**S****ECURITIES****A****ND****E****XCHANGE****C****OMMISSION**

**W****ASHINGTON****, D.C.  20549**

** **

**F****ORM****10 -K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**F****OR THE FISCAL YEAR ENDED****D****ECEMBER****31, 2001**

 

**C****OMMISSION****F****ILE****N****UMBER****1-12881**

 

**L****ONE****S****TAR****T****ECHNOLOGIES****, I****NC****.**

 

| (A DELAWARE CORPORATION)                                      |
|---------------------------------------------------------------|
|                                                          |
| **15660 N.  D****ALLAS****P****ARKWAY****, S****UITE****500** |
| **D****ALLAS****, T****EXAS****75248**                        |
|                                                          |
| **972/770-6401**                                              |
|                                                          |
| I.R.S. EMPLOYER IDENTIFICATION NUMBER:  **75-2085454**   |
|                                                          |

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

 

| **Title of  each Title of each class** |   | **Name of  each exchange   on which registered** |
|----------------------------------------|--------|--------------------------------------------------|
| Common Stock, par value  $1.00         |   | New York Stock Exchange                          |

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý. No  o.

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

As of January 31, 2002, the number of shares of common stockoutstanding was 25,205,550.  Theaggregate market value of common stock (based upon the closing price on the NewYork Stock Exchange on that date) held by nonaffiliates of the registrant wasapproximately $379.3 million.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of registrant’s Proxy Statement for its 2002 Annual Meeting ofShareholders are incorporated by reference into Part III hereof.

 

 

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**T****ABLE****O****F****C****ONTENTS**

 
| **PART I**   |
|--------------|
|         |   |
| ITEM 1.      | BUSINESS |
|         |   |
| ITEM 2.      | PROPERTIES |
|         |   |
| ITEM 3.      | LEGAL PROCEEDINGS |
|         |   |
| ITEM 4.      | SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS |
|         |   |
| **PART II**  |
|         |   |
| ITEM 5.      | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS |
|         |   |
| ITEM 6.      | SELECTED FINANCIAL DATA |
|         |   |
| ITEM 7.      | MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
|         |   |
| ITEM 7A.     | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|         |   |
| ITEM 8.      | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|         |   |
| ITEM 9.      | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
|         |   |
| **PART III** |
|         |   |
| ITEM 10.     | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
|         |   |
| ITEM 11.     | EXECUTIVE COMPENSATION |
|         |   |
| ITEM 12.     | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT |
|         |   |
| ITEM 13.     | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
|         |   |
| **PART IV**  |
|         |   |
| ITEM 14.     | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |
|         |   |
| ITEM 15.     | SIGNATURES |

 

2

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**PART I**

**I****TEM 1.****           ****B****USINESS**

**GENERAL**

 

We are the leading domestic manufacturer and marketer of premium welded“oil country tubular goods,” which are steel tubular products used in thecompletion and production of oil and natural gas wells. We are a majormanufacturer of line pipe, which is used in the gathering and transmission ofoil and natural gas. In addition, we are a leading manufacturer of specialtytubing products used in power technology, automotive, construction,agricultural and industrial applications. In January 2000, we acquired theassets of Fintube Limited Partnership, the largest specialty tubingmanufacturer of heat recovery finned tubulars, which are used in various powertechnology markets, including in the construction of gas-fired, combined-cycleelectrical power generation plants. We also completed an acquisition of theassets of Bellville Tube Corporation (Bellville), a manufacturer of casing,tubing and line pipe for the oil and gas industry, on April 1, 2000. We beganproducing and marketing oil country tubular goods and other tubular productsover 45 years ago.

** **

**O****UR****S****TRATEGY**

 

Our goal is to be the leading provider of both oilfield tubularproducts and specialty tubing products and to increase our market presence inorder to benefit from favorable market conditions. The key elements of ourstrategy to achieve commercial leadership and operational excellence are:

 

•              ***Achievingincreased production, greater productivity and penetration into new marketsthrough capital investment and commercial alliances expansion****.* We constantly seek to improve our productionefficiency by upgrading our manufacturing technologies. By becoming moreefficient, we will be able to continue offering our products at attractiveprices to an increasing number of customers. Through our exclusive commercialalliances with several mills, we have been able to outsource production ofspecific types of oil country tubular goods and line pipe, enabling us toconcentrate our capital expenditures and manufacturing expertise on our premiumproducts and new technologies. Expanding these alliances will enable us both tooffer a wider variety of tubular products to our customers and to increase ourproduction of premium products.   Wealso have increased our production capacity for finned tubulars utilizing ourproprietary technology for high-speed finned tubing welding machines.

 

•              ***Continuingto develop and market new product applications and technologies****.* We have historically been successful inpioneering new production capabilities to expand the market acceptance of ouroil country tubular goods, line pipe and specialty tubing products. Forexample, we pioneered the electric resistance welded, full-body normalizedprocess, which, together with our extensive heat-treating capabilities, enablesus to manufacture and sell our oil country tubular goods and line pipe for deepwells and other critical applications. We have also developed expandable casingproducts which are used in critical repair and extended reach drillingapplications to save time and costs.  Inaddition, we have produced and sold slotted tubes for expandable sand screensand new rise sleeves to provide solutions for completion in unconsolidated sandformations and subsea completions, respectively.  We will continue to invest in new technologies and develop newproducts for the markets we serve.

 

•              ***Growingthrough strategic acquisitions****.*Our acquisitions of Fintube and Bellville enable us to increase our productioncapacity and expand the selection of products we offer and the markets we serveat a cost significantly less than that required to develop these operations onour own.  During 2001, we attempted topurchase an unrelated manufacturer of oil country tubular goods and line pipeto further expand our product line. However, the uncertainty that followed the tragic events of September 11thmade the cost of acquiring capital prohibitive and we did not complete thisacquisition.  We will continue to pursuestrategic acquisitions that we believe to be beneficial to our business.

 

**I****NDUSTRY****B****ACKGROUND**

 

***Oilfield Products.***  Oilcountry tubular goods, or OCTG, include casing and tubing, which wemanufacture, as well as drill pipe, which we do not manufacture.  Casing acts as a structural retainer wall inoil and natural gas wellbores to provide support and prevent caving duringdrilling operations and is used to protect water-bearing formations during

 

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the drilling of a well. Casing is generally not removed after it hasbeen installed in a well. Tubing, which is used to transmit oil and natural gasto the surface, may be replaced during the life of a producing well.

 

Demand for oil country tubular goods depends primarily on the number ofoil and natural gas wells being drilled, completed and re-worked and the depthand drilling conditions of these wells. The level of these activities dependsprimarily on natural gas and oil prices and industry expectations of futureprices. A key indicator of domestic demand is the average number of drillingrigs 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 1,156 in 2001 compared to 918 in2000.  Drilling increased until mid-2001with a heavy emphasis on natural gas production activities.  During the third and fourth quarters of2001, oil and gas prices declined, resulting in a significant decrease indomestic drilling activity.  Atyear-end, 887 rigs were working, of which 84% were drilling for naturalgas.  The decrease resulted in lessdemand for our oilfield products.

 

The oil country tubular goods market is also affected by the level ofinventories maintained by manufacturers, distributors, threading companies  and end users. During downturns in drillingactivity, customers typically utilize the inventory of these products ratherthan purchase new products, causing demand for new production to furtherdecrease, which happened in the second half of 2001.  Conversely, in periods of increased drilling activity, increasesin oil country tubular goods inventory levels by distributors and end userstypically occur, accelerating demand for new production.

 

The amount of imported oilfield products also affects the oil countrytubular goods market. Imported oil country tubular goods accounted forapproximately 37% of the apparent supply available to the domestic oil countrytubular goods market during 2001, 30% during 2000 and 17% during 1999.  The domestic oil country tubular goodsindustry expects to file a number of trade cases in the first half of 2002 againstforeign countries that are believed to be illegally importing oil countrytubular goods.  The results of thesecases will not be known until the second half of 2002.  Imported oil country tubular goods increasedsignificantly during 2000 and 2001, as domestic drilling activity acceleratedwhile international drilling activity increased at a much lower rate.  The amount of imported oil country tubulargoods was lower in 1999 due to the dramatic decline in distributor stockpurchases during 1999 as inventories were liquidated and demand for newproducts reduced as drilling activity declined.  Protective tariffs on several foreign countries were imposed in1995. These trade tariffs, which were intended to promote an equitable tradeenvironment were extended for another five years during 2001. In June 2000,trade tariffs with respect to Canada and Taiwan were revoked.

 

Manufacturers produce oil country tubular goods in numerous sizes,weights, grades and thread profiles. The grade of pipe used in a particularapplication depends on technical requirements for strength, corrosionresistance and other performance characteristics. Oil country tubular goods aregenerally classified by “carbon” and “alloy” grades. Carbon grades of oilcountry tubular goods have yield strengths of 75,000 pounds per square inch orless and are generally used in oil and natural gas wells drilled to depths lessthan 8,000 feet. Alloy grades of oil country tubular goods, often referred toas premium goods, have yield strengths of 75,000 pounds per square inch or moreand are generally used in oil and natural gas wells drilled to depths in excessof 8,000 feet or for high temperature wells, highly corrosive wells or othercritical applications.

 

Carbon and alloy grades of oil country tubular goods are available fromboth electric resistance welded and seamless tube producers. Electricresistance welded tubes are produced by processing flat rolled steel intostrips which are cold-formed, welded, full-body normalized or seam-annealed andend-finished with threads and couplings. Seamless products are produced byindividually heating and piercing solid steel billets into tubes and then endfinishing those tubes into oil country tubular goods in a manner similar toelectric resistance welded pipe.

 

Based on published industry statistics, electric resistance weldedproducts now account for approximately half of the tonnage of domestic casingand tubing consumed. Electric resistance welded, full-body normalized casingand tubing and seamless casing and tubing compete for critical applicationssuch as deep natural gas wells and offshore wells. Customers purchasingproducts for these applications require high-performance oil country tubulargoods that can sustain enormous pressure as measured by burst, collapse andyield strength. Operators drilling shallow wells generally purchase oil countrytubular goods based primarily on price and availability, as wells of thisnature require less stringent performance characteristics.

 

Line pipe products are used for surface production flow lines and gatheringand transmission of oil, natural gas and fluids. Line pipe is primarilyproduced in welded form. Line pipe markets are dependent not only on thefactors which influence the oil country tubular goods market, but also onpipeline construction activity, line pipe replacement

 

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requirements, new residential construction and utility purchasingprograms.  Line pipe sales often lag oilcountry tubular goods sales by twelve or more months.

 

***Specialty Tubing Products.***  Thespecialty tubing business includes the manufacture, marketing and sale of abroad variety of steel tubing products, including premium and custom-madeproducts. Applications for specialty tubular products include finned tubularproducts for power technology markets for heat recovery applications andprecision mechanical tubular products for automotive, fluid power and othermarkets for various mechanical applications.

 

Demand for finned tubular products depends on, among other factors,combined-cycle electrical power plant construction, and the cost of alternativefuels for power generation and, to a lesser extent, on industrial processingplant and petrochemical plant construction. Demand for these products was downin the fourth quarter of 2001 as construction of new power plants was curtaileddue to lower energy demand attributable to the slowdown in the general economyand constraints on capital to fund the construction projects.  Power plant construction curtailments andcancellations are expected to continue during 2002.

 

The demand for precision mechanical tubulars and other specialty tubingused for automotive, fluid power and other mechanical applications is cyclicaland dependent on the general economy, the automotive and constructionindustries and other factors affecting domestic goods activity.   Demand for precision mechanical tubularswithin the traditional markets was up in 2000 as a result of economicrecoveries in certain foreign markets and a strong domestic economy during thefirst half of 2000.  The recessionexperienced in the United States in 2001 significantly reduced demand forprecision mechanical tubulars throughout the year.  Late in 2001, the continuing decline in the economy resulted infurther decreased demand for precision mechanical tubing, which is not expectedto increase until general domestic economic conditions improve.

 

***Flat Rolled Steel and Other Products******.*** We have a rolling mill which has thecapacity to produce 1.4 million tons of flat rolled steel per year.  Participation in flat rolled steel marketsallows us to maintain flexibility in procurement of lower cost steel.   Flat rolled steel, produced primarily forthe manufacture of oilfield and specialty tubing products, is also sold tofabricators of various construction and industrial products. The market forflat rolled steel is affected by a number of factors, including price, capacityutilization and material costs.  Flatrolled steel is sold in highly competitive markets and price, quality andavailability are the main determinants of customer purchasing decisions.  Other products consist of tubular goods thatserve a variety of uses, such as structural piling applications in theconstruction industry.

 

**O****UR****O****ILFIELD****P****RODUCTS**

 

***Products.***  Wemanufacture and market premium oil country tubular goods. Our oil countrytubular goods include casing and production tubing but not drill pipe. We alsomanufacture and market line pipe.

 

**Oil Country Tubular Goods**

 

We manufacture premium alloy and carbon welded oil country tubulargoods, including casing, which acts as a structural retainer wall in oil andnatural gas wellbores, and production tubing, which transmits hydrocarbons tothe surface. We offer casing and tubing products with the widest variety ofdiameters, grades and wall thicknesses in the United States. This varietyprovides us with a distinct competitive advantage as a single source supplierof a complete range of oilfield casing and production tubing. As a result ofour broad product range and unique heat-treating capabilities, we are able toservice nearly all typical drilling applications for oil and natural gas wells.

 

Casing, which historically represents about 75% of the oil countrytubular goods tonnage sold by us, is the structural retainer wall in oil andnatural gas wellbores. It also serves to prevent pollution of nearby waterreservoirs and contamination of a well’s production. Casing is generally notremoved after it has been installed. Production tubing is installed within thecasing to convey oil and natural gas to the surface. We offer the widest gradesand ranges of outside diameters in casing (31⁄2 “ to 20”) and tubing (1.9” to 31⁄2“) produced in the United States, including products that have beensuccessfully used in wells with depths of over 30,000 feet.

 

Our premium product line includes tubulars manufactured with theelectric resistance welded, full-body normalized process and other thermaltechniques that we pioneered. Because this process gives our tubes betterperformance characteristics than typical seam-annealed casing and tubing, weare able to serve both primary markets for oil country tubular goods: deepcritical wells and shallow wells. Our premium products successfully competeboth with seamless oil country tubular goods for critical applications and withconventional seam-annealed tubular products manufactured

 

5

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for shallow wells.  We alsooffer seamless and seam-annealed products through marketing arrangements withother producers.

 

Critical applications, such as deep natural gas wells and offshorewells, require high-performance casing and tubing that can withstand enormouspressure as measured by burst strength, collapse strength and yield strength.Both major and independent oil companies that conduct drilling programs of thisnature emphasize quality and compliance with specific standards. In ourelectric resistance welded, full-body normalized manufacturing process, whichmeets and exceeds American Petroleum Institute standards, we heat treat theentire tube and not just the weld area. This process strengthens the entiretube and makes our premium casing, tubing and line pipe interchangeable withseamless tubulars for nearly all critical applications.  Typically, greater than 45% to 60% of ourannual oil country tubular goods tonnage consists of premium, high-strengthtubular products.  Because of higherlevels of deeper drilling, particularly for natural gas, 66% of our oil countrytubular goods revenues during 2001 were from high-strength alloy grade productscompared to 57% in 2000.

 

Operators drilling shallow wells generally purchase oil country tubulargoods based primarily on price and availability, as wells of this naturerequire less stringent performance characteristics. We compete in this market,which is served primarily by producers of seam-annealed oil country tubulargoods, with our WildcatTM brand of oil country tubular goods and productsproduced through our exclusive alliance mills.

 

**Line Pipe**

 

We offer the widest size and chemistry range of line pipe used togather and transmit oil and natural gas in the United States with outsidediameters from 2 3/8” to 60”. Historically, approximately 20% to 25% of our oilfield product revenuesare from line pipe sales.

 

***Sales and Distribution.***  Ourdomestic oil country tubular goods sales distribution network consists of 14non-exclusive distributors that maintain and deliver product inventory to majorand independent oil and gas companies that explore for oil and natural gas. Wealso sell line pipe through distributors and directly to end users.Internationally, oil country tubular goods are sold through distributors andtrading companies as well as directly to end users. Approximately 4% of thetonnage of oil country tubular goods and 2% of the tonnage of line pipe that weshipped in 2001 were to destinations outside the United States. Our two largestcustomers, both distributors of our oilfield products in 2001, accounted forapproximately 10% each, of the total oil country tubular good tons we shipped.About 78% of the oil and natural gas wells drilled in the United States in 2001were located in Texas, Oklahoma, Kansas, Louisiana, New Mexico and the federalwaters of the Gulf of Mexico, all located within 750 miles of our mills inTexas. 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 mills.

 

***Alliance Mills.***  Inaddition to production from our mills, we have marketing agreements to sellother steel oilfield tubular products manufactured by several companies.Through commercial alliances with several mills, we have expanded our oilfieldproduct offering. These arrangements enable us to outsource production ofspecific products, allowing us to offer a wider variety of casing, tubing andline pipe without a permanent capital investment. These alliances allow us toconcentrate our capital expenditures and manufacturing expertise on our premiumproducts, while offering our customers a complete size range of casing, tubingand line pipe. These transactions are performed on a commission basis andthrough purchase and resale of the products. Our alliance arrangementsaccounted for approximately 22% of our revenues from oilfield products during 2001.

 

***Competition.***  Oilcountry tubular goods and line pipe are sold in highly competitive markets.Once users of oil country tubular goods determine which performancecharacteristics are relevant, they base their purchasing decisions on fourfactors: quality, availability, service and price. We believe that we arecompetitive in all of these areas. We successfully compete with both seamlessoil country tubular goods and seam-annealed electric resistance weldedproducts, as described above under “Business-Industry Background — OilfieldProducts.”  Our electric resistancewelded, full-body normalized casing and tubing products compete with seamlessoil country tubular goods, and we offer products with the widest variety ofdiameters, grades and wall thicknesses in the United States. Several domesticmanufacturers produce limited lines of oil country tubular goods, and a numberof foreign manufacturers produce oil country tubular goods for export to theUnited States.

 

From 1986 through June 2000, the level of imports of oil countrytubular goods from Canada and Taiwan was greatly reduced by the existence ofantidumping 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

 

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reduced by the existence of antidumping duty orders covering importsfrom these countries and a countervailing duty order covering imports fromItaly. The orders also have had a beneficial impact on prices for oil countrytubular goods in the domestic market. Affected parties can requestadministrative reviews of imposed duties and tariffs.  These orders against Argentina, Italy, Japan, Korea, and Mexicowere reviewed through the International Trade Commission in 2001 and willremain in place for an additional five year period.  The domestic oil country tubular goods industry expects to file anumber of trade cases in the first half of 2002 against foreign countries thatare believed to be illegally importing oil country tubular goods.  The results of these cases will not be knownuntil the second half of 2002.

 

In February 2000, in response to a petition filed by domestic weldedline pipe producers and their workers, including us, the United Statesgovernment granted relief to the line pipe industry under Section 201 of theTrade Act of 1974. The relief, effective March 1, 2000, restricts imports ofwelded line pipe not exceeding 16 inches in outside diameter to a maximum of9,000 tons from any country other than Canada and Mexico for three years.Imports in excess of that amount are subject to significant tariffs.

 

**O****UR****S****PECIALTY****T****UBING****P****RODUCTS**

 

***Products.***  Ourspecialty tubing business includes the manufacture, marketing and sale of avariety of tubular products. Our specialty tubular products are generally highvalue-added premium or custom products often involved in exactingapplications.  Our specialty tubingproducts include finned tubulars used in power technology applications and inindustrial processing and petrochemical plants.

 

**Finned Tubular Products**

 

We manufacture custom-engineered specialty finned tubular products usedin a variety of heat recovery applications, primarily for heat recovery steamgeneration in gas-fired, combined-cycle electrical power generating plants. Wehave the major portion of domestic manufacturing capacity for finned tubes andfabrication of heat recovery steam generators. Finned tubes are steel tubes with various types of fins or studs weldedto the outside to increase the amount of surface area for maximized recovery ofheat. Modules, or large bundles, of finned tubes are fabricated intoheat-recovery steam generators that raise the efficiency of electric powerplants by more than 30% by converting exhaust heat into steam to generateadditional electricity. The Energy Information Administration expects theamount of new combined-cycle generating capacity additions to increasesubstantially by 2010.  Accordingly, weexpect the heat recovery steam generation market to grow rapidly over thelong-term if the construction of combined-cycle power generation plantsaccelerates as expected.   However, inthe near-term, due to depressed economic conditions, construction of manyelectric power plants has been delayed or cancelled resulting in less demandfor finned tubular products.  Our heatrecovery products also serve the petrochemical and food processing industries.

 

**Precision Mechanical Tubulars**

 

We have one of the largest production capacities in the world forprecision mechanical tubular products using the Drawn Over Mandrelmanufacturing process. The use of the Drawn Over Mandrel manufacturing processenables us to achieve higher critical tolerances and dimensional control thanother processes. Our precision mechanical tubular product line includes a widearray of high-quality, custom-made steel tubular products with precisedimensional control and special metallurgical properties. Our precisionmechanical tubular products have the widest size range in the world, from 1/2” to 15” inoutside diameter, and are made from a variety of combinations of chemicalcompositions, thermal treatments, mechanical properties and surface finishes.Product uses include the manufacture of hydraulic cylinders for constructionand farm equipment; automotive applications, such as stabilizers and intrusiontubes; and other uses, including machine parts, bearing races, down-hole pumpbarrels, heavy-lift crane boom chords, drill rods and liner hangers. As a resultof the wide range of industrial applications for precision mechanical tubularproducts, sales traditionally follow general domestic economic conditions.

 

The Drawn Over Mandrel process uses a drawbench to pull tubing througha die and over a mandrel to shape and smooth surfaces and impart precisedimensional tolerances to tubes. Our production facilities include sevendrawbenches. Our 1,000,000 pound drawbench, the largest in the WesternHemisphere, combined with our 800,000 pound drawbench enable us to accessbroader markets through the manufacture of larger diameter, thicker wallproducts. Order quantities for our precision mechanical tubular products aretypically less than 20,000 pounds, and the products are made to exact customerspecifications.

 

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**Other Specialty Tubing Products**

 

We also produce hot finished specialty tubing. We have developed newthick wall products using enhanced hot reduction technology for applicationssuch as heavy axles for trailers and trucks, including sport utility vehicles,that were typically made out of seamless tubes. This product is also used forother industrial applications.

 

In connection with our production of finned tubes, we design andmanufacture other products relating to large-scale applied heat recoverytechnology, such as boiler tubing and economizers. Economizers are bundles offinned tubes arranged to maximize the amount of heat captured from boilerexhaust gases. Economizers are normally used on large boilers for officebuildings, hospitals, universities, prisons, breweries and food processingplants. We also manufacture and sell X-ID tubing, which has specific patternson the interior surface of the tube for enhanced heat transfer.

 

***Sales and Distribution.***  Domestically,we market and sell our precision mechanical tubulars through 19 non-exclusivesteel service centers and directly to end users. Our precision mechanicaltubulars 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 currentlysold directly to end users and exports accounted for approximately 22% in 2001and 20% in 2000 of the shipment tonnage of our precision mechanical tubulars.We market our finned tubes and other heat recovery products through a smalldomestic sales force, an international sales manager based in Quebec andindependent distributors.  Exports offinned tubulars and other heat recovery tubes accounted for approximately 18%,and 21%  of the revenues from thoseproducts in 2001 and 2000, respectively.

 

***Competition.***  Themarket for specialty tubing is competitive and is served by severalmanufacturers. During 1996, we completed a capital expenditure program toexpand our production capacity for precision mechanical tubulars, which is oneof the largest in the world using the Drawn Over Mandrel manufacturing process.

 

Since these products are made to end user specifications and oftenrequire just-in-time delivery, only small quantities are imported into theUnited States. In contrast to the oil country tubular goods market, seamlessand electric resistance welded specialty tubing products differ in theirapplications. Electric resistance welded tubing, such as precision mechanicaltubulars, is preferred for many mechanical tubing applications because itsconsistent wall thickness requires less machining in the finishing process. Incontrast, seamless tubes are used primarily in heavy gauge applications such asboiler and pressure tubing.

