAS CASING AND TUBING AND LINE PIPE.
The domestic steel industry historically has faced significant competition
from foreign steel producers. The level of imports of oil country tubular goods,
which has varied significantly over time, affects the domestic market for these
goods. High levels of imports reduce the volume sold by domestic producers and
tend to suppress selling prices, both of which have an adverse impact on our
business.
The level of imports of oil and gas casing and tubing and line pipe is
affected by:
- overall world demand for oil and gas casing and tubing and line pipe;
- inventory levels of casing, tubing and line pipe;
- the purchasing pattern of distributors and end users;
- domestic and foreign trade policy; and
- the relative value of the United States dollar.
Many foreign steel producers are owned, controlled or subsidized by their
governments and their decisions with respect to production and sales may be
influenced more by political and economic policy considerations than by
prevailing market conditions. Actions motivated by these factors could increase
competition and cause our sales to decrease.
The United States government is currently imposing duties on the imports of
various oil and gas casing and tubing products from some foreign countries in
response to antidumping and countervailing duty cases filed by several domestic
steel companies. In February 2000, the United States government granted relief
to the line pipe industry under Section 201 of the Trade Act of 1974 by imposing
restrictions and tariffs on some welded line pipe imports for three years. For a
more complete description of
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antidumping and countervailing duty orders relating to our business and their
effects, see "Our Business--Our Oilfield Products--Competition" on page 32.
Antidumping and countervailing duty orders applicable to our industry are
limited to specific countries, are largely under appeal and may be revoked as a
result of periodic "sunset reviews." Additionally, an individual exporter may
retain revocation as to itself under specific circumstances. In June 2000, the
United States government completed sunset reviews of orders covering Canada and
Taiwan revoking both orders. The United States government has begun conducting
sunset reviews of orders covering Argentina, Italy, Japan, Korea and Mexico. If
those orders are revoked in full or in part or the duty rates are lowered, we
could be exposed to increased competition from imports that could have a
material adverse effect on our business. The relief recently granted to the line
pipe industry under Section 201 of the Trade Act of 1974 is also subject to
appeal and review, and a revocation of that relief could harm us.
We cannot predict the United States government's future actions regarding
import duties or other trade restrictions on imports of oil and gas casing and
tubing products or line pipe, or the impact of these actions on our sales of oil
and gas casing and tubing products or line pipe.
OUR PRECISION MECHANICAL TUBULARS AND OTHER BUSINESSES ARE SENSITIVE TO ECONOMIC
DOWNTURNS, WHICH COULD CAUSE OUR REVENUES TO DECREASE.
The demand for our precision mechanical tubulars, flat rolled steel and
other products is also cyclical in nature and is sensitive to general economic
conditions. We manufacture and sell high quality steel tubing in the form of
precision mechanical tubulars used by our customers in the manufacture of
products such as automotive stabilizers, hydraulic cylinders and cranes. The
demand for these products and, in turn, for our precision mechanical tubulars,
is cyclical and dependent on the general economy, the automotive and
construction industries and other factors affecting domestic goods activity. We
cannot assure you that our precision mechanical tubulars inventories will not
become excessive, which could have a material adverse effect on price levels and
the quantity of precision mechanical tubulars sold by us.
WE FACE SIGNIFICANT FOREIGN AND DOMESTIC COMPETITION IN OUR OIL AND GAS CASING
AND TUBING AND FINTUBE BUSINESSES, AND THIS COMPETITION MAY CAUSE US TO LOSE
SALES.
The market for our products, particularly with respect to oil and gas casing
and tubing, line pipe and finned tubes, is highly competitive. We believe that
the principal competitive factors affecting these products are quality,
availability, service and price. We compete with foreign and domestic producers,
including, in the case of oilfield products, manufacturers of seamless products.
Many of the foreign producers benefit from substantially greater assets and
resources than we have and from integrated or consolidated commercial
relationships. Our oil and gas casing and tubing and line pipe products are
subject to competition from domestic and foreign integrated and mini-mill
producers. Our Fintube products face competition from both domestic
manufacturers and from Pacific Rim and other international producers. These
companies may be better able than us to successfully endure downturns in either
the energy or industrial sectors.
In the welded oil and gas casing and tubing and line pipe market, we compete
against manufacturers that may be able to purchase or produce semi-finished
steel, hot rolled coils or scrap at a lower cost than we can. Our Lone Star
Steel subsidiary satisfies its raw material requirements and those of our
Bellville subsidiary by purchasing semi-finished steel, using purchased and
internally generated scrap to make hot rolled coils in its melt shop and hot
strip mill and purchasing coils. Correspondingly, our Fintube subsidiary must
also compete with manufacturers that may be able to purchase or produce coils
more cost-effectively than we can. We cannot assure you that we can satisfy our
subsidiaries' raw material requirements as cost-effectively as our competitors.
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WE HAVE SUBSTANTIAL CAPITAL REQUIREMENTS, AND WE MAY REQUIRE ADDITIONAL CAPITAL
IN THE FUTURE WHICH MIGHT NOT BE AVAILABLE TO US.
We operate in capital intensive businesses. We have made, and expect to
make, significant capital expenditures each year both for the recurring
maintenance necessary to keep manufacturing facilities operational and to comply
with environmental and other legal requirements. Additionally, we regularly make
significant capital expenditures for technological improvements and maintenance.
If funding is insufficient at any time in the future, we may be unable to
develop or enhance our products or services, take advantage of business
opportunities or respond to competitive pressures.
WE HAVE UNDERFUNDED PENSION PLANS, WHICH COULD RESULT IN CLAIMS AGAINST OUR
ASSETS.
Our three defined benefit pension plans for our Lone Star Steel subsidiary's
bargaining unit employees were underfunded by an aggregate of approximately
$18.2 million as of November 30, 1999 (as reflected in our December 31, 1999
financial statements) using an investment return assumption of 9% per annum and
a discount rate of 7.5% per annum. If the plans were terminated under the
distress termination provisions of the Employee Retirement Income Security Act
of 1974, as amended, or "ERISA," using the actuarial assumptions specified by
the Pension Benefit Guaranty Corporation, or "PBGC," the PBGC would have claims
against our assets for the amount necessary to satisfy the plans' unfunded
benefit liabilities under the PBGC assumptions, which amount would likely be
between $30 million and $35 million.
POTENTIAL CASUALTIES AND PRODUCT LIABILITY CLAIMS RELATING TO THE PRODUCTS WE
MANUFACTURE AND SELL TO THE OIL AND GAS INDUSTRY AND INDUSTRIES USING HEAT
RECOVERY APPLICATIONS COULD HARM OUR BUSINESS.
Our oil and gas casing, tubing and line pipe products are sold primarily for
use in oil and gas drilling and transmission activities, which are subject to
inherent risks, including well failures, line pipe leaks and fires, that could
result in death, personal injury, property damage, pollution or loss of
production. Any of these hazards and risks can result in the loss of
hydrocarbons, environmental pollution, personal injury claims and damage to
property. Correspondingly, defects in our specialty tubing products could result
in death, personal injury, property damage, pollution, damage to equipment and
facilities or inefficient heat recovery. We warrant our oilfield products and
specialty tubing and the alliance products we sell or distribute to be free of
various defects. Actual or claimed defects in our products may give rise to
claims against us for losses and expose us to claims for damages. We cannot
assure you that our insurance will be adequate or available to protect us in the
event of a claim or that the coverage will not be canceled or otherwise
terminated.
POLITICAL AND ECONOMIC CONDITIONS IN FOREIGN COUNTRIES IN WHICH WE OPERATE COULD
ADVERSELY AFFECT US.
Our Lone Star Steel subsidiary's direct foreign revenues as a percentage of
total revenues were approximately 6% in 1999, 8% in 1998 and 9% in 1997. Our
entry into the finned tube business has increased our foreign exposure, as our
Fintube subsidiary maintains manufacturing facilities in Canada and Mexico.
Before our Fintube acquisition, Fintube Limited Partnership had direct and
indirect sales relating to projects outside the United States of approximately
$5.1 million in 1999, $8.6 million in 1998 and $15.8 million in 1997. The
success of our sales to foreign markets depends on numerous factors, many of
which are beyond our control. These factors include economic conditions in the
foreign countries in which we sell our products and services. Our international
sales may also expose us to risks inherent in doing business outside the United
States, including currency fluctuations, restrictions on the repatriation of
profits and assets, compliance with foreign laws and standards and political
risks.
VARIOUS GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS APPLICABLE TO OUR
BUSINESS MAY REQUIRE US TO TAKE ACTIONS WHICH WILL ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS.
Our business is subject to numerous United States and foreign federal,
state, provincial and local laws and regulations, including regulations with
respect to air emissions, wastewater discharges and the
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generation, handling, storage, transportation, treatment and disposal of waste
materials. Although we believe we are in substantial compliance with all
applicable laws and regulations, legal requirements are frequently changed and
subject to interpretation, and we are unable to predict the ultimate cost of
compliance with these requirements or their effect on our operations. We may be
required to make significant expenditures to comply with governmental laws and
regulations. We cannot be certain that existing laws or regulations, as
currently interpreted or reinterpreted in the future, or future laws or
regulations, will not have a material adverse effect on our results of
operations and financial condition.
WE DO NOT INTEND TO DECLARE DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid any dividends on our common stock since becoming a publicly
held corporation in 1985, and we do not anticipate paying dividends on our
common stock at any time in the foreseeable future. As a result, any positive
return on your investment in our common stock will depend upon any appreciation
in the market price of the common stock.
VOLATILITY IN THE PRICE OF OUR COMMON STOCK COULD RESULT IN A LOWER TRADING
PRICE THAN YOU PAID.
The market price of our common stock may be adversely affected by factors
such as actual or anticipated fluctuations in our operating results, acquisition
activity, the impact of international markets, changes in financial estimates by
securities analysts, general market conditions and other factors. Broad market
fluctuations may adversely affect the market price of our common stock. We
cannot assure you that the market price of our common stock will not decline
below the levels prevailing at the time of this offering.
OUR OPERATIONS ARE SUBJECT TO VARIOUS COLLECTIVE BARGAINING AGREEMENTS, AND WORK
STOPPAGES AND OTHER LABOR PROBLEMS COULD ADVERSELY AFFECT US.
Our subsidiaries are subject to five collective bargaining agreements. At
June 30, 2000, we had a total of 2,266 active employees, of whom 1,257 were
represented by four unions and five bargaining units. The majority of these
union workers are employees of our Lone Star Steel subsidiary represented by the
United Steelworkers of America under a contract signed in May 1996, which
expires on May 31, 2001. Two of the other agreements, covering an aggregate of
approximately 127 of Lone Star Steel's warehouse and plant security workers as
of June 30, 2000, expire in July 2000 and September 2000, respectively. The
remaining two collective bargaining agreements covered a total of 38 employees
of our Fintube subsidiary in Canada and Mexico as of June 30, 2000. These
agreements generally cover wages, health care benefits and retirement plans,
seniority, job classes and work rules. We can give you no assurance that these
collective bargaining agreements will be renewed upon expiration or that new
collective bargaining agreements on terms acceptable to us will be established.
OUR SIGNIFICANT STOCKHOLDERS CONTROL A SUBSTANTIAL PORTION OF OUR OUTSTANDING
COMMON STOCK.
We believe that a significant stockholder group collectively owns 11,344,772
shares of our common stock, which represents approximately 48.15% of our
outstanding common stock, or 39.89% of our outstanding common stock on a pro
forma basis to take into account this offering, assuming no exercise of the
underwriters' over-allotment option. Accordingly, these stockholders, as a
group, will be able to significantly influence the outcome of stockholder votes,
including votes concerning the election of directors, the adoption or amendment
of provisions in our certificate of incorporation or bylaws, and the approval of
mergers and other significant corporate transactions. Historically, this
significant stockholder group has generally not affirmatively acted to control
or impact our management. We cannot assure you, however, that this stockholder
group will continue to act in the same manner in the future. One of the eight
members of our Board of Directors serves on our Board at the request of this
significant stockholder group. The existence of these levels of ownership
concentrated in a few persons makes it less likely that any other holder of
common stock will be able to affect our management or direction. These factors
may also have the effect of delaying or preventing a change in our management or
voting control or our acquisition by a third party. In addition, this group's
ownership of approximately 39.89% of our common stock following this offering
may reduce the trading volume.
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PROVISIONS IN OUR CHARTER AND BYLAWS MAY AFFECT YOUR RIGHTS AS A STOCKHOLDER AND
LIMIT THE PRICE SOME INVESTORS MIGHT BE WILLING TO PAY FOR OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws may make it more
difficult for a third party to acquire us, or may discourage acquisition bids
for us and could limit the price that investors might be willing to pay in the
future for shares of our common stock. For example, our Board of Directors has
the authority to issue up to 10,000,000 shares of preferred stock and to fix the
rights, preferences, privileges and restrictions of those shares without any
further vote or action by the stockholders. Our certificate of incorporation
also provides for a staggered board. We are also subject to provisions of the
Delaware General Corporation Law and provisions in our certificate of
incorporation that may make some business combinations more difficult. See
"Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter
and Bylaw Provisions" on page 41 for more information about these types of
charter and bylaws provisions and applicable Delaware law.
THE NUMBER OF SHARES OF OUR STOCK ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT
THE PRICE OF OUR COMMON STOCK.
After this offering, we will have outstanding 26,561,610 shares of common
stock, or 26,842,860 shares if the underwriters' over-allotment option is
exercised in full. Except for any portion of the 760,237 shares issued in
connection with the Fintube acquisition and covered by a previously-filed resale
Form S-3 registration statement that are not sold while that registration
statement remains effective, and except for shares held by "affiliates" of Lone
Star, as defined in Rule 144 under the Securities Act of 1933, all of the shares
of our common stock are freely tradeable without restriction or registration
under the Securities Act.
As of July 31, 2000, we had outstanding options entitling their holders to
acquire an aggregate of 1,744,875 shares of our common stock, of which options
covering 639,219 shares were currently exercisable. An aggregate of 628,650
shares of our common stock are reserved for issuance upon the exercise of
options that may be granted in the future under our stock option plan.
Additionally, we recently instituted an employee stock purchase plan under which
200,000 shares are reserved for issuance.
The market price of our common stock could drop due to sales of a large
number of shares of our common stock by selling stockholders under the resale
Form S-3 mentioned above or otherwise, or due to the perception that these sales
could occur. These factors could also make it more difficult to raise funds
through future offerings of common stock. See "Underwriting" on page 44 for more
information regarding lock-up agreements entered into with the underwriters in
connection with this offering. Additionally, four partners of Fintube Limited
Partnership who received an aggregate of 382,576 shares of our common stock in
connection with the acquisition of the assets of such partnership have agreed
with us not to sell or transfer an aggregate of 282,576 shares until 30 days
after the closing of this public offering (but in any event no later than
August 31, 2000). The four partners are Raymond M. Briggs, Larry J. Bump,
Jerry R. Nichols and Jerry E. Ryan.
WE COULD LOSE OUR FEDERAL TAX NET OPERATING LOSS CARRYFORWARDS IF WE, OR THE
CONSOLIDATED GROUP WITH WHOM WE FILE TAX RETURNS, EXPERIENCES AN OWNERSHIP
CHANGE OF MORE THAN 50 PERCENTAGE POINTS.
We had federal income tax net operating loss carryforwards of approximately
$261.6 million at December 31, 1999 that, if not utilized to reduce our taxable
income, will expire between years 2003 and 2014. Our ability to use these net
operating loss carryforwards to reduce taxable income is dependent upon either
us, or the consolidated group with whom we file our tax returns, not
experiencing an ownership change of more than 50 percentage points under rules
contained in the Internal Revenue Code. Since our common stock is publicly
traded, there is no assurance that future trading or other sales of our stock
will not result in an ownership change that could limit the availability of our
net operating loss carryforwards. In addition, a portion of our net operating
loss carryforwards relates to our former subsidiary, American Federal Bank,
F.S.B., and is subject to an agreement with the Federal Deposit Insurance
Corporation
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under which we may be required to pay that government agency for certain tax
benefits relating to the use of the net operating loss carryforwards.
POTENTIAL PROBLEMS RELATED TO THE YEAR 2000 MAY ADVERSELY AFFECT OUR BUSINESS.
As of the date of this prospectus, we have not experienced any significant
year 2000 problems with our internal systems or equipment, nor have we detected
any significant year 2000 problems affecting our customers or suppliers. While
we believe that our systems are year 2000 compliant, our business could be
adversely affected if any of the systems on which we depend to conduct our
operations are not in fact year 2000 compliant. We also cannot reasonably
estimate the potential impact on our financial condition and operations if key
third parties including, among others, suppliers, contractors, financial
institutions, customers and governments did not become year 2000 compliant on a
timely basis. Any failure by us to address our year 2000 compliance issues
successfully, or of our suppliers, customers and other third parties with whom
we conduct business to address their year 2000 issues successfully, could have a
harmful effect on our business, financial position and results of operations.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document and in the
documents referred to in this document which are subject to risks and
uncertainties. These forward-looking statements include statements regarding our
financial position, business strategy and other plans and objectives for future
operations and any other statements which are not historical facts. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we cannot assure you that the actual results or developments we
anticipate will be realized or, even if substantially realized, that they will
have the expected effects on our business or operations. Among the factors that
could cause actual results to differ materially from our expectations are the
following:
- natural gas and oil price volatility;
- domestic and foreign competition;
- steel price volatility;
- our ability to successfully manage our business;
- fluctuations in industry-wide inventory levels;
- fluctuations in construction levels of gas-fired, combined cycle power
generation plants;
- general economic conditions;
- the presence or absence of governmentally imposed trade restrictions; and
- other factors disclosed under "Risk Factors" and elsewhere in this
prospectus.
These factors expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting on our behalf.
Except for our ongoing obligations to disclose material information as required
by the federal securities laws, we do not have any intention or obligation to
update forward-looking statements after we distribute this document.
Actual results may differ materially from those suggested by the
forward-looking statements for various reasons, including those discussed under
"Risk Factors."
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USE OF PROCEEDS
We estimate that the net proceeds to us from our sale of 3,000,000 shares of
common stock in this offering will be approximately $126.7 million ($138.6
million if the underwriters' over-allotment option is exercised in full) at an
assumed public offering price of $44 5/8 per share, after deducting underwriting
discounts and commissions and estimated offering expenses of $7.2 million. We
intend to use these net proceeds for the following purposes:
- To repay a substantial portion of the following indebtedness outstanding
as of March 31, 2000:
- Our Lone Star Steel subsidiary's slab financing arrangements of
approximately $32.3 million at a 11.5% average interest rate with an
average maturity of 60 days;
- the term loan indebtedness of approximately $19.3 million incurred by
our Fintube subsidiary at a 9.52% interest rate and with a maturity
date of January 3, 2006 in connection with the Fintube acquisition;
- the term loan indebtedness of approximately $18.2 million incurred by
our Fintube subsidiary at a LIBOR plus 2.5% interest rate and with a
maturity date of January 3, 2006;
- the term loan indebtedness of approximately $8.5 million at a LIBOR
plus 3.5% interest rate and with a maturity date of March 16, 2002;
- the approximately $58.8 million drawn under our Lone Star Steel
subsidiary's revolving credit facility at a LIBOR plus 3.0% interest
rate and with a maturity date of March 16, 2002 (including
$20.0 million relating to the Fintube acquisition and $5.0 million
relating to the Bellville acquisition); and
- the approximately $4.0 million of indebtedness outstanding under our
Fintube subsidiary's revolving credit facility at a LIBOR plus 2.5%
interest rate and with a maturity date of January 3, 2006 and
$6.5 million of indebtedness outstanding under our Fintube subsidiary's
revolving credit facility at a prime plus 1.0% interest rate and with a
maturity date of January 3, 2006; and
- To acquire other businesses, to fund development of new products, to fund
capital expenditures to enhance productivity and to provide funds for
general corporate purposes.
The underwriters will pay the proceeds from the sale of common stock by the
selling stockholder directly to the selling stockholder.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the symbol
"LSS." The following table sets forth, on a per share basis for the periods
indicated, the range of high and low sales prices of our common stock as
reported by the New York Stock Exchange during the periods shown.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
HIGH LOW
------------- -------------
<S> <C> <C>
1997:
First Quarter.............................................. $ 22 $ 15 3/8
Second Quarter............................................. 28 5/8 18
Third Quarter.............................................. 52 1/2 27 13/16
Fourth Quarter............................................. 59 3/16 22 1/4
1998:
First Quarter.............................................. $ 33 7/16 $ 23 1/8
Second Quarter............................................. 25 1/8 14 3/4
Third Quarter.............................................. 16 15/16 8 7/8
Fourth Quarter............................................. 13 1/4 8 5/8
1999:
First Quarter.............................................. $ 14 1/2 $ 10 1/4
Second Quarter............................................. 19 13/16 12 7/16
Third Quarter.............................................. 21 5/8 16 11/16
Fourth Quarter............................................. 29 3/16 17 5/16
2000:
First Quarter.............................................. $ 51 $ 25 5/8
Second Quarter............................................. 54 1/4 36
Third Quarter (through August 1, 2000)..................... 47 1/2 39 3/8
------ ------
</TABLE>
On August 1, 2000, the last reported sale price of our common stock as
reported on the New York Stock Exchange was $42 3/16 per share. On July 31,
2000, the outstanding shares of our common stock were held by approximately
3,367 holders of record.
DIVIDEND POLICY
We have not paid any dividends on our common stock since becoming a publicly
held corporation in 1985, and we do not anticipate paying dividends on our
common stock at any time in the foreseeable future. Although we are not
restricted from paying dividends, our operating subsidiaries' credit agreements
restrict their ability to transfer funds to us.
16
<PAGE>
CAPITALIZATION
The following table shows our actual, pro forma and pro forma as adjusted
capitalization as of March 31, 2000. Capitalization consists of debt, including
the current portion, and stockholders' equity. Our pro forma capitalization
gives effect to our April 1, 2000 acquisition of the assets of Bellville Tube
Corporation as though the acquisition occurred on March 31, 2000. The pro forma
as adjusted capitalization column reflects the Bellville pro forma adjustments
and also gives effect to this offering and the application of net proceeds to us
as described under "Use of Proceeds," assuming a public offering price of
$44 5/8 per share and no exercise of the underwriters' over-allotment option.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and accompanying notes that are included in this prospectus or that
we have filed with the Securities and Exchange Commission and incorporated into
this prospectus by reference. See "Where You Can Find More Information" on
page 46.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Cash................................. $ 7.1 $ 7.1 $ 7.1(1)
============ ============ ============
Current portion of long term debt.... $ 8.0 $ 8.0 $ --
Long-term debt:
Revolving credit facility.......... 69.3 69.3 20.9
Term loans......................... 38.0 38.0 --
------------ ------------ ------------
Total debt................... 115.3 115.3 20.9
Shareholders' equity(2).............. 224.1 224.1 350.8
------------ ------------ ------------
Total capitalization......... $ 339.4 $ 339.4 $ 371.7
============ ============ ============
</TABLE>
------------------------
(1) Gives effect to the repayment of our Lone Star Steel subsidiary's slab
financing arrangements as currently contemplated. See "Use of Proceeds" on
page 15.
