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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number 1-12852
ROUGE INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-3340770
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3001 MILLER ROAD, P.O. BOX 1699, DEARBORN, MICHIGAN 48121-1699
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(Address of principal executive offices) (Zip Code)
(313) 317-8900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Class A Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Based upon the closing price of the Class A Common Stock on February 29,
2000, as reported on the New York Stock Exchange composite tape (as reported by
the Wall Street Journal), the aggregate market value of registrant's Class A
Common Stock held by nonaffiliates of registrant as of such date was
$109,981,565.
The number of shares of common stock issued and outstanding as of February
29, 2000 was 22,134,435. This amount includes 14,572,035 shares of Class A
Common Stock and 7,562,400 shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 2000 Proxy Statement of Rouge Industries, Inc. are
incorporated by reference into Part III of this Form 10-K to the extent provided
herein.
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ROUGE INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 13
Item 3. Legal Proceedings......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders....................................... 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................... 17
Item 6. Selected Financial Data................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 20
Item 8. Financial Statements and Supplementary Data............................................... 32
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................................................. 55
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 56
Item 11. Executive Compensation.................................................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 56
Item 13. Certain Relationships and Related Transactions............................................ 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 57
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PART I
Item 1. Business.
GENERAL
Rouge Steel Company ("Rouge Steel") is the primary operating subsidiary
of Rouge Industries, Inc., a Delaware corporation (together with its
subsidiaries, "Rouge Industries" or the "Company"). The Company was incorporated
in 1996. Rouge Steel is an integrated producer of high quality, flat rolled
carbon steel products consisting of hot rolled, cold rolled and galvanized
steel. The Company's products generally command higher margins than commodity
flat rolled carbon steel products. The Company's products generally, and its
value-added products specifically, are sold primarily to customers in the
automotive industry which have exacting quality, delivery and service
requirements. The Company's ability to meet these requirements and its
participation in the development of new products designed for automotive
applications have enabled it to expand its sales to automotive customers. The
Company also sells its products to steel converters, service centers and other
end users.
Other wholly-owned subsidiaries of Rouge Industries include QS Steel Inc.
("QS Steel") and Eveleth Taconite Company ("Eveleth"). QS Steel holds minority
ownership interests in five Michigan-based joint ventures. Eveleth holds a 45%
interest in Eveleth Mines LLC ("EVTAC"), a Minnesota-based iron ore mining and
pellet producing operation.
PRODUCTS
The Company currently produces four finished sheet steel products: (i)
hot rolled, which is sold to automotive, converter and service center customers
and other end users; (ii) cold rolled, which is hot rolled steel that is
subsequently cold reduced in thickness, annealed and typically tempered to
enhance ductility and surface characteristics and is sold to automotive,
converter and service center customers and other end users; (iii)
electrogalvanized, which is cold rolled steel that can be differentially coated
on one or both sides with either pure zinc or a zinc/iron combination to make
the steel more corrosion resistant and is sold almost exclusively to automotive
customers; and (iv) hot dip galvanized, which is cold rolled steel that is
coated on both sides with zinc to make the steel more corrosion resistant and is
sold to automotive and service center customers and other end users such as
commercial and residential door manufacturers.
The following table sets forth the percentage of Rouge Industries' steel
product revenues from hot rolled, cold rolled, electrogalvanized and hot dip
galvanized steel for the years from 1997 through 1999.
<TABLE>
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Year Ended December 31
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1999 1998 1997
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<S> <C> <C> <C>
Hot Rolled 37.3% 44.6% 49.4%
Cold Rolled 27.4 30.5 29.8
Electrogalvanized 21.9 21.0 20.2
Hot Dip Galvanized 13.4 3.9 0.6
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Total 100.0% 100.0% 100.0%
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Approximately one-half of the Company's sales of hot rolled steel have
been to the automotive market for wheels and structural components such as
suspension arms, frames and seat frames. Rouge Steel also sells hot rolled steel
in the non-automotive end user markets for the manufacture of roof decking,
grating, guard rails and pipes and to converters and service centers to be
further processed or sold directly to other end users. Cold rolled steel is sold
by the Company for use in automotive parts, lighting fixtures, room dividers and
doors, and for unexposed applications such as the manufacture of floor pans and
tubing. Electrogalvanized products are sold to automotive customers for use as
major automotive body panels such as doors, quarter panels and fenders. Hot dip
galvanized products are presently sold to automotive, construction and service
center customers.
One of the Company's primary objectives is to increase its production and
sales of value-added higher margin products. In order to increase the Company's
capability to produce more sophisticated products as well as retain and add
customers, the Company has entered into five Michigan-based strategic joint
ventures:
(i) Shiloh of Michigan, L.L.C. ("Shiloh of Michigan"), a joint venture
with Shiloh Industries, Inc. ("Shiloh") which produces engineered
steel blanks that the Company sells to its automotive customers;
(ii) Spartan Steel Coating, L.L.C. ("Spartan Steel"), a joint venture
with Worthington Industries, Inc. (together with its subsidiaries,
"Worthington") which produces hot dip galvanized steel primarily
for automotive applications;
(iii) TWB Company, L.L.C. ("TWB"), a joint venture with Worthington,
Thyssen Inc., Bethlehem Blank Welding, Inc. and LTV Steel Company,
Inc. which produces laser welded blanks sold primarily for
automotive and other end use applications;
(iv) Delaco Processing, L.L.C. ("Delaco Steel Processing"), a joint
venture with Delaco Supreme Tool & Gear Co. which slits and
warehouses steel coils to be sold to automotive customers and other
end users; and
(v) Bing Blanking, L.L.C. ("Bing Blanking"), a joint venture with Bing
Management II, L.L.C. which produces first operation blanks and
roll formed parts primarily for the automotive industry.
The Company has invested approximately $52.1 million in Spartan Steel and
$6.5 million in TWB. Shiloh of Michigan has a $30 million credit facility, 20%
of which is guaranteed by the Company. Delaco Steel Processing and Bing Blanking
have credit facilities of $7.3 million and $5 million, respectively, both of
which are guaranteed by the Company. Delaco Steel Processing and Bing Blanking
are minority business enterprises which allow the Company to take advantage of
an opportunity created by an announced commitment to minority suppliers by the
Company's three largest customers. Rouge Industries' participation in these
joint ventures responds to the demand by end users for increasingly complex
products and is intended to mitigate the erosion in sales that might occur if
the Company were unable to provide these products to its current customers. In
addition, participation in these joint ventures may provide opportunities for
the Company to supply new customers.
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MARKETS AND CUSTOMERS
Consistent with the Company's goal to strengthen long-term customer
relationships, customer service is a key component of Rouge Industries' strategy
and significant resources have been devoted toward that end. The Company has
approximately 200 steel customers, virtually all of which are located within 350
miles of Rouge Steel's integrated facility. The Company believes its proximity
to its customers allows it to provide focused customer service and resources.
The primary goal in this respect is to maintain and improve its responsiveness
to customer needs in a continually changing competitive environment.
Ford Motor Company ("Ford") and DaimlerChrysler AG ("DaimlerChrysler"),
the Company's two largest customers, accounted for approximately 39% and 10%,
respectively, of total sales in 1999. Sales to Ford and DaimlerChrysler were 37%
and 10%, respectively, of total sales in 1998. While the loss of Ford as a
customer could have a materially adverse effect on the Company's business, the
Company believes that its relationship with Ford provides a stable sales base
and the ability to expand its product capability and concentrate on increasing
margins through more efficient production. No single customer, other than Ford,
DaimlerChrysler or Worthington, has accounted for more than 10% of the Company's
total sales over the past five years. The Company's ten largest customers in the
aggregate accounted for approximately 71% of total sales in 1999 and
approximately 75% of total sales in 1998. For 1999, the Company estimates that
its share of the domestic flat rolled steel market, as measured by shipments,
was approximately 4.2%.
The Company's primary customers are in the automotive, converter, service
center and other end user markets. The following table sets forth the percentage
of the Company's steel product revenues from various markets for the years ended
December 31, 1997 through 1999.
<TABLE>
<CAPTION>
Year Ended December 31
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1999 1998 1997
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<S> <C> <C> <C>
Automotive 63.0% 67.0% 62.0%
Converters 7.5 13.5 19.0
Service Centers 27.2 16.7 15.8
Other End Users 2.3 2.8 3.2
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Total 100.0% 100.0% 100.0%
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</TABLE>
Automotive. The Company is a significant supplier of hot rolled, cold
rolled, hot dip galvanized and electrogalvanized steel to the automotive
industry. Car and truck manufacturers and their parts suppliers require sheet
steel with exact dimensions, enhanced formability and defect-free surfaces. The
Company's steel products have been used in a variety of automotive applications
including exposed and unexposed panels and high strength parts for safety
applications and to achieve weight reduction. The Company supplies sophisticated
steel products to meet the demand for lighter, safer and longer lasting vehicles
such as bake hardenable steel and steel for hot forming, which is used for high
strength and safety applications such as automotive door beams. The automotive
market comprised 63.0% of the Company's steel product revenues in 1999 down from
67.0% in 1998.
Sales to Ford, the Company's largest customer, accounted for
approximately 39% of total sales in 1999, 37% of total sales in 1998 and 32% of
total sales in 1997. In addition to its relationship with Ford, the Company has
diversified its automotive customer base. Until the early
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1990's, the Company sold only a small amount of steel to DaimlerChrysler and had
no direct sales to General Motors Corporation ("GM"). Sales to DaimlerChrysler,
the Company's second largest customer, were approximately 10% of total sales in
1999 and 1998 and 9% of total sales in 1997. Currently, GM is the Company's
third largest customer. The Company believes that its ability to provide the
sophisticated grades of steel required for automotive applications combined with
its ability to provide competitive pricing, quality and delivery prompted
DaimlerChrysler and GM to begin purchasing significant quantities of hot rolled,
cold rolled and galvanized steel from the Company.
Converters. The Company sells hot rolled and cold rolled steel to the
converter market, which includes customers that process steel into a more
finished state such as pipes, tubing and cold rolled strip steel. Although the
converter market is typically more price sensitive than the end user market due
to its reliance on purchases at prevailing prices, it provides the Company with
some sales stability during downturns in the automotive market.
Service Centers. The Company sells hot rolled, cold rolled and hot dip
galvanized steel to service center customers that provide processing services
such as slitting, shearing and blanking for distribution primarily to automotive
end users. Steel service centers are a major factor in the distribution of flat
rolled products to end users.
Direct Sales to Other End Users. The Company sells hot rolled steel to
manufacturers of roof decking, grating, guard rails and pipes. The Company sells
cold rolled steel to manufacturers of lighting fixtures, room dividers and
doors. Steel products are distributed by Rouge Steel principally through its own
sales organization.
Order Status. The order load was 617,000 net tons at December 31, 1999,
compared to 432,000 net tons at December 31, 1998. All orders related to the
order load at December 31, 1999 are expected to be shipped during the first half
of 2000. The order load represents orders received but not yet filled.
RAW MATERIALS AND ENERGY SOURCES
The principal raw materials and energy sources used by Rouge Steel in its
production process are coke, iron ore pellets, steel scrap, natural gas,
electricity, steam, oxygen and nitrogen. Coke, iron ore pellets, electricity,
steam, oxygen and nitrogen are predominantly purchased pursuant to long-term or
annual agreements. The other raw materials are generally purchased in the open
market from various sources. Certain of the purchased raw materials are not
covered by long-term contracts and, therefore, availability and price are
subject to world market conditions.
Coke. Coke represents the Company's single largest raw material
expenditure. The Company does not produce coke and, as a consequence, relies
upon outside sources. In 1999, approximately 42% of the Company's coke was
provided by USX Corporation ("USX"). The Company acquired approximately 40% of
its coke through a tolling agreement with New Boston Coke Corporation ("New
Boston"), whose total productive capacity is dedicated to the Company. Under the
tolling agreement, the Company provides coal to New Boston for processing into
coke. Approximately 18% of the Company's coke was purchased in the open market.
During the past ten to fifteen years, coke production capacity in the United
States has been reduced. Due to the environmental issues associated with
operating coke ovens, the Company expects coke production capacity to be reduced
further in the next ten years. The coke shortage that may result from the
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reduction in capacity may cause the price that the Company pays for coke to
increase which may adversely affect the Company's results of operations.
Iron Ore Pellets. The Company has consumed an average of 3.3 million
gross tons of iron ore pellets annually over the three-year period ended
December 31, 1999. Approximately 74% of the Company's requirements for pellets
during this period was obtained under a trade arrangement with Stelco, Inc.
Under this arrangement, the Company exchanged acid pellets purchased from its
45% owned joint venture, EVTAC, for fluxed pellets or acid pellets with a higher
manganese content, which are used to enhance blast furnace productivity. The
Company is required to pay a cash premium indexed to inflation factors in
addition to providing the EVTAC acid pellets. The premium is equal to the
difference between the market price of the fluxed pellets and the market price
of EVTAC acid pellets. During the three-year period ended December 31, 1999, the
Company traded an average of 2.4 million gross tons of EVTAC pellets annually,
which constituted 100% of the Company's share of the pellets produced by EVTAC.
The balance of the Company's pellet requirements was purchased pursuant to a
contract with The Cleveland-Cliffs Iron Company. In June 1999, EVTAC temporarily
scaled back operations by 18%, reducing capacity to 4.4 million gross tons of
pellets to be purchased by Rouge Steel and the other owners pursuant to the
terms of their existing purchase agreements.
The iron ore reserves of EVTAC are sufficient to provide the Company with
an estimated 25-year supply at the current level of production. The Company and
the other owners of EVTAC continue discussions regarding EVTAC's operations and
activities. These discussions and any subsequent resulting actions may affect,
among other things, the cost and availability of iron ore pellets, the timing of
EVTAC employee benefit liability recognition and funding requirements and
recognition of other obligations relating to the mining operations.
Scrap. The price of steel scrap increased during 1999 from near-record
low prices in 1998. The price of #1 industrial bundles increased by 81% between
the end of 1998 and the end of 1999. The higher price reflects reduced supply in
1999 compared to the supply of steel scrap in 1998 as a result of the high level
of steel imports that arrived in the U.S. in the second half of 1998. As a
result of the dramatic increase in the price of #1 industrial bundles, the
Company began to substitute less expensive scrap in the basic oxygen furnaces.
The Company spent approximately $60 million to purchase steel scrap in 1999
compared to $99 million in 1998.
Other Raw Materials and Energy Sources. During 1999, natural gas,
electricity and steam constituted 39%, 38% and 23%, respectively, of the
Company's total energy costs. Natural gas is acquired at prevailing market
prices from various producers. The Company has purchased electricity from DTE
Energy Company since the February 1, 1999 explosion at the Rouge Complex
Powerhouse (the "Powerhouse") which is owned 60% by the Company and 40% by Ford.
Prior to the explosion, the Powerhouse provided electricity for all of the
Company's steel- making facilities except its ladle refining facility, as well
as all of its steam requirements pursuant to an operating agreement with Ford
(the "Powerhouse Joint Operating Agreement") which expired December 31, 1999,
but was extended until March 31, 2000 and will be extended thereafter on a
rolling 30-day basis unless terminated by either party upon 30 days notice. The
Company installed temporary package steam boilers to provide heating and
processing steam after the Powerhouse explosion. In December, 1998, Rouge Steel
and Ford signed an agreement for long-term energy services with CMS Energy
Corporation (together with its subsidiaries, "CMS") which has commenced to build
and will operate a co-generation power plant. The new power plant is expected to
be in operation by mid-2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Powerhouse Explosion and
Insurance Claim."
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The Company has a long-term contract for the supply of oxygen and
nitrogen with Praxair, Inc. which expires in 2005. The contract contains annual
minimum oxygen and nitrogen purchase levels of $8.3 million and $550,000,
respectively.
COMPETITION
The Company competes directly with domestic and foreign flat rolled
carbon steel producers and producers of plastics, aluminum and other materials
which can be used in place of flat rolled carbon steel in manufactured products.
The Company competes principally on the basis of service, quality, price and the
ability to meet customers' product specifications and delivery schedules. The
Company believes, however, that its competitive position in the steel industry
is strengthened by, among other things, (i) substantially reduced postretirement
expenses resulting from certain agreements with Ford, (ii) environmental
indemnifications from Ford until 2009, (iii) substantial capital investments
during the past six years in steel-making equipment and downstream joint
ventures, (iv) a single-site, geographically strategic location, and (v)
financial flexibility.
Imports. Domestic steel producers face significant competition from
foreign producers. Decisions by these foreign steel producers with respect to
production and sales may be influenced to a greater degree by political and
economic policy considerations than by prevailing market conditions.
Steel imports in 1999 are estimated to be 35.0 million tons, a 16%
decrease from 1998 levels. The high import levels in 1998 resulted from the
depressed economic conditions in other parts of the world, particularly in the
Pacific Basin and Russia. Imports in 1999 were closer to historic levels.
Imports as a percentage of apparent domestic consumption, including semifinished
steel, averaged approximately 26% in 1999 compared to 30% in 1998, which was an
all time high. In the previous five years (1993 through 1997), steel imports
averaged 26.9 million tons, or 22.5% of apparent domestic consumption.
Domestic Steel Industry. The domestic steel industry is a cyclical
business that is highly competitive. In the United States, the Company competes
with many domestic integrated steel companies. The Company also competes with
electric furnace based mini-mills, which generally target regional markets, have
reduced environmental maintenance costs and liabilities and derive certain
competitive advantages by utilizing less capital intensive steel-making
processes. The capability of electric furnace based, thin slab mini-mills to
produce flat rolled steel products is increasing. In the future, these
mini-mills may provide increased competition in the higher quality, value-added
product lines now dominated by the integrated steel producers. New mini- mills
that produce flat rolled steel and improvements in the production efficiencies
of integrated mills have increased overall production capacity in the United
States, which has caused downward price pressure. The ability of mini-mill
producers to capture a significant percentage of the sheet steel markets, which
represented approximately half of domestic industry shipments in 1999, cannot
presently be determined due to operating cost and product quality issues
associated with thin-slab technology. In addition, the availability and
fluctuations in the cost of scrap, the primary raw material for mini-mill steel
production, may influence the ability of mini- mills to compete with domestic
integrated producers.
A number of integrated steel producers have gone through bankruptcy
reorganizations. These proceedings have resulted in reduced operating costs for
these producers and may permit them to price their steel products at levels
below those that could otherwise be maintained. The
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Company believes, however, that due to Ford's retention of certain retiree costs
and reduced exposure to historical environmental liabilities resulting from
certain agreements with Ford, as well as limited levels of indebtedness since
the Company's initial public offering, Rouge Industries is in a better position
to compete with these companies than many of its competitors.
Steel Substitutes. In the case of many steel products, there is
substantial competition from other products, including plastics, aluminum,
ceramics, glass, wood and concrete. However, the Company, to a limited degree,
and certain other manufacturers of steel products have begun to compete in
recent years in markets not traditionally served by steel producers, including
the markets for steel construction studs and steel frames for houses.
EMPLOYEES
At December 31, 1999, the work force of Rouge Steel was comprised of
2,364 hourly and 642 salaried personnel, including Rouge Steel employees working
at Double Eagle Steel Coating Company ("Double Eagle"). In 1999, the Company's
employment cost per ton shipped was $101 and tons shipped per employee was
approximately 772.
Hourly employees of Rouge Steel are represented by the International
Union, United Automobile, Aerospace and Agricultural Implement Workers of
America, UAW (the "UAW"). Most of the hourly employees of the Company's
competitors are represented by the United Steelworkers of America (the "USWA")
and are subject to USWA-patterned agreements. Rouge Steel and the UAW have a
labor agreement with a five-year term which expires August 1, 2000. The labor
agreement includes provisions for employment security and profit sharing. The
Company believes that it continues to maintain a good relationship with the UAW.
EVTAC workers, who are employed by Thunderbird Mining Company, a wholly-owned
subsidiary of EVTAC, are represented by the USWA. EVTAC is presently operating
under a rolling 21-day extension of the agreement between the USWA and
Thunderbird Mining Company that was scheduled to expire on August 1, 1999.
ENVIRONMENTAL CONTROL AND CLEANUP EXPENDITURES
The Company's operations are subject to many federal, state and local
laws, regulations, permits and consent agreements relating to the protection of
human health and the environment. Except as set forth below, the Company
believes that its facilities are in material compliance with these provisions
and does not believe that future compliance with such provisions will have a
materially adverse effect on its results of operations or financial position.
The Company has incurred capital expenditures in connection with matters
relating to environmental control of approximately $1 million during the past
four years. In addition, the Company has planned an aggregate of approximately
$8 million in capital expenditures for environmental compliance for the years
2000 through 2003. Since environmental laws and regulations are becoming
increasingly stringent, the Company's environmental capital expenditures
and costs for environmental compliance may increase in the future. In addition,
due to the possibility of unanticipated regulatory or other developments, the
amount and timing of future environmental expenditures may vary substantially
from those currently anticipated. The costs for current and future environmental
compliance may also place domestic integrated steel producers at a competitive
disadvantage with respect to foreign steel producers, which may not be required
to undertake equivalent costs in their operations, and manufacturers of steel
substitutes, which are subject to less stringent environmental requirements.
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In connection with the acquisition of the Company from Ford in 1989 (the
"Acquisition"), Ford has agreed to indemnify the Company (the "Ford Indemnity")
for any liability arising out of an environmental condition existing prior to
the Acquisition or a subsequent change in law relating to such condition that
results in an environmental claim under any federal or state environmental law,
including the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended, ("CERCLA"), the Resource Conservation and Recovery Act
("RCRA"), the Clean Water Act, the Safe Drinking Water Act, the Clean Air Act
and the Occupational Safety and Health Act of 1970 or an environmental claim
based upon a release of a material of environmental concern. An environmental
claim includes, among other things, the costs associated with the release of any
pollutants, contaminants, toxic substances and hazardous substances into the
environment. The Ford Indemnity provides that Ford shall pay the Company's
liabilities, including any penalties and attorney's fees, in connection with any
environmental claim relating to a pre-Acquisition condition. The Ford Indemnity
terminates on December 15, 2009. In some instances, Ford has acted proactively;
in others, it has denied responsibility. The submitted claims include asbestos
removal, CERCLA liabilities, National Pollutant Discharge Elimination System
permit violations, underground storage tank removal, transformer replacement and
transformer removal and disposal. The Company does not believe the rejection by
Ford of any claims made under the Ford Indemnity will have a materially adverse
effect on the Company's results of operations or financial position.
From time to time, the Company has received from the United States
Environmental Protection Agency (the "U.S. EPA") various requests for
information in connection with an environmental statute. Whether these
information requests suggest contemplated actions by the U.S. EPA and whether
such requests for information will lead to a materially adverse effect on the
Company's results of operations or financial position is unknown.
In 1990, Congress passed amendments to the Clean Air Act which impose
more stringent standards on air emissions. Pursuant to Title V of the Clean Air
Act Amendments of 1990, the Company submitted an application for a facility
operating permit (a "Title V Permit") in 1997 with amendments in 1998. The
Michigan Department of Environmental Quality (the "MDEQ") advised the Company
that the application and the amendments were administratively complete. The
Company expects to receive a draft Title V Permit in the first half of 2000.
In 1998, the Company and the Wayne County Air Quality Management
Division (the "Division") entered into a consent order resolving certain notices
of violation ("NOVs") and issues involving the basic oxygen furnace ("BOF")
electrostatic precipitator and the blast furnace flare stack. The settlement
agreement includes performance of a supplemental environmental project ("SEP")
for the installation of a waste oxide dryer. The dryer was installed in January
1999 and is intended to secure significant additional environmental and public
health improvements. The settlement agreement imposed a $125,000 penalty,
stipulated penalties for future violations, a compliance program and a five-year
term.
