<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 1-12852
ROUGE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3340770
(State of Incorporation) (I.R.S. Employer Identification No.)
3001 MILLER ROAD, P.O. BOX 1699, DEARBORN, MI 48121-1699
(Address of principal executive offices)
(313) 317-8900
(Registrant's telephone number, including area code)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- ----------
The number of shares of common stock issued and outstanding as of July 17, 1998
was 22,020,873. This amount includes 14,458,473 shares of Class A Common Stock
and 7,692,400 shares of Class B Common Stock.
<PAGE> 2
ROUGE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Report of Independent Accountants...............................................................................3
Consolidated Balance Sheets.....................................................................................4
Consolidated Statements of Operations...........................................................................6
Consolidated Statements of Changes in Stockholders' Equity......................................................7
Consolidated Statements of Cash Flows...........................................................................8
Notes to Consolidated Financial Statements......................................................................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders............................................................17
Item 5. Other Events...................................................................................................18
Item 6. Exhibits and Reports on Form 8-K...............................................................................18
</TABLE>
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<PAGE> 3
[PricewaterhouseCoopers LLP Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
July 17, 1998
To the Board of Directors and
Stockholders of Rouge Industries, Inc.
We have reviewed the accompanying consolidated financial information of Rouge
Industries, Inc. and consolidated subsidiaries appearing on pages 4 through 10
of this report on Form 10-Q as of June 30, 1998, and for the three-month and
six-month periods ended June 30, 1998 and 1997. This financial information is
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information, as of June 30, 1998, and for
the three-month and six-month periods ended June 30, 1998 and 1997, for it to be
in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1997, and the related
consolidated statements of operations, of changes in stockholders' equity, and
of cash flows for the year then ended (not presented herein), and in our report
dated January 28, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 31, 1997,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
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<PAGE> 4
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
June 30 December 31
Assets 1998 1997
---- ----
Unaudited
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 27,398 $ 12,570
Accounts Receivable
Trade and Other (Net of Allowances
of $11,641 and $6,333) 124,664 101,590
Affiliates 7,180 9,876
Inventories 215,316 248,317
Other Current Assets 2,884 8,562
-------- --------
Total Current Assets 377,442 380,915
-------- --------
Property, Plant, and Equipment
Land 366 -
Buildings and Improvements 26,357 24,718
Machinery and Equipment 276,045 275,489
Construction in Progress 9,264 10,517
-------- --------
Subtotal 312,032 310,724
Less: Accumulated Depreciation (50,168) (42,162)
-------- --------
Net Property, Plant, and Equipment 261,864 268,562
-------- --------
Investment in Unconsolidated Subsidiaries 64,305 50,936
-------- --------
Deferred Charges and Other 27,281 28,096
-------- --------
Total Assets $730,892 $728,509
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 5
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
June 30 December 31
1998 1997
---- ----
Unaudited
<S> <C> <C>
Current Liabilities
Accounts Payable
Trade $161,213 $152,917
Affiliates 11,589 13,924
Accrued Vacation Pay 11,951 11,007
Taxes Other than Income 1,944 4,312
Other Accrued Liabilities 26,203 21,579
-------- --------
Total Current Liabilities 212,900 203,739
-------- --------
Long Term Debt - 17,900
-------- --------
Other Liabilities 61,756 56,969
-------- --------
Excess of Net Assets Acquired Over Cost 8,382 11,280
-------- --------
Commitments and Contingencies (Note 5)
Stockholders' Equity
Common Stock
Class A, 80,000,000 shares authorized with 14,452,929 and 14,428,219 issued
and outstanding as of June 30, 1998 and
December 31, 1997, respectively 144 144
Class B, 7,562,400 shares authorized, issued, and
outstanding 76 76
Capital in Excess of Par Value 128,850 128,517
Retained Earnings 321,030 312,130
Additional Minimum Pension Liability (2,246) (2,246)
-------- --------
Total Stockholders' Equity 447,854 438,621
-------- --------
Total Liabilities and Stockholders' Equity $730,892 $728,509