(2) Lone Star's 1999 financial statements were restated to reflect the
utilization of an $800,000 reserve previously set aside for an inventory
purchase commitment.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The historical Statement of Income Data, Other Data and Balance Sheet Data
as of and for each of the years in the five-year period ended December 31, 1999
have been derived from the consolidated financial statements of Lone Star, which
have been audited by Arthur Andersen LLP, independent public accountants. You
should read the information contained in this section in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this prospectus and Lone Star's historical consolidated financial
statements and related notes, and the unaudited pro forma financial statements
and related notes, in this prospectus and in the annual reports and other
information that Lone Star has filed with the Securities and Exchange Commission
and incorporated into this prospectus by reference. See "Where You Can Find More
Information" on page 46.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999(1) 1999 2000(1)
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................................... $ 425.8 $ 549.0 $ 654.3 $ 432.4 $ 353.4 $ 63.7 $ 153.9
Cost of goods sold............................ (399.6) (500.8) (590.1) (428.0) (340.6) (65.9) (135.9)
------- ------- ------- ------- ------- ------- -------
Gross profits................................. 26.2 48.2 64.2 4.4 12.8 (2.2) 18.0
Special charges(2)............................ -- -- -- (14.5) -- -- --
Selling, general and administrative
expenses.................................... (14.6) (16.4) (19.6) (20.0) (15.5) (3.8) (8.2)
------- ------- ------- ------- ------- ------- -------
Operating income (loss)....................... 11.6 31.8 44.6 (30.1) (2.7) (6.0) 9.8
Interest income............................... 5.8 4.4 3.0 2.0 1.8 0.4 0.5
Interest expense.............................. (8.7) (6.8) (6.6) (4.0) (4.6) (0.9) (3.0)
Other income (expense)........................ 2.4 (0.1) 0.3 (0.2) -- (0.1) 0.2
Minority interest in Lone Star Steel(3)....... (1.5) (3.8) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations
before income tax......................... 9.6 25.5 41.3 (32.3) (5.5) (6.6) 7.1
Income tax.................................... -- (0.6) (0.9) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss) from continuing
operations.................................. 9.6 24.9 40.4 (32.3) (5.5) (6.6) 7.1
Extraordinary items(4)........................ -- -- 0.9 7.4 -- --
Net income (loss) before gain from
discontinued operations..................... 9.6 24.9 41.3 (24.9) (5.5) (6.6) 7.1
Gain from discontinued operations(5).......... -- -- 12.4 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................. $ 9.6 $ 24.9 $ 53.7 $ (24.9) $ (5.5) $ (6.6) $ 7.1
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share............... $ 0.47 $ 1.21 $ 2.50 $ (1.10) $ (0.24) $ (0.29) $ 0.30
======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per share............. $ 0.46 $ 1.19 $ 2.44 $ (1.10) $ (0.24) $ (0.29) $ 0.29
======= ======= ======= ======= ======= ======= =======
Weighted average common shares outstanding-
basic..................................... 20.4 20.6 21.5 22.5 22.5 22.5 23.4
diluted................................... 20.6 20.9 22.1 22.5 22.5 22.5 24.0
OTHER DATA:
Net cash provided by (used in) operating
activities.................................. $ (4.8) $ 19.6 $ 25.9 $ 8.6 $ 28.1 $ 9.9 $ (10.7)
Net cash provided by (used in) investing
activities.................................. (2.0) (25.8) (7.7) (4.3) (11.7) 2.6 (90.8)
Net cash provided by (used in) financing
activities.................................. 5.0 (6.5) (31.3) 2.4 (15.1) 10.3 86.4
EBITDA(6)..................................... 23.0 43.6 58.9 (14.3) 14.0 (1.8) 14.9
Depreciation.................................. 11.4 11.8 13.3 14.8 15.7 3.9 4.3
Amortization.................................. -- -- 1.0 1.0 1.0 0.3 0.8
Capital expenditures.......................... 14.9 20.0 34.7 17.6 7.2 1.4 4.0
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------- AS OF
1995 1996 1997 1998 1999(1) MARCH 31, 2000(1)
-------- -------- -------- -------- -------- ------------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 40.0 $ 27.3 $ 14.2 $ 20.9 $ 22.2 $ 7.1
Short term investments........................... 32.6 20.1 6.3 3.1 1.2 1.3
Net working capital.............................. 141.0 131.9 125.9 111.5 86.9 105.9
Marketable securities............................ -- 19.8 19.0 9.0 15.4 20.4
Total assets..................................... 357.7 396.0 405.8 335.8 351.1 487.6
Long-term debt................................... 95.4 87.8 43.0 46.0 28.0 107.3
Total debt....................................... 96.7 88.1 43.0 46.0 30.0 115.3
Shareholders' equity............................. 102.2 128.8 217.7 189.1 195.9 224.1
</TABLE>
------------------------------
(1) Lone Star's December 31, 1999 and March 31, 2000 financial statements were
restated to reflect the utilization of an $800,000 reserve previously set
aside for an inventory purchase commitment.
(2) Our Lone Star Steel subsidiary downsized and restructured certain operations
in 1998. As a result, special charges of $14.5 million were recognized to
write-down property, plant and equipment and supplies to fair value
($8.1 million), renegotiate or cancel contractual obligations
($4.4 million) and to recognize employee severance cost ($2.0 million).
(3) Prior to fiscal year 1997 Lone Star owned less than 100% of the equity of
Lone Star Steel. Minority interest in Lone Star Steel represents the
minority stockholders' equity in the income (loss) of Lone Star Steel. In
1995, Lone Star repurchased 4.95% of Lone Star Steel's common stock from its
minority stockholders. In 1997, Lone Star purchased all of the remaining
outstanding common stock, preferred stock and warrants held by minority
stockholders of Lone Star Steel to make it a wholly-owned subsidiary.
(4) In 1997, an extraordinary loss of $1.1 million was recognized for an early
prepayment penalty fee for refinancing Lone Star Steel's credit facility.
Also in 1997 an extraordinary gain of $2.0 million was recognized for a
reduction in Lone Star Steel's obligation to provide medical and death
benefits under the Coal Industry Retiree Health Benefit Act of 1992. During
1998, Lone Star Steel was relieved of its obligation under this act and
reversed its liability resulting in an extraordinary gain.
(5) Reflects $12.4 million in payments received in 1997 from the 1993 sale of
American Federal Bank, F.S.B.
(6) EBITDA consists of earnings (loss) from operations plus depreciation and
amortization. EBITDA does not represent funds available for our
discretionary use and is not intended to represent cash flow from operations
as measured under generally accepted accounting principles. EBITDA should
not be considered as an alternative to net loss or net cash used in
operating activities, but may be useful to investors as an indication of
operating performance. Our calculations of EBITDA may not be consistent with
calculations of EBITDA used by other companies.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are the leading domestic manufacturer of premium welded oil country
tubular goods, which are steel tubular products used in the completion of and
production from oil and natural gas wells. We are also a major manufacturer of
line pipe, which is used in the gathering and transmission of oil and natural
gas. In addition, we are a leading manufacturer of specialty tubing products
used in power technology, automotive, construction, agricultural and industrial
applications. In January 2000, we acquired the assets of Fintube Limited
Partnership, the largest specialty tubing manufacturer of heat recovery finned
tubes, which are used in various power technology markets, including the
construction of gas-fired, combined cycle power generation plants. On April 1,
2000, we also completed an acquisition of the assets of Bellville Tube
Corporation, a manufacturer of casing, tubing and line pipe for the oil and gas
industry.
Historically, our oilfield products have accounted for over 60% of our total
revenues. As a result, our 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 our principal products to decrease. As a
result, our historical operating results have fluctuated based on the demand for
our products. We had an operating loss in 1999 due to the low level of oil and
gas drilling activity that resulted from low natural gas and oil prices in the
first half of the year. We 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 our oil and gas
casing, tubing and line pipe products. Our 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. Our Fintube business is affected by the level of continuing domestic
and foreign demand for power generation as well as domestic and foreign
competition.
OILFIELD PRODUCTS. Our oilfield products consist of (1) casing, which acts
as a structural retainer wall in oil and natural gas wellbores, (2) production
tubing, which transmits hydrocarbons to the surface, and (3) line pipe, which is
used in gathering and transmitting hydrocarbons from the wellhead to larger
transmission pipelines.
Demand for our oilfield products depends primarily upon the number of oil
and natural gas wells being drilled, completed and re-worked and the depth and
drilling conditions of these wells. The level of these activities depends
primarily on natural gas and oil prices and industry expectations as to future
prices. According to industry reports, domestic drilling activity was down 24%
in 1999 compared to the previous year. However, drilling activity accelerated in
the second half of 1999 and by year-end 771 rigs were active, compared to 621
rigs at the end of 1998. Our backlog of orders for oilfield products at
March 31, 2000, was up 258% from the first quarter of 1999 due to the increase
in drilling activity and demand attributable to reduced industry-wide oil
country tubular goods inventories.
SPECIALTY TUBING PRODUCTS. As a result of the January 2000 Fintube
acquisition, our specialty tubing product segment now includes finned tubular
products manufactured by our Fintube subsidiary, in addition to the precision
mechanical tubulars we have historically manufactured. Finned tubular products
are used in heat recovery steam generation applications such as gas-fired,
combined cycle power generation plants and, to a lesser extent, in industrial
processing plants and petrochemical plants.
Our precision mechanical tubulars consist of a wide array of high-quality,
custom-made steel tubular products with precise dimensional control and special
metallurgical properties which are manufactured by the "Drawn Over Mandrel"
process. This process allows us to achieve higher critical tolerances and
dimensional control than other processes. These products are used for several
industrial applications, including the manufacture of hydraulic cylinders for
construction and farm equipment; automotive
20
<PAGE>
applications, such as stabilizers and intrusion tubes; and other uses, including
machine parts, bearing races, down-hole pump barrels, heavy-lift crane boom
chords, drill rods and liner hangers.
Demand for precision mechanical tubulars within the traditional markets was
down slightly in 1999 as a result of Asian economic issues which lowered demand
for our products from Asian countries. Demand for hydraulic cylinders used in
construction and farm equipment was down due to decreased domestic farming
activity and reduced building activity in some Asian economies. Our backlog of
orders at March 31, 2000 for precision mechanical tubulars and as-welded
specialty tubing was up 35% from the first quarter of 1999, due to increased
demand for as-welded specialty tubing resulting from significantly increased
demand for axle and other applications in 1999.
FLAT ROLLED STEEL AND OTHER PRODUCTS. We manufacture and market flat rolled
steel, which is primarily used in the manufacture of our oil country tubular
products. We also sell flat rolled steel to fabricators of large-diameter
transmission pipe, storage tanks, rail cars and a variety of other construction
and industrial products. Our other products are principally used for structural
and piling applications in the construction industry. We sell flat rolled steel
directly to end users and through service centers primarily in the Southwestern
region of the United States.
We sell flat rolled steel 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, our shipment volumes were down in 1998 and 1999. However, during the
first half of 1999, the United States government established antidumping duties
and quotas for suppliers from certain foreign countries which reduced the amount
of imported foreign coils, resulting in increased shipments of coils produced by
us during the second half of 1999.
Our Fintube subsidiary sells its steel strip directly to end users in North
America through a small sales force. Flat rolled steel processing services are
also sold to steel mills where we receive processing revenues but do not
purchase and resell steel.
MANUFACTURING. The manufacture of our products is capital intensive.
Utilization rates at our Lone Star Steel manufacturing facilities were low
during the first half of 1999 and expanded significantly during the second half
of 1999. The level of production volume through our various facilities has a
significant effect on the cost of manufacturing. Key variable costs include
costs of raw materials, including scrap steel, steel slabs, wire rod, coils,
electricity and natural gas. Fintube's production volumes also affect its cost
of manufacturing. Most of our Fintube 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.
We have entered into marketing alliances and manufacturing arrangements with
several companies. These alliances and arrangements involve the marketing of
their products which provide us access to additional manufacturing capacity.
Fintube has licensed its manufacturing technology to licensees in India, Italy,
Japan and Korea.
FINTUBE AND BELLVILLE ACQUISITIONS AND OVERVIEW OF PRO FORMA
INFORMATION. On January 3, 2000, we 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 our common stock valued at $20 million. On April 1, 2000, we completed
the purchase of substantially all of the assets of Bellville Tube Corporation
for approximately $14.5 million in cash, of which $5.0 million was from
borrowings.
We expect the Fintube and Bellville acquisitions to significantly increase
our consolidated revenues, cash flows and earnings beginning in 2000. Our
revenues in 1999, on a pro forma basis after giving effect to the Fintube and
Bellville acquisitions, increase by $82.4 million to $435.8 million.
Additionally, the net loss
21
<PAGE>
of $5.5 million, or $0.24 per diluted share, incurred by us during 1999 becomes
net income of $4.6 million, or $0.20 per diluted share, on a pro forma basis.
HISTORICAL RESULTS OF OPERATIONS
Our revenues are derived from three business segments: oilfield products,
specialty tubing products and flat rolled steel and other products and services.
Consolidated revenues reported in the statements of earnings are as follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- -------------------
1997 1998 1999 1999
------------------- ------------------- ------------------- -------------------
$ % $ % $ % $ %
-------- -------- -------- -------- -------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield products............. 454.1 69 255.6 59 185.1 52 30.0 47
Specialty tubing products..... 129.0 20 123.2 29 120.5 34 26.7 42
Flat rolled steel and other
products.................... 71.2 11 53.6 12 47.8 14 7.0 11
----- --- ----- --- ----- --- ----- ---
Consolidated net revenues..... 654.3 100 432.4 100 353.4 100 63.7 100
===== === ===== === ===== === ===== ===
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
2000
-------------------
$ %
-------- --------
($ IN MILLIONS)
<S> <C> <C>
Oilfield products............. 81.5 53
Specialty tubing products..... 56.7 37
Flat rolled steel and other
products.................... 15.7 10
----- ---
Consolidated net revenues..... 153.9 100
===== ===
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN TONS)
<S> <C> <C> <C> <C> <C>
Oilfield products.............. 632,600 372,500 336,100 55,900 125,400
Specialty tubing products...... 119,800 111,900 116,700 24,500 50,300
Flat rolled steel and other
products..................... 194,100 144,700 144,600 23,300 42,200
------- ------- ------- ------- -------
Total tons shipped............. 946,500 629,100 597,400 103,700 217,900
======= ======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
NET REVENUES of $153.9 million for the three months ended March 31, 2000
increased 142% from the first quarter of 1999. Net revenues were comprised of
$81.5 million from oilfield products, $56.7 million from specialty tubing
products, and $15.7 million from flat rolled steel and other products,
representing increases of 172%, 112%, and 124%, respectively.
First quarter 2000 shipments increased to 217,900 tons, or 110%, when
compared to the same period in 1999 and were comprised of 125,400 tons of
oilfield products, 50,300 tons of specialty tubing products and 42,200 tons of
flat rolled steel and other products. Oilfield products, specialty tubing
products, and flat rolled steel and other product shipments increased by 124%,
105%, and 81%, respectively.
Increased net revenues for the first quarter of 2000 were due to higher
shipment volumes in all segments. Oilfield revenues advanced on additional
shipment volumes and higher prices as the average number of active domestic rigs
increased 40% to 770 at the end of the first quarter from the same period in
1999. Net revenues from specialty tubing were higher reflecting the addition of
our Fintube subsidiary's sales to this business segment. Our Fintube
subsidiary's net revenues for the first quarter of 2000 were 25% higher than in
the same period in 1999 due to increased sales of finned tubes used in heat
recovery steam generation applications in new gas-fired, combined cycle power
generation plants. Excluding our Fintube
22
<PAGE>
subsidiary, specialty tubing revenues were up 30% from the first quarter of
1999, due to higher shipment volumes of precision mechanical tubulars and new
heavy wall as-welded tubulars. Net revenues from flat rolled steel and other
products were 124% higher than in the first quarter of 1999 due to increased
shipment volumes and higher prices compared to the first quarter of 1999.
PRO FORMA REVENUES for the three month period ended March 31, 1999 and 2000
including the acquisition of Fintube and Bellville were $87.7 million and
$154.1 million, respectively.
GROSS PROFIT for the three months ended March 31, 2000 was $18.0 million
compared to a gross loss of $2.2 million for the same 1999 period. Gross profit
benefited from our Fintube subsidiary's higher margin contribution and increased
shipment volumes for all products and higher prices for oilfield tubulars and
flat rolled steel and other products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased from $3.8 million in
1999 to $8.2 million in 2000 due to the addition of our Fintube subsidiary's
selling, general and administrative expenses and the addition of amortization of
goodwill associated with the Fintube acquisition.
INTEREST INCOME increased 25% in 2000 from $0.4 million in 1999 to
$0.5 million in 2000 due to higher average interest rates on invested cash,
short-term investments and marketable securities.
INTEREST EXPENSE increased from $0.9 million in 1999 to $3.0 million in
2000. Our Lone Star Steel subsidiary's revolving credit facility during 2000 had
higher average interest rates relative to 1999. In addition, the increase is
attributable to interest expense on the new Fintube borrowings.
NET INCOME in the first quarter of 2000 was $7.1 million, or $0.29 per
diluted share, compared to a net loss of $6.6 million, or $0.29 per diluted
share, in the three months ended March 31, 1999. Net income of $2.9 million for
the first quarter of 2000 was attributable to Fintube. Excluding Fintube, net
income was $4.2 million in the first quarter of 2000, an increase of 164% over
the same period in 1999.
1999 COMPARED WITH 1998
NET REVENUES of $353.4 million in 1999 were 18% lower than in 1998. Net
revenues from oilfield products declined 28% from $255.6 million in 1998 to
$185.1 million in 1999. Shipment volumes and prices were down from 1998 levels
by 10% and 20%, respectively. Demand for our oil country tubular goods decreased
as drilling activities declined and the consumption of excess industry-wide oil
country tubular goods inventory replaced new mill production and detrimentally
impacted demand during the first half of 1999.
Specialty tubing products revenues decreased in 1999 by 2% from
$123.2 million in 1998 to $120.5 million in 1999. Shipment volumes increased 4%
to 116,700 tons but were offset by lower prices. Selling prices were 6% lower
due to a higher percentage of as-welded tubular sales, reduced international
sales and slightly reduced prices for precision mechanical tubulars due to
increased capacity in the industry. Shipment volumes increased 4% due to
increased sales of new heavy wall products used in axle and other applications.
Flat rolled steel and other products revenues were down 11% from
$53.6 million in 1998 to $47.8 million in 1999. 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 191% from $4.4 million in 1998 to $12.8 million in
1999 due to a 16% 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% from
$20.0 million in 1998 to $15.5 million in 1999 due to significant spending and
salaried workforce reductions made during the second half of 1998.
23
<PAGE>
INTEREST INCOME decreased 10% 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 15% from $4.0 million in 1998 to $4.6 million in
1999. Our Lone Star Steel subsidiary's revolving credit facility during 1999 had
higher average interest rates which were partially 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 a loss of $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, OR NOLS, at December 31, 1999, totaled
approximately $261.6 million, a portion of which may be related to our former
American Federal Bank, F.S.B. subsidiary and subject to an agreement with the
Federal Deposit Insurance Corporation whereby we may be required to pay that
government agency for certain tax benefits. If not utilized, the NOLs will
expire between years 2003 and 2014, and their future availability may be limited
if we or a member of our consolidated group experiences an ownership change of
more than 50 percentage points, as defined by rules contained in the Internal
Revenue Code.
NET LOSS of $5.5 million, or $0.24 per diluted share, decreased 78% from a
net loss of $24.9 million in 1998 due to lower costs of goods sold in 1999.
Also, the net loss for 1998 included a $14.5 million special charge.
Subsequent to the issuance of Lone Star'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.
1998 COMPARED WITH 1997
NET REVENUES of $432.4 million in 1998 were 34% lower than in 1997. Net
revenues from oilfield products declined 44% from $454.1 million in 1997 to
$255.6 million in 1998. Shipment volumes and prices in 1998 were down from 1997
levels by 41% and 4%, respectively. Demand for our oil country tubular goods
decreased as drilling activities declined precipitously in the second half of
1998. The average domestic rig count was down 116 to 827 rigs in 1998 with only
621 rigs operating at year-end, compared to 1,007 rigs at the end of 1997. The
replacement of new mill production by the consumption of excess industry-wide
oil country tubular goods inventories also detrimentally impacted demand. In
addition, demand declined due to increased competition from imported oil country
tubular goods which grew to 24% of the apparent supply available to the domestic
market from 16% in 1997.
Specialty tubing products revenues decreased by 4% from $129.0 million in
1997 to $123.2 million in 1998 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 products revenues were down 25% from $71.2
million in 1997 to $53.6 million in 1998. 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 93% 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 fewer units of production absorbed fixed and semi-fixed costs.
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SPECIAL CHARGES. In response to 1998 market conditions, we restructured and
downsized our operations. Lower operating rates resulted in the need to reduce
employment levels and initiate other actions. As a result, we recognized special
charges of $14.5 million 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 of our facilities permanently reduced or eliminated their
operations, relying instead on alternative production or procurement methods.
This included a reduction in the production level of our 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 impairment loss. We
based the determination of the impairment loss 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.
We renegotiated or canceled certain supplier contracts to accommodate the
lower operating levels resulting in a loss accrual of $4.4 million at December
31, 1998.
We terminated employees or identified certain positions for elimination as
of December 31, 1998. We based payments made to terminated employees on our
standard severance package. We terminated approximately 200 employees covered by
the severance package. 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% from
$19.6 million in 1997 to $20.0 million in 1998 due primarily to continued higher
spending related to year 2000 readiness initiatives partially offset by lower
selling expenses.
INTEREST INCOME decreased 33% 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 39% from $6.6 million in 1997 to $4.0 million in
1998 due to the conversion of $50.0 million principal amount of our 8%
convertible subordinated debentures into common stock in August 1997. Also, our
Lone Star Steel subsidiary'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 our Lone
Star Steel subsidiary'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 fewer units of
production absorbed fixed and semi-fixed costs.
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EXTRAORDINARY ITEM of $7.4 million, or $0.33 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. During 1997 extraordinary items
totaling a net gain of $0.9 million, or $0.04 per diluted share, consisted of a
gain of $2.0 million for the downward adjustment of obligations under this act,
partially offset by an extraordinary prepayment charge of $1.1 million on the
refinancing of our Lone Star Steel subsidiary'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
$0.33 per diluted share.
FINANCIAL CONDITION AND LIQUIDITY
As of March 31, 2000, we had $28.8 million in cash and short term
investments and $105.9 million in working capital.
Cash provided by (used in) operating activities was ($10.7) million for the
three months ended March 31, 2000, $28.1 million for fiscal 1999, $8.6 million
for fiscal 1998 and $25.9 million for fiscal 1997. Cash provided by operations
in 2000 decreased due to increased demand for our oilfield products resulting in
increased investment in receivables and inventories. In 1999 cash provided by
operations increased to $28.1 million from $8.6 million in 1998 due to the
reduced net loss. In fiscal 1999, we used net cash provided by operations to
fund capital expenditures and reduce revolving credit facilities. In 1998, we
used the net cash provided by operations primarily to upgrade property, plant
and equipment. We used cash provided by operations in 1997 in part to purchase
the minority interest in our Lone Star Steel subsidiary and for the purchase of
treasury stock.
Cash used in investing activities was $90.8 million for the three months
ended March 31, 2000 as a result of funding the Fintube and Bellville
acquisitions, $11.7 million for fiscal 1999, $4.3 million for fiscal 1998 and
$7.7 million for fiscal 1997, which we primarily used for capital expenditures
and the purchase of marketable securities, somewhat offset in 1998 and 1997 by
the sale of marketable securities.
Cash provided by (used in) financing activities was $86.4 million for the
three months ended March 31, 2000, ($15.1) million in 1999, $2.4 million in 1998
and ($31.3) million in 1997. Cash provided by financing activities in 2000 was
primarily attributable to financing the Fintube and Bellville acquisitions and
increasing borrowings under our Lone Star Steel subsidiary's revolving credit
facility to fund increasing shipments. 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 our Lone Star
Steel subsidiary's revolving credit facility. Cash used in financing activities
in 1997 was used primarily to purchase the minority interest in our Lone Star
Steel subsidiary and to purchase treasury stock.
On March 16, 1999, our Lone Star Steel subsidiary 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, our subsidiary can borrow an amount
based on a percentage of eligible accounts receivable and inventories, reduced
by outstanding letters of credit. At March 31, 2000, borrowings totaled
$67.3 million, including $8.5 million on the term loan with a remaining
availability of $30.8 million. At our subsidiary's option, the interest rate is
the prime lending rate plus 1.0% or the LIBOR plus 3.0%. Our subsidiary 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%. Our subsidiary's
assets other than real estate secure these loans. In connection with our
purchase of assets from Fintube Limited Partnership on January 3, 2000, and
Bellville Tube Corporation on April 1, 2000, our Lone Star Steel subsidiary
borrowed an additional $25.0 million under its present credit facility to repay
its $25.0 million subordinated loan to us, we guaranteed $25.0 million of our
Lone Star Steel subsidiary's credit facility and we used the
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loan repayment to fund a portion of the purchase price payable in the Fintube
and Bellville acquisitions. At March 31, 2000, borrowings by our Lone Star Steel
subsidiary totaled $67.3 million, including the term loan, with a remaining
availability of $31.2 million.