In 1999, the Company and the Division executed a consent order resolving
certain NOVs for events which occurred in 1997 and 1998. The consent order
required the Company to pay $140,000 and undertake an SEP for design
improvements to the BOF off-gas conditioning system.
In 1997, the Company voluntarily disclosed its failure to obtain a
construction and operating permit for an operational change previously thought
to be exempt from the air permitting requirements. The Company discovered the
error through an environmental self-audit.
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Disclosure was made under a Michigan statute that provides immunity from state
enforcement for environmental violations discovered through self-audits if they
are voluntarily and promptly reported and corrected. The Company has formally
requested immunity under the law. A permit application for the operational
change has been submitted to both the Division and the MDEQ and is presently in
the public comment process.
In 1997, the Company received a notice from the Corporation Counsel of
the City of Melvindale (the "City") of the City's intention to sue the Company
for alleged release of particulates into the air and violations of the County of
Wayne permit. The City has also made damage claims against the Company on behalf
of approximately 50 residents who claim to have incurred property damage as a
result of dust fallout. In 1998, a separate class action lawsuit was filed
against the Company on behalf of residents allegedly injured by dust. In late
1999, discussions among Rouge Steel and the class action plaintiffs resulted in
a tentative settlement agreement. In early 2000, the Company agreed to a final
judgement and consented to pay $1.5 million for distribution to plaintiff class
members and their attorneys. The final judgment also formalizes the Company's
obligation to undertake specified abatement measures, some of which had already
been initiated at the time of the tentative settlement. In addition, two
separate actions have been initiated for alleged property damage from dust
fallout. The Company intends to vigorously defend the property damage claims.
Rouge Steel does not believe that these matters will have a materially adverse
effect on its results of operations or financial position.
In September 1998, the U.S. EPA Region 5 commenced a multimedia
investigation of Rouge Steel's facility. The Company furnished information to
the U.S. EPA in response to a request for information issued by the agency
pursuant to Section 114(a) of the Clean Air Act. The Company also furnished
information in accordance with Section 3007 of RCRA. The Company has been
notified that certain compliance issues arising from the investigation have been
referred to the United States Department of Justice for enforcement action. If
this matter proceeds, the Company believes it may include claimed monetary
sanctions in excess of $500,000. The Company does not believe that the
enforcement action will have a materially adverse effect on its results of
operations or financial position.
Rouge Steel has received a series of NOVs from the Division for incidents
occurring in August and September 1998 and September 1999. The NOVs allege
violations of the Division's air rules and characterize the facility's emission
fallout as a nuisance condition. Rouge Steel has denied the allegations
contained in the NOVs. The preliminary nature of the NOVs and Rouge Steel's
response make it difficult to predict the outcome or its impact on the Company's
results of operations or financial position.
Rouge Steel and the former owner of the Rouge Steel facility have
voluntarily approached the MDEQ with a joint proposal to conduct a phased
cleanup of their solid waste management units ("SWMUs") at the Rouge Complex
under the RCRA corrective action program. In connection with this proposal, the
companies have voluntarily submitted a work plan for demolition and remediation
of the coke plant. The MDEQ is considering the proposal. The former owner of the
Rouge Steel facility has agreed to pay for most of the coke plant remediation
project. Therefore, this work is not expected to have a materially adverse
effect on Rouge Steel's results of operations or financial position. Further
investigation is needed to develop a reasonably accurate estimate of the
potential costs of remediating the remaining Rouge Steel SWMUs. The cost of the
necessary investigation is estimated to be in the range of $150,000 to $200,000.
In the absence of the additional facility-specific information that will be
developed by this investigation, the potential costs to clean up the remaining
Rouge Steel SWMUs cannot be established at this time.
11
<PAGE> 12
The Company has no information to suggest that the cost of remediating the
remaining SWMUs would have a materially adverse effect on its results of
operations or financial position. The companies have proposed to complete the
remediation of the SWMUs before 2005.
On February 1, 1999, there was a catastrophic explosion and fire at the
Powerhouse that effectively disabled the Powerhouse's capability to produce
steam and electricity for the Rouge Complex. The emergency situation required
the immediate installation of temporary steam boilers and electricity generating
equipment before permits could be obtained to prevent major damage to plant
equipment. Soon after the explosion, the Company approached the State and County
environmental agencies to request an emergency variance from the permitting
requirements. When the agencies refused to consider a variance, the Company
voluntarily proposed a settlement agreement to address any potential liability
associated with the emergency installation of this equipment. After lengthy
discussions regarding the settlement proposal, neither the State nor the County
has indicated any intent to take enforcement action or demand penalties in this
matter. However, the Company has not received formal notice that no action will
be taken, and it can provide no assurance in this regard.
On August 4, 1999, the Company voluntarily disclosed to the Division that
when briquettes from the Company's waste oxide reclamation facility are added to
hot metal at the BOF, the Company has experienced particulate emission control
problems. The Company has developed a plan to re-engineer the BOF baghouse to
address the problem. In the interim, the Company voluntarily suspended use of
the waste oxide pellets in the reladling process late in 1999. It is expected
that the BOF baghouse modifications will be completed in the second quarter of
2000.
RESEARCH AND DEVELOPMENT
The Company does not incur material expenses in research and development
activities but does participate in various research and development programs.
The Company addresses research and development requirements and product
enhancement by maintaining a staff of technical support, quality assurance and
engineering personnel. The Company also participates in joint projects with the
American Iron and Steel Institute.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The matters discussed in this Annual Report on Form 10-K 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 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 Annual
Report on Form 10-K 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 associated with 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.
12
<PAGE> 13
Item 2. Properties.
Rouge Steel's integrated single-site facility is located on a 457-acre
industrial site adjacent to Ford's stamping, engine, glass, frame and assembly
plants in Dearborn, Michigan. The Rouge Steel facility is strategically located
in the heart of the automotive manufacturing region and in an area where many
customers of flat rolled steel are situated. The Company believes that Rouge
Steel's single-site location is a strategic advantage because it permits reduced
transportation costs, increased efficiencies and better management response
times.
Rouge Steel's facilities include three blast furnaces (one of which has
been idle since 1988), two basic oxygen furnaces, two electric arc furnaces
(which have been idle since 1992), two ladle refining facilities, a vacuum
degassing facility, one three-strand continuous caster, one hot strip mill,
three pickle lines, one tandem mill, two annealing facilities (one of which is a
hydrogen annealing facility), two temper mills, two slitters and one recoil
welder. In addition, Rouge Steel owns a 50% interest in Double Eagle, the
world's largest electrogalvanizing facility and a 60% interest in the Powerhouse
that was managed, operated and maintained by Ford (which owns the other 40%). On
February 1, 1999, an explosion and fire at the Powerhouse curtailed the supply
of utilities which resulted in the temporary idling of the Company's steel
making facilities. It is considered unlikely that the Powerhouse will be
operational in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Powerhouse Explosion and
Insurance Claim." Prior to the Powerhouse explosion, Ford and Rouge Steel had
entered an agreement for long-term energy services with CMS which has commenced
to build and will operate a co-generation power plant scheduled to begin
operating in mid-2000. Along with Rouge Steel's properties, Rouge Industries
owns (i) a 48% interest in Spartan Steel, a cold rolled hot dip galvanizing
facility; (ii) a 20% interest in Shiloh of Michigan, an engineered steel
blanking facility; (iii) a 45% interest in EVTAC, an iron ore mining and pellet
producing facility; (iv) an 11.1% interest in TWB, a producer of laser welded
blanks; (v) a 49% interest in Delaco Steel Processing, a steel processor and
(vi) a 40% interest in Bing Blanking, a steel blanker and producer of roll
formed parts.
Item 3. Legal Proceedings.
ENVIRONMENTAL LAWSUIT
Residents of the City of Melvindale (a community in close proximity to
Rouge Steel) filed a class action lawsuit against the Company in 1998 claiming
trespass, nuisance and negligence as a result of alleged air pollution. In late
1999, discussions among Rouge Steel and the class action plaintiffs resulted in
a tentative settlement agreement. In early 2000, the Company agreed to final
judgement and consented to pay $1.5 million for distribution to plaintiff class
members and their attorneys.
13
<PAGE> 14
POWERHOUSE EXPLOSION LAWSUITS
Three liability lawsuits resulting from the Powerhouse explosion have
been filed against Rouge Steel. The Company has general liability insurance that
provides coverage for such lawsuits. Ford, which owns 40% of the Powerhouse
assets and was responsible for the day-to-day management, operation and
maintenance of the Powerhouse, has made settlement offers to certain workers
injured in the explosion and the families of the deceased, including the three
persons maintaining the above-referenced lawsuits. The Company has been informed
that the settlement offers have been accepted by the three persons maintaining
lawsuits against Rouge Steel and dismissal documents have been received for two
of the lawsuits. It is possible that Ford will seek recovery from Rouge Steel or
its insurers for liabilities incurred to settle with the workers who accept
Ford's settlement offers. It is presently not possible to reasonably estimate
the Company's monetary exposure with respect to these matters.
From time to time, Rouge Industries and its consolidated subsidiaries are
defendants in routine litigation incidental to their business. The Company
believes that such current proceedings, individually or in the aggregate, will
not have a materially adverse effect on the Company's results of operations or
financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
14
<PAGE> 15
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of December 31, 1999, certain
information with respect to the executive officers of the Company. Executive
officers are chosen by the Board of Directors of the Company at the first
meeting of the Board after each annual meeting of stockholders. Officers of the
Company serve at the discretion of the Board of Directors and are subject to
removal at any time. There is no family relationship among any of the officers
or directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Carl L. Valdiserri............ 63 Chairman and Chief Executive Officer
Louis D. Camino............... 62 President and Chief Operating Officer
Gary P. Latendresse........... 56 Vice Chairman and Chief Financial Officer
William E. Hornberger......... 53 Senior Vice President, Corporate Relations and External Affairs
George T. Kilavos............. 68 Vice President, Production Planning
Daniel A. Marion.............. 61 Vice President, Purchasing and Transportation
Ronald J. Nock................ 47 Vice President, Sales and Marketing
Martin Szymanski.............. 46 Vice President, General Counsel and Secretary
</TABLE>
BUSINESS EXPERIENCE
Mr. Valdiserri has been Chairman and Chief Executive Officer of the
Company since 1989. From 1987 until 1989 he was an independent consultant
regarding the steel industry, principally to The Chase Manhattan Bank, N.A. From
1982 until 1987, Mr. Valdiserri was Executive Vice President of Weirton Steel
Company. Mr. Valdiserri joined the Weirton Division of National Steel
Corporation in 1978. He was Chief Engineer in the Great Lakes Division of
National Steel Corporation from 1973 to 1978 and held various other engineering
positions from 1964 to 1972. He began his career with Wheeling-Pittsburgh Steel
Corporation in 1958. Mr. Valdiserri has 40 years of experience in the steel
manufacturing industry. Mr. Valdiserri is also a director of Champion
Enterprises, Inc.
Mr. Camino has served as President and Chief Operating Officer, as well
as a director of the Company, since 1990. Mr. Camino was Vice President of
Operations for Acme Steel Company from 1986 to 1990. Mr. Camino began his career
with Jones and Laughlin Steel Corporation as a supervisor in 1960, and has 39
years of experience in the steel manufacturing industry.
Mr. Latendresse has been Vice Chairman and Chief Financial Officer since
July 1999. From January 1998 to July 1999, he was Executive Vice President and
Chief Financial Officer. Mr. Latendresse was Vice President and Chief Financial
Officer from 1992 to 1997. He became a director of the Company in 1992. He was
Vice President, Finance and Controller from 1987 until 1992. Mr. Latendresse has
held various financial positions with the Company and Ford for 31 years. Mr.
Latendresse has 31 years of experience in the steel manufacturing industry. Mr.
Latendresse is also the Treasurer and Assistant Secretary of the Company.
Mr. Hornberger has been Senior Vice President, Corporate Relations and
External Affairs since July 1999. He was Vice President, Employee Relations and
Public Affairs from 1992 to 1999. From 1987 to 1992, he was Vice President,
Employee Relations. Mr. Hornberger has held various employee relations positions
at Rouge Steel and Ford since 1973. He has 16 years of experience in the steel
manufacturing industry.
15
<PAGE> 16
Mr. Kilavos was Vice President, Production Planning from 1990 until his
retirement on January 1, 2000. From 1984 to 1990, Mr. Kilavos was Director,
Production Planning at Weirton Steel Company. He previously held various
materials management positions at Weirton Steel Company and National Steel
Corporation. As of his retirement, Mr. Kilavos had 38 years of experience in the
steel manufacturing industry.
Mr. Marion was Vice President, Purchasing and Transportation from 1995
until his retirement on March 1, 2000. From 1988 to 1995, Mr. Marion was
Procurement Manager, Purchasing and Supply Staff, Ford Motor Company. He
previously held various purchasing positions during his 34 years with Ford,
including more than ten years of steel purchasing experience.
Mr. Nock has been Senior Vice President, Commercial and Strategic
Planning since January 2000. He served as Vice President, Sales and Marketing
from 1988 through 1999. Mr. Nock held various positions at the Company since
1982, including Manager of Sales and Sales Representative. He has 24 years of
experience in the steel manufacturing industry.
Mr. Szymanski has been Vice President, General Counsel and Secretary
since October 1999. He served as Secretary and General Counsel from January 1,
1998 to October 1999. From January 1997 to December 1997, he was Associate
General Counsel of the Company. From 1990 through 1996, he served as General
Counsel and Assistant Secretary of Modern Engineering, Inc., a Warren,
Michigan-based tier one automotive technical services, prototype and assembly
tooling supplier. Prior to that, he held key legal assignments at Stroh Brewery
Company and Fruehauf Corporation. Mr. Szymanski has over 21 years of corporate
and private practice legal experience.
16
<PAGE> 17
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters.
As of December 31, 1999, there were (i) 14,570,511 shares of class A
common stock, par value $0.01 per share (the "Class A Common Stock"), issued and
outstanding and held by approximately 7,000 stockholders of record, and (ii)
7,562,400 shares of class B common stock, par value $0.01 per share (the "Class
B Common Stock" and together with the Class A Common Stock, the "Common Stock"),
issued and outstanding and held by two stockholders of record. As of December
31, 1999, Carl L. Valdiserri and Worthington held 7,140,400 and 422,000 shares,
respectively, of Class B Common Stock. In February 1997, Worthington issued debt
securities ("DECS") which, upon maturity, could be redeemed for shares of Common
Stock or cash. On March 1, 2000, Worthington relinquished its shares of Common
Stock to satisfy its obligations with respect to the DECS. Worthington no longer
owns any Common Stock. The principal market for the Class A Common Stock is the
New York Stock Exchange, Inc. (the "NYSE"). The Class B Common Stock is not
listed for trading on any securities exchange.
Quarterly cash dividends of $0.03 per share of Common Stock were paid on
January 23, April 24, July 24 and October 23, 1998, January 22, April 23, July
23, October 22, 1999 and January 21, 2000. Future dividends on the Common Stock
are payable in cash or shares of Class A Common Stock, at the discretion of the
Board of Directors of the Company. The Company's Certificate of Incorporation
provides that (i) no dividends be paid on the Class B Common Stock unless a
dividend (equal to the dividend declared and paid to the holders of Class B
Common Stock) is declared and paid on the Class A Common Stock and (ii) any
dividend paid on the Class B Common Stock will be paid only in shares of Class A
Common Stock or cash. Holders of Class A Common Stock and Class B Common Stock
will be entitled to share ratably, as a single class, in any dividends paid on
the Common Stock. The declaration and payment of dividends on the Common Stock
will be subject to a quarterly review by the Board of Directors of the Company.
The timing and amount of dividends, if any, will depend, among other things, on
the Company's funding obligations with respect to profit sharing plans, results
of operations, financial condition, cash requirements, restrictions, if any, in
loan agreements, obligations with respect to preferred stock, if any, and other
factors deemed relevant by the Board of Directors.
The Company's Class A Common Stock has been listed for trading on the
NYSE since March 29, 1994 under the symbol ROU. The following table sets forth,
for the periods indicated, the high and low sales prices of the Company's Class
A Common Stock. The closing sale price of the Company's Class A Common Stock on
February 29, 2000 was $7.69.
<TABLE>
<CAPTION>
1999 HIGH LOW
- ---- ------ ------
<S> <C> <C>
First Quarter............................................ $14.00 $ 8.00
Second Quarter........................................... 11.94 8.25
Third Quarter............................................ 9.75 6.63
Fourth Quarter........................................... 8.50 5.63
<CAPTION>
1998..................................................... HIGH LOW
- ---- ------ ------
<S> <C> <C>
First Quarter............................................ $16.13 $12.13
Second Quarter........................................... 16.00 10.75
Third Quarter............................................ 12.75 7.13
Fourth Quarter........................................... 10.63 6.25
</TABLE>
17
<PAGE> 18
Item 6. Selected Financial Data.
The Statement of Operations data and Balance Sheet data in the following
table present selected historical consolidated financial information derived
from the historical consolidated financial statements of the Company as of and
for each of the years in the five-year period ended December 31, 1999. This
information should be read in conjunction with the historical consolidated
financial statements of the Company and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 20.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- --------- ---------
(dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total Sales $ 967.6 $ 1,163.2 $ 1,341.6 $ 1,307.4 $ 1,206.6
Operating Income (Loss) (254.1)(5) 35.1 31.7 24.7 121.6(1)
Net Interest Income (Expense) (2.1) 0.7 0.8 4.8 5.4
Income Tax (Provision) Benefit 30.5 (8.7) (8.1) (6.9) (33.5)
Net Income (Loss) (47.8)(5) 23.4 22.4 23.4 94.7(1)
Per Share Data
Net Income (Loss) - Basic and Diluted $ (2.16) $ 1.06 $ 1.02 $ 1.07 $ 4.37
Cash Dividends Declared 0.12 0.12 0.12 0.12 0.10
Weighted-Average Shares Outstanding (000) 22,122 22,025 21,939 21,845 21,677
<CAPTION>
December 31
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- --------- --------- ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working Capital $ 198.3 $ 212.4 $ 177.2 $ 216.6 $ 294.2
Property, Plant, and Equipment, Net 278.6 258.1 268.6 209.2 135.7
Total Assets 867.6 768.9 728.5 682.0 672.5
Long-Term Debt, Including Current Portion 104.8 29.0 17.9 - -
Stockholders' Equity 409.8 459.6 438.6 417.3 393.9
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OTHER DATA
Net Tons Shipped (000) 2,320 2,630 3,029 2,876 2,542
Raw Steel Production (Mils) NT 2.2 3.1 2.8 2.6 2.9
Effective Capacity Utilization 66% 94% 91% 84% 96%
Continuously Cast Percentage 100 100 100 95 92
Purchased Slabs (000) NT 351 76 619 843 -
Number of Employees at Year-End (2) 3,006 3,108 3,128 3,119 3,167
Average Hourly Labor Rate (3) $ 31.28 $ 30.25 $ 30.43 $ 30.81 $ 32.40
Total Sales per Employee (000) (2) 322 374 429 419 381
Hours Worked per Net Ton Produced (2) 2.94 2.81 2.81 2.89 3.14
Operating Income (Loss) per Net Ton Shipped $ (110)(5) $ 13 $ 10 $ 9 $ 48(1)
Capital Expenditures (Mils) (4) 80.5 31.8 112.4 101.5 69.4
</TABLE>
18
<PAGE> 19
(1) Operating income and net income for the year ended December 31, 1995
include the pre-tax effect of a $30.0 million (or $12 per net ton shipped)
gain from the settlement of certain litigation relating to property tax
assessment matters.
(2) Includes all hourly and salaried employees.
(3) Includes $0.29 per hour in 1998, $0.35 per hour in 1997, $0.49 per hour in
1996 and $1.94 per hour in 1995 paid or accrued pursuant to the Rouge Steel
Company Profit Sharing Plan for Hourly Employees. Due to losses sustained
in 1999, no amounts were paid or accrued.
(4) Includes capital expenditures paid or accrued and investments in
unconsolidated subsidiaries.
(5) Operating loss and net loss for the year ended December 31, 1999 include
the pre-tax effect of business interruption and property damage losses and
other claim-related expenses of $221.4 million (or $95 per net ton shipped)
resulting from the February 1, 1999 explosion at the Powerhouse.
19
<PAGE> 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
OVERVIEW
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Consolidated Financial Statements
which begin on page 32.
Rouge Steel Company ("Rouge Steel") is the primary operating subsidiary
of Rouge Industries, Inc., a Delaware corporation (together with its
subsidiaries, "Rouge Industries" or the "Company"). Rouge Steel is an integrated
producer of high quality, flat rolled steel products consisting of hot rolled,
cold rolled and galvanized steel. In recent years, the Company has emphasized
the production of value-added flat rolled carbon steel products that require
additional processing and generally command higher margins than commodity flat
rolled carbon steel products. The Company's products generally, and its
value-added products specifically, are sold primarily to customers in the
automotive industry which have exacting quality, delivery and service
requirements. The Company also sells its products to steel converters, service
centers and other end users.
Other wholly-owned subsidiaries of Rouge Industries include QS Steel Inc.
("QS Steel") and Eveleth Taconite Company ("Eveleth"). QS Steel holds minority
ownership interests in five Michigan-based joint ventures. Eveleth holds a 45%
interest in Eveleth Mines LLC ("EVTAC"), a Minnesota-based iron ore mining and
pellet producing operation.
Rouge Steel's operations are subject to the cyclicality of the steel
industry and the domestic economy as a whole. Given the inherent cyclicality of
the domestic steel industry, the Company believes it is important to maintain
financial flexibility in order to take advantage of opportunities to reduce
costs and upgrade the quality and mix of its products. Rouge Industries believes
that its strong balance sheet combined with its ongoing effort to reduce
operating costs will position the Company to continue to pursue its business
strategy throughout the economic cycle and to respond to the continually
changing needs of its customers.
The following table summarizes the annual raw steel capacity, raw steel
production, utilization rates and finished shipment information for the domestic
steel industry (as reported by the American Iron and Steel Institute) and for
Rouge Steel for the years from 1997 through 1999:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(in millions of tons except utilization)
DOMESTIC INDUSTRY
Raw Steel Capacity 128.1 125.4 121.4
Raw Steel Production 104.2 108.7 108.6
Utilization 81.3% 86.7% 89.4%
Finished Shipments 103.1 102.4 105.9
ROUGE STEEL
Raw Steel Capacity 3.3 3.3 3.1
Raw Steel Production 2.2 3.1 2.8
Utilization 65.7%(1) 94.3% 91.2%
Finished Shipments 2.3 2.6 3.0
</TABLE>
20
<PAGE> 21
(1) The decrease in utilization was the result of a 93-day outage in primary
operations caused by the Powerhouse explosion. See " - Powerhouse
Explosion and Insurance Claim."
The cyclicality of the steel industry and the domestic economy affects
the Company's steel product prices. To protect itself from the volatile nature
of prices in the domestic steel industry, the Company sells approximately two
thirds of its steel products pursuant to fixed price contracts, under which
prices are typically set annually. In 1991, when domestic steel industry
production and shipments were low, the Company's steel product prices reached a
nine-year low. In 1993, prices began to rise and in 1994 they reached the
highest level since 1988. By mid-1995, however, prices began to soften despite
the continuing strong demand for the Company's products. During the second half
of 1995, the Company lost approximately one half of the pricing gains which it
realized in 1993 and 1994. Prices in 1996 made a modest recovery from late-1995
levels, but nevertheless remained lower than average 1995 prices. In 1997,
prices declined slightly from 1996 levels despite strong demand for the
Company's products. In 1998, prices declined again, partially as a result of the
unprecedented levels of imports. Prices in late 1999 made a modest recovery from
late-1998 levels but did not increase to early-1998 levels.