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 6
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share and per share amounts)
Unaudited
<TABLE>
<CAPTION>
For the Quarter Ended For the Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Unaffiliated Customers $276,418 $303,334 $558,290 $594,797
Affiliates 29,583 51,871 66,663 94,580
-------- -------- -------- --------
Total Sales 306,001 355,205 624,953 689,377
-------- -------- -------- --------
Costs and Expenses
Costs of Goods Sold 288,240 332,810 589,478 646,413
Depreciation and Amortization 4,240 3,671 9,370 7,218
Selling and Administrative Expenses 6,744 6,197 12,670 11,782
Amortization of Excess of Net Assets Acquired
Over Cost (1,449) (1,449) (2,898) (2,898)
-------- -------- -------- --------
Total Costs and Expenses 297,775 341,229 608,620 662,515
-------- -------- -------- --------
Operating Income 8,226 13,976 16,333 26,862
Interest Income 975 569 1,026 939
Interest Expense 7 (96) (418) (175)
Other - Net (380) 335 (766) 705
-------- -------- -------- --------
Income Before Income Taxes and Equity in
Loss of Unconsolidated Subsidiaries 8,828 14,784 16,175 28,331
Income Tax Provision (2,236) (3,638) (4,448) (7,718)
-------- -------- -------- --------
Income Before Equity in Loss of
Unconsolidated Subsidiaries 6,592 11,146 11,727 20,613
Equity in Loss of Unconsolidated Subsidiaries (442) (524) (1,506) (707)
-------- -------- -------- --------
Net Income $ 6,150 $ 10,622 $ 10,221 $ 19,906
======== ======== ======== ========
Per Share Amounts
Net Income - Basic and Diluted $ 0.28 $ 0.48 $ 0.46 $ 0.91
======== ======== ======== ========
Cash Dividends Declared $ 0.03 $ 0.03 $ 0.06 $ 0.06
======== ======== ======== ========
Weighted Average Shares Outstanding 22,004,525 21,921,783 22,001,422 21,917,956
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 7
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Quarter Ended For the Six Months Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Common Stock
Beginning and Ending Balance $ 220 $ 220
Capital in Excess of Par Value
Beginning Balance 128,653 128,517
Common Stock Issued for Benefit Plans 197 333
-------- --------
Ending Balance 128,850 128,850
-------- --------
Retained Earnings
Beginning Balance 315,541 312,130
Net Income and Comprehensive Income 6,150 10,221
Cash Dividends Declared (661) (1,321)
-------- --------
Ending Balance 321,030 321,030
-------- --------
Additional Minimum Pension Liability
Beginning and Ending Balance (2,246) (2,246)
-------- --------
Total Stockholders' Equity $447,854 $447,854
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 8
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Six Months Ended
June 30
-------
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 10,221 $ 19,906
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Deferred Taxes 180 6,469
Depreciation and Amortization 9,370 7,218
Amortization of Capitalized Debt Costs - 18
Equity in Loss of Unconsolidated Subsidiaries 1,506 707
Amortization of Excess of Net Assets Acquired Over Cost (2,898) (2,898)
Common Stock Issued for Benefit Plans 333 482
Changes in Assets and Liabilities:
Accounts Receivable (13,767) (30,546)
Inventories 33,682 41,909
Prepaid Expenses 5,085 5,047
Accounts Payable and Accrued Liabilities 22,987 16,842
Other - Net (8) (1)
-------- --------
Net Cash Provided by Operating Activities 66,691 65,153
-------- --------
Cash Flows From Investing Activities
Capital Expenditures (16,556) (27,468)
Purchase of Marketable Securities - (3,311)
Sale of Marketable Securities - 1,004
Investment in Unconsolidated Subsidiaries (16,334) (22,732)
Other - Net 247 (369)
-------- --------
Net Cash Used for Investing Activities (32,643) (52,876)
-------- --------
Cash Flows From Financing Activities
Drawdowns on Revolving Line 126,100 -
Principal Payments on Revolving Line (144,000) -
Cash Dividend Payments (1,320) (1,315)
-------- --------
Net Cash Used for Financing Activities (19,220) (1,315)
-------- --------
Net Increase in Cash and Cash Equivalents 14,828 10,962
Cash and Cash Equivalents - Beginning of Period 12,570 24,914
-------- --------
Cash and Cash Equivalents - End of Period $ 27,398 $ 35,876
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-8-
<PAGE> 9
ROUGE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited; however, in the
opinion of the Company, the statements include all adjustments, consisting of
only normal recurring adjustments, necessary for a fair statement of the results
for the interim periods presented. The foregoing interim results are not
necessarily indicative of the results of operations expected for the full fiscal
year ending December 31, 1998.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires disclosure of comprehensive income in interim periods and additional
disclosures of the components of comprehensive income on an annual basis.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by and distributions to the Company's stockholders.