 

Based on generally available market data, we estimate that we have amajor portion of the domestic manufacturing capacity for finned tubes used forheat recovery steam generation.  We haveone significant domestic competitor and a number of smaller foreigncompetitors.

 

**O****UR****F****LAT****R****OLLED****S****TEEL****A****ND****O****THER****P****RODUCTS****A****ND****S****ERVICES**

 

***Products and Services.***  Wealso manufacture and market flat rolled steel and other miscellaneous productsthat are secondary to our manufacture of oilfield and specialty tubingproducts. Flat rolled steel is primarily used by us in the manufacture oftubular products. We also sell flat rolled steel to fabricators of largediameter transmission pipe, storage tanks, rail cars and a variety of otherconstruction and industrial products. Our participation in the flat rolledsteel commodity market provides us flexibility in sourcing lower cost steel forour tubular products and to some extent involves our excess capacity for flatrolled steel as related to the manufacture of our oilfield and specialty tubingproducts.

 

We also market other products such as tubulars for use in structuraland piling applications in the construction industry, and we providetransportation, storage and other services.

 

We also have a stand-alone steel coil slitting business and a steel rodto thin steel strip manufacturing process. This business includes a steel coilstorage and processing business, where we provide profitable, toll slittingservices for major steel customers and also provide steel storage and customcutting. The steel coil division ships its processed steel on a just-in-timebasis for outside customers and to our finned tubing manufacturingoperations.  We own the rights to ourpatented cold-rolling process for flattening steel rod into narrow bands ofthin-gauge steel which we use as finning material for our finned tubes and thinstrip steel we sell to third parties.

 

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***Sales and Distribution.***  Wemanufacture and sell flat rolled steel directly to end users and throughservice centers, primarily in the Southwestern region of the UnitedStates.  The largest customer of ourflat rolled steel, Friedman Industries, Inc., historically has accounted forapproximately 75% to 80% of our flat rolled steel sales, as well assubstantially all other sales of miscellaneous tubular products other thanoilfield and specialty tubing products. This customer has steel processingfacilities located adjacent to our facilities in Lone Star, Texas, and thosefacilities purchase most of their flat rolled steel from us. Sales to thiscustomer represented approximately 8% and 9% of our total revenues for 2001 and2000, respectively.

 

We sell thin steel strip directly to end users in North America througha small sales force. Flat rolled steel processing services are also sold tosteel mills where we receive processing revenues but do not purchase and resellsteel.

 

***Competition.***  Ourflat rolled steel is sold in highly competitive markets generally concentratedin the Southwestern region of the United States. Sales and earnings areaffected by the cost of raw materials, use of flat rolled steel by us in themanufacture of our tubular products, demand by outside customers and generaleconomic conditions.  Our thin stripflat rolled steel and steel coil slitting services compete against servicecenters located in the Midwest.

 

**C****USTOMERS**

 

We sell our oilfield products through our exclusive distributors tonumerous end users, including BP, Chevron, El Paso Exploration, AnadarkoPetroleum Corporation, Texaco Inc., Burlington Resources Inc., ApacheCorporation and Exxon Mobil Corporation. We sell our finned and other heatrecovery tube products to over 50 end users, including Foster WheelerCorporation, Chicago Tube and Iron Company, Cerrey, Nooter Eriksen, Inc., andDeltak, L.L.C.  We sell our precisionmechanical tubulars to such distributors and end users as Earle M. JorgensenCompany, Marmon/Keystone Corp., Hyva, DaimlerChrysler Corporation, AmericanAxle & Manufacturing Holdings, Inc., Ford Motor Company, and DanaCorporation.

 

**R****ESEARCH****, D****EVELOPMENT****, I****NFORMATION****T****ECHNOLOGY****A****ND****P****ATENTS**

 

We are committed to technologically innovative product development.With respect to oilfield products, we collaborate with customers and industrygroups to develop new grades of oil country tubular goods as well as newproducts, such as expandable casing. Our expandable casing product wasdeveloped for a joint venture between Shell Oil Company and Halliburton Companyand was first successfully installed in late 1999 in the Gulf of Mexico withover fifty successful installations to date. We have also developed slotted tubes for expandable sand screens andriser sleeves to provide new product solutions for our customers.  Our technical knowledge and high-performancecasing products are also being applied in an innovative method for drillingwells using casing instead of drill pipe. We also have used our expertise to develop high-strength, thick wall linepipe for offshore applications. In addition, we developed ultrasonic testingmethods to assure the quality of our tubing. In the specialty tubing area, ourrecent product developments include the Aeroseg finned tube, a new thermalmechanically processed Drawn Over Mandrel product called QDOM for applicationsrequiring extreme mechanical properties and thick wall products using hotreduction technology for applications such as heavy axles that are normallymade out of seamless tubes. We hold several United States patents covering someof our manufacturing processes and products.

 

We also have invested in information technologies that provide theplatform for internet-based commercial marketing and resource constrainedproduction planning. We believe our information technologies capabilities willallow us to more profitably run our facilities, give our customers excellentservice and facilitate web-based commercial initiatives.

** **

**M****ANUFACTURING CAPABILITIES**

 

We manufacture our oilfield products, precision mechanical tubulars,flat rolled steel and other products at our facilities located on anapproximately 2,000-acre site we own in Lone Star, Texas which contains over2,000,000 square feet of manufacturing space and approximately 91,000 squarefeet of oilfield products manufacturing facilities near Houston, Texas.  We manufacture our finned tubular productsin approximately 416,500 square feet of manufacturing facilities onapproximately 131.5 acres that we own or lease in the Tulsa, Oklahomametropolitan area; Pryor, Oklahoma; Quebec, Canada; Veracruz and Monterrey,Mexico.

 

Our East Texas facilities’ annual rated capacity approximates 480,000slab tons, 1,400,000 flat rolled tons and 1,000,000 welded pipe tons. We haveaccess through marketing arrangements and alliances with mills for additionaloilfield tubular capacity of approximately 800,000 tons per year.  In 2001, the precision mechanical specialtytubing

 

9

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facilities operated near 65% of capacity.  The rolling mills and pipe mills generally operated atapproximately 52% of capacity, while the EAF’s operated at less than 44% ofcapacity.

 

We have a major portion of the domestic manufacturing capacity forproduction of finned tubes for heat recovery steam generation. We also licensetechnology relating to the production of finned tubular products to licenseesin India, Italy, Japan and Korea.

 

**R****AW****M****ATERIALS****A****ND INVENTORY**

 

In general, we attempt to procure raw materials and to manage ourfinished goods inventory in a manner that will provide:

 

•              significantflexibility in responding to the levels of demand for our various products;

•              ashort lead time in filling our customers’ orders;

•              thecapacity to offer a broad product range; and

•              theability to offer our products at an effective cost.

 

We generally produce oil country tubular goods and line pipe to fillspecific orders and, accordingly, we maintain the majority of our inventory inthe form of steel slabs, steel coils, work-in-process or finished goods earmarkedfor specific orders. Some work-in-process and finished goods inventories aremaintained in order to provide flexibility in responding to customer deliverydemands.

 

We can use steel slabs, scrap steel and steel coils in the manufactureof our tubular products. We purchased steel slabs to meet approximately 70% ofour steel needs in 2001, and it was often necessary for us to commit topurchase slabs 90 to 150  days prior toproduction. We anticipate again using steel slabs for most of our production needsin 2002. Our principal raw material for our internally produced steel slabs isscrap steel, which is internally generated from our operations or available inthe spot market. The price of scrap steel and steel slabs can be volatile, isinfluenced by a number of competitive market conditions beyond our control andis not directly related to the demand for our products.

 

In February 2002, the U.S. Government imposed 30% tariffs on varioustypes of imported steel, principally steel coil, but also including steelslabs.  We procure steel slabsprincipally from Mexico.  Mexico andCanada were excluded from these tariffs. Tariffs on other countries that produce steel slabs are only imposedafter a quota of 5.4 million tons is exceeded. These actions will reduce foreign imports of steel coils and increasethe cost of flat rolled steel, which is approximately 20% of our steelrequirements.  However, the increasedcost of steel coils may in part be offset by better prices for flat rolledsteel produced and sold by us.

 

Raw materials for our specialty tubing products are readily availablefrom multiple sources. Steel coils and wire rod are the primary raw materialsused in the manufacture of our finned tubular products, and steel coils are theprincipal raw material used in the manufacture of our precision mechanicaltubulars. We usually produce our specialty tubing products to meet specificorders and, accordingly, inventory is managed to minimize the amount offinished goods on hand. Work-in-process inventories are maintained in order toprovide flexibility in responding to customer needs.

 

We manufacture flat rolled steel primarily for use in producingoilfield and precision mechanical tubulars, but also for sale to third parties.We manufacture flat rolled steel using both purchased steel slabs andinternally produced slabs.

 

**E****MPLOYEES**

 

At December 31, 2001, we had a total of 1,892 active employees, of whom826 were represented by four unions and five bargaining units. The majority ofthese union workers are represented by the United Steelworkers of America undera contract signed in June 2001, which expires on May 31, 2005. Two of the otheragreements, covering an aggregate of approximately 79 warehouse and plantsecurity workers as of December 31, 2001, expire in July 2003 and September2003, respectively. The remaining two collective bargaining agreements covereda total of 145 employees in Canada and Mexico as of December 31, 2001.  Our management considers its relationshipwith our employees to be good.

 

10

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We have dedicated necessary resources and made the commitment to designand implement a health and safety program that will meet the OccupationalSafety & Health Administration’s (OSHA) Voluntary Protection Program (VPP)Star criteria at our East Texas facilities. The VPP safety management program goes beyond OSHA standards to protectworkers more effectively than simple compliance.  We plan to submit the VPP application to OSHA by the end of 2002.

 

**F****OREIGN****O****PERATIONS**

 

Our export sales to destinations outside the United States includingfinned tubulars and other heat recovery tubes were approximately $45.3 millionin 2001, $47.2 million in 2000, and $21.2 million in 1999.  We own manufacturing facilities in Quebec,Canada and Veracruz, Mexico and entered into a lease of manufacturingfacilities in Monterrey, Mexico that began operations in September 2000.  Our export sales of $45.3 million todestinations outside the United States included  $7.7 million from these foreign facilities in 2001.

 

**E****NVIRONMENTAL**

 

Our operations are subject to extensive environmental regulations withrespect to air emissions, wastewater discharges, and waste management.  Our environmental protection and improvementexpenditures were approximately $4 million during the past three years,including expenditures related to PCB transformer elimination, enhancingcontainment in processing and storage areas, asbestos abatement, waste disposalsite closures and out-of-service facility remediation projects.

 

In connection with the cleanup of several offsite commercial wastemanagement sites, we, along with many other entities, have been designated apotentially responsible party (PRP) by the U.S. Environmental Protection Agency   under the Comprehensive EnvironmentalResponse, Compensation and Liability Act (CERCLA).  CERCLA subjects PRPs to potential liability for such cleanupcosts.  Cost estimates have been obtainedfor each of the cleanup actions, and our share has been determined.  Based upon these estimates, we do notbelieve our liability, individually or in the aggregate, will be material toour financial position and our results of operations.

 

The waste units that received wastes defined as hazardous waste underthe Resource Conservation and Recovery Act (RCRA) have been closed.  The two RCRA units requiring continuedmonitoring are undergoing post-closure care. The remaining cost of post-closure care is estimated to be approximately$380,000.  We have met our financialassurance requirements by demonstrating the company’s ability to pay thisamount.    The Texas Natural ResourceConservation Commission (TNRCC) is in the process of determining what, if any,corrective action is required to address the remaining non-RCRA solid wastemanagement units.

 

We possess necessary authorizations for air emissions, wastewaterdischarges and waste management.  We arepresently in substantial compliance with our permits and applicable air, waterand waste management rules and regulations. We have an environmental management system in place to assist inmaintaining compliance.  In March of2002, we received formal certification that this system conformed toEnvironmental Management System Standard ISO 14001, 1996.  We do not expect future environmentalexpenditures necessary to comply with environmental rules and regulations tohave a material impact on our financial position or operations.

 

**I****TEM****2.            P****ROPERTIES**

 

We manufacture our oilfield products, precision mechanical tubulars,flat rolled steel and other products at our facilities located on anapproximately 2,000-acre site we own in Lone Star, Texas which contains over2,000,000 square feet of manufacturing space. The original facilities, constructed in the 1940’s and 1950’s have beenexpanded and modernized, and include two electric-arc furnaces (EAF) equippedwith oxy-fuel burners with a combined capacity of approximately 575,000 ingottons per year; two rolling mills, a “two-high” mill that rolls the EAF ingotsinto slabs and a “four-high” single stand reversing Steckel mill that producesflat rolled coils; coil slitting and handling equipment; two pipe weldingmills; seven draw benches, including the largest specialty tubing drawbench inthe Western Hemisphere; three heat-treating facilities; numerous types ofultrasonic and electromagnetic testing and inspection equipment; finishingfacilities at which oil country tubular goods are threaded and couplings areapplied; and various support facilities including a shortline railroad andother transportation and storage facilities.

 

11

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Our annual rated capacity at our East Texas facilities approximates480,000 slab tons, 1,400,000 flat rolled tons, and 1,000,000 welded pipetons.  We have access through marketingarrangements and agreements with alliance mills to an additional oilfield pipecapacity of approximately 800,000 tons.

 

We also have 91,000 square feet of oilfield products manufacturingfacilities near Houston, Texas.  Wemanufacture our finned tubular products in approximately 416,500 square feet ofmanufacturing facilities on approximately 131.5 acres that we own or lease inthe Tulsa, Oklahoma metropolitan area; Pryor, Oklahoma; Quebec, Canada;Veracruz and Monterrey, Mexico.   Ourheadquarters are located in leased facilities in Dallas, Texas.

 

We own 7,000 acres in Texas which were purchased primarily for ironore, coal reserves, or water rights and mineral interests in an additional12,000 acres in Oklahoma and 60,000 acres in Texas.  No minerals have been recovered from these properties for manyyears because their use is no longer required in our operations.  We own nominal oil and gas interests in anadditional 18,000 acres in Texas.

 

**I****TEM****3.            L****EGAL****P****ROCEEDINGS**

 

On August 16, 2001, we entered into an agreement to purchase the assetsof North Star Steel Company’s Tubular Steel Division.  Consummation of the acquisition was subject to completion offinancing arrangements.  Due to lack ofcommon stock financing which, along with certain debt financing, was requiredby the acquisition agreement to close the acquisition, we notified Cargill,Incorporated, the parent company of North Star Steel Company, on December 14,2001, that we were not able to complete the acquisition.  Later that day, Cargill, Incorporatednotified us that it was filing a lawsuit against us seeking unspecified damagesand alleging that we had breached the agreement.  We are confident that we have fully performed all of ourobligations under the agreement, and we will contest the lawsuit vigorously.

 

During the last three years, our subsidiary, Lone Star Steel Company(Steel), has been named as one of a number of defendants in twenty lawsuitsalleging that certain individuals were exposed to asbestos on the defendants’premises.  To date several of theselawsuits have been settled for less than $10,000 in the aggregate.  Of the twenty lawsuits, three have beensettled or are pending settlement and four have been dismissed or are pendingdismissal.  We did not manufacture ordistribute any products containing asbestos. Some or all of these claims may not be covered by our insurance.  We have accrued for our estimated exposureto known claims, but do not know the extent to which future claims may befiled.  Therefore,  we cannot estimate our exposure, if any, tounasserted claims.

 

Management does not believe, based upon analysis of known facts andcircumstances and reports from legal counsel, that any pending legal proceedingwill have a material adverse effect on the financial condition or results ofour operations taken as a whole.

 

**I****TEM****4.            S****UBMISSION****O****F****M****ATTERS********T****O****A V****OTE****O****F SHAREHOLDERS**

 

None.

**PART****II**

 

**I****TEM****5.            M****ARKET****F****OR****R****EGISTRANT****’****S********C****OMMON****E****QUITY****A****ND****R****ELATED****S****HAREHOLDER**

**M****ATTERS**

 

Lone Star’s Common Stock trades on the New York Stock Exchange underthe symbol LSS.  The following tablesummarizes the range of trading prices by quarter for the last two years (in$):

 
|   |   |   |   | **First** |   | **Second** |   | **Third** |   | **Fourth** |   |
|--------|--------|--------|--------|-----------|--------|------------|--------|-----------|--------|------------|--------|
| 2001   |   | High   |   | $         | 49.10  |       | $      | 54.30     |   | $          | 35.95  |   | $ | 19.20 |   |
|   |   | Low    |   | 30.20     |   | 33.00      |   | 10.10     |   | 11.21      |   |
| 2000   |   | High   |   | 51.00     |   | 54.25      |   | 51.88     |   | 54.75      |   |
|   |   | Low    |   | 25.63     |   | 36.00      |   | 37.25     |   | 24.45      |   |
|        |        |        |        |           |        |            |        |           |        |            |        |  |  |  |  |

 

12

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As of January 31, 2002, we had approximately 3,090 common shareholdersof record.  We have not paid dividendson our common stock since becoming a public company and have no present plan todo so.

 

**I****TEM****6.            S****ELECTED****F****INANCIAL****D****ATA**

 
|                                                                      |   | ***($ in millions, except share and employee data)*** |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                                      |   | **2001**                                              |   | **2000 (1)** |   | **1999** |   | **1998** |   | **1997** |   |
| Oilfield products revenues                                                |   | $                                                     | 401.9  |   | $ | 362.0 |   | $ | 187.3 |   | $ | 258.1 |   | $ | 460.4 |   |
| Specialty tubing products  revenues                                       |   | 187.7                                                 |   | 220.9 |   | 126.6 |   | 130.3 |   | 135.9 |   |
| Flat rolled and other  tubular revenues                                   |   | 60.6                                                  |   | 62.4 |   | 48.1 |   | 54.0 |   | 72.1 |   |
| Total revenues(2)                                                         |   | 650.2                                                 |   | 645.3 |   | 362.0 |   | 442.4 |   | 668.4 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Gross profit                                                              |   | 69.3                                                  |   | 85.9 |   | 12.8 |   | 4.4 |   | 64.2 |   |
| Special charges                                                           |   | —                                                |   | — |   | — |   | (14.5 | ) | — |   |
| Selling, general, and  administrative expenses                            |   | (36.1                                                 | )      | (33.7 | ) | (15.5 | ) | (20.0 | ) | (19.6 | ) |
| Operating income (loss)                                                   |   | 33.2                                                  |   | 52.2 |   | (2.7 | ) | (30.1 | ) | 44.6 |   |
| Interest income                                                           |   | 2.9                                                   |   | 2.0 |   | 1.8 |   | 2.0 |   | 3.0 |   |
| Interest expense                                                          |   | (12.8                                                 | )      | (14.4 | ) | (4.6 | ) | (4.0 | ) | (6.6 | ) |
| Other income (expense)                                                    |   | (5.5                                                  | )      | 0.6 |   | — |   | (0.2 | ) | 0.3 |   |
| Income tax                                                                |   | (0.8                                                  | )      | (1.8 | ) | — |   | — |   | (0.9 | ) |
| Income (loss) before  extraordinary items                                 |   | 17.0                                                  |   | 38.6 |   | (5.5 | ) | (32.3 | ) | 40.4 |   |
| Net income (loss)                                                         |   | $                                                     | 16.4   |   | $ | 38.6 |   | $ | (5.5 | ) | $ | (24.9 | ) | $ | 53.7 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Earnings before interest,  taxes, depreciation and amortization (3)       |   | $                                                     | 56.2   |   | $ | 73.6 |   | $ | 14.0 |   | $ | (14.3 | ) | $ | 58.9 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Income (loss) before  extraordinary itemsper  common share — diluted |   | $                                                     | 0.68   |   | $ | 1.59 |   | $ | (0.24 | ) | $ | (1.43 | ) | $ | 1.83 |   |
| Net income (loss) per  common share — diluted                        |   | $                                                     | 0.66   |   | $ | 1.59 |   | $ | (0.24 | ) | $ | (1.10 | ) | $ | 2.44 |   |
| Common shares used for  diluted EPS                                       |   | 25.0                                                  |   | 24.3 |   | 22.5 |   | 22.5 |   | 22.1 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Current assets                                                            |   | $                                                     | 325.1  |   | $ | 257.5 |   | $ | 172.1 |   | $ | 152.9 |   | $ | 207.2 |   |
| Total assets                                                              |   | $                                                     | 580.8  |   | $ | 515.3 |   | $ | 351.1 |   | $ | 335.8 |   | $ | 405.8 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Current liabilities                                                       |   | $                                                     | 66.1   |   | $ | 91.7 |   | $ | 85.2 |   | $ | 41.4 |   | $ | 81.3 |   |
| Total liabilities                                                         |   | $                                                     | 265.5  |   | $ | 259.5 |   | $ | 155.2 |   | $ | 146.7 |   | $ | 188.1 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                                 |   | $                                                     | 315.3  |   | $ | 255.8 |   | $ | 195.9 |   | $ | 189.1 |   | $ | 217.7 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Shares outstanding                                                        |   | 25.2                                                  |   | 23.7 |   | 22.6 |   | 22.5 |   | 22.5 |   |
|                                                                      |   |                                                  |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                      |   | $                                                     | 25.2   |   | $ | 23.3 |   | $ | 7.2 |   | $ | 17.6 |   | $ | 34.7 |   |
| Depreciation and  amortization                                            |   | $                                                     | 23.0   |   | $ | 21.4 |   | $ | 16.7 |   | $ | 15.8 |   | $ | 14.3 |   |
| Active employees                                                          |   | 1,892                                                 |   | 2,358 |   | 1,554 |   | 938 |   | 2,044 |   |

----

(1)             IncludesFintube Technologies, Inc. and Bellville Tube Corporation results of operationssince the acquisitions  became effectiveon January 1, 2000 and April 1, 2000, respectively. 

(2)             Certaincharges for shipping and handling costs have been reclassified in accordancewith EITF 00-10 which requires freight charges billed to customers to beclassified in revenues and shipping costs incurred to be classified in cost ofgoods sold.  Lone Star previouslyreported such amounts net in revenues. The resulting reclassifications have increased revenues and cost ofgoods sold.  Gross profit, operatingincome or loss, and net income or loss are unchanged in all periods.

 

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(3)             Earningsbefore interest, taxes, depreciation and amortization (EBITDA) is calculated byadding depreciation and amortization to operating income (loss).  EBITDA is presented because it is a widelyaccepted financial indicator of a company’s ability to incur and servicedebt.  EBITDA does not represent netincome or cash flows from operations as those terms are defined in generallyaccepted accounting principles, or GAAP, and does not necessarily indicatewhether cash flows will be sufficient to fund cash needs.

** **

**I****TEM****7.                  M****ANAGEMENT****’****S****D****ISCUSSION****A****ND****A****NALYSIS********O****F****R****ESULTS****O****F****O****PERATIONS****A****ND****F****INANCIAL****C****ONDITION**

 

**O****VERVIEW**

We are the leading domestic manufacturer and marketer of premium weldedoil country tubular goods, which are steel tubular products used in thecompletion of and production from oil and natural gas wells. We are also amajor manufacturer of line pipe, which is used in the gathering andtransmission of oil and natural gas. In addition, we are a leading manufacturerof specialty tubing products used in power technology, automotive,construction, agricultural and industrial applications. Effective January 1,2000, we acquired the assets of Fintube Technologies, Inc. (Fintube), thelargest specialty tubing manufacturer of heat recovery finned tubes, which areused in various power technology markets, including the construction of gas-fired, combined-cycle electrical power generation plants. On April 1, 2000, wealso completed an acquisition of the assets of Bellville Tube Corporation(Bellville), a manufacturer of casing, tubing and line pipe for the oil and gasindustry.   During 2001, we attempted topurchase an unrelated manufacturer of oil country tubular goods and linepipe.  However, we were not able toobtain financing and did not complete the purchase.  The seller has filed a lawsuit against us claiming breach ofcontract.  We intend to vigorously defendthis lawsuit.

 

Historically, our oilfield products have accounted for approximately60% of our total revenues and were 62% of total revenues in 2001.  As a result, our revenues are largelydependent upon the state of the oil and gas industry, which has historicallybeen volatile. Downturns in the oil and gas markets cause demand for ourprincipal products to decrease, which occurred in the second half of 2001.  As a result, our historical operatingresults have fluctuated based on the demand for our products.  Our future operating results may fluctuatesignificantly depending upon a number of factors, including industryconditions, the level of oil and gas drilling activity and competition fromimports. Our finned tubular products are affected by the level of domestic andforeign demand for power generation as well as domestic and foreigncompetition.