Total Sales. The Company's total sales are a function of net tons
shipped, prices and mix of products. The following table sets forth the
percentage of the Company's steel product revenues represented by each of its
product types for each of the years from 1997 through 1999:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Hot Rolled 37.3% 44.6% 49.4%
Cold Rolled 27.4 30.5 29.8
Electrogalvanized 21.9 21.0 20.2
Hot Dip Galvanized 13.4 3.9 0.6
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Sales to affiliates are comprised primarily of sales to Worthington
Industries, Inc. ("Worthington"), Rouge Industries' sixth largest customer and
second largest shareholder in 1999. Until March 1, 2000, Worthington owned
approximately 27.2% of the Company's common stock which represented a voting
interest of 19.8%. In February 1997, Worthington issued debt securities ("DECS")
which, upon maturity, could be redeemed for shares of Rouge Industries common
stock or cash. On March 1, 2000, Worthington relinquished its shares of the
Company's common stock to satisfy its obligations with respect to the DECS.
Worthington no longer owns any Rouge Industries common stock.
Sales to Ford Motor Company ("Ford"), the Company's largest customer,
are primarily made pursuant to a ten-year steel purchase agreement which expires
after model-year 2000. The Company does not believe that the expiration of the
steel purchase agreement will have a materially adverse effect on its results of
operations or financial position.
Costs of Goods Sold. The principal elements constituting Rouge
Industries' costs of goods sold are raw materials, labor and energy. Outside
processing costs represent a growing element of the Company's costs of goods
sold. The major raw materials and energy used by the Company in its production
process are coke, iron ore pellets, steel scrap, natural gas, electricity,
steam, oxygen and nitrogen.
21
<PAGE> 22
Iron ore pellets are purchased from EVTAC pursuant to a pellet purchase
agreement which expires in 2002. The Company's wholly-owned subsidiary, Eveleth,
holds a 45% interest in EVTAC.
Rouge Steel's hourly production and maintenance employees are
represented by the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America, UAW and are working under a labor
contract which expires on August 1, 2000.
Outside processing costs, which are principally costs for value-added
processing that the Company cannot perform at Rouge Steel's integrated facility,
have always been an element of the Company's costs of goods sold. The Company's
joint ventures will increase the use of outside processing and related costs.
However, Rouge Industries believes that the incremental revenue generated from
additional sales of value-added products produced by the joint ventures will
exceed such cost increases.
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. 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. Ford was responsible for
the day-to-day management, operation and maintenance of the Powerhouse.
Rouge Industries' 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 temporary
steam boilers and electrical distribution equipment which were procured 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. The amount capitalized for these temporary facilities was
approximately $65.1 million. Of that amount, approximately $40.4 million
has been amortized through December 31, 1999 and the remainder will be
amortized through the third quarter of 2000.
3. Powerhouse property damage - The net book value of the Powerhouse property
destroyed, which was $1.6 million, was written off in 1999. Any proceeds
from the claims relating to Powerhouse property damage (other than amounts
relating to repairs discussed in 1. above) are expected to result in a
gain since the proceeds are expected to exceed the net book value
22
<PAGE> 23
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 December
31, 1999, the Company has recorded recoverable insurance proceeds of $202.1
million net of reserves of $40.0 million. Of the total amount recorded, $177.4
million has been included in other income and $24.7 million has been deferred
and will be recognized in other income over the period the related capital items
are amortized. At December 31, 1999, the Company has a receivable of $43.1
million, which is net of reserves of $40.0 million and advances from the
insurance carriers of $159.0 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.
The Company is currently evaluating ancillary costs relating to the
explosion, including cleanup and abatement activities. 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 on the available information,
during 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. Through December 31, 1999, advances totaling
$138.0 million were received from the Company's insurance carriers for business
interruption losses. An additional $21.0 million advance was received 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998
Total Sales. Total sales decreased 16.8% in 1999 to $967.6 million from
$1,163.2 million in 1998, a decrease of $195.6 million. The decrease in total
sales in 1999 was caused principally by lower steel product shipments. Steel
product shipments decreased 11.8% in 1999 to 2,320,000 net tons from 2,630,000
net tons in 1998, a decrease of 310,000 net tons. Rouge Industries' shipments
were lower in 1999 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
23
<PAGE> 24
Company of the decrease in total sales resulting from lower shipments was
magnified by lower steel product selling prices in 1999. See "- Powerhouse
Explosion and Insurance Claim."
Costs and Expenses. Total costs and expenses increased 8.3% in 1999 to
$1,221.7 million from $1,128.1 million in 1998, an increase of $93.6 million.
Costs of goods sold increased 4.3% in 1999 to $1,137.1 million from $1,090.0
million in 1998, an increase of $47.1 million. The increase in costs of goods
sold was primarily due to additional costs related to the Powerhouse explosion.
Rouge Steel recorded continuing expenses associated with its steelmaking plant
despite the entire plant being shut down for 11 days and primary operations,
which includes the blast furnaces, basic oxygen furnaces and continuous caster,
not resuming production until May. Additionally, the Company recorded expenses
for non-capital repairs to its damaged property. The higher costs associated
with the Powerhouse explosion were partially offset by lower steel product
shipments in 1999 resulting from the lost production discussed above. Costs of
goods sold in 1999 was 117.5% of total sales compared to 93.7% in 1998.
Depreciation and amortization increased 216.4% in 1999 to $63.3 million from
$20.0 million in 1998, an increase of $43.3 million. The higher depreciation and
amortization expense reflects the completion of major capital projects as well
as the amortization of the cost of the temporary steam boilers and electrical
distribution system installed to provide the Company with steam and
electricity until the co- generation power plant is placed into service. These
temporary facilities, which were placed into service in the second quarter of
1999, are being amortized over their estimated useful lives, at which time they
will be replaced by the co-generation power plant. See "- Powerhouse Explosion
and Insurance Claim."
Selling and Administrative Expenses. Selling and administrative expenses
in 1999 were $26.8 million compared to $23.9 million in 1998, an increase of
$2.9 million. The increase in selling and administrative expense is primarily
comprised of legal and other professional services relating to the Powerhouse
explosion insurance claim. See "- Powerhouse Explosion and Insurance Claim."
Operating Income (Loss). The operating loss in 1999 was $254.1 million
compared to operating income of $35.1 million in 1998, a change of $289.2
million. The decrease in operating income was primarily due to the Powerhouse
explosion and weak steel product prices.
Interest Expense. Interest expense increased 266.8% in 1999 to $2.8 million
from $775,000 in 1999, an increase of $2.0 million. The increase in interest
expense was the result of higher debt in 1999. The average debt balance in 1999
was $44.7 million compared to $10.2 million in 1998.
Insurance Recovery. The Company recognized $177.4 million of income in 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 to operations. The Company expects that the Powerhouse
insurance claim will not be settled for at least another year. Since the claim
is not near settlement, 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 1999 was $30.5
million compared to an income tax provision of $8.7 million in 1998. The income
tax benefit in 1999 was a function of the loss incurred.
24
<PAGE> 25
Equity in Unconsolidated Subsidiaries. Equity in unconsolidated
subsidiaries increased in 1999 to $1.7 million from a loss of $1.0 million in
1998, a change of $2.7 million. The improvements in income from unconsolidated
subsidiaries came mostly from EVTAC and Spartan Steel Coating, L.L.C.
Net Income (Loss). The net loss in 1999 was $47.8 million compared to net
income of $23.4 million in 1998. The net loss was primarily due to the
Powerhouse explosion and weak steel product prices.
Powerhouse Explosion Insurance Claim. The insurance claim related to the
February 1, 1999 explosion and fire at the Powerhouse includes the effect of a
93-day outage and the corresponding reduction in shipments, Total Sales and
Costs of Goods Sold. Costs of Goods Sold includes property damage expenses of
$57.5 million and estimated business interruption expenses of $111.2 million
related to the Powerhouse explosion. Depreciation and Amortization Expense
includes an additional $40.4 million related to the temporary steam boilers and
electrical distribution equipment. The aggregate effect of Powerhouse
explosion-related items on Operating Loss was $217.4 million. Other income
includes $177.4 million of insurance recoveries. See "- Powerhouse Explosion and
Insurance Claim."
YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997
Total Sales. Total sales decreased 13.3% in 1998 to $1,163.2 million from
$1,341.6 million in 1997, a decrease of $178.4 million. The decrease in total
sales was caused by lower shipments and lower steel product selling prices,
partially offset by improved product mix. Shipments decreased 13.2% in 1998 to
2,630,000 net tons from 3,029,000 net tons in 1997, a decrease of 399,000 net
tons. Shipments were lower in 1998 for two reasons: (i) the unprecedented high
level of low-priced imports which resulted in the Company losing sales to
service center customers and (ii) the decision by the Company to purchase fewer
slabs to augment its own production.
Costs and Expenses. Total costs and expenses decreased 13.9% in 1998 to
$1,128.1 million from $1,309.9 million in 1997, a decrease of $181.8 million.
Costs of goods sold decreased 14.7% in 1998 to $1,090.0 million from $1,278.3
million in 1997, a decrease of $188.3 million. The decrease in costs of goods
sold in 1998 can be attributed primarily to the 13.2% decrease in shipments
discussed above, as well as dramatically lower scrap prices, the absence of a
blast furnace reline and a reduced level of purchased slabs. The Company's
smaller blast furnace was relined in 1997. Costs of goods sold was 93.7% of
total sales in 1998, down from 95.3% of total sales in 1997. Depreciation and
amortization expense increased 28.5% in 1998 to $20.0 million from $15.6 million
in 1997, an increase of $4.4 million. The higher depreciation and amortization
expense reflects the completion of major capital projects, primarily the
automated raw material handling system and the reline of the Company's smaller
blast furnace. Selling and administrative expenses increased 9.7% in 1998 to
$23.9 million from $21.8 million in 1997, an increase of $2.1 million. The
increase in selling and administrative expenses is primarily due to higher
Michigan single business tax resulting from a lower capital acquisition
deduction in 1998.
Operating Income. Operating income increased 10.7% in 1998 to $35.1 million
from $31.7 million in 1997, an increase of $3.4 million, despite lower steel
product shipments. Operating income represented 3.0% of total sales in 1998, up
from 2.4% of total sales in 1997.
Other - Net. Other - net increased in 1998 to $2.7 million from $1.2
million in 1997, an increase of $1.5 million. The increase was comprised of two
items: (i) insurance deductibles for a
25
<PAGE> 26
railroad accident and a mobile equipment fire and (ii) an increase in the
reserve for doubtful accounts.
LIQUIDITY AND CAPITAL RESOURCES
Rouge Industries' liquidity needs arise predominantly from capital
investments and working capital requirements. As a result of the explosion and
fire at the Powerhouse on February 1, 1999, the Company incurred increased
levels of expenditures to restore its operations to normal levels. The Company
expects to meet its liquidity needs with cash provided by operating activities,
funds provided by borrowings and anticipated insurance recoveries.
See "- Powerhouse Explosion and Insurance Claim."
Cash and cash equivalents on December 31, 1999 totaled $1.9 million
compared to $2.4 million on December 31, 1998, a decrease of $500,000. Cash
provided by financing activities was more than offset by cash used for operating
activities and capital expenditures during 1999.
Cash Flows from Operating Activities. Net cash used for operating
activities was $3.7 million in 1999 compared to net cash provided by operating
activities of $20.3 million in 1998. The decrease of $24.0 million was primarily
attributable to the Powerhouse explosion and the resulting net loss. The $48.0
million increase in accounts receivable since December 31, 1998 is primarily
comprised of the insurance recovery receivable. Many of the Powerhouse-related
accruals had not yet been paid as of December 31, 1999, which explains the high
level of payables.
Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, increased 78.6% in 1999 to $70.0
million from $39.2 million in 1998, an increase of $30.8 million. The
expenditures made in 1999 were primarily for computer systems, "C" blast furnace
upgrades and partial payment of the temporary electrical distribution system and
steam boilers which were installed after the Powerhouse explosion. Other
expenditures were made to modernize and expand the Company's facilities. In
2000, the Company plans to spend approximately $40 million on capital items,
including environmental equipment for the basic oxygen furnace (the "BOF") and
the remaining expenditures for the temporary steam and electrical distribution
systems. Other capital expenditures will be generally directed at improving
plant efficiency and product quality in order to improve Rouge Industries'
competitive position in the marketplace.
Credit Facility. Rouge Steel has a $125 million, unsecured revolving loan
commitment under a credit agreement (the "Credit Agreement") among the Company,
the banks named therein and Bank One, Michigan, as administrative agent. On June
30, 2000, $25 million of the commitments of the banks under the Credit Agreement
will expire with the remaining $100 million expiring on December 16, 2002. The
revolving loans provided for under the Credit Agreement bear interest, at the
option of the Company, at a rate equal to either (i) the base rate, which is the
higher of the prime rate or the federal funds rate plus 0.5%, or (ii) the LIBOR
rate plus an applicable margin, which varies with the Company's debt to
capitalization ratio and can range from 0.50% to 0.80%. The Company had
borrowings of $104.8 million under the facility as of December 31, 1999. In
addition to the Credit Agreement, the Company has obtained two $25 million
uncommitted credit facilities, both of which expire in the second quarter of
2000. The Company believes that cash flows from operations and funds available
under its credit facilities, along with anticipated insurance proceeds, will be
adequate for its working capital and capital expenditure requirements.
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<PAGE> 27
ENVIRONMENTAL MATTERS
The Company's operations are subject to many federal, state and local
laws, regulations, permits and consent agreements relating to the protection of
human health and the environment. Except as set forth below, the Company
believes that its facilities are in material compliance with these provisions
and does not believe that future compliance with such provisions will have a
materially adverse effect on its results of operations or financial position.
The Company has incurred capital expenditures in connection with matters
relating to environmental control of approximately $1 million during the past
four years. In addition, the Company has planned an aggregate of approximately
$8 million in capital expenditures for environmental compliance for the years
2000 through 2003. Since environmental laws and regulations are becoming
increasingly stringent, the Company's environmental capital expenditures and
costs for environmental compliance may increase in the future. In addition, due
to the possibility of unanticipated regulatory or other developments, the amount
and timing of future environmental expenditures may vary substantially from
those currently anticipated. The costs for current and future environmental
compliance may also place domestic integrated steel producers at a competitive
disadvantage with respect to foreign steel producers, which may not be required
to undertake equivalent costs in their operations, and manufacturers of steel
substitutes, which are subject to less stringent environmental requirements.
In connection with the acquisition of the Company from Ford in 1989 (the
"Acquisition"), Ford has agreed to indemnify the Company (the "Ford Indemnity")
for any liability arising out of an environmental condition existing prior to
the Acquisition or a subsequent change in law relating to such condition that
results in an environmental claim under any federal or state environmental law,
including the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended, ("CERCLA"), the Resource Conversation and Recovery Act
("RCRA"), the Clean Water Act, the Safe Drinking Water Act, the Clean Air Act
and the Occupational Safety and Health Act of 1970 or an environmental claim
based upon a release of a material of environmental concern. An environmental
claim includes, among other things, the costs associated with the release of any
pollutants, contaminants, toxic substances and hazardous substances into the
environment. The Ford Indemnity provides that Ford shall pay the Company's
liabilities, including any penalties and attorney's fees, in connection with any
environmental claim relating to a pre-Acquisition condition. The Ford Indemnity
terminates on December 15, 2009. In some instances, Ford has acted proactively;
in others, it has denied responsibility. The submitted claims include asbestos
removal, CERCLA liabilities, National Pollutant Discharge Elimination System
permit violations, underground storage tank removal, transformer replacement and
transformer removal and disposal. The Company does not believe the rejection by
Ford of any claims made under the Ford Indemnity will have a materially adverse
effect on the Company's results of operations or financial position.
From time to time, the Company has received from the United States
Environmental Protection Agency (the "U.S. EPA") various requests for
information in connection with an environmental statute. Whether these
information requests suggest contemplated actions by the U.S. EPA and whether
such requests for information will lead to a materially adverse effect on the
Company's results of operations or financial position is unknown.
In 1990, Congress passed amendments to the Clean Air Act which impose
more stringent standards on air emissions. Pursuant to Title V of the Clean Air
Act Amendments of 1990, the Company submitted an application for a facility
operating permit (a "Title V permit") in 1997, with amendments in 1998. The
Michigan Department of Environmental Quality (the
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<PAGE> 28
"MDEQ") advised the Company that the application and the amendment were
administratively complete. The Company expects to receive a draft Title V Permit
in the first half of 2000.
In 1998, the Company and the Wayne County Air Quality Management Division
(the "Division") entered into a consent order resolving certain notices of
violation ("NOVs") and issues involving the BOF electrostatic precipitator and
the blast furnace flare stack. The settlement agreement includes performance of
a supplemental environmental project ("SEP") for the installation of a waste
oxide dryer. The dryer was installed in January 1999 and intended to secure
significant additional environmental and public health improvements. The
settlement agreement imposed a $125,000 penalty, stipulated penalties for future
violations, a compliance program and a five-year term.
In 1999, the Company and the Division executed a consent order resolving
certain NOVs for events which occurred in 1997 and 1998. The consent order
required the Company to pay $140,000 and undertake an SEP for design
improvements to the BOF off-gas conditioning system.
In 1997, the Company voluntarily disclosed its failure to obtain a
construction and operating permit for an operational change previously thought
to be exempt from the air permitting requirements. The Company discovered the
error through an environmental self-audit. Disclosure was made under a Michigan
statute that provides immunity from state enforcement for environmental
violations discovered through self-audits if they are voluntarily and promptly
reported and corrected. The Company has formally requested immunity under the
law. A permit application for the operational change has been submitted to both
the Division and the MDEQ and is presently in the public comment process.
In 1997, the Company received a notice from the Corporation Counsel of
the City of Melvindale (the "City") of the City's intention to sue the Company
for alleged release of particulates into the air and violations of the County of
Wayne permit. The City has also made damage claims against the Company on behalf
of approximately 50 residents who claimed to have incurred property damage as a
result of dust fallout. In 1998, a separate class action lawsuit was filed
against the Company on behalf of residents allegedly injured by dust. In late
1999, discussions among Rouge Steel and the class action plaintiffs resulted in
a tentative settlement agreement. In early 2000, the Company agreed to a final
judgement and consented to pay $1.5 million for distribution to plaintiff class
members and their attorneys. The final judgement also formalizes the Company's
obligation to undertake specified abatement measures, some of which had already
been initiated at the time of the tentative settlement. In addition, two
separate actions have been initiated for alleged property damage from dust
fallout. The Company intends to vigorously defend the property damage claims.
Rouge Steel does not believe that these matters will have a materially adverse
effect on its results of operations or financial position.
In September 1998, U.S. EPA Region 5 commenced a multimedia investigation
of Rouge Steel's facility. The Company furnished information to the U.S. EPA in
response to a request for information issued by the agency pursuant to Section
114(a) of the Clean Air Act. The Company also furnished information in
accordance with Section 3007 of RCRA. The Company has since been notified that
certain compliance issues arising from the investigation have been referred to
the United States Department of Justice for enforcement action. If this matter
proceeds, the Company believes it may include claimed monetary sanctions in
excess of $500,000. The Company does not believe that the enforcement action
will have a materially adverse effect on its results of operations or financial
position.
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<PAGE> 29
Rouge Steel has received a series of NOVs from the Division for incidents
occurring in August and September 1998 and September 1999. The NOVs allege
violations of the Division's air rules and characterize the facility's emission
fallout as a nuisance condition. Rouge Steel has denied the allegations
contained in the NOVs. The preliminary nature of the NOVs and Rouge Steel's
response make it difficult to predict the outcome or its impact on the Company's
results of operations or financial position.
Rouge Steel and the former owner of the Rouge Steel facility have
voluntarily approached the MDEQ with a joint proposal to conduct a phased
cleanup of their solid waste management units ("SWMUs") at the Rouge Complex
under the RCRA corrective action program. In connection with this proposal, the
companies have voluntarily submitted a work plan for demolition and remediation
of the coke plant. The MDEQ is considering the proposal. The former owner of the
Rouge Steel facility has agreed to pay for most of the coke plant remediation
project. Therefore, this work is not expected to have a materially adverse
effect on Rouge Steel's results of operations or financial position. Further
investigation is needed to develop a reasonably accurate estimate of the
potential costs of remediating the remaining Rouge Steel SWMUs. The cost of the
necessary investigation is estimated to be in the range of $150,000 to $200,000.
In the absence of the additional facility-specific information that will be
developed by this investigation, the potential costs to clean up the remaining
Rouge Steel SWMUs cannot be estimated at this time. The Company has no
information to suggest that the cost of remediating the remaining SWMUs would
have a materially adverse effect on its results of operations or financial
position. The companies have proposed to complete the remediation of the SWMUs
before 2005.
On February 1, 1999, there was a catastrophic explosion and fire at the
Powerhouse that effectively disabled the Powerhouse's capability to produce
steam and electricity for the Rouge Complex. The emergency situation required
the immediate installation of temporary steam boilers and electricity generating
equipment before permits could be obtained to prevent major damage to plant
equipment. Soon after the explosion, the Company approached the State and County
environmental agencies to request an emergency variance from the permitting
requirements. When the agencies refused to consider a variance, the Company
voluntarily proposed a settlement agreement to address any potential liability
associated with the emergency installation of this equipment. After lengthy
discussions regarding the settlement proposal, neither the State nor the County
has indicated any intent to take enforcement action or demand penalties in this
matter. However, the Company has not received formal notice that no action will
be taken, and it can provide no assurance in this regard.
On August 4, 1999, the Company voluntarily disclosed to the Division that
when briquettes from the Company's waste oxide reclamation facility are added to
hot metal at the BOF, the Company has experienced particulate emission control
problems. The Company has developed a plan to re-engineer the BOF baghouse to
address the problem. In the interim, the Company voluntarily suspended use of
the waste oxide pellets in the reladling process late in 1999. It is expected
that the BOF baghouse modifications will be completed in the second quarter of
2000.
YEAR - 2000 CHANGEOVER
The Company completed its Year-2000 assessment and remediation program,
which was initiated in 1998 to modify or replace significant portions of the
Company's hardware and software so that systems would properly interpret dates
beyond January 1, 2000. Prior to December 31, 1999, all critical internal
manufacturing business systems were either replaced or
29
<PAGE> 30
remediated, tested and in operation, and live Year-2000 production or simulation
tests were successfully conducted on all manufacturing facilities.
Rouge Steel suppliers identified by Purchasing and Operations as being
critical were asked to provide details regarding their contingency plans.
Meetings also were conducted with the Company's most critical steel processors,
all of whom indicated that they would be Year-2000 ready. The Company also met
with and received assurances from its critical infrastructure providers for
electricity, natural gas and oxygen that they would-be Year-2000 ready.
Capital expenditures of approximately $7 million were incurred to replace
or significantly upgrade existing hardware and software with new equipment. The
Company also incurred approximately $4 million of additional expense to
remediate existing computer systems and manufacturing equipment that were not
Year-2000 ready. These expenditures were consistent with estimates provided in
earlier disclosures.
Rouge Steel's Year-2000 rollover plan was to have in operation as few
facilities as practicable during the Year-2000 rollover period. As a result,
most operations were temporarily idled prior to midnight. Because of the smooth
rollover, manufacturing operations were resumed shortly after midnight on
January 1, 2000. Supplies from the critical infrastructure providers of
electricity, natural gas and oxygen, as well as all other material flow from
other key suppliers during the transition period, were uninterrupted. Although
contingency plans had been established to address unforeseen operational or
supply problems, they were never invoked.