On January 3, 2000, our Fintube subsidiary entered into a new senior credit
facility providing a $20.0 million revolving line of credit and a $39.0 million
term loan used to pay part of the cash portion of the purchase price in our
acquisition of substantially all of the assets of Fintube Limited Partnership.
Under the revolving line of credit, our Fintube subsidiary can borrow an amount
based on a percentage of eligible accounts receivable and eligible inventory,
reduced by outstanding letters of credit. At our Fintube subsidiary's option,
the interest rate is the prime lending rate plus 1.0% or the LIBOR plus 2.5%.
Our Fintube subsidiary pays a 0.50% rate on the unused portion of the credit
facility. The interest rate on $20.0 million of the term loan is fixed by a rate
swap agreement at 7.02% and the remainder of the term loan is the same as the
revolving credit facility. The term loan is repayable in quarterly installments
of $1.5 million through December 31, 2002 and $1.75 million thereafter through
December 31, 2005. As of March 31, 2000, borrowings of our Fintube subsidiary
totaled approximately $48.0 million, including the term loan, with a remaining
availability, based on eligible accounts receivable and inventory on such date,
of approximately $8.3 million.
Our subsidiaries' loan agreements contain various restrictive covenants
which require our subsidiaries to meet specified quarterly financial ratios,
including cash flow and net worth measurements. We believe we are currently in
compliance with these covenants. These agreements limit our subsidiaries'
ability to incur additional indebtedness, to transfer funds to us and to pay
cash dividends to us.
We entered into slab consignment and sales agreements with third parties. We
have accounted for these inventory financing transactions as product financing
arrangements. We have recorded inventory purchases financed under these
arrangements as inventory. At March 31, 2000, $32.3 million was included in
accounts payable under these financing arrangements.
We intend to use most of the approximately $126.7 million of net proceeds of
this offering (assuming a public offering price of $44 5/8 per share and no
exercise of the underwriters' over-allotment option) to pay down indebtedness.
See "Use of Proceeds" on page 15.
We operate in capital intensive businesses. We have made, and we expect we
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, we
regularly make capital expenditures for technological improvements and for
research and development projects. If funding is insufficient at any time in the
future, we may be unable to develop or enhance our products or services, take
advantage of business opportunities or respond to competitive pressures.
Our capital budget for 2000 is approximately $20.0 million. We require
capital primarily to fund general working capital needs and capital
expenditures. Principal sources of funds include cash generated by operations,
borrowings under our subsidiaries' credit facilities and proceeds from this
offering. We believe these sources of funds will provide the liquidity necessary
to fund our cash requirements during 2000.
Our operations are subject to environmental compliance and permitting
requirements of various foreign, federal, state and provincial governmental
agencies. We believe that the cost of maintaining compliance with environmental
requirements will fall within our contemplated operating and capital expenditure
plans, averaging $1.0 - $2.0 million annually in the foreseeable future.
We completed our identification, assessment and remediation of the year 2000
compliance issue in December 1999. To date, we have not experienced any material
year 2000 failures and to the best of our knowledge neither have any of our
significant customers or service providers. However, we cannot assure you that
in the future issues related to the year 2000 will not have a material adverse
effect on our financial condition or that of our significant customers or
service providers.
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OUR BUSINESS
GENERAL
We are the leading domestic manufacturer of premium welded "oil country
tubular goods," which are steel tubular products used in the completion and
production of oil and natural gas wells. We are a major manufacturer of line
pipe, which is used in the gathering and transmission of oil and natural gas. In
addition, we are a leading manufacturer of specialty tubing products used in
power technology, automotive, construction, agricultural and industrial
applications. In January 2000, we acquired the assets of Fintube Limited
Partnership, the largest specialty tubing manufacturer of heat recovery finned
tubulars, which are used in various power technology markets, including in the
construction of gas-fired, combined cycle power generation plants. We also
completed an acquisition of the assets of Bellville Tube Corporation, a
manufacturer of casing, tubing and line pipe for the oil and gas industry, on
April 1, 2000. We began producing and marketing oil country tubular goods and
other tubular products over 45 years ago.
OUR STRATEGY
Our goal is to be the leading provider of both oilfield tubular products and
specialty tubing products and to increase our market presence in order to
benefit from favorable market conditions. The key elements of our strategy to
achieve commercial leadership and operational excellence are:
- ACHIEVING INCREASED PRODUCTION, GREATER PRODUCTIVITY AND PENETRATION INTO
NEW MARKETS THROUGH CAPITAL INVESTMENT AND COMMERCIAL ALLIANCES EXPANSION.
We constantly seek to improve our production efficiency by upgrading our
manufacturing technologies. By becoming more efficient, we will be able to
continue offering our products at attractive prices to an increasing
number of customers. Through our exclusive commercial alliances with
several mills, we have been able to outsource production of specific types
of oil country tubular goods and line pipe, enabling us to concentrate our
capital expenditures and manufacturing expertise on our premium products.
Expanding these alliances will enable us both to offer a wider variety of
tubular products to our customers and to increase our production of
premium products.
- CONTINUING TO DEVELOP AND MARKET NEW PRODUCT APPLICATIONS AND
TECHNOLOGIES. We have historically been successful in pioneering new
production capabilities to expand the market acceptance of our oil country
tubular goods, line pipe and specialty tubing products. For example, we
pioneered the electric resistance welded, full-body normalized process,
which, together with our extensive heat treating capabilities, enables us
to manufacture and sell our oil country tubular goods and line pipe for
deep wells and other critical applications. We will continue to invest in
developing new technologies and product applications to expand the markets
for our products.
- GROWING THROUGH STRATEGIC ACQUISITIONS. Our recent acquisitions of Fintube
and Bellville enable us to increase our production capacity and expand the
selection of products we offer and the markets we serve at a cost
significantly less than that required to develop these operations on our
own. We will continue to pursue strategic acquisitions that we believe to
be beneficial to our business.
INDUSTRY BACKGROUND
OILFIELD PRODUCTS. Oil country tubular goods, or OCTG, include casing and
tubing, which we manufacture, as well as drill pipe. Casing acts as a structural
retainer wall in oil and natural gas wellbores to provide support and prevent
caving during drilling operations and is used to protect water-bearing
formations during the drilling of a well. Casing is generally not removed after
it has been installed in a well. Tubing, which is used to transmit oil and
natural gas to the surface, may be replaced during the life of a producing well.
Demand for oil country tubular goods depends primarily on the number of oil
and natural gas wells being drilled, completed and re-worked and the depth and
drilling conditions of these wells. The level of
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these activities depends primarily on natural gas and oil prices and industry
expectations of future prices. A key indicator of domestic demand is the average
number of drilling rigs operating in the United States. According to the Baker
Hughes rig count, the most commonly cited indicator of the level of domestic
drilling activity, the average United States rig count was 625 in 1999, was 827
in 1998, and was 943 in 1997. The active rig count in the United States reached
a 50 year low of 488 rigs in April 1999. However, as the result of stronger
natural gas and oil prices, which have encouraged greater spending by oil and
gas companies, drilling activity accelerated in the second half of 1999 and by
year-end 771 rigs were active, compared to 621 rigs at the end of 1998. The
average domestic active rig count was 942 during July 2000.
The oil country tubular goods market is also affected by the level of
inventories maintained by manufacturers, distributors and end users. During
downturns in drilling activity, customers typically utilize the inventory of
these products rather than purchase new products, causing demand for new
production to further decrease. Conversely, in periods of increased drilling
activity, increases in oil country tubular goods inventory levels by
distributors and end users typically occur, accelerating demand for new
production.
The amount of imported oilfield products also affects the oil country
tubular goods market. Imported oil country tubular goods accounted for
approximately 17% of the apparent supply available to the domestic oil country
tubular goods market during 1999, 24% during 1998 and 16% during 1997. The
amount of imported oil country tubular goods was lower in 1999 than in 1998 due
to the dramatic decline in distributor stock purchases during 1999 as
inventories were liquidated and demand for new products reduced as drilling
activity declined. The level of imported oil country tubular goods increased
during 1998 due to dislocations of inventories from foreign competitors.
Dislocations occur when, as global drilling activity declines, traditional
non-United States markets are encroached upon by foreign manufacturers,
particularly those subject to United States trade tariffs. The lower level of
imported oil country tubular goods in 1997 resulted from the imposition of
protective tariffs on several foreign countries in 1995. These trade tariffs,
which were intended to promote an equitable trade environment, remained in
effect as of July 2000, except those that were recently revoked with respect to
Canada and Taiwan. See "Our Business--Our Oilfield Products--Competition" on
page 32 for more information regarding how import trade restrictions affect
foreign competition in the oil country tubular goods and line pipe markets.
Manufacturers produce oil country tubular goods in numerous sizes, weights,
grades and thread profiles. The grade of pipe used in a particular application
depends on technical requirements for strength, corrosion resistance and other
performance characteristics. Oil country tubular goods are generally classified
by "carbon" and "alloy" grades. Carbon grades of oil country tubular goods have
yield strengths of 75,000 pounds per square inch or less and are generally used
in oil and natural gas wells drilled to depths less than 8,000 feet. Alloy
grades of oil country tubular goods, often referred to as premium goods, have
yield strengths of 75,000 pounds per square inch or more and are generally used
in oil and natural gas wells drilled to depths in excess of 8,000 feet or for
high temperature wells, highly corrosive wells or other critical applications.
Carbon and alloy grades of oil country tubular goods are available from both
electric resistance welded and seamless tube producers. Electric resistance
welded tubes are produced by processing flat rolled steel into strips which are
cold-formed, welded, full-body normalized or seam-annealed and end-finished with
threads and couplings. Seamless products are produced by individually heating
and piercing solid steel billets into tubes and then end finishing those tubes
into oil country tubular goods in a manner similar to electric resistance welded
pipe. We believe that the seamless manufacturing process involves higher capital
and production costs than our welded process and that seamless products are
typically priced higher than comparable welded products.
Based on published industry statistics, electric resistance welded products,
which did not have a significant market penetration prior to the mid-1970's, now
account for approximately half of the tonnage of domestic casing and tubing
consumed. Electric resistance welded, full-body normalized casing and tubing and
seamless casing and tubing compete for critical applications such as deep
natural gas wells and
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offshore wells. Customers purchasing products for these applications require
high-performance oil country tubular goods that can sustain enormous pressure as
measured by burst, collapse and yield strength. Operators drilling shallow wells
generally purchase oil country tubular goods based primarily on price and
availability, as wells of this nature require less stringent performance
characteristics.
Line pipe products are used for surface production flow lines and gathering
and transmission of oil, natural gas and fluids. Line pipe is primarily produced
in welded form. Line pipe markets are dependent not only on the factors which
influence the oil country tubular goods market, but also on pipeline
construction activity, line pipe replacement requirements, new residential
construction and utility purchasing programs.
SPECIALTY TUBING PRODUCTS. The specialty tubing business includes the
manufacture, marketing and sale of a broad variety of steel tubing products,
including premium and custom-made products. Applications for specialty tubular
products include power technology markets for heat recovery applications and
automotive, fluid power and other markets for various mechanical applications.
Demand for finned tubular products depends on, among other factors, power
plant construction and the cost of alternative fuels for power generation and,
to a lesser extent, on industrial processing plant and petrochemical plant
construction. The demand for precision mechanical tubulars and other specialty
tubing used for automotive, fluid power and other mechanical applications is
cyclical and dependent on the general economy, the automotive and construction
industries and other factors affecting domestic goods activity.
Demand for precision mechanical tubulars within the traditional markets was
down slightly in 1999 as a result of Asian economic issues which lowered demand
for our products from Asian countries. Demand for hydraulic cylinders used in
agricultural and construction related equipment was down due to decreased
domestic farming activity and reduced building activity in Asian economies.
FLAT ROLLED STEEL AND OTHER PRODUCTS. Flat rolled steel, produced primarily
for the manufacture of oilfield and specialty tubing products, is also sold to
fabricators of various construction and industrial products. Other products
consist of tubular goods that serve a variety of uses, such as structural piling
applications in the construction industry. The market for flat rolled steel is
affected by a number of factors, including price, capacity utilization and
material costs.
Flat rolled steel is sold in highly competitive markets and price, quality
and availability are the main determinants of customer purchasing 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.
However, during the first half of 1999, antidumping duties and quotas were
established for suppliers from several foreign countries, which reduced the
amount of imported foreign coils, resulting in increased domestic shipments of
coils.
OUR OILFIELD PRODUCTS
PRODUCTS. We manufacture and market premium oil country tubular goods. Our
oil country tubular goods include casing and production tubing but not drill
pipe. We also manufacture and market line pipe.
Oil Country Tubular Goods
We manufacture carbon and premium alloy welded oil country tubular goods,
including casing, which acts as a structural retainer wall in oil and natural
gas wellbores, and production tubing, which transmits hydrocarbons to the
surface. We offer casing and tubing products with the widest variety of
diameters, grades and wall thicknesses in the United States. This variety
provides us with a distinct competitive advantage as a single source supplier of
a complete range of oilfield casing and production tubing. As a result of our
broad product range and unique heat treating capabilities, we are able to
service nearly all typical drilling applications for oil and natural gas wells.
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Casing, which historically represents about 75% of the oil country tubular
goods tonnage sold by us, is the structural retainer wall in oil and natural gas
wellbores. It also serves to prevent pollution of nearby water reservoirs and
contamination of a well's production. Casing is generally not removed after it
has been installed. Production tubing is installed within the casing to convey
oil and natural gas to the surface. We offer the widest grades and ranges of
outside diameters in casing (3 1/2" to 20") and tubing (1.9" to 3 1/2") produced
in the United States, including products that have been successfully used in
wells with depths of over 30,000 feet.
Our premium product line includes tubulars manufactured with the electric
resistance welded, full-body normalized process and other heat treating
techniques that we pioneered. Because this process gives our tubes better
performance characteristics than typical seam-annealed casing and tubing, we are
able to serve both primary markets for oil country tubular goods: deep critical
wells and shallow wells. Our premium products successfully compete both with
seamless oil country tubular goods for critical applications and with
conventional seam-annealed tubular products manufactured for shallow wells.
Critical applications, such as deep natural gas wells and offshore wells,
require high-performance casing and tubing that can withstand enormous pressure
as measured by burst strength, collapse strength and yield strength. Both major
and independent oil companies that conduct drilling programs of this nature
emphasize quality and compliance with specific standards. In our electric
resistance welded, full-body normalized manufacturing process, which meets and
exceeds American Petroleum Institute standards, we heat treat the entire tube
and not just the weld area. This process strengthens the entire tube and makes
our premium casing, tubing and line pipe interchangeable with seamless tubulars
for nearly all critical applications. We believe that the seamless manufacturing
process involves higher capital and production costs than our welded process and
that seamless products are generally priced higher than comparable welded
products. Typically, greater than 40% to 50% of our annual oil country tubular
goods tonnage consists of premium, high-strength tubular products.
Operators drilling shallow wells generally purchase oil country tubular
goods based primarily on price and availability, as wells of this nature require
less stringent performance characteristics. We compete in this market, which is
served primarily by producers of seam-annealed oil country tubular goods, with
our Wildcat-TM- brand of oil country tubular goods and products produced through
our exclusive alliance mills.
Line Pipe
Our line pipe ranges in outside diameter from 2 3/8" to 16" and is used to
gather and transmit oil and natural gas from the well site to larger
transmission pipelines. Historically, 15% to 20% of our oilfield product
revenues are from line pipe sales.
SALES AND DISTRIBUTION. Our domestic oil country tubular goods sales
distribution network consists of 11 non-exclusive distributors that maintain and
deliver product inventory to major and independent oil and gas companies that
explore for oil and natural gas. We also sell line pipe through distributors and
directly to end users. Internationally, oil country tubular goods are sold
through distributors and trading companies as well as directly to end users.
Approximately 4% of the tonnage of oil country tubular goods and 1% of the
tonnage of line pipe that we shipped in 1999 were to destinations outside the
United States. Our two largest customers, both distributors of our oilfield
products in 1999, accounted for 19% and 16%, respectively, of the total oil
country tubular good tons we shipped. About 76% of the oil and natural gas wells
drilled in the United States in 1999 were located in Texas, Oklahoma, Kansas,
Louisiana, New Mexico and the federal waters of the Gulf of Mexico, all located
within 750 miles of our mill in Lone Star, Texas. The majority of our oilfield
products were sold for use in these states, as well as the Gulf of Mexico which
is less than 250 miles from our mill.
ALLIANCE MILLS. In addition to production from our mill, we have marketing
agreements to sell other steel oilfield tubular products manufactured by several
companies. Through commercial alliances with several mills, we have expanded our
oilfield product offering. These arrangements enable us to outsource
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production of specific products, allowing us to offer a wider variety of casing,
tubing and line pipe without a permanent capital investment. These alliances
allow us to concentrate our capital expenditures and manufacturing expertise on
our premium products, while offering our customers a complete size range of
casing, tubing and line pipe. These transactions are performed on a commission
basis, through purchase and resale of the products. Our alliance arrangements
accounted for approximately 24% of our revenues from oilfield products during
1999. We also have commitments to buy tubular products from some of our alliance
mills.
COMPETITION. Oil country tubular goods and line pipe are sold in highly
competitive markets. Once users of oil country tubular goods determine which
performance characteristics are relevant, they base their purchasing decisions
on four factors: quality, availability, service and price. We believe that we
are competitive in all of these areas. We successfully compete with both
seamless oil country tubular goods and seam-annealed electric resistance welded
products, as described above under "Our Business--Our Oilfield
Products--Products" on page 30. Our electric resistance welded, full-body
normalized casing and tubing products compete with seamless oil country tubular
goods, and we offer products with the widest variety of diameters, grades and
wall thicknesses in the United States. Several domestic manufacturers produce
limited lines of oil country tubular goods, and a number of foreign
manufacturers produce oil country tubular goods for export to the United States.
See "Our Business--Industry Background" on page 28.
From 1986 through June 2000, the level of imports of oil country tubular
goods from Canada and Taiwan was greatly reduced by the existence of antidumping
duty orders covering imports from these countries. In addition, since 1995, the
level of imports of oil country tubular goods from Argentina, Italy, Japan,
Korea and Mexico has been greatly reduced by the existence of antidumping duty
orders covering imports from these countries and a countervailing duty order
covering imports from Italy. The orders also have had a beneficial impact on
prices for oil country tubular goods in the domestic market. Affected parties
can request administrative reviews of imposed duties and tariffs.
In February 2000, in response to a petition filed by domestic welded line
pipe producers and their workers, including us, the United States government
granted relief to the line pipe industry under Section 201 of the Trade Act of
1974. The relief, effective March 1, 2000, restricts imports of welded line pipe
not exceeding 16 inches in outside diameter to a maximum of 9,000 tons from any
country other than Canada and Mexico for three years. Imports in excess of that
amount are subject to significant tariffs.
Antidumping and countervailing duty orders may be revoked as a result of
periodic "sunset reviews." An individual exporter also may obtain revocation as
to itself under certain circumstances. In June 2000, the United States
government completed sunset reviews of the orders covering Canada and Taiwan,
revoking both orders. The United States government has begun conducting sunset
reviews of the orders covering Argentina, Italy, Japan, Korea and Mexico. These
reviews are expected to be completed by August 2001. The relief recently granted
to the line pipe industry under Section 201 is also subject to appeal and
review.
OUR SPECIALTY TUBING PRODUCTS
PRODUCTS. Our specialty tubing business includes the manufacture, marketing
and sale of a variety of tubular products. Our specialty tubular products are
generally high value-added premium or custom products often involved in exacting
applications. As a result of the January 2000 Fintube acquisition, our specialty
tubing products now include finned tubular products used in power technology
applications and in industrial processing and petrochemical plants. Our Fintube
subsidiary is the leader in the design and production of finned tubes for heat
recovery steam generation and has a majority of the domestic manufacturing
capacity for finned tubes. The Fintube products augment the breadth of specialty
tubing products that we manufacture, which before the Fintube acquisition were
primarily precision mechanical tubulars provided to automotive, fluid power and
other markets for various mechanical applications.
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Finned Tubular Products
We manufacture custom-engineered specialty finned tubular products used in a
variety of heat recovery applications, primarily for heat recovery steam
generation in gas-fired, combined cycle power generating plants. Finned tubes
are steel tubes with various types of fins or studs welded to the outside to
increase the amount of surface area for maximized recovery of heat. Finned tubes
raise the efficiency of electric plants by more than 30% by converting exhaust
heat into steam to generate additional electricity. The Energy Information
Administration expects the amount of new combined cycle generating capacity
additions to increase by 540% between 2001 and 2005, and for these additions to
represent 55% of the projected 110 gigawatts of all new power generating
capacity additions during that period. Accordingly, we expect the heat recovery
steam generation market to grow rapidly over the next several years if, as
expected, the construction of combined cycle power generation plants
accelerates. Our heat recovery products also serve the petrochemical and food
processing industries.
Precision Mechanical Tubulars
We have the second largest production capacity in the world for precision
mechanical tubular products using the Drawn Over Mandrel manufacturing process.
The use of the Drawn Over Mandrel manufacturing process enables us to achieve
higher critical tolerances and dimensional control than other processes. Our
precision mechanical tubular product line includes a wide array of high-quality,
custom-made steel tubular products with precise dimensional control and special
metallurgical properties. Our precision mechanical tubular products have the
widest size range from 1/2" to 15" in outside diameter in North America and are
made from a variety of combinations of chemical compositions, thermal
treatments, mechanical properties and surface finishes. Product uses include the
manufacture of hydraulic cylinders for construction and farm equipment;
automotive applications, such as stabilizers and intrusion tubes; and other
uses, including machine parts, bearing races, down-hole pump barrels, heavy-lift
crane boom chords, drill rods and liner hangers. As a result of the wide range
of industrial applications for precision mechanical tubular products, sales
traditionally follow general domestic economic conditions.
During 1999, we developed a new quench and tempered Drawn Over Mandrel
process for applications that require increasingly demanding mechanical
properties such as high pressure cylinders and high strength crane boom cords.
The Drawn Over Mandrel process uses a drawbench to pull tubing through a die
and over a mandrel to shape and smooth surfaces and impart precise dimensional
tolerances to tubes. Our production facilities include seven drawbenches. Our
1,000,000 pound drawbench, the largest in the Western Hemisphere, combined with
our 800,000 pound drawbench enable us to access broader markets through the
manufacture of larger diameter, thicker wall products. Order quantities for our
precision mechanical tubular products are typically less than 20,000 pounds, and
are made to exact customer specifications.
Other Specialty Tubing Products
We also produce as-welded specialty tubing. We have developed new thick wall
products using enhanced hot reduction technology for applications such as heavy
axles for trailers and trucks, including sport utility vehicles, that were
typically made out of seamless tubes. This product is also used for other
industrial applications.
In connection with our production of finned tubes, we design and manufacture
other products relating to large-scale applied heat recovery technology, such as
boiler tubing and economizers. Economizers are bundles of finned tubes arranged
to maximize the amount of heat captured from boiler exhaust gases. Economizers
are normally used on large boilers for office buildings, hospitals,
universities, prisons, breweries and food processing plants. We also manufacture
and sell X-ID tubing, which has specific patterns on the interior surface of the
tube for enhanced heat transfer.
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SALES AND DISTRIBUTION. Domestically, we market and sell our precision
mechanical tubulars through 19 non-exclusive steel service centers and directly
to end users. Our precision mechanical tubulars have detailed design
specifications and in some cases long lead times, making annual contracts an
efficient mechanism for large purchasers. Internationally, the majority of our
precision mechanical tubulars is currently sold directly to end users. Exports
accounted for approximately 17% in 1999 and 19% in 1998 of the tonnage of our
precision mechanical tubulars. We market our Fintube products through a small
domestic sales force, an international sales manager based in Quebec and
independent distributors.
COMPETITION. The market for specialty tubing is competitive and is served
by several manufacturers. During 1996, we completed a capital expenditure
program to expand our production capacity for precision mechanical tubulars,
which is now the second largest in the world using the Drawn Over Mandrel
manufacturing process.