*** ***

***Oilfield Products*****.**  Ouroilfield products consist of (1) casing, which acts as a structural retainerwall in oil and natural gas wellbores, (2) production tubing, which transmitshydrocarbons to the surface, and (3) line pipe, which is used in gathering andtransmitting hydrocarbons from the wellhead to larger transmission pipelines.

 

Demand for our oilfield products depends primarily upon the number ofoil and natural gas wells being drilled, completed and re-worked and the depthand drilling conditions of these wells. The level of these activities dependsprimarily on natural gas and oil prices and industry expectations as to futureprices. According to industry reports, average domestic drilling activityincreased in 2001 by 26% compared to the previous year.  However, drilling activity decreasedsteadily through the second half of 2001 and by year-end 887 rigs were active,compared to 1,114 rigs at the end of 2000. Demand for our oilfield products are likely to remain weak until theexpectation of higher oil and gas prices results in an increase in the numberof active drilling rigs, which may not occur in the near term.

*** ***

***Specialty Tubing Products*****.**  Our specialtytubing product segment includes finned tubular products and  precision mechanical tubulars. Finnedtubular products are used in heat recovery steam generation applications suchas gas-fired, combined-cycle electrical power generation plants and, to alesser extent, in industrial processing plants and petrochemical plants.   Demand for finned tubulars and relatedproducts was down in the fourth quarter of 2001 as a result of curtailed andcancelled power plant construction projects related to the slowdown in thegeneral economy and lack of affordable capital for these projects.  Further curtailments and cancellations ofnew power plant construction projects is likely in the near term.

 

Our precision mechanical tubulars consist of a wide array of high-quality,custom-made steel tubular products with precise dimensional control and specialmetallurgical properties which are manufactured by the “Drawn Over Mandrel”process. This process allows us to achieve higher critical tolerances anddimensional control than other 

 

14

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processes. These products are used for several industrial applications,including the manufacture of hydraulic cylinders for construction and farmequipment; 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.

 

Demand for precision mechanical tubulars within the traditional marketswas down in 2001 due to the economic slowdown, particularly in the industrialsector.  Demand for our precisionmechanical tubing products in 2002 may be unfavorably impacted until thecurrent slowdown in the domestic economy subsides.

*** ***

***Flat Rolled Steel and Other Products*****.**  Wemanufacture and market flat rolled steel, which is primarily used in themanufacture of our oil country tubular products. We also sell flat rolled steelto fabricators of large-diameter transmission pipe, storage tanks, rail carsand a variety of other construction and industrial products. Our other productsare principally used for structural and piling applications in the constructionindustry. We sell flat rolled steel directly to end users and through servicecenters 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 purchasedecisions.  During the first half of1999, the United States government established antidumping duties and quotasfor flat rolled steel suppliers from certain foreign countries which reducedthe amount of imported foreign steel coils, resulting in increased shipments ofsteel coils produced by us during the second half of 1999 and 2000.  Flat rolled steel 2000 revenues alsobenefited from the full year inclusion of steel coil slitting and steel striprevenues.  During 2001, imports of lowpriced flat rolled steel increased throughout the year reducing our revenuesfrom flat rolled steel by 40% in the fourth quarter compared to the firstquarter of 2001.  This surge of lowpriced imports was in part the cause for bankruptcies of several domestic steelmills.  In March 2002, significanttariffs on imported products from all foreign countries other than Canada andMexico were imposed, which will last for up to three years.  This action has stabilized the domestic flatrolled steel market and demand is expected to recover.

 

We sell steel strip directly to end users in North America through asmall sales force. Flat rolled steel processing services are also sold to steelmills where we receive processing revenues but do not take title to the steel.

*** ***

***Manufacturing*****.**  Themanufacture of our products is capital intensive. Utilization rates at our EastTexas manufacturing facilities was up during the first half of 2001 and thenreduced significantly during the second half of 2001 as demand for our oilfieldproducts declined with decreased drilling, which was down 30% from the end ofthe second quarter to the end of the year. Specialty tubing demand further decreased following the tragic events ofSeptember 11th and the general economic contraction whichfollowed.  Flat rolled steel demand wasalso down due to increased imports.  Asa result, total shipment volumes were down 37% in the fourth quarter of 2001compared to the second quarter of 2001. The reduced production volumes negatively impacted cost of our productssold in the second half of the year as fixed and semi-fixed costs were absorbedby fewer units produced.  The level ofproduction volume through our various facilities has a significant effect onthe cost of manufacturing. Key variable costs include costs of labor and rawmaterials, including scrap steel, steel slabs, wire rod, steel coils,electricity and natural gas.  Most ofour finned tubes and other heat recovery products are manufactured in specificconfigurations as ordered. Accordingly, our manufacturing costs are to someextent factored into product prices on an order-by-order basis.

 

We have entered into marketing alliances and manufacturing arrangementswith several companies. These alliances and arrangements involve the marketingof their products which provide us access to additional manufacturing capacity.  In addition, we have manufacturingtechnology licensees in India, Italy, Japan and Korea.

 

**C****RITICAL****A****CCOUNTING****P****OLICIES AND****E****STIMATES**

 

Management’s Discussion and Analysis and Results of Operations andFinancial Condition are based on the related consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Thepreparation of the financial statements requires the use of estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses.  Lone Star evaluates itsestimates primarily based on historical experience and business knowledge.  These estimates are evaluated by managementand revised as circumstances change.   Adiscussion of the significant estimates made by Lone Star follows:

 

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***Warranty Claims***

Our products are used in applications which are subject to inherentrisks including well failures, performance deficiencies, line pipe leaks,personal injury, property damage, environmental contamination or loss ofproduction.  We warrant our products to meet certainspecifications.  Actual or claimeddeficiencies in meeting these specifications may give rise to claims.  We maintain a reserve for known and unknownwarranty claims.  The warranty claimexposure is evaluated using historical claim trends and information availableon specifically known claims. We also maintain product and excess liabilityinsurance subject to certain deductibles that limits our exposure to theseclaims.  We consider the extent ofinsurance coverage in our estimate of the reserve.  Typically, this reserve is not subject to significantfluctuations from period to period. However, the incurrence of an unusual amount of claims could alter ourexposure and the related reserve.

*** ***

***Bad Debts***

 

Our customers are concentrated in markets and industries that aresubject to volatility.  In addition, wesell a substantial amount of products to a few customers.  We maintain a reserve for known and unknownbad debts.  We evaluate credit risk andthe adequacy of our reserve by monitoring the age of our accounts receivableand credit worthiness of our customers. In addition, we monitor the overall status of the industries where ourproducts and services are utilized. Typically, this reserve is not subject to significant fluctuations fromperiod to period.

*** ***

***Environmental Obligations***

 

Our business is subject to numerous environmental regulations.  We are actively remediating a few knownexposures and conducting post closure monitoring activities.  Our environmental department monitors thestatus of our environmental exposures and compliance with regulations throughvarious means.  We maintain anenvironmental reserve to cover the costs of expected remediation and postclosure monitoring.  We estimate therange of cost for the remediation and post closure based on historicalexperience, results of monitoring and the known extent of exposure.  We evaluate the range of exposure and recordthe reserve at the most probable amount within that range. Typically, thisreserve is not subject to significant fluctuations from period to period;although given the nature of environmental exposure, significant changes in thereserve are possible.

 

**H****ISTORICAL****R****ESULTS****O****F**** ****PERATIONS**

 

Our revenues are derived from three business segments: oilfieldproducts, specialty tubing products and flat rolled steel and other productsand services.

 

In the last three years, segment revenues were as follows:

 
|                                  |   | ***($ in millions)*** |   |
|---------------------------------------|--------|-----------------------|--------|
|                                  |   | **2001**              |   | **2000** |   | **1999** |   |
|                                  |   | **$**                 |   | **%** |   | **$** |   | **%** |   | **$** |   | **%** |   |
| Oilfield products                     |   | 401.9                 |   | 62 |   | 362.0 |   | 56 |   | 187.3 |   | 52 |   |
| Specialty Tubing products             |   | 187.7                 |   | 29 |   | 220.9 |   | 34 |   | 126.6 |   | 35 |   |
| Flat rolled steel and  other products |   | 60.6                  |   | 9 |   | 62.4 |   | 10 |   | 48.1 |   | 13 |   |
| Consolidated net revenues             |   | 650.2                 |   | 100 |   | 645.3 |   | 100 |   | 362.0 |   | 100 |   |

 

Shipments of products by segment are as follows:

 
|                                  |   | ***(in tons)*** |   |
|---------------------------------------|--------|-----------------|--------|
|                                  |   | **2001**        |   | **%** |   | **2000** |   | **%** |   | **1999** |   | **%** |   |
| Oilfield products                     |   | 580,300         |   | 65 |   | 516,000 |   | 60 |   | 336,100 |   | 56 |   |
| Specialty tubing products             |   | 154,100         |   | 17 |   | 176,400 |   | 21 |   | 116,700 |   | 20 |   |
| Flat rolled steel and  other products |   | 161,000         |   | 18 |   | 165,300 |   | 19 |   | 144,600 |   | 24 |   |
| Total shipments                       |   | 895,400         |   | 100 |   | 857,700 |   | 100 |   | 597,400 |   | 100 |   |

 

 

16

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**2001 C****OMPARED****W****ITH****2000**

*** ***

***Net revenues*** of $650.2 million for the year endedDecember 31, 2001 were 1% higher than in 2000. Revenues from oilfield products rose 11% to $401.9 million from 2000 on12% higher shipment volumes.  Demand foroilfield products increased during the first half of 2001 due to a consistentincrease in drilling activity, with the active rig count rising from 1,114 at the end of 2000 to1,275 at the end of the second quarter of 2001.  However, from the end of the second quarter of 2001 to the end ofthe year, the active rig count declined 30%, significantly reducing demand forand revenues from our oilfield products in the second half of the year.

 

Specialty tubing product revenues decreased in 2001 by 15% from $220.9million in 2000 to $187.7 million in 2001. Revenues from precision mechanical tubing products were down due toreduced industrial activity associated with slower general economicconditions.  Revenues from theseproducts were particularly weak following events of September 11thas revenues dropped 28% from the third quarter of 2001 to the fourth quarter of2001.  Likewise, revenues from specialtyfinned tubulars and related products fell 9% in the fourth quarter of 2001following the cancellation and curtailment of some power plant constructionprojects.

 

Flat rolled steel and other tubular products were down 3% from 2000 to$60.6 million in 2001, due to a 3% decrease in shipment volumes and unchangedprices due to reduced industrial demand. Shipments decreased throughout the year as imports steadily increased.

*** ***

***Gross profit*** for 2001 decreased 19% to $69.3million.  Gross profit was down althoughrevenues were 1% higher than 2000 due to significantly reduced productionvolumes in the second half of 2001, which caused fixed and semi-fixed cost tobe absorbed in less units of production. Unit costs were particularly high in the fourth quarter as shipmentvolumes were down substantially in our three business segments due to thefurther slowdown in the economy after September 11th.

*** ***

***Selling, general, and administrativeexpenses*** were$36.1 million in 2001 compared to $33.7 million in 2000.  This was due to increased expensesassociated with high sales volumes in the first half of 2001 and severancecosts related to workforce reductions associated with the business downturn inthe second half of 2001.

*** ***

***Interest income*** increased in 2001 to $2.9 million from $2.0million in 2000 due to higher cash balances resulting from $50.8 million inproceeds from the sale of common stock in April of 2001 and $150 million inproceeds from sale of  bonds in May of2001, partially offset by lower average interest rates.

*** ***

***Interest expense*** decreased from $14.4 million in 2000 to$12.8 in 2001 primarily due to lower interest rates.

*** ***

***Other expense,******n e t*** of $5.5 million was primarily related to aone-time charge of $5.0 million for the write-off of acquisition relatedexpenses and financing costs associated with the uncompleted acquisition and$0.8 million charge to income from the settlement of our interest rate swapupon early retirement of debt.

*** ***

***Income before extraordinary items***was $17.0 million compared to $38.6 milliondue to lower gross margins in the second half of 2001 resulting fromsignificantly lower production volumes and the $5.0 million write-off ofacquisition and financing costs associated with the uncompleted acquisition.

*** ***

***Extraordinary loss*** of $0.6 million for 2001 was due to earlyretirement of debt associated with the extinguishment of a bank credit facilityusing proceeds from the sale of stock and bonds.

*** ***

***Net operating loss carryforwards*** at December 31, 2001 totaled $231.0 million(see Note G to the consolidated financial statements).

*** ***

***Net income*** in 2001 was $16.4 million, or $0.66 perdiluted share, compared to a net income of $38.6 million, or $1.59 per dilutedshare in 2000.  The decrease isattributable to the factors discussed in income before extraordinary itemsabove.

** **

**2000 C****OMPARED****W****ITH****1999**

*** ***

***Net revenues*** of $645.3 million for the year endedDecember 31, 2000 were up 78% from 1999. Revenues rose 93% to $362.0 million for oilfield products, and shipmentvolumes and prices increased 54% and 26%, respectively.  

 

17

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Demand for oilfield products improved in 2000, due to a consistentincrease in drilling activity, with the average rig count rising from 625 in1999 to 918 in 2000.

 

Specialty tubing product revenues increased in 2000 to $220.9 million,a 74% improvement from 1999 revenues of $126.6 million due to the inclusion offinned tubular revenues for the full year and a 5% increase in shipment volumesfor precision mechanical tubulars with average prices equal to 1999.

 

Flat rolled steel and other tubular products revenues were up 30% to$62.4 million.  This increase isattributable to inclusion of coil slitting revenues for the full year and a 10%increase in flat rolled steel shipment volumes combined with 11% higher averageselling prices.

*** ***

***Gross profit*** for 2000 was $85.9 million, compared to$12.8 million in 1999.  Gross profit andoperating income benefited from higher margin contributions from our twoacquisitions, increased shipment volumes for all products and higher prices foroilfield and flat rolled steel and other products.  Also contributing to the increase in gross profit  was 93% higher oilfield revenues thatincluded an oilfield product mix of higher margin premium alloy tubulars whichwere 57% of casing and tubing sales.

*** ***

***Selling, general, and administrativeexpenses***increased significantly in 2000 to $33.7 million, principally due to additionalexpenses associated with our two acquisitions.

*** ***

***Interest income*** increased slightly in 2000 to $2.0 millionfrom $1.8 million in 1999 due to higher average interest rates on investedcash, short-term investments and marketable securities.

*** ***

***Interest expense*** increased from $4.6 million in 1999 to $14.4million in 2000 primarily due to additional debt associated with our twoacquisitions, increased borrowings to support expanded oilfield productsactivity levels, and higher average interest rates.

*** ***

***Income before extraordinary items*** for 2000 was $38.6 million, or $1.59 perdiluted share, compared to the $5.5 million loss, or $0.24 loss per dilutedshare in 1999.  Factors contributing tothe increase in income from continuing operations include increased operatingincome margins from our two acquisitions, and 93% higher oilfield revenues thatincluded an oilfield product mix of higher margin premium alloy tubulars whichwere 57% of casing and tubing sales.

*** ***

***Net operating loss carryforwards*** at December 31, 2000 totaled $244.7 million(see Note G to the consolidated financial statements).

*** ***

***Net income*** in 2000 was $38.6 million, or $1.59 perdiluted share, compared to a net loss of $5.5 million, or $0.24 loss perdiluted share, at the end of 1999.  Theincrease is attributable to the factors discussed in income beforeextraordinary items above.

 

**F****INANCIAL****C****ONDITION****A****ND****L****IQUIDITY**

 

As of December 31, 2001, we had $106.5 million in cash and cashequivalents and $259.0 million in working capital.

 

Cash provided by (used in) operating activities was $31.3 million,($8.6) million, and $28.1 million for 2001, 2000, and 1999, respectively.  Cash from operations in 2001 increased dueto higher sales in the first half of 2001 while business was strong and thecollection of the associated accounts receivable in the second half of 2001when business weakened.  Cash was usedby operating activities in 2000 attributable to increased accounts receivableand the increase in inventories associated with higher oilfield productsshipments.  In 1999 cash provided byoperations was $28.1 million due to the reduced net loss as our oilfieldbusiness began recovery in the second half of 1999. In fiscal 1999, we used netcash provided by operations to fund capital expenditures and reduce revolving creditfacilities.

 

Cash used in investing activities was $14.7 million, $96.6 million, and$11.7 million for 2001, 2000, and 1999, respectively.  Cash used in 2001 primarily relates to higher capitalexpenditures to expand our finned tubular products capacity in Mexico andCanada and install new computer based enterprise resource planningsystems.  Cash used in 2000 and 1999relates to our acquisitions of Fintube and Bellville and capital expenditures.

 

Cash provided by (used in) financing activities was $63.2 million in2001, $109.7 million in 2000, and ($15.1) million in 1999.  Cash provided by financing activities in2001 was generated from the proceeds of the sale of $150 million 

 

18

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senior subordinated notes and $50.8 million of common stock, offset byrepayments on the revolving credit facilities and term loans.  Cash provided by financing activities in2000 was primarily attributable to borrowings to finance the Fintube andBellville acquisitions and higher borrowings to fund additional working capitalto meet the increased demand for oilfield products.  Cash used by financing activities for fiscal 1999 was primarilyrelated to the reduction of revolving credit facilities.

 

On May 2, 2001, we sold 1.2 million shares of our common stock under apreviously filed universal shelf registration statement.  The proceeds to us were $50.8 million.  Proceeds of the sale were used to extinguishdebt associated with credit facilities at our subsidiary, Lone Star SteelCompany (Steel), and Fintube Technologies, Inc. (Fintube), and for generalcorporate purposes.

 

On May 29, 2001, we issued $150.0 million 9% senior subordinated notesdue September 1, 2011 to qualified institutional buyers.  Interest on the outstanding seniorsubordinated notes will accrue at a rate of 9.0% per year, payablesemi-annually in arrears on each June 1 and December 1, commencing December 1,2001.  We used the proceeds receivedfrom the senior notes to pay down the revolving lines of credit, term loans,slab consignment obligations and for general corporate purposes.  The notes are fully and unconditionallyguaranteed by each of our current and future domestic restricted subsidiaries.

 

In 2000, Steel had a credit facility consisting of a three-year $120.0million revolving line of credit and a three-year $10.0 million term loan.  Under this revolving credit facility, Steelcould borrow an amount based on a percentage of eligible accounts receivableand inventories, reduced by outstanding letters of credit.

 

In October 2001, the Steel credit facility was restated and amended toa three-year $100 million senior secured credit facility for use by Lone Starand our domestic subsidiaries. Borrowings from this facility can be used for general corporate purposes.  Under this credit facility, we can borrow anamount based on a percentage of eligible accounts receivable and inventoriesreduced by outstanding letters of credit. The availability under this facilitywas $99.7 million at December 31, 2001. Substantially all of our assets, other than real estate, secure thisloan.  At our option, the interest rateis the prime lending rate or the LIBOR plus the applicable additional interest.  As a result, we will be subject to interestrate risk if we borrow from the credit facility.   At December 31, 2001, no amount was outstanding under thiscredit facility.

 

In 2000, Fintube had a senior credit facility providing a $20 millionrevolving line of credit and a $39 million term loan used to pay part of thecash portion of the purchase price in the Fintube acquisition.  In August 2001, the Fintube credit facilitywas paid in full early and terminated, resulting in the write off of $0.6million in deferred financing costs as an extraordinary item.  In addition, we terminated an interest rateswap agreement related to the Fintube credit facility.  The settlement of the interest rate swapresulted in a $0.8 million charge included in other expenses.

 

We operate in capital intensive businesses. We have made, and we expectwe will be required to make, significant capital expenditures each year forrecurring maintenance necessary to keep manufacturing facilitiesoperational,  to comply withenvironmental and other legal requirements and to improve our informationsystems. Additionally, we regularly make capital expenditures for technologicalimprovements and for research and development projects. If funding isinsufficient at any time in the future, we may be unable to develop or enhanceour products or services, take advantage of business opportunities or respondto competitive pressures.  Our capitalexpenditures budget for 2002 is approximately $20.0 million.

 

We require capital primarily to fund general working capital needs andcapital expenditures. Principal sources of funds include cash and investments,cash generated from operations and borrowings under our credit facility. Webelieve these sources of funds will provide the liquidity necessary to fund ourcash requirements during 2002.

 

Our operations are subject to environmental compliance and permittingrequirements of various foreign, federal, state and provincial governmentalagencies. We believe that the cost of maintaining compliance with environmentalrequirements will fall within our contemplated operating and capitalexpenditure plans, averaging $1.0 - $2.0 million annually in the foreseeablefuture.

 

We lease equipment under various operating leases.  Future minimum lease payments undernoncancelable operating leases are as follows: 2002, $2.1 million; 2003, $1.2 million; 2004, $1.1 million; 2005, $0.7million; 2006, $0.6 million; and thereafter, $0.3 million.

 

19

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**R****ECENT****A****CCOUNTING****P****RONOUNCEMENTS**

 

Effective January 1, 2001, we adopted Statement of Financial AccountingStandards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments andHedging Activities.”  SFAS 133 requiresthat all derivative financial instruments that qualify for hedge accounting berecognized in the financial statements and measured at fair value, regardlessof purpose or intent of holding them. On January 1, 2001, a transition obligation of $0.5 million was recordedrelated to the interest rate swap agreement. Additionally, a loss to other comprehensive income in the equitysection of the balance sheet of $0.5 millionwas recorded.  Subsequent changes infair value were recorded through other comprehensive income.  In August 2001, the credit facility associatedwith the Fintube acquisition was paid in full and the related interest rateswap was terminated.  The settlement ofthe interest rate swap resulted in a $0.8 million charge to income in the thirdquarter.

 

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations,” and SFAS 142, “Goodwill and Other Intangible Assets.”  SFAS 141 requires, among other things, allbusiness combinations initiated after June 30, 2001, be accounted for using thepurchase method of accounting.  SFAS 142primarily addresses the accounting for goodwill and intangible assetssubsequent to their acquisition.  UnderSFAS 142, goodwill will no longer be amortized over its estimated useful life,but instead will be tested for impairment at least annually.  SFAS 142 will be effective for fiscal yearsbeginning after December 15, 2001 and must be adopted at the beginning of afiscal year.  During 2001, we amortizedgoodwill associated with the Fintube and Bellville acquisitions, as detailed inNote A, of approximately $2.0 million. We are currently performing the required goodwill impairment analysesand expect to have these completed by April 2002.  We do not expect an impairment of goodwill, but we cannotdefinitively conclude until the analyses are complete.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs. It applies to all entities and legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and/or the normal operation of along-lived asset.  SFAS No. 143 requiresthat the fair value of a liability for an asset retirement obligation berecognized in the period in which it is incurred if a reasonable estimate offair value can be made.  The associatedasset retirement costs are capitalized as part of the carrying amount of thelong-lived asset and are subsequently allocated to expense over the asset’suseful life.  This Statement iseffective for financial statements issued for fiscal years beginning after June15, 2002.  We have not yet determinedthe impact that SFAS No. 143 will have on our financial position or results ofoperations.

 

In August, 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS 144”).  SFAS 144 addresses financial accounting andreporting for the impairment of long-lived assets and for long-lived assets tobe disposed of.  This statementsupersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets andfor Long-Lived Assets to Be Disposed Of,” however, this statement retains thefundamental provisions of SFAS 121 for (a) recognition and measurement of theimpairment of long-lived assets to be held and used and (b) measurement oflong-lived assets to be disposed of by sale. This Statement also supersedes the accounting and reporting provisionsof APB Opinion No. 30, “Reporting the Results of Operations — Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions” for segments of a business tobe disposed.  SFAS 144 is effective forfiscal years beginning after December 15, 2001.  We do not believe that the adoption of SFAS 144 will have amaterial effect on our financial position or results of operations.