In summary, Rouge Steel's transition into the year 2000 has, to date,
been considered uneventful and successful and did not result in any noteworthy
events with respect to the Company or its suppliers. However, the potential for
future disruptions resulting from Year-2000 issues exists. Accordingly, the
Company will continue to monitor its operations and maintain appropriate
contingency plans.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The matters discussed in this Annual Report on Form 10-K 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 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 Annual
Report on Form 10-K 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.
RECENT EVENTS
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BOF Incident. On January 7, 2000, a mechanical system failure occurred
at Rouge Steel's BOF which required approximately seven weeks to repair. The
BOF operated at approximately 85% of its normal production capacity during the
repair. The Company estimates that it lost approximately 50,000 tons of slab
production, but purchased slabs allowed the Company to continue to fill customer
orders. While management is still evaluating the full impact, the BOF incident
is currently expected to result in a total loss in the range of $8 million to
$12 million. All amounts in excess of the $2.5 million deductible are expected
to be covered under the Company's insurance program. The estimate of the total
loss will change as additional information becomes available with respect to
actual costs incurred and as the insurers perform their review of claim
information submitted by the Company. Considerable uncertainty still exists
with respect to 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.
The DECS. On March 1, 2000, pursuant to the terms of Worthington's 7 1/4%
Exchangeable Notes due March 1, 2000, Worthington delivered 5,999,600 shares of
the Company's Class A Common Stock (after converting its 422,000 shares of Class
B Common Stock into an equal number of shares of Class A Common Stock) to the
holders of the DECS. The amount delivered represented Worthington's entire
equity position in the Company. The Company did not receive any of the proceeds
from the sale of the DECS or delivery thereunder of the shares of Class A Common
Stock.
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Item 8. Financial Statements and Supplementary Data.
The following information is submitted pursuant to the requirements of
Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants....................................................................... 33
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................... 34
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997...................................................................... 36
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997...................................................................... 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997...................................................................... 38
Notes to Consolidated Financial Statements.............................................................. 39
Schedule II - Valuation and Qualifying Accounts and Reserves............................................ 53
</TABLE>
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<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Rouge Industries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Rouge
Industries, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Detroit, Michigan
February 2, 2000, except as to
Note 12 which is as of March 1, 2000
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<PAGE> 34
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
Assets
<TABLE>
<CAPTION>
December 31
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 1,861 $ 2,418
Accounts Receivable
Trade and Other (Net of Allowances of $15,997 and $17,937) 135,588 130,624
Insurance Recovery 43,085 --
Affiliates 2,643 5,644
Inventories 269,808 275,811
Other Current Assets 27,530 7,075
--------- ---------
Total Current Assets 480,515 421,572
--------- ---------
Property, Plant, and Equipment
Land 360 366
Buildings and Improvements 23,000 23,018
Machinery and Equipment 363,406 289,058
Construction in Progress 13,145 4,525
--------- ---------
Subtotal 399,911 316,967
Less: Accumulated Depreciation (121,301) (58,846)
--------- ---------
Net Property, Plant, and Equipment 278,610 258,121
--------- ---------
Investment in Unconsolidated Subsidiaries 71,258 64,646
--------- ---------
Deferred Charges and Other 37,223 24,548
--------- ---------
Total Assets $ 867,606 $ 768,887
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE> 35
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Current Liabilities
Accounts Payable
Trade $191,737 $153,115
Affiliates 9,890 13,776
Deferred Insurance Recovery 24,671 -
Current Portion of Long-Term Debt 4,800 -
Accrued Vacation Pay 10,484 10,737
Taxes Other than Income 4,506 6,131
Other Accrued Liabilities 36,129 25,394
-------- --------
Total Current Liabilities 282,217 209,153
-------- --------
Long-Term Debt 100,000 29,000
-------- --------
Other Postretirement Benefits 63,936 54,301
-------- --------
Other Liabilities 11,678 11,327
-------- --------
Excess of Net Assets Acquired Over Cost - 5,484
-------- --------
Commitments and Contingencies (Notes 10 and 11)
Stockholders' Equity
Common Stock
Class A, 80,000,000 shares authorized with 14,570,511 and 14,521,538 issued
and outstanding as of December 31, 1999
and 1998, respectively 146 145
Class B, 8,690,400 shares authorized with 7,562,400
issued and outstanding 76 76
Capital in Excess of Par Value 129,943 129,458
Retained Earnings 282,409 332,876
Accumulated Other Comprehensive Income (Loss) (2,799) (2,933)
-------- --------
Total Stockholders' Equity 409,775 459,622
-------- --------
Total Liabilities and Stockholders' Equity $867,606 $768,887
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 36
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Sales
Unaffiliated Customers $ 922,208 $1,050,144 $1,158,218
Affiliates 45,434 113,045 183,342
----------- ---------- ----------
Total Sales 967,642 1,163,189 1,341,560
----------- ---------- ----------
Costs and Expenses
Costs of Goods Sold 1,137,151 1,090,032 1,278,351
Depreciation and Amortization 63,267 19,993 15,563
Selling and Administrative Expenses 26,772 23,875 21,760
Amortization of Excess of Net Assets Acquired Over Cost (5,484) (5,796) (5,796)
----------- ---------- ----------
Total Costs and Expenses 1,221,706 1,128,104 1,309,878
----------- ---------- ----------
Operating Income (Loss) (254,064) 35,085 31,682
Interest Income 750 1,473 1,418
Interest Expense (2,843) (775) (630)
Insurance Recovery 177,414 - -
Other - Net (1,214) (2,722) (1,244)
----------- ---------- ----------
Income (Loss) Before Income Taxes
and Equity in Unconsolidated Subsidiaries (79,957) 33,061 31,226
Income Tax (Provision) Benefit 30,494 (8,705) (8,094)
----------- ---------- ----------
Income (Loss) Before Equity in Unconsolidated Subsidiaries (49,463) 24,356 23,132
Equity in Unconsolidated Subsidiaries 1,652 (964) (718)
----------- ---------- ----------
Net Income (Loss) $ (47,811) $ 23,392 $ 22,414
=========== ========== ==========
Net Income (Loss) Per Share - Basic and Diluted $ (2.16) $ 1.06 $ 1.02
=========== ========== ==========
Weighted-Average Shares Outstanding 22,121,701 22,025,430 21,938,743
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE> 37
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Class A and Class B Common Stock
Beginning Balance $ 221 $ 220 $ 219
Common Stock Issued for Benefit Plans 1 1 1
--------- --------- ---------
Ending Balance 222 221 220
--------- --------- ---------
Capital in Excess of Par Value
Beginning Balance 129,458 128,517 127,096
Common Stock Issued for Benefit Plans 410 932 1,405
Common Stock Issued for ODEP 55 9 16
Exercise of Stock Options 20 - -
--------- --------- ---------
Ending Balance 129,943 129,458 128,517
--------- --------- ---------
Retained Earnings
Beginning Balance 332,876 312,130 292,349
Net Income (Loss) (47,811) 23,392 22,414
Cash Dividends Declared (2,656) (2,646) (2,633)
--------- --------- ---------
Ending Balance 282,409 332,876 312,130
--------- --------- ---------
Accumulated Other Comprehensive Income (Loss)
Beginning Balance (2,933) (2,246) (2,399)
Additional Minimum Pension Liability Adjustment 134 (687) 153
--------- --------- ---------
Ending Balance (2,799) (2,933) (2,246)
--------- --------- ---------
Total Stockholders' Equity $ 409,775 $ 459,622 $ 438,621
========= ========= =========
Comprehensive Income (Loss)
Net Income (Loss) $ (47,811) $ 23,392 $ 22,414
Additional Minimum Pension Liability Adjustment 134 (687) 153
--------- --------- ---------
Comprehensive Income (Loss) $ (47,677) $ 22,705 $ 22,567
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE> 38
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (47,811) $ 23,392 $ 22,414
Adjustments to Reconcile Net Income (Loss) to Net Cash
(Used for) Provided by Operating Activities:
Deferred Taxes (31,434) 3,193 9,540
Depreciation and Amortization 63,267 19,993 15,563
Equity in Unconsolidated Subsidiaries (1,652) 964 718
Amortization of Excess of Net Assets Acquired Over Cost (5,484) (5,796) (5,796)
Common Stock Issued for Benefit Plans 466 942 1,422
Changes in Assets and Liabilities:
Accounts Receivable (48,048) (17,465) (3,878)
Inventories 4,723 (25,108) 21,164
Prepaid Expenses 3,696 (288) (47)
Accounts Payable and Accrued Liabilities 31,254 20,479 24,171
Deferred Insurance Recovery 24,671 - -
Other - Net 2,629 - 117
Proceeds from Property Tax Settlement - - 5,000
----------- ----------- ---------
Net Cash (Used for) Provided by Operating Activities (3,723) 20,306 90,388
----------- ----------- ---------
Cash Flows From Investing Activities
Capital Expenditures (64,700) (21,226) (82,359)
Purchase of Marketable Securities - - (6,310)
Sale of Marketable Securities - - 8,349
Investment in Unconsolidated Subsidiaries (5,298) (17,959) (37,538)
Other - Net - 273 (142)
----------- ----------- ---------
Net Cash Used for Investing Activities (69,998) (38,912) (118,000)
----------- ----------- ---------
Cash Flows From Financing Activities
Drawdowns on Revolving Line 453,200 271,700 121,800
Principal Payments on Revolving Line (377,400) (260,600) (103,900)
Cash Dividend Payments (2,656) (2,646) (2,632)
Exercise of Stock Options 20 - -
----------- ----------- ---------
Net Cash Provided by Financing Activities 73,164 8,454 15,268
----------- ----------- ---------
Net Decrease in Cash and Cash Equivalents (557) (10,152) (12,344)
Cash and Cash Equivalents - Beginning of Year 2,418 12,570 24,914
----------- ----------- ---------
Cash and Cash Equivalents - End of Year $ 1,861 $ 2,418 $ 12,570
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE> 39
ROUGE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
Rouge Steel Company ("Rouge Steel") is the principal operating subsidiary of
Rouge Industries, Inc. (together with its subsidiaries, "Rouge Industries" or
the "Company"). Rouge Steel is engaged in the production and sale of flat rolled
steel products primarily to domestic automotive manufacturers and their
suppliers. Other wholly-owned subsidiaries of Rouge Industries include QS Steel
Inc. ("QS Steel") and Eveleth Taconite Company ("Eveleth"). QS Steel holds
minority ownership interests in five Michigan- based joint ventures. Eveleth
holds a 45 percent interest in Eveleth Mines LLC, a Minnesota-based iron ore
mining and pellet producing operation. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Rouge Industries
and its subsidiaries. Intercompany transactions have been eliminated.
Investments in business entities in which the Company does not have control, but
has the ability to exercise significant influence over the operating and
financial policies, are accounted for under the equity method.
Segment Information
Rouge Industries has one operating segment that comprises its flat rolled steel
products. The Company's business is conducted entirely in the United States.
Significant customers are discussed elsewhere in this Note.
Internal Use Software
In 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 were $1,864,000 and $4,669,000 in 1999 and 1998, respectively.
These capitalized software costs will be amortized over the lesser of 60 months
or the useful life of the software.
Financial Instruments
The carrying amount of the Company's financial instruments, which include cash
equivalents, marketable securities, accounts receivable, accounts payable and
long-term debt, approximates their fair value at December 31, 1999 and 1998. The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk are cash equivalents, marketable securities and accounts receivable.
The Company attempts to limit its credit risk associated with cash equivalents
and marketable securities by utilizing outside investment managers to
39
<PAGE> 40
place the Company's investments with highly rated corporate and financial
institutions. With respect to accounts receivable, the Company limits its credit
risk by performing ongoing credit evaluations and, when deemed necessary,
requiring letters of credit, guarantees or collateral. The Company's customer
base is comprised principally of domestic automotive manufacturers and their
suppliers. Management does not believe significant risk exists in connection
with the Company's concentrations of credit at December 31, 1999.
Significant Customers
The Company's significant customers are Ford Motor Company ("Ford") and
DaimlerChrysler AG ("DaimlerChrysler"). Sales to Ford, which are primarily made
pursuant to a ten-year steel purchase agreement, totaled $381,546,000 in 1999,
$429,230,000 in 1998 and $434,898,000 in 1997. The steel purchase agreement
expires after model-year 2000.
Sales to DaimlerChrysler totaled $96,667,000 in 1999, $120,061,000 in 1998 and
$116,013,000 in 1997.
Sales to Worthington Industries, Inc. ("Worthington") totaled $157,307,000 in
1997. In 1998 and 1999 sales to Worthington were less than 10 percent of
total sales.
Inventories
Inventories are stated at the lower of cost or market with cost determined by
the last-in, first-out ("LIFO") method for raw materials, work-in-process and
finished goods and the first-in, first-out ("FIFO") method for nonproduction and
sundry. Costs in inventory include materials, direct labor, Double Eagle
electrogalvanizing and Spartan Steel hot dip galvanizing (see Note 4) and
applied manufacturing overhead.
Nonmonetary Transactions
The Company routinely exchanges iron ore inventory with other parties. Since the
exchanges involve similar productive assets and do not complete an earnings
process, the Company accounts for the exchanges on the cost basis of the
inventory relinquished without recognition of gain or loss.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Replacements and major
improvements are capitalized; maintenance and repairs are expensed as incurred.
Gains or losses on asset dispositions are included in the determination of net
income.
Depreciation and Amortization
Depreciation of the Company's property, plant, and equipment is computed using
the straight-line method. The average estimated useful lives are as follows:
Years
-----
Buildings 35
Land Improvements 20
Steel-Producing Machinery and Equipment 18
Power Equipment 28
Office Furniture 12
40
<PAGE> 41
The costs of relines to the blast furnaces and the refurbishment of turbo
generators are capitalized and amortized over their expected lives which are
eight to ten years and five years, respectively.
As a result of the Powerhouse explosion (see Note 11), during 1999 the Company
installed temporary facilities to provide steam and electrical distribution. The
cost of these assets was approximately $65,100,000, which is being amortized
over their expected useful lives of thirteen to sixteen months.
The excess of net assets acquired over cost, relating to the acquisition of the
Company from Ford in 1989 (the "Acquisition"), has been amortized on a
straight-line basis over a ten-year period.
Environmental Accounting
Environmental expenditures are capitalized if the costs mitigate or prevent
future environmental contamination or if the costs improve existing assets'
environmental safety or efficiency. All other environmental expenditures are
expensed. Liabilities for environmental expenditures are accrued when it is
probable that such obligations have been incurred and the amounts can be
reasonably estimated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates.
NOTE 2 - MARKETABLE SECURITIES
As of December 31, 1999 and 1998, marketable securities classified as cash
equivalents were $439,000 and $313,000, respectively. The Company's investments
in marketable securities are comprised entirely of money market funds.
NOTE 3 - INVENTORIES
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Production
Raw Materials $ 79,434 $ 83,422
Semifinished and Finished Steel Products 182,517 175,831
-------- --------
Total Production at FIFO 261,951 259,253
LIFO Reserves (9,214) (4,651)
-------- --------
Total Production at LIFO 252,737 254,602
Nonproduction and Sundry 17,071 21,209
-------- --------
Total Inventories $269,808 $275,811
======== ========
</TABLE>
NOTE 4 - INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
At December 31, 1999, the Company's investments in unconsolidated subsidiaries
consist of a 50 percent interest in Double Eagle Steel Coating Company ("Double
Eagle"), a 45 percent interest in Eveleth Mines LLC ("EVTAC"), a 20 percent
interest in Shiloh of Michigan, L.L.C. ("Shiloh of Michigan"), a 48 percent
interest in Spartan Steel Coating, L.L.C. ("Spartan Steel"), an 11.1 percent
interest in TWB Company,
41
<PAGE> 42
L.L.C. ("TWB"), a 40 percent interest in Bing Blanking, L.L.C. ("Bing Blanking")
and a 49 percent interest in Delaco Processing, L.L.C. ("Delaco Steel
Processing"). All of the Company's investments in unconsolidated subsidiaries
are accounted for under the equity method.
Double Eagle is an electrogalvanizing facility which is operated as a cost
center. Accordingly, Double Eagle records neither sales nor income. Rouge
Industries' proportionate share of Double Eagle's production costs of
$39,609,000, $40,432,000 and $39,459,000 for 1999, 1998 and 1997, respectively,
is included in the Company's costs and expenses and inventory. The Company is
committed to pay 50 percent of the fixed costs incurred and a pro rata share of
variable costs based on coatings applied to the Company's products. At December
31, 1999, the Company's share of the underlying net assets of Double Eagle
exceeded its investment by $33,234,000. This excess results from purchase
accounting adjustments made on the consolidated accounts of the Company at the
time of the acquisition of the Company from Ford and relates primarily to
property, plant, and equipment. This excess is being amortized as a reduction of
Rouge Industries' share of Double Eagle's costs over the remaining lives of the
property.
Eveleth became a wholly-owned subsidiary of the Company in 1996 and, in exchange
for a 45 percent ownership interest in EVTAC, Eveleth assigned substantially all
of its operating assets and liabilities to EVTAC. At December 31, 1999, the
Company's share of the underlying net assets of EVTAC exceeded its investment by
$8,234,000. This excess is being amortized over the estimated remaining useful
lives of the contributed assets.
Shiloh of Michigan produces engineered steel blanks, TWB produces laser welded
blanks, Spartan Steel is a cold rolled hot dip galvanizing facility, Bing
Blanking is a producer of first operation blanks and roll formed parts, and
Delaco Steel Processing is a steel processor and warehouser. Spartan Steel, Bing
Blanking and Delaco Steel Processing all began operation in 1998.
The table below sets forth summarized financial information for Rouge
Industries' unconsolidated subsidiaries (dollars in thousands):
<TABLE>
<CAPTION>
December 31
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Current Assets $103,415 $ 97,468
Noncurrent Assets 341,529 360,312
Current Liabilities 80,285 91,756
Noncurrent Liabilities 110,513 119,155
<CAPTION>
Year Ended December 31
-----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales $327,760 $258,779 $193,463
Gross Profit 34,108 18,422 2,960
Net Income (Loss) 15,546 (1,594) (6,358)
</TABLE>
42
<PAGE> 43
NOTE 5 - DEBT
The Company had borrowings of $104,800,000 outstanding as of December 31, 1999
and $29,000,000 outstanding as of December 31, 1998.
Rouge Steel has a $125,000,000, unsecured revolving loan commitment under a
credit agreement (the "Credit Agreement"). On June 30, 2000, $25,000,000 of the
commitments of the banks under the Credit Agreement will expire with the
remaining $100,000,000 expiring on December 16, 2002. Rouge Steel is the
borrower under the Credit Agreement and Rouge Industries is the guarantor.
Interest 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 0.50% to 0.80%,
depending on the Company's debt to capitalization ratio at the time of
borrowing. The interest rate option is chosen by Rouge Steel at the time of each
borrowing and is thereafter changeable under certain specified conditions. The
facility bears a fixed annual fee of $20,000 and a fee on the entire amount of
the facility which can vary from 0.125% to 0.2%, depending on the Company's debt
to capitalization ratio at the time. The Credit Agreement contains certain
financial covenants, with which the Company was in compliance on December 31,
1999. Additionally, during the second quarter of 1999, the Company obtained
uncommitted credit facilities from two banks for $25,000,000 each. Both of the
uncommitted facilities expire in the second quarter of 2000.
Cash paid for interest was $2,550,000 in 1999, $926,000 in 1998 and $462,000 in
1997.
43
<PAGE> 44
NOTE 6 - PENSION AND POSTRETIREMENT BENEFIT PLANS
The following table presents benefit obligation, asset value, funded status,
cash flow and weighted average assumptions for Rouge Steel's pension and
postretirement benefit plans (dollars in thousands):
<TABLE>
<CAPTION>
Pension Plans Postretirement Benefit Plans
-------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of Year $ 130,763 $ 109,087 $ 91,957 $ 67,879 $ 54,530 $ 47,189
Service Cost 7,993 8,116 8,047 4,490 3,649 3,287
Interest Cost 9,280 8,425 7,531 4,878 4,211 3,781
Participants' Contributions 337 337 305 -- -- --
Plan Amendments -- -- 1,557 -- -- --
Actuarial (Gain) Loss (4,034) 6,821 739 (8,320) 5,727 453
Total Benefit Payments (2,893) (2,023) (1,049) (333) (238) (180)
--------- --------- --------- --------- --------- ---------
Benefit Obligation at End of Year $ 141,446 $ 130,763 $ 109,087 $ 68,594 $ 67,879 $ 54,530
--------- --------- --------- --------- --------- ---------
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year $ 128,055 $ 121,360 $ 87,729 $ -- $ -- $ --
Actual Return on Plan Assets 20,554 6,550 23,111 -- -- --
Employer Contributions 187 2,124 11,264 333 238 180
Participants' Contributions 337 337 305 -- -- --
Total Benefit Payments (2,893) (2,023) (1,049) (333) (238) (180)
Other 13 (293) -- -- -- --
--------- --------- --------- --------- --------- ---------
Fair Value of Plan Assets at End of Year $ 146,253 $ 128,055 $ 121,360 $ -- $ -- $ --
--------- --------- --------- --------- --------- ---------
Funded Status $ 4,807 $ (2,708) $ 12,273 $ (68,594) (67,879) (54,530)
Unrecognized Actuarial (Gain) Loss (14,427) (967) (12,760) 4,380 13,273 7,743
Unrecognized Prior Service Cost 7,492 8,600 9,707 190 237 284
Adjustment to Book Value -- -- -- 88 68 49
Adjustment for Sept. 30th Measurement Date 81 -- (96) -- -- --
--------- --------- --------- --------- --------- ---------
Net Amount Recognized $ (2,047) $ 4,925 $ 9,124 $ (63,936) $ (54,301) $ (46,454)
--------- --------- --------- --------- --------- ---------
Amount Recognized in the Consolidated
Balance Sheets Consists of
Prepaid Benefit Cost $ 3,945 $ 6,837 $ 9,498 $ -- $ -- $ --
Accrued Benefit Liability (5,992) (1,912) (374) (63,936) (54,301) (46,454)
Additional Minimum Liability (5,286) (5,878) (3,462) -- -- --
Intangible Asset 980 1,366 1,216 -- -- --
Accumulated Other Comprehensive Income 4,306 4,512 2,246 -- -- --
--------- --------- --------- --------- --------- ---------
Net Amount Recognized $ (2,047) $ 4,925 $ 9,124 $ (63,936) (54,301) (46,454)
--------- --------- --------- --------- --------- ---------
Weighted-Average Assumptions
Discount Rate 7.50% 6.75% 7.25% 7.50% 6.75% 7.25%
Expected Return on Plan Assets 9.00 9.00 9.00 N/A N/A N/A
Rate of Compensation Increase - Salaried 3.70 3.70 3.70 3.70 3.70 3.70
Rate of Compensation Increase - Hourly N/A N/A N/A 3.00 3.00 3.00
</TABLE>
For measurement purposes, an assumed health care trend rate of 6.0% was used for
the postretirement benefit obligation in 1997, 1998 and 1999. A measurement date
of September 30 was used for the pension plans. A measurement date of December
31 was used for the postretirement benefit plans.