The Company's comprehensive income is comprised of net income and minimum
pension liability adjustments. For the three-month and six-month periods ended
June 30, 1998 and 1997, there were no adjustments to the minimum pension
liability.
These consolidated financial statements should be read together with the
Company's audited financial statements presented in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 6, 1998. For the purpose of these Notes to
Consolidated Financial Statements "Rouge Industries" or the "Company" refers to
Rouge Industries, Inc. and its subsidiaries unless the context requires
otherwise.
NOTE 2 - BING BLANKING, L.L.C.
On March 31, 1998, Bing Blanking, L.L.C. ("Bing Blanking"), a joint venture
between the Company and Bing Management II, L.L.C., acquired the machinery and
equipment of Freedland Industries, Corp., an automotive blanking and rollforming
supplier, for $4,026,000. The acquisition was financed by a loan to Bing
Blanking from the Company. Bing Blanking is presently negotiating a bank loan.
The Company expects to be repaid all but $3,000,000 of its loan to Bing Blanking
with the proceeds of the bank loan. The Company acquired the land and building
associated with the Bing Blanking acquisition for $2,212,000 and is leasing them
to Bing Blanking.
NOTE 3 - INTERNAL USE SOFTWARE COSTS
Effective January 1, 1998, the Company adopted AICPA Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP No. 98-1 requires, in certain cases,
capitalization of software costs that previously would have been expensed as
incurred. Software costs capitalized in the three-month and six-month periods
ended June 30, 1998 were $586,000 and $2,305,000, respectively. These
capitalized software costs will be amortized over the lesser of 60 months or the
useful life of the software.
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<PAGE> 10
NOTE 4 - INVENTORIES
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
---- ----
Unaudited
<S> <C> <C>
Production
Raw Materials $ 55,371 $ 84,169
Semifinished and Finished Steel Products 156,293 160,017
-------- --------
Total Production at FIFO 211,664 244,186
LIFO Reserve (19,191) (17,285)
-------- --------
Total Production at LIFO 192,473 226,901
Nonproduction and Sundry 22,843 21,416
-------- --------
Total Inventories $215,316 $248,317
======== ========
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Shiloh of Michigan, L.L.C. Loan Guaranty. Rouge Industries guarantees 20 percent
of a $30,000,000 line of credit for Shiloh of Michigan, L.L.C. ("Shiloh of
Michigan"), the Company's engineered steel blanking joint venture with Shiloh
Industries, Inc. As of June 30, 1998, Shiloh of Michigan had borrowings of
$25,000,000 outstanding under its line of credit.
NOTE 6 - EARNINGS PER SHARE
There was no difference between basic and diluted earnings per share in the
three-month and six-month periods ended June 30, 1998 and 1997. The tables below
present dilutive securities, which represent stock options granted to members of
management or the board of directors with exercise prices lower than the average
market price of the Company's Class A Common Stock, and anti-dilutive
securities, which are stock options granted to members of management or the
board of directors with exercise prices higher than average market price of the
Company's Class A Common Stock. All of these stock options will expire between
2004 and 2008.
<TABLE>
<CAPTION>
For the Quarter Ended June 30
---------------------------------------------------------------------------
1998 1997
-------------------------------- -------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C>
Dilutive Securities 14,670 $12.13 20 $15.13
Anti-dilutive Securities 298,750 $14.63 - $28.88 303,200 $21.00 - $28.88
<CAPTION>
For the Six Months Ended June 30
---------------------------------------------------------------------------
1998 1997
-------------------------------- -------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C>
Dilutive Securities 16,651 $12.13 -
Anti-dilutive Securities 298,750 $14.63 - $28.88 304,700 $21.00 - $28.88
</TABLE>
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<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
COMPARISON OF THE THREE - MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Total Sales. Total sales for Rouge Industries, Inc. (together with its
subsidiaries, "Rouge Industries" or the "Company") decreased 13.9% in the second
quarter of 1998 to $306.0 million from $355.2 million in the second quarter of
1997, a decrease of $49.2 million. The decrease in total sales was caused
principally by a decrease in steel product shipments. Shipments decreased 13.8%
in the second quarter of 1998 to 692,000 net tons from 803,000 net tons in the
second quarter of 1997, a decrease of 111,000 net tons. Rouge Steel's shipments
were lower in the second quarter of 1998 primarily because of production issues
at the blast furnaces and downstream facilities and, to a lesser extent, the
strike at General Motors Corporation, the Company's fourth largest customer. The
effect on the Company of the decrease in total sales resulting from lower
shipments was intensified by lower steel product selling prices in the second
quarter of 1998.