 

**F****ORWARD****-L****OOKING****I****NFORMATION**

 

 

The statements included in this Annual Report regarding futurefinancial performance and results and the other statements that are nothistorical facts are forward-looking statements.  The words “believes,” “intends,” “expects,” “anticipates,”“projects,” “estimates,” “predicts,” and similar expressions are also intendedto identify forward-looking statements. Such statements involve risks, uncertainties and assumptions, including,but not limited to, industry and market conditions, environmental liabilities,competitive pricing, practices and conditions, availability and pricing of rawmaterials, fluctuations in prices of crude oil and natural gas, the tradeenvironment, the impact of current and future laws and governmental regulations(particularly environmental laws and regulations) and other factors discussedin this Annual Report and in other filings with the Securities and ExchangeCommission.  Should one or more of theserisks or 

 

20

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uncertainties materialize, or should underlying assumptions proveincorrect, actual outcomes may vary materially from those indicated.

 

**I****TEM****7****A****.               Q****UANTITATIVE****A****ND****Q****UALITATIVE****D****ISCLOSURES********A****BOUT****M****ARKET****R****ISK**

 

We are exposed to certain risks associated with the change in foreigncurrency rates, interest rates and commodity prices.  We seek to minimize the potential adverse impact of those marketrisks through the use of appropriate management techniques including thelimited use of derivative financial instruments.

 

Our operations in Mexico and Canada are measured in the localcurrencies, converted to the U.S. dollar equivalent based on published exchangerates for the period reported and are therefore subject to risk of exchangerate fluctuations.  We believe that ourcurrent risk exposure to exchange rate movements is not significant.

 

Our investments in cashequivalents, short-term investments and marketable securities, the weightedaverage maturity of which is less than one year, are subject to interest raterisk.  The value of these securities woulddecline in the event of increases in market interest rates.  We manage this risk by investing insecurities with short-term maturities and varying maturity dates.  In addition, we intend to hold thesesecurities until maturity and, as a result, avoid the losses resulting fromsudden changes in interest rates.

 

To the extent that we borrow against our credit facility, we areexposed to interest rate risk arising from the variable-rate nature of thefacility. There were no borrowings on this facility at December 31, 2001.  In the past, we have used interest rateswaps to effectively fix a portion of the interest rates on our variable ratecredit facilities.  We did not have anyinterest rate swaps at December 31, 2001. Our senior subordinated notes accrueinterest at a fixed rate of nine percent. The fair value of the notes is sensitive to changes in interest rates.

 

We are subject to commodity price risk, primarily with respect topurchases of steel and natural gas. Purchased steel represents a significant portion of our cost of goodssold.  As a result, fluctuations in thecost of purchased steel, which can be volatile and cyclical in nature, have asignificant impact on our margins both positively and negatively.  We purchase natural gas for our operationsand therefore have a limited market risk in natural gas prices.  As a result, our earnings could be affectedby changes in the price of natural gas. As market conditions dictate, we may enter into contracts to acquire asignificant portion of our natural gas requirements over periods ranging fromsix to eighteen months.  Our remainingrequirements are purchased on the market at the current value.

 

**I****TEM****8.            C****ONSOLIDATED****F****INANCIAL****S****TATEMENTS****A****ND****S****UPPLEMENTARY****D****ATA**

 

**I****NDEX****T****O****C****ONSOLIDATED****F****INANCIAL****S****TATEMENTS**

 
| Report of  Independent Public Accountants                                                        |
|--------------------------------------------------------------------------------------------------|
| Consolidated  Statements of Income for the years ended December 31, 2001, 2000, and 1999         |
| Consolidated Balance Sheets  at December 31, 2001 and 2000                                       |
| Consolidated  Statements of Cash Flows, for the years ended December 31, 2001, 2000, and  1999   |
| Consolidated  Statements of Shareholders’ Equity at December 31, 2001, 2000, 1999, and 1998 |
| Notes to  Consolidated Financial Statements                                                      |
| Schedule I -  Condensed Financial Information of Registrant                                      |
| Schedule II -  Valuation and Qualifying Accounts                                                 |
|                                                                                             |

 

21

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**R****EPORT****O****F****I****NDEPENDENT****P****UBLIC****A****CCOUNTANTS**

 

To the Shareholders and Board of Directors of Lone Star Technologies,Inc. (Lone Star):

 

We have audited the accompanying consolidated balance sheets of LoneStar (a Delaware corporation) and subsidiaries as of December 31, 2001 and2000, and the related consolidated statements of income, shareholders’ equity,and cash flows for each of the three years in the period ended December 31,2001.  These financial statements andthe schedules referred to below are the responsibility of Lone Star’smanagement.  Our responsibility is toexpress an opinion on these financial statements and schedules based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Lone Star and subsidiaries as of December 31, 2001 and 2000, and the resultsof their operations and their cash flows for the three years ended December 31,2001, in conformity with accounting principles generally accepted in the UnitedStates.

 

Our audits were made for the purpose of forming an opinion on the basicconsolidated financial statements taken as a whole.  The schedules listed in the index to consolidated financialstatements are presented for the purpose of complying with the Securities andExchange Commission’s rules and are not a part of the basic consolidatedfinancial statements.  These scheduleshave been subjected to the auditing procedures applied in our audits of thebasic consolidated financial statements and, in our opinion, fairly state inall material respects the financial data required to be set forth therein inrelation to the basic consolidated financial statements taken as a whole.

 
|           |             | ARTHUR ANDERSEN LLP |
|----------------|------------------|---------------------|
| Dallas, Texas, |             |
|           | January 22, 2002 |                |
|                |                  |                     |  |

 

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**LONE STAR TECHNOLOGIES, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

***($ and shares in millions, except per sharedata)***

 
|                                                     |   | **For the  Years Ended December 31,** |       |
|----------------------------------------------------------|--------|---------------------------------------|------------|
|                                                     |   | **2001**                              |       | **2000** |   | **1999** |   |
| Net revenues                                             |   | $                                     | 650.2      |   | $ | 645.3 |   | $ | 362.0 |   |
| Cost of goods sold                                       |   | (580.9                                | )          | (559.4 | ) | (349.2 | ) |
| Gross profit                                             |   | 69.3                                  |       | 85.9 |   | 12.8 |   |
| Selling, general and  administrative expenses            |   | (36.1                                 | )          | (33.7 | ) | (15.5 | ) |
| Operating income (loss)                                  |   | 33.2                                  |       | 52.2 |   | (2.7 | ) |
| Interest income                                          |   | 2.9                                   |       | 2.0 |   | 1.8 |   |
| Interest expense                                         |   | (12.8                                 | )          | (14.4 | ) | (4.6 | ) |
| Other (expense) income                                   |   | (5.5                                  | )          | 0.6 |   | — |   |
| Income (loss) before  income tax                         |   | 17.8                                  |       | 40.4 |   | (5.5 | ) |
| Income tax                                               |   | (0.8                                  | )          | (1.8 | ) | — |   |
| Income (loss) before  extraordinary items                |   | 17.0                                  |       | 38.6 |   | (5.5 | ) |
| Extraordinary loss                                       |   | (0.6                                  | )          | — |   | — |   |
| ***Net income (loss)***                                  |   | **$**                                 | **16.4**   | ** ** | **$** | **38.6** | ** ** | **$** | **(5.5** | **)** |
|                                                     |   |                                  |       |   |   |   |   |
| **Per  common share — basic:**                      |   |                                  |       |   |   |   |   |
| Net income (loss) before  extraordinary items            |   | $                                     | 0.69       |   | $ | **1.64** |   | $ | (0.24 | ) |
| Extraordinary items                                      |   | (0.02                                 | )          | — |   | — |   |
| ***Net income (loss) available to common shareholders*** |   | **$**                                 | **0.67**   | ** ** | **$** | **1.64** | ** ** | **$** | **(0.24** | **)** |
|                                                     |   |                                  |       |   |   |   |   |
| **Per  common share — diluted:**                    |   |                                  |       |   |   |   |   |
| Net income (loss) before  extraordinary items            |   | $                                     | 0.68       |   | $ | 1.59 |   | $ | (0.24 | ) |
| Extraordinary items                                      |   | (0.02                                 | )          | — |   | — |   |
| ***Net income (loss) available to common shareholders*** |   | **$**                                 | **0.66**   | ** ** | **$** | **1.59** | ** ** | **$** | **(0.24** | **)** |
|                                                     |   |                                  | ** ** |   | ** ** |   | ** ** |
| **Weighted  average shares outstanding**                 |   |                                  |       |   |   |   |   |
| Basic                                                    |   | 24.7                                  |       | 23.5 |   | 22.5 |   |
| Diluted                                                  |   | 25.0                                  |       | 24.3 |   | 22.5 |   |

 

Seeaccompanying notes.

 

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**LONE STAR TECHNOLOGIES, INC.**

**CONSOLIDATED BALANCE SHEETS**

***($ in millions, except share data)***

 
|                                                                                                          |   | **December  31,** |       |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                          |   | **2001**          |       | **2000** |   |
| **ASSETS**                                                                                                    |   |              |       |   |   |
| **Current  assets:**                                                                                          |   |              |       |   |   |
| Cash and cash equivalents                                                                                     |   | $                 | 106.5      |   | $ | 26.7 |   |
| Short-term investments                                                                                        |   | —            |       | 0.1 |   |
| Accounts receivable, net                                                                                      |   | 70.3              |       | 95.1 |   |
| Current inventories, net                                                                                      |   | 139.4             |       | 129.5 |   |
| Other current assets                                                                                          |   | 8.9               |       | 6.1 |   |
| ***Total current assets***                                                                                    |   | 325.1             |       | 257.5 |   |
|                                                                                                          |   |              |       |   |   |
| Marketable securities                                                                                         |   | —            |       | 10.4 |   |
| Property, plant, and  equipment, net                                                                          |   | 187.1             |       | 180.6 |   |
| Goodwill, net                                                                                                 |   | 55.1              |       | 57.2 |   |
| Other noncurrent assets                                                                                       |   | 13.5              |       | 9.6 |   |
| ***Total assets***                                                                                            |   | **$**             | **580.8**  | ** ** | **$** | **515.3** | ** ** |
|                                                                                                          |   |              |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                |   |              |       |   |   |
| **Liabilities:**                                                                                              |   |              |       |   |   |
| Current installments on  long-term debt                                                                       |   | $                 | —     |   | $ | 8.0 |   |
| Accounts payable                                                                                              |   | 42.5              |       | 55.1 |   |
| Accrued liabilities                                                                                           |   | 23.6              |       | 28.6 |   |
| ***Total current liabilities***                                                                               |   | **66.1**          | ** ** | **91.7** | ** ** |
|                                                                                                          |   |              |       |   |   |
| Term loan                                                                                                     |   | —            |       | 32.0 |   |
| Revolving credit facility                                                                                     |   | —            |       | 96.2 |   |
| Senior subordinated debt                                                                                      |   | 150.0             |       | — |   |
| Postretirement benefit  obligations                                                                           |   | 35.5              |       | 24.5 |   |
| Other noncurrent  liabilities                                                                                 |   | 13.9              |       | 15.1 |   |
| ***Total liabilities***                                                                                       |   | **265.5**         | ** ** | **259.5** | ** ** |
|                                                                                                          |   |              |       |   |   |
| Commitments and  Contingencies (See Note I)                                                                   |   | —            |       | — |   |
|                                                                                                          |   |              |       |   |   |
| **Shareholders’  equity:**                                                                               |   |              |       |   |   |
| Preferred stock, $1 par  value (authorized: 10,000,000 shares, issued: none)                                  |   | —            |       | — |   |
| Common stock, $1 par value  (authorized: 80,000,000 shares, issued: 25,201,595 and 23,822,101,  respectively) |   | 25.2              |       | 23.8 |   |
| Capital surplus                                                                                               |   | 272.0             |       | 221.5 |   |
| Accumulated other  comprehensive loss                                                                         |   | (15.9             | )          | (3.6 | ) |
| Accumulated income                                                                                            |   | 34.0              |       | 17.6 |   |
| Treasury stock at cost  (313 and 168,322 common shares, respectively)                                         |   | —            |       | (3.5 | ) |
| ***Total shareholders’ equity***                                                                         |   | **315.3**         | ** ** | **255.8** | ** ** |
|                                                                                                          |   |              |       |   |   |
| ***Total liabilities and shareholders’ equity***                                                         |   | **$**             | **580.8**  | ** ** | **$** | **515.3** | ** ** |

 

Seeaccompanying notes.

 

24

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**LONE STAR TECHNOLOGIES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

***($ in millions)***

 
|                                                                                                     |   | **For the  Years Ended December 31,** |      |
|----------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                                                                     |   | **2001**                              |      | **2000** |   | **1999** |   |
| ***Beginning cash and cash equivalents***                                                                |   | **$**                                 | **26.7**  | ** ** | **$** | **22.2** | ** ** | **$** | **20.9** | ** ** |
|                                                                                                     |   |                                  |      |   |   |   |   |
| **Cash  flows from operating activities:**                                                               |   |                                  |      |   |   |   |   |
| Net income (loss)                                                                                        |   | 16.4                                  |      | 38.6 |   | (5.5 | ) |
| **Adjustments  to reconcile net income (loss) to net cash****provided  (used) by operating activities:** |   |                                  |      |   |   |   |   |
| Depreciation and  amortization                                                                           |   | 23.0                                  |      | 21.4 |   | 16.7 |   |
| Extraordinary loss                                                                                       |   | 0.6                                   |      | — |   | — |   |
| Non-cash charge for stock  compensation                                                                  |   | (0.2                                  | )         | 0.7 |   | — |   |
| Accounts receivable, net                                                                                 |   | 24.8                                  |      | (23.5 | ) | (19.8 | ) |
| Current inventories, net                                                                                 |   | (9.9                                  | )         | (29.9 | ) | — |   |
| Accounts payable and  accrued liabilities                                                                |   | (17.6                                 | )         | (10.0 | ) | 41.8 |   |
| Other                                                                                                    |   | (5.8                                  | )         | (5.9 | ) | (5.1 | ) |
| ***Net cash provided (used) by operating activities***                                                   |   | 31.3                                  |      | (8.6 | ) | 28.1 |   |
|                                                                                                     |   |                                  |      |   |   |   |   |
| **Cash  flows from investing activities:**                                                               |   |                                  |      |   |   |   |   |
| Capital expenditures                                                                                     |   | (25.2                                 | )         | (23.3 | ) | (7.2 | ) |
| Sale of short-term  investments                                                                          |   | 0.1                                   |      | 1.1 |   | 1.9 |   |
| Sale of marketable  securities                                                                           |   | 10.4                                  |      | 5.0 |   | (6.4 | ) |
| Proceeds from sale of  property                                                                          |   | —                                |      | 0.8 |   | — |   |
| Cash paid for  acquisitions, net of cash received                                                        |   | —                                |      | (80.2 | ) | — |   |
| ***Net cash used in investing activities***                                                              |   | (14.7                                 | )         | (96.6 | ) | (11.7 | ) |
|                                                                                                     |   |                                  |      |   |   |   |   |
| **Cash  flows from financing activities:**                                                               |   |                                  |      |   |   |   |   |
| Net proceeds from issuance  of senior subordinated debt                                                  |   | 145.9                                 |      | — |   | — |   |
| Debt issuance costs                                                                                      |   | (1.0                                  | )         | — |   | — |   |
| Net (payments) borrowings  under revolving credit facilities                                             |   | (96.2                                 | )         | 75.2 |   | (25.0 | ) |
| Issuance of term note                                                                                    |   | —                                |      | 39.0 |   | 10.0 |   |
| Principal payments on term  notes                                                                        |   | (40.0                                 | )         | (8.0 | ) | (1.0 | ) |
| Proceeds from options                                                                                    |   | 4.4                                   |      | 3.5 |   | 0.9 |   |
| Net proceeds from stock  offering                                                                        |   | 50.1                                  |      | — |   | — |   |
| ***Net cash provided (used) by financing activities***                                                   |   | 63.2                                  |      | 109.7 |   | (15.1 | ) |
|                                                                                                     |   |                                  |      |   |   |   |   |
| Net increase in cash and  cash equivalents                                                               |   | 79.8                                  |      | 4.5 |   | 1.3 |   |
|                                                                                                     |   |                                  |      |   |   |   |   |
| ***Ending cash and cash equivalents***                                                                   |   | **$**                                 | **106.5** | ** ** | **$** | **26.7** | ** ** | **$** | **22.2** | ** ** |
|                                                                                                     |   |                                  |      |   |   |   |   |
| **Supplemental  disclosure of noncash transactions:**                                                    |   |                                  |      |   |   |   |   |
| Issuance of common stock  for acquisition                                                                |   | $                                     | —    |   | $ | 20.0 |   | $ | — |   |
|                                                                                                     |   |                                  |      |   |   |   |   |
| **Supplemental  cash flow disclosure:**                                                                  |   |                                  |      |   |   |   |   |
| Interest paid                                                                                            |   | $                                     | 13.1      |   | $ | 14.8 |   | $ | 6.7 |   |
| Income taxes paid                                                                                        |   | $                                     | 0.8       |   | $ | 1.3 |   | $ | — |   |

 

See accompanying notes.

 

25

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**LONE STAR TECHNOLOGIES, INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

***($ in millions)***

 
|                                     |   |       |   |        |   | **Accumulated**    |   |            |   |         |   |      |   |
|------------------------------------------|--------|------------|--------|-------------|--------|--------------------|--------|-----------------|--------|--------------|--------|-----------|--------|
|                                     |   |       |   |        |   | **Other**          |   | **Accumulated** |   |         |   |      |   |
|                                     |   | **Common** |   | **Capital** |   | **Comprehensive**  |   | **Income**      |   | **Treasury** |   |      |   |
|                                     |   | **Stock**  |   | **Surplus** |   | **Income  (Loss)** |   | **(Deficit)**   |   | **Stock**    |   | **Total** |   |
| ***Balance, December 31, 1998***         |   | $23.1      |   | $208.6      |   | $(12.8             | )      | $(15.5          | )      | $(14.3       | )      | $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    |   | —     |   | (2.0        | )      | —             |   | —          |   | 2.9          |   | 0.9       |   |
|                                     |   |       |   |        |   |               |   |            |   |         |   |      |   |
| ***Balance, December 31, 1999***         |   | 23.1       |   | 206.6       |   | (1.4               | )      | (21.0           | )      | (11.4        | )      | 195.9     |   |
| Net income                               |   | —     |   | —      |   | —             |   | 38.6            |   | —       |   | 38.6      |   |
| Other comprehensive loss:                |   |       |   |        |   |               |   |            |   |         |   |      |   |
| Minimum pension liability  adjustment    |   | —     |   | —      |   | (2.2               | )      | —          |   | —       |   | (2.2      | )      |
| Comprehensive income                     |   |       |   |        |   |               |   |            |   |         |   | 36.4      |   |
| Stock issuance for  acquisition          |   | 0.7        |   | 19.3        |   | —             |   | —          |   | —       |   | 20.0      |   |
| Employee benefit plan  stock issuance    |   | —     |   | (4.4        | )      | —             |   | —          |   | 7.9          |   | 3.5       |   |
|                                     |   |       |   |        |   |               |   |            |   |         |   |      |   |
| ***Balance, December 31, 2000***         |   | 23.8       |   | 221.5       |   | (3.6               | )      | 17.6            |   | (3.5         | )      | 255.8     |   |
| Net income                               |   | —     |   | —      |   | —             |   | 16.4            |   | —       |   | 16.4      |   |
| Other comprehensive loss:                |   |       |   |        |   |               |   |            |   |         |   |      |   |
| Minimum pension liability  adjustment    |   | —     |   | —      |   | (12.2              | )      | —          |   | —       |   | (12.2     | )      |
| Foreign currency  translation adjustment |   | —     |   | —      |   | (0.1               | )      | —          |   | —       |   | (0.1      | )      |
| Comprehensive income                     |   |       |   |        |   |               |   |            |   |         |   | 4.1       |   |
| Stock offerings                          |   | 1.1        |   | 49.0        |   | —             |   | —          |   | —       |   | 50.1      |   |
| Employee benefit plan  stock issuance    |   | 0.3        |   | 1.5         |   | —             |   | —          |   | 3.5          |   | 5.3       |   |
|                                     |   |       |   |        |   |               |   |            |   |         |   |      |   |
| ***Balance, December 31, 2001***         |   | $25.2      |   | $272.0      |   | $(15.9             | )      | $34.0           |   | $—      |   | $315.3    |   |

 

Seeaccompanying notes.

 

26

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**LONES****TART****ECHNOLOGIES, I****NC.**

**NOTES T****O C****ONSOLIDATED F****INANCIAL S****TATEMENTS**

 

Lone Star Technologies, Inc. (Lone Star), a Delaware corporation, is amanagement and holding company with three principal operating subsidiaries,Lone Star Steel Company (Steel), Fintube Technologies, Inc. (Fintube), acquiredJanuary 3, 2000, and Bellville Tube Corporation (Bellville), acquired April 1,2000.  Steel manufactures and globallymarkets oilfield products to the oil and gas drilling industry, mechanicaltubing products to automotive, fluid power, and other markets for variousmechanical applications, and flat rolled steel and other tubular products todomestic industrial markets.  Fintubemanufactures specialty finned tubular products used in a variety of heatrecovery applications including combined-cycle electrical power generation.  Bellville manufactures oilfield tubularproducts.

 

Lone Star’s consolidated revenues are not seasonal.  However, demand for oilfield products issubject to significant fluctuations due to the volatility of oil and gas pricesand domestic drilling activity as well as other factors including competitionfrom imports.  Demand for mechanicaltubing and finned tubular products are primarily subject to economicconditions.

** **

**A****CCOUNTING****P****OLICIES****- N****OTE****A**

*** ***

***Principles of consolidation***.  Theconsolidated financial statements include the accounts of Lone Star and itssubsidiaries.  Intercompany transactionsare eliminated in consolidation.

*** ***

***Cash, investments, and marketablesecurities***.  Lone Star’s cash and cash equivalentsinclude commercial bank accounts and highly liquid investments in a fundconsisting of U. S. government and related agencies obligations with originalmaturities of less than three months. Short-term investments consist of U. S. government and related agenciesdebt obligations with maturities at purchase greater than three months and upto one year.  Marketable securitiesconsist of U. S. government and related agencies debt obligations withmaturities 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 ofwhich is less than one year, are classified as held-to-maturity because LoneStar has the intent and ability to hold them to maturity.  The recorded amount of our cash equivalentsapproximates market value at December 31, 2001.

*** ***

***Inventories*** are stated at the lower of cost (principallylast-in, first-out “LIFO”) or market value and include raw materials, labor,and overhead.

*** ***

***Property, plant, and equipment*** are stated at cost.  Depreciation is provided on either astraight-line method or an accelerated basis over the estimated useful lives(5-10 years) of depreciable assets. Long-lived assets including property, plant, and equipment areperiodically evaluated to determine whether events or changes in circumstanceshave occurred that indicate the remaining asset balances may not be recoverableand an impairment loss should be recorded.

*** ***

***Income taxes***. Lone Star files a consolidated federal income tax return.  Lone Star utilizes an asset and liabilityapproach for financial accounting and income tax reporting.  Deferred tax liabilities or assets arerecognized for the estimated future tax effects attributable to temporarydifferences and carryforwards and are adjusted whenever tax rates or otherprovisions of income tax statutes change.

*** ***

***Revenue recognition***. Product revenues are recognized as sales when revenue is earned and isrealized or realizable.  This includessatisfying the following criteria:  thearrangement with the customer is evident, usually through the receipt of apurchase order; the sales price is fixed or determinable; delivery hasoccurred, which may include delivery to the customer storage warehouse locationat one of the Company’s subsidiaries; and collectibility is reasonablyassured.  Freight and shipping that isbilled to customers is included in net sales, and the cost of shipping isincluded in cost of sales.