44
<PAGE> 45
The following schedule sets forth the components of net periodic benefit cost
(dollars in thousands):
<TABLE>
<CAPTION>
Pension Plans Postretirement Benefit Plans
----------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service Cost $ 7,993 $ 8,116 $ 8,077 $ 4,490 $ 3,649 $ 3,287
Interest Cost 9,280 8,425 7,565 4,878 4,211 3,781
Expected Return on Plan Assets (11,411) (10,833) (8,358) -- -- --
Amortization of Prior Service Cost 1,108 1,108 1,140 47 47 47
Recognized Actuarial (Gain) Loss 271 (397) 131 573 197 382
-------- -------- -------- -------- -------- --------
Net Periodic Benefit Cost $ 7,241 $ 6,419 $ 8,555 $ 9,988 $ 8,104 $ 7,497
======== ======== ======== ======== ======== ========
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
December 31
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Projected Benefit Obligation $20,002 $18,577 $15,486
Accumulated Benefit Obligation 19,759 18,317 15,271
Fair Value of Plan Assets 14,529 12,939 12,262
</TABLE>
Rouge Steel Company has two nonpension postretirement benefit plans. One plan is
noncontributory. The health care provision of the other plan has a contribution
requirement for eligible participants hired after November 1, 1988. The life
insurance provision of this plan is noncontributory.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for the year ended
and as of December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on Total of Service and Interest Cost Components $ 2,324 $ (1,756)
Effect on Postretirement Benefit Obligation 14,526 (11,166)
</TABLE>
NOTE 7 - INCOME TAXES
Rouge Industries' income tax provision, arising wholly from Federal taxation
since the Company neither has been nor is presently subject to state or foreign
income taxes, consists of the following components (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ (940) $ (3,275) $ 1,446
Deferred 31,434 (5,430) (9,540)
-------- -------- --------
Total (Provision) Benefit $ 30,494 $ (8,705) $ (8,094)
======== ======== ========
</TABLE>
45
<PAGE> 46
The Company's income tax provision is net of taxes related to the equity in the
income or loss of unconsolidated subsidiaries. The tax provision associated with
the income of unconsolidated subsidiaries was $783,000 in 1999, which is
comprised of a current provision of $847,000 and a deferred benefit of $64,000.
The income tax benefit associated with the loss of unconsolidated subsidiaries
was $655,000 in 1998, which was comprised of a current provision of $2,000 and a
deferred benefit of $657,000. The income tax benefit associated with the loss of
unconsolidated subsidiaries was $385,000 in 1997 which was comprised of a
current provision of $513,000 and a deferred benefit of $898,000.
The Accumulated Other Comprehensive Income (Loss) of $4,306,000 and $4,512,000
for 1999 and 1998, respectively, are shown net of the deferred tax impact of
$1,507,000 and $1,579,000.
The differences between the total provision and the provision computed using the
Federal statutory income tax rate were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pre-Tax Income (Loss) $(79,957) $ 33,061 $ 31,226
======== ========= ========
Computed (Provision) Benefit $ 27,985 $ (11,571) $(10,929)
Source of Difference:
Amortization of Negative Goodwill 1,919 2,029 2,029
Change in Valuation Allowance 700 1,106 774
Other (110) (269) 32
-------- --------- --------
Total (Provision) Benefit $ 30,494 $ (8,705) $ (8,094)
======== ========= ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31
---------------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Basis of Consolidated Subsidiary $ 7,254 $ 7,033
Postretirement and Other Benefits 30,604 24,661
Other 9,516 9,991
Operating Loss and Alternative
Minimum Tax Credit Carryforwards 76,758 30,065
---------- ----------
Gross Deferred Tax Assets 124,132 71,750
Valuation Allowance (10,015) (10,715)
---------- ----------
Gross Deferred Tax Assets
After Valuation Allowance 114,117 61,035
---------- ----------
LIABILITIES
Property, Plant, and Equipment (48,845) (36,637)
Inventories (11,696) (11,495)
Insurance Adjustment (9,245) -
Other (33) (33)
---------- ----------
Gross Deferred Tax Liabilities (69,819) (48,165)
---------- ----------
Total Net Deferred Tax Assets $ 44,298 $ 12,870
========== ==========
</TABLE>
46
<PAGE> 47
Unused regular tax loss carryforwards were approximately $137,917,000 at
December 31, 1999. Alternative minimum tax credit carryforwards amounted to
$28,487,000 at December 31, 1999 and December 31, 1998. The alternative minimum
tax credit may be carried forward indefinitely.
A valuation allowance is recorded for deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized. The
Company previously recorded a partial valuation allowance on certain deferred
tax assets. The reduction of the valuation allowance was primarily the result of
the utilization of basis differences in fixed assets. Current deferred tax
assets of $21,219,000 and $45,000 in 1999 and 1998, respectively, are recorded
in Other Current Assets. The remaining deferred tax assets are included in
Deferred Charges and Other.
The Company received a cash refund of $2,379,000 in 1999. Net cash paid for
income taxes was $6,557,000 in 1998. A net cash refund of $2,704,000 was
received in 1997.
NOTE 8 - COMMON STOCK
Class A shares have a par value of $0.01. Each Class A share has one vote.
Class B shares have a par value of $0.01. Each Class B share has 2.5 votes.
The Company has an outside director equity plan (the "ODEP"), a 1994 stock
incentive plan and a 1998 stock incentive plan (the 1994 stock incentive plan
and the 1998 stock incentive plan together the "SIP"). The ODEP and the SIP
provide for stock option grants to the Company's directors and employees,
respectively, at fair market value on the date of grant. Under the plans, the
Company is authorized to grant options to its directors and employees for up to
1,000,000 shares of common stock. Of this amount, options are outstanding for
505,725 shares at December 31, 1999. These stock options generally vest over a
period of three years and are exercisable for a period not exceeding ten years
from the date of grant. The stock options may be exercised subject to continued
employment and certain other conditions.
The Company applies Accounting Principles Board Opinion No. 25 in accounting for
its stock-based compensation plans. Accordingly, no compensation cost has been
recognized for the ODEP and the SIP. If compensation cost for the ODEP and the
SIP had been determined based upon the fair value at the grant dates for awards
under these plans consistent with the method set forth in SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) and
net income (loss) per share would have resulted in the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) (dollars in thousands) As Reported $ (47,811) $23,392 $22,414
Pro Forma (48,010) 22,880 21,523
Net Income (Loss) Per Share As Reported $ (2.16) $ 1.06 $ 1.02
Pro Forma (2.17) 1.04 0.98
</TABLE>
47
<PAGE> 48
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend Yield 1.37% 0.99% 0.57%
Risk-Free Interest Rate 4.74 5.77 6.35
Expected Volatility 41.16 36.40 33.26
Expected Life 7 years 7 years 7 years
</TABLE>
A summary of the status of the Company's stock-based compensation plans as of
December 31, 1999, 1998 and 1997 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ----------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 383,950 $21.09 297,250 $24.29 207,325 $26.04
Granted 187,700 8.79 109,300 12.16 105,800 20.92
Forfeited (63,625) 17.87 (22,600) 20.00 (15,875) 24.69
Exercised (2,300) 8.75 - N/A - N/A
------- ------- -------
Outstanding at December 31 505,725 $16.98 383,950 $21.09 297,250 $24.29
======= ====== ======= ====== ======= ======
Options Exercisable at Year-End 399,244 $18.98 309,425 $22.58 222,175 $25.11
Weighted-Average Fair Value of
Options Granted During the Year $ 3.86 $ 5.41 $ 9.57
</TABLE>
The following table presents summarized information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
- --------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$8.75 - 11.44 168,050 9 Years $ 8.80 84,025 $ 8.80
$12.13 to 15.13 91,325 8 12.22 68,869 12.23
$21.00 to 23.00 88,250 6.9 21.11 88,250 21.11
$23.01 to 24.00 84,100 6 23.72 84,100 23.72
$28.88 74,000 5 28.88 74,000 28.88
</TABLE>
NOTE 9 - EARNINGS PER SHARE
The calculation of diluted net income per share for the years ended December 31,
1999, 1998 and 1997 did not require an adjustment to net income for the effect
of dilutive securities. The weighted-average shares outstanding were adjusted
for the effect of 0, 0 and 37 shares of dilutive securities which were
outstanding as of December 31, 1999, 1998 and 1997, respectively.
The dilutive securities represent stock options which were granted to members of
management or the board of directors which had exercise prices lower than the
average market price of the Company's Class A Common Stock. Options to purchase
505,725 shares at $8.75 to $28.88 per share in 1999, 383,950 shares at $12.13 to
$28.88 per share in 1998 and 295,750 shares at $21.00 to $28.88 per share in
1997 were outstanding but were not included in the computation of diluted
earnings per share because the exercise
48
<PAGE> 49
prices of these options were greater than the average market price of the
Company's Class A Common Stock. These options will expire between 2005 and 2009.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Commitments to Ford
The Company purchases various services including environmental, heavy equipment
repair, construction and transportation from Ford. In addition, the Company
leases certain land, office space and production support facilities from Ford
under cancelable operating leases with terms ranging from 1 to 99 years. The
costs of these services were approximately $7,182,000 in 1999, $9,464,000 in
1998 and $18,469,000 in 1997. The Company has assumed some of the services which
had previously been provided by Ford resulting in the decline in payments to
Ford.
The Company also jointly owns a powerhouse facility (the "Powerhouse") with
Ford, under a renewable ten-year agreement, which expired on December 31, 1999
but was extended until March 31, 2000 and will be extended thereafter on a
rolling 30-day basis unless terminated by either party upon 30 days notice. On
February 1, 1999, an explosion and fire at 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. See Note 11 for a more detailed discussion of the Powerhouse explosion.
Prior to the explosion, the Powerhouse generated electricity, steam and other
utilities. The fixed assets of the Powerhouse are owned 60 percent by the
Company and 40 percent by Ford, with each party receiving a portion of the power
generated. The costs of operating the facility are allocated between the Company
and Ford based on the consumption of utilities. The Company's share of the costs
of this facility was approximately $7,118,000 in 1999, $76,185,000 in 1998 and
$78,499,000 in 1997. The cost in 1999 represents utility costs allocated to
Rouge Steel for the one month preceding the Powerhouse explosion. The Company
has signed an agreement for long-term energy services with CMS Energy
Corporation which has commenced to build and will operate a co-generation power
plant. It is expected that the new facility will begin generating electricity in
mid-2000.
In connection with its operation of the Powerhouse, Ford purchased a portion of
the gas produced by the Company's blast furnaces for use at the Powerhouse based
on a negotiated formula. Ford purchased $2,040,000, $27,046,000 and $26,497,000
worth of blast furnace gas in 1999, 1998 and 1997, respectively. Of these
amounts, between 60 and 70 percent was charged back to the Company for its
proportionate share of the cost of such gas. The temporary facilities that were
put into place after February 1, 1999 are not configured to use blast furnace
gas. Consequently, from February 1 through December 31, the blast furnace gas
was flared and not sold to the Powerhouse.
During 1999, 1998 and 1997, the Company purchased scrap from Ford at a cost of
$20,025,000, $31,774,000 and $40,496,000, respectively. These purchases were
made under a supply agreement that expires at the end of automotive model-year
2000.
Other Commitments
Pursuant to a purchase and sale agreement executed in connection with the
restructuring of EVTAC in 1996, Rouge Steel is required to purchase 45 percent
of the first 5.0 million natural gross tons of pellets produced each year by
EVTAC at world market prices. The Company also has the right of first refusal
with respect to 45 percent of any pellets produced by EVTAC in excess of 5.0
million natural gross tons. In June 1999, EVTAC temporarily scaled back
operations by 18 percent, reducing capacity to 4.4 million natural gross tons
of pellets to be purchased by the Company and the other owners pursuant to
the terms of
49
<PAGE> 50
existing purchase agreements. The Company and the other owners of EVTAC are
continuing discussions regarding EVTAC's operations and activities. These
discussions and any subsequent resulting actions may affect, among other things,
the cost and availability of iron ore pellets, the timing of EVTAC employee
benefit liability recognition and funding requirements and recognition of other
obligations relating to the mining operations.
The Company has a ten-year contract for the supply of oxygen and nitrogen which
expires in 2005. The contract contains annual minimum oxygen and nitrogen
purchases of $8,300,000 and $550,000, respectively. Oxygen and nitrogen
purchases aggregated approximately $18,569,000 in 1999, $21,001,000 in 1998 and
$15,124,000 in 1997.
The Company has noncancellable operating lease commitments for facilities and
equipment with annual lease payments of $9,305,000, which will end in 2006.
Expense for 1999 was $2,640,000.
Shiloh of Michigan, L.L.C. Loan Guaranty
Rouge Industries guarantees the lesser of $6,000,000 or 20 percent of a line of
credit for Shiloh of Michigan, an engineered steel blanking joint venture
between the Company and Shiloh Industries, Inc. As of December 31, 1999, Shiloh
of Michigan had borrowings of $30,270,000 outstanding under its line of credit.
Delaco Processing, L.L.C. Loan Guaranty
Rouge Industries and Delaco Steel Corporation have agreed to jointly and
severally guarantee a $7,300,000 line of credit for Delaco Steel Processing, the
Company's 49 percent owned steel slitting joint venture with Delaco Supreme Tool
& Gear Co. As of December 31, 1999, Delaco Steel Processing had borrowings of
$2,898,000 outstanding under its line of credit.
Bing Blanking, L.L.C. Loan Guaranty
The Company guarantees a $4,000,000 term loan and a $1,000,000 line of credit
loan for Bing Blanking. As of December 31, 1999, Bing Blanking had $3,582,000
outstanding under its term loan and did not have any borrowings outstanding
under its line of credit. In addition, as of December 31, 1999, Bing Blanking
owes the Company $3,000,000.
Environmental Matters
The Company is indemnified by Ford through December 15, 2009 for environmental
obligations relating to conditions arising prior to the acquisition of the
Company from Ford in 1989. It is the Company's practice to coordinate the
resolution of such obligations with Ford. Management believes that disputed or
unresolved obligations are immaterial in relation to the Company's consolidated
financial position or results of operations.
The Company's operations are subject to many federal, state and local laws,
regulations, permits and consent agreements relating to the protection of human
health and the environment. Although the Company believes that its facilities
are in material compliance with these provisions, from time to time, the Company
is subject to investigations by an environmental agency. In management's
opinion, none of such current investigations, individually or in the aggregate,
will have a materially adverse effect on the Company's consolidated financial
position or results of operations.
50
<PAGE> 51
Litigation
Residents of the City of Melvindale (a community in close proximity to Rouge
Steel) filed a class action lawsuit against the Company in 1998 claiming
trespass, nuisance and negligence as a result of alleged air pollution. In late
1999, discussion among Rouge Steel and the class action plaintiffs resulted in a
tentative settlement agreement. In early 2000, the Company agreed to a final
judgement and consented to pay $1,500,000 for distribution to the plaintiff
class members and their attorneys. The Company has accrued $1,500,000 for the
settlement and does not believe that the ultimate settlement will differ
materially from that amount.
Three liability lawsuits resulting from the Powerhouse explosion have been filed
against Rouge Steel. The Company has general liability insurance that provides
coverage for such lawsuits. Ford, which owns 40 percent of the Powerhouse assets
and was responsible for the day-to-day operation of the Powerhouse, has made
settlement offers to certain workers injured in the explosion and the families
of the deceased, including the three persons maintaining the above-referenced
lawsuits. The Company has been informed that the settlement offers have been
accepted by the three persons maintaining lawsuits against Rouge Steel and
dismissal documents have been received for two of the lawsuits. It is possible
that Ford will seek recovery from Rouge Steel or its insurers for liabilities
incurred to settle with the workers who accept Ford's settlement offers. It is
presently not possible to reasonably estimate the Company's monetary exposure
with respect to these matters.
From time to time, the Company is involved in routine litigation incidental to
its business. In management's opinion, none of such current proceedings,
individually or in the aggregate, will have a materially adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 11 - POWERHOUSE EXPLOSION AND INSURANCE CLAIM
On February 1, 1999, an explosion and fire at 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. The loss of power resulted in the temporary shutdown of Rouge Steel's
steel making facilities. The Powerhouse is owned 60 percent by Rouge Steel and
40 percent by Ford. Ford was responsible for the day-to-day management,
operation and maintenance of 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.
51
<PAGE> 52
3. Powerhouse property damage - The net book value of the Powerhouse
property destroyed, which was $1,622,000, was written off in 1999. Any
proceeds from the claims relating to Powerhouse property damage (other
than amounts relating to repairs discussed in 1. above) 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 December 31,
1999, the Company has recorded recoverable insurance proceeds of $202,085,000
net of reserves of $39,990,000. Of the total amount recorded, $177,414,000 has
been included in other income and $24,671,000 has been deferred and will be
recognized in other income over the period the related capital items are
amortized. At December 31, 1999, the Company has a receivable of $43,085,000,
which is net of reserves of $39,990,000 and advances from the insurance carriers
of $159,000,000. 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 claim process. The estimates will
change as additional information becomes available with respect to actual costs
and as the insurers perform their review of claim information submitted by the
Company. Based on the magnitude and complexity of the insurance claim, the
Company is presently 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.
The Company is evaluating ancillary costs relating to the explosion, including
cleanup and abatement activities. 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 1999, the Company
recorded a $3,000,000 reserve for its share of the estimated cost to encapsulate
the Powerhouse. If the 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 12 - SUBSEQUENT EVENTS
BOF Incident
On January 7, 2000, a mechanical system failure occurred at Rouge Steel's basic
oxygen furnace facility (the "BOF") which required approximately seven weeks to
repair. The BOF operated at approximately 85 percent of its normal production
capacity during the repair. While management is still evaluating the full
impact, the BOF incident is currently expected to result in a total loss in the
range of $8,000,000 to $12,000,000. All amounts in excess of the $2,500,000
deductible are expected to be covered under the Company's insurance program. The
estimate of the total loss will change as additional information becomes
available with respect to actual costs incurred and as the insurers perform
their review of claim information submitted by the Company. Considerable
uncertainty still exists with respect to 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.
The DECS
On March 1, 2000, pursuant to the terms of Worthington's 7 1/4% Exchangeable
Notes due March 1, 2000 (the "DECS"), Worthington delivered 5,999,600 shares of
the Company's Class A Common Stock (after converting its 422,000 shares of Class
B Common Stock into an equal number of shares of Class A Common Stock) to the
holders of the DECS. The Company did not receive any of the proceeds from the
sale of the DECS or delivery thereunder of the shares of Class A Common Stock.
52
<PAGE> 53
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Accounts Receivable Allowances (amounts in thousands):
<TABLE>
<CAPTION>
Charged
Balance (Credited) to Balance
Year Ended at Beginning Cost and at End
December 31 of Period Expenses Write-Offs of Period
------------ --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
1999 $17,937 $ (776) $(1,164) $15,997
1998 6,333 11,604 - 17,937
1997 7,294 (815) (146) 6,333
</TABLE>
53
<PAGE> 54
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
1999
<S> <C> <C> <C> <C>
Total Sales $233,912 $173,238 $261,153 $299,339
Gross Margin (69,975) (81,390) (42,056) (39,355)
Net Loss (11,582) (14,827) (10,950) (10,452)
Net Loss Per Share (0.52) (0.67) (0.49) (0.47)
1998
Total Sales $318,952 $306,001 $269,679 $268,557
Gross Margin 12,583 13,521 12,724 14,336
Net Income 4,071 6,150 5,543 7,628
Net Income Per Share 0.19 0.28 0.25 0.34
</TABLE>
54
<PAGE> 55
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
None.
55
<PAGE> 56
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
Information regarding the Company's Directors is incorporated by
reference to the information contained under the caption "Proposal No. 1 -
Election of Directors" in the Company's 2000 Proxy Statement (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than April 28, 2000. Information regarding the Company's Executive
Officers is set forth in Part I of this Form 10-K pursuant to Instruction G of
Form 10-K.
Item 11. Executive Compensation.
Incorporated by reference to the information contained under the caption
"Executive Compensation" in the Company's Proxy Statement, which will be filed
with the Securities and Exchange Commission not later than April 28, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the information contained under the caption
"Security Ownership" in the Company's Proxy Statement, which will be filed with
the Securities and Exchange Commission not later than April 28, 2000.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the information contained under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission not
later than April 28, 2000.
With the exception of the information specifically incorporated by
reference, the Company's Proxy Statement is not to be deemed filed as part of
this report for purposes of this Part III.
56
<PAGE> 57
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) Documents filed as part of this Report:
(1) A list of the financial statements filed as part of this
report is submitted as a separate section, the index to
which is located on page 32.
(2) A list of financial statement schedules required to be
filed by Item 8 is located on page 32.
(3) Exhibits:
The following exhibits are included in this report or incorporated herein
by reference:
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 Agreement and Plan of Merger dated July 20, 1997, by and
among the Registrant, Rouge Steel Company and Merger Sub
(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Registration Statement on Form 8-B (the
"Form 8-B")).
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3.1
to the Form 8-B).
3.2 Amended and Restated By-Laws of the Registrant (incorporated
herein by reference to Exhibit 3.2 to the Form 8-B).
4.1 Amended and Restated Stockholders Agreement dated as of
November 14, 1996 (the "Stockholders Agreement"), among the
Registrant, Carl L. Valdiserri and Worthington Industries,
Inc. ("Worthington") (incorporated herein by reference to
Exhibit 10.3 to the Registrant's 1996 Annual Report on Form
10-K (Commission File Number 1- 12852) (the "1996 Form
10-K")).
4.2 First Amendment to Amended and Restated Stockholders
Agreement dated July 20, 1997, by and among Rouge Steel
Company, the Registrant, Carl L. Valdiserri and Worthington
(incorporated herein by reference to Exhibit 4.1 to the Form
8-B).
10.1 Credit Agreement dated as of December 16, 1997 (the "Credit
Agreement"), among the Registrant, Rouge Steel Company, the
banks named therein and NBD Bank (incorporated herein by
reference to Exhibit 10.1 to the Registrant's 1997 Annual
Report on Form 10-K (Commission File Number I-12852) (the
"1997 Form 10-K")).
10.2+ First Amendment to Credit Agreement dated as of July 23,
1999 among the Registrant, Rouge Steel Company, the banks
named therein and Bank One, Michigan, formerly known as NBD
Bank.
57
<PAGE> 58
Exhibit
Number Description of Exhibit
------ ----------------------
10.3 Purchase and Sale Agreement dated as of December 15, 1989,
between Ford Motor Company ("Ford") and Marico Acquisition
Corp. ("Marico") (incorporated herein by reference to
Exhibit 10.10 to the Company's Registration Statement on
Form S-1 (Registration No. 33-74698) (the "S-1 Registration
Statement")).
10.4 Oxygen, Nitrogen and Argon Supply Agreement dated as of
November 16, 1993, between Praxair, Inc. and the Registrant
(incorporated herein by reference to Exhibit 10.4 to the
Registrant's 1994 Annual Report on Form 10-K (Commission
File Number 1-12852) (the "1994 Form 10-K")).
10.5 Steel Purchase Agreement dated as of December 15, 1989,
between the Registrant and Ford (incorporated herein by
reference to Exhibit 10.16 to the S-1 Registration
Statement).
10.6 Steel Products Purchase Agreement dated as of December 15,
1989, between the Registrant and Worthington (the
"Worthington Agreement") (incorporated herein by reference
to Exhibit 10.17 to the S-1 Registration Statement).
10.7 Letter dated February 20, 1996 confirming Exercise of Option
to Extend Term of Worthington Agreement (incorporated herein
by reference to Exhibit 10.8 to the Registrant's 1995 Annual
Report on Form 10-K (Commission File Number 1-12852) (the
"1995 Form 10-K")).
10.8 Technical and Transportation Services Agreement dated as of
December 15, 1989, between the Registrant and Ford
(incorporated herein by reference to Exhibit 10.18 to the
S-1 Registration Statement).
10.9 Scrap Sale Agreement dated as of December 15, 1989, between
the Registrant and Ford (incorporated herein by reference to
Exhibit 10.20 to the S-1 Registration Statement).
10.10 Powerhouse Joint Operating Agreement dated as of December
15, 1989, between the Registrant and Ford (incorporated
herein by reference to Exhibit 10.21 to the S-1 Registration
Statement).
10.11 Transitional Services Agreement dated as of December 15,
1989, between the Registrant and Ford (incorporated herein
by reference to Exhibit 10.22 to the S-1 Registration
Statement).
