<PAGE> 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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 30, 1999
was 22,129,530. This amount includes 14,567,130 shares of Class A Common Stock
and 7,562,400 shares of Class B Common Stock.
<PAGE> 2
ROUGE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 1999
---------------------------
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
PART I - FINANCIAL INFORMATION ----
- ------------------------------
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......................................................................................12
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings..............................................................................................24
Item 4. Submission of Matters to a Vote of Security Holders............................................................25
Item 6. Exhibits and Reports on Form 8-K...............................................................................25
</TABLE>
-2-
<PAGE> 3
[PricewaterhouseCoopers LLP Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
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 11
of this report on Form 10-Q as of June 30, 1999, and for the three-month and
six-month periods ended June 30, 1999 and 1998. 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 consolidated interim financial information 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, 1998, 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 February 3, 1999, except as to Note 11 which is as of March 2, 1999 and
the second paragraph of Note 10, which is as of March 25, 1999, 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, 1998, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Detroit, Michigan
July 30, 1999
-3-
<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 1999 1998
-------------- --------------
Unaudited
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 8,332 $ 2,418
Accounts Receivable
Trade and Other (Net of Allowances
of $14,425 and $17,937) 107,021 130,624
Insurance Recovery 71,569 -
Affiliates 3,222 5,644
Inventories 244,320 275,811
Other Current Assets 27,770 7,075
---------- ----------
Total Current Assets 462,234 421,572
---------- ----------
Property, Plant, and Equipment
Land 366 366
Buildings and Improvements 23,014 23,018
Machinery and Equipment 332,832 289,058
Construction in Progress 4,716 4,525
---------- ----------
Subtotal 360,928 316,967
Less: Accumulated Depreciation (78,691) (58,846)
---------- ----------
Net Property, Plant, and Equipment 282,237 258,121
---------- ----------
Investment in Unconsolidated Subsidiaries 64,080 64,646
- ----------------------------------------- ---------- ----------
Deferred Charges and Other 19,622 24,548
- -------------------------- ---------- ----------
Total Assets $ 828,173 $ 768,887
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE> 5
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---- ----
Unaudited
Current Liabilities
- -------------------
<S> <C> <C>
Accounts Payable
Trade $ 219,050 $ 153,115
Affiliates 7,564 13,776
Accrued Vacation Pay 11,704 10,737
Taxes Other than Income 1,359 6,131
Other Accrued Liabilities 41,040 25,394
----------- ----------
Total Current Liabilities 280,717 209,153
----------- ----------
Long Term Debt 10,000 29,000
- -------------- ----------- ----------
Other Postretirement Benefits 59,295 54,301
- ----------------------------- ----------- ----------
Other Liabilities 11,601 11,327
- ----------------- ----------- ----------
Deferred Insurance Recovery 31,661 -
- --------------------------- ----------- ----------
Excess of Net Assets Acquired Over Cost 2,591 5,484
- --------------------------------------- ----------- ----------
Commitments and Contingencies (Notes 4 and 6)
Stockholders' Equity
Common Stock
Class A, 80,000,000 shares authorized with 14,567,130 and 14,521,538 issued
and outstanding as of June 30, 1999 and
December 31, 1998, respectively 146 145
Class B, 8,690,400 shares authorized with 7,562,400
shares issued and outstanding 76 76
Capital in Excess of Par Value 129,880 129,458
Retained Earnings 305,139 332,876
Accumulated Other Comprehensive Income (2,933) (2,933)
----------- ----------
Total Stockholders' Equity 432,308 459,622
----------- ----------
Total Liabilities and Stockholders' Equity $ 828,173 $ 768,887
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<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
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Unaffiliated Customers $ 161,442 $276,418 $ 384,261 $ 558,290
Affiliates 11,796 29,583 22,890 66,663
----------- -------- ---------- ---------
Total Sales 173,238 306,001 407,151 624,953
----------- -------- ---------- ---------
Costs and Expenses
- ------------------
Costs of Goods Sold 239,159 288,240 537,529 589,478