*** ***

***Goodwill and other intangibles.*** TheFintube and Bellville acquisitions have been accounted for under the purchasemethod of accounting, and accordingly, the purchase price has been allocated tothe assets acquired and the liabilities assumed based upon fair values at thedate of the acquisition.  The excesspurchase price over the fair value of the tangible and intangible net assets acquiredhas been recorded as goodwill.   Also,goodwill was recorded when the

 

27

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minority interest in Steel was acquired in 1997.  Goodwill and other intangible amortizationis provided using the straight-line method over the periods as follows (inmillions):

 
|                   |   | **Fintube** |   | **Bellville** |   | **Steel**  |   |
|------------------------|--------|-------------|--------|---------------|--------|------------|--------|
|                   |   | **Period**  |   | **Amounts**   |   | **Period** |   | **Amounts** |   | **Period** |   | **Amounts** |   |
| Goodwill               |   | 30 years    |   | $44.8         |   | 30 years   |   | $6.8 |   | 20 years |   | $3.5 |   |
| Non-compete agreements |   | 6 years     |   | $0.4          |   | —     |   | — |   | — |   | — |   |
| License agreements     |   | 5 years     |   | $0.1          |   | —     |   | — |   | — |   | — |   |
| Other                  |   | 5 years     |   | $0.5          |   | —     |   | — |   | — |   | — |   |

 

Impairment of goodwill and other intangibles is assessed at eachbalance sheet date based on a review of the acquired operations as to income,growth of income in relation to the expected growth of income when acquired, ifthe operations are considered for sale, and estimated realizable value.  Valuation reserves are provided if thecarrying value of acquired goodwill and other intangibles is determined to bepermanently impaired.  Beginning onJanuary 1, 2002, goodwill will no longer be amortized.  Impairment of goodwill will be assessedannually and as events and circumstances warrant.  Goodwill and other intangibles are presented net of accumulatedamortization of $6.0 million and $3.4 million at December 31, 2001 and 2000,respectively.

*** ***

***Reclassifications.***  Inaccordance with EITF 00-10, “Accounting for Shipping and Handling Fees andCosts,” Steel changed its accounting policy for freight.  The new pronouncement required freightcharges billed to customers to be classified in sales and shipping costsincurred to be classified in cost of sales. Steel previously reported such amounts as a reduction of net sales.  Accordingly, reclassifications were made for1999 to increase net sales and costs of sales by $8.6 million, with no effectto reported gross profit.  Certain other2000 and 1999 amounts have been reclassified to conform with the currentpresentation.

*** ***

***Use of Estimates. ***Preparation of the consolidated financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosures of contingent assets and liabilities,and the reported amounts of revenues and expenses. We evaluate our estimatesprimarily based on historical experience and business knowledge.  Our estimates are revised as circumstanceschange.  However, actual results coulddiffer from those estimates. Significant estimates have been made to reserve for warranty claims, baddebts and environmental obligations as follows:

 

Our products are used in applications which are subject to inherentrisks including well failures, performance deficiencies, line pipe leaks,personal injury, property damage, environmental contamination or loss ofproduction.  We warrant our products tomeet certain specifications.  Actual orclaimed deficiencies from these specifications may give rise to claims.  We maintain a reserve for known and unknownwarranty claims.  The warranty claimexposure is evaluated using historical claim trends and information availableon specifically known claims. We also maintain product and excess liabilityinsurance subject to certain deductibles that limit our exposure to theseclaims.  We consider the extent of insurancecoverage in its estimate of the reserve. Typically, this reserve is not subject to significant fluctuations fromperiod to period.  However, theincurrence of an unusual amount of claims could alter our exposure and therelated reserve.

 

Our customers are concentrated in markets and industries that aresubject to volatility.  In addition, wesell a substantial amount of products to a few customers.  We maintain a reserve for known and unknownbad debts.  We evaluate credit risk andthe adequacy of our reserve by monitoring the age of our accounts receivableand credit worthiness of our customers. In addition, we monitor the overall status of the industries where ourproducts and services are utilized. Typically, this reserve is not subject to significant fluctuations fromperiod to period.

 

Our business is subject to numerous environmental regulations.  We are actively remediating a few knownexposures and conducting post closure monitoring activities.  Our environmental department monitors thestatus of our environmental exposures and compliance with regulations throughvarious means.  We maintain anenvironmental reserve to cover the costs of expected remediation and postclosure monitoring.  We estimate therange of cost for the remediation and post closure based on historicalexperience, results of monitoring and the known extent of exposure.  We evaluate the range of exposure and recordthe reserve at the most probable amount within that range. Typically, thisreserve is not subject to significant fluctuations from period to period;although given the nature of environmental exposure, significant changes in thereserve are possible.

 

28

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**C****URRENT****O****PERATING****E****NVIRONMENT****A****ND****B****USINESS****S****EGMENTS****— N****OTE****B**

 
|                                  |   | ***($ in millions)***         |   |
|---------------------------------------|--------|-------------------------------|--------|
|                                  |   | **Years  Ended December 31,** |   |
|                                  |   | **2001**                      |   | **2000** |   | **1999** |   |
| ***Oilfield***                        |   |                          |   |   |   |   |   |
| Net revenues                          |   | $                             | 401.9  |   | $ | 362.0 |   | $ | 187.3 |   |
| Operating income                      |   | 35.7                          |   | 35.2 |   | (5.8 | ) |
| Identifiable assets                   |   | 243.0                         |   | 238.1 |   | 158.8 |   |
| Capital expenditures                  |   | 12.3                          |   | 10.0 |   | 3.6 |   |
| Depreciation and  amortization        |   | 11.8                          |   | 10.8 |   | 9.1 |   |
|                                  |   |                          |   |   |   |   |   |
| ***Specialty tubing***                |   |                          |   |   |   |   |   |
| Net revenues                          |   | $                             | 187.7  |   | $ | 220.9 |   | $ | 126.6 |   |
| Operating income                      |   | 8.0                           |   | 22.0 |   | 10.6 |   |
| Identifiable assets                   |   | 197.2                         |   | 216.6 |   | 127.4 |   |
| Capital expenditures                  |   | 11.8                          |   | 11.6 |   | 3.6 |   |
| Depreciation and  amortization        |   | 9.7                           |   | 9.6 |   | 6.6 |   |
|                                  |   |                          |   |   |   |   |   |
| ***Flat rolled steel and other***     |   |                          |   |   |   |   |   |
| Net revenues                          |   | $                             | 60.6   |   | $ | 62.4 |   | $ | 48.1 |   |
| Operating loss                        |   | (5.8                          | )      | (1.1 | ) | (4.5 | ) |
| Identifiable assets                   |   | 24.5                          |   | 21.2 |   | 20.0 |   |
| Capital expenditures                  |   | 0.9                           |   | 1.7 |   | — |   |
| Depreciation and  amortization        |   | 1.2                           |   | 1.0 |   | 1.0 |   |
|                                  |   |                          |   |   |   |   |   |
| ***Corporate and other nonsegments*** |   |                          |   |   |   |   |   |
| Operating loss                        |   | $                             | (4.7   | ) | $ | (3.9 | ) | $ | (3.0 | ) |
| Identifiable assets                   |   | 116.1                         |   | 39.4 |   | 44.0 |   |
| Capital expenditures                  |   | 0.2                           |   | — |   | — |   |
| Depreciation and  amortization        |   | 0.3                           |   | — |   | — |   |
|                                  |   |                          |   |   |   |   |   |
| ***Consolidated totals***             |   |                          |   |   |   |   |   |
| Net revenues                          |   | $                             | 650.2  |   | $ | 645.3 |   | $ | 362.0 |   |
| Operating income (loss)               |   | 33.2                          |   | 52.2 |   | (2.7 | ) |
| Total assets                          |   | 580.8                         |   | 515.3 |   | 351.1 |   |
| Capital expenditures                  |   | 25.2                          |   | 23.3 |   | 7.2 |   |
| Depreciation and  amortization        |   | 23.0                          |   | 21.4 |   | 16.7 |   |

 

Oilfield products are comprised of casing, tubing, and line pipe thatare manufactured and marketed globally to the oil and gas drillingindustry.  Specialty tubing productsconsist of (1) precision mechanical tubing and as-welded tubing that aremanufactured and marketed globally to automotive, fluid power, and othermarkets for various mechanical applications and (2) finned tubular productsused in a variety of heat recovery applications.  Flat rolled steel and other tubular products and services aremanufactured and provided to general industrial markets.

 

Sales of oilfield products are greatly affected by the level ofdomestic oil and gas drilling, which in turn is primarily dependent on oil andnatural gas prices.  Because of thevolatility of oil and gas prices and drilling activity as well as otherfactors, such as competition from foreign imports, demand for these steelproducts can be subject to significant fluctuations.

 

The specialty precision mechanical tubing, flat rolled, and othertubular product markets are more diversified than oilfield markets, with salestraditionally following general domestic economic conditions.  The principal market is

 

29

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domestic, although sales are made into international markets.  The majority of sales occur through networksof sales distributors, although some sales are made directly to end-users.  Tubular products produced by othermanufacturers are also marketed.

 

Sales of finned tubular products are dependent upon the amount ofconstruction of combined-cycle electric power plants.  Construction of the power plants is based upon economicconditions, the price of natural gas, and capital availability.  Late in 2001, several power plantconstruction projects were deferred or cancelled resulting in decreased demandfor these products for the near term.

 

Our participation in the flat rolled steel commodity market providesflexibility in sourcing lower cost steel for our tubular products and to someextent involves our excess capacity for flat rolled steel as related to themanufacture of our oilfield and specialty tubing products and certain costconsiderations associated with our total manufacturing operations.  Our flat rolled steel commodity market isgenerally concentrated in the southwestern region of the United States.  Flat rolled steel is sold in highlycompetitive markets, with price, quality, and availability primarilydetermining customer purchase decisions.

 

Sales to the largest oilfield products customer were $39.1 million orapproximately 6% of net revenues in 2001, $45.7 million or 7% in 2000, and$28.1 million or 8% in 1999.  Sales toanother significant customer of flat rolled steel and other tubular productswere $42.9 million or 7%, $48.3 million or 7%, and $36.4 million or 10% of netrevenues for 2001, 2000, and 1999 respectively.  Direct foreign revenues as a percent of total oilfield revenueswere approximately 3%, 1%, and 6% of the total in 2001, 2000, and 1999,respectively.

 

We manufacture our oilfield products, precision mechanical tubulars,flat rolled steel and other products at our facilities located in Texas.  Raw materials and supplies, principallysteel slabs and steel coils used in the manufacture of these products havehistorically been readily available from various competitive sources.  The manufacture of these products usesseveral common facilities and shares administrative support.  Accordingly, the segment informationcontains certain costs and assets which are allocated and may not reflect eachline of business as if it were operated separately.

 

We also have operations in Oklahoma, Mexico, and Canada.  Primary operations include the applicationof fins and studs to tubes, specialty finned tubular products for heat recoveryapplications, and the fabrication of heat recovery steam generators andeconomizers.  Domestic manufacturingoperations are internally supported by a steel coil slitting division and atube mill.  Principal markets arethroughout North America, Asia, and South America.

 

The corporate segment is responsible for financial operations includinginvesting and managing financial assets, financing of product purchases,shareholder relations, and assessing and evaluating strategic alternatives.

 

Of our total active employees, 44% are represented by five collectivebargaining agreements.  The majority ofunion workers are represented by the United Steelworkers of America under acontract signed in June 2001, which expires on May 31, 2005.  Two other agreements covering approximately79 warehouse and plant security workers as of December 31, 2001, expire in July2003 and September 2003, respectively. The remaining two agreements covered a total of 145 employees in Canadaand Mexico as of December 31, 2001.

 

For the year ended December 31, 2001, Lone Star had net sales of $650.2million and operating income of $33.2 million. This compares to net sales of$645.3 million and an operating income of $52.2 million for 2000.  Oilfield products revenues were 11% higherthan in 2000 due to an increase in drilling activity, with the active rig countrising from 1,114 at the end of 2000 to 1,275 at the end of the second quarterof 2001.  However, drilling activitydecreased steadily through the second half of 2001 and by year-end 887 rigswere active.   Demand for oilfieldproducts is likely to remain weak until the expectation of higher oil and gasprices results in an increase in the number of active drilling rigs. The levelsof oil and gas prices and related drilling activities are subject to manyfactors.  As a result, the market can besubject to volatile economic swings. Therefore, no assurance can be given regarding the extent of futuredemand for our oil country tubular goods, or that profitability can be achievedduring periods of depressed demand.

 

Principal sources of funds include cash and cash equivalents held, cashgenerated by operations and borrowings under our revolving credit facility.

 

30

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Lone Star believes that reimbursements by Steel, Fintube, and Bellvillefor most of its operating costs and funds generated by cash and investmentswill be adequate to fund its cash requirements during 2002.

 

31

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**A****DDITIONAL****B****ALANCE****S****HEET****I****NFORMATION****— N****OTE****C**

 
|                                                  |   | ***($ in millions)*** |   |
|-------------------------------------------------------|--------|-----------------------|--------|
|                                                  |   | **2001**              |   | **2000** |   |
| ***Inventories***                                     |   |                  |   |   |   |
| Finished goods                                        |   | $                     | 42.2   |   | $ | 30.8 |   |
| Work in process                                       |   | 47.2                  |   | 51.0 |   |
| Raw materials                                         |   | 50.4                  |   | 52.3 |   |
| Materials, supplies, and  other                       |   | 25.8                  |   | 25.5 |   |
| ***Total inventories before LIFO valuation reserve*** |   | 165.6                 |   | 159.6 |   |
| Reserve to reduce  inventories to LIFO value          |   | (21.2                 | )      | (24.1 | ) |
| ***Total inventories***                               |   | 144.4                 |   | 135.5 |   |
| Amount included in other  noncurrent assets           |   | (5.0                  | )      | (6.0 | ) |
| ***Net current inventories***                         |   | $                     | 139.4  |   | $ | 129.5 |   |
|                                                  |   |                  |   |   |   |
| ***Property, plant, and equipment***                  |   |                  |   |   |   |
| Land and land improvements                            |   | $                     | 13.1   |   | $ | 13.1 |   |
| Buildings, structures, and  improvements              |   | 21.2                  |   | 19.2 |   |
| Machinery and equipment                               |   | 347.9                 |   | 333.3 |   |
| Construction in progress                              |   | 22.2                  |   | 13.0 |   |
| ***Total property, plant, and equipment***            |   | 404.4                 |   | 378.6 |   |
| Less accumulated  depreciation and amortization       |   | (217.3                | )      | (198.0 | ) |
| Property, plant, and  equipment, net                  |   | $                     | 187.1  |   | $ | 180.6 |   |
|                                                  |   |                  |   |   |   |
| ***Other noncurrent assets***                         |   |                  |   |   |   |
| Inventory (supplies and  spare parts)                 |   | $                     | 5.0    |   | $ | 6.0 |   |
| Other                                                 |   | 8.5                   |   | 3.6 |   |
| ***Total other noncurrent assets***                   |   | $                     | 13.5   |   | $ | 9.6 |   |
|                                                  |   |                  |   |   |   |
| ***Accrued liabilities***                             |   |                  |   |   |   |
| Accrued compensation                                  |   | $                     | 8.8    |   | $ | 10.4 |   |
| Property taxes                                        |   | 0.7                   |   | 3.7 |   |
| Warranty reserves                                     |   | 3.0                   |   | 2.0 |   |
| Environmental reserves                                |   | 0.5                   |   | 1.0 |   |
| Pension obligations                                   |   | 2.1                   |   | — |   |
| Other                                                 |   | 8.5                   |   | 11.5 |   |
| ***Total accrued liabilities***                       |   | $                     | 23.6   |   | $ | 28.6 |   |
|                                                  |   |                  |   |   |   |
| ***Other noncurrent liabilities***                    |   |                  |   |   |   |
| Environmental reserves                                |   | $                     | 9.5    |   | $ | 9.8 |   |
| Other                                                 |   | 4.4                   |   | 5.3 |   |
| ***Total other noncurrent liabilities***              |   | $                     | 13.9   |   | $ | 15.1 |   |

 

Accounts receivable on the consolidated balance sheet is stated net ofallowance for doubtful accounts of $1.8 million at December 31, 2001 and $2.0million at December 31, 2000. Approximately $144.9 and $141.9 million of totalinventories before LIFO valuation reserves were accounted for on the LIFO basisat December 31, 2001 and 2000, respectively. Non-LIFO inventories are stated at the lower of average cost or market.  The total inventories before LIFO valuationreserves approximates replacement cost of the inventories.

 

32

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**S****HAREHOLDERS****‘ E****QUITY****— N****OTE****D**

 

On May 2, 2001, Lone Star sold 1.2 million shares of its common stockunder a previously filed universal shelf registration statement.  The proceeds to Lone Star was $50.8million.  Proceeds of the sale were usedto extinguish debt associated with our credit facilities at Steel and Fintubeand for general corporate purposes.

 

The following table identifies changes in common stock issued andtreasury stock from December 31, 1999 to December 31, 2001.

 
|                              |   | **Issued** |   | **Treasury  Stock** |   | **Outstanding** |   |
|-----------------------------------|--------|------------|--------|---------------------|--------|-----------------|--------|
| Balance, December 31, 1999        |   | 23,061,864 |   | (462,991            | )      | 22,598,873      |   |
| Issuance for Fintube  Acquisition |   | 760,237    |   | —              |   | 760,237         |   |
| Employee benefit plans            |   | —     |   | 294,669             |   | 294,669         |   |
| Balance, December 31, 2000        |   | 23,822,101 |   | (168,322            | )      | 23,653,779      |   |
| Stock offering                    |   | 1,150,000  |   | —              |   | 1,150,000       |   |
| Employee benefit plans            |   | 229,494    |   | 168,009             |   | 397,503         |   |
| Balance, December 31, 2001        |   | 25,201,595 |   | (313                | )      | 25,201,282      |   |

 

**D****EBT****- N****OTE****E**

 

In 2000, Steel had a credit facility consisting of a three-year $120.0million revolving line of credit and a three-year $10.0 million term loan.  Under this revolving credit facility, Steelcould borrow an amount based on a percentage of eligible accounts receivableand inventories, reduced by outstanding letters of credit.

 

In October 2001, the Steel credit facility was restated and amended toa three-year $100 million senior secured credit facility for use by us and ourdomestic subsidiaries.  Borrowings fromthis facility can be used for general corporate purposes.  Under this credit facility, we can borrow anamount based on a percentage of eligible accounts receivable and inventoriesreduced by outstanding letters of credit. The availability under this facilitywas $99.7 million at December 31, 2001. Substantially all of our assets, other than real estate, secure thisloan.  At our option, the interest rateis the prime lending rate or the LIBOR plus the applicable additionalinterest.  As a result, we will besubject to interest rate risk if we borrow from the credit facility.   At December 31, 2001, no amount wasoutstanding under this credit facility.

 

In 2000, our subsidiary, Fintube, had a senior credit facilityproviding a $20 million revolving line of credit and a $39 million term loanused to pay part of the cash portion of the purchase price in the Fintubeacquisition.  In August 2001, theFintube credit facility was paid in full early and terminated, resulting in thewrite off of $0.6 million in deferred financing costs as an extraordinaryitem.  In addition, we terminated aninterest rate swap agreement related to the Fintube credit facility.  The settlement of the interest rate swapresulted in a $0.8 million charge included in other expenses.

 

Steel engages in slab consignment and sales agreements with thirdparties.  Under these agreements, Steelarranges for third parties to purchase slabs from vendors that manufacture theslabs and the third party consigns the slab inventory to Steel.  Steel is then required to repurchase theslab inventory based on usage within specified time periods.  These inventory financing transactions havebeen accounted for as product financing arrangements.  Inventory financed under these arrangements has been recorded asinventory by Steel.  At December 31,2001, we were not obligated for any slab consignment arrangements.

 

On May 29, 2001, Lone Star issued $150.0 million 9% senior subordinatednotes due September 1, 2011 to qualified institutional buyers.  Interest on the outstanding seniorsubordinated notes will accrue at a rate of 9.0% per year, payablesemi-annually in arrears on each June 1 and December 1, commencing December 1,2001.  Lone Star used the proceedsreceived from the senior notes to pay down the revolving lines of credit, termloans, slab consignment obligations, and for general corporate purposes.  The notes are fully and unconditionallyguaranteed by each of the current and future domestic restricted subsidiariesof Lone Star.  The following condensedconsolidating financial statements of Lone Star and its subsidiaries arepresented for the periods in which nonguarantors of these notes were part ofthe consolidated financial statements. The information for Lone Star is presented in the “Parent Company”column.  The nonguarantors areinsignificant to the overall financial statements and are therefore included inthe “Subsidiaries” column.

 

33

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**LONE STAR TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**($ in millions)**

 
|                                 |   | **December 31, 2001** |   |
|--------------------------------------|--------|-----------------------|--------|
|                                 |   | **Parent**            |   |   |   |   |   |   |   |
|                                 |   | **Company**           |   | **Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
| Assets:                              |   |                  |   |   |   |   |   |   |   |
| Current Assets                       |   |                  |   |   |   |   |   |   |   |
| Cash and cash equivalents            |   | $                     | 105.6  |   | $ | 0.9 |   | $ | — |   | $ | 106.5 |   |
| Accounts receivable, net             |   | 4.6                   |   | 70.3 |   | (4.6 | ) | 70.3 |   |
| Current inventories, net             |   | —                |   | 139.4 |   | — |   | 139.4 |   |
| Other current assets                 |   | 0.7                   |   | 8.2 |   | — |   | 8.9 |   |
| Total current assets                 |   | 110.9                 |   | 218.8 |   | (4.6 | ) | 325.1 |   |
|                                 |   |                  |   |   |   |   |   |   |   |
| Investment in subsidiaries           |   | 189.7                 |   | — |   | (189.7 | ) | — |   |
| Property, plant and  equipment, net  |   | 0.2                   |   | 186.9 |   | — |   | 187.1 |   |
| Goodwill, net                        |   | 3.5                   |   | 51.6 |   | — |   | 55.1 |   |
| Other noncurrent assets              |   | 166.2                 |   | 7.4 |   | (160.1 | ) | 13.5 |   |
| Total assets                         |   | $                     | 470.5  |   | $ | 464.7 |   | $ | (354.4 | ) | $ | 580.8 |   |
|                                 |   |                  |   |   |   |   |   |   |   |
| Liabilities:                         |   |                  |   |   |   |   |   |   |   |
| Accounts payable                     |   | $                     | 1.2    |   | $ | 45.9 |   | $ | (4.6 | ) | $ | 42.5 |   |
| Accrued liabilities                  |   | 1.5                   |   | 22.1 |   | — |   | 23.6 |   |
| Total current liabilities            |   | 2.7                   |   | 68.0 |   | (4.6 | ) | 66.1 |   |
|                                 |   |                  |   |   |   |   |   |   |   |
| Senior subordinated debt             |   | 150.0                 |   | — |   | — |   | 150.0 |   |
| Post-retirement benefit  obligations |   | —                |   | 35.5 |   | — |   | 35.5 |   |
| Other noncurrent  liabilities        |   | 2.5                   |   | 171.5 |   | (160.1 | ) | 13.9 |   |
| Total liabilities                    |   | 155.2                 |   | 275.0 |   | (164.7 | ) | 265.5 |   |
| Total shareholders’ equity      |   | 315.3                 |   | 189.7 |   | (189.7 | ) | 315.3 |   |
| Total liabilities &  equity      |   | $                     | 470.5  |   | $ | 464.7 |   | $ | (354.4 | ) | $ | 580.8 |   |

 

34

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**LONE STAR TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATING INCOME STATEMENT**

**($ in millions)**

 
|                                          |   | **For the Twelve Months Ended December 31, 2001** |   |
|-----------------------------------------------|--------|---------------------------------------------------|--------|
|                                          |   | **Parent**                                        |   |   |   |   |   |   |   |
|                                          |   | **Company**                                       |   | **Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
| Net Revenues                                  |   | $                                                 | — |   | $ | 663.2 |   | $ | (13.0 | ) | $ | 650.2 |   |
| Cost of Goods Sold                            |   | —                                            |   | (593.9 | ) | 13.0 |   | (580.9 | ) |
| Gross profit                                  |   | —                                            |   | 69.3 |   | — |   | 69.3 |   |
| Selling, General and  Administrative expenses |   | 0.4                                               |   | (36.5 | ) | — |   | (36.1 | ) |
| Equity in subsidiaries’  income          |   | 19.7                                              |   | — |   | (19.7 | ) | — |   |
| Operating income                              |   | 20.1                                              |   | 32.8 |   | (19.7 | ) | 33.2 |   |
| Interest expense, net                         |   | 1.2                                               |   | (11.1 | ) | — |   | (9.9 | ) |
| Other expense, net                            |   | (4.9                                              | )      | (0.6 | ) | — |   | (5.5 | ) |
| Income tax                                    |   | —                                            |   | (0.8 | ) | — |   | (0.8 | ) |
| Income before  extraordinary items            |   | 16.4                                              |   | 20.3 |   | (19.7 | ) | 17.0 |   |
| Extraordinary items                           |   | —                                            |   | (0.6 | ) | — |   | (0.6 | ) |
| Net income                                    |   | $                                                 | 16.4   |   | $ | 19.7 |   | $ | (19.7 | ) | $ | 16.4 |   |