10.12 Natural Gas Operating Agreement dated as of December 15,
1989 between the Registrant and Ford (incorporated herein by
reference to Exhibit 10.25 to the S-1 Registration
Statement).
10.13 Joint Venture Agreement dated as of November 30, 1984 (the
"Joint Venture Agreement"), between United States Steel
Corporation ("USS") and the Registrant (incorporated herein
by reference to Exhibit 10.23 to the S-1 Registration
Statement).
58
<PAGE> 59
Exhibit
Number Description of Exhibit
------ ----------------------
10.14 Amendment to Joint Venture Agreement (incorporated herein by
reference to Exhibit 10.24 to the S-1 Registration
Statement).
10.15 Operating Agreement for Shiloh of Michigan, L.L.C. dated as
of January 2, 1996 by and among Shiloh of Michigan, L.L.C.,
the Registrant and Shiloh Industries, Inc. (incorporated
herein by reference to Exhibit 10.16 to the 1995 Form 10-K).
10.16 Operating Agreement of TWB Company, L.L.C. dated as of April
15, 1997 by and between Thyssen Inc. ("Thyssen") and
Worthington Steel of Michigan, Inc., ("Worthington Steel")
(incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1997 (the "First Quarter 1997
10-Q")).
10.17 First Amendment to Operating Agreement of TWB Company,
L.L.C. dated as of April 15, 1997 by and among Thyssen,
Worthington Steel, LTV Steel Company, Inc. Bethlehem Blank
Welding, Inc. and QS Steel Inc. (incorporated herein by
reference to Exhibit 10.2 to the First Quarter 1997 10-Q).
10.18 Operating Agreement of Delaco Processing, L.L.C. dated as of
September 3, 1997 by and between QS Steel Inc. and Delaco
Supreme Tool & Gear Co. (incorporated herein by reference to
Exhibit 10.18 to the 1997 Form 10-K).
10.19 First Amended and Restated Operating Agreement for Bing
Blanking, L.L.C. dated as of March 31, 1998 by and among
Bing Blanking, L.L.C., QS Steel Inc., and Bing Management
II, L.L.C. (incorporated herein by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 1998).
10.20 Operating Agreement of Spartan Steel Coating, L.L.C. dated
as of November 14, 1996 among QS Steel Inc. and Worthington
Steel (incorporated herein by reference to Exhibit 10.18 to
the 1996 Form 10-K).
10.21 Eveleth Mines Exit Agreement dated as of November 25, 1996
among Oglebay Norton Company, ONCO Eveleth Company, Eveleth
Taconite Company, Eveleth Expansion Company, AK Steel
Corporation, Virginia Horn Taconite Company, Rouge Steel
Company, Stelco, Inc., Ontario Eveleth Company and Eveleth
Mines LLC (incorporated herein by reference to Exhibit 10.19
to the 1996 Form 10-K).
10.22 Pellet Sale and Purchase Agreement dated as of January 1,
1997 by and between Eveleth Mines LLC and Rouge Steel
Company (incorporated herein by reference to Exhibit 10.20
to the 1996 Form 10-K).
59
<PAGE> 60
Exhibit
Number Description of Exhibit
------ ----------------------
10.23 Member Control Agreement of Eveleth Mines LLC dated as of
December 2, 1996 between Virginia Horn Taconite Company,
Rouge Steel Company and Ontario Eveleth Company
(incorporated herein by reference to Exhibit to 10.21 to the
1996 Form 10-K).
10.24 Letter Agreement dated as of October 25, 1996 between
Worthington Industries and Rouge Steel Company (incorporated
herein by reference to Exhibit 10.22 to the 1996 Form 10-K).
10.25 Pellet Sale and Purchase and Trade Agreement dated as of
January 1, 1991 by and between The Cleveland-Cliffs Iron
Company and the Registrant (incorporated herein by reference
to Exhibit 10.31 to the S-1 Registration Statement).
10.26 Agreement for the Provision of Tolled Coke dated December
22, 1992 between New Boston Coke Corporation and the
Registrant (incorporated herein by reference to Exhibit
10.35 to the S-1 Registration Statement).
10.27** Rouge Steel Company Savings Plan for Salaried Employees
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Registration
No. 33-88520) (the "Form S-8 Registration Statement")).
10.28** Amendment to Rouge Steel Company Savings Plan for Salaried
Employees (incorporated herein by reference to Exhibit 10.3
to the Form 8-B).
10.29 Rouge Steel Company Tax-Efficient Savings Plan for Hourly
Employees (incorporated herein by reference to Exhibit 4.2
to the Form S-8 Registration Statement).
10.30 Amendment to Rouge Steel Company Tax-Efficient Savings Plan
for Hourly Employees (incorporated herein by reference to
Exhibit 10.4 to the Form 8-B).
10.31 Rouge Steel Company Profit Sharing Plan for Salaried
Employees (incorporated herein by reference to Exhibit 10.38
to the S-1 Registration Statement).
10.32** Rouge Steel Company Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.39 to the
S-1 Registration Statement).
10.33** Rouge Steel Company Amended and Restated Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.1 to
the Form 8-B).
10.34**+ First Amendment to Rouge Steel Company Amended and Restated
Stock Incentive Plan.
10.35**+ Rouge Steel Company 1998 Stock Incentive Plan.
10.36**+ First Amendment to Rouge Steel Company 1998 Stock Incentive
Plan.
60
<PAGE> 61
Exhibit
Number Description of Exhibit
--------- ----------------------
10.37** Rouge Steel Company Retirement Plan for Salaried Employees
(incorporated herein by reference to Exhibit 10.41 to the
S-1 Registration Statement).
10.38**+ Amended and Restated Supplemental Executive Retirement Plan.
10.39**+ Amended and Restated Rouge Steel Company Benefit Restoration
Plan.
10.40** Rouge Steel Company Amended and Restated Outside Director
Equity Plan (incorporated herein by reference to Exhibit
10.2 to the Form 8-B).
21+ List of Subsidiaries.
23+ Consent of PricewaterhouseCoopers LLP.
---------------------
+ Filed herewith.
** Compensatory plans in which the Registrant's directors and executive
officers participate.
(b) The Company did not file a Current Report on Form 8-K during
the fourth quarter of 1999.
(c) The exhibits listed under Item 14(a)(3) are filed herewith or
incorporated herein by reference.
(d) The financial statement schedule listed under Item 14(a)(2) is
filed herewith.
61
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
16th day of March 2000.
ROUGE INDUSTRIES, INC.
By: /s/ Carl L. Valdiserri
-------------------------------
Name: Carl L. Valdiserri
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Carl L. Valdiserri Chief Executive Officer and Chairman of March 16, 2000
- -----------------------------
the Board
/s/ Louis D. Camino President, Chief Operating Officer March 16, 2000
- -----------------------------
and Director
/s/ Gary P. Latendresse Vice Chairman, Chief Financial Officer March 16, 2000
- -----------------------------
and Director
/s/ Dominick C. Fanello Director March 16, 2000
- -----------------------------
/s/ John E. Lobbia Director March 16, 2000
- -----------------------------
/s/ Peter J. Pestillo Director March 16, 2000
- -----------------------------
/s/ Clayton P. Shannon Director March 16, 2000
- -----------------------------
</TABLE>
62
<PAGE> 63
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.2 First Amendment to Credit Agreement dated as of
July 23, 1999 among the Registrant, Rouge Steel
Company, the banks named therein and Bank One,
Michigan, formerly known as NBD Bank.
10.34 First Amendment to Rouge Steel Company Amended
and Restated Stock Incentive Plan.
10.35 Rouge Steel Company 1998 Stock Incentive Plan.
10.36 First Amendment to Rouge Steel Company 1998 Stock
Incentive Plan.
10.38 Amended and Restated Supplemental Executive
Retirement Plan.
10.39 Amended and Restated Rouge Steel Company Benefit
Restoration Plan.
21 List of Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.2
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of July 23,
1999 (this "Amendment"), is among ROUGE INDUSTRIES, INC., a Delaware corporation
("Holdings"), ROUGE STEEL COMPANY, a Delaware corporation (the "Borrower"), the
financial institutions party hereto (the "Banks") and BANK ONE, MICHIGAN,
formerly known as NBD Bank, a Michigan banking corporation, as agent for the
Banks (in such capacity, the "Agent").
RECITALS
A. Holdings, the Borrower, the Agent and the Banks are
parties to a Credit Agreement dated as of December 16, 1997 (the "Credit
Agreement").
B. Holdings and the Borrower desire to amend the Credit
Agreement, and the Agent and the Banks are willing to do so strictly in
accordance with the terms hereof.
TERMS
In consideration of the premises and of the mutual agreements
herein contained, the parties agree as follows:
ARTICLE I.
AMENDMENTS
Upon fulfillment of the conditions set forth in Article III
hereof, the Credit Agreement shall be amended as follows:
1.1 The definition of "Applicable Margin" contained in
Section 1.1 is restated as follows:
"Applicable Margin" shall mean (i) with respect to Base
Rate Loans, 0% and (ii) with respect to LIBOR Loans, the Letter of
Credit fees payable under Section 2A.4(b) and the facility fees and
usage fees payable under Section 2.16, the applicable margin set forth
opposite the Debt to Capitalization Ratio set forth below:
<PAGE> 2
<TABLE>
<CAPTION>
Debt to Capitalization Applicable Margin for Applicable Margin
Ratio LIBOR Loans and for Facility Fees
----- Letter of Credit Fees -----------------
---------------------
<S> <C> <C>
Greater than 0.35 0.80% 0.20%
Equal to or less than 0.35 but
Greater than 0.25 0.60% 0.15%
Equal to or less than 0.25 0.50% 0.125%
</TABLE>
For purposes of determining the Applicable Margin, the Debt to
Capitalization Ratio will be determined at the end of each fiscal
quarter of the Borrower (a "Margin Determination Date"). Such
Applicable Margin determined on a Margin Determination Date will be
effective (a "Margin Adjustment Date") commencing on the fifth day
after Agent's receipt of the financial statements delivered pursuant
to Section 5.1(a) or (b) and the compliance certificate executed and
delivered by an Authorized Officer pursuant to Section 5.1(e)
certifying the Debt to Capitalization Ratio for the previous fiscal
quarter, and shall be effective with respect to all LIBOR Loans made,
continued or converted on or after such Margin Adjustment Date and
shall be effective with respect to all Letter of Credit fees payable
under Section 2A.4(b) and facility fees payable under Section 2.16 on
or after such Margin Adjustment Date. Notwithstanding the foregoing,
if a lower Applicable Margin would be effective on any Margin
Adjustment Date and a Default or Event of Default exists on such date
or Holdings and/or the Borrower has failed to deliver the financial
statements and compliance certificate described in Section 5.1(a) or
(b) or 5.1(e), respectively, with respect to a fiscal quarter or
fiscal year in accordance with the provisions thereof, then such
Applicable Margin shall not be so reduced until such Default or Event
of Default shall be cured or waived or Holdings and/or the Borrower
shall have delivered such financial statements and compliance
certificate in accordance with the provisions of Section 5.1(a) or
(b) and 5.1(e), as the case may be. Notwithstanding anything herein
to the contrary, for the period from the First Amendment Effective
Date to, but not including, the Margin Adjustment Date occurring
after the date the aggregate Revolving Loan Commitments of all Banks
is equal to or less than $100,000,000, the Applicable Margin for
LIBOR Loans and Letter of Credit Fees shall not be less than 0.60%
and for facility fees shall not be less than 0.15%.
1.2 The following new definitions are hereby added to
Section 1.1 in appropriate alphabetical order:
"EBITDA" shall mean, for any period, EBIT for such
period minus, to the extent deducted in determining such EBIT,
depreciation and amortization expense, all determined in
accordance with GAAP.
"First Amendment" shall mean the First Amendment to this
Agreement dated July 23, 1999.
"First Amendment Effective Date" shall mean the
effective date of the First Amendment.
2
<PAGE> 3
1.3 Section 2.16 is amended by adding the following to the
end thereof:
For each day on which the aggregate principal amount of
the outstanding Revolving Loans exceeds 50% of the aggregate
amount of the Revolving Loan Commitments of all of the Banks,
the Borrower further agrees to pay to the Agent for the
account of each Bank a usage fee at a per annum rate equal to
0.125% on the aggregate principal amount of the outstanding
Revolving Loans, payable quarterly in arrears on each Payment
Date and on the Maturity Date or such earlier date, if any, on
which the Revolving Loan Commitments shall terminate in
accordance with the terms hereof. Such fees shall be computed
on the basis of a 360-day year.
1.4 Section 6.1(c) is restated as follows:
(c) Interest Coverage Ratio. Holdings shall not, as of
the end of each fiscal quarter (other than the fiscal quarters
ending June 30, 1999, September 30, 1999 and December 31, 1999),
permit the Interest Coverage Ratio for such fiscal quarter to be
less than 3.0:1.0, in each case as calculated for the four
consecutive fiscal quarters then ending, provided that (i) for the
fiscal quarter ending March 31, 2000, the Interest Coverage Ratio
shall be calculated for the one fiscal quarter then ending, (ii)
for the fiscal quarter ending June 30, 2000, the Interest Coverage
Ratio shall be calculated for the two fiscal quarters then ending
and (iii) for the fiscal quarter ending September 30, 2000, the
Interest Coverage Ratio shall be calculated for the three fiscal
quarters then ending.
1.5 A new Section 6.1(d) is hereby added as follows:
(d) EBITDA to Interest Expense Ratio. Holdings shall
not, as of the end of each of the fiscal quarters ending September
30, 1999 or December 31, 1999, permit the ratio of EBITDA as of the
end of such fiscal quarter to Interest Expense as of the end of
such fiscal quarter to be less than 4.0 to 1.0, as calculated (i)
in the case of the fiscal quarter ending September 30, 1999, for
the one fiscal quarter then ending, and (ii) in the case of the
fiscal quarter ending December 31, 1999, for the two consecutive
quarters then ending.
1.6 Annex 1 attached hereto is hereby substituted for Annex
1 attached to the Credit Agreement.
ARTICLE II.
REPRESENTATIONS
Each of Holdings and the Borrower represents and warrants to
the Agent and the Banks that:
2.1 The execution, delivery and performance of this
Amendment and the New Revolving Notes are within its powers, have been duly
authorized and are not in contravention with any law, of the terms of its
Articles of Incorporation or By-Laws, or any undertaking to which it is a party
or by which it is bound.
3
<PAGE> 4
2.2 This Amendment and the New Revolving Notes are the
legal, valid and binding obligation of the Borrower enforceable against it in
accordance with the terms hereof.
2.3 After giving effect to the amendments herein contained,
the representations and warranties contained in Section 4 of the Credit
Agreement and the representations and warranties contained in the other Loan
Documents are true on and as of the date hereof with the same force and effect
as if made on and as of the date hereof.
2.4 After giving effect to the waiver contained in Section
4.1, no Event of Default or Default exists or has occurred and is continuing on
the date hereof.
ARTICLE III.
CONDITIONS OF EFFECTIVENESS
This Amendment shall not become effective until each of the
following has been satisfied.
3.1 This Amendment shall be signed by Holdings, the Borrower
and the Banks.
3.2 The Borrower shall deliver new Revolving Notes (the "New
Revolving Notes") in the amount of the revised Revolving Loan Commitments of
each Bank, and such New Revolving Notes are issued in exchange and substitution
for the existing Revolving Notes and shall evidence the same, plus additional
obligations as evidenced by the existing Revolving Notes.
3.3 Holdings and the Borrower shall have delivered a
certified board resolution approving the execution, delivery and performance of
this Amendment and the New Revolving Notes and shall have delivered such
opinions of counsel as may be required by the Agent.
3.4 The Borrower shall deliver such other agreements and
documents requested by the Agent.
ARTICLE IV.
MISCELLANEOUS.
4.1 Holdings and the Borrower have informed the Banks and
the Agent that an Event of Default has occurred due to a breach of Section
6.1(c) (the "Existing Default"), and Holdings and the Borrower have requested
that the Banks and the Agent waive the Existing Default subject to this
Amendment becoming effective pursuant to Article III hereof and the terms and
conditions set forth herein. Pursuant to such request, the Banks and the Agent
hereby waive the Existing Default for the period prior to the effectiveness of
this Amendment, but not at any time thereafter. The Borrower acknowledges and
agrees that the waiver contained herein is a limited waiver, limited to the
specific one time waiver described above. Such limited waiver (a) shall not
modify or waive any other term, covenant or agreement of the Loan Documents, and
(b) shall not be deemed to have prejudiced any present or future right or rights
which the Agent or the Banks now have or may have under the Loan documents.
4
<PAGE> 5
4.2 Holdings and the Borrower jointly and severally agree to
pay each Bank which signs this Amendment on or before July 23, 1999 an amendment
fee equal to 0.10% on the amount of such Bank's Revolving Loan Commitment after
giving effect to this Amendment.
4.3 References in the Credit Agreement or in any other Loan
to the Credit Agreement shall be deemed to be references to the Credit
Agreement as amended hereby and as further amended from time to time.
4.4 The Borrower agrees to pay and to save the Agent
harmless for the payment of all costs and expenses arising in connection with
this Amendment, including the reasonable fees of counsel to the Agent in
connection with preparing this Amendment and the related documents.
4.5 Except as expressly amended hereby, the Borrower agrees
that the Credit Agreement and all other Loan Documents are ratified and
confirmed and shall remain in full force and effect and that it has no set off,
counterclaim, defense or other claim or dispute with respect to any of the
foregoing. Terms used but not defined herein shall have the respective meanings
ascribed thereto in the Credit Agreement.
4.6 This Amendment may be signed upon any number of
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
IN WITNESS WHEREOF, the parties signing this Amendment have
caused this Amendment to be executed and delivered as of the day and year first
above written.
ROUGE INDUSTRIES, INC.
By: /s/ Gary P. Latendresse
----------------------------------------------
Title: Vice Chairman and Chief Financial Officer
------------------------------------------
ROUGE STEEL COMPANY
By: /s/ Gary P. Latendresse
----------------------------------------------
Title: Vice Chairman and Chief Financial Officer
------------------------------------------
BANK ONE, MICHIGAN, as Agent,
as Issuing Bank, and individually as a Bank
By: /s/ William H. Canney
----------------------------------------------
Title: Vice President
------------------------------------------
COMERICA BANK
By: /s/ Steven McCormack
----------------------------------------------
Title: Account Officer
------------------------------------------
NATIONAL CITY BANK
By: /s/ John R. DiFrancisco
----------------------------------------------
Title: Vice President
------------------------------------------
5
<PAGE> 6
ANNEX 1
REVOLVING LOAN COMMITMENTS
REVOLVING LOAN COMMITMENTS FOR THE PERIOD FROM AND INCLUDING THE FIRST AMENDMENT
EFFECTIVE DATE TO BUT EXCLUDING JUNE 30, 2000:
<TABLE>
<CAPTION>
Name of Bank Amount of Revolving Loan Commitment
- ------------ -----------------------------------
<S> <C>
NBD Bank $50,000,000
Comerica Bank $37,500,000
National City Bank $37,500,000
</TABLE>
REVOLVING LOAN COMMITMENTS FOR THE PERIOD FROM AND INCLUDING JUNE 30, 2000 TO
BUT EXCLUDING THE MATURITY DATE:
<TABLE>
<CAPTION>
Name of Bank Amount of Revolving Loan Commitment
- ------------ -----------------------------------
<S> <C>
NBD Bank $40,000,000
Comerica Bank $30,000,000
National City Bank $30,000,000
</TABLE>
6
<PAGE> 1
EXHIBIT 10.34
FIRST AMENDMENT TO THE
ROUGE STEEL COMPANY
STOCK INCENTIVE PLAN
(As last Amended and Restated Effective July 30, 1997)
WHEREAS, Rouge Industries, Inc., a Delaware corporation (the
"Company"), sponsors the Rouge Steel Company Stock Incentive Plan (as last
amended and restated effective July 30, 1997) (the "Plan"); and
WHEREAS, the Company, by action of its Compensation Committee, desires
to amend the Plan.
NOW, THEREFORE, the Company hereby amends the Plan, effective December
2, 1999, as follows:
1. A new subsection g. shall be added to Section 6.A.3, effective
December 2, 1999, to read in its entirety as follows:
"g. Notwithstanding the terms of any Option Agreement, but
subject to the other provisions of this Section 6, in the event of the
occurrence of a Change in Control, as defined herein, prior to an
Optionee's retirement, disability, termination of employment or death,
all outstanding Options shall become fully vested and exercisable.
For purposes of this Plan, "Change in Control" means,
subject to the last paragraph of this subsection, the occurrence of any
of the following events:
(1) The Company or Rouge Steel Company is merged,
consolidated or reorganized into or with another corporation or
other legal person, and as a result of such merger,
consolidation or reorganization less than 55% of the combined
voting power of the then-outstanding Voting Stock of such
corporation or person immediately after such transaction are
held in the aggregate by the Company or Rouge Steel Company or
by the holders of Voting Stock of the Company immediately prior
to such transaction;
(2) The Company or Rouge Steel Company sells or transfers
all or substantially all of its assets to another corporation or
other legal person, and as a result of such sale or transfer
less than 55% of the combined voting power of the
-1-
<PAGE> 2
then-outstanding Voting Stock of such corporation or other legal
person immediately after such sale or transfer is held in the
aggregate by the Company or Rouge Steel Company or by the
holders of Voting Stock of the Company immediately prior to such
sale or transfer;
(3) The Company files a report or proxy statement with
the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 disclosing in response to Form
8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of the Company or
Rouge Steel Company will occur in the future pursuant to a
then-existing contract or transaction which when consummated
would be a Change in Control determined without regard to this
subsection (3);
(4) If, during any period of two (2) consecutive years,
individuals who at the beginning of any such period constitute
the directors of the Company cease for any reason to constitute
at least a majority thereof; provided, however, that for
purposes of this subsection (4), each director who is first
elected, or first nominated for election by the Company's
stockholders, by a vote of at least two-thirds of the directors
of the Company (or a committee thereof) then still in office who
were directors of the Company at the beginning of any such
period will be deemed to have been a director of the Company at
the beginning of such period; or
(5) Unless otherwise determined by a majority vote of the
Board of Directors of the Company in the case of a corporate
structure reorganization, the shareholders of the Company
approve, pursuant to applicable state law requirements, a
complete liquidation or dissolution of the Company or Rouge
Steel Company.
Notwithstanding the foregoing provisions of subparagraph
(3) above, unless otherwise determined in a specific case by a majority
vote of the Board of Directors of the Company, a "Change in Control"
shall not be deemed to have occurred for purposes of subparagraph (3)
above solely because the Company, a subsidiary, or any
Company-sponsored employee stock ownership plan or any other employee
benefit plan of the Company or any subsidiary either files or becomes
obligated to file a report or a proxy statement under or in response to
Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any
successor schedule, form or report or item therein) under the
Securities Exchange Act of 1934 disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of 20% or otherwise, or
because the Company reports that a Change in Control of the Company has
occurred or will occur in the future by reason of such beneficial
ownership.
For purposes of this Article, "Voting Stock" means
securities entitled to vote generally in the election of directors.
-2-
<PAGE> 3
Notwithstanding anything to the contrary herein, a
"Change in Control" shall not be deemed to have occurred solely as a
result of a transfer of stock of the Company by Worthington Industries,
Inc., or any of its affiliates or shareholders, to any lender pursuant
to the amortization of one or more certain debt-in-exchange-for-capital
loans between such parties which are referred to as "DECS" and which
are evidenced by exchangeable notes due March 1, 2000. However, this
paragraph shall not prohibit the occurrence of a "Change In Control"
event if subsequent transactions would otherwise result in the
occurrence of a "Change In Control" event pursuant to this subsection."