Costs and Expenses. Total costs and expenses decreased 12.7% in the second
quarter of 1998 to $297.8 million from $341.2 million in the second quarter of
1997, a decrease of $43.4 million. Costs of goods sold decreased 13.4% in the
second quarter of 1998 to $288.2 million from $332.8 million in the second
quarter of 1997, a decrease of $44.6 million. The decrease in costs of goods
sold was due to lower shipments and was partially offset by price increases on
raw materials and energy and costs associated with the blast furnace and
downstream facility production issues. Costs of goods sold in the second quarter
of 1998 was 94.1% of total sales, up from 93.7% of total sales in the second
quarter of 1997, due to steel product selling price reductions and the cost
increases discussed above. Depreciation and amortization increased 15.5% in the
second quarter of 1998 to $4.2 million from $3.7 million in the second quarter
of 1997, an increase of $700,000. The increase
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<PAGE> 12
in depreciation and amortization reflects the completion of major capital
projects, primarily the automated raw material handling system and the reline of
the Company's smaller blast furnace.
Operating Income. Primarily as a result of lower shipments and steel
product selling prices, raw material and energy price increases, and costs
associated with blast furnace and downstream facility production issues,
operating income decreased 41.1% in the second quarter of 1998 to $8.2 million
from $14.0 million in the second quarter of 1997, a decrease of $5.8 million.
Operating income represented 2.7% of total sales in the second quarter of 1998
compared to 3.9% of total sales in the second quarter of 1997.
Income Tax Provision. The lower income tax provision in the second quarter
of 1998 was a function of lower taxable income.
Net Income. Net income decreased 42.1% in the second quarter of 1998 to
$6.1 million from $10.6 million in the second quarter of 1997, a decrease of
$4.5 million. The decrease in net income is attributable to lower steel product
selling prices and shipments, raw material and energy price increases, and costs
associated with blast furnace and downstream facility production issues,
partially offset by a lower income tax provision.
COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Total Sales. Total sales decreased 9.3% in the first half of 1998 to
$625.0 million from $689.4 million in the first half of 1997, a decrease of
$64.4 million. The decrease in total sales was caused principally by lower steel
product shipments. Steel product shipments decreased 8.2% in the first half of
1998 to 1,420,000 net tons from 1,547,000 net tons in the first half of 1997, a
decrease of 127,000 net tons. Rouge Industries' shipments were lower in the
first half of 1998 primarily because of blast furnace and downstream facility
production issues. The effect on the Company of the decrease in total sales
resulting from lower shipments was intensified by lower steel product selling
prices in the first half of 1998.
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<PAGE> 13
Costs and Expenses. Total costs and expenses decreased 8.1% in the first
half of 1998 to $608.6 million from $662.5 million in the first half of 1997, a
decrease of $53.9 million. Costs of goods sold decreased 8.8% in the first half
of 1998 to $589.5 million from $646.4 million in the first half of 1997, a
decrease of $56.9 million. The decrease in costs of goods sold was primarily due
to lower shipments and blast furnace and downstream facility production issues.
Costs of goods sold in the first half of 1998 was 94.3% of total sales, compared
to 93.8% of total sales in the first half of 1997. Depreciation and amortization
increased 29.7% in the first half of 1998 to $9.4 million from $7.2 million in
the first half of 1997, an increase of $2.2 million. The increase in
depreciation and amortization reflects the completion of major capital projects,
primarily the automated raw material handling system and the reline of the
Company's smaller blast furnace.
Operating Income. Operating income decreased 39.2% in the first half of
1998 to $16.3 million from $26.9 million in the first half of 1997, a decrease
of $10.6 million. Operating income represented 2.6% of total sales in the first
half of 1998 compared to 3.9% of total sales in the first half of 1997,
primarily because of steel product selling price reductions.