 

**LONE STAR TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATING CASH FLOW STATEMENT**

**($ in millions)**

 
|                                               |   | **For the Twelve Months Ended December 31, 2001** |   |
|----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                               |   | **Parent**                                        |   |   |   |   |   |   |   |
|                                               |   | **Company**                                       |   | **Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
| Cash from Operating  Activities:                   |   |                                              |   |   |   |   |   |   |   |
| Net income                                         |   | $                                                 | 16.4   |   | $ | 19.7 |   | $ | (19.7 | ) | $ | 16.4 |   |
| Undistributed equity in  subsidiaries’ income |   | (19.7                                             | )      | — |   | 19.7 |   | — |   |
| Other                                              |   | (3.0                                              | )      | 17.9 |   | — |   | 14.9 |   |
| Net cash provided by  operating activities         |   | (6.3                                              | )      | 37.6 |   | — |   | 31.3 |   |
| Net cash flows from  investing activities          |   | 10.3                                              |   | (25.0 | ) | — |   | (14.7 | ) |
| Net cash flows from  financing activities          |   | 76.3                                              |   | (13.1 | ) | — |   | 63.2 |   |
| Net change in cash                                 |   | 80.3                                              |   | (0.5 | ) | — |   | 79.8 |   |
| Net cash beginning balance                         |   | 25.3                                              |   | 1.4 |   | — |   | 26.7 |   |
| Net cash ending balance                            |   | $                                                 | 105.6  |   | $ | 0.9 |   | $ | — |   | $ | 106.5 |   |

 

35

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**LONE STAR TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**($ in millions)**

 
|                                 |   | **December 31, 2000** |   |
|--------------------------------------|--------|-----------------------|--------|
|                                 |   | **Parent**            |   |   |   |   |   |   |   |
|                                 |   | **Company**           |   | **Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
| Assets:                              |   |                  |   |   |   |   |   |   |   |
| Current Assets                       |   |                  |   |   |   |   |   |   |   |
| Cash and cash equivalents            |   | $                     | 25.3   |   | $ | 1.4 |   | $ | — |   | $ | 26.7 |   |
| Short-term investments               |   | 0.1                   |   | — |   | — |   | 0.1 |   |
| Accounts receivable, net             |   | 0.6                   |   | 95.5 |   | (1.0 | ) | 95.1 |   |
| Current inventories, net             |   | —                |   | 129.5 |   | — |   | 129.5 |   |
| Other current assets                 |   | 0.7                   |   | 5.4 |   | — |   | 6.1 |   |
| Total current assets                 |   | 26.7                  |   | 231.8 |   | (1.0 | ) | 257.5 |   |
|                                 |   |                  |   |   |   |   |   |   |   |
| Marketable securities                |   | 10.4                  |   | — |   | — |   | 10.4 |   |
| Investment in subsidiary             |   | 219.1                 |   | — |   | (219.1 | ) | — |   |
| Property, plant and  equipment, net  |   | —                |   | 180.6 |   | — |   | 180.6 |   |
| Goodwill, net                        |   | 3.7                   |   | 53.5 |   | — |   | 57.2 |   |
| Other noncurrent assets              |   | 0.1                   |   | 9.5 |   | — |   | 9.6 |   |
| Total assets                         |   | $                     | 260.0  |   | $ | 475.4 |   | $ | (220.1 | ) | $ | 515.3 |   |
|                                 |   |                  |   |   |   |   |   |   |   |
| Liabilities:                         |   |                  |   |   |   |   |   |   |   |
| Current installments on  loan        |   | $                     | — |   | $ | 8.0 |   | $ | — |   | $ | 8.0 |   |
| Accounts payable                     |   | —                |   | 56.1 |   | (1.0 | ) | 55.1 |   |
| Accrued liabilities                  |   | 1.1                   |   | 27.5 |   | — |   | 28.6 |   |
| Total current liabilities            |   | 1.1                   |   | 91.6 |   | (1.0 | ) | 91.7 |   |
|                                 |   |                  |   |   |   |   |   |   |   |
| Term loan                            |   | —                |   | 32.0 |   | — |   | 32.0 |   |
| Revolving credit facility            |   | —                |   | 96.2 |   | — |   | 96.2 |   |
| Post-retirement benefit  obligations |   | —                |   | 24.5 |   | — |   | 24.5 |   |
| Other noncurrent  liabilities        |   | 3.1                   |   | 12.0 |   | — |   | 15.1 |   |
| Total liabilities                    |   | 4.2                   |   | 256.3 |   | (1.0 | ) | 259.5 |   |
| Total shareholders’ equity      |   | 255.8                 |   | 219.1 |   | (219.1 | ) | 255.8 |   |
| Total liabilities &  equity      |   | $                     | 260.0  |   | $ | 475.4 |   | $ | (220.1 | ) | $ | 515.3 |   |

 

36

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**LONE STAR TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATING INCOME STATEMENT**

**($ in millions)**

 
|                                          |   | **For the Twelve Months Ended December 31, 2000** |   |
|-----------------------------------------------|--------|---------------------------------------------------|--------|
|                                          |   | **Parent**                                        |   |   |   |   |   |   |   |
|                                          |   | **Company**                                       |   | **Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
| Net Revenues                                  |   | $                                                 | — |   | $ | 655.0 |   | $ | (9.7 | ) | $ | 645.3 |   |
| Cost of Goods Sold                            |   | —                                            |   | (569.1 | ) | 9.7 |   | (559.4 | )  |
| Gross profit                                  |   | —                                            |   | 85.9 |   | — |   | 85.9 |   |
| Selling, General and  Administrative expenses |   | 0.8                                               |   | (34.5 | ) | — |   | (33.7 | )  |
| Equity in subsidiaries’  income          |   | 35.5                                              |   | — |   | (35.5 | ) | — |   |
| Operating income                              |   | 36.3                                              |   | 51.4 |   | (35.5 | ) | 52.2 |   |
| Interest expense, net                         |   | 1.9                                               |   | (14.4 | ) | 0.1 |   | (12.4 |   |
| Other income, net                             |   | 0.4                                               |   | 0.3 |   | (0.1 | ) | 0.6 |   |
| Income tax                                    |   | —                                            |   | (1.8 | ) | — |   | (1.8 | )  |
| Net income                                    |   | $                                                 | 38.6   |   | $ | 35.5 |   | $ | (35.5 | ) | $ | 38.6 |   |

 

 

**LONE STAR TECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATING CASH FLOW STATEMENT**

**($ in millions)**

 
|                                               |   | **For the Twelve Months Ended December 31, 2000** |   |
|----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                               |   | **Parent**                                        |   |   |   |   |   |   |   |
|                                               |   | **Company**                                       |   | **Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
| Cash from Operating  Activities:                   |   |                                              |   |   |   |   |   |   |   |
| Net income                                         |   | $                                                 | 38.6   |   | $ | 35.5 |   | $ | (35.5 | ) | $ | 38.6 |   |
| Undistributed equity in  subsidiaries’ income |   | (35.5                                             | )      | — |   | 35.5 |   | — |   |
| Other                                              |   | 1.2                                               |   | (48.4 | ) | — |   | (47.2 | ) |
| Net cash provided by  operating activities         |   | 4.3                                               |   | (12.9 | ) | — |   | (8.6 | ) |
| Net cash flows from  investing activities          |   | (27.8                                             | )      | (68.8 | ) | — |   | (96.6 | ) |
| Net cash flows from  financing activities          |   | 30.7                                              |   | 79.0 |   | — |   | 109.7 |   |
| Net change in cash                                 |   | 7.2                                               |   | (2.7 | ) | — |   | 4.5 |   |
| Net cash beginning balance                         |   | 18.1                                              |   | 4.1 |   | — |   | 22.2 |   |
| Net cash ending balance                            |   | $                                                 | 25.3   |   | $ | 1.4 |   | $ | — |   | $ | 26.7 |   |

 

**N****ET****E****ARNINGS****P****ER****S****HARE****- N****OTE****F**

 

Basic earnings per share is computed by dividing net income by theweighted average number of shares of common stock.  The numbers of shares used to compute basic earnings per share in2001, 2000, and 1999 were 24.7 million, 23.5 million, and 22.5 million,respectively.  Diluted earnings pershare is computed by dividing net income by the weighted average number ofshares of common stock and other dilutive securities.  Dilutive securities (stock options) equivalent to 0.3 millionshares of common stock were outstanding at December 31, 2001.  Lone Star had a net loss in 1999 and the effectof including dilutive securities in earnings per share would have beenanti-dilutive.  The numbers

 

37

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of shares used to compute diluted earnings per share in 2001, 2000, and1999, were 25.0 million, 24.3 million, and 22.5 million, respectively.

** **

**I****NCOME****T****AXES****- N****OTE****G**

 

Income tax expense was $0.8 million, $1.8 million, and $0.0 in 2001,2000 and 1999, respectively, including federal alternative minimum tax andstate and foreign income taxes.  Therewas no deferred income tax expense or benefit for 2001, 2000 or 1999.  A reconciliation of the U.S. Federalstatutory rate to actual income tax expense is as follows:

 
|                                                        |   | ***($ in millions)*** |   |
|-------------------------------------------------------------|--------|-----------------------|--------|
|                                                        |   | **2001**              |   | **2000** |   | **1999** |   |
| Income (loss) from  continuing operations before income tax |   | $                     | 17.8   |   | $ | 40.4 |   | $ | (5.5 | ) |
| Statutory federal income  tax rate                          |   | 35                    | %      | 35 | % | 35 | % |
| Income tax (benefit)  expense at statutory rate             |   | 6.2                   |   | 14.1 |   | (1.9 | ) |
| Net operating loss,  benefit not recognized (recognized)    |   | (5.7                  | )      | (13.3 | ) | 1.9 |   |
| Federal alternative minimum  tax                            |   | 0.5                   |   | 0.8 |   | — |   |
| State and foreign income  taxes                             |   | 0.3                   |   | 1.0 |   | — |   |
| Total income tax expense                                    |   | $                     | 0.8    |   | $ | 1.8 |   | $ | — |   |

 

The following table discloses the components of the deferred taxamounts at December 31, 2001 and 2000:

 
|                                                                                                                      |   | ***($ in millions)*** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                                      |   | **2001**              |   | **2000** |   |
| ***Deferred tax assets*** — temporary differences                                                                    |   |                  |   |   |   |
| Postretirement benefit  accruals                                                                                          |   | $                     | 13.0   |   | $ | 8.3 |   |
| Environmental reserves                                                                                                    |   | 3.5                   |   | 3.7 |   |
| Other expense accruals and  reserves                                                                                      |   | 5.0                   |   | 6.6 |   |
| Inventories                                                                                                               |   | 5.7                   |   | 5.2 |   |
| Other                                                                                                                     |   | 0.9                   |   | 0.5 |   |
| Total deferred tax assets  — temporary differences                                                                   |   | 28.1                  |   | 24.3 |   |
| Net operating loss  carryforwards                                                                                         |   | 80.9                  |   | 85.6 |   |
| Alternative minimum tax  credit carryforward                                                                              |   | 2.0                   |   | 1.8 |   |
| Total deferred tax assets                                                                                                 |   | 111.0                 |   | 111.7 |   |
| ***Deferred tax liability*** — temporary difference for basis in and  depreciation of property, plant, and equipment |   | $                     | (41.6  | ) | $ | (37.2 | ) |
| Net deferred tax assets                                                                                                   |   | 69.4                  |   | 74.5 |   |
| Less valuation allowance                                                                                                  |   | (69.4                 | )      | (74.5 | ) |
| ***Net deferred tax amount***                                                                                             |   | $                     | — |   | $ | — |   |

 

At December 31, 2001, Lone Star had federal tax net operating losscarryforwards (NOL’s) of approximately $231.0 million, a portion of which maybe related to American Federal Bank, a former subsidiary of Lone Star andsubject to an agreement with the Federal Deposit Insurance Corporation (FDIC) wherebyLone Star may be required to pay the FDIC for certain tax benefits.  The NOL’s are available for utilization byLone Star, Steel, Fintube, Bellville and the other subsidiaries.  If not utilized, the NOL’s will expirebetween years 2003 and 2019, and their future availability may be limited ifLone Star or a member of the consolidated group experiences an ownership changeof 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 anownership change, as defined by IRS regulations, which would limit availabilityof the NOL’s.  Due to the uncertaintyregarding possible utilization of NOL’s and the sensitivity of earnings to thelevel of domestic drilling activity, valuation allowances were recorded tofully reserve the computed net deferred tax assets.

 

38

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**E****MPLOYEE****B****ENEFIT****P****LANS****- N****OTE****H**

*** ***

***Defined contribution plans*****.** Defined contribution plans are available to substantially all full-timeemployees under which participants can make voluntary pretaxcontributions.  For nonbargaining unitemployees, matching contributions are provided within specified limits.  Steel makes contributions at rates specifiedunder collective bargaining agreements for its bargaining unit employees.  Contributions totaled $3.0 million, $2.7million, and $1.2 million for the years ended December 31, 2001, 2000, and1999, respectively.

*** ***

***Nonqualified deferred compensationplan*****.**  Beginning in 2000, Lone Star offered anonqualified compensation plan to certain management personnel and highlycompensated employees of Lone Star and its participating affiliates thatprovides eligible employees the opportunity to defer a specified percentage oftheir cash compensation.  Participantsmay elect to defer up to 25% of total compensation and Lone Star will match 50%of the amount deferred by each employee with the matching not to exceed $25,000.  The total liability included in othernoncurrent liabilities was $1.1 million and $0.4 million at December 31, 2001and 2000, respectively.

*** ***

***Employee stock purchase plan***. During 2000, Lone Star adopted an employee stock purchase plan for alleligible employees.  Eligible employeesinclude all regular full-time employees of Lone Star and its subsidiaries whohave been employed for at least 12 months. Eligible employees may defer up to 5% of their compensation for eachquarter for the purchase of Lone Star common stock.  Shares are purchased at the end of each quarter at a price equalto the lower of: (a) 90% of the market price of Lone Star’s common stock on thefirst day of the quarter, or (b) 90% of the market price of Lone Star’s commonstock on the last day of the quarter. The maximum number of Lone Star shares that may be purchased for allparticipants under the plan is 200,000 shares, of which 191,020 shares wereavailable to be issued at December 31, 2001.

*** ***

***Long-term incentive plan***. Lone Star has a long-term incentive plan which provides for the issuanceof up to 2,700,000 shares of common stock to key employees and outsidedirectors through the granting of incentive and nonqualified stock options,stock appreciation rights, restricted stock grants, and performance unitgrants.  The option price is the averageof the high and low market price on the date of the grant.  Options are generally exercisable for tenyears with one-fourth of the shares becoming exercisable on the one-yearanniversary of the grant date and an additional one-fourth becoming exercisableon the same anniversary date over the next three years.  If the optionee’s employment is terminatedunder certain circumstances after a change of control of Lone Star occursbefore an option’s fourth anniversary, the option may be exercised in fullearlier.  Also, accelerated vesting ofoptions can occur upon death or retirement from employment of an optionholder.  Following is a summary of stockoption activity during 2001, 2000, and 1999:

 
|                                 |   |                     |   |                 |                |                |          |   |   | **Weighted** |   |
|--------------------------------------|--------|--------------------------|--------|----------------------|---------------------|---------------------|---------------|--------|--------|--------------|--------|
|                                 |   |                     |   |                 |                |                |          |   |   | **Average**  |   |
|                                 |   |                     |   |                 |                |                |          |   |   | **Exercise** |   |
|                                 |   | **Shares  Under Option** |   | **Price  Range ($)** |                |                | **Price ($)** |   |
| ***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  |   |
| Granted in 2000                      |   | 650,000                  |   | 27.19                |   —  | 50.06               |          | 33.79  |   |
| Exercised in 2000                    |   | (282,400                 | )      |                 | 2.59                |   —  | 31.28         |   | 12.49  |         |
| Cancelled in 2000                    |   | (22,000                  | )      |                 | 27.19               |   —  | 27.19         |   | 27.19  |         |
| ***Outstanding, December 31, 2000*** |   | 1,653,725                |   | 3.06                 |   —  | 50.06               |          | 23.43  |   |
| Granted in 2001                      |   | 484,375                  |   | 37.29                |   —  | 45.36               |          | 38.27  |   |
| Exercised in 2001                    |   | (265,375                 | )      | 6.00                 |   —  | 34.06               |          | 16.46  |   |
| Cancelled in 2001                    |   | (12,250                  | )      |                 | 27.19               |   —  | 39.27         |   | 34.22  |         |
| ***Outstanding, December 31, 2001*** |   | 1,860,475                |   | 6.88                 |   —  | 61.67               |          | 28.66  |   |
|                                      |        |                          |        |                      |                     |                     |               |        |        |              |        |  |  |  |  |  |  |  |  |

 

39

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The weighted average fair value per option granted in 2001, 2000, and1999 was $20.78, $17.45, and $6.68, respectively. The fair value of each optiongrant is estimated on the date of grant using the Black-Scholes option pricingmodel with the following weighted average assumptions for grants in 2001, 2000,and 1999, respectively: risk-free interest rates of 4.77%, 6.69%, and 5.37%;volatility of 54.10%, 49.37% and 48.53%; and expected lives of five years forall option grants without payment of dividends.  Lone Star accounts for this plan pursuant to APB Opinion No. 25,under which compensation cost has not been recognized with the exception of theperformance options granted to certain Fintube employees described below.  Because the SFAS No. 123 method ofaccounting has not been applied to options granted prior to January 1, 1995,the pro forma compensation cost may not be representative of that expected infuture years.  Had compensation cost forthis plan been determined consistent with SFAS No. 123, net income and earnings per share would have been reduced tothe following pro forma amounts:

 
|                       |                               | **2001** |   | **2000** |   | **1999** |   |
|----------------------------|------------------------------------|----------|--------|----------|--------|----------|--------|
| Net income (loss)          | — as reported ($in  millions) |     | $16.4  |     | $38.6  |     | $(5.5  | ) |
|                       | — pro forma ($in millions)    |     | $10.1  |     | $33.6  |     | $(8.1  | ) |
|                       |                               |     |   |     |   |     |   |
| Basic earnings per share   | — as reported                 |     | $0.67  |     | $1.64  |     | $(0.24 | ) |
|                       | — pro forma                   |     | $0.41  |     | $1.43  |     | $(0.36 | ) |
|                       |                               |     |   |     |   |     |   |
| Diluted earnings per share | — as reported                 |     | $0.66  |     | $1.59  |     | $(0.24 | ) |
|                       | — pro forma                   |     | $0.40  |     | $1.39  |     | $(0.36 | ) |
|                            |                                    |          |        |          |        |          |        |  |  |  |

 

On the acquisition date, Lone Star granted certain employees of Fintubeoptions which vest only upon the achievement of certain operating performancecriteria in 2000 and 2001.  Fintube hadrecorded approximately $0.5 million in compensation expense related to theperformance options granted to the employees of Fintube in 2000.  Compensation expense for these options isre-measured each reporting date based on the market price of Lone Star’s stockand continuing achievement of performance criteria.

 

At December 31, 2001, 1,031,775 shares were available for grant and722,663 shares were exercisable.  Thefollowing table reflects the weighted average exercise price and weightedaverage contractual life of various exercise price ranges of the 1,860,475options outstanding as of December 31, 2001:

 
|                     |   |       |   |      |   | ***2001***                |   |                      |   |            |   |
|--------------------------|--------|------------|--------|-----------|--------|---------------------------|--------|---------------------------|--------|-----------------|--------|
|                     |   |       |   |      |   | ***Options Outstanding*** |   | ***Options Exercisable*** |   |
|                     |   |       |   |      |   |                      |   | **Weighted**              |   | **Weighted**    |   |   |   | **Weighted** |   |
|                     |   |       |   |      |   |                      |   | **Average**               |   | **Average**     |   |   |   | **Average** |   |
|                     |   |       |   |      |   |                      |   | **Exercise**              |   | **Contractual** |   |   |   | **Exercise** |   |
| **Exercise Price Range** |   | **Shares** |   | **Price** |   | **Life  (Yrs.)**          |   | **Shares**                |   | **Price**       |   |
| $                        | 6.88   |       | — |      | $      | 10.32                     |   | 83,600                    |   | $               | 8.15   |   | 2.9 |   | 83,600 |   | $ | 8.15 |   |
| 11.06                    |   | —     |   | 16.59     |   | 356,875                   |   | 13.30                     |   | 7.0             |   | 168,125 |   | 13.38 |   |
| 16.75                    |   | —     |   | 25.13     |   | 221,875                   |   | 19.97                     |   | 5.6             |   | 210,938 |   | 19.96 |   |
| 27.19                    |   | —     |   | 40.79     |   | 1,058,750                 |   | 34.79                     |   | 8.3             |   | 222,500 |   | 31.50 |   |
| 41.11                    |   | —     |   | 61.67     |   | 139,375                   |   | 47.58                     |   | 8.9             |   | 37,500 |   | 50.06 |   |
| $                        | 6.88   |       | — |      | $      | 61.67                     |   | 1,860,475                 |   | $               | 28.66  |   | 7.5 |   | 722,663 |   | $ | 22.18 |   |
|                          |        |            |        |           |        |                           |        |                           |        |                 |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Lone Star also issued 125,500 shares and 11,250 shares of restrictedstock grants to certain employees, with a value of $5.5 million and $0.4million during 2001 and 2000, respectively. We recognized compensation expense related to these awards of $0.7million and $0.1 million in 2001 and 2000, respectively.  Restricted stock grants were not made in1999.

*** ***

***Defined Benefit Pension and HealthCare Plans*****.**  Steel has three defined benefit pensionplans covering a substantial portion of its bargaining unit employees.  Retirement benefits are based on years ofservice at progressively increasing flat-rate amounts.  A special initial lump -sum pension paymentequal to 13 weeks of vacation

 

40

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pay is also paid following retirement. Steel funds the minimum required contributions each year as required byapplicable regulations.

 

During 1996, the largest of the three pension plans was amended so thatnew employees do not participate in the defined benefit plan.  During 1998, the other two plans weresimilarly amended.  New employees areeligible to participate in one of the defined contribution retirement plans, asare substantially all other employees.

 

Steel also sponsors an unfunded defined benefit postretirement healthcare plan for eligible bargaining unit employees and a limited number of otherretirees eligible under special early retirement programs.  These health care plan benefits are limitedto eligible retirees and their spouses until age 65, at which time coverageterminates.  Certain otherpostretirement benefits, primarily life insurance are also provided.  The anticipated costs of thesepostretirement benefits are accrued over the employees’ years of service.