Depreciation and Amortization 15,469 4,240 20,986 9,370
Selling and Administrative Expenses 8,488 6,744 14,908 12,670
Amortization of Excess of Net Assets Acquired
Over Cost (1,449) (1,449) (2,898) (2,898)
----------- -------- ---------- ---------
Total Costs and Expenses 261,667 297,775 570,525 608,620
----------- -------- ---------- ---------
Operating Income (Loss) (88,429) 8,226 (163,374) 16,333
Interest Income 242 975 371 1,026
Interest Expense (162) 7 (513) (418)
Insurance Recovery 64,006 - 122,408 -
Other - Net (478) (380) (2,597) (766)
----------- -------- ---------- ---------
Income (Loss) Before Income Taxes and Equity
In Unconsolidated Subsidiaries (24,821) 8,828 (43,705) 16,175
Income Tax (Provision) Benefit 10,444 (2,236) 17,636 (4,448)
----------- -------- ---------- ---------
Income (Loss) Before Equity in
Unconsolidated Subsidiaries (14,377) 6,592 (26,069) 11,727
Equity in Unconsolidated Subsidiaries (450) (442) (340) (1,506)
----------- -------- ---------- ---------
Net Income (Loss) $ (14,827) $ 6,150 $ (26,409) $ 10,221
=========== ======== ========== =========
Per Share Amounts
- -----------------
Net Income (Loss) - Basic and Diluted $ (0.67) $ 0.28 $ (1.19) $ 0.46
============= ========= ========= ==========
Cash Dividends Declared $ 0.03 $ 0.03 $ 0.06 $ 0.06
============= ========= ========= ==========
Weighted Average Shares Outstanding 22,125,604 22,004,525 22,111,880 22,001,422
============= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
<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, 1999 June 30, 1999
----------------------- -------------------------
<S> <C> <C>
Common Stock
Beginning Balance $ 221 $ 221
Common Stock Issued for Employee Benefit Plans 1 1
----------- ------------
Ending Balance 222 222
----------- ------------
Capital in Excess of Par Value
Beginning Balance 129,746 129,458
Common Stock Issued for Benefit Plans 134 422
----------- ------------
Ending Balance 129,880 129,880
----------- ------------
Retained Earnings
Beginning Balance 320,630 332,876
Net Income (Loss) and Comprehensive Income (Loss) (14,827) (26,409)
Cash Dividends Declared (664) (1,328)
----------- ------------
Ending Balance 305,139 305,139
----------- ------------
Accumulated Other Comprehensive Income
Beginning and Ending Balance (2,933) (2,933)
----------- ------------
Total Stockholders' Equity $ 432,308 $ 432,308
=========== ============
Comprehensive Income (Loss)
Net Income (Loss) $ (14,827) $ (26,409)
Additional Minimum Pension Liability Adjustment - -
----------- ------------
Comprehensive Income (Loss) $ (14,827) $ (26,409)
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-7-
<PAGE> 8
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Six Months Ended
June 30
-------
1999 1998
------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities
- ------------------------------------
Net Income (Loss) $ (26,409) $ 10,221
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided By Operating Activities:
Deferred Taxes (15,622) 180
Depreciation and Amortization 20,986 9,370
Equity in Unconsolidated Subsidiaries 340 1,506
Amortization of Excess of Net Assets Acquired Over Cost (2,893) (2,898)
Common Stock Issued for Benefit Plans 421 333
Changes in Assets and Liabilities:
Accounts Receivable (45,544) (13,767)
Inventories 31,913 33,682
Prepaid Expenses 4,511 5,085
Accounts Payable and Accrued Liabilities 43,159 22,987
Deferred Insurance Recovery 31,661 -
Other - Net (1,275) (8)
------------ -----------
Net Cash Provided by Operating Activities 41,248 66,691
------------ -----------
Cash Flows From Investing Activities
- ------------------------------------
Capital Expenditures (16,415) (16,556)
Investment in Unconsolidated Subsidiaries (196) (16,334)
Other - Net 1,605 247
------------ -----------
Net Cash Used for Investing Activities (15,006) (32,643)
------------ -----------
Cash Flows From Financing Activities
- ------------------------------------
Drawdowns on Revolving Line 174,000 126,100
Principal Payments on Revolving Line (193,000) (144,000)
Cash Dividend Payments (1,328) (1,320)
------------ -----------
Net Cash Used for Financing Activities (20,328) (19,220)
------------ -----------
Net Increase in Cash and Cash Equivalents 5,914 14,828
Cash and Cash Equivalents - Beginning of Period 2,418 12,570
------------ -----------
Cash and Cash Equivalents - End of Period $ 8,332 $ 27,398
============ ===========
</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 necessary for a
fair statement of the results for the interim periods presented. Such
adjustments include normal recurring adjustments as well as additional
adjustments discussed in Note 4. The foregoing interim results are not
necessarily indicative of the results of operations expected for the full fiscal
year ending December 31, 1999.