Income Tax Provision. The lower income tax provision in the first half of
1998 was a function of lower taxable income.
Net Income. Net income decreased 48.7% in the first half of 1998 to $10.2
million from $19.9 million in the first half of 1997, a decrease of $9.7
million. The decrease in net income is primarily attributable to lower steel
product selling prices and shipments.
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<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents on June 30, 1998 totaled $27.4 million compared
to $12.6 million on December 31, 1997, an increase of $14.8 million.
Cash Flows From Operating Activities. Net cash provided by operating
activities increased 2.4% in the first half of 1998 to $66.7 million from $65.2
million in the first half of 1997, an increase of $1.5 million. Net cash
provided by operating activities was primarily attributable to accounts
receivable, inventories and accrued liabilities.
Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, decreased in the first half of 1998
to $32.9 million from $50.2 million in the first half of 1997, a decrease of
$17.3 million. The expenditures made in the first half of 1998 were primarily
for computer system upgrades and investment in Spartan Steel Coating, L.L.C.
("Spartan Steel"), Rouge Industries' 48%-owned cold rolled hot dip galvanizing
joint venture with Worthington Industries, Inc. During the remainder of 1998, it
is anticipated that an additional $15 million will be accrued for capital items
and investments in unconsolidated subsidiaries, the most significant of which
are expansion of the Company=s shipping facility and additional investments in
Spartan Steel. The remaining capital expenditures are generally directed at
improving plant efficiency and product quality.
Credit Facility. Rouge Steel has a five-year, $100 million, unsecured
revolving loan commitment under a credit agreement (the "Credit Agreement")
which expires on December 16, 2002. The Company had no borrowings under the
facility as of June 30, 1998. The Company believes that net income and funds
available under the Credit Agreement will be adequate for its working capital
and capital expenditure requirements.
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<PAGE> 15
YEAR 2000 READINESS
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may result in
computer systems being unable to properly interpret dates in the year 2000 and
beyond causing computer systems and operating equipment to malfunction which
could lead to business and manufacturing disruptions. The Company has performed
a high-level assessment of the Year 2000 issue and management has determined
that it will be required to modify or replace significant portions of the
Company=s software and hardware so that its systems will properly interpret
dates beyond January 1, 2000. Management=s efforts have also included
communication with the Company's significant suppliers and customers to
determine the extent to which Rouge Industries' systems are vulnerable to any
failures by suppliers and customers to address the Year 2000 issue. In many
cases, the Company will replace older hardware and software with new equipment,
programs and systems which will significantly upgrade the existing functionality
and Rouge Industries estimates that capital expenditures between $6 and $8
million will be made with respect to these upgrades. Additionally, the Company
expects to incur between $5 and $7 million of expense to remediate existing
computer systems and equipment that are not Year-2000 ready. All remediation is
targeted for completion by the first quarter of 1999 with testing projected to
be complete by the second quarter of 1999.
The costs and timing of the Year-2000 project are based on management's
best estimates, which were derived using assumptions of future events. There can
be no guarantee that actual costs will not exceed such estimates or that the
project will be completed on time. Specific factors which might cause higher
actual costs or delays include the availability and cost of trained personnel,
the ability to locate all computer codes requiring correction and the failure of
third parties to remediate their own potential problems related to the Year 2000
issue.
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<PAGE> 16
OUTLOOK
Blast Furnace Outage. Blast furnace production during the first half of
1998 was lower than anticipated as the new raw material handling system and the
Company's smaller blast furnace, which returned to operation after a major
reline and repair, encountered operating problems. The problems have been
largely resolved but minor repairs need to be made to the blast furnace which
are expected to result in an eight- to ten-day outage. The outage,
scheduled to occur in August, is expected to cause the Company to lose
approximately 25,000 tons of hot metal production.
General Motors Strike. General Motors Corporation ("GM") is experiencing
labor disputes resulting in strikes at two of its plants in Flint, Michigan
which have curtailed production at most GM facilities. The length of the
strike is uncertain. The Company anticipates that its shipments in the third
quarter could decline by eight to ten percent over second quarter levels as a
result of the strike.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The matters discussed in this Quarterly Report on Form 10-Q include
certain forward-looking statements that involve risks and uncertainties. These
forward-looking statements may include, among others, statements concerning
projected levels of production, sales, shipments and income, pricing trends,
cost reduction strategies, product mix, anticipated capital expenditures,
Year-2000 readiness costs and other future plans and strategies.