 

The measurement dates for determining the assets and obligations ofthese plans were November 30, 2001, 2000, and 1999.  The following table sets forth the changes in the plans’ benefitobligations, assets and funded status amounts recognized in the consolidatedbalance sheets at December 31, 2001, 2000, and 1999 (in millions):

 
|                                                   |   | **Pension  Benefits** |   | **Other  Benefits** |   |
|--------------------------------------------------------|--------|-----------------------|--------|---------------------|--------|
| ***Change in Benefit Obligation***                |   | **2001**              |   | **2000**            |   | **1999** |   | **2001** |   | **2000** |   | **1999** |   |
| Benefit obligation at  beginning of year               |   | $                     | 75.2   |                | $      | 76.8 |   | $ | 84.0 |   | $ | 11.5 |   | $ | 12.6 |   | $ | 13.9 |   |
| Service cost                                           |   | 0.9                   |   | 0.9                 |   | 1.0 |   | 0.5 |   | 0.5 |   | 0.6 |   |
| Interest cost                                          |   | 5.4                   |   | 5.4                 |   | 5.3 |   | 0.8 |   | 0.9 |   | 0.9 |   |
| Actuarial loss (gain)                                  |   | 5.4                   |   | (1.6                | )      | (7.0 | ) | 1.1 |   | (1.8 | ) | (2.1 | ) |
| Benefits paid                                          |   | (6.3                  | )      | (6.3                | )      | (6.5 | ) | (0.6 | ) | (0.7 | ) | (0.7 | ) |
| Benefit obligation at end  of year                     |   | $                     | 80.6   |                | $      | 75.2 |   | $ | 76.8 |   | $ | 13.3 |   | $ | 11.5 |   | $ | 12.6 |   |
|                                                   |   |                  |   |                |   |   |   |   |   |   |   |   |   |
| ***Change in Plan Assets***                            |   |                  |   |                |   |   |   |   |   |   |   |   |   |
| Fair value of plan assets  at beginning of year        |   | $                     | 64.5   |                | $      | 58.6 |   | $ | 54.3 |   | $ | — |   | $ | — |   | $ | — |   |
| Actual return on plan  assets                          |   | (1.3                  | )      | 1.4                 |   | 8.7 |   | — |   | — |   | — |   |
| Employer contributions                                 |   | 0.2                   |   | 10.8                |   | 2.1 |   | 0.6 |   | 0.7 |   | 0.7 |   |
| Benefits paid                                          |   | (6.3                  | )      | (6.3                | )      | (6.5 | ) | (0.6 | ) | (0.7 | ) | (0.7 | ) |
| Fair value of plan assets  at end of year              |   | $                     | 57.1   |                | $      | 64.5 |   | $ | 58.6 |   | $ | — |   | $ | — |   | $ | — |   |
|                                                   |   |                  |   |                |   |   |   |   |   |   |   |   |   |
| ***Reconciliation of Funded Status***                  |   |                  |   |                |   |   |   |   |   |   |   |   |   |
| Unfunded status —  obligation in excess of assets |   | $                     | 23.5   |                | $      | 10.7 |   | $ | 18.2 |   | $ | 13.3 |   | $ | 11.5 |   | $ | 12.6 |   |
| Unrecognized actuarial  gain (loss)                    |   | (16.5                 | )      | (4.3                | )      | (2.1 | ) | 2.3 |   | 3.5 |   | 1.8 |   |
| Unrecognized net  obligation at January 1, 1986        |   | —                |   | —              |   | (1.0 | ) | — |   | — |   | — |   |
| Unrecognized prior service  cost                       |   | (1.3                  | )      | (1.5                | )      | (1.6 | ) | — |   | — |   | — |   |
| Net amount recognized                                  |   | $                     | 5.7    |                | $      | 4.9 |   | $ | 13.5 |   | $ | 15.6 |   | $ | 15.0 |   | $ | 14.4 |   |

 

41

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|                                                     |   | **Pension  Benefits** |   | **Other  Benefits** |   |
|----------------------------------------------------------|--------|-----------------------|--------|---------------------|--------|
| ***Amounts  Recognized in Consolidated Balance Sheets*** |   | **2001**              |   | **2000**            |   | **1999** |   | **2001** |   | **2000** |   | **1999** |   |
| Postretirement benefit  obligations — current       |   | $                     | 2.1    |                | $      | — |   | $ | 4.9 |   | $ | 0.9 |   | $ | 0.8 |   | $ | 0.9 |   |
| Postretirement benefit  obligations — noncurrent    |   | 20.8                  |   | 10.2                |   | 12.6 |   | 14.7 |   | 14.2 |   | 13.5 |   |
| Other noncurrent assets —  prepaid benefit cost     |   | 0.0                   |   | (0.7                | )      | — |   | — |   | — |   |   |   |
| Other noncurrent assets —  intangible asset         |   | (1.3                  | )      | (1.0                | )      | (2.6 | ) | — |   | — |   | — |   |
| Accumulated other comprehensive  loss                    |   | (15.9                 | )      | (3.6                | )      | (1.4 | ) | — |   | — |   | — |   |
| Net amount recognized                                    |   | $                     | 5.7    |                | $      | 4.9 |   | $ | 13.5 |   | $ | 15.6 |   | $ | 15.0 |   | $ | 14.4 |   |

 

In determining the benefit obligation, weighted average discount ratesof 6.75%, 7.5% and 7.5% were used for 2001, 2000, and 1999, respectively.  Other assumptions utilized for all threeyears included a 9.0% expected long-term rate of return on plan assets and a4.0% annual increase in the compensation rate.

 

Assumed health care cost trend rates have a significant effect on theamounts reported for the health care plans. The annual rate of increase in the per capita costs of covered healthcare benefits is assumed to decrease gradually from 10.0% to an ultimate trendrate of 6.0% by the year 2007. Increasing the assumed medical cost trend rates by 1.0% in each yearwould have resulted in a $1.2 million increase in the benefit obligation as ofDecember 31, 2001, and a $0.2 million increase in the aggregate of the servicecost and interest cost components of net periodic benefit expense for2001.  A 1.0% decrease in the assumedtrend rates would have resulted in a $1.0 million decrease in the benefitobligation and a $0.1 million decrease in expense.

 

The pension plans’ assets consist primarily of short-term money marketinvestments, government and corporate obligations, real estate, and publicmarket equity securities.

 

Net periodic benefit expense for 2001, 2000, and 1999, included thefollowing components:

 

 
|                                               |   | **Pension  Benefits** |   | **Other  Benefits** |   |
|----------------------------------------------------|--------|-----------------------|--------|---------------------|--------|
|                                               |   | **2001**              |   | **2000**            |   | **1999** |   | **2001** |   | **2000** |   | **1999** |   |
|                                               |   | ***($in millions)***  |   |
| Service cost                                       |   | $                     | 0.9    |                | $      | 0.9 |   | $ | 1.0 |   | $ | 0.5 |   | $ | 0.5 |   | $ | 0.6 |   |
| Interest cost                                      |   | 5.4                   |   | 5.4                 |   | 5.3 |   | 0.8 |   | 0.9 |   | 0.9 |   |
| Expected return on plan  asset                     |   | (5.5                  | )      | (5.3                | )      | (4.6 | ) | — |   | — |   | — |   |
| Amortization of net  obligation at January 1, 1986 |   | —                |   | 1.0                 |   | 1.0 |   | — |   | — |   | — |   |
| Amortization of prior  service cost                |   | 0.2                   |   | 0.2                 |   | 0.2 |   | — |   | — |   | — |   |
| Recognized net actuarial  loss                     |   | —                |   | —              |   | 0.5 |   | (0.1 | ) | — |   | — |   |
| ***Net periodic benefit expense***                 |   | $                     | 1.0    |                | $      | 2.2 |   | $ | 3.4 |   | $ | 1.2 |   | $ | 1.4 |   | $ | 1.5 |   |

 

***Profit sharing plans*****.**  LoneStar and its subsidiaries have profit sharing plans for substantially allemployees which provide for payment of a specified percentage of quarterlyoperating earnings.  Total payments toemployees were $3.2 million, $3.6 million, and $0.7 million for 2001, 2000, and1999, respectively.

** **

**C****OMMITMENTS****A****ND****C****ONTINGENCIES****- N****OTE****I**

 

Lone Star incurs various commitments for the purchase of raw materials,certain tubular goods, supplies, services, and energy arising in the ordinarycourse of business.  The majority ofthese commitments are for a period of less than one year.

 

Equipment is leased under various operating leases.  Rental expense totaled $5.0 million, $3.8million, and $3.6 million in 2001, 2000, and 1999, respectively.  Future minimum lease payments undernoncancelable operating leases

 

42

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are as follows: 2002, $2.1 million; 2003, $1.2 million; 2004, $1.1million; 2005, $0.7 million; 2006, $0.6 million; and thereafter, $0.3 million.

 

Lone Star’s operations are subject to numerous environmental laws.  The three major areas of regulation are airquality, water quality, and solid and hazardous waste management.  The primary governmental oversight agenciesinclude the Texas Natural Resource Conservation Commission and theEnvironmental Protection Agency. Agreements are in place with these agencies to conduct numerousenvironmental studies and to develop plans to ensure continuous compliance withapplicable laws and regulations. Various environmental studies, monitoring programs, and capital projectsare ongoing.  Estimated expenditures forcertain remediation programs are included in accrued liabilities and othernoncurrent liabilities as shown in Note C and are computed on a non-discountedbasis.  Included in other noncurrentliabilities are environmental reserves of $9.5 million and $9.8 million atDecember 31, 2001 and 2000 respectively. Current reserves of $0.5 million and $1.0 million are included inaccrued liabilities at December 31, 2001 and 2000, respectively.  Lone Star believes that its environmentalexpenditures will continue to fall within its contemplated operating andcapital plans.

 

On August 16, 2001, Lone Star entered into an agreement to purchase theassets of North Star Steel Company’s Tubular Steel Division.  Consummation of the acquisition was subjectto completion of financing arrangements. Due to lack of common stock financing which, along with certain debtfinancing, was required by the acquisition agreement to close the acquisition,Lone Star notified Cargill, Incorporated, the parent company of North StarSteel Company, on December 14, 2001, that it was not able to complete theacquisition.  Later that day, Cargill,Incorporated notified Lone Star that it was filing a lawsuit against Lone Starseeking unspecified damages and alleging that Lone Star had breached theagreement.  Lone Star is confident thatit has fully performed all of its obligations under the agreement, and it willcontest the lawsuit vigorously.

 

During the last three years, Steel has been named as one of a number ofdefendants in twenty lawsuits alleging that certain individuals were exposed toasbestos on the defendants’ premises. To date several of these lawsuits have been settled for less than$10,000 in the aggregate.  Of the twentylawsuits three have been settled or are pending settlement and four have beendismissed or are pending dismissal.  Wedid not manufacture or distribute any products containing asbestos.  Some or all of these claims may not becovered by our insurance.  Steel hasaccrued for its estimated exposure to known claims, but does not know theextent to which future claims may be filed. Therefore, Steel cannot estimate its exposure, if any, to unassertedclaims.

 

Lone Star and its subsidiaries are parties to a number of otherlawsuits and controversies which are not discussed herein.  Management of Lone Star and its operatingcompanies, based upon their analysis of known facts and circumstances and reportsfrom legal counsel, does not believe that any such matter will have a materialadverse effect on the results of operations or financial condition of Lone Starand its subsidiaries, taken as a whole.

** **

**A****CQUISITIONS****— N****OTE****J**

 

On January 3, 2000, Lone Star through Fintube, a wholly owned subsidiaryof Lone Star, purchased substantially all of the assets of Fintube LimitedPartnership (“FLP”) for a base purchase price of $82 million plus a $2.5million adjustment for working capital and approximately $1.2 million inacquisition related expenses (the “Fintube Acquisition”).  The Fintube Acquisition was effective as ofJanuary 1, 2000.  The working capitaladjustment was estimated at the closing and was reduced on an actual,post-closing basis by $0.7 million in July 2000.  The consideration for the Fintube Acquisition was determinedfollowing a competitive bidding process in arm’s-length negotiations betweenLone Star and FLP.  The acquiredbusiness involves the design and production of finned tubes and other productsused in a variety of heat recovery applications.  Lone Star is operating and using the assets acquired in theFintube Acquisition in substantially the same manner as they were used by FLPprior to the Fintube Acquisition.  LoneStar and Fintube utilized three different sources of financing to pay thepurchase price.  Lone Star used $20million of cash that it received from Steel in connection with Steel’srepayment of a $20 million subordinated loan from Lone Star.  Steel borrowed the $20 million that itrepaid to Lone Star under Steel’s revolving line of credit.  Additionally, Lone Star issued approximately$20 million of Lone Star common stock directly to the limited partners or otherbeneficial owners of FLP.  Finally,Fintube entered into a new credit agreement which provided (i) approximately $7million under a revolving credit facility and (ii) $39 million under a termloan facility.

 

The Fintube Acquisition has been accounted for under the purchasemethod of accounting, and accordingly, the purchase price has been allocated tothe assets acquired and the liabilities assumed based upon fair value at thedate of the acquisition.  The excesspurchase price over the fair values of the tangible and intangible net assetsacquired was

 

43

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approximately $49.5 million, and was recorded as goodwill and otherintangibles amortized on a straight -line basis over periods ranging from 5 to30 years.  Beginning January 1, 2002,goodwill will no longer be amortized. Impairment of goodwill will be assessed annually and as events andcircumstances warrant.

 

On April 1, 2000, Lone Star through Bellville Acquisition, Inc., awholly owned subsidiary of Lone Star, purchased substantially all of the assetsof Bellville for a base purchase price of $14.8 million less a $0.2 millionadjustment for working capital (the “Bellville Acquisition”).  The working capital adjustment was estimatedat the closing and was further adjusted by an additional $0.1 million on anactual, post-closing basis in July 2000. The consideration for the Bellville Acquisition was determined througharm’s-length negotiations between Lone Star and Bellville.  Lone Star financed the Bellville Acquisitionthrough cash held by Lone Star and $5.0 million of borrowings.  In connection with these borrowings, Steelborrowed $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 Steel’s creditfacility and pledged the stock of Bellville as collateral for suchguaranty.  The cash paid for theBellville Acquisition was wired to Bellville on March 31, 2000; however, thepurchase was not effective until April 1, 2000.

 

The Bellville Acquisition by Lone Star has been accounted for under thepurchase method of accounting, and accordingly, the purchase price has beenallocated to the assets acquired and the liabilities assumed based upon fairvalue at the date of the Bellville Acquisition.  The excess purchase price over the fair values of the tangibleand intangible net assets acquired was approximately $7.2 million, has beenrecorded as goodwill amortized on a straight -line basis over 30 years.  Beginning January 1, 2002, goodwill will nolonger be amortized.  Impairment ofgoodwill will be assessed annually and as events and circumstances warrant.

 

The unaudited pro forma results below assume the acquisitions occurredat the beginning of the periods presented ($ in millions, except per shareamounts):

 
|                     |   | **December 31,** |   |
|--------------------------|--------|------------------|--------|
|                     |   | **2000**         |   | **1999** |   |
| Net sales                |   | $                | 645.5  |   | $ | 444.3 |   |
| Net income               |   | 39.1             |   | 4.6 |   |
| Basic income per share   |   | 1.66             |   | 0.20 |   |
| Diluted income per share |   | $                | 1.61   |   | $ | 0.20 |   |

 

The above pro forma results include adjustments to give effect toamortization of goodwill, interest expense and other purchase priceadjustments.  The pro forma results arenot necessarily indicative of the operating results that would have occurredhad the acquisitions been consummated as of the beginning of the periodspresented, nor are they necessarily indicative of future operating results.

** **

**N****EW****A****CCOUNTING****P****RONOUNCEMENTS****— N****OTE****K**

 

Effective January 1, 2001, we adopted Statement of Financial AccountingStandards (“SFAS”) No. 133,  “Accountingfor Derivative Instruments and Hedging Activities.”  SFAS No. 133 requires that all derivative financial instrumentsthat qualify for hedge accounting be recognized in the financial statements andmeasured at fair value, regardless of purpose or intent of holding them.  On January 1, 2001, a transition obligationof $0.5 million was recorded related to the interest rate swap agreement.  Additionally, a loss to other comprehensiveincome in the equity section of the balance sheet of $0.5 million wasrecorded.  Subsequent changes in fairvalue were recorded through other comprehensive income.  In August 2001, the Fintube credit facilitywas paid in full and the related interest rate swap was terminated.  The settlement of the interest rate swapresulted in a $0.8 million charge to income in the third quarter.

 

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 141, “Business Combinations,”and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 requires, among other things,all business combinations initiated after June 30, 2001, be accounted for usingthe purchase method of accounting.  SFASNo. 142 primarily addresses the accounting for goodwill and intangible assetssubsequent to their acquisition.  UnderSFAS No. 142, goodwill will no longer be amortized over its estimated usefullife, but instead will be tested for impairment at least annually.  SFAS No. 142 will be effective for fiscalyears beginning after December 15, 2001 and must be adopted at the beginning ofa fiscal year.  During 2001, we amortizedgoodwill associated with the Fintube and Bellville acquisitions, as detailed inNote A, of approximately $0.5 million per quarter.  We are currently performing the required goodwill impairmentanalyses and expect to have these

 

44

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completed by April 2002.  We donot expect an impairment of goodwill, but we cannot conclude until the analysesare complete.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.”  SFAS 143addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs. It applies to all entities and legal obligations associatedwith the retirement of long-lived assets that result from the acquisition,construction, development and/or the normal operation of a long-livedasset.  SFAS No. 143 requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate of fair value canbe made.  The associated assetretirement costs are capitalized as part of the carrying amount of thelong-lived asset and are subsequently allocated to expense over the asset’suseful life.  This Statement iseffective for financial statements issued for fiscal years beginning after June15, 2002. We have not yet determined the impact that SFAS No. 143 will have onour financial position or results of operations.

 

In August, 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.”  SFAS No. 144 addresses financial accounting and reporting for theimpairment of long-lived assets and for long-lived assets to be disposed of.  This statement supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of,” however, this statement retains the fundamental provisionsof SFAS No. 121 for (a) recognition and measurement of the impairment oflong-lived assets to be held and used and (b) measurement of long-lived assetsto be disposed of by sale.  ThisStatement also supersedes the accounting and reporting provisions of APBOpinion No. 30, “Reporting the Results of Operations — Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions” for segments of a business tobe disposed.  SFAS No. 144 is effectivefor fiscal years beginning after December 15, 2001.  We do not believe that the adoption of SFAS No. 144 will have amaterial effect on our financial position or results of operations.

** **

**Q****UARTERLY****F****INANCIAL****S****UMMARY****(U****NAUDITED****)  — N****OTE****L**

 
|                                                |   | **($ in millions, except per share data; quarterly  amounts unaudited):** |   |
|-----------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                                |   | **Quarter**                                                               |   |
|                                                |   | **First**                                                                 |   | **Second** |   | **Third** |   | **Fourth** |   | **Total Year** |   |
| **2001**                                            |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Net revenues                                        |   | $                                                                         | 179.4  |   | $ | 184.4 |   | $ | 168.9 |   | $ | 117.5 |   | $ | 650.2 |   |
| Gross profit                                        |   | 24.5                                                                      |   | 27.7 |   | 16.3 |   | 0.8 |   | 69.3 |   |
| Net income (loss)                                   |   | $                                                                         | 13.4   |   | $ | 16.3 |   | $ | 3.2 |   | $ | (16.5 | ) | $ | 16.4 |   |
|                                                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| **Per  common share — basic**                  |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Net income (loss)  available to common shareholders |   | $                                                                         | 0.56   |   | $ | 0.66 |   | $ | 0.13 |   | $ | (0.65 | ) | $ | 0.67 |   |
|                                                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| **Per  common share — diluted**                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Net income (loss)  available to common shareholders |   | $                                                                         | 0.55   |   | $ | 0.65 |   | $ | 0.13 |   | $ | (0.65 | ) | $ | 0.66 |   |
|                                                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| **2000**                                            |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Net revenues                                        |   | $                                                                         | 156.6  |   | $ | 156.2 |   | $ | 170.2 |   | $ | 162.3 |   | $ | 645.3 |   |
| Gross profit                                        |   | 17.9                                                                      |   | 22.0 |   | 22.6 |   | 23.4 |   | 85.9 |   |
| Net income                                          |   | $                                                                         | 7.1    |   | $ | 8.8 |   | $ | 10.4 |   | $ | 12.3 |   | $ | 38.6 |   |
|                                                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| **Per  common share — basic**                  |   |                                                                      |   |   |   |   |   |   |   |   |   |
|                                                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Net income available to  common shareholders        |   | $                                                                         | 0.30   |   | $ | 0.37 |   | $ | 0.44 |   | $ | 0.52 |   | $ | 1.64 |   |
|                                                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| **Per  common share — diluted**                |   |                                                                      |   |   |   |   |   |   |   |   |   |
|                                                |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Net income available to  common shareholders        |   | $                                                                         | 0.29   |   | $ | 0.36 |   | $ | 0.43 |   | $ | 0.51 |   | $ | 1.59 |   |

 

45

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**LONE STARTECHNOLOGIES, INC. AND SUBSIDIARIES**

**Schedule I****- Condensed FinancialInformation of Registrant**

**(ParentCompany Only)**

 
|                                    |   | ***($ in millions, except share data)*** |       |
|-----------------------------------------|--------|------------------------------------------|------------|
|                                    |   | **Years ended  December 31,**            |       |
|                                    |   | **2001**                                 |       | **2000** |   | **1999** |   |
| ***Condensed Statements of Income***    |   |                                     | ** ** |   | ** ** |   | ** ** |
| General and administrative  expenses    |   | $                                        | (4.7       | ) | $ | (3.9 | ) | $ | (3.0 | ) |
| Steel cost sharing                      |   | 4.0                                      |       | 4.0 |   | 3.0 |   |
| Fintube management fee                  |   | 1.0                                      |       | 0.5 |   | — |   |
| Bellville management fee                |   | 0.1                                      |       | 0.1 |   | — |   |
| Equity in Steel’s income  (loss)   |   | 12.2                                     |       | 21.8 |   | (9.4 | ) |
| Equity in Fintube’s income         |   | 4.4                                      |       | 11.1 |   | — |   |
| Equity in Bellville’s  income      |   | 3.1                                      |       | 2.6 |   | — |   |
| Interest income, net                    |   | 1.1                                      |       | 1.9 |   | 1.7 |   |
| Other income (expense)                  |   | (4.8                                     | )          | 0.4 |   | — |   |
| Other intercompany income  from Steel   |   | —                                   |       | 0.1 |   | 2.2 |   |
| Net income (loss)                       |   | $                                        | 16.4       |   | $ | 38.6 |   | $ | (5.5 | ) |
| Cash dividends received  from Bellville |   | $                                        | 3.9        |   | $ | 2.2 |   | $ | — |   |

 
|                                                                                                        |   | **As of  December 31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                        |   | **2001**                |   | **2000** |   |
| ***Condensed Balance Sheets***                                                                              |   |                    |   |   |   |
| Current assets:                                                                                             |   |                    |   |   |   |
| Cash and cash equivalents                                                                                   |   | $                       | 105.6  |   | $ | 25.3 |   |
| Short-term investments                                                                                      |   | —                  |   | 0.1 |   |
| Due from subsidiaries                                                                                       |   | 4.6                     |   | 0.6 |   |
| Other current assets                                                                                        |   | 0.7                     |   | 0.7 |   |
| Total current assets                                                                                        |   | 110.9                   |   | 26.7 |   |
| Investment in Steel                                                                                         |   | 120.5                   |   | 153.6 |   |
| Investment in Fintube                                                                                       |   | 55.1                    |   | 50.6 |   |
| Investment in Bellville                                                                                     |   | 14.1                    |   | 14.9 |   |
| Marketable securities                                                                                       |   | —                  |   | 10.4 |   |
| Advances to subsidiaries                                                                                    |   | 160.1                   |   | — |   |
| Other noncurrent assets                                                                                     |   | 9.8                     |   | 3.8 |   |
| Total assets                                                                                                |   | $                       | 470.5  |   | $ | 260.0 |   |
|                                                                                                        |   |                    |   |   |   |
| Current liabilities:                                                                                        |   | $                       | 2.7    |   | $ | 1.1 |   |
| Senior subordinated debt                                                                                    |   | 150.0                   |   |   |   |
| Other noncurrent  liabilities                                                                               |   | 2.5                     |   | 3.1 |   |
| Total liabilities                                                                                           |   | $                       | 155.2  |   | $ | 4.2 |   |
|                                                                                                        |   |                    |   |   |   |
| Shareholders’ equity:                                                                                  |   |                    |   |   |   |
| Preferred stock, $1 par  value (authorized: 10,000,000 shares, issued: none)                                |   | $                       | — |   | $ | — |   |
| Common stock, $1 par value  (authorized: 80,000,000 shares, issued:25,201,595 and 23,822,101, respectively) |   | 25.2                    |   | 23.8 |   |
| Capital surplus                                                                                             |   | 272.0                   |   | 221.5 |   |
| Accumulated comprehensive  loss                                                                             |   | (15.9                   | )      | (3.6 | ) |
| Accumulated income                                                                                          |   | 34.0                    |   | 17.6 |   |
| Treasury stock (313 and  168,322 common shares, respectively, at cost)                                      |   | —                  |   | (3.5 | ) |
| Total shareholders’ equity                                                                             |   | 315.3                   |   | 255.8 |   |
| Total liabilities and  shareholders’ equity                                                            |   | $                       | 470.5  |   | $ | 260.0 |   |

 
|                                                  |   | **Years ended  December 31,** |   |
|-------------------------------------------------------|--------|-------------------------------|--------|
|                                                  |   | **2001**                      |   | **2000** |   | **1999** |   |
| ***Condensed Statements of Cash Flows***              |   |                          |   |   |   |   |   |
| Net income (loss)                                     |   | $                             | 16.4   |   | $ | 38.6 |   | $ | (5.5 | ) |
| Undistributed equity in  Steel’s (income) loss   |   | (12.2                         | )      | (21.8 | ) | 9.4 |   |
| Undistributed equity in  Fintube’s income        |   | (4.4                          | )      | (11.1 | ) | — |   |
| Undistributed equity in  Bellville’s income      |   | (3.1                          | )      | (2.6 | ) | — |   |
| Other                                                 |   | (3.0                          | )      | 1.2 |   | (2.4 | ) |
| Net cash provided (used) by  operating activities     |   | (6.3                          | )      | 4.3 |   | 1.5 |   |
| Net cash provided (used) by  investing activities     |   | 10.3                          |   | (27.8 | ) | (4.5 | ) |
| Net cash provided by  financing activities            |   | 76.3                          |   | 30.7 |   | 0.9 |   |
| Net increase (decrease) in  cash and cash equivalents |   | 80.3                          |   | 7.2 |   | (2.1 | ) |
| Beginning cash and cash  equivalents                  |   | 25.3                          |   | 18.1 |   | 20.2 |   |
| Ending cash and cash  equivalents                     |   | $                             | 105.6  |   | $ | 25.3 |   | $ | 18.1 |   |
| Supplemental disclosure of  noncash transaction:      |   |                          |   |   |   |   |   |
| Issuance of common stock  for acquisition of Fintube  |   | $                             | — |   | $ | 20.0 |   | $ | — |   |

 

46

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**LONE STAR TECHNOLOGIES, INC.**

**Schedule II****- Valuation and QualifyingAccounts**

**December 31, 1999, 2000, and 2001**

***($ in millions)***

 
|                             |   | **Balance at** |   | **Charged to** |   | **Charged**  |   |                  |   | **Balance**   |   |
|----------------------------------|--------|----------------|--------|----------------|--------|--------------|--------|-----------------------|--------|---------------|--------|
|                             |   | **beginning**  |   | **costs and**  |   | **to other** |   |                  |   | **at end**    |   |
|                             |   | **of period**  |   | **expenses**   |   | **accounts** |   | **Deductions****(b)** |   | **of period** |   |
| ***Description***                |   |           |   |           |   |         |   |                  |   |          |   |
| *Year  ended December 31, 1999*  |   |           |   |           |   |         |   |                  |   |          |   |
| Allowance for doubtful  accounts |   | $              | 1.4    |           | $      | —       |   | $                     | — |          | $      | (0.1 | ) | $ | 1.3 |   |
| Reserves for special  charges(a) |   | 5.3            |   | —         |   | —       |   | (5.3                  | )      | —        |   |
|                             |   |           |   |           |   |         |   |                  |   |          |   |
| *Year  ended December 31, 2000*  |   |           |   |           |   |         |   |                  |   |          |   |
| Allowance for doubtful  accounts |   | 1.3            |   | 0.6            |   | 0.1          |   | —                |   | 2.0           |   |
|                             |   |           |   |           |   |         |   |                  |   |          |   |
| *Year  ended December 31, 2001*  |   |           |   |           |   |         |   |                  |   |          |   |
| Allowance for doubtful  accounts |   | 2.0            |   | 0.7            |   | —       |   | (0.9                  | )      | 1.8           |   |
|                                  |        |                |        |                |        |              |        |                       |        |               |        |  |  |  |  |  |

----

 (a)  Does not include special charge associatedwith the write-down of property, plant, and equipment.