2. The phrase "Compensation Committee" in Section 12 is deleted and
replaced with the phrase "Committee."
3. Except as amended by this First Amendment, the terms of the Plan
shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has adopted this First Amendment as of
the 22nd day of December, 1999.
ATTEST: ROUGE INDUSTRIES, INC.
/s/ Martin Szymanski By: /s/ William E. Hornberger
- ------------------------------ ---------------------------------
Secretary William E. Hornberger
Its: Senior Vice President
---------------------------------
-3-
<PAGE> 1
EXHIBIT 10.35
ROUGE STEEL COMPANY
1998 STOCK INCENTIVE PLAN
- --------------------------------------------------------------------
SECTION 1. PURPOSE.
The purpose of this Stock Incentive Plan is to align the interests of
certain officers and employees of Rouge Steel Company with those of shareholders
of the Company by rewarding long-term growth and profitability of the Company.
Ownership of stock assists in the attraction and retention of qualified
employees and provides them with additional incentive to devote their best
efforts to pursue and sustain the Company's financial success through the
achievement of corporate goals. Accordingly, certain officers and employees may
be granted Stock Options, Stock Appreciation Rights, Restricted Stock and
Performance Share Awards.
SECTION 2. DEFINITIONS.
A. "Agreement" shall mean a written agreement, in a form approved by the
Committee, which sets forth the terms and conditions of an Award. Agreements
shall be subject to the express terms and conditions set forth herein, and to
such other terms and conditions not inconsistent with the Plan as the Committee
shall deem appropriate.
B. "Award" shall mean an Option (which may be designed as a Nonqualified
Stock Option or an Incentive Stock Option), a Stock Appreciation Right (which
may be designated as a Freestanding SAR or Tandem SAR), a Restricted Stock Award
or a Performance Share Award, in each case granted under this Plan. Each Award
shall be evidenced by an Agreement.
C. "Beneficiary" shall mean (i) any transferee of an Employee's right,
interests, Options or SARs, subject to Section 13B of the Plan or (ii) the
person, persons, trust or trusts designated by an Employee, or if no designation
has been made, the person, persons, trust or trusts entitled by will, any trust
agreement or the laws of descent and distribution, to receive the benefits
specified under this Plan in the event of an Employee's death, and, if
necessary, for purposes of exercise of any Option or SAR, the term shall include
the Employee's executor, administrator or personal representative.
D. "Board" shall mean the Board of Directors of the Company.
E. "Code" shall mean the Internal Revenue Code of 1986, as amended.
F. "Committee" shall mean the Compensation Committee of the Board. All
Directors serving on the Committee at any given time shall be (i) "Non-Employee
Directors" as that term is used in Rule 16b-3 of the Securities and Exchange
Commission, and (ii) "outside directors" as that term is used in Section 162(m)
of the Code (except to the extent not necessary for Section 162(m) Relief or
Section 162(m) Relief is not sought). The number of Directors serving on the
Committee at any given time shall be no less than the number then required by
Rule 16b-3 and by Section 162(m) (except to such extent not necessary for
Section 162(m) Relief or Section 162(m) Relief is not sought).
G. "Common Stock" shall mean shares of $0.01 par value Class A Common Stock
of the Company, subject to adjustment pursuant to Section 11.
H. "Company" shall mean Rouge Industries, Inc., a Delaware corporation.
I. "Disabled" or "Disability" shall mean eligible to receive a
benefit under the Long-Term Disability Plan of Rouge Steel Company.
J. "Employee" shall mean an Employee of Rouge Steel Company, whether or not
an officer thereof, and shall include any such Employee who is also a director
of Rouge Steel Company.
K. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
L. "Exercise Price" shall mean, with respect to each share of Common Stock
subject to an option, the price fixed by the Committee at which such share may
be purchased from the Company pursuant to the exercise of such Option, which
price may not be less than 100% of the Fair Market Value of such share on the
date the Option is granted.
-1-
<PAGE> 2
M. "Fair Market Value" shall mean the closing price of the Common Stock on
the New York Stock Exchange as reported on the Composite Tape, or if it is not
listed on the New York Stock Exchange, the closing price on the exchange on
which the Common Stock is then listed, or if not listed on any exchange, the
closing price reported on the NASDAQ National Market System over-the-counter
market; if, however, there is no trading of the Common Stock on the date in
question, then the closing price of the Common Stock, as so reported, on the
last preceding date on which there was trading shall instead be used to
determine Fair Market Value. If Fair Market Value for any date in question
cannot be determined as hereinabove provided, Fair Market Value shall be
determined by the Committee by whatever method or means the members, in the good
faith exercise of their discretion, at that time shall deem appropriate.
N. "Freestanding SAR" shall mean a right, granted pursuant to this Plan
without reference or relationship to any Option, of a holder to receive cash,
shares of Common Stock, or a combination thereof, as the case may be, having an
aggregate value equal to the excess of the Fair Market Value of one share of
Common Stock on the date of exercise of such SAR over the Fair Market Value of
one such share on the date of grant of such SAR.
O. "Incentive Stock Option" or "ISO" shall mean an Option that meets the
requirements of Section 422 of the Code, or any successor provision, and that is
intended by the Committee to constitute an ISO. Any ISO granted hereunder must
be granted within ten years from the date the Plan becomes effective and the
aggregate Fair Market Value (determined at the time of grant of any ISO) of the
Common Stock for which ISOs are granted under the Plan which are exercisable by
an Employee for the first time during any calendar year may not exceed $100,000.
If for any reason an Option (or any portion thereof) intended by the Committee
to be an ISO nevertheless does not so qualify as an ISO under the Code, either
at the time of grant or subsequently, such failure to qualify shall not
invalidate the Option (or any portion thereof) and instead the nonqualified
portion (or, if necessary, the entire Option) shall be deemed to have been
granted as a Nonqualified Stock Option irrespective of the manner in which it is
designated in the Option Agreement.
P. "Legal Representative" shall mean the guardian or legal representative of
the Employee who, upon the Disability or incapacity of an Employee, shall have
acquired on behalf of the Employee, by legal proceeding or otherwise, the right
to exercise the Employee's rights and receive his or her benefits under the
Plan.
Q. "Nonqualified Stock Option" or "NQSO" shall mean an Option that is not an
ISO.
R. "Option" shall mean the right, granted pursuant to this Plan, of a holder
to purchase shares of Common Stock at a price and upon terms to be specified by
the Committee. The term shall include a Nonqualified Stock Option or an
Incentive Stock Option.
S. "Performance Measures" shall mean, with respect to each Performance Share
Award or any Restricted Stock Award, the criteria and objectives, determined by
the Committee, which must be met during the applicable Performance Period or
Restriction Period, as the case may be: (i) for any Performance Share Award, the
conditions established upon the holder's receipt of the Award; or (ii) for any
Restricted Stock Award, the lapse of restrictions with respect to the Award.
Such criteria and objectives may include, but shall not be limited to, earnings
per share, total return on Common Stock, and Company return on equity compared
to a peer group's return on equity. To the extent Section 162(m) Relief is
sought, the Committee shall take into account the provisions of Section 162(m)
of the Code with respect to the timing of the establishment of the Performance
Measures. The Performance Measures pertinent to any Performance Share Award or
Restricted Stock Award shall be established at the time of such Award and set
forth in the applicable Agreement, but may be revised by the Committee
thereafter if and whenever its members determine that, in light of events
occurring or circumstances arising after the date of such Award, such revision
is necessary or appropriate to afford the recipient benefits substantially
similar to those originally intended with respect to such Award; provided that,
to the extent Section 162(m) Relief is sought, the Committee shall take in to
account the requirements of Section 162(m) of the Code in making any such
revision. Anything herein to the contrary notwithstanding, to the extent Section
162(m) Relief is sought, (i) the Committee shall provide that no compensation
shall be payable under the Plan in connection with a Performance Measure (or the
satisfaction or attainment thereof) unless the applicable Performance Measure
has been disclosed to and approved by the shareholders to the extent required to
qualify for Section 162(m) Relief; and (ii) no such compensation shall be
payable in the absence of such disclosure and approval.
T. "Performance Period" shall mean the period designated by the Committee
during which the Performance Measures applicable to a Performance Share Award
shall be measured. The Performance Period shall be established at the time of
such Performance Share Award, and shall not be less than three (3) nor more than
five (5) years in duration. The duration of Performance Periods may vary.
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<PAGE> 3
U. "Performance Share Award" shall mean an award of the right, contingent
upon attainment of Performance Measures within a Performance Period, to receive
a specified number of Performance Shares or, in lieu of all or any portion of
such Performance Shares, their Fair Market Value in cash, as more specifically
provided in Section 9.
V. "Performance Shares" shall mean those shares of Common Stock issuable
pursuant to a Performance Share Award.
W. "Plan" shall mean the Rouge Steel Company Stock Incentive Plan.
X. "Restriction Period" shall mean the period designated by the Committee
during which Restricted Stock may not be sold, exchanged, assigned, transferred,
pledged, hypothecated or otherwise encumbered or disposed of except as otherwise
provided in the Plan, which period shall not be less than three (3) years nor
more than five (5) years from the date of grant.
Y. "Restricted Stock" shall mean any shares of Common Stock issued pursuant
to the Plan subject to the restriction that they may not be sold, exchanged,
assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed
of except as otherwise provided in the Plan, prior to termination of a
Restriction Period. Restricted Stock shall constitute issued and outstanding
shares of Common Stock for all corporate purposes.
Z. "Restricted Stock Award" shall mean an award of Restricted Stock pursuant
to the Plan.
AA. "Retirement" shall mean retirement of an Employee from the employ
of Rouge Steel Company as described in the Rouge Steel Company Salaried Employee
Retirement Plan.
BB. "Rule 16b-3" means Rule 16b-3 of the Securities and Exchange
Commission (or any successor regulation) as in effect with respect to the
Company at a given time.
CC. "Section 162(m) Relief" shall mean such exception as may be available
pursuant to Section 162(m) of the Code from the limitation on tax deductibility
provided for thereunder.
DD. "Stock Appreciation Right" or "SAR" shall mean any Freestanding SAR or
Tandem SAR.
EE. "Tandem SAR" shall mean a right, granted under this Plan, pursuant to
which a holder may elect to surrender an Option, or any portion thereof, which
is then exercisable, and receive in exchange therefor shares of Common Stock,
cash, or a combination thereof, as the case may be with an aggregate value equal
to the excess of the Fair Market Value of one share of Common Stock at the time
of exercise over the per share Exercise Price specified in such Option,
multiplied by the number of shares of Common Stock covered by such Option, or
portion thereof, which is so surrendered.
FF. "Tax Withholding Date" shall mean the date the withholding tax
obligation first arises with respect to an Award.
SECTION 3. STOCK SUBJECT TO THE PLAN.
Shares of Common Stock issuable as or pursuant to Awards granted under the
Plan must be authorized and issued shares of Common Stock. Subject to adjustment
as provided in Section 11, at any given time, the maximum number of shares of
Common Stock which may be issued as Restricted Stock and made subject to future
issuance in settlement of Performance Awards or pursuant to the exercise of
Options or SARs hereunder shall be 500,000 shares, except that the following
shall also be available hereunder: (i) shares as to which Options granted during
the Granting Period have since expired, terminated, or been canceled for any
reason other than exercise of such Options (or of related Tandem SARs); (ii) the
excess (if any) of the number of shares subject to Tandem SARs both granted and
exercised during the Granting Period over the number of shares issued or to be
issued (or withheld or to be withheld for purposes of tax withholding) in
connection with the exercise of such SARs; (iii) the excess (if any) of the
number of Freestanding SARs both granted and exercises during the Granting
Period over the number of shares issued or to be issued (or withheld or to be
withheld for tax withholding purposes) in connection with the exercise of such
SARs; (iv) the number of shares subject to Performance Share Awards both granted
and forfeited during the Granting Period; (v) with respect to Performance Share
Awards granted during the Granting Period which have been determined to have
been earned, the excess (if any) of the number of shares so determined to have
been earned over the number of shares issued or to be issued (or withheld or to
be withheld for tax withholding purposes) in settlement of such Performance
Share Awards; and (vi) to the extent permitted by Rule 16b-3, shares of
Restricted Stock that are forfeited.
In addition to the foregoing, in no event may the total number of shares
covered by outstanding ISOs plus the number of shares issued in settlement of
exercised ISOs, whenever granted, exceed 500,000 shares, and in no event may
Freestanding SARs exercisable only for cash be granted at any time at which this
Section would not permit the grant of Freestanding SARs which could be settled
in shares. In no event may any Employee receive Options, SARs, Restricted
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Stock Awards, Performance Share Awards or any combination of each for more than
50,000 shares of Common Stock over the life of the Plan.
SECTION 4. ADMINISTRATION.
The Plan shall be administered by the Committee. In addition to any implied
powers and duties that may be needed to carry out the provisions of the Plan,
the Committee shall have all the powers vested in it by the terms of the Plan,
including exclusive authority to grant Awards under the Plan, to select the
employees to receive such Awards, to determine the type, size and terms of the
Awards to be made to each Employee selected (which Awards need not be uniform),
to determine the time when Awards will be granted (to the extent Section 162(m)
Relief is sought, taking into account the provisions of Section 162(m) of the
Code), and to prescribe the form of the Agreements embodying Awards made under
the Plan. The Committee shall be authorized to interpret the Plan and the Awards
granted under the Plan, to establish, amend and rescind any rules and
regulations relating to the Plan, to make any other determinations which it
believes necessary or advisable for the administration of the Plan, and to
correct any defect or supply any omission or reconcile any inconsistency in the
Plan or in any Award in the manner and to the extent the Committee deems
desirable to carry it into effect.
All Committee determinations shall, unless otherwise determined by the
Board, be final, conclusive and binding on the Company, any Employee,
Beneficiary, Legal Representative, and any other interested parties. The
Committee may authorize any one or more of their number, or any officer of the
Company, to execute and deliver documents on behalf of the Committee.
SECTION 5. ELIGIBILITY.
All Employees are eligible for selection by the Committee to receive an
Award, except Employees covered by a Collective Bargaining Agreement with the
Company which does not provide for coverage under this Plan.
SECTION 6. STOCK OPTIONS.
A. Terms and Conditions.
1. Type of Option. Each Option Agreement shall specify whether the
pertinent Option is intended as a Nonqualified Stock Option or an Incentive
Stock Option.
2. Number of Shares Covered. Each Option Agreement shall specify the
number of shares of Common Stock subject to the pertinent Option.
3. Exercise Period.
a. In General. Each Option Agreement shall specify the period (or
periods) during which the pertinent Option (or portions thereof) may be
exercised, and shall provide that the Option (or such portion) shall expire
at the end of such period (or periods). Except as otherwise provided herein,
any Option must be exercised during the period of the Employee's employment
with Rouge Steel Company. No Option may be exercised later than ten (10)
years from the date it is granted.
b. Retirement. In the event of the Retirement of the Optionee, his/her
Option shall be exercisable for a period of three (3) years after the date
of Retirement (or, in the case of any ISO held by an Optionee who is not
Disabled, three (3) months after such date), or during the remainder of the
original term of the Option, whichever is shorter.
c. Disability. In the event of the cessation of the Employee's
employment by reason of Disability, the Option shall be exercisable for a
period of three (3) years after the date of cessation of such employment
(or, in the case of any ISO held by an Optionee who is Disabled, one (1)
year after such date), or during the remainder of the original term of the
Option, whichever period is shorter.
d. Termination of Employment. In the event of the cessation of the
Optionee's employment for any reason other than Retirement, Disability or
death, the Option shall expire on the date of termination of employment from
Rouge Steel Company, if not earlier expired in accordance with its terms.
e. Death. In the event of the Optionee's death (whether during his or
her employment with Rouge Steel Company or during any applicable
post-termination exercise period), the Option shall be exercisable by the
Beneficiary(ies) of the decedent for a period of one (1) year after the date
of the Employee's death (or, in the case of ISOs, for a period of three (3)
months after the Employee's death), or, if the decedent's death occurs
subsequent to his or her Retirement, Disability
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<PAGE> 5
or termination of employment for any other reason, during the period the
decedent would have been permitted to exercise the Option (had he or she
survived), if that period is shorter. Notwithstanding the foregoing,
however, in no event may any Option be exercised after its original term.
f. Extension or Reduction of Exercise Period. In the circumstances set
forth in subsections "b" through "e" of this Section, the Committee may
extend or reduce the length of the exercise period, but may not extend any
such period beyond the original term of the Option (or, insofar as this
paragraphs related to Freestanding SARs pursuant to Section 7, the SAR).
Further, with respect to ISOs, as a condition of any such extension, the
holder shall be required to deliver to the Company a release which provides
that such holder holds the Company and Rouge Steel Company harmless with
respect to any adverse tax consequences the holder may suffer by reason of
any such extension.
4. Exercise Price. The Exercise Price shall be determined by the
Committee at the time any Option is granted and shall be set forth in the
Option Agreement.
5. Manner of Exercise. The specified number of shares with respect to
which an Option is exercised will, subject to applicable tax withholding, be
issued following receipt by the Company of (i) written notice of such
exercise from the optionee (in such form as the Committee shall have
specified in the Option Agreement or otherwise) of an Option delivered to
the Corporate Secretary or Vice President, Employee Relations and Public
Affairs of the Company, and (ii) payment to the Company, as provided herein,
of the Exercise Price.
6. Payment for Shares. The Exercise Price for the number of shares of
Common Stock with respect to which an Option is exercised shall be paid in
full when the Option is exercised. Unless otherwise provided in the Option
Agreement, the Exercise Price may be paid, in whole or in part, in (i) cash,
(ii) whole shares of Common Stock, valued at their then Fair Market Value,
(iii) if permitted in the sole discretion of the Committee (taking into
account, without limitation, Section 16 of the Exchange Act), through the
withholding of shares issuable upon exercise of the Option valued at their
then Fair Market Value, or (iv) by a combination of such methods of payment.
The Company may enter into any arrangement permitted under applicable laws
to facilitate the "cashless" exercise of any Option.
B. Effect of Exercise of Option on Tandem SAR.
Upon the exercise of an Option with respect to which a Tandem SAR has been
granted, the number of shares of Common Stock with respect to which the SAR
shall be exercisable shall be reduced by the number of shares with respect to
which the Option has been exercised.
SECTION 7. STOCK APPRECIATION RIGHTS.
A. Terms and Conditions.
1. Type of SAR. Each SAR Agreement shall specify whether it relates to a
Tandem SAR or to Freestanding SARs.
2. Number of Optioned Shares or Freestanding SARs. In the case of any
Tandem SAR, the SAR Agreement shall specify the Option and the number of
shares of Common Stock subject thereto to which the SAR relates. Any SAR
Agreement relating to Freestanding SARs shall specify the number of such
SARs to which it relates.
3. Exercise Period. Each SAR Agreement shall specify the period during
which the pertinent SAR(s) may be exercised and shall provide that the
SAR(s) shall expire at the end of each period (or periods). For a
Freestanding SAR, such expiration date shall be no later than ten (10) years
from the date of grant thereof. For Tandem SARs, such expiration date(s)
shall be no later than the date(s) of expiration of the related Option and a
Tandem SAR shall be exercisable during its term only when and to the extent
the related Option is exercisable. A Freestanding SAR shall be exercisable
only during the period of the grantee's employment with Rouge Steel Company
and for such post-termination exercise period as would apply under the
provisions of Section 6(A)(3)(b)-(f) had the Freestanding SAR Award to the
grantee instead been an Award of NQSOs.
4. Manner of Exercise. A SAR granted under the Plan shall be exercised
by the holder by delivery to the Corporate Secretary or Vice President,
Employee Relations and Public Affairs of the Company of written notice of
exercise in such form as the Company shall have specified in the SAR
Agreement or otherwise.
5. Payment to Holder. If the form of consideration to be received upon
exercise of the SAR is not specified in the Agreement governing the SAR,
upon the exercise thereof, the holder may request the form of consideration
he or she wishes to receive in satisfaction of such SAR, which may be in
shares of Common Stock (valued at Fair Market Value on the date of exercise
of the SAR), or in cash, or partly in cash and partly in shares of Common
Stock, as the holder
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<PAGE> 6
shall request; provided, however, that the Committee, in its sole
discretion (taking into account, without limitation, Section 16 of the
Exchange Act), may consent to or disapprove any request of the Employee to
receive cash in full or partial settlement of such SAR. Payment shall be
subject to applicable tax withholding.
B. Effect of Exercise of Tandem SAR on Related Option.
Upon the exercise of a Tandem SAR, the number of shares covered by the
related Option shall be reduced by the number of shares of Common Stock with
respect to which such SAR is exercised.
SECTION 8. RESTRICTED STOCK AWARDS.
A. Terms and Conditions.
The general terms and conditions of any Restricted Stock Award shall be set
forth in the applicable Agreement. Such Agreement shall specify the number of
shares of Common Stock subject to the Award, and the applicable Restriction
Period or Periods. Any such Agreement may (or, to the extent Section 162(m)
Relief is sought, shall) provide for forfeiture of shares covered thereby if
specified Performance Measures are not attained during a Restriction Period
and/or for termination of any Restriction Period upon attainment of Performance
Measures, but in no event may any such Agreement permit termination of any
Restriction Period earlier than three (3) years after the date of grant of the
pertinent Award.
B. Certificates Evidencing Ownership of Restricted Stock.
During the Restriction Period, a certificate representing the Restricted
Stock shall be registered in the recipient's name and bear a restrictive legend
to the effect that ownership of such Restricted Stock, and the enjoyment of all
rights appurtenant thereto, are subject to the restrictions, terms, and
conditions provided in the Plan and the applicable Agreement.
Such certificate, the Restricted Stock certificate, shall be deposited by
the recipient with the Company, together with stock powers or other instruments
of assignment, each endorsed in blank, which will permit transfer to the Company
of all or any portion of the Restricted Stock evidenced by the Restricted Stock
certificate in the event it is forfeited. Upon the termination of an applicable
Restriction Period, and subject to remittance of applicable withholding tax, a
certificate or certificates evidencing ownership of the number of shares of
Common Stock theretofore evidenced by the Restricted Stock certificate, free of
restrictive legend (other than any relating to a right of first refusal of the
Company or required by any applicable securities laws), shall be issued to the
Employee, his or her Beneficiary(ies), or Legal Representative, promptly after
the expiration of the Restriction period.
C. Rights With Respect to Shares During Restriction Period.
Subject to the terms and conditions of the Agreement governing a particular
Restricted Stock Award, the Employee, as the owner of the Common Stock issued as
Restricted Stock, shall have all rights of a shareholder, including, but not
limited to, voting rights, the right to receive cash or stock dividends thereon,
and the right to participate in any capital adjustment of the Company. The
Committee may, at the time of grant and otherwise in its sole discretion,
provide for the deferral of the payment of cash dividends otherwise payable
until the expiration of the applicable Restriction Period. Any distributions
with respect to shares of Restricted Stock other than in the form of cash shall
be held by the Company, and shall be subject to the same restrictions as the
shares with respect to which such distributions were made.
D. Reduction of Length of Restriction Period.
The Committee may, at any time, reduce the length of the Restriction Period
with respect to any shares comprising a Restricted Stock Award; provided,
however, that subject to the provisions of Section 13(J) hereof, in no event
shall such Restriction Period be less than three (3) years from the date of
grant of the Restricted Stock Award.
E. Effect of Termination of Employment by Recipient During Restriction
Period.
In the event the employment with Rouge Steel Company of a recipient of a
Restricted Stock Award shall terminate during the Restriction Period by reason
of death or Disability, the restrictions with respect to the shares comprising
such Award shall lapse, unless otherwise determined by the Committee.