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, 1998 filed with the Securities and
Exchange Commission on March 31, 1999. 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 - INVENTORIES
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
-------------- --------------
Unaudited
<S> <C> <C>
Production
Raw Materials $ 63,530 $ 83,422
Semifinished and Finished Steel Products 170,502 175,831
------------- ------------
Total Production at FIFO 234,032 259,253
LIFO Reserve (9,400) (4,651)
------------- ------------
Total Production at LIFO 224,632 254,602
Nonproduction and Sundry 19,688 21,209
------------- ------------
Total Inventories $ 244,320 $ 275,811
============= ============
</TABLE>
NOTE 3 - DEBT
During the second quarter of 1999, the Company obtained uncommitted credit
facilities from two banks for $25,000,000 each. Additionally, on July 23, 1999,
as a result of the Powerhouse explosion and its effect on the Company's net
income and cash flow, Rouge Steel executed an amendment (the "Amendment") to its
$100,000,000, unsecured revolving loan facility (the "Credit Agreement"). The
Amendment changed, among other things, (i) a financial covenant, with which the
Company would have been out of compliance (ii) the amount of borrowings
available under the Credit Agreement, which increased to $125,000,000. Interest
on loans made under the amended Credit Agreement is calculated using one of two
methods. Loans under the base rate option are charged interest equal to the
higher of the prime rate or the federal funds rate plus 0.5%. Loans under the
LIBOR option are charged interest at the London Interbank Offered Rate plus a
margin ranging from 0.5% to 0.8%, depending on the Company's debt to
capitalization ratio at the time of borrowing.
-9-
<PAGE> 10
NOTE 4 - POWERHOUSE EXPLOSION AND INSURANCE CLAIM
On February 1, 1999, an explosion and fire at the Rouge Complex Powerhouse (the
"Powerhouse") resulted in the interruption of the supply of electricity, process
and heating steam, turbo air, mill water and other utilities to virtually all of
the facilities of Rouge Steel Company ("Rouge Steel"), the Company's
wholly-owned subsidiary. The loss of power resulted in the temporary shutdown of
Rouge Steel's steel making facilities. The Powerhouse is owned 60% by Rouge
Steel and 40% by Ford Motor Company ("Ford"). Ford managed and operated the
Powerhouse.
The Company's insurance program provides coverage for damage to property
destroyed, interruption of business operations, including profit recovery, and
expenditures incurred to minimize the period and total cost of disruption to
operations. The Company continues to evaluate its potential insurance recoveries
in three areas:
1. Damage to Rouge Steel property and Powerhouse property as a result of the
explosion - Costs for repairs are being expensed as incurred, with
related estimated insurance recoveries recorded as they are considered to
be probable, up to the amount of the actual costs incurred.
2. Rouge Steel business interruption costs - The non-capitalizable costs are
being expensed as incurred. Estimated insurance recoveries are recorded
to the extent such recoveries are considered to be probable. Recoveries
in excess of actual costs incurred will be recorded as gains when the
claims are settled and proceeds are received. Certain costs relating to
capital improvements incurred to mitigate the Company's loss from the
Powerhouse explosion are being capitalized and amortized over their
estimated useful lives. Insurance recoveries relating to these items are
being recognized over the same periods.
3. Powerhouse property damage - The net book value of the Powerhouse
property destroyed, which was $1,622,000, was written off in the first
quarter. Any such proceeds from the claims relating to Powerhouse
property damage are expected to result in a gain since the proceeds are
expected to exceed the net book value of the property written off. The
anticipated gain will be recorded as the claims are settled and proceeds
are received.
Pursuant to the accounting methodology described above, through June 30, 1999,
the Company has recorded recoverable insurance proceeds of $154,069,000 net of
reserves of $27,401,000. Of the total mount recorded, $122,408,000 has been
included in other income and $31,661,000 has been deferred and will be
recognized in other income over the period the related capital items are
amortized. At June 30, 1999, the Company has a receivable of $71,569,000, which
is net of reserves of $27,401,000 and advances from the insurance carriers of
$82,500,000.
In addition to costs discussed above, the Company is currently evaluating
ancillary costs, including cleanup and abatement activities, relating to the
explosion. Certain of these costs are probable, but are not currently subject to
reasonable estimation. Such amounts could be material to the Company's results
of operations, cash flows and financial position during future periods. Based
upon the available information, during the first quarter of 1999, the Company
recorded a $3,000,000 reserve for its share of the estimated cost to encapsulate
the Powerhouse. If the
-10-
<PAGE> 11
abatement costs exceed $3,000,000, those costs will be recorded as incurred if
they relate to future operations. If they do not result in future benefit to the
Company, additional abatement costs will be recorded in the period during which
losses become probable and reasonably estimable.
NOTE 5 - 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, 1999 and 1998. 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 represent 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 2009.