 (b)  Includes write-offs of accounts receivableand utilization of reserves for special charges.

 

**I****TEM****9.                  C****HANGES****I****N****A****ND****D****ISAGREEMENTS****W****ITH****A****CCOUNTANTS********O****N****A****CCOUNTING****A****ND****F****INANCIAL****D****ISCLOSURE**

 

None.

 

**P****ART****III**

 

**I****TEM****10.         D****IRECTORS****A****ND****E****XECUTIVE****O****FFICERS********O****F****T****HE****R****EGISTRANT**

 

Information required under this item is contained in Lone Star’s proxystatement for the 2002 Annual Meeting of Shareholders, and is incorporatedherein by reference.

** **

**I****TEM****11.         E****XECUTIVE****C****OMPENSATION**

 

Information required under this item is contained in Lone Star’s proxystatement for the 2002 Annual Meeting of Shareholders, and is incorporatedherein by reference.

** **

**I****TEM****12.         S****ECURITY****O****WNERSHIP****O****F****C****ERTAIN****B****ENEFICIAL****O****WNERS********A****ND****M****ANAGEMENT**

 

Information required under this item with respect to beneficial ownersof more than 5 percent of outstanding common stock and to directors andexecutive officers is contained in Lone Star’s proxy statement for the 2002Annual Meeting of Shareholders, and is incorporated herein by reference.

 

47

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**I****TEM****13.         C****ERTAIN****R****ELATIONSHIPS****A****ND****R****ELATED****T****RANSACTIONS**

 

Information required under this item with respect to directors andexecutive officers is contained in Lone Star’s proxy statement for the 2002Annual Meeting of Shareholders, and is incorporated herein by reference.

 

**P****ART****IV**

 

**I****TEM****14.         E****XHIBITS****, F****INANCIAL****S****TATEMENT****S****CHEDULES****, A****ND****R****EPORTS****O****N****F****ORM****8-K**

 

 (a)1.       Financial Statements - The following Consolidated FinancialStatements are filed as part of this report:

•                 Reportof Independent Public Accountants

•             ConsolidatedStatements of Income - for theyears ended December 31, 2001, 2000, and 1999

•             ConsolidatedBalance Sheets at December 31, 2001 and 2000

•             ConsolidatedStatements of Cash Flows - forthe years ended December 31, 2001, 2000, and 1999

•                 ConsolidatedStatements of Shareholders’ Equity - at December 31, 2001, 2000, 1999, and 1998

•             Notesto Consolidated Financial Statements

 

2.          Schedule I  — Condensed Financial Information of Registrant

             Schedule II - Valuation andQualifying Accounts

 

Note: All schedules notfiled herein for which provision is made under rules of Regulation S-X havebeen omitted as not applicable or not required or the information required hasbeen included in the notes to the consolidated financial statements.

 

3.          Index to Exhibits

*** ***

***Description***

 
| 1.1 |   | Underwriting Agreement dated May 2, 2001 among Lone Star, Alpine  Capital, L.P., and Bear Stearns & Co., Inc. (incorporated by reference to  Exhibit 99.1 to Form 8-K of Lone Star as filed May 15, 2001).                                                                                              |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1 |   | Asset Purchase Agreement dated as of November 16, 1999 by and among  Lone Star, Fintube Technologies, Inc. and Fintube Limited Partnership  (incorporated by reference to the same numbered Exhibit to Form 8-K of Lone  Star as filed on January 18, 2000.)                                                |
| 2.2 |   | First Amendment to Asset Purchase Agreement dated as of January 1,  2000 by and among Lone Star, Fintube Technologies, Inc. and Fintube Limited  Partnership (incorporated by reference to the same numbered Exhibit to Form  8-K of Lone Star as filed on January 18, 2000.)                               |
| 2.3 |   | Asset Purchase Agreement dated as of March 7, 2000 by and among Lone  Star, Bellville Acquisition, Inc. and Bellville Tube Corporation  (incorporated by reference to Exhibit 2.1 to Form 8-K of Lone Star as filed  on April 14, 2000.)                                                                    |
| 2.4 |   | First Amendment to Asset Purchase Agreement dated as of March 31,  2000 by and among Lone Star, Bellville Acquisition, Inc. and Bellville Tube  Corporation (incorporated by reference to Exhibit 2.2 to Form 8-K of Lone  Star as filed on April 14, 2000.)                                                |
| 2.5 |   | Purchase and Sale Agreement among North Star Steel Company, Universal  Tubular Services, Inc., Cargill, Incorporated, Lone Star Technologies, Inc.,  and Star Seamless, Inc., dated as of August 16, 2001 (incorporated by  reference to Exhibit 2.1 to Form 8-K of Lone Star as filed on August 17, 2001). |
| 3.1 |   | Certificate of Incorporation of Registrant (incorporated by reference  to Exhibit 3(a) to Form S-4 Registration Statement of Lone Star as filed on  April 4, 1986, File No. 33-4581).                                                                                                                       |
| 3.2 |   | 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).                                                                           |
| 3.3 |   | Agreement and Plan of Merger dated March 6, 1986, among St eel, a  Texas corporation, Lone Star, a Delaware corporation, and Lone Star Steel  Company Merging Corporation, a Delaware corporation                                                                                                           |

 

48

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|    |   | (incorporated by reference to Exhibit II to Form S-4 Registration  Statement of Lone Star as filed on April 4, 1986, File No. 33-4581).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.4     |   | By-Laws as adopted March 6, 1986, as amended 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).                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.5     |   | Certificate of Amendment to Certificate of Incorporation dated May  20, 1998 (incorporated by reference to Exhibit 3.4 to Form 10-Q for the  quarter ended June 30, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1     |   | Statement of Resolution establishing Cumulative Preferred Stock,  Series A (par value $1 per share), dated September 9, 1988 (incorporated by  reference to Exhibit 3(c) of Form 10-K of Lone Star filed April 7, 1989).                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2     |   | Lone Star Indenture with Bankers Trust Company, Trustee, with respect  to $50,000,000 8% Convertible Subordinated Debentures Due 2002 (Eurobonds),  dated August 26, 1987 (incorporated by reference to Exhibit 4(c) of Form 10-K  of Lone Star as filed on April 7, 1989).                                                                                                                                                                                                                                                                                                                                                       |
| 4.3     |   | 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 Agreement of Lone Star as  filed on February 4, 2000, File No. 333-96207).                                                                                                                                                                                                    |
| 4.4     |   | Letter Agreement dated October 19, 2000 by Alpine Capital, L.P.,  Keystone, Inc. and The Anne T. and Robert M. Bass Foundation to Lone Star  (incorporated by reference to Exhibit 4.6 to Amendment No. 2 to Form S-3  Registration Statement of Lone Star as filed on October 30, 2000, File No.  333-41130.                                                                                                                                                                                                                                                                                                                     |
| 4.5     |   | Indenture dated as of May 29, 2001 among Lone Star, Environmental  Holdings, Inc., Zinklahoma, Inc., Lone Star Steel Company, Lone Star  Logistics, Inc., Lone Star Steel International, Inc., Lone Star Steel Sales  Company, Rotac, Inc., T&N Lone Star Warehouse Co., Texas & Northern  Railway Company, Lone Star ST Holdings, Inc., Fintube Technologies, Inc.,  Fintube Canada, Inc., Bellville Tube Corporation, and Wells Fargo Bank  Minnesota, National Association (incorporated by reference to Exhibit 4.3 to  Form S-4 Registration Statement of Lone Star as filed on June 27, 2001, File  No. 333-63944). |
| 4.6     |   | Exchange and Registration Rights Agreement dated May 29, 2001, among  Lone Star, Goldman, Sachs & Co., Salomon Smith Barney Inc., Banc of  America Securities LLC, CIBC World Markets Corp., Dresdner Kleinwort  Wasserstein Securities LLC, RBC Dominion Securities Corporation, and The Robinson—  Humphrey Company, LLC (incorporated by reference to Exhibit 4.4 to Form S-4  Registration Statement of Lone Star as filed on June 27, 2001, File No.  333-63944).                                                                                                                                                   |
| 10.1    |   | Amended 1985 Long-Term Incentive Plan (incorporated by reference to  Exhibit A of Proxy Statement of Lone Star as filed on October 22, 1993).*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1(a) |   | Amendments to the Amended 1985 Long-Term Incentive Plan adopted on  May 8, 1997 (incorporated by reference to Exhibit 10.1(a) to Form 10-Q of  Lone Star for the quarter ended June 30, 1997).*                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1(b) |   | Amendments to the Amended 1985 Long-Term Incentive Plan adopted on  May 14, 1998 (incorporated by reference to same numbered Exhibit to Form 10-Q  for the quarter ended June 30, 1998).*                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1(c) |   | Amendments to the Amended 1985 Long-Term Incentive Plan adopted on  May 11, 1999 (incorporated by reference to same numbered Exhibit to Form 10-Q  for the quarter ended June 30, 1999).*                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1(d) |   | Amendment to the Amended 1985 Long-Term Incentive Plan adopted on May  9, 2000 (incorporated by reference to same numbered Exhibit to Form 10-Q for  the quarter ended June 30, 2000.) *                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.1(e) |   | Amendments to the Amended 1985 Long-Term Incentive Plan adopted on  May 8, 2001 (incorporated by reference to same numbered exhibit to Form 10-Q  for the quarter ended June 30, 2001).*                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2    |   | Employment Retention Policy adopted May 8, 1997, letter agreements  dated May 22, 1997 between Lone Star and John P. Harbin, Charles J. Keszler  and Robert F. Spears and between Steel and W. Byron Dunn and letter agreement  dated September 25, 1997 between Lone Star and Rhys J. Best (incorporated by  reference to same numbered Exhibit to Form 10-K for the year ended December  31, 1997).*                                                                                                                                                                                                                            |
| 10.3    |   | Contract for Electric Service dated September 30, 1996 between  Southwestern Electric Power Company and Steel (incorporated by reference to  Exhibit 10.21 to Form 10-K for the year ended December 31, 1996).                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4    |   | Assignment, Termination and Release dated January 21, 1997, among  Steel, Lone Star, and the minority shareholders of Steel (incorporated by  reference to Exhibit 10.22 to Form 10-K for the year ended December 31,  1996).                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5    |   | Credit Agreement dated as of October 2, 1997 by and among Steel and  the banks named therein (incorporated by reference to Exhibit 10.23 to Form  10-K for the year ended December 31, 1997).                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6    |   | Cost Sharing Agreement dated as of July 1, 1997 between Lone Star and  St eel (incorporated by reference to Exhibit 10.24 to Form 10-K for the year  ended December 31, 1997).                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

49

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| 10.7     |   | Compromise and Settlement Agreement and Release dated July 31, 1997  between Lone Star and Guaranty Federal Bank, F.S.B. (incorporated by reference to Exhibit 10.26 to Form 10-K for the year  ended December 31, 1997).                                                                                                                                               |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8     |   | Consulting Agreement dated as of July 23, 1998 between Lone Star and  John P. Harbin (incorporated by reference to Exhibit 10.27 to Form 10-Q for  the quarter ended September 30, 1998).*                                                                                                                                                                              |
| 10.9     |   | Phantom Stock Deferred Compensation Plan adopted on September 22,  1998 (incorporated by reference to Exhibit 10.28 to Form 10-Q for the quarter  ended September 30, 1998).*                                                                                                                                                                                           |
| 10.10    |   | First Amendment dated as of December 24, 1998 to Credit Agreement  dated as of October 2, 1997 by and among Steel and the banks named therein  (incorporated by reference to Exhibit 10.29 to Form 10-K for the year ended  December 31, 1998).                                                                                                                         |
| 10.11    |   | Financing Agreement dated March 12, 1999 between Steel and The CIT  Group/Business Credit, Inc. (incorporated by reference to Exhibit 10.30 to  Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                        |
| 10.12    |   | Subordination Agreement dated March 12, 1999 between Lone Star and  The CIT Group/Business Credit, Inc. (incorporated by reference to Exhibit  10.31 to Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                |
| 10.13    |   | Intercreditor Agreement dated March 12, 1999 among Lone Star, Steel  and The CIT Group/Business Credit, Inc. (incorporated by reference to Exhibit  10.32 to Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                           |
| 10.14    |   | Amendment agreement dated December 28, 1999 to Financing Agreement  dated March 12, 1999 between Steel and The CIT Group/Business Credit, Inc.  (incorporated by reference to Exhibit 10.33 to Form 10-K for the year ended  December 31, 1999.)                                                                                                                        |
| 10.15(a) |   | Limited Guaranty dated December 28, 1999 of Lone Star in favor of The  CIT Group/Business Credit, Inc., as Agent (incorporated by reference to  Exhibit 10.34 to Form 10-K for the year ended December 31, 1999.)                                                                                                                                                       |
| 10.16(b) |   | Limited Guaranty dated as of March 31, 2000 by and between the CIT  Group/Business Credit, Inc., as agent,   and Lone Star (incorporated by reference to Exhibit 2.3 to Form 8-K of  Lone Star as filed on April 14, 2000.)                                                                                                                                        |
| 10.17(c) |   | Stock Pledge Agreement dated as of March 31, 2000 by and between the  CIT Group/Business Credit, Inc., as agent, and Lone Star (incorporated by  reference to Exhibit 2.4 to Form 8-K of Lone Star as filed on April 14,  2000.)                                                                                                                                        |
| 10.18    |   | Credit Agreement dated as of January 3, 2000 among Fintube  Technologies, Inc. (“Fintube”), the financial institutions named in the  Agreement (“Lenders”) and Bank of America, N.A., as Agent for the Lenders  (incorporated by reference to Exhibit 10.35 to Form 10-Q for the quarter  ended June 30, 2000.)                                     |
| 10.19    |   | Employee Stock Purchase Plan adopted on May 9, 2000 (incorporated by  reference to Exhibit 10.36 to Form 10-Q for the quarter ended June 30,  2000.)*                                                                                                                                                                                                                   |
| 10.20    |   | Deferred Compensation Plan adopted by Lone Star’s Board of Directors  on May 9, 2000 (incorporated by reference to Exhibit 10.37 to Form 10-Q for  the quarter ended June 30, 2000.)*                                                                                                                                                                              |
| 10.21    |   | Amendment agreement dated September 29, 2000 to Financing Agreement  dated March 12, 1999 between Steel and The CIT Group/Business Credit, Inc.  (incorporated by reference to Exhibit 10.38 to Form 10-Q for the quarter  ended September 30, 2000.)                                                                                                                   |
| 10.22    |   | Amendment agreement dated October 25, 2000 to Financing Agreement  dated March 12, 1999 between Steel and The CIT Group/Business Credit, Inc.  (incorporated by reference to Exhibit 10.39 to Form 10-K for the year ended  December 31, 2000.)                                                                                                                         |
| 10.23    |   | Modification Agreement dated September __, 2000 to Credit Agreement  dated as of January 3, 2000 among Fintube, the Lenders and Bank of America,  N.A., as Agent for the Lenders (incorporated by reference to Exhibit 10.40to  Form 10-K for the year ended December 31, 2000.)                                                                                        |
| 10.24    |   | Second Modification Agreement dated February 20, 2001 to Credit  Agreement dated as of January 3, 2000 among Fintube, the Lenders and Bank of  America, N.A., as Agent for the Lenders (incorporated by reference to Exhibit  10.41 to Form 10-K for the year ended December 31, 2000.)                                                                                 |
| 10.25    |   | Deferred Compensation Plan adopted by Lone Star's Board of Directors  on May 9, 2000 (incorporated by reference to Exhibit 10.37 to Form 10-Q for  the quarter ended June 30, 2000).                                                                                                                                                                                    |
| 10.26    |   | Employment Agreement dated May 7, 2001 between Lone Star and Rhys J.  Best (incorporated by reference to Exhibit 99.1 to Form 8-K of Lone Star as  filed on May 9, 2001).*                                                                                                                                                                                              |
| 10.27    |   | Purchase Agreement dated May 23, 2001 among Lone Star, Goldman, Sachs  & Co., Salomon Smith Barney Inc., Banc of America Securities LLC, RBC  Dominion Securities Corporation, and The Robinson-Humphrey Company, LLC  (incorporated by reference to Exhibit 10.10 to Form S-4 Registration  Statement of Lone Star as filed on June 27, 2001, File No. 333-63944). |
| 10.28    |   | Consulting Employment Agreement dated January 1, 2000, among Fintube  Technologies, Inc., Jerry E. Ryan, and Lone Star (incorporated by reference  to Exhibit 10.42 to Form 10-Q for the quarter ended March 31, 2001).*                                                                                                                                                |

 

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| 10.29  |   | Employment Agreement dated January 1, 2000 between Fintube  Technologies, Inc. and Larry Sims (incorporated by reference to Exhibit 10.43  to Form 10-Q for the quarter ended March 31, 2001).*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.30  |   | Amended and Restated Financing Agreement dated October 8, 2001 among  The CIT Group/Business Credit, Inc. (as Agent and Lender), the Lenders party  thereto, and Lone Star, Lone Star Steel Company, Fintube Technologies, Inc.,  Lone Star Logistics, Inc., T&N Lone Star Warehouse Co., Texas &  Northern Railway Company, Fintube Canada, Inc. and Bellville Tube Corporation  (as Borrowers), and Environmental Holdings, Inc., Zinklahoma, Inc., Lone Star  Steel International, Inc., Lone Star Steel Sales Company, Rotac, Inc., and  Lone Star ST Holdings, Inc. (as Guarantors) (incorporated by reference to Exhibit  10.13 to Amendment No. 2 to Form S-4 of Lone Star as filed on October 9,  2001, File No. 333-63944). |
| 21     |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 23     |   | Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 24     |   | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 99.1   |   | Letter from the Registrant to the Securities and Exchange Commission  regarding Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *      |   | Management contract or compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (b)    |   | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 
| **Date of Report** |   | **Date Filed**   |   | **Description**                                     |   |
|--------------------|--------|------------------|--------|-----------------------------------------------------|--------|
| October 1, 2001    |   | October 2, 2001  |   | Filing amendment to Form S-4 Registration Statement |   |
| October 8, 2001    |   | October 10, 2001 |   | Financing Agreement with CIT Group                  |   |
| October 15, 2001   |   | October 16, 2001 |   | Results of operations for third quarter of 2001     |   |

 

51

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**I****TEM****15.               S****IGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                 | **LONE S****TAR T****ECHNOLOGIES , I****NC.** |
|----------------------|-----------------------------------------------|
|                 |                                          |
| Date: March 27, 2002 | By:                                           | /s/ Charles J. Keszler |
|                 | (Charles J. Keszler)                          |
|                 | Vice President and Chief                      |
|                 | Financial Officer                             |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| ***Signature***                        |                         | ***Title***                            |   |   | ***Date***     |
|----------------------------------------|------------------------------|----------------------------------------|--------|--------|----------------|
|                                   |                         |                                   |   |   |           |
| /s/ Rhys J. Best                       | ,                            | Chairman, Director, Chief              |   |   | March 27, 2002 |
| (Rhys J. Best)                         |                         | Executive Officer and President        |   |   |           |
|                                   |                         | (Principal Executive Officer)          |   |   |           |
|                                   |                         |                                   |   |   |           |
| /s/ Charles J. Keszler                 | ,                            | Vice President and Chief               |   |   | March 27, 2002 |
| (Charles J. Keszler)                   |                         | Financial Officer (Principal Financial |   |   |           |
|                                   |                         | and Accounting Officer)                |   |   |           |
|                                   |                         |                                   |   |   |           |
| /s/ Frederick B. Hegi, Jr.             | *,                           | Director                               |   |   | March 27, 2002 |
| (Frederick B. Hegi, Jr.)               |                         |                                   |   |   |           |
|                                   |                         |                                   |   |   |           |
| /s/ Robert Kelley                      | *,                           | Director                               |   |   | March 27, 2002 |
| (Robert Kelley)                        |                         |                                   |   |   |           |
|                                   |                         |                                   |   |   |           |
| /s/ M. Joseph McHugh                   | *,                           | Director                               |   |   | March 27, 2002 |
| (M. Joseph McHugh)                     |                         |                                   |   |   |           |
|                                   |                         |                                   |   |   |           |
| /s/ Thomas M. Mercer, Jr.              | *,                           | Director                               |   |   | March 27, 2002 |
| (Thomas M. Mercer, Jr.)                |                         |                                   |   |   |           |
|                                   |                         |                                   |   |   |           |
| /s/ Alfred M. Micallef                 | *,                           | Director                               |   |   | March 27, 2002 |
| (Alfred M. Micallef)                   |                         |                                   |   |   |           |
|                                   |                         |                                   |   |   |           |
| /s/ Jerry E. Ryan                      | *,                           | Director                               |   |   | March 27, 2002 |
| (Jerry E. Ryan)                        |                         |                                   |   |   |           |
|                                   |                         |                                   |   |   |           |
| *By:                                   |  /s/ Charles J. Keszler |                                   |   |   |           |   |
| (Charles J. Keszler, Attorney-in-Fact) |                         |                                   |   |   |           |
|                                   |                         |                                   |   |   |           |
|                                        |                              |                                        |        |        |                |  |

 

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