Since these products are made to end user specifications and often require
just-in-time delivery, only small quantities are imported into the United
States. In contrast to the oil country tubular goods market, seamless and
electric resistance welded specialty tubing products differ in their
applications. Electric resistance welded tubing, such as precision mechanical
tubulars, is preferred for many mechanical tubing applications because its
consistent wall thickness requires less machining in the finishing process. In
contrast, seamless tubes are used primarily in heavy gauge applications such as
boiler and pressure tubing.
Based on generally available market data, we estimate that we have a
substantial majority of the domestic manufacturing capacity for finned tubes
used for heat recovery steam generation. Our Fintube subsidiary has one
significant domestic competitor and a number of smaller foreign competitors.
OUR FLAT ROLLED STEEL AND OTHER PRODUCTS AND SERVICES
PRODUCTS AND SERVICES. We also manufacture and market flat rolled steel and
other miscellaneous products that are secondary to our manufacture of oilfield
and specialty tubing products. Flat rolled steel is primarily used by us in the
manufacture of tubular products. We also sell flat rolled steel to fabricators
of large diameter transmission pipe, storage tanks, rail cars and a variety of
other construction and industrial products. Our participation in the flat rolled
steel commodity market to some extent involves our excess capacity for flat
rolled steel as related to the manufacture of our oilfield and specialty tubing
products, as well as cost considerations associated with our total manufacturing
operations.
We also market other products such as tubulars for use in structural and
piling applications in the construction industry, and we provide transportation,
storage and other services.
Fintube has developed a stand-alone steel coil slitting business and a new
steel rod to thin steel strip manufacturing process. This business includes a
steel coil storage and processing business, where we provide profitable, toll
slitting services for major steel customers and also provide steel storage and
custom cutting. The steel coil division ships its processed steel on a
just-in-time basis for outside customers and to other divisions of Fintube's
business. We own the rights to our patented cold-rolling process for flattening
steel rod into narrow bands of thin-gauge steel which we use as finning material
for our finned tubes and thin strip steel we sell to third parties.
SALES AND DISTRIBUTION. Our Lone Star Steel subsidiary manufactures and
sells flat rolled steel directly to end users and through service centers,
primarily in the Southwestern region of the United States. Due to an influx of
inexpensive imported flat rolled steel during 1998 and early 1999, markets for
flat rolled steel experienced excess supply and lower pricing. As a result, our
shipment volumes were down in 1998 and 1999. However, during the first half of
1999, antidumping duties and quotas were established for several foreign
countries which reduced the amount of imported foreign coils resulting in
increased shipments by us during the second half of 1999. The largest customer
of our flat rolled steel, Friedman Industries, Inc., historically has accounted
for approximately 75% of our flat rolled steel sales, and 76% in 1999, as well
as substantially all other sales of miscellaneous tubular products other than
oilfield and specialty tubing
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products. This customer has steel processing facilities located adjacent to our
facilities in Lone Star, Texas, and those facilities purchase most of their flat
rolled steel from us. Sales to this customer represented approximately 10% of
our total revenues for 1999.
Our Fintube subsidiary sells thin steel strip directly to end users in North
America through a small sales force. Flat rolled steel processing services are
also sold to steel mills where we receive processing revenues but do not
purchase and resell steel.
COMPETITION. Flat rolled steel is sold in highly competitive markets
generally concentrated in the Southwestern region of the United States. Sales
and earnings are affected by the cost of raw materials, use of flat rolled steel
by us in the manufacture of our tubular products, demand by outside customers
and general economic conditions. Fintube's thin strip flat rolled steel and
steel coil slitting services compete against service centers located in the
Midwest.
CUSTOMERS
We sell our oilfield products through our exclusive distributors to numerous
end users, including The Coastal Corporation, Anadarko Petroleum Corporation,
Texaco Inc., Burlington Resources Inc., Apache Corporation and Exxon Mobil
Corporation. We sell our finned and boiler tube products to over 50 end users,
including Foster Wheeler Corporation, Chicago Tube and Iron Company, Cerrey,
Nooter Eriksen, Inc. and Deltak, L.L.C. We sell our precision mechanical
tubulars to such distributors and end users as Earle M. Jorgensen Company,
Marmon/Keystone Corp., Hyva, DaimlerChrysler Corporation, American Axle &
Manufacturing Holdings, Inc., Ford Motor Company and Dana Corporation.
RESEARCH, DEVELOPMENT, INFORMATION TECHNOLOGY AND PATENTS
We are committed to technologically innovative product development. With
respect to oilfield products, we collaborate with customers and industry groups
to develop new grades of oil country tubular goods as well as new products, such
as expandable casing. Our expandable casing product was developed for a joint
venture between Shell Oil Company and Halliburton Company and was first
successfully installed in late 1999 in the Gulf of Mexico. We are currently the
only supplier of this product. Our technical knowledge and high-performance
casing products are also being applied in an innovative method for drilling
wells using casing instead of drill pipe. The first commercial well using casing
drilling was completed in August 1999. We also have used our expertise to
develop high-strength, thick wall line pipe for offshore applications. In
addition, we developed ultrasonic testing methods to assure the quality of our
tubing. In the specialty tubing area, our recent product developments include
the Aeroseg finned tube, a new quench and tempered Drawn Over Mandrel product
called QDOM for applications requiring highly demanding mechanical properties
and thick wall products using hot reduction technology for applications such as
heavy axles that are normally made out of seamless tubes. We hold several United
States patents covering some of our manufacturing processes and products.
We also have invested in information technologies that provide the platform
for internet-based commercial marketing and resource constrained production
planning. We believe our information technologies capabilities will allow us to
more profitably run our facilities, give our customers excellent service and
facilitate web-based commercial initiatives.
MANUFACTURING CAPABILITIES
We manufacture our oilfield products, precision mechanical tubulars, flat
rolled steel and other products at our facilities located on an approximately
2,000-acre site we own in Lone Star, Texas which contains over 2,000,000 square
feet of manufacturing space. We manufacture our finned tubular products in
approximately 387,500 square feet of manufacturing facilities on approximately
131.5 acres that we own or lease in the Tulsa, Oklahoma metropolitan area;
Pryor, Oklahoma; Quebec, Canada; and Veracruz,
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Mexico. Our acquisition of the assets of Bellville Tube Corporation added
approximately 91,000 square feet of oilfield products manufacturing facilities
near Houston, Texas.
Our Lone Star Steel facilities' annual rated capacity approximates 480,000
slab tons, 1,400,000 flat rolled tons and 1,000,000 welded tubular tons. We have
access through marketing arrangements and alliances with mills for additional
oilfield tubular capacity of approximately 200,000 tons per year.
We have a majority of the domestic manufacturing capacity for production of
finned tubes for heat recovery steam generation. We also license technology
relating to the production of finned tubular products to licensees in India,
Italy, Japan and Korea.
RAW MATERIALS AND INVENTORY
In general, we attempt to procure raw materials and to manage our finished
goods inventory in a manner that will provide:
- significant flexibility in responding to the levels of demand for our
various products;
- a short lead time in filling our customers' orders;
- the capacity to offer a broad product range; and
- the ability to offer our products at an effective cost.
We generally produce oil country tubular goods and line pipe to fill
specific orders and, accordingly, we maintain the majority of our inventory in
the form of steel coils and other raw materials, work-in-process or finished
goods earmarked for specific orders. Some work-in-process and finished goods
inventories are maintained in order to provide flexibility in responding to
customer delivery demands.
Raw materials for our specialty tubing products are readily available from
multiple sources. Steel coils and wire rod are the primary raw materials used in
the manufacture of our finned tubular products, and steel coils are the
principal raw material used in the manufacture of our precision mechanical
tubulars. We usually produce our specialty tubing products to meet specific
orders and, accordingly, inventory is managed to minimize the amount of finished
goods on hand. Work-in-process inventories are maintained in order to provide
flexibility in responding to customer needs.
We manufacture flat rolled steel primarily for use in producing oil country
tubular goods, but also for sale to third parties. We manufacture flat rolled
steel using both purchased steel slabs and internally produced slabs.
We can use steel slabs, scrap steel and steel coils in the manufacture of
our tubular products. We primarily purchased steel slabs to meet production
needs in 1999, and it was often necessary for us to commit to purchase slabs 90
to 150 days prior to production. We anticipate again using steel slabs for most
of our production needs in 2000. Our principal raw material for our internally
produced steel slabs is scrap steel, which is internally generated from our
operations or available in the spot market. The price of scrap steel and steel
slabs can be volatile, is influenced by a number of competitive market
conditions beyond our control and is not directly related to the demand for our
products.
EMPLOYEES
At June 30, 2000, we had a total of 2,266 active employees, of whom 1,257
were represented by four unions and five bargaining units. The majority of these
union workers are employees of our Lone Star Steel subsidiary represented by the
United Steelworkers of America under a contract signed in May 1996, which
expires on May 31, 2001. Two of the other agreements, covering an aggregate of
approximately 127 of Lone Star Steel's warehouse and plant security workers as
of June 30, 2000, expire in July 2000 and September 2000, respectively. The
remaining two collective bargaining agreements covered a total of 38 employees
of Fintube in Canada and Mexico as of June 30, 2000.
Our management considers its relationship with our employees to be good.
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FOREIGN OPERATIONS
Our Lone Star Steel and Bellville subsidiaries conduct no manufacturing
operations outside the United States. Lone Star Steel's export sales to
destinations outside the United States were approximately $21.2 million in 1999,
$33.8 million in 1998 and $58.1 million in 1997. Our Fintube subsidiary owns
manufacturing facilities in Quebec, Canada and Veracruz, Mexico and has recently
entered into a lease of manufacturing facilities in Monterrey, Mexico that will
begin operations in September 2000.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
We are subject to foreign, federal, state, provincial and local
environmental laws and regulations concerning, among other things, waste
materials, wastewater disposal and air emissions. We believe that we are
currently in material compliance with all applicable environmental regulations.
LEGAL PROCEEDINGS
We do not believe, based upon analysis of known facts and circumstances and
reports from legal counsel, that any pending legal proceeding will have a
material adverse effect on our financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of our
executive officers and directors, as well as the presidents of our Lone Star
Steel, Fintube and Bellville subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
LONE STAR
TECHNOLOGIES, INC.:
Rhys J. Best............... 53 Chairman of the Board, Chief Executive Officer,
President and Director
Robert F. Spears........... 57 Vice President, General Counsel and Secretary
Charles J. Keszler......... 37 Vice President-Finance and Treasurer
Charles L. Blackburn....... 72 Director
Frederick B. Hegi, Jr...... 56 Director
James E. McCormick......... 72 Director
M. Joseph McHugh........... 62 Director
Thomas M. Mercer, Jr....... 56 Director
Alfred M. Micallef......... 57 Director
Jerry E. Ryan.............. 57 Director
OPERATING COMPANIES:
W. Byron Dunn.............. 46 President and Chief Executive Officer of Lone Star Steel
Larry J. Sims.............. 61 President and Chief Executive Officer of Fintube
Technologies, Inc.
H. Kenneth Beil............ 64 President of Bellville Tube Corporation
</TABLE>
LONE STAR TECHNOLOGIES, INC.'S OFFICERS AND DIRECTORS:
RHYS J. BEST has served as one of our directors since August 1997. He has
served as President and Chief Executive Officer since July 1998 and has also
served as Chairman of the Board since January 1999. From 1989 until August 1997,
Mr. Best served as President and Chief Executive Officer of our Lone Star Steel
subsidiary.
ROBERT F. SPEARS has served as our Vice President, General Counsel and
Secretary since July 1996. From 1991 until July 1996, Mr. Spears served as
General Counsel of Financial Industries Corporation, a life insurance holding
company in Austin, Texas.
CHARLES J. KESZLER has served as our Vice President-Finance and Treasurer
since February 1996. Mr. Keszler served as Director of Taxes and Pension
Investments of our Lone Star Steel subsidiary from February 1994 to February
1996.
CHARLES L. BLACKBURN has served as one of our directors since 1991. From
1987 until his retirement in April 1995, Mr. Blackburn served as Chairman,
President and Chief Executive Officer of Maxus Energy Corporation, an oil and
gas producer. Prior to joining Maxus Energy Corporation, Mr. Blackburn served as
an Executive Vice-President of Shell Oil Company.
FREDERICK B. HEGI, JR. has served as one of our directors since 1985.
Mr. Hegi has served as General Partner of Wingate Partners, L.P. and Wingate
Management Co., L.P since 1987, as Principal of Wingate Management Co. II, L.P.
since 1994, and as President of Valley View Capital Corporation since 1982, all
of which are private investment firms. Mr. Hegi has also served as Chairman of
United Stationers, Inc., a wholesale office products company, since November
1996; Chairman of Loomis--Fargo & Co., an armored car services company, since
May 1999; and Chairman, President and Chief Executive Officer of Kevco, Inc., a
wholesale distributor of building products to the manufactured housing and
recreational vehicles industries, since July 1999. Mr. Hegi also serves as a
director of United Stationers, Inc., Loomis--Fargo & Co. and Kevco, Inc.
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JAMES E. MCCORMICK has served as one of our directors since 1991.
Mr. McCormick served as President and Chief Operating Officer of Oryx Energy
Company, an oil and gas exploration and production company formerly named Sun
Exploration and Production Company, from 1988 until his retirement in 1992.
Mr. McCormick also serves as a director of BJ Services Co., Santa Fe Snyder
Corp., TESCO Corporation and Dallas National Bank.
M. JOSEPH MCHUGH has served as one of our directors since June 1999. From
November 1999 to May 2000, Mr. McHugh served as Acting Chief Financial Officer
of Pillowtex Corporation, a manufacturer of home textiles. Prior to a period of
retirement from January to October 1999, Mr. McHugh served as President and
Chief Operating Officer of Triangle Pacific Corp., a manufacturer of hardwood
flooring and kitchen and bathroom cabinets, from November 1994 to
December 1998. Mr. McHugh also serves as a director of Pillowtex Corporation.
THOMAS M. MERCER, JR. has served as one of our directors since May 1995.
Since April 1995, Mr. Mercer has served as a partner of Ceres Capital Partners,
which provides financial advisory and investment banking services, and since
1993 has been an owner of The Mercer Financial Company, which provides financial
advisory and investment banking services.
ALFRED M. MICALLEF has served as one of our directors since May 2000.
Mr. Micallef has served as President and Chief Executive Officer of JMK
International, Inc., a holding company of rubber and plastics manufacturing
businesses, since January 1985. He also serves as a director of Cash America
International, Inc.
JERRY E. RYAN has served as one of our directors since May 2000. Mr. Ryan
has served as a consultant to our Fintube subsidiary since January 2000.
Mr. Ryan served as Chairman of the Board of the general partner of Fintube
Limited Partnership from 1989 to January 2000 and also as Chief Executive
Officer of the general partner from 1989 to February 1999.
OPERATING COMPANIES' PRESIDENTS:
W. BYRON DUNN has served as President and Chief Executive Officer of our
Lone Star Steel subsidiary since August 1997. Mr. Dunn served as Executive Vice
President--Sales and Marketing of Lone Star Steel from 1991 to August 1997.
LARRY J. SIMS has served as President and Chief Executive Officer of our
Fintube subsidiary since January 2000. Mr. Sims served as President and Chief
Executive Officer of the general partner of Fintube Limited Partnership from
February 1999 to January 2000. From 1989 to February 1999, Mr. Sims served as
President and Chief Operations Officer of the general partner of Fintube Limited
Partnership.
H. KENNETH BEIL has served as President of our Bellville subsidiary since
April 2000. Mr. Beil served as President of Bellville Tube Corporation, the
company that sold its assets to our subsidiary, which subsequently assumed the
Bellville name, from May 1996 to March 2000 and as Vice President--Operations of
Bellville Tube Corporation from 1993 to May 1996.
MANAGEMENT AND DIRECTOR STOCK OWNERSHIP
Our management team has a vested interest in our financial performance. Our
directors, executive officers and the presidents of our Lone Star Steel, Fintube
and Bellville subsidiaries own an aggregate of 140,682 shares of our common
stock, or 0.6%, as of July 31, 2000. Further, this group has been granted
options to purchase an additional 1,181,875 shares of our common stock.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock by each person or entity known to us to be a beneficial owner
of more than 5% of the outstanding shares of our common stock as of June 30,
2000, including the aggregate number of shares owned by the principal
stockholders as of June 30, 2000, the percentage of our outstanding common stock
owned by the principal stockholders as of June 30, 2000, the aggregate number of
shares to be offered by the principal stockholders, the aggregate number of
shares to be owned by the principal stockholders after the sale of all shares in
this offering and the percentage of our outstanding common stock that will be
owned by the principal stockholders after this sale, in each case assuming the
offering and sale of all shares covered by this prospectus and no additional
issuances to or purchases or sales by the principal stockholders of our common
stock or other issuances of our common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED IF ALL SHARES
OWNED BEING REGISTERED
PRIOR TO OFFERING NUMBER OF HEREUNDER ARE SOLD
---------------------- SHARES BEING ----------------------
NUMBER OF REGISTERED NUMBER OF
PRINCIPAL AND SELLING STOCKHOLDERS SHARES PERCENT(1) FOR SALE(2) SHARES(3) PERCENT(3)
---------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Alpine Capital, L.P.(4) .................. 8,965,172 38.0% 750,000 8,215,172 30.93%
201 Main Street, Suite 3100
Fort Worth, Texas 76102
Keystone, Inc.(4) ........................ 2,279,600 9.7% -- 2,279,600 8.58%
201 Main Street, Suite 3100
Fort Worth, Texas 76102
</TABLE>
------------------------
(1) Based on 23,561,610 shares of our common stock issued and outstanding as of
July 31, 2000.
(2) Assuming exercise in full of the underwriters' over-allotment option, Alpine
Capital, L.P. will sell 1,031,250 shares of common stock.
(3) Based on 26,561,610 shares of our common stock outstanding immediately
following the completion of this offering and assuming no exercise of the
underwriters' over-allotment option. Assuming exercise in full of the
underwriters' over-allotment option, Alpine Capital, L.P. will own 7,933,922
shares of common stock, constituting 29.56% of the outstanding shares of
common stock.
(4) Alpine Capital, L.P. and Keystone, Inc. are members of a significant
stockholder group that is reported to collectively own 11,344,772 shares of
our common stock, which represents approximately 48.15% of our outstanding
common stock. Alpine Capital, L.P., Keystone, Inc., Robert W. Bruce, III,
Algenpar, Inc., J. Taylor Crandall, The Anne T. and Robert M. Bass
Foundation, Anne T. Bass and Robert M. Bass all report their holdings
jointly. In a Schedule 13D filed with the Securities and Exchange Commission
on June 22, 1993, as amended, these stockholders reported that these shares
were acquired for investment purposes. This stock is held in the following
manner:
- Alpine Capital, L.P. has sole voting and dispositive power with respect to
8,965,172 shares of our common stock constituting approximately 38.05% of
our outstanding common stock. Robert W. Bruce, III, Algenpar, Inc., and
J. Taylor Crandall all have shared voting and dispositive power with
respect to these shares.
- Keystone, Inc. and Robert M. Bass are reported to have sole voting and
dispositive power as to an additional 2,279,600 shares of our common
stock, which represents approximately 9.68% of our outstanding common
stock.
- The Anne T. and Robert M. Bass Foundation is reported to have sole voting
and dispositive power as to an additional 100,000 shares of our common
stock, which represents approximately 0.4% of our outstanding common
stock. Anne T. Bass, Robert M. Bass, Robert W. Bruce, III and J. Taylor
Crandall are reported to have shared voting and dispositive power with
respect to these shares.
Thomas M. Mercer, Jr., one of the eight members of our Board of Directors,
serves on our Board at the request of the selling stockholder and various
related parties.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 80 million shares of common stock,
$1.00 par value per share, and 10 million shares of preferred stock, $1.00 par
value per share.
The following summary of the terms and provisions of our capital stock does
not purport to be complete, and is qualified in its entirety by reference to our
certificate of incorporation and bylaws, which we incorporated by reference as
exhibits to the registration statement, of which this prospectus is a part, and
applicable law.
COMMON STOCK
We are authorized to issue up to 80 million shares of common stock, par
value $1.00 per share. The holders of our common stock are entitled to one vote
for each share held of record on all matters to be voted upon by the
stockholders. The holders of our common stock are entitled to participate
equally in dividends, if any, declared by our Board of Directors out of legally
available funds, and in the distribution of assets in the event of liquidation.
However, the payment of any dividends and the distribution of assets to holders
of our common stock will be subject to any prior rights of any outstanding
shares of our preferred stock. We have never paid cash dividends on our common
stock. The holders of our common stock have no preemptive, conversion or other
rights to subscribe for additional shares of our stock. There are no redemption
rights or sinking fund provisions applicable to our common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, validly issued, fully paid
and nonassessable.
PREFERRED STOCK
Our Board of Directors is authorized, without further action by the
stockholders, to issue up to 10 million shares of preferred stock and to
establish, without stockholder approval, one or more classes or series of Lone
Star preferred stock having the number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights, preferences, and
limitations that our Board of Directors may designate. No shares of our
preferred stock are issued or outstanding. The issuance of our preferred stock
could adversely affect the voting power of holders of our common stock and
restrict their rights to receive payments upon our liquidation. It could also
have the effect of delaying, deferring or preventing a change in control of Lone
Star. We have no present plan to issue any shares of preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
BOARD OF DIRECTORS. Our certificate of incorporation provides that our
Board of Directors will set the number of members of our Board by resolution and
that our Board will be divided into three classes, each class to be as nearly
equal in number of directors as possible. In addition, under our certificate of
incorporation, directors may be removed only for cause by the affirmative vote
of 80% of the then-outstanding shares of our capital stock entitled to vote.
Thus, the holder or holders of as little as one share more than 20% of the
voting power may veto the removal of any director. Our certificate of
incorporation also provides that vacancies on our Board of Directors will be
filled by the affirmative vote of a majority of the remaining directors, even if
less than a quorum, and that the newly elected director serves for the unexpired
term of his or her predecessor. The likely effect of the classified board and
limitations on the removal of directors and filling of vacancies is an increase
in the time required for the stockholders to change the composition of our Board
of Directors. These classification provisions are subject to the rights of
holders of preferred stock which may be established by our Board of Directors
pursuant to our certificate of incorporation in order to permit the holders of
preferred stock to elect directors under specified circumstances relating to the
payment of dividends by, and the liquidation of, Lone Star.
Our bylaws provide that nominations for the election of directors may be
made by the Board of Directors, by a proxy committee appointed by the Board or
by any stockholder entitled to vote in the
41
<PAGE>
election of directors. Under our bylaws, stockholders intending to nominate
director candidates for election must give proper advance notice to the
secretary of Lone Star. The chairman of any stockholder meeting may refuse to
acknowledge the nomination of any person not nominated in compliance with the
procedure established in the bylaws. Although this does not give the Board of
Directors any power to approve or disapprove stockholder nominations for
election of directors, it may have the effect of precluding a contest for the
election of directors if these procedures are not followed.
STOCKHOLDER MEETINGS. Our certificate of incorporation provides that any
action required or permitted to be taken by our stockholders at an annual
meeting or special meeting of stockholders may not be taken by written consent.
Our certificate of incorporation further provides that special meetings of the
stockholders may be called only by the Chairman of the Board of Directors or by
a majority of the Board of Directors. The foregoing provisions could have the
effect of delaying until the next stockholders' meeting stockholder actions that
are favored by the holders of a majority of the outstanding voting securities of
Lone Star.
SPECIAL VOTE REQUIRED FOR BUSINESS COMBINATIONS. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law, and provisions in our certificate of incorporation which
relate to transactions with interested stockholders. Subject to certain
exceptions, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. For purpose of Section 203, a "business combination"
includes mergers, asset sales having an aggregate market value equal to 10% or
more of either the aggregate market value of all the assets of the corporation
determined on a consolidated basis or the aggregate market value of all the
outstanding stock of the corporation, and other transactions resulting in a
financial benefit to the interested stockholder. An "interested stockholder" is
generally a person who, together with affiliates and associates, owns (or within
three years prior to the date of determination of whether the person is an
"interested stockholder" did own) 15% or more of the corporation's outstanding
voting stock.