<TABLE>
<CAPTION>
For the Quarter Ended June 30
----------------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Dilutive Securities 16,467 $8.75 14,670 $12.13
Anti-dilutive Securities 370,025 $11.44 - $28.88 298,750 $14.63 - $28.88
For the Six Months Ended June 30
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- --------------- ---------- ---------------
Dilutive Securities 32,336 $8.75 16,651 $12.13
Anti-dilutive Securities 370,025 $11.44 - $28.88 298,750 $14.63 - $28.88
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
POWERHOUSE EXPLOSION LAWSUITS
Three liability lawsuits resulting from the Powerhouse explosion have been filed
against Rouge Steel. The Company has general liability insurance which provides
coverage for such lawsuits. Ford Motor Company, which owns 40% of the Powerhouse
assets and managed and operated the Powerhouse, has made settlement offers to
certain workers injured in the explosion and the families of the deceased. It is
presently not possible to reasonably estimate either the level of the Company's
monetary exposure or the likely outcome of the lawsuits or potential settlement.
Other than the matters discussed above and in Note 4, there have been no
material changes to the commitments and contingencies discussed in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
-11-
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
POWERHOUSE EXPLOSION AND INSURANCE CLAIM
On February 1, 1999, an explosion and fire at the Rouge Complex
Powerhouse (the "Powerhouse") resulted in the interruption of the supply of
electricity, process and heating steam, turbo air, mill water and other
utilities to virtually all of the facilities of Rouge Steel Company ("Rouge
Steel"). The loss of power resulted in the temporary shutdown of Rouge Steel's
steel making facilities. The Powerhouse is owned 60% by Rouge Steel and 40% by
Ford Motor Company ("Ford"). Ford managed and operated the Powerhouse.
Rouge Industries, Inc.'s ("Rouge Industries" or the "Company") insurance
program provides coverage for damage to property destroyed, interruption of
business operations, including profit recovery, and expenditures incurred to
minimize the period and total cost of disruption to operations. The Company
continues to evaluate its potential insurance recoveries in three areas:
1. Damage to Rouge Steel property and Powerhouse property as a result of the
explosion - Costs for repairs are being expensed as incurred, with
related estimated insurance recoveries recorded as they are considered to
be probable, up to the amount of the actual costs incurred.
2. Rouge Steel business interruption costs - The non-capitalizable costs are
being expensed as incurred. Estimated insurance recoveries are recorded
to the extent such recoveries are considered to be probable. Recoveries
in excess of actual costs incurred will be recorded as gains when the
claims are settled and proceeds are received. Certain costs relating to
capital improvements incurred to mitigate the Company's loss from the
Powerhouse explosion are being capitalized and amortized over their
estimated useful lives. Insurance recoveries relating to these items are
being recognized over the same periods.
-12-
<PAGE> 13
3. Powerhouse property damage - The net book value of the Powerhouse
property destroyed, which was $1.6 million, was written off in the first
quarter. Any such proceeds from the property damage claims which exceed
the net book value of the property written off are expected to result in
a gain since the proceeds are expected to exceed the net book value of
the property written off. The anticipated gain will be recorded as the
claims are settled and proceeds are received.
Based on the magnitude and complexity of the insurance claim, the Company
is currently unable to reasonably estimate the amount of actual costs to be
incurred in the future as well as the extent of the Company's exposure for
amounts not covered by its insurance program.
Pursuant to the accounting methodology described above, through June 30,
1999, the Company has recorded recoverable insurance proceeds of $154.1 million
net of reserves of $27.4 million. Of the total amount recorded, $122.4 million
has been included in other income and $31.7 million has been deferred and will
be recognized in other income over the period the related capital items are
amortized. At June 30, 1999, the Company has a receivable of $71.6 million,
which is net of reserves of $27.4 million and advances from the insurance
carriers of $82.5 million. The Company continues to discuss the determination of
the total claim with its insurers. The Company's assessment of probability with
respect to the receivable was made based on discussions with insurers and legal
and financial experts retained to assist in the claims process. The estimates
will change as additional information becomes available with respect to actual
costs and as the insurers perform their review of claims information submitted
by the Company.
In addition to costs discussed above, the Company is currently evaluating
ancillary costs, including cleanup and abatement activities, relating to the
explosion. Certain of these costs are probable, but are not currently subject to
reasonable estimation. Such amounts could be material
-13-
<PAGE> 14
to the Company's results of operations, cash flows and financial position during
future periods. Based on the available information, during the first quarter of
1999, the Company recorded a $3.0 million reserve for its share of the estimated
cost to encapsulate the Powerhouse. If the abatement costs exceed $3.0 million,
those costs will be recorded as incurred if they relate to future operations. If
they do not result in future benefit to the Company, additional abatement costs
will be recorded in the period during which losses become probable and
reasonably estimable.