As permitted by the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Rouge Industries is identifying in this Quarterly
Report on Form 10-Q a number of factors which could cause the Company's actual
results to differ materially from those anticipated. These factors include, but
are not necessarily limited to, (i) changes in the general economic climate,
(ii) the supply of and demand for steel products in the Company's markets, (iii)
pricing of steel products in the Company's markets, (iv) potential environmental
liabilities, (v) the availability and prices of raw materials, supplies,
utilities and other services and items required by the Company's operations, and
(vi) higher than expected operating costs.
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<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, Rouge Industries is a defendant in routine lawsuits
incidental to its business. The Company believes that none of such current
proceedings, individually or in the aggregate, will have a materially adverse
effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Rouge Industries' Annual Meeting of Stockholders was held on May 7, 1998.
In connection with the meeting, proxies were solicited. Set forth below are the
voting results on proposals considered and voted upon:
1) Both nominees for Class I Director were elected by a plurality of
the votes entitled to be cast by the stockholders who were
present or represented by proxy.
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Louis D. Camino 31,923,117 36,098
Peter J. Pestillo 31,923,817 35,398
</TABLE>
2) The Rouge Steel Company Stock Incentive Plan (the "1998 Stock
Incentive Plan") was adopted.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Adoption of the 1998 Stock Incentive Plan 31,692,414 86,621 180,180
</TABLE>
3) The appointment of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the fiscal year ending
December 31, 1998 was ratified by a majority of the votes
entitled to be cast by the stockholders who were present or
represented by proxy.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Ratification of the appointment of
PricewaterhouseCoopers LLP as Rouge
Industries= independent public accountants for
the fiscal year ending December 31, 1998 31,938,416 7,875 12,925
</TABLE>
-17-
<PAGE> 18
Item 5. Other Events
On May 7, 1998, Rouge Industries' board of directors declared a $0.03 per
share dividend on the Company's common stock. The dividend will be payable on
July 24, 1998 to stockholders of record on July 10, 1998. The total amount of
dividends to be paid is approximately $660,000.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this report.
Exhibit Number Description of Exhibit
-------------- ----------------------
15 PricewaterhouseCoopers LLP
Awareness Letter
27 Financial Data Schedule
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 23, 1998 ROUGE INDUSTRIES, INC.
By: /s/ Carl L. Valdiserri
----------------------------
Name: Carl L. Valdiserri
Title: Chairman of the Board and
Chief Executive Officer
Date: July 23, 1998 By: /s/ Gary P. Latendresse
----------------------------
Name: Gary P. Latendresse
Title: Executive Vice President and
Chief Financial Officer
-19-
<PAGE> 20
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
15 PricewaterhouseCoopers LLP Awareness Letter
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 15
[On PricewaterhouseCoopers Letterhead]
July 23, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Rouge Industries, Inc. has incorporated by reference our
report dated July 17, 1998 (issued pursuant to the provisions of Statements on
Auditing Standards No. 71 and No. 42) in the Prospectus constituting part of its
Registration Statement on Form S-3 (Registration No. 333-16183) amended as of
February 11, 1997 and in its Registration Statements on Form S-8 (No. 33-88518,
No. 33-88520, No. 333-53741 and No. 333-53743). We are also aware of our
responsibilities under the Securities Act of 1933.
Yours very truly,
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 27,398
<SECURITIES> 0
<RECEIVABLES> 143,485
<ALLOWANCES> 11,641
<INVENTORY> 215,316
<CURRENT-ASSETS> 377,442
<PP&E> 312,032
<DEPRECIATION> 50,168
<TOTAL-ASSETS> 730,892
<CURRENT-LIABILITIES> 212,900
<BONDS> 0
0
0
<COMMON> 220
<OTHER-SE> 447,634
<TOTAL-LIABILITY-AND-EQUITY> 730,892
<SALES> 624,953
<TOTAL-REVENUES> 624,953
<CGS> 301,238
<TOTAL-COSTS> 598,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,257
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> 16,175
<INCOME-TAX> 4,448
<INCOME-CONTINUING> 11,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,221
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