Our certificate of incorporation contains additional provisions relating to
business combinations that supplement Section 203 and prohibits us from engaging
in a "business combination" with an "interested stockholder" for a period of two
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
As defined in our certificate of incorporation, a "business combination"
includes:
- mergers;
- assets sales and other transactions having an aggregate fair market value
of $100 million or more;
- the adoption of any plan or proposal for the liquidation or dissolution of
Lone Star proposed by any "interested stockholder" or an affiliate of any
"interested stockholder"; and
- any reclassification of securities or other transaction that has the
effect of increasing the proportionate share of the outstanding shares of
any class of equity or convertible securities of Lone Star or any
subsidiary which is directly or indirectly owned by any "interested
stockholder" or any affiliate of any "interested stockholder."
As defined in our certificate of incorporation, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the prior
two years did own, 20% or more of our outstanding voting stock or who is an
assignee of any shares which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any "interested
stockholder," if the assignment did not involve a public offering within the
meaning of the Securities Act of 1933, as amended.
AMENDING OUR CERTIFICATE OF INCORPORATION AND BYLAWS. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is
42
<PAGE>
required to amend a corporation's certificate of incorporation or bylaws unless
the certificate of incorporation or bylaws, as the case may be, requires a
greater percentage. The majority stockholder vote would be in addition to any
separate class vote that might be required by the terms of any series of
preferred stock that might be outstanding at the time any amendments are
submitted to stockholders. Many of the provisions in our certificate of
incorporation require the affirmative vote of 80% or more of the then-
outstanding shares of our capital stock for their amendment.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
, 2000, between us and the underwriters, the underwriters named
below, who are represented by Bear, Stearns & Co. Inc., Banc of America
Securities LLC, Dain Rauscher Incorporated and The Robinson-Humphrey
Company, LLC, have severally agreed to purchase from us and the selling
stockholder the respective numbers of shares of common stock set forth below at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Banc of America Securities LLC..............................
Dain Rauscher Incorporated..................................
The Robinson-Humphrey Company, LLC..........................
---------
Total............................................... 3,750,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration statement,
the continuing correctness of our representations to them, the receipt of
"comfort letters" from our accountants and no occurrence of an event that would
have a material adverse effect on our business. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
We and the selling stockholder have granted to the underwriters an option,
exercisable for days from the date of the underwriting agreement, to
purchase up to 281,250 additional shares from us and up to 281,250 additional
shares from the selling stockholder, in each case at the public offering price
less the underwriting discounts and commissions. The underwriters may exercise
this option solely to cover over-allotments, if any, made in connection with
this offering. To the extent that the underwriters exercise this option, each
underwriter will become obligated, subject to conditions, to purchase a number
of additional shares approximately proportionate to such underwriter's initial
purchase commitment.
The underwriters propose initially to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share on sales to
other dealers. After the offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions.
Our officers and directors, who hold an aggregate of % of our issued and
outstanding shares of common stock, have agreed pursuant to lock-up agreements
not to sell or offer to sell or otherwise dispose of any shares of common stock
for a period of 90 days after the date of this prospectus without the prior
written consent of Bear Stearns. Similarly, Alpine Capital, L.P. and related
entities, who hold an aggregate of % of our issued and outstanding shares of
common stock, have agreed pursuant to lock-up agreements not to sell or offer to
sell or otherwise dispose of any shares of common stock for a period of
120 days after the effective date of this prospectus without the prior written
consent of Bear Stearns.
In addition, we have agreed with the underwriters not to issue, sell, offer
or agree to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any common stock, or any securities convertible into,
exercisable for or exchangeable for common stock during the period from the date
of this
44
<PAGE>
prospectus and continuing through the date 90 days after the date of this
prospectus, except with the prior written consent of Bear Stearns. These
agreements do not apply to our granting stock options under existing plans
covering not more than 250,000 shares of common stock in the aggregate; our
issuance of common stock upon the exercise of presently outstanding stock
options; our issuance of not more than 100,000 shares of common stock under our
employee stock purchase plan and deferred compensation plan; or the issuance of
shares of our common stock in connection with one or more acquisitions.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thereby creating a
short position in our common stock for their own account. In addition, to cover
such over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. The representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our common stock at a level
above that which might otherwise prevail in the open market. These transactions
may be made on the New York Stock Exchange, in the over-the-counter market or
otherwise. The underwriters are not required to engage in these activities and,
if begun, may end any of these activities at any time.
In connection with this offering, some of the underwriters and selling group
members who are qualified market makers on the New York Stock Exchange may
engage in passive market making transactions in our common stock on the New York
Stock Exchange according to Rule 103 of Regulation M under the Securities
Exchange Act of 1934, during the business day prior to the pricing of the
offering and before the start of offers or sales of our common stock. Passive
market makers must comply with volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for such security. If all
independent bids are lowered below the passive market maker's bid, however, the
bid must then be lowered when specific purchase limits are exceeded.
We and the selling stockholder have agreed to indemnify the underwriters
against a number of liabilities, including liabilities under the Securities Act
of 1933, as amended, or to contribute to payments the underwriters may be
required to make as a result of these liabilities.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
From time to time, Bear Stearns and Dain Rauscher Wessels and their
affiliates have provided, and may continue to provide in the future, investment
banking, general financing, and banking services to us and our affiliates, for
which they have received, and expect to receive, customary compensation. An
affiliate of Banc of America Securities is the lead lender under the Fintube
credit facility.
45
<PAGE>
The following table summarizes the compensation and estimated expenses that
we and the selling stockholder will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions payable by us... $ $ $ $
Underwriting discounts and
commissions payable by the
selling stockholder......... $ $ $ $
Expenses payable by us........ $ $ $ $
Expenses payable by the
selling stockholder......... $ $ $ $
</TABLE>
Our shares of common stock trade on the New York Stock Exchange under the
symbol "LSS."
LEGAL MATTERS
The legality of the common stock offered in this prospectus will be passed
upon for us by Thompson & Knight L.L.P., Dallas, Texas. Legal matters relating
to the common stock offered by this prospectus will be passed upon for the
underwriters by Locke Liddell & Sapp LLP, Dallas, Texas.
EXPERTS
The audited consolidated financial statements and schedules of Lone Star and
Fintube included in and incorporated by reference in this prospectus and
elsewhere in the registration statement to the extent and for the periods
indicated in their reports have been audited by Arthur Andersen LLP, independent
public accountants, and are included or incorporated by reference in this
prospectus in reliance upon the authority of said firm as experts in giving said
reports.
The audited financial statements of Bellville Tube Corporation incorporated
by reference in this prospectus and elsewhere in the registration statement to
the extent and for the periods indicated in their reports have been audited by
Harper & Pearson Company, independent public accountants, and are incorporated
by reference in this prospectus in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission. This prospectus provides you with a general
description of the securities being offered. You should read this prospectus
together with additional information described under this heading "Where You Can
Find More Information."
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the SEC's public reference rooms at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York, New York
10048. Our filings with the Securities and Exchange Commission are also
available to the public over the Internet at the SEC's website at
http://www.sec.gov. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference rooms.
The Securities and Exchange Commission allows us to "incorporate by
reference" the information we file with it, which means that we can disclose
important information to you by referring you to those
46
<PAGE>
documents. The information incorporated by reference is an important part of
this prospectus, and information that we file later with the Securities and
Exchange Commission will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the Securities and Exchange Commission under Sections 13(a), 13(c), 14, or
15(d) of the Securities Exchange Act of 1934 until all of the securities are
sold.
- Annual Report on Form 10-K, as amended, for the year ended December 31,
1999.
- Current Report on Form 8-K filed November 22, 1999 (date of event November
16, 1999).
- Current Report on Form 8-K filed January 18, 2000 (date of event
January 3, 2000), Amendment No. 1 to the Form 8-K filed February 3, 2000,
Amendment No. 2 to the Form 8-K filed March 17, 2000, Amendment No. 3 to
the Form 8-K filed March 29, 2000 and Amendment No. 4 to the Form 8-K
filed June 1, 2000. The Form 8-K, as amended, includes audited financial
statements of Fintube Limited Partnership and unaudited pro forma
financial statements of Lone Star reflecting the acquisition by Lone Star
of the Fintube assets.
- Current Report on Form 8-K filed March 16, 2000 (date of event March 8,
2000).
- Quarterly Report on Form 10-Q, as amended, for the three month period
ended March 31, 2000.
- Current Report on Form 8-K filed April 17, 2000 (date of event March 31,
2000) and Amendment No. 1 to the Form 8-K filed June 14, 2000. The
Form 8-K, as amended, includes audited financial statements of Bellville
Tube Corporation and unaudited pro forma financial statements of Lone Star
reflecting the acquisition by Lone Star of the Bellville assets.
- Current Report on Form 8-K filed July 18, 2000 (date of event July 17,
2000).
- Current Report on Form 8-K filed July 28, 2000 (date of event July 27,
2000).
- Registration Statement on Form 8-A filed April 9, 1997 containing a
description of the Lone Star common stock.
You may request a copy of these filings at no cost by writing or telephoning
us at the following address:
Lone Star Technologies, Inc.
P.O. Box 803546
Dallas, Texas 75380
Attention: Sharon Goodrich
(972) 770-6401
47
<PAGE>
LONE STAR TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
LONE STAR TECHNOLOGIES, INC.
Introduction to Unaudited Pro Forma Financial Information... F-2
Unaudited Pro Forma Consolidated Balance Sheet at March 31,
2000...................................................... F-3
Notes to Unaudited Pro Forma Consolidated Balance Sheet..... F-4
Unaudited Pro Forma Consolidated Income Statement for the
Three Months ended March 31, 2000......................... F-5
Notes to Unaudited Pro Forma Consolidated Income
Statement................................................. F-6
Introduction to Unaudited Pro Forma Financial Information... F-7
Unaudited Pro Forma Consolidated Income Statement for the
Twelve Months Ended December 31, 1999..................... F-8
Notes to Unaudited Pro Forma Consolidated Income
Statement................................................. F-9
Consolidated Statements of Income for the Quarter ended
March 31, 1999 and 2000................................... F-11
Consolidated Balance Sheets at March 31, 1999 and 2000...... F-12
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1999 and 2000............................. F-13
Notes to Consolidated Financial Statements at March 31,
2000...................................................... F-14
Report of Independent Public Accountants.................... F-20
Consolidated Statements of Income for the years ended
December 31, 1997, 1998, and 1999......................... F-21
Consolidated Balance Sheets at December 31, 1998 and 1999... F-22
Consolidated Statements of Shareholders' Equity at
December 31, 1996, 1997, 1998 and 1999.................... F-23
Consolidated Statements of Cash Flows, for the years ended
December 31, 1997, 1998, and 1999......................... F-24
Notes to Consolidated Financial Statements.................. F-25
Schedule I--Condensed Financial Information of Registrant... F-42
Schedule II--Valuation and Qualifying Accounts.............. F-44
FINTUBE LIMITED PARTNERSHIP
Report of Independent Public Accountants.................... F-45
Consolidated Balance Sheets at December 31, 1998 and 1999... F-46
Consolidated Statements of Income for the years ended
December 31, 1997, 1998 and 1999.......................... F-47
Consolidated Statements of Partners' Capital for the years
ended December 31, 1997, 1998 and 1999.................... F-48
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-49
Notes to Consolidated Financial Statements, December 31,
1997, 1998 and 1999....................................... F-50
</TABLE>
F-1
<PAGE>
LONE STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information (the "Pro Forma
Financial Information") has been prepared to illustrate the effects of the
transactions described below and is based on the Financial Statements of Lone
Star Technologies, Inc. ("Lone Star") and Bellville Tube Corporation
("Bellville") for the period ended March 31, 2000, which are incorporated by
reference in this Prospectus.
The following unaudited pro forma statement of operations for the period ended
March 31, 2000 gives effect to the acquisition by Lone Star and its subsidiaries
of the assets of Bellville (the "Acquisition"), as if such transaction had
occurred on January 1, 2000. The pro forma unaudited balance sheet as of
March 31, 2000 has been prepared as if the Acquisition had occurred on that
date.
The Acquisition will be accounted for using the purchase method of accounting.
The total purchase costs of the Acquisition (approximately $14.6 million) have
been allocated to the tangible and intangible assets and liabilities acquired
based upon their respective fair values. The allocation of the aggregate
purchase price reflected in the Pro Forma Financial Information is preliminary.
The final allocation of the purchase price is contingent upon the review for
other intangible assets and an assessment of the acquired net assets; however,
that allocation is not expected to differ materially from the preliminary
allocation.
The Pro Forma Financial Information is based on the historical financial
statements of Lone Star and Bellville and the assumptions and adjustments
described in the accompanying notes. Lone Star's historical March 31, 2000
financial statements were restated to reflect the utilization of a $0.8 million
reserve previously set aside for an inventory purchase commitment. The unaudited
pro forma statements of operations do not purport to represent what Lone Star's
results of operations actually would have been if the acquisition had occurred
as of the date indicated or what results will be for any future periods. The Pro
Forma Financial Information is based upon assumptions that Lone Star believes
are reasonable and should be read in conjunction with the Financial Statements
and the related notes thereto included elsewhere in this Prospectus.
F-2
<PAGE>
LONE STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
(A) LONE STAR
LONE STAR (B) PRO FORMA TECHNOLOGIES
TECHNOLOGIES BELLVILLE ADJUSTMENTS PRO FORMA
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 7,100,000 $ 500,000 $ (500,000)(c) $ 7,100,000
Short-term investments................ 1,300,000 -- -- 1,300,000
Accounts receivable, net.............. 86,900,000 1,484,000 (1,484,000)(c) 86,900,000
Inventories........................... 122,500,000 410,000 -- 122,910,000
Prepaid expenses and other current
assets.............................. 2,500,000 23,000 -- 2,523,000
------------ ---------- ------------ ------------
Total current assets................ 220,300,000 2,417,000 (1,984,000) 220,733,000
MARKETABLE SECURITIES................... 20,400,000 -- -- 20,400,000
PROPERTY, PLANT, AND EQUIPMENT, net..... 168,000,000 2,800,000 4,507,000 (d) 175,307,000
GOODWILL AND OTHER INTANGIBLES.......... 48,500,000 -- 7,079,000 (d) 55,579,000
PREPAID DEPOSIT FOR ACQUISITION......... 14,586,000 -- (14,586,000)(d) --
OTHER ASSETS............................ 15,814,000 -- -- 15,814,000
------------ ---------- ------------ ------------
Total assets........................ $487,600,000 $5,217,000 $ (4,984,000) $487,833,000
============ ========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt..... $ 8,000,000 $ -- $ -- $ 8,000,000
Accounts payable...................... 74,700,000 233,000 -- 74,933,000
Accrued liabilities................... 31,700,000 505,000 (505,000)(c) 31,700,000
Due to stockholders................... -- 500,000 (500,000)(c) --
------------ ---------- ------------ ------------
Total current liabilities........... 114,400,000 1,238,000 (1,005,000) 114,633,000
LONG-TERM DEBT, net..................... 38,000,000 -- -- 38,000,000
REVOLVING CREDIT FACILITY............... 69,300,000 -- 69,300,000
OTHER NONCURRENT LIABILITIES............ 41,800,000 -- -- 41,800,000
------------ ---------- ------------ ------------
Total liabilities................... 263,500,000 1,238,000 (1,005,000) 263,733,000
STOCKHOLDERS' EQUITY.................... 224,100,000 3,979,000 (3,979,000)(e) 224,100,000
------------ ---------- ------------ ------------
Total liabilities and stockholders'
equity............................ $487,600,000 $5,217,000 $ (4,984,000) $487,833,000
============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma balance
sheet.
F-3
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
a) The historical balances for Lone Star are derived from the unaudited
financial statements of Lone Star as of March 31, 2000.
b) The historical balances for Bellville are derived from the audited financial
statements of Bellville as of March 31, 2000.
c) Lone Star did not acquire the accounts receivable and did not assume certain
liabilities of Bellville Tube Corporation. These adjustments reflect the
elimination of such assets as follows:
<TABLE>
<CAPTION>
ACCOUNTS ACCRUED DUE TO
CASH RECEIVABLE LIABILITIES STOCKHOLDERS
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Elimination of assets not
acquired........................ $(500,000) $(1,484,000) $ -- $ --
Elimination of liabilities not
assumed......................... -- -- (505,000) (500,000)
--------- ----------- --------- ---------
Total......................... $(500,000) $(1,484,000) $(505,000) $(500,000)
</TABLE>
d) Reflects the preliminary allocation of the purchase price for the
Acquisition, which was recorded by Lone Star as of March 31, 2000 as prepaid
deposit for acquisition. The Acquisition will be accounted for using the
purchase method of accounting. The Company has not yet determined the final
allocation of the purchase price and, accordingly, the amounts shown below
may differ from the amounts ultimately determined; however, that allocation
is not expected to differ materially from the preliminary allocation.
The preliminary pro forma allocation of the purchase price is as follows:
<TABLE>
<S> <C>
Purchase price for net assets of Bellville.................. $14,586,000
Less--Net assets of Bellville acquired (Bellville accounts
receivable not acquired)................................ 3,000,000
-----------
Excess of purchase price over historical amounts to
be allocated...................................... $11,586,000
===========
</TABLE>
Allocation of excess purchase price based on preliminary estimated values:
<TABLE>
<S> <C>
Property, plant, and equipment.............................. $ 4,507,000
Goodwill and other intangibles.............................. 7,079,000
-----------
Total excess purchase price............................... $11,586,000
===========
</TABLE>
e) Reflects the elimination of Bellville stockholders' equity at December 31,
1999.
F-4
<PAGE>
LONE STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
(A) LONE STAR
LONE STAR (B) PRO FORMA TECHNOLOGIES
TECHNOLOGIES BELLVILLE ADJUSTMENTS PRO FORMA
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
NET SALES/REVENUES..................... $ 153,900,000 $ 3,548,000 $(3,344,000)(c) $ 154,104,000
COST OF SALES.......................... (135,900,000) (2,411,000) 3,430,000 (d) (134,881,000)
------------- ----------- ----------- -------------
Gross profit....................... 18,000,000 1,137,000 86,000 19,223,000
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES............................. (8,200,000) (541,000) (59,000)(e) (8,800,000)
------------- ----------- ----------- -------------
Operating income (loss)............ 9,800,000 596,000 27,000 10,423,000
INTEREST INCOME........................ 500,000 21,000 (147,000)(f) 374,000
INTEREST EXPENSE....................... (3,000,000) -- (108,000 (g) (3,108,000)
OTHER INCOME (EXPENSE)................. 200,000 35,000 -- 235,000
------------- ----------- ----------- -------------
Income (loss) before income
taxes............................ 7,500,000 652,000 (228,000) 7,924,000
INCOME TAX BENEFIT (EXPENSE)........... (400,000) (33,000) 33,000 (h) (400,000)
------------- ----------- ----------- -------------
NET INCOME (LOSS)...................... $ 7,100,000 $ 619,000 $ (195,000) $ 7,524,000
============= =========== =========== =============
NET LOSS PER SHARE
Basic................................ $ .30 -- -- $ .32
Diluted.............................. $ .29 -- -- $ .31
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic................................ 23,400,000 -- -- 23,400,000
Diluted.............................. 24,000,000 -- -- 24,000,000
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
financial statement.
F-5
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
a) The historical balances for Lone Star are derived from the unaudited
financial statements of Lone Star for the three months ended March 31, 2000.
b) The historical balances for Bellville are derived from the audited financial
statements of Bellville for the three months ended March 31, 2000.
c) Reflects the elimination of intercompany transactions between Lone Star and
Bellville.
d) Reflects the incremental change in depreciation expense due to purchase
accounting adjustments to the fair value of property, plant and equipment
consistent with the depreciation policies utilized by Lone Star, and the
elimination of the effects of sales between Lone Star and Bellville.
<TABLE>
<S> <C>
Reduction in Depreciation expense........................... $ 80,000
Elimination of Intercompany transactions.................... 3,344,000
----------
$3,430,000
==========
</TABLE>
e) Reflects the incremental change in amortization expense due to purchase
accounting and adjustments to intangible assets in connection with the
acquisition consistent with the amortization policies utilized by Lone Star.
f) Reflects a reduction in interest income on the invested cash used to acquire
Bellville at an assumed rate of 5.3%.
g) Reflects interest expense (at an assumed rate of 8.64%) associated with the
incremental borrowings under the revolving credit agreement, in connection
with the Acquisition financing.
h) Reflects the utilization of Lone Star's net operating loss carryforward to
eliminate the Bellville income tax expense.
F-6
<PAGE>
LONE STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma financial information (the "Pro Forma
Financial Information") is based on the Financial Statements of Lone Star
Technologies, Inc. ("Lone Star"), Fintube Limited Partnership ("Fintube") and
Bellville Tube Corporation ("Bellville") for the year ended December 31, 1999,
which are included elsewhere or incorporated by reference in this Prospectus,
and has been prepared to illustrate the effects of the transactions described
below.
The following unaudited pro forma income statement for the year ended
December 31, 1999 gives effect to the acquisition by Lone Star and its
subsidiaries of the assets of Fintube, the Fintube subsidiaries and Bellville
(the "Acquisition"), and the issuance of approximately 760,000 shares of Lone
Star common stock, as if such transactions had occurred on January 1, 1999.
The Acquisition will be accounted for using the purchase method of
accounting. The total purchase costs of the Acquisition (approximately
$85 million for Fintube and $15 million for Bellville) have been allocated to
the tangible and intangible assets and liabilities acquired based upon their
respective fair values. The allocation of the aggregate purchase price reflected
in the Pro Forma Financial Information is preliminary. The final allocation of
the purchase price is contingent upon the review for other intangible assets and
an assessment of the acquired net assets; however, that allocation is not
expected to differ materially from the preliminary allocation.
The Pro Forma Financial Information is based on the historical financial
statements of Lone Star, Fintube and Bellville and the assumptions and
adjustments described in the accompanying notes. Lone Star's historical
December 31, 1999 financial statements were restated to reflect the utilization
of a $0.8 million reserve previously set aside for an inventory purchase
commitment. The unaudited pro forma income statement does not purport to
represent what Lone Star's results of operations actually would have been if the
Acquisition and the above-described stock issuance had occurred as of the date
indicated or what the results will be for any future periods. The Pro Forma
Financial Information is based upon assumptions that Lone Star believes are
reasonable and should be read in conjunction with the Financial Statements and
the related notes thereto included elsewhere in this Prospectus or incorporated
herein by reference.
F-7
<PAGE>
LONE STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
FINTUBE LONE STAR BELLVILLE
(A) (B) PRO FORMA & FINTUBE (C) PRO FORMA LONE STAR
LONE STAR FINTUBE ADJUSTMENTS SUBTOTAL BELLVILLE ADJUSTMENTS PRO FORMA
------------- ------------ ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES/ REVENUES.... $ 353,400,000 $ 80,744,000 $ -- $ 434,144,000 $ 9,235,000 $(7,600,000)(h) $ 435,779,000
COST OF SALES.......... (340,600,000) (53,848,000) 492,000 (d) (393,956,000) (7,034,000) 7,914,000 (i) (393,076,000)
------------- ------------ ----------- ------------- ----------- ----------- -------------
Gross profit....... 12,800,000 26,896,000 492,000 40,188,000 2,201,000 314,000 42,703,000
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............. (15,500,000) (13,820,000) (251,000)(e) (29,571,000) (756,000) (248,000)(j) (30,575,000)
------------- ------------ ----------- ------------- ----------- ----------- -------------
Operating income
(loss)........... (2,700,000) 13,076,000 241,000 10,617,000 1,445,000 66,000 12,128,000
INTEREST INCOME........ 1,800,000 -- -- 1,800,000 90,000 (596,000)(k) 1,294,000
INTEREST EXPENSE....... (4,600,000) (1,171,000) (4,653,000)(f) (10,424,000) -- (432,000)(l) (10,856,000)
OTHER INCOME
(EXPENSE)............ -- 2,169,000 -- 2,169,000 -- -- 2,169,000
------------- ------------ ----------- ------------- ----------- ----------- -------------
Income (loss) before
income taxes....... (5,500,000) 14,074,000 (4,412,000) 4,162,000 1,535,000 (962,000) 4,735,000
INCOME TAX BENEFIT
(EXPENSE)............ -- (117,000) -- (117,000) (58,000) 58,000 (m) (117,000)
------------- ------------ ----------- ------------- ----------- ----------- -------------
NET INCOME (LOSS)...... $ (5,500,000) $ 13,957,000 $(4,412,000) $ 4,045,000 $ 1,477,000 $ (904,000) $ 4,618,000
============= ============ =========== ============= =========== =========== =============
NET LOSS PER SHARE
Basic................ $ (.24) -- -- .18 -- -- .20
Diluted.............. $ (.24) -- -- .18 -- -- .20
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic................ 22,548,000 -- 760,000 (g) 23,308,000 -- -- 23,308,000
Diluted.............. 22,548,000 -- 1,076,000 (g) 23,624,000 -- -- 23,624,000
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
financial statement.