The Company is negotiating with its insurance carriers for interim cash
payments on the insurance claims. In the second quarter of 1999, advances
totaling $82.5 million were received from the Company's insurance carriers for
business interruption losses. An additional $7.0 million advance was received in
July for property damage losses. The Company expects to fund the cash needs
relating to the matters noted above from bank borrowings, insurance proceeds and
working capital.
During May of 1999, Rouge Steel restarted its two blast furnaces in a
controlled manner. The Company sustained two setbacks when the package steam
boilers failed in late May and a plant-wide power failure occurred early in
June. The Company increased blast furnace production gradually and by the end of
June 1999, the blast furnaces were able to produce at nearly normal operating
rates.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Total Sales. Total sales for Rouge Industries, Inc. (together with its
subsidiaries, "Rouge Industries" or the "Company") decreased 43.4% in the second
quarter of 1999 to $173.2 million from $306.0 million in the second quarter of
1998, a decrease of $132.8 million. The decrease in total sales was caused
principally by a decrease in steel product shipments and selling prices.
Shipments
-14-
<PAGE> 15
decreased 46.2% in the second quarter of 1999 to 372,000 net tons from
692,000 net tons in the second quarter of 1998, a decrease of 320,000 net tons.
Rouge Steel's shipments were lower in the second quarter of 1999 primarily
because of the disruption of production resulting from the February 1, 1999
explosion and fire at the Powerhouse. The Company lost approximately 450,000
tons of slab production in the second quarter of 1999. A portion of the lost
production was made up by purchased slabs and coils. The effect on the Company
of the decrease in total sales resulting from lower shipments was exacerbated by
lower steel product selling prices in the second quarter of 1999.
Costs and Expenses. Total costs and expenses decreased 12.1% in the second
quarter of 1999 to $261.7 million from $297.8 million in the second quarter of
1998, a decrease of $36.1 million. Costs of goods sold decreased 17.0% in the
second quarter of 1999 to $239.1 million from $288.2 million in the second
quarter of 1998, a decrease of $49.1 million. The decrease in costs of goods
sold was due to lower shipments resulting from the lost production discussed
above, largely offset by additional costs related to the Powerhouse explosion.
Rouge Steel recorded continuing expenses associated with its steel making plant
in the second quarter of 1999 even though its primary operations, which includes
the blast furnaces, basic oxygen furnaces and continuous caster, did not resume
production until May. Additionally, the Company recorded expenses for
non-capital repairs to its damaged property. Costs of goods sold in the second
quarter of 1999 was 138.1% of total sales, up from 94.2% of total sales in the
second quarter of 1998. Depreciation and amortization increased in the second
quarter of 1999 to $15.5 million from $4.2 million in the second quarter of
1998, an increase of $11.3 million. The increase in depreciation and
amortization reflects three months of the 13-month amortization of the cost of
the temporary steam and electrical distribution systems installed to provide the
Company with steam and electricity until the new powerhouse is placed in
service. See "Powerhouse Explosion and Insurance Claim."
-15-
<PAGE> 16
Operating Income (Loss). The operating loss in the second quarter of 1999
was $88.4 million compared to operating income of $8.2 million in the second
of 1998, a decrease of $96.6 million. The decrease in operating income
was primarily due to the Powerhouse explosion discussed above.
Insurance Recovery. The Company recognized $64.0 million of income in the
second quarter of 1999 for anticipated insurance proceeds related to the
Powerhouse explosion. The Company has an insurance program that provides
coverage for damage to property destroyed, interruption of business operations
and expenses incurred to minimize the period of disruption of operations. The
Company expects that the Powerhouse insurance claim will take at least two years
to settle. Since it is early in the claim process, the Company is unable to
accurately estimate the extent of its exposure to unrecoverable losses incurred
as a result of the Powerhouse explosion. The Company has recorded a reserve with
respect to its anticipated insurance proceeds which has the effect of reducing
income recognized. See "Powerhouse Explosion and Insurance Claim."
Income Tax (Provision) Benefit . The income tax benefit in the second
quarter of 1999 was $10.4 million compared to an income tax provision of $2.2
million in the second quarter of 1998. The income tax benefit in the second
quarter of 1999 was a function of the loss incurred as a result of the
Powerhouse explosion.
Net Income (Loss). The net loss in the second quarter of 1999 was $14.8
million compared to net income of $6.2 million in the second quarter of 1998.