In the event the employment with Rouge Steel Company of a recipient of a
Restricted Stock Award shall terminate during the Restriction Period by reason
of the recipient's Retirement, or for any other reason other than death or
Disability, the shares comprising the Award shall be forfeited by such Employee,
unless otherwise determined by the Committee.
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<PAGE> 7
SECTION 9. PERFORMANCE SHARE AWARDS.
A. Terms and Conditions.
The general terms and conditions of any Performance Share Award shall be set
forth in the applicable Agreement. Such Agreement shall specify the number of
Performance Shares subject to the Award, the Performance Period(s) and the
Performance Measures applicable to the Award.
B. Following the end of a Performance Period applicable to a granted Award,
the Committee will determine the extent (if any) to which Performance Measures
established for the Award were attained and, accordingly, the consideration (if
any) to which the holder of the Award becomes entitled. The Committee may, in
its sole discretion, determine that such holder will be entitled to less than
the maximum permitted consideration pursuant to such Award; provided, that the
Committee has reserved unto itself this flexibility at the time of grant. The
Committee shall, where required for Section 162(m) Relief and Section 162(m)
Relief is sought, certify in writing, prior to payment of the consideration,
that the Performance Measures were in fact satisfied.
C. Payment.
The Committee shall determine, in its sole discretion (taking into account,
without limitation, Section 16 of the Exchange Act), the manner of payment upon
attainment of Performance Measures during a Performance Period, which may
include (i) cash equal to the Fair Market Value (as of the end of the
Performance Period) of the Performance Shares, (ii) delivery of the Performance
Shares subject to the Performance Share Award, without restrictions, or subject
to any restrictions the Committee may impose, or (iii) a combination of cash and
Performance Shares. Payment to the recipient shall be subject to any applicable
withholding tax.
If, following the completion of a Performance Period, it is the
determination of the Committee that Performance Shares be delivered to the
Employee in the form of shares of Restricted Stock, the recipient must execute a
Restricted Stock Agreement as a condition of the issuance of such shares in his
or her name.
D. Effect of Termination of Employment During Performance Period.
An Employee must be employed by Rouge Steel Company at the end of a
Performance Period to be entitled to settlement of the Performance Share Award
for such Period; provided, however, that in the event of an Employee's
termination of employment before the end of such Period, the Committee may, in
its sole discretion, limit any forfeiture in any manner it deems appropriate, to
the extent that, in its sole discretion, it determines doing so would be
equitable or in the best interests of the Company.
SECTION 10. WITHHOLDING TAXES.
The Company will, if required by applicable law, cause to be withheld
Federal, state and/or local taxes in connection with the exercise, vesting or
settlement of an Award. Unless otherwise provided in the applicable Agreement,
each Employee may satisfy any such tax withholding obligation by any of the
following means, or by a combination of such means: (i) a cash payment; (ii) by
delivery to the Company or Rouge Steel Company a number of shares of Common
Stock having a Fair Market Value, as of the Tax Withholding Date, sufficient to
satisfy the amount of the withholding tax obligation arising from an exercise,
vesting or settlement of an Award; (iii) if permitted in the sole discretion of
the Committee (taking into account, without limitation, Section 16 of the
Exchange Act), by authorizing the withholding from the shares of Common Stock
otherwise issuable to the Employee pursuant to the exercise or vesting of an
Award, a number of shares having a Fair Market Value, as of the Tax Withholding
Date, which will satisfy the amount of the withholding tax obligation; or (iv)
by a combination of such methods of payment. If the amount requested is not
paid, the Company may refuse to satisfy the Award.
SECTION 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
In the event of any change in the outstanding Common Stock by reason of any
stock split, stock dividend, recapitalization, merger, consolidation,
reorganization, combination, or exchange of shares, split-up, split-off,
spin-off, spin-away, liquidation or other similar change in capitalization, or
any distribution to common stockholders other than cash dividends, the number or
kind of shares that may be issued under the Plan pursuant to Section 3, and the
number or kind of shares subject to any outstanding Award, shall be
automatically adjusted, and the Committee shall be authorized to make such other
equitable adjustment of any Award or shares issuable pursuant thereto, or in any
Performance Measures related to any Award, so that the proportionate interest of
the Employee shall be maintained as before the occurrence of such event. Any
such adjustment shall be conclusive and binding for all purposes of the Plan.
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SECTION 12. AMENDMENT AND TERMINATION.
Subject to the following sentences of this Section 12, the Board or the
Compensation Committee may at any time terminate, modify or amend the Plan in
such respects as it shall deem advisable; provided, that the Board or the
Compensation Committee may not make any amendment in the Plan that would, if
such amendment were not approved by the shareholders, cause the Plan to fail to
comply with (A) Section 16 of the Exchange Act (or Rule 16b-3), (B) any other
requirement of applicable law or regulation, or (C) the requirements for Section
162(m) Relief to the extent Section 162(m) Relief is sought, unless and until
the approval of the shareholders is obtained. Under no circumstances, without
shareholder approval, may the Plan be amended or modified to permit the exercise
of an Option at less than the Exercise Price. The termination or any
modification or amendment of the Plan shall not, without the consent of the
Employee, adversely affect his or her rights under an Award previously granted,
unless required by applicable law.
SECTION 13. MISCELLANEOUS PROVISIONS.
A. No Employee or other person shall have any claim or right to be granted
an Award under the Plan.
B. Except for ISOs and related Tandem SARs which shall not be transferrable
other than by will or the laws of descent and distribution, (i) an Employee's
Options or SARs may be transferred, in whole or in part, either directly or by
operation of law or otherwise only to immediate family members of the Employee
sharing the same household, a trust established for the benefit of the Employee
or immediate family members of the Employee sharing the same household, or
partnership in which the Employee and immediate family members sharing the same
household are the only partners, and in any event only to the extent such
transfer effects only a change in the form of beneficial ownership without
changing an Employee's pecuniary interest in such Options or SARs under the Plan
and is not the exercise (except in accordance with the terms of the Plan) or
conversion of a derivative security, or deposit or withdrawal from a voting
trust to the extent exempt pursuant to Rule 16a-13 of the Securities and
Exchange Commission, as then in effect, or (ii) an Employee's rights and
interests under the Plan or with respect to any Option, SAR or Performance Share
Award may be transferred pursuant to a domestic relations order to the extent
exempt pursuant to Rule 16a-12 of the Securities and Exchange Commission, as
then in effect; provided further, however, an Employee's rights and interests
under the Plan or with respect to Options, SARs, or Performance Share Awards
shall not otherwise be assigned or transferred in whole or in part, either
directly or by operation of law, or otherwise except in the event of Employee's
death, by will or the laws of descent and distribution (including, without
limitation, by way of execution, levy, garnishment, attachment, pledge,
bankruptcy or in any other manner). An Option or SAR (and any right to satisfy
tax withholding obligations, or to pay any portion of an Exercise Price, through
withholding of shares otherwise issuable pursuant to the exercise or vesting of
an Award) shall be exercisable, during an Employee's lifetime, only by such
Employee, his or her Beneficiary or his or her Legal Representative. Grant of
any Option, SAR or Performance Share Award shall not confer upon the grantee any
rights of a shareholder with respect to any shares subject to such Award.
C. The Plan, the grant, exercise, vesting and/or settlement of Awards
thereunder, and the obligations of the Company to satisfy Awards shall be
subject to all applicable Federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency as may be required, and
the Committee may impose any additional restrictions with respect to Awards in
order to comply with any legal requirements applicable to Awards or to qualify
for any exemption it may deem appropriate.
D. The expenses of the Plan shall be borne by the Company.
E. By accepting an Award under the Plan, each Employee and each Legal
Representative or Beneficiary shall be conclusively deemed to have indicated his
or her acceptance and ratification of, and consent to, any action taken under
the Plan by the Company or the Board.
F. Nothing in the Plan, or in any Agreement entered into pursuant to the
Plan, shall confer on an Employee any right to continue in the employ of the
Company or Rouge Steel Company, or in any way affect the Company's or Rouge
Steel Company's right to terminate the Employee's employment without prior
notice at any time for any reason or for no reason.
G. Participation in the Plan shall not affect an Employee's eligibility to
participate in any other benefit or incentive plan of the Company or Rouge Steel
Company. Awards under the Plan are not considered earnings for purposes of the
Rouge Steel Company Savings Plan for Salaried Employees, the Rouge Steel Company
Salaried Employee Retirement Plan, Rouge Steel Company insurance or other
employee benefit programs.
H. With respect to shares acquired upon the exercise of Options or Stock
Appreciation Rights and with respect to shares acquired by an individual under a
Restricted Stock Award, Performance Share Award, or otherwise under the Plan,
the Company may reserve a "right of first refusal" to purchase any such shares
at Fair Market Value from the holder thereof.
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<PAGE> 9
If such right is reserved, the holder, prior to any disposition of such shares
of Common Stock, shall be required to first notify the Corporate Secretary or
Vice President, Employee Relations and Public Affairs of the Company or such
other officer as may be designated by the Committee, in writing in such form as
the Committee may prescribe, of his or her intention to dispose of any such
shares, and the Company will advise the holder within five (5) days whether it
intends to purchase such shares, for this purpose. Fair Market Value shall be
determined as of the date next preceding the date that the Company notifies the
holder of its intention to purchase such shares. The Committee will designate an
officer to decide whether to accept or reject such right of first refusal. If
the Company does not exercise its right to purchase the shares within such
period, the holder may freely dispose of the shares following expiration of such
period.
I. A breach by the Employee, his or her Beneficiary(ies), or Legal
Representative, of any restrictions, terms or conditions provided in the Plan,
the Agreement, or otherwise established by the Committee with respect to any
Award will, unless waived in whole or in part by the Committee, cause a
forfeiture of such Award.
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J. Except to the extent preempted by Federal law, the provisions of this
Plan shall be interpreted and construed in accordance with the internal laws of
the State of Michigan.
K. It is the intention that the Plan at all times fully satisfy the
provisions and conditions of Rule 16b-3 applicable to a Plan of this type.
Accordingly, anything herein to the contrary notwithstanding, to the extent that
Rule 16b-3 at any given time would require that decisions concerning the
selection of Employees who are or become subject to reporting requirements of
Section 16 of the Exchange Act ("Section 16 Reporting Persons") to be granted
Awards hereunder, the timing, amounts, and other terms of such Awards, and the
form of settlement of any such Awards be made only by the Committee, all such
decisions by the Committee shall be final and conclusive and not subject to
reversal or modification by the Board. Moreover, irrespective of any rights or
discretionary power which a Section 16 Reporting Person holding a pertinent
Award otherwise would possess hereunder or under the Agreement evidencing such
Award concerning the timing of exercise of a SAR, the manner of paying the
Exercise Price for an exercised Option, a request or election concerning the
form of settlement of a SAR, or the manner of satisfying tax withholding
objections arising with respect to any Award, the Section 16 Reporting Person
shall be entitled to exercise such rights and discretion only at such times and
manner and under such other conditions as at the time are contemplated by the
applicable provisions of Rule 16b-3 and any attempt otherwise to exercise such
rights or discretion shall be void and of no effect.
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<PAGE> 1
EXHIBIT 10.36
FIRST AMENDMENT TO THE
ROUGE STEEL COMPANY
1998 STOCK INCENTIVE PLAN
WHEREAS, Rouge Industries, Inc., a Delaware corporation (the
"Company"), sponsors the Rouge Steel Company 1998 Stock Incentive Plan (the
"Plan"); and
WHEREAS, the Company, by action of its Compensation Committee, desires
to amend the Plan.
NOW, THEREFORE, the Company hereby amends the Plan, effective December
2, 1999, as follows:
1. A new subsection g. shall be added to Section 6.A.3, effective
December 2, 1999, to read in its entirety as follows:
"g. Notwithstanding the terms of any Option Agreement, but
subject to the other provisions of this Section 6, in the event of the
occurrence of a Change in Control, as defined herein, prior to an
Optionee's retirement, disability, termination of employment or death,
all outstanding Options shall become fully vested and exercisable.
For purposes of this Plan, "Change in Control" means,
subject to the last paragraph of this subsection, the occurrence of any
of the following events:
(1) The Company or Rouge Steel Company is merged,
consolidated or reorganized into or with another corporation
or other legal person, and as a result of such merger,
consolidation or reorganization less than 55% of the combined
voting power of the then-outstanding Voting Stock of such
corporation or person immediately after such transaction are
held in the aggregate by the Company or Rouge Steel Company or
by the holders of Voting Stock of the Company immediately
prior to such transaction;
(2) The Company or Rouge Steel Company sells or
transfers all or substantially all of its assets to another
corporation or other legal person, and as a result of such
sale or transfer less than 55% of the combined voting power of
the then-outstanding Voting Stock of such corporation or other
legal person immediately after such sale or transfer is held
in the aggregate by the Company or
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<PAGE> 2
Rouge Steel Company or by the holders of Voting Stock of the
Company immediately prior to such sale or transfer;
(3) The Company files a report or proxy statement
with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 disclosing in response to Form
8-K or Schedule 14A (or any successor schedule, form or report
or item therein) that a change in control of the Company or
Rouge Steel Company will occur in the future pursuant to a
then-existing contract or transaction which when consummated
would be a Change in Control determined without regard to this
subsection (3);
(4) If, during any period of two (2) consecutive
years, individuals who at the beginning of any such period
constitute the directors of the Company cease for any reason
to constitute at least a majority thereof; provided, however,
that for purposes of this subsection (4), each director who is
first elected, or first nominated for election by the
Company's stockholders, by a vote of at least two-thirds of
the directors of the Company (or a committee thereof) then
still in office who were directors of the Company at the
beginning of any such period will be deemed to have been a
director of the Company at the beginning of such period; or
(5) Unless otherwise determined by a majority vote of
the Board of Directors of the Company in the case of a
corporate structure reorganization, the shareholders of the
Company approve, pursuant to applicable state law
requirements, a complete liquidation or dissolution of the
Company or Rouge Steel Company.
Notwithstanding the foregoing provisions of
subparagraph (3) above, unless otherwise determined in a specific case
by a majority vote of the Board of Directors of the Company, a "Change
in Control" shall not be deemed to have occurred for purposes of
subparagraph (3) above solely because the Company, a subsidiary, or any
Company-sponsored employee stock ownership plan or any other employee
benefit plan of the Company or any subsidiary either files or becomes
obligated to file a report or a proxy statement under or in response to
Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any
successor schedule, form or report or item therein) under the
Securities Exchange Act of 1934 disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of 20% or otherwise, or
because the Company reports that a Change in Control of the Company has
occurred or will occur in the future by reason of such beneficial
ownership.
For purposes of this Article, "Voting Stock" means
securities entitled to vote generally in the election of directors.
Notwithstanding anything to the contrary herein, a
"Change in Control" shall not be deemed to have occurred solely as a
result of a transfer of stock of the Company by Worthington Industries,
Inc., or any of its affiliates or shareholders, to any lender pursuant
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<PAGE> 3
to the amortization of one or more certain debt-in-exchange-for-capital
loans between such parties which are referred to as "DECS" and which
are evidenced by exchangeable notes due March 1, 2000. However, this
paragraph shall not prohibit the occurrence of a "Change In Control"
event if subsequent transactions would otherwise result in the
occurrence of a "Change In Control" event pursuant to this subsection."
2. The phrase "Compensation Committee" in Section 12 is deleted and
replaced with the phrase "Committee."
3. Except as amended by this First Amendment, the terms of the Plan
shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has adopted this First Amendment as of
the 22nd day of December, 1999.
ATTEST: ROUGE INDUSTRIES, INC.
/s/ Martin Szymanski By: /s/ William E. Hornberger
- ----------------------------- -------------------------------------
Secretary William E. Hornberger
Its: Senior Vice President
-------------------------------------
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<PAGE> 1
EXHIBIT 10.38
ROUGE STEEL COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, ROUGE STEEL COMPANY, a Delaware corporation (the "Company"),
adopted the Rouge Steel Company Supplemental Executive Retirement Plan effective
January 1, 1997; and
WHEREAS, the Company desires to amend and restate the Rouge Steel
Company Supplemental Executive Retirement Plan effective December 2, 1999.
NOW, THEREFORE, the Company hereby amends and restates the Rouge Steel
Company Supplemental Executive Retirement Plan (the "Plan"), effective December
2, 1999, to read as follows:
ARTICLE I
PLAN PURPOSE
The purpose of this Plan is to attract and retain key management
employees by supplementing retirement benefit payments to those key management
employees of the Company designated in writing from time to time by the
Compensation Committee of the Board of Directors of the Company (the
"Participants").
ARTICLE II
BENEFIT DESCRIPTION
A Participant or the Participant's surviving spouse shall be entitled
to benefits under this Plan only when the Participant (i) has accrued at least
five (5) continuous Years of Service after his or her designation as a
Participant in this Plan and (ii) is entitled to normal retirement, regular
early retirement, special early retirement, total and permanent disability
retirement benefits, or in the event of termination of employment after a Change
in Control, deferred vested benefits pursuant to the Rouge Steel Company
Salaried Employee Retirement Plan (the "Retirement Plan"); provided,
<PAGE> 2
however, in the event of a Change in Control, as defined herein, the five (5)
continuous Years of Service requirement for entitlement to benefits under the
Plan shall be waived; and, provided, further, the Compensation Committee of the
Board of Directors of the Company ("Compensation Committee") may, in its sole
discretion by written resolution, waive or reduce the five (5) continuous Years
of Service requirement for entitlement to benefits under the Plan. Subject to
Article VII of this Plan, and Appendix A hereto if applicable, a Participant
entitled to benefits under this Plan shall be entitled to a monthly benefit,
upon the Participant's retirement under the Retirement Plan, payable pursuant to
Article IV of this Plan, equal to 1.9% of the Participant's "Final Average
Monthly Compensation" multiplied by the number of his or her Years of Service
(but not in excess of thirty-five (35)).
For purposes of this Plan, "Final Average Monthly Compensation" means
the quotient of the average of the Participant's highest five (5) annual
incentive compensation payments (and which may be zero for a year) attributable
to calendar years (which need not be consecutive) under the Rouge Steel Company
Incentive Compensation Plan or the Rouge Steel Company Margin Improvement
Incentive Plan that occur during the ten (10) full calendar years prior to
termination of employment, divided by twelve (12). Notwithstanding the
foregoing, even if a Participant has not been eligible for annual incentive
compensation payments for five (5) years, Final Average Monthly Compensation
shall still be computed as if a Participant had been eligible for annual
incentive compensation for five (5) years, but had received no such compensation
for such additional years.
For purposes of this Plan, "Years of Service" means years of credited
service, as defined in the Retirement Plan; provided, solely for purposes of
computing benefits under the formula set forth herein (and not eligibility or
entitlement), Years of Service for any Participant who is a Group I Employee or
Group II Employee as defined in the Retirement Plan shall also include years of
creditable service used
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<PAGE> 3
in determining eligibility for benefits under the Retirement Plan; and,
provided, further, at the time a key employee becomes a Participant, the
Compensation Committee, in its sole discretion, may in writing, credit such
Participant with additional whole Years of Service solely for purposes of
computing benefits under the formula set forth herein, but not for any other
purposes such as Plan eligibility or entitlement.
ARTICLE III
CHANGE IN CONTROL
For purposes of this Plan, "Change in Control" means, subject to the
last paragraph of this Section, the occurrence of any of the following events:
(a) Rouge Industries, Inc. or the Company is merged,
consolidated or reorganized into or with another corporation or other
legal person, and as a result of such merger, consolidation or
reorganization less than 55% of the combined voting power of the
then-outstanding Voting Stock of such corporation or person immediately
after such transaction are held in the aggregate by Rouge Industries,
Inc. or the Company or by the holders of Voting Stock of Rouge
Industries, Inc. immediately prior to such transaction;
(b) Rouge Industries, Inc. or the Company sells or transfers
all or substantially all of its assets to another corporation or other
legal person, and as a result of such sale or transfer less than 55% of
the combined voting power of the then-outstanding Voting Stock of such
corporation or other legal person immediately after such sale or
transfer is held in the aggregate by Rouge Industries, Inc. or the
Company or by the holders of Voting Stock of Rouge Industries, Inc.
immediately prior to such sale or transfer;
(c) Rouge Industries, Inc. files a report or proxy statement
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 disclosing in response to Form 8-K or Schedule 14A
(or any successor schedule, form or report or item therein) that a
change in control of Rouge Industries, Inc. or the Company will occur
in the future pursuant to a then-existing contract or transaction which
when consummated would be a Change in Control determined without regard
to this subsection (c);
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<PAGE> 4
(d) If, during any period of two (2) consecutive years,
individuals who at the beginning of any such period constitute the
directors of Rouge Industries, Inc. cease for any reason to constitute
at least a majority thereof; provided, however, that for purposes of
this subsection (d), each director who is first elected, or first
nominated for election by Rouge Industries, Inc.'s stockholders, by a
vote of at least two-thirds of the directors of Rouge Industries, Inc.
(or a committee thereof) then still in office who were directors of
Rouge Industries, Inc. at the beginning of any such period will be
deemed to have been a director of Rouge Industries, Inc. at the
beginning of such period;
or
(e) Unless otherwise determined by a majority vote of the Board
of Directors of Rouge Industries, Inc. in the case of a corporate
structure reorganization, the shareholders of Rouge Industries, Inc.
approve, pursuant to applicable state law requirements, a complete
liquidation or dissolution of Rouge Industries, Inc. or the Company.
Notwithstanding the foregoing provisions of subsection (c), unless
otherwise determined in a specific case by a majority vote of the Board of
Directors of Rouge Industries, Inc., a "Change in Control" shall not be deemed
to have occurred for purposes of subsection (c) solely because Rouge Industries,
Inc., a subsidiary, or any Company-sponsored employee stock ownership plan or
any other employee benefit plan of Rouge Industries, Inc. or any subsidiary
either files or becomes obligated to file a report or a proxy statement under or
in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any
successor schedule, form or report or item therein) under the Securities
Exchange Act of 1934 disclosing beneficial ownership by it of shares of Voting
Stock, whether in excess of 20% or otherwise, or because Rouge Industries, Inc.
reports that a Change in Control of Rouge Industries, Inc. has occurred or will
occur in the future by reason of such beneficial ownership.
For purposes of this Article III, "Voting Stock" means securities
entitled to vote generally in the election of directors.
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<PAGE> 5
Notwithstanding anything to the contrary herein, a "Change in Control"
shall not be deemed to have occurred solely as a result of a transfer of stock
of Rouge Industries, Inc. by Worthington Industries, Inc., or any of its
affiliates or shareholders, to any lender pursuant to the amortization of one or
more certain debt-in-exchange-for-capital loans between such parties which are
referred to as "DECS" and which are evidenced by exchangeable notes due March 1,
2000. However, this paragraph shall not prohibit the occurrence of a "Change In
Control" event if subsequent transactions would otherwise result in the
occurrence of a "Change In Control" event pursuant to this Section.
ARTICLE IV
BENEFIT PAYOUT
The benefits under this Plan shall become payable when a Participant
begins to receive payments from the Retirement Plan, or when the Participant
dies and the Participant's spouse begins to receive payments, under the
Retirement Plan.
Benefits payable under this Plan shall be payable to a Participant or
the Participant's spouse, if any, in the same form and manner as contributory
life income benefits are paid to the Participant or the Participant's spouse, if
any, pursuant to the Retirement Plan; provided, however, if Retirement Plan
benefits are paid pursuant to a contingent annuitant election for benefits by
the Participant pursuant to Article VII, Section 5B, thereof, benefits payable
pursuant to this Plan shall not be paid in the form of a contingent annuitant
election but instead shall be paid in the same form as the normal form of
benefit payment for Retirement Plan noncontributory benefits as if the only life
income benefits payable to the Participant under the Retirement Plan were
noncontributory benefits; and, provided, further