F-8
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
a) The historical balances for Lone Star are derived from the audited financial
statements of Lone Star for the twelve months ended December 31, 1999.
b) The historical balances for Fintube are derived from the audited financial
statements of Fintube for the twelve months ended December 31, 1999.
c) The historical balances for Bellville are derived from the audited financial
statements of Bellville for the twelve months ended December 31, 1999.
d) Reflects the reduction in depreciation expense due to purchase accounting
adjustments to the fair value of property, plant, and equipment consistent
with the depreciation policies utilized by Lone Star.
e) Reflects the incremental change in amortization expense due to purchase
accounting and adjustments to intangible assets in connection with the
acquisition consistent with the amortization policies utilized by Lone Star.
This adjustment also reflects the elimination of compensation expense from
the Fintube Management Equity Participation Plan, obligations of which Lone
Star did not assume.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
------------------
<S> <C>
Incremental change in amortization expense.................. $(1,906,000)
Less Elimination of Compensation expense of Fintube......... 1,655,000
-----------
Net Selling, General and Administrative expenses.......... $ (251,000)
===========
</TABLE>
f) Reflects interest expense (at an assumed rate of 8.64%) associated with the
borrowings under the revolving credit agreement and term loan, and
amortization of deferred financing cost in connection with the Fintube
Acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
------------------
<S> <C>
Interest expense related to new borrowings--Fintube......... $ 5,824,000
Less--Historical interest expense of Fintube (debt not
assumed).................................................. (1,171,000)
-----------
$ 4,653,000
===========
</TABLE>
g) Reflects the issuance of approximately 760,000 shares to the limited
partners of Fintube. Diluted weighted average shares outstanding also
includes the Lone Star stock options which are dilutive.
h) Reflects the elimination of sales between Lone Star and Bellville.
i) Reflects the reduction in depreciation expense due to purchase accounting
adjustments to the fair value of property, plant, and equipment consistent
with the depreciation policies utilized by Lone Star, and the elimination of
the effects of sales between Lone Star and Bellville.
<TABLE>
<S> <C>
Reduction in depreciation expense........................... 314,000
Elimination of intercompany transactions.................... 7,600,000
---------
7,914,000
=========
</TABLE>
F-9
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT (CONTINUED)
j) Reflects the incremental change in amortization expense due to purchase
accounting and adjustments to intangible assets in connection with the
acquisition consistent with the amortization policies utilized by Lone Star.
k) Reflects a reduction in interest income on the invested cash used to acquire
Bellville at an assumed rate of 5.3%.
l) Reflects interest expense (at an assumed rate of 8.64%) associated with the
borrowings under the revolving credit agreement
m) Reflects the utilization of Lone Star's net operating loss carryforwards to
eliminate the Bellville income tax expense.
F-10
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31,
----------------------
1999 2000
-------- --------
<S> <C> <C>
Net revenues................................................ $ 63.7 $ 153.9
Cost of goods sold.......................................... (65.9) (136.0)
------- -------
Gross profit (loss)....................................... (2.2) 17.9
Selling, general and administrative expenses................ (3.8) (8.1)
------- -------
Operating income (loss)................................... (6.0) 9.8
Interest income............................................. 0.4 0.5
Interest expense............................................ (0.9) (3.0)
Other income (expense)...................................... (0.1) 0.2
------- -------
Income (loss) from continuing operations before income
tax..................................................... (6.6) 7.5
Income tax.................................................. -- (0.4)
------- -------
NET INCOME (LOSS)......................................... $ (6.6) $ 7.1
======= =======
PER COMMON SHARE--BASIC:
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS........ $ (0.29) $ 0.30
======= =======
PER COMMON SHARE--DILUTED:
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS........ $ (0.29) $ 0.29
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................... 22.5 23.4
Diluted................................................... 22.5 24.0
</TABLE>
See accompanying notes.
F-11
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 22.2 $ 7.1
Short-term investments.................................... 1.2 1.3
Accounts receivable, net.................................. 56.1 86.9
Current inventories, net.................................. 88.9 122.5
Other current assets...................................... 3.7 2.5
------ ------
TOTAL CURRENT ASSETS........................................ 172.1 220.3
Marketable securities....................................... 15.4 20.4
Property, plant, and equipment, net......................... 149.5 168.0
Goodwill.................................................... -- 48.5
Prepaid Bellville acquisition cost.......................... -- 14.6
Other noncurrent assets..................................... 14.1 15.8
------ ------
TOTAL ASSETS................................................ $351.1 $487.6
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES:
Current installments on long-term debt.................... $ 2.0 $ 8.0
Accounts payable.......................................... 57.0 74.7
Accrued liabilities....................................... 26.2 31.7
------ ------
TOTAL CURRENT LIABILITIES................................... 85.2 114.4
------ ------
Term loan................................................... 7.0 38.0
Revolving credit facility................................... 21.0 69.3
Postretirement benefit obligations.......................... 26.1 26.0
Other noncurrent liabilities................................ 15.9 15.8
------ ------
TOTAL LIABILITIES........................................... 155.2 263.5
------ ------
Commitments and Contingencies (See Note 8).................. -- --
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, 23,822,101, respectively)........... 23.1 23.8
Capital surplus........................................... 209.9 223.7
Accumulated other comprehensive loss...................... (1.4) (1.8)
Accumulated deficit....................................... (21.0) (13.8)
Treasury stock (462,991 and 321,866 common shares,
respectively)........................................... (14.7) (7.8)
------ ------
TOTAL SHAREHOLDERS' EQUITY.................................. 195.9 224.1
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $351.1 $487.6
====== ======
</TABLE>
See accompanying notes.
F-12
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED
MARCH 31,
----------------------
1999 2000
-------- --------
<S> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS......................... $ 20.9 $ 22.2
====== ======
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... (6.6) 7.1
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH....
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization........................... 4.2 5.1
Accounts receivable, net................................ 2.5 (15.3)
Current inventories, net................................ 14.5 (22.9)
Accounts payable and accrued liabilities................ (3.3) 13.2
Other................................................... (1.4) 2.1
------ ------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES...... 9.9 (10.7)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1.4) (4.0)
Short-term investments.................................... 2.0 (0.1)
Marketable securities..................................... 2.0 (5.0)
Advance payment for acquisition of Bellville Assets....... -- (14.6)
Cash paid for acquisition of Fintube...................... -- (67.1)
------ ------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES...... 2.6 (90.8)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 10.0 --
Initial borrowings under new revolving credit facility.... 34.0 6.8
Net borrowings (payments) under revolving credit
facility................................................ (10.3) 41.5
Net payments under old revolving credit facility.......... (44.0) --
Issuance of term note..................................... -- 39.0
Term note repayment....................................... -- (2.0)
Issuance of common stock.................................. -- 1.1
------ ------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...... (10.3) 86.4
------ ------
Net increase (decrease) in cash and cash
equivalents......................................... 2.2 (15.1)
------ ------
ENDING CASH AND CASH EQUIVALENTS...................... $ 23.1 $ 7.1
====== ======
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION:
ISSUANCE OF COMMON STOCK FOR ACQUISITION.................. -- $ 20.0
</TABLE>
See accompanying notes.
F-13
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
In the opinion of management, the unaudited consolidated financial
statements include all adjustments (consisting of only normal, recurring
adjustments) necessary to present fairly the financial position as of March 31,
2000 and the cash flows and the results of operations for the three months ended
March 31, 2000 and 1999. Unaudited financial statements are prepared on a basis
substantially consistent with those audited for the year ended December 31,
1999. Effective January 1, 2000, Lone Star Technologies, Inc. ("Lone Star")
acquired the assets of Fintube Limited Partnership. The accompanying
consolidated financial statements include the operations of Fintube for the
three-month period ended March 31, 2000. The results of operations for the
interim periods presented may not be indicative of total results for the full
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
promulgated by the Securities and Exchange Commission. However, management
believes that the disclosures contained herein are adequate to make the
information presented not misleading. Certain reclassifications of prior period
amounts have been made to conform with the current period. The unaudited
financial statements should be read in conjunction with the audited financial
statements and accompanying notes in Lone Star Annual Report on Form 10-K for
the year ended December 31, 1999.
NOTE 2--ACQUISITIONS
On January 3, 2000, Lone Star through Fintube Technologies, Inc. (Purchaser)
(a wholly owned subsidiary of Lone Star), purchased substantially all of the
assets of Fintube Limited Partnership (FLP) for a base purchase price of $82.0
million plus a $2.5 million adjustment for working capital and approximately
$1.5 million in acquisition related expenses. The acquisition was effective as
of January 1, 2000. The working capital adjustment was estimated at the closing
and is expected to be adjusted on an actual, post-closing basis in August 2000.
The consideration for the acquisition was determined following a competitive
bidding process in arm's-length negotiations between Lone Star and FLP. The
acquired business involves the design and production of finned tubes and other
products used in a variety of heat recovery applications. Lone Star intends to
operate and to use the assets acquired in the Acquisition in substantially the
same manner as they were used by FLP prior to the Acquisition. Lone Star and
Purchaser utilized three different sources of financing to pay the purchase
price. Lone Star used $20.0 million of cash that it received from Lone Star
Steel Company ("Steel"), a wholly owned subsidiary of Lone Star, in connection
with Steel's repayment of a $20.0 million subordinated loan from Lone Star.
Steel borrowed the $20.0 million that it repaid to Lone Star under Steel's $90.0
million revolving line of credit with the CIT Group/ Business Credit, Inc.,
acting on its own behalf and as agent for other banks. Additionally, Lone Star
issued approximately $20.0 million of Lone Star common stock directly to the
limited partners or other beneficial owners of FLP. Finally, Purchaser entered
into a new Credit Agreement with Bank of America, acting on its own behalf and
as agent for other banks, in connection with the Acquisition and borrowed (i)
approximately $7.0 million under the revolving credit facility and (ii) $39.0
million under the term loan facility.
The acquisition by Purchaser has been accounted for under the purchase
method of accounting, and accordingly, the purchase price has been allocated to
the assets acquired and the liabilities assumed based upon fair value at the
date of the acquisition. The excess purchase price over the fair values of the
tangible net assets acquired was approximately $50.1 million, has been recorded
as goodwill and is being amortized on a straight-line basis over 30 years. In
the event that facts and circumstances indicate that the goodwill
F-14
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--ACQUISITIONS (CONTINUED)
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
an adjustment is required.
The net purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Current Assets.............................................. $26,573
Net property & equipment.................................... 17,963
Other Assets................................................ 675
Goodwill & other intangibles................................ 50,113
Liabilities Assumed......................................... 9,799
-------
Net purchase price........................................ $85,525
</TABLE>
The allocation of the purchase price is preliminary and subject to
adjustment pending the outcome of an assessment of the intangible assets
acquired and the terms of the working capital purchase price adjustment.
On April 1, 2000 Lone Star purchased substantially all of the assets of
Bellville Tube Corporation for a base purchase price of $14.8 million less a
$0.2 million adjustment for working capital. The working capital adjustments
were estimated at the closing and are expected to be adjusted on an actual,
post-closing basis in August 2000. The consideration for the acquisition was
determined through arm's length negotiations between Lone Star and Bellville.
Lone Star financed the acquisition through cash held by Lone Star and $5.0
million of borrowings. In connection with these borrowings, Steel borrowed $5.0
million under its present credit facility to repay the remaining $5.0 million of
its subordinated loan to Lone Star. Lone Star guaranteed an additional $5.0
million of the Subsidiary's credit facility, pledged the stock of Purchaser as
collateral for such guaranty, and used the loan repayment to fund a portion of
the Bellville purchase price. The cash paid for the acquisition was wired to
Bellville on March 31, 2000; however, the purchase was not effective until April
1, 2000. The acquisition of Bellville will be accounted for under the purchase
method of accounting.
The accompanying consolidated balance sheet reflects a $14.6 million prepaid
deposit for the acquisition and an increase in borrowings under Steel's
revolving credit agreement of $5.0 million. The actual purchase price allocation
will be recorded on April 1, 2000.
The unaudited pro forma results below assume the acquisitions occurred at
the beginning of the period presented (in millions, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
-------------------
1999 2000
-------- --------
<S> <C> <C>
Net sales.................................................. $87.7 $154.1
Net income (loss).......................................... (2.6) 7.5
Basic income (loss) per share.............................. (0.11) 0.32
Diluted income (loss) per share............................ (0.11) 0.31
</TABLE>
F-15
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--ACQUISITIONS (CONTINUED)
The above pro forma results include adjustments to give effect to
amortization of goodwill, interest expense and other purchase price adjustments.
The pro forma results are not necessarily indicative of the operating results
that would have occurred had the acquisitions been consummated as of the
beginning of the periods presented, nor are they necessarily indicative of
future operating results. Lone Star has not yet determined the final allocation
of the purchase price and, accordingly, the amounts shown may differ from the
amounts ultimately determined; however, that allocation is not expected to
differ materially from the preliminary allocation.
NOTE 3--BUSINESS SEGMENTS DATA
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED
MARCH 31,
----------------------
1999 2000
-------- --------
(IN MILLIONS)
<S> <C> <C>
OILFIELD PRODUCTS
Net revenues................................................ $30.0 $ 81.5
Operating earnings (loss)................................... (4.6) 3.5
Identifiable assets......................................... 136.9 194.5
Capital expenditures........................................ 0.6 2.2
Depreciation and amortization............................... 2.2 2.5
SPECIALTY TUBING
Net revenues................................................ $26.7 $ 56.7
Operating earnings.......................................... 0.4 6.1
Identifiable assets......................................... 126.8 224.7
Capital expenditures........................................ 0.8 1.8
Depreciation and amortization............................... 1.8 2.4
FLAT ROLLED STEEL AND OTHER PRODUCTS
Net revenues................................................ $ 7.0 $ 15.7
Operating loss.............................................. (1.2) (0.1)
Identifiable assets......................................... 15.4 2.1
Capital expenditures........................................ -- --
Depreciation and amortization............................... 0.2 0.2
CORPORATE AND OTHER NON-SEGMENTS
Net revenues................................................ $ -- $ --
Operating earnings (loss)................................... (0.6) 0.3
Identifiable assets......................................... 35.8 47.1
CONSOLIDATED TOTALS
Net revenues................................................ $63.7 $153.9
Operating earnings (loss)................................... (6.0) 9.8
Identifiable assets......................................... 314.9 487.0
Capital expenditures........................................ 1.4 4.0
Depreciation and amortization............................... 4.2 5.1
</TABLE>
F-16
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--DEBT
On March 16, 1999, Lone Star Steel Company (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 March 31, 2000, borrowings totaled $67.3
million including $8.5 million on the term loan with a remaining availability of
$30.8 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 of assets from Fintube
Limited Partnership on January 3, 2000, and Bellville Tube Corporation
(Bellville) effective April 1, 2000 (see Note 2), Steel borrowed $25.0 million
under its present credit facility to repay its $25.0 million subordinated loan
to Lone Star, Lone Star guaranteed $25.0 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 Limited Partnership and Bellville acquisitions.
On January 3, 2000, Lone Star's new subsidiary, Fintube Technologies, Inc.
(Fintube) entered into a new senior credit facility providing a $20.0 million
revolving line of credit and a $39.0 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. At
Fintube's option, the interest rate is the prime lending rate plus 1.0% or the
LIBOR plus 2.5%. Fintube pays a 0.50% rate on the unused portion of the credit
facility. The interest rate on $20.0 million of the term loan is fixed by a rate
swap agreement at 7.02% and on the remainder of the term loan is the same as the
revolving credit facility. The term loan is repayable in quarterly installments
of $1.5 million through December 31, 2002 and of $1.75 million thereafter
through December 31, 2005. As of March 31, 2000, borrowings by the Fintube
subsidiary totaled approximately $48.0 million, including the term loan, with a
remaining availability, based on eligible accounts receivable and inventory on
such date, of approximately $8.3 million.
NOTE 5--EARNINGS PER SHARE
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 for the three months ended March 31, 2000 and 1999,
respectively, were 23.4 million and 22.5 million. 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 per share for the three months ended March 31, 2000 was
24.0 million--dilutive securities equivalent to 0.6 million shares of common
stock were outstanding during the three months ended March 31, 2000. Dilutive
securities were not included in the computation of diluted EPS for March 31,
1999. Lone Star had losses in that period and the effect of including the
dilutive securities would have been anti-dilutive to EPS.
NOTE 6--INVENTORIES
At March 31, 2000, inventories totaled $152.9 million before LIFO and other
reserves and were composed of finished goods, $19.3 million; work in process,
$67.0 million; and raw materials and supplies,
F-17
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--INVENTORIES (CONTINUED)
$66.6 million. Net of LIFO and other reserves of $23.1 million, inventories were
$129.2 million, of which $6.7 million (consisting of supplies and spare parts)
were classified as noncurrent assets.
NOTE 7--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 obligations with maturities at purchase greater
than three months and up to one year. Marketable securities consist of U. S.
government and related agencies obligations with maturities at purchase greater
than one year and up to two years. 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.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Steel and Fintube have 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 and Fintube's operations are subject to foreign, federal, state,
provincial and local environmental laws and regulations concerning, among other
things, waste materials, wastewater disposal and air emissions. Lone Star
believes that its subsidiaries are currently in material compliance with all
applicable environmental laws and regulations.
NOTE 9--INCOME TAXES
Lone Star had federal tax net operating loss carryforwards of approximately
$261.6 million at March 31, 2000, a portion of which may be related to American
Federal Bank (AFB), a previous subsidiary of Lone Star, 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. A provision for
alternative minimum tax of $0.4 million was recognized for the quarter ended
March 31, 2000. Because of the net losses for the three months ended March 31,
1999, no provision for taxes was recognized for that period. If not utilized,
the net operating loss carryforwards will expire between years 2003 and 2014.
NOTE 10--COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the quarters ended March 31, 2000 and March
31, 1999 was:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 2000
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Net income (loss)........................................ $(6.6) $ 7.1
Employee benefit plan stock grant........................ -- (0.4)
----- -----
Comprehensive income (loss).............................. $(6.6) $ 6.7
</TABLE>
F-18
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--NEW ACCOUNTING PRONOUNCEMENT
The SEC recently issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements. The Company is
currently evaluating the impact of this pronouncement, and does not believe its
application will have a material effect on the financial statements.
NOTE 12--RESTATEMENT OF FINANCIAL STATEMENTS
Lone Star's Consolidated Balance Sheet as of March 31, 2000 has been revised
as a result of the restatement of Lone Star's Consolidated Financial Statements
for the fourth quarter of 1999 and the year ended December 31, 1999 to reflect
the utilization of the remaining $0.8 million of Lone Star's reserve related to
an inventory purchase commitment which was originally recorded in 1998.
A summary of the effect of the restatement is as follows (in millions):
<TABLE>
<CAPTION>
AS REPORTED AS RESTATED
----------- -----------
<S> <C> <C>
Accrued Liabilities................................. $ 32.5 $ 31.7
Total Current Liabilities........................... 115.2 114.4
Total Liabilities................................... 264.3 263.5
Accumulated Deficit................................. (14.6) (13.8)
Total Shareholder's Equity.......................... 223.3 224.1
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Lone Star Technologies, Inc. (Lone
Star):
We have audited the accompanying consolidated balance sheets of Lone Star (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1999, 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, 1998 and 1999, 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)
F-20
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net revenues................................................ $ 654.3 $ 432.4 $ 353.4
Cost of goods sold.......................................... (590.1) (428.0) (340.6)
-------- -------- --------
Gross profit.............................................. 64.2 4.4 12.8
Special charges............................................. -- (14.5) --
Selling, general and administrative expenses................ (19.6) (20.0) (15.5)
-------- -------- --------
Operating income (loss)................................... 44.6 (30.1) (2.7)
Interest income............................................. 3.0 2.0 1.8
Interest expense............................................ (6.6) (4.0) (4.6)
Other income (expense)...................................... 0.3 (0.2) --
-------- -------- --------
Income (loss) from continuing operations before income
tax..................................................... 41.3 (32.3) (5.5)
Income tax.................................................. (0.9) -- --
-------- -------- --------
Income (loss) from continuing operations.................. 40.4 (32.3) (5.5)
Extraordinary items......................................... 0.9 7.4 --
-------- -------- --------
Income (loss) before gain from discontinued operations.... 41.3 (24.9) (5.5)
Gain from discontinued operations........................... 12.4 -- --
-------- -------- --------
NET INCOME (LOSS)......................................... $ 53.7 $ (24.9) $ (5.5)
======== ======== ========
PER COMMON SHARE--BASIC:
Net income (loss) from continuing operations.............. $ 1.88 $ (1.43) $ (0.24)
Extraordinary items....................................... 0.04 0.33 --
Gain from discontinued operations......................... 0.58 -- --
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS........ $ 2.50 $ (1.10) $ (0.24)
PER COMMON SHARE--DILUTED:
Net income (loss) from continuing operations.............. $ 1.83 $ (1.43) $ (0.24)
Extraordinary items....................................... 0.04 0.33 --
Gain from discontinued operations......................... 0.57 -- --
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS........ $ 2.44 $ (1.10) $ (0.24)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................... 21.5 22.5 22.5
Diluted................................................... 22.1 22.5 22.5
</TABLE>
See accompanying notes.
F-21
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20.9 $ 22.2
Short-term investments.................................... 3.1 1.2
Accounts receivable, net.................................. 36.3 56.1
Current inventories, net.................................. 88.9 88.9
Other current assets...................................... 3.7 3.7
------ ------
TOTAL CURRENT ASSETS........................................ 152.9 172.1
Marketable securities....................................... 9.0 15.4
Property, plant, and equipment, net......................... 157.8 149.5
Other noncurrent assets..................................... 16.1 14.1
------ ------
TOTAL ASSETS................................................ $335.8 $351.1
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Current installments on long-term debt.................... $ -- $ 2.0
Accounts payable.......................................... 15.8 57.0
Accrued liabilities....................................... 25.6 26.2
------ ------
TOTAL CURRENT LIABILITIES................................. 41.4 85.2
------ ------
Term loan................................................. -- 7.0
Revolving credit facility................................. 46.0 21.0
Postretirement benefit obligations........................ 41.5 26.1
Other noncurrent liabilities.............................. 17.8 15.9
------ ------
TOTAL LIABILITIES........................................... 146.7 155.2
------ ------
Commitments and Contingencies (See Note J).................. -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value (authorized: 10,000,000
shares, issued: none)................................... -- --
Common stock, $1.00 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...................... (12.8) (1.4)
Accumulated deficit....................................... (15.5) (21.0)
Treasury stock (566,116 and 462,991 common shares,
respectively)........................................... (15.6) (14.7)
------ ------
TOTAL SHAREHOLDERS' EQUITY.................................. 189.1 195.9
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $335.8 $351.1
====== ======
</TABLE>
See accompanying notes.
F-22
<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.