The net loss was primarily due to the Powerhouse explosion.
COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Total Sales. Total sales decreased 34.9% in the first half of 1999 to
$407.2 million from $625.0 million in the first half of 1998, a decrease of
$217.8 million. The decrease in total sales was caused principally by lower
product shipments. Steel product shipments decreased 35.7% in the first
-16-
<PAGE> 17
half of 1999 to 913,000 net tons from 1,420,000 net tons in the first half of
1998, a decrease of 507,000 net tons. Rouge Steel's shipments were lower in the
first half of 1999 primarily because of the disruption of production resulting
from the February 1, 1999 explosion and fire at the Powerhouse. The Company lost
approximately 900,000 tons of slab production in the first half of 1999. A
portion of the lost production was made up by processing semi-finished
inventories and purchased slabs and coils. The effect on the Company of the
decrease in total sales resulting from lower shipments was exacerbated by lower
steel product selling prices in the first half of 1999.
Costs and Expenses. Total costs and expenses decreased 6.3% in the first
half of 1999 to $570.5 million from $608.6 million in the first half of 1998, a
decrease of $38.1 million. Costs of goods sold decreased 8.8% in the first half
of 1999 to $537.5 million from $589.5 million in the first half of 1998, a
decrease of $52.0 million. The decrease in costs of goods sold was primarily due
to lower shipments resulting from the lost production discussed above largely
offset by additional costs related to the Powerhouse explosion. Rouge Steel
recorded continuing expenses associated with its steel making plant in the first
half of 1999 despite the fact that the entire plant was shut down for 11 days
and primary operations, which includes the blast furnaces, basic oxygen furnaces
and continuous caster, did not resume production until May. Additionally the
Company recorded expenses for non-capital repairs to its damaged property. Costs
of goods sold in the first half of 1999 was 132.0% of total sales, compared to
94.3% of total sales in the first half of 1998. Depreciation and amortization
increased in the first half of 1999 to $21.0 million from $9.4 million in the
first half of 1998, an increase of $11.6 million. The increase in depreciation
and amortization reflects the completion of major capital projects as well as
three months of the 13-month amortization of the cost of the temporary steam and
electrical distribution systems installed to provide the Company with steam and
electricity until the new powerhouse is placed in service. See "Powerhouse
Explosion and Insurance Claim."
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<PAGE> 18
Operating Income (Loss). The operating loss in the first half of 1999 was
$163.4 million compared to operating income of $16.3 million in the first half
of 1998, a decrease of $179.7 million. The decrease in operating income was
primarily due to the Powerhouse explosion discussed above.
Income Tax (Provision) Benefit. The income tax benefit in the first half
of 1999 was $17.6 million compared to an income tax provision of $4.4 million in
the first half of 1998. The income tax benefit was a function of the loss
incurred as a result of the Powerhouse explosion.
Net Income (Loss). The net loss in the first half of 1999 was $26.4
million compared to net income in the first half of 1998 of $10.2 million, a
decrease of $36.6 million. The net loss was primarily due to the Powerhouse
explosion.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities. Net cash provided by operating
activities decreased 38.2% in the first half of 1999 to $41.2 million from $66.7
million in the first half of 1998, a decrease of $25.5 million. The decrease in
net cash provided by operating activities was primarily attributable to the
Powerhouse explosion and the resulting net loss. The $45.5 million increase in
accounts receivable reflects the insurance recovery receivable partially offset
by lower trade receivables at June 30, 1999 resulting from lower shipments. Many
of the Powerhouse-related accruals are in payables at June 30, 1999 which
explains the high level of payables and the relatively low level of debt
compared to the net loss incurred.
Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, decreased 49.5% in the first half of
1999 to $16.6 million from $32.9 million in the first half of 1998, a decrease
of $16.3 million. The expenditures made in the first half of 1999 were primarily
for computer systems, "C" blast furnace upgrades and to partially pay for the
steam boilers which were installed after the Powerhouse explosion. During the
remainder of 1999,
-18-
<PAGE> 19
the largest capital expenditure will be the remaining $30 million for the steam
boilers and electrical distribution equipment. The remaining capital
expenditures will be generally directed at improving plant efficiency and
product quality.
Credit Facility. Rouge Steel has a $125 million, unsecured revolving loan
commitment under a credit agreement (the "Credit Agreement") which expires on
December 16, 2002. The Company had borrowings of $10.0 million under the
facility as of June 30, 1999. In addition to the Credit Agreement, during the
second quarter of 1999, the Company obtained two $25 million, uncommitted,
credit facilities. The Company believes that net income and funds available
under its credit facilities, along with anticipated insurance proceeds, will be
adequate for its working capital and capital expenditure requirements.