F-23
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS......................... $ 27.3 $ 14.2 $ 20.9
====== ====== ======
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... 53.7 (24.9) (5.5)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Gain on sale of discontinued operations................... (12.4) -- --
Depreciation and amortization............................. 14.3 15.8 16.7
Extraordinary item--UMWA liability........................ (2.0) (7.4) --
Special charges--write-down of assets..................... -- 8.1 --
Accounts receivable, net.................................. (0.1) 43.8 (19.8)
Current inventories, net.................................. (25.7) 13.2 --
Accounts payable and accrued liabilities.................. 6.9 (39.9) 41.8
Other..................................................... (8.8) (0.1) (5.1)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 25.9 8.6 28.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (34.7) (17.6) (7.2)
Short-term investments.................................... 13.8 3.2 1.9
Proceeds from sale of discontinued operations............. 12.4 -- --
Marketable securities..................................... 0.8 10.0 (6.4)
Proceeds from sale of assets.............................. -- 0.1 --
------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES................... (7.7) (4.3) (11.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial borrowings under new revolving credit facility.... 50.0 -- 34.5
Net borrowings (payments) under revolving credit
facility................................................ (7.0) 3.0 (13.5)
Net payments under old revolving credit facility.......... (37.8) -- (46.0)
Issuance of term note..................................... -- -- 10.0
Term note repayment....................................... (0.3) -- (1.0)
Treasury stock purchases.................................. (14.1) (1.9) --
Acquisition of minority interest.......................... (25.0) -- --
Issuance of common stock.................................. 2.9 1.3 0.9
------ ------ ------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........ (31.3) 2.4 (15.1)
------ ------ ------
Net increase (decrease) in cash and cash equivalents.... (13.1) 6.7 1.3
------ ------ ------
ENDING CASH AND CASH EQUIVALENTS........................ $ 14.2 $ 20.9 $ 22.2
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Conversion of subordinated debentures to common stock..... $ 50.0 $ -- $ --
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid............................................. $ 9.4 $ 5.4 $ 6.7
Income taxes paid......................................... $ 1.3 $ 0.3 $ --
</TABLE>
F-24
<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 tubing and as-welded tubing that are manufactured and marketed globally
to automotive, fluid power and other markets for various mechanical
applications. Following 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 United States
government and related agencies obligations with original maturities of less
than three months. Short-term investments consist of United States government
and related agencies debt obligations with maturities at purchase greater than
three months and up to one year. Marketable securities consist of United States
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 $38.8 million in United States government and related agencies
obligations at amortized cost.
INVENTORIES are stated at the lower of cost (principally on the last-in,
first-out "LIFO" method of accounting) or market value and include raw
materials, labor, and overhead.
PROPERTY, PLANT, AND EQUIPMENT are stated at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of depreciable
assets. Long-lived assets including property, plant, and equipment are
periodically evaluated to determine whether events or changes in circumstances
have
F-25
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING POLICIES--NOTE A (CONTINUED)
occurred that indicate the remaining asset balances may not be recoverable and
an impairment loss should be recorded.
INCOME TAXES. Lone Star files a consolidated federal income tax return.
Lone Star utilizes an asset and liability approach for financial accounting and
income tax reporting. Deferred tax liabilities or assets are recognized for the
estimated future tax effects attributable to temporary differences and
carryforwards and are adjusted whenever tax rates or other provisions of income
tax statutes change.
USE OF ESTIMATES. Preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities, and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
CURRENT OPERATING ENVIRONMENT AND BUSINESS SEGMENTS--NOTE B
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
($ IN MILLIONS; UNAUDITED)
<S> <C> <C> <C>
OILFIELD PRODUCTS (See Note N with respect to the
restatement of consolidated financial statements for the
fourth quarter of 1999 and the year ended December 31,
1999)
Net revenues.............................................. $454.1 $255.6 $185.1
Noncash portion of special charges........................ -- 4.5 --
Operating income (loss)................................... 36.1 (17.2) (5.8)
Identifiable assets....................................... 238.0 170.8 158.8
Capital expenditures...................................... 22.1 9.3 3.6
Depreciation and amortization............................. 9.0 8.9 9.1
SPECIALTY TUBING PRODUCTS
Net revenues.............................................. $129.0 $123.2 $120.5
Noncash portion of special charges........................ -- 3.1 --
Operating income (loss)................................... 12.3 (4.6) 10.6
Identifiable assets....................................... 103.4 110.9 127.4
Capital expenditures...................................... 12.2 8.1 3.6
Depreciation and amortization............................. 4.6 6.0 6.6
FLAT ROLLED AND OTHER TUBULAR PRODUCTS
Net revenues.............................................. $ 71.2 $ 53.6 $ 47.8
Noncash portion of special charges........................ -- 0.5 --
Operating income (loss)................................... (1.1) (4.9) (4.5)
Identifiable assets....................................... 20.4 16.3 20.9
Capital expenditures...................................... 0.4 0.2 --
Depreciation and amortization............................. 0.7 0.9 1.0
</TABLE>
F-26
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CURRENT OPERATING ENVIRONMENT AND BUSINESS SEGMENTS--NOTE B (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
($ IN MILLIONS; UNAUDITED)
<S> <C> <C> <C>
CORPORATE AND OTHER NON-SEGMENTS
Net revenues.............................................. $ -- $ -- $ --
Operating loss............................................ (2.7) (3.4) (3.0)
Identifiable assets....................................... 44.0 37.8 44.0
CONSOLIDATED TOTALS FROM CONTINUING OPERATIONS (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)
Net revenues.............................................. $654.3 $432.4 $353.4
Operating income (loss)................................... 44.6 (30.1) (2.7)
Total assets.............................................. 405.8 335.8 351.1
Capital expenditures...................................... 34.7 17.6 7.2
Depreciation and amortization............................. 14.3 15.8 16.7
</TABLE>
Oilfield products are comprised of casing, tubing, and line pipe that are
manufactured and marketed globally to the oil and gas drilling industry.
Specialty tubing products consist of Drawn Over Mandrel tubing and as-welded
tubing that are manufactured and marketed globally to automotive, fluid power,
and other markets for various mechanical applications. Following the Fintube
acquisition (see subsequent events Note M), 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.
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: Drawn Over Mandrel 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.
F-27
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CURRENT OPERATING ENVIRONMENT AND BUSINESS SEGMENTS--NOTE B (CONTINUED)
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 $83.1 million or approximately 13% of net
revenues in 1997, $29.9 million or 7% in 1998, and $28.1 million or 8% in 1999.
Sales to another significant customer of flat rolled steel and other tubular
products were $53.3 million or 8%, $43.3 million or 10%, and $36.4 million or
10% of net revenues for 1997, 1998, and 1999, 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, 1998, Lone Star had net sales of
$432.4 million and an operating loss of $30.1 million. This compares to net
sales of $353.4 million and an operating loss of $3.5 million for 1999. 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.
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.
F-28
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CURRENT OPERATING ENVIRONMENT AND BUSINESS SEGMENTS--NOTE B (CONTINUED)
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 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
F-29
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SPECIAL CHARGES (1998)--NOTE C (CONTINUED)
severance costs included in special charges totaled $2.0 million, of which
$1.1 million was paid in 1998 and $0.9 million in 1999.
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(B) PERIOD
---------- ---------- ---------- ------------- ----------
($ IN MILLIONS)
<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)........ $5.3 -- -- (5.3) --
</TABLE>
------------------------
(a) Does not include special charge associated with the write-down of property,
plant, and equipment.
(b) Includes write-offs of accounts receivable and utilization of reserves for
special charges.
F-30
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADDITIONAL BALANCE SHEET INFORMATION--NOTE D
<TABLE>
<CAPTION>
1998 1999
-------- --------
($ IN MILLIONS)
<S> <C> <C>
INVENTORIES
Finished goods.......................................... $ 30.8 $ 24.5
Work in process......................................... 33.1 36.4
Raw materials........................................... 29.2 30.4
Materials, supplies, and other.......................... 27.3 25.4
------- -------
Total inventories before LIFO valuation reserve....... 120.4 116.7
Reserve to reduce inventories to LIFO value............... (23.5) (20.8)
------- -------
Total inventories..................................... 96.9 95.9
Amount included in other noncurrent assets................ (8.0) (7.0)
------- -------
Net current inventories............................... $ 88.9 $ 88.9
======= =======
PROPERTY, PLANT, AND EQUIPMENT
Land and land improvements.............................. $ 10.9 $ 12.0
Buildings, structures, and improvements................. 6.0 6.0
Machinery and equipment................................. 297.9 305.2
Construction in progress................................ 7.5 6.3
------- -------
Total property, plant, and equipment.................. 322.3 329.5
Less accumulated depreciation and amortization.......... (164.5) (180.0)
------- -------
Property, plant, and equipment, net................... $ 157.8 $ 149.5
======= =======
OTHER NONCURRENT ASSETS
Inventory (supplies and spare parts)...................... $ 8.0 $ 7.0
Other..................................................... 8.1 7.1
------- -------
Total other noncurrent assets......................... $ 16.1 $ 14.1
======= =======
ACCRUED LIABILITIES
Accrued compensation.................................... $ 5.9 $ 7.4
Property taxes.......................................... 5.2 4.3
Warranty reserves....................................... 2.0 2.5
Environmental reserves.................................. 0.5 0.5
Pension obligations..................................... -- 4.9
Supplier contract reserves.............................. 4.3 --
Other................................................... 7.7 6.6
------- -------
Total accrued liabilities............................. $ 25.6 $ 26.2
======= =======
OTHER NONCURRENT LIABILITIES
Environmental reserves.................................... $ 10.9 $ 10.7
Other..................................................... 6.9 5.2
------- -------
Total other noncurrent liabilities.................... $ 17.8 $ 15.9
======= =======
</TABLE>
Accounts receivable is stated net of allowance for doubtful accounts of
$1.4 million at December 31, 1998 and $1.3 million at December 31, 1999.
Approximately $110.8 million and $108.2 million of total inventories before LIFO
valuation reserves were accounted for on the LIFO basis at December 31, 1998
F-31
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADDITIONAL BALANCE SHEET INFORMATION--NOTE D (CONTINUED)
and 1999, respectively. During 1998 and 1999, Steel experienced a reduction of
inventory which resulted in the depletion of previous inventory LIFO layers, the
financial effect of which was not significant to net reported results of
operations. Non-LIFO inventories are stated at the lower of average cost or
market. The total inventories before LIFO valuation reserves approximates
replacement cost of the inventories.
CHANGE IN COMMON SHARES OUTSTANDING--NOTE E
<TABLE>
<CAPTION>
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 $20.0 million under its
present credit facility to repay $20.0 million of its subordinated loan to Lone
Star, Lone Star guaranteed $20.0 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
$50.0 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 $20.0 million revolving line of credit and a
$39.0 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 $46.0 million, including the term
loan, with a remaining availability, based on eligible accounts receivable and
inventory on such date, of approximately $6.0 million.
F-32
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEBT--NOTE F (CONTINUED)
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 has
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 1997, 1998, and 1999 were 21.5 million,
22.5 million, and 22.5 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 per share in 1997, 1998, and 1999 were 22.1 million,
22.5 million, and 22.5 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 1998 or 1999. Current income tax
expense was recognized for federal alternative minimum taxes of $0.9 million in
1997. There was no deferred income tax expense or benefit for 1997, 1998, or
1999. A reconciliation of computed income taxes to actual income taxes follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Income (loss) from continuing operations before income
tax................................................. $ 41.3 $(32.3) $(5.5)
Statutory federal income tax rate..................... 35% 35% 35%
====== ====== =====
Income tax (benefit) expense at statutory rate........ 14.5 (11.3) (1.9)
Net operating loss, benefit not recognized
(benefit recognized)................................ (13.6) 11.3 1.9
------ ------ -----
Income taxes (federal alternative minimum tax).... $ 0.9 $ -- $ --
====== ====== =====
</TABLE>
F-33
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES--NOTE H (CONTINUED)
The following table discloses the components of the deferred tax amounts at
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
($ IN MILLIONS)
<S> <C> <C>
DEFERRED TAX ASSETS--temporary differences
Postretirement benefit accruals........................... $ 13.5 $ 10.3
Environmental reserves.................................... 4.0 3.9
Other expense accruals and reserves....................... 7.1 5.9
Inventories............................................... 6.0 5.3
Other..................................................... 0.6 0.4
------ ------
Total deferred tax assets--temporary differences........ 31.2 25.8
Net operating loss carryforwards........................ 86.0 91.8
Alternative minimum tax credit carryforward............. 1.0 1.0
------ ------
Total deferred tax assets............................... 118.2 118.6
DEFERRED TAX LIABILITY--temporary difference for basis in
and depreciation of property, plant, and equipment........ (33.3) (34.9)
------ ------
Net deferred tax assets................................. 84.9 83.7
Less valuation allowance................................ (84.9) (83.7)
------ ------
NET DEFERRED TAX AMOUNT................................. $ -- $ --
====== ======
</TABLE>
At December 31, 1999, Lone Star had federal tax net operating loss
carryforwards (NOLs) of approximately $261.6 million, a portion of which may be
related to AFB and subject to an agreement with the Federal Deposit Insurance
Corporation (FDIC) whereby Lone Star may be required to pay the FDIC for certain
tax benefits. If not utilized, the NOLs 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 NOLs. Due to these uncertainties regarding possible utilization of NOLs
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 collective agreements
for its bargaining unit employees. Lone Star and Steel contributions totaled
$1.5 million in 1997, $1.3 million in 1998, and $1.2 million in 1999. Fintube
also has a defined contribution plan.
STOCK OPTION PLAN. Lone Star has a long-term incentive plan which provides
for the issuance of up to 2,700,000 shares of common stock to key employees and
outside directors through the granting of incentive (the right to grant further
incentive options expired in 1995) and nonqualified stock options, stock
F-34
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE BENEFIT PLANS--NOTE I (CONTINUED)
appreciation rights, restricted stock grants, and performance unit grants. The
option price is the average of the high and low market price on the date of the
grant. Options are generally exercisable for ten years with one-fourth of the
shares becoming exercisable on the one-year anniversary of the grant date and an
additional one-fourth becoming exercisable on the same anniversary date over the
next three years. If the optionee's employment is terminated under certain
circumstances after a change of control of Lone Star occurs before an option's
fourth anniversary, the option may be exercised in full earlier. Also,
accelerated vesting of options can occur upon death or retirement from
employment of an option holder. Following is a summary of stock option activity
during 1997, 1998, and 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES UNDER OPTION PRICE RANGE ($) PRICE ($)
------------------- ------------------------ ---------
<S> <C> <C> <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 1997, 1998, and 1999
was $9.72, $14.28, and $6.68, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for grants in 1997, 1998, and
1999, respectively: risk-free interest rates of 6.36%, 5.60%, and 5.37%;
volatility of 47.94%, 48.83%, and 48.53%; and expected lives of five years for
all 1997, 1998, and 1999 option grants with payment of no dividends.
F-35
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE BENEFIT PLANS--NOTE I (CONTINUED)
Lone Star accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for this plan been
determined consistent with SFAS No. 123, net income and earnings per share would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)--as reported ($ in millions)........ $53.7 $(24.9) $(5.5)
--pro forma ($ in millions)......................... $52.6 $(27.0) $(8.1)
Basic earnings per share--as reported................. $2.50 $(1.10) $(.24)
--pro forma......................................... $2.45 $(1.19) $(.35)
Diluted earnings per share--as reported............... $2.44 $(1.10) $(.24)
--pro forma......................................... $2.39 $(1.19) $(.35)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
DEFINED BENEFIT PENSION AND HEALTH CARE PLANS. Steel has three defined
benefit pension plans covering a substantial portion of its bargaining unit
employees. Retirement benefits are based on years of service at progressively
increasing flat-rate amounts. A special initial lump-sum pension payment equal
to 13 weeks of vacation pay is also paid following retirement. Steel funds the
minimum required contributions each year as required by applicable regulations.
During 1996, the largest of the three pension plans was amended so that new
employees do not participate in the defined benefit plan. During 1998, the other
two plans were similarly amended. New employees are eligible to participate in
one of the defined contribution retirement plans, as are substantially all other
employees. The amendments also provided for increased benefits to newly retiring
plan participants.
Steel also sponsors an unfunded defined benefit postretirement health care
plan for eligible bargaining unit employees and a limited number of other
retirees eligible under special early retirement programs. These health care
plan benefits are limited to eligible retirees and their spouses until age 65,
at which time coverage terminates. Certain other postretirement benefits,
primarily life insurance, are also provided. The anticipated costs of these
postretirement benefits are accrued over the employees' years of service.
F-36
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE BENEFIT PLANS--NOTE I (CONTINUED)
The measurement dates for determining the assets and obligations of these
plans were November 30, 1997, 1998, and 1999. 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, 1997,
1998, and 1999:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............ $79.4 82.7 84.0 $11.9 12.3 13.9
Service cost..................................... 0.9 0.9 1.0 0.5 0.5 0.6
Interest cost.................................... 5.5 5.4 5.3 0.9 0.8 0.9
Plan participants' contributions................. -- -- -- 0.1 -- --
Amendments....................................... -- 0.5 -- -- -- --
Actuarial loss (gain)............................ 3.5 1.2 (7.0) (0.4) 1.2 (2.1)
Benefits paid.................................... (6.6) (6.7) (6.5) (0.7) (0.9) (0.7)
----- ----- ----- ----- ----- -----
Benefit obligation at end of year.................. $82.7 84.0 76.8 $12.3 13.9 12.6
===== ===== ===== ===== ===== =====
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..... $44.0 53.2 54.3 $ -- -- --
Actual return on plan assets..................... 5.0 2.8 8.7 -- -- --
Employer contributions........................... 10.8 5.0 2.1 0.6 0.9 0.7
Plan participants' contributions................. -- -- -- 0.1 -- --
Benefits paid.................................... (6.6) (6.7) (6.5) (0.7) (0.9) (0.7)
----- ----- ----- ----- ----- -----
Fair value of plan assets at end of year........... $53.2 54.3 58.6 $ -- -- --
===== ===== ===== ===== ===== =====
RECONCILIATION OF FUNDED STATUS
Unfunded status--obligation in excess of assets.... $29.5 29.7 18.2 $12.3 13.9 12.6
Unrecognized actuarial gain (loss)................. (10.7) (13.7) (2.1) 0.8 (0.3) 1.8
Unrecognized net obligation at January 1, 1986..... (3.1) (2.1) (1.0) -- -- --
Unrecognized prior service cost.................... (1.3) (1.7) (1.6) -- -- --
----- ----- ----- ----- ----- -----
Net amount recognized............................ $14.4 12.2 13.5 $13.1 13.6 14.4
===== ===== ===== ===== ===== =====
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS
Postretirement benefit obligations--current........ $ 3.0 -- 4.9 $ 0.8 1.0 0.9
Postretirement benefit obligations--noncurrent..... 25.5 28.9 12.6 12.3 12.6 13.5
Other noncurrent assets--intangible asset.......... (4.4) (3.9) (2.6) -- -- --
Accumulated other comprehensive loss............... (9.7) (12.8) (1.4) -- -- --
----- ----- ----- ----- ----- -----
Net amount recognized............................ $14.4 12.2 13.5 $13.1 13.6 14.4
===== ===== ===== ===== ===== =====
</TABLE>
In determining the benefit obligation, weighted average discount rates of
7.0%, 6.5%, and 7.5% were used for 1997, 1998, and 1999, 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.
F-37
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE BENEFIT PLANS--NOTE I (CONTINUED)
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 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 $0.2 million decrease in expense.
Net periodic benefit expense for 1997, 1998, and 1999 included the following
components:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Service cost.......................... $ 0.9 0.9 1.0 $0.5 0.5 0.6
Interest cost......................... 5.5 5.4 5.3 0.9 0.8 0.9
Expected return on plan asset......... (3.6) (4.7) (4.6) -- -- --
Amortization of net obligation at
January 1, 1986..................... 1.0 1.0 1.0 -- -- --
Amortization of prior service cost.... 0.1 0.1 0.2 -- -- --
Recognized net actuarial loss......... 0.1 0.1 0.5 -- -- --
----- ----- ----- ---- ---- ----
Net periodic benefit expense...... $ 4.0 2.8 3.4 $1.4 1.3 1.5
===== ===== ===== ==== ==== ====
</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 $3.9 million, $1.5 million, and
$0.7 million for 1997, 1998, and 1999, 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.
F-38
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES--NOTE J (CONTINUED)
Steel leases equipment under various operating leases. Rental expense
totaled $3.9 million, $3.7 million, and $3.6 million in 1997, 1998, and 1999,
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 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 $12.4 million in August 1997, and recognized
as gains from discontinued operations. There were no income tax effects
recognized for these items.
F-39
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTERLY FINANCIAL SUMMARY--NOTE L
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH TOTAL YEAR
-------- -------- -------- -------- ----------
($ IN MILLIONS, EXCEPT SHARE AMOUNTS;
QUARTERLY AMOUNTS UNAUDITED)
<S> <C> <C> <C> <C> <C>
1998
Net revenues....................................... $151.0 $129.0 $ 88.9 $ 63.5 $432.4
Gross profit (loss)................................ 15.4 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) $(1.10)
Extraordinary items................................ -- -- -- 0.33 0.33
Net income (loss) available to common
shareholders..................................... $ 0.43 $ 0.09 $(0.69) $(0.95) $(1.10)
1999 (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)
Net revenues....................................... $ 63.7 $ 77.2 $ 99.5 $113.0 $353.4
Gross profit (loss)................................ (2.2) (0.5) 6.9 8.6 12.8
Net income (loss).................................. $ (6.6) $ (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)
</TABLE>
SUBSEQUENT EVENTS--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 $85.0 million, which included
the issuance of approximately 760,000 shares of Lone Star common stock valued at
$20.0 million. The assets were purchased by Fintube Technologies, Inc.
(Fintube), a new wholly owned subsidiary of Lone Star. While the new Fintube
subsidiary assumed 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 $59.0 million credit agreement with a
bank group. The initial funding under the credit agreement was approximately
$46.0 million with the balance available for working
F-40
<PAGE>
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUBSEQUENT EVENTS--NOTE M (CONTINUED)
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 generation plants. Fintube also
designs and manufactures other products, such as boiler economizers, boiler
tubing and enhanced-surface tubing.
On 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 $0.8 million of Lone Star's reserve for an inventory purchase
commitment should have been fully utilized in the fourth quarter of 1999. 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 as reported shareholder's equity, of
$195.1 million, would be restated as $195.9 million.
F-41
<PAGE>
LONE STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT(1)
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
($ IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
General and administrative expenses......................... $ (2.8) $ (3.4) $ (3.0)
Steel cost sharing.......................................... 2.3 3.3 3.0
Equity in Steel's income (loss)............................. 39.9 (28.0) (9.4)
Interest income............................................. 2.9 1.7 1.7
Interest expense............................................ (2.7) -- --
Other intercompany income from Steel........................ 1.7 1.5 2.2
Gain on sale of discontinued operations..................... 12.4 -- --
------ ------- ------
Net income (loss)........................................... 53.7 (24.9) (5.5)
====== ======= ======
Cash dividends received from Steel.......................... $ -- $ -- $ --
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
CONDENSED BALANCE SHEETS
Current assets:
Cash and cash equivalents................................. $ 20.2 $ 18.1
Short-term investments.................................... 3.1 1.2
Due from Steel............................................ 25.4 25.6
Other current assets...................................... 0.6 1.1
Total current assets.................................... 49.3 46.0
Investment in Steel......................................... 132.0 134.1
Marketable securities....................................... 9.0 15.4
Other noncurrent assets..................................... 4.2 3.9
Total assets................................................ $194.5 $198.6
Current liabilities:........................................ $ 1.0 $ 0.6
Other noncurrent liabilities................................ 4.4 2.9
Total liabilities........................................... $ 5.4 $ 3.5
Shareholders' equity:
Preferred stock, $1.00 par value (authorized: 10,000,000
shares, issued: none)
Common stock, $1.00 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...................... (12.8) (1.4)
Retained deficit.......................................... (15.5) (21.0)
Treasury stock (566,116 and 462,991 common shares,
respectively, at cost).................................. (15.6) (14.7)
------ ------
Total shareholders' equity.............................. 189.1 195.9
====== ======
Total liabilities and shareholders' equity.................. $194.5 $198.6
====== ======
</TABLE>
F-42
<PAGE>
LONE STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT(1)
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Net income (loss)........................................... $53.7 $(24.9) $ (5.5)
Undistributed equity in Steel's income (loss)............... (39.9) 28.0 9.4
Gain on sale of discontinued operations..................... (12.4) -- --
Other....................................................... (14.8) (0.2) (2.4)
Net cash provided (used) by operating activities.......... (13.4) 2.9 1.5
Net cash provided (used) by investing activities.......... 27.0 13.2 (4.5)
Net cash provided (used) by financing activities.......... (36.2) (0.6) 0.9
Net increase (decrease) in cash and cash equivalents.... (22.6) 15.5 (2.1)
Beginning cash and cash equivalents......................... 27.3 4.7 20.2
----- ------ ------
Ending cash and cash equivalents............................ $ 4.7 $ 20.2 $ 18.1
===== ====== ======
</TABLE>
------------------------
(1) See Note N to the consolidated financial statements.