YEAR 2000 READINESS
The Year-2000 problem affects computer hardware, software and other
equipment used by the Company in the day-to-day conduct of its business. The use
of two-digit dates in computational and other decision-making functions could
result in computer system and operating equipment failures, potentially leading
to business and manufacturing disruptions.
The Company has performed an assessment of its Year-2000 issues and
believes that it has identified all of its computer systems, software
applications and manufacturing equipment that could be impacted by Year-2000
related problems. A remediation program was undertaken in 1998 to modify or
replace significant portions of the Company's hardware and software so that its
systems will properly interpret dates beyond January 1, 2000. The Company has
completed virtually all of the remediation and testing, with no major problems
identified to date.
The remediation program was implemented on four fronts: technical
infrastructure, business computing and manufacturing systems, plant-floor and
other facility-related equipment and external suppliers and customers.
-19-
<PAGE> 20
The technical infrastructure effort, which refers to the technical
computing environment such as networks and personal computers, is now complete.
The mainframe computer and all network components are Year-2000 ready. All of
the network servers have been upgraded to Year-2000 ready levels. The
replacement or upgrade of the Company's personal computers is also complete.
Remediation of business computing and manufacturing systems is being
handled by replacing selected business systems with third-party applications and
by the efforts of internal and outside technical resources. A program was
undertaken in 1998 to replace the Company's financial and purchasing systems
with third-party applications. The final modules of these systems were launched
in June 1999. All of the remaining business computing and manufacturing systems
have been remediated and tested and were in production by the end of July 1999.
All plant-floor equipment has been assessed; 98% of the hardware and 85%
of the software are now considered Year-2000 ready. Year-2000 live production
tests have been successfully completed in the blast furnace, continuous caster,
hot strip mill and cold mills. Remediation and testing of all remaining
plant-floor equipment are scheduled for completion by the end of August 1999.
The Company has contacted all of its outside processors and key suppliers
(including the major utilities) to determine their progress in achieving
Year-2000 readiness. All major outside processors have indicated, through a
self-assessment checklist, that they are either Year-2000 ready today, or have
established plans to be so. The Company is conducting Year-2000 electronic data
interchange tests with each of its processors.
The Company's purchasing organization has completed its contact program
with key suppliers relative to their Year-2000 plans. Based on the responses
received, the Company has concluded that it will not be necessary to use an
outside auditing firm to review the progress of critical suppliers.
Estimated Costs: The Company has incurred capital expenditures of
approximately $7 million to replace or significantly upgrade existing hardware
and software with new equipment. The
-20-
<PAGE> 21
Company also expects to incur approximately $4 million of additional expense to
remediate existing computer systems and manufacturing equipment that are not
Year-2000 ready. To date, virtually all of the capital expenditures and
approximately 90% of the total expense have been incurred in the course of
addressing the Year-2000 problem. The capital expenditures and expense discussed
above represent approximately 20% of the Company's information technology
expense budget and were identified as part of the normal planning processes used
by the Company in the development of its budgets.
Material Impact on the Business: The Company expects to identify and
resolve all Year-2000 problems that could materially affect its business.
Nevertheless, there is a possibility that the Company could experience unforseen
problems that could result in a disruption of its manufacturing capabilities. In
the event of such disruption, the Company will take every available means to
rectify the problems and resume normal manufacturing operations. It is difficult
to accurately predict the magnitude and extent of such potential disruptions;
however, the Company believes that it can operate the majority of its
administrative and some of its manufacturing operations on a manual basis
without suffering the consequences of a lengthy outage. All manufacturing
processes are particularly critical to Rouge Steel's operations in the event of
Year-2000 failures. It would be difficult to operate Rouge Steel's manufacturing
facilities in the event of a catastrophic failure of any of these operations. To
mitigate these concerns, the Company plans to continue both simulation and live
testing of manufacturing areas during 1999 to assure compliance.
Contingency Plans: The Company believes that all other operational
failures, particularly those of an administrative nature, can be handled through
other means, such as manual intervention and processing, the use of contract
labor, etc. The Company has developed a preliminary operating plan for all of
its major operations, including contingency plans for maintaining basic
operations in the event of one or more Year-2000 related failures. Included in
the contingency plans will be a Year-
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<PAGE> 22
2000 rollover checklist to ensure that all critical business and manufacturing
processes are fully operational following December 31, 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, but are not limited to, 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.
RECENT DEVELOPMENTS
The Company's post-Powerhouse configuration has caused it to be fully
reliant on electricity from the Southeastern Michigan electrical grid,
increasing its exposure to interruptible power. Electricity supply in Michigan
has been strained this summer because of hot weather and the loss of the
Powerhouse capacity. At times during the third quarter, the Company has
voluntarily curtailed its finishing operations because the cost of electricity
made it uneconomical to continue operating and it has been forced to curtail its
finishing operations because sufficient power to operate was not available at
any cost. The Company anticipates that the cost and availability of electricity
could continue to affect its operations on very hot days when electricity demand
is high.
-22-
<PAGE> 23
"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,
(vi) uncertainty related to the Powerhouse explosion and the Company's ability
to resolve the insurance claim and (vii) higher than expected operating costs.
-23-
<PAGE> 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
ENVIRONMENTAL LAWSUIT
Seven residents of Melvindale, a city that borders Dearborn, Michigan,
filed a lawsuit against Rouge Steel in the circuit court for the County of
Wayne. The lawsuit alleges trespass, nuisance and negligence by Rouge Steel in
the emission of particulates for an unspecified period of time. The Company has
agreed to the plaintiffs' request that they be certified a class comprising
3,765 households in Melvindale. The Company has commenced facilitation
proceedings with plaintiffs' counsel.
POWERHOUSE EXPLOSION LAWSUITS
Three liability lawsuits resulting from the Powerhouse explosion have been
filed against Rouge Steel. The Company has general liability insurance which
provides coverage for such lawsuits. Ford Motor Company, which owns 40% of the
Powerhouse assets and managed and operated the Powerhouse, has made settlement
offers to certain workers injured in the explosion and the families of the
deceased. It is presently not possible to reasonably estimate either the level
of the Company's monetary exposure or the likely outcome of the lawsuits or
potential settlement.
In addition to the matters discussed above, from time to time, Rouge
Industries and its consolidated subsidiaries are defendants in routine lawsuits
incidental to its business. The Company believes that such other current
proceedings, individually or in the aggregate, will not have a materially
adverse effect on the Company.
-24-
<PAGE> 25
Item 4. Submission of Matters to a Vote of Security Holders
Rouge Industries' Annual Meeting of Stockholders was held on May 6, 1999.
In connection with the meeting, proxies were solicited. Set forth below are the
voting results on proposals considered and voted upon:
1) All three nominees for Class II 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>
Gary P. Latendresse 29,683,159 20,066
Dominick C. Fanello 29,680,579 22,646
John E. Lobbia 29,683,409 19,816
</TABLE>
2) The appointment of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the fiscal year ending
December 31, 1999 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, 1999 29,684,019 12,525 6,681
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this report.
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
15 PricewaterhouseCoopers LLP Awareness Letter
</TABLE>
-25-
<PAGE> 26
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: August 4 , 1999 ROUGE INDUSTRIES, INC.
-----
By: /s/ Carl L. Valdiserri
------------------------
Name: Carl L. Valdiserri
Title: Chairman of the Board and
Chief Executive Officer
Date: August 4 , 1999 By: /s/ Gary P. Latendresse
----- -------------------------
Name: Gary P. Latendresse
Title: Vice Chairman and
Chief Financial Officer
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<PAGE> 27
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
15 PricewaterhouseCoopers LLP Awareness Letter
27 FDS
<PAGE> 1
EXHIBIT 15
[PricewaterhouseCoopers Letterhead]
August 4, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated July 30, 1999 on our review of interim
financial information of Rouge Industries, Inc. (the "Company") as of and for
the period ended June 30, 1999 and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in its
Registration Statements on Form S-3 (Registration No. 333-16183) amended as of
February 11, 1997 and in its Registration Statements on Form S-8 (Registration
No. 33-88518, No. 33-88520, No. 333-53741 and No. 333-53743).
Very truly yours,
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,332
<SECURITIES> 0
<RECEIVABLES> 223,638
<ALLOWANCES> 41,826
<INVENTORY> 244,320
<CURRENT-ASSETS> 462,234
<PP&E> 360,928
<DEPRECIATION> 78,691
<TOTAL-ASSETS> 828,173
<CURRENT-LIABILITIES> 280,717
<BONDS> 0
0
0
<COMMON> 222
<OTHER-SE> 432,086
<TOTAL-LIABILITY-AND-EQUITY> 828,173
<SALES> 407,151
<TOTAL-REVENUES> 407,151
<CGS> 537,529
<TOTAL-COSTS> 558,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 513
<INCOME-PRETAX> (43,705)
<INCOME-TAX> (17,636)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,409)
<EPS-BASIC> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