F-43
<PAGE>
LONE STAR TECHNOLOGIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997, 1998, AND 1999
($ IN MILLIONS)
<TABLE>
<CAPTION>
($ IN MILLIONS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(B) 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 the consolidated financial statements.
F-44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Fintube Limited Partnership:
We have audited the accompanying consolidated balance sheets of Fintube
Limited Partnership (a Delaware Limited Partnership) and subsidiaries as of
December 31, 1998 and 1999, and the related consolidated statements of income,
partners' capital and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fintube Limited Partnership
and subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
February 4, 2000
F-45
<PAGE>
FINTUBE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
ASSETS
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 628,000 $ 256,600
Accounts receivable, net allowance for doubtful accounts
of $152,461 in 1998 and $196,177 in 1999................ 10,903,157 15,485,510
Inventories............................................... 8,585,322 10,718,286
Prepaid expenses.......................................... 74,986 112,822
----------- -----------
Total current assets................................ 20,191,465 26,573,218
----------- -----------
PROPERTY, PLANT AND EQUIPMENT............................... 36,959,749 38,530,540
Less--accumulated depreciation............................ 15,615,646 17,126,282
----------- -----------
21,344,103 21,404,258
----------- -----------
OTHER ASSETS................................................ 281,054 1,382,721
----------- -----------
$41,816,622 $49,360,197
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ -- $17,871,191
Accounts payable.......................................... 2,945,979 3,893,928
Accrued liabilities....................................... 2,120,887 5,905,367
----------- -----------
Total current liabilities........................... 5,066,866 27,670,486
----------- -----------
LONG-TERM DEBT.............................................. 18,225,853 --
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL........................................... 20,592,124 23,757,932
Less--notes receivable for purchase of Partnership
interest................................................ (2,068,221) (2,068,221)
----------- -----------
NET PARTNERS' CAPITAL....................................... 18,523,903 21,689,711
----------- -----------
$41,816,622 $49,360,197
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-46
<PAGE>
FINTUBE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES.............................................. $56,972,650 $61,215,649 $80,743,647
COST OF SALES......................................... 45,665,484 45,621,021 53,847,666
----------- ----------- -----------
Gross profit.................................. 11,307,166 15,594,628 26,895,981
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 10,453,351 9,800,521 12,165,431
MANAGEMENT EQUITY PLAN EXPENSE........................ -- -- 1,655,000
----------- ----------- -----------
Operating income.............................. 853,815 5,794,107 13,075,550
INTEREST EXPENSE...................................... 1,290,290 1,474,601 1,170,850
GAIN ON DISPOSAL OF FIRE DAMAGED ASSETS............... -- 1,743,270 --
OTHER INCOME.......................................... 974,691 835,865 2,169,116
----------- ----------- -----------
INCOME BEFORE TAX PROVISION........................... 538,216 6,898,641 14,073,816
TAX PROVISION......................................... 114,849 115,267 117,076
----------- ----------- -----------
NET INCOME............................................ $ 423,367 $ 6,783,374 $13,956,740
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-47
<PAGE>
FINTUBE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<S> <C> <C>
PARTNERS' CAPITAL, December 31, 1996........................ $ 15,871,938
------------
COMPREHENSIVE INCOME:
Net income for the year ended December 31, 1997........... $ 423,367
Foreign translation adjustment............................ (98,509)
----------
TOTAL COMPREHENSIVE INCOME.................................. 324,858
SALE OF PARTNERSHIP INTEREST................................ 350,000
DISTRIBUTIONS TO PARTNERS................................... (1,259,114)
------------
PARTNERS' CAPITAL, December 31, 1997........................ 15,287,682
------------
COMPREHENSIVE INCOME:
Net income for the year ended December 31, 1998........... 6,783,374
Foreign translation adjustment............................ (83,715)
----------
TOTAL COMPREHENSIVE INCOME.................................. 6,699,659
DISTRIBUTIONS TO PARTNERS................................... (1,395,217)
------------
PARTNERS' CAPITAL, December 31, 1998........................ 20,592,124
------------
COMPREHENSIVE INCOME:
Net income for year ended December 31, 1999............... 13,956,740
Foreign translation adjustment............................ (6,946)
----------
TOTAL COMPREHENSIVE INCOME.................................. 13,949,794
DISTRIBUTION TO PARTNERS.................................... (12,438,986)
MANAGEMENT EQUITY PLAN APPRECIATION......................... 1,655,000
------------
PARTNERS' CAPITAL, December 31, 1999........................ $ 23,757,932
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-48
<PAGE>
FINTUBE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 423,367 $ 6,783,374 $ 13,956,740
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities-Depreciation... 2,079,268 2,492,897 2,901,948
Amortization.................................... 278,292 292,327 152,763
Gain on disposition of fire damaged assets...... -- (1,743,270) --
Expenses reimbursed from fire................... -- (397,759) --
(Gain) loss on disposal of assets............... 11,224 (5,154) 50,756
Foreign currency exchange gains................. (98,509) (83,715) (6,946)
Management equity plan appreciation............. -- 1,655,000
Change in assets and liabilities--(Increase)
decrease in accounts receivable............... 1,214,880 1,215,983 (4,582,353)
(Increase) decrease in inventories............ (3,227,038) 474,420 (2,132,964)
(Increase) decrease in prepaid expenses....... (411,612) 617,019 (37,836)
Increase in other assets...................... (82,344) (169,899) (1,254,430)
Increase in accounts payable.................. 577,057 254,829 947,949
Increase (decrease) in accrued liabilities.... 846,274 (2,326,155) 3,784,480
------------ ------------ ------------
Net cash provided by operating activities... 1,610,859 7,404,897 15,435,107
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (6,238,309) (5,838,638) (3,178,762)
Proceeds from insurance company................... -- 2,891,296 --
Proceeds from sales of property................... 171,038 -- 165,903
Patent expenditure................................ (43,622) -- --
------------ ------------ ------------
Net cash used in investing activities....... (6,110,893) (2,947,342) (3,012,859)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt...................... 53,257,361 26,862,985 40,136,901
Repayment of long-term debt....................... (46,373,146) (29,913,000) (40,491,563)
Distributions to partners......................... (2,159,114) (1,395,217) (12,438,986)
------------ ------------ ------------
Net cash used in financing activities....... 4,725,101 (4,445,232) (12,793,648)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH..................... 225,067 12,323 (371,400)
CASH AT BEGINNING OF YEAR........................... 390,610 615,677 628,000
------------ ------------ ------------
CASH AT END OF YEAR................................. $ 615,677 $ 628,000 $ 256,600
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest............ $ 1,290,290 $ 1,474,601 $ 1,090,003
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-49
<PAGE>
FINTUBE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. OPERATIONS AND ORGANIZATION:
FORMATION
Fintube Limited Partnership (the Partnership) is a limited partnership
organized on July 19, 1991, under the Delaware Revised Uniform Limited
Partnership Act. The Partnership's wholly-owned subsidiaries include TEKtube,
Kentube Engineered Products and Aletas y Birlos, S.A. de C.V. (AYB), a Mexican
entity. The General Partner is Division Fintube Corporation (DFC), an Oklahoma
corporation. DFC is also the Class B Limited Partner. In addition, the
Partnership owns 99 percent of Fintube Properties, LLC.
The Partnership has operations in Oklahoma, Mexico and Canada. Primary
operations include the application of fins and studs to tubes and the
manufacturing of heat economizers and retromizers. The manufacturing operations
are internally supported by a steel coil slitting division and a tube mill.
Principal markets are throughout the United States, Asia and South America. In
1997, 1998 and 1999, significant sales of manufacturing equipment were made and
the Partnership expects to make similar sales in future years.
SHARING RATIOS
Under the Limited Partnership Agreement, net income and net loss are
allocated as follows:
1) For each fiscal year in which the Partnership has net income, a
preferred return will first be made to the Class B Limited Partner in an
amount equal to the interest rate applicable to the revolving line of
credit multiplied by the average daily Class B Limited Partner capital
account. The remaining net income will be allocated to the General
Partner and the Class A Limited Partners on a pro-rata basis based on
their respective capital accounts.
2) For each fiscal year in which the Partnership has a net loss, it will be
allocated to the General Partner and the Class A Limited Partners on a
pro-rata basis based on their respective capital accounts. In no event
shall the allocation of a net loss create or increase a negative capital
account for any Limited Partner.
DISTRIBUTION PREFERENCE
The Class B Limited Partner has a preferred distribution right of
$2,800,000, $1,800,000 and $0 at December 31, 1997, 1998 and 1999, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES:
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Raw materials....................................... $5,853,752 $ 6,295,398
Work in process..................................... 1,586,032 4,169,198
Finished goods...................................... 1,145,538 253,690
---------- -----------
$8,585,322 $10,718,286
========== ===========
</TABLE>
F-50
<PAGE>
FINTUBE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated on
either a straight-line or accelerated basis over the estimated useful lives
(5-20 years) of the assets. Maintenance, repairs and betterments, including
replacement of minor items of physical properties are charged to expense. Major
additions to physical properties are capitalized. The cost of the assets retired
or sold is credited to the asset accounts and the related accumulated
depreciation is charged to the accumulated depreciation accounts. The gain or
loss from sale or retirement of property, if any, is included in the
consolidated statement of income. Property, plant and equipment consisted of the
following at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Land and land improvements......................... $ 1,222,274 $ 1,222,274
Buildings.......................................... 7,944,286 7,630,398
Machinery and equipment............................ 22,548,827 24,126,385
Furniture and fixtures............................. 2,633,760 4,542,288
Construction in progress........................... 2,610,602 1,009,195
----------- -----------
$36,959,749 $38,530,540
=========== ===========
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Unvouchered accounts payable......................... $ 255,082 $1,423,738
Customer deposits.................................... 116,093 1,419,613
Accrued payroll and employee benefits................ 1,045,799 1,331,435
Accrued bonuses...................................... 216,750 940,000
Other accrued liabilities............................ 487,163 790,581
---------- ----------
$2,120,887 $5,905,367
========== ==========
</TABLE>
REVENUE RECOGNITION
The Partnership recognizes revenue upon shipment.
WARRANTY
The Partnership maintains a reserve for potential warranty claims based on
known conditions. Generally, the warranty period on all products is one to two
years and is limited to the replacement cost of the product.
ROYALTIES
The Partnership has four royalty agreements under which income is received
based on a percentage of the net selling price, as defined in the agreements, of
products manufactured under the agreements.
F-51
<PAGE>
FINTUBE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Partnership is not a taxable entity for federal and state income tax
purposes. As a partnership, the taxable income of the Partnership is included in
the taxable income of its partners. During 1997, 1998 and 1999, taxes of
$114,849, $115,267 and $117,076, respectively, were paid by the Partnership on
behalf of its Mexican subsidiary, AYB.
CONSOLIDATION
All significant intercompany accounts and transactions between the
Partnership and its subsidiaries have been eliminated.
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." Assets and liabilities are translated to United States
dollars at the current exchange rate. Income and expense accounts are translated
using the weighted average exchange rate for the period. Adjustments arising
from translation of foreign financial statements are reflected in a cumulative
translation adjustment account in the partners' capital section of the
consolidated balance sheets. Transaction gains and losses are included in net
income.
COMPREHENSIVE INCOME
The Partnership applies Statement of Financial Accounting Standards
No. 130, (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires
reporting of all nonowner changes in equity in a financial statement of the
period for which they are recognized. The Partnership discloses comprehensive
income, which consists of the foreign translation adjustment, in the
consolidated statements of partners' capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. INVOLUNTARY CONVERSION OF NONMONETARY ASSETS:
On January 27, 1998, the Partnership suffered a structural fire at one of
its manufacturing facilities. The fire caused approximately $3.2 million in
damage to property, plant, equipment and inventory. Proceeds received from the
insurance carrier resulted in a gain of approximately $1.7 million. In addition,
the fire and subsequent building and equipment repairs affected production
capacity, resulting in an operating variance for 1998.
F-52
<PAGE>
FINTUBE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
4. LONG-TERM DEBT:
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revolving line of credit, interest payable monthly
at LIBOR plus 1.35% (6.69688% at December 31,
1999)............................................ $ 7,099,383 $ 3,347,783
Bank term loan, payable in varying annual amounts,
interest at LIBOR plus 1.35% (6.69688% at
December 31, 1999)............................... 9,500,000 13,170,313
Industrial revenue bond, monthly payments of
$22,500 plus interest at 82% of Wall Street
Journal prime (6.97% at December 31, 1999),
maturing in April 2006........................... 1,626,470 1,353,095
----------- -----------
$18,225,853 $17,871,191
=========== ===========
</TABLE>
All debt of the Partnership was repaid in conjunction with the purchase of
the Partnership's assets on January 1, 2000 (see Note 8).
5. COMMITMENTS AND CONTINGENCIES:
PARTNERS' INCOME TAX PAYMENTS
The Partnership Agreement provides for quarterly distributions on or before
January 10, April 10, June 10 and September 10 to all partners in an amount
sufficient to pay all federal, state and local income tax liabilities resulting
from allocation of income.
ROLLUP TRANSACTION
The Class A Limited Partners have the option to initiate a tax-free rollup
transaction in which all partners would exchange their partnership interest for
an equivalent equity interest in a new corporation.
CLAIMS AND LITIGATION
The Partnership is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the present knowledge of the
facts, management believes the resolution of claims and pending litigation will
not have a material adverse effect on the Partnership's consolidated financial
statements.
6. MANAGEMENT INVESTMENT IN PARTNERSHIP:
Certain key management personnel have purchased interests in the Partnership
under the provisions of a Management Equity Participation Plan. Purchases prior
to 1997 were financed through notes payable to the Partnership due in 2000 with
interest payable annually at the lesser of a bank's prime rate or 10%. Effective
January 1, 1997, two notes totaling $350,000 were issued for Partnership
interests. The new notes payable to the Partnership are due in 2006 with
interest payable at the lesser of a bank's prime rate or 10%. The notes are
deducted from the partnership capital in the consolidated balance sheets. Notes
payable to the Partnership at December 31, 1998 and 1999, totaled $2,068,221.
The Partnership applies variable
F-53
<PAGE>
FINTUBE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
6. MANAGEMENT INVESTMENT IN PARTNERSHIP: (CONTINUED)
accounting to the plan. Compensation expense of $0, $0 and $1,841,000 was
recorded for the years ended December 31, 1997, 1998 and 1999, respectively.
Throughout the term of the notes, the Partnership is obligated to repurchase
the interest of a participant in the event of death, termination or withdrawal
at a price based on the participant's purchase price or the valuation formula
provided in the agreement with the participant.
7. RETIREMENT SAVINGS PLAN:
The Partnership sponsors a defined contribution benefit plan. The
Partnership may, on a discretionary basis, make contributions to the plan. In
1997, 1998 and 1999, Partnership contributions to the plan were approximately
$180,000, $165,000 and $0, respectively.
8. SUBSEQUENT EVENT:
Effective January 1, 2000, a subsidiary of Lone Star Technologies, Inc.
purchased substantially all of the assets of the Partnership and its
subsidiaries for a base purchase price of $82.0 million plus a $2.5 million
adjustment for working capital. Of the purchase price, $20.0 million was paid
through the issuance of 760,237 shares of Lone Star common stock directly to the
selling partners. Promissory notes receivable from the Management Equity
Participation Plan of approximately $2.0 million were excluded from the
transaction. The Partnership's bank debt ($17.0 million as of January 3, 2000),
litigation and expenses incurred in conjunction with the sale of the
Partnership's assets to Lone Star, among other things, were excluded from the
transaction.
F-54
<PAGE>
DESCRIPTION OF BACK COVER:
The standard text at the top of the back cover reads, "Our products are
depended on around the world." Directly below this phrase is a cluster of
various tubular products consisting of a single line pipe, a single precision
mechanical tubular, a single threaded casing, a single finned tubular, and a
single Bellville production tube. The standard text located directly below the
picture of the cluster of tubulars and superimposed on a flat picture of the
continents of the world reads, "Lone Star products have been used in more than
70 countries around the world. For nearly 50 years, we have produced oil country
tubular goods and line pipe from our ideally located production facilities in
Lone Star, Texas--within 750 miles of over three-fourths of the oil and gas
wells drilled in the United States. We recently complemented our East Texas
manufacturing facilities with our acquisition of Bellville Tube Corporation, a
Houston area manufacturer of high-quality, low-cost casing, tubing and line
pipe. In addition to our strong position in the Gulf of Mexico, our oilfield
products have been used in offshore applications throughout the world, including
the North Sea, China, Nigeria, Thailand, Vietnam, Gabon, Brazil and Indonesia.
We are a leading manufacturer of speciality tubing products used in power
generation, automotive, construction, agricultural and industrial applications.
Our Fintube operating company has the majority of the domestic manufacturing
capacity for finned tubes and licenses its manufacturing technology in Japan,
Korea, Italy and India."
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,750,000 SHARES
[LOGO]
COMMON STOCK
----------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
DAIN RAUSCHER WESSELS
THE ROBINSON-HUMPHREY COMPANY
August , 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Except for the Securities and Exchange Commission registration fee, all
expenses are estimated. All such expenses will be paid by the Registrant.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee......... $ 50,806
NASD filing fee............................................. $ 19,745
New York Stock Exchange fee................................. $ 17,500
Accounting fees and expenses................................ $ 90,000*
Legal fees and expenses..................................... $125,000*
Printing and engraving expense.............................. $200,000*
Miscellaneous............................................... $ 21,949*
--------
Total................................................... $525,000
========
</TABLE>
------------------------
* Estimate
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with Section 102(b)(7) of the Delaware General Corporation Law
("DGCL"), Registrant's Certificate of Incorporation includes a provision that,
to the fullest extent permitted by law, limits the personal liability of members
of its Board of Directors to Registrant or its stockholders for monetary damages
for breach of fiduciary duty as a director to a total of $25,000. Such provision
does not eliminate or limit the liability of a director for (1) any breach of a
director's duty of loyalty to Registrant or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of a law, (3) paying an unlawful dividend or approving an illegal
stock repurchase (as provided in Section 174 of the DGCL) or (4) any transaction
from which the director derived an improper personal benefit.
Under Section 145 of the DGCL, the Registrant has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. Depending on the character of the proceeding, a corporation
may indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
In the case of an action by or in the right of the Registrant, no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Registrant unless
and only to the extent that the court of chancery or the court in which such
action or suit was brought shall determine that despite the adjudication of
liability such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper. Section 145 of the DGCL further
provides that to the extent a director or officer of the Registrant has been
successful in the defense of any action, suit or proceeding referred to above or
in the defense of any claim, issue or matter therein,
II-1
<PAGE>
that person shall be indemnified against expenses (including attorney's fees)
actually and reasonably incurred in connection therewith.
The Registrant also has the power to purchase and maintain insurance on
behalf of any person covering any liability incurred in that person's capacity
as a director, officer, employee or agent of the corporation, or arising out of
that person's status as such, whether or not the corporation would have the
power to indemnify against the liability.
The certificate of incorporation and bylaws provide that the Registrant will
indemnify its officers and directors and former officers and directors against
any expenses, liability or loss reasonably incurred or suffered by such persons
as a result of having acted as an officer or director of the Registrant, or, at
the request of the Registrant, as an officer, director, agent or employee of
another business entity. The certificate of incorporation and bylaws further
provide that the Registrant may, by action of its Board of Directors, provide
indemnification to employees and agents of the Registrant with the same scope
and effect as the indemnification of directors and officers.
ITEM 16. EXHIBITS.
The information required by this Item 16 is set forth in the Index to
Exhibits accompanying this Registration Statement.
ITEM 17. UNDERTAKINGS.
(B) FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT DOCUMENTS BY REFERENCE.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's Annual Report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(H) REQUEST FOR ACCELERATION OF EFFECTIVE DATE.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
(I) REGISTRATION STATEMENT PERMITTED BY RULE 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as
amended, shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on August 1, 2000.
<TABLE>
<S> <C> <C>
LONE STAR TECHNOLOGIES, INC.
(REGISTRANT)
By: /s/ RHYS J. BEST
-----------------------------------------
Rhys J. Best
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Chairman of the Board, Chief
/s/ RHYS J. BEST Executive Officer and President
-------------------------------------- (principal executive officer) and August 1, 2000
Rhys J. Best Director
/s/ CHARLES J. KESZLER Vice President--Finance and
-------------------------------------- Treasurer (principal financial and August 1, 2000
Charles J. Keszler accounting officer)
CHARLES L. BLACKBURN *
-------------------------------------- Director August 1, 2000
Charles L. Blackburn
FREDERICK B. HEGI, JR. *
-------------------------------------- Director August 1, 2000
Frederick B. Hegi, Jr.
JAMES E. MCCORMICK *
-------------------------------------- Director August 1, 2000
James E. McCormick
M. JOSEPH MCHUGH *
-------------------------------------- Director August 1, 2000
M. Joseph McHugh
THOMAS M. MERCER *
-------------------------------------- Director August 1, 2000
Thomas M. Mercer, Jr.
ALFRED M. MICALLEF *
-------------------------------------- Director August 1, 2000
Alfred M. Micallef
JERRY E. RYAN *
-------------------------------------- Director August 1, 2000
Jerry E. Ryan
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ RHYS J. BEST
----------------------------------
Rhys J. Best
ATTORNEY-IN-FACT
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger dated March 6, 1986, among Lone
Star Steel Company, a Texas corporation, Lone Star
Technologies, Inc., a Delaware corporation, and Lone Star
Steel Company Merging Corporation, a Delaware corporation
(incorporated by reference to Exhibit II to Form S-4
Registration Statement of Lone Star as filed on April 4,
1986, File No. 33-4581).
4.1 Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3(a) to Form S-4 Registration
Statement of Lone Star as filed on April 4, 1986, File
No. 33-4581).
4.2 Certificate of Amendment to Certificate of Incorporation
dated September 30, 1986 (incorporated by reference to
Exhibit 3.2 to Form S-3 Registration Statement of Lone
Star as filed on February 4, 2000, File No. 333-96207).
4.3 Certificate of Amendment to Certificate of Incorporation
dated May 20, 1998 (incorporated by reference to
Exhibit 3.3 to Form 10-Q of Lone Star for the quarter
ended June 30, 1998).
4.4 By-Laws as adopted March 6, 1986, as amended by amendments
effective September 30, 1986 and March 15, 1990
(incorporated by reference to Exhibit 3.5 to Form S-3
Registration Statement of Lone Star as filed on
February 4, 2000, File No. 333-96207).
4.5 Stock Registration Agreement dated January 1, 2000 among
Lone Star Technologies, Inc., Fintube Limited
Partnership, Yorktown Energy Partners, Brown University
Third Century Fund, Warburg, Dillon, Reed, L.L.C. and
Ticonderoga Partners and the stockholders named therein
(incorporated by reference to Exhibit 4.1 to Form S-3
Registration Statement of Lone Star as filed on
February 4, 2000, File No. 333-96207).
5.1* Opinion of Thompson & Knight L.L.P.
23.1* Consent of counsel (included in its opinion filed as
Exhibit 5.1).
23.2** Consent of independent accountants.
23.3** Consent of independent accountants.
23.4** Consent of independent accountants.
24* Power of Attorney (a power of attorney pursuant to which
amendments to this Registration Statement may be filed is
included on the signature page hereof).
</TABLE>
------------------------
* Previously filed on July 11, 2000.
** Filed herewith.
II-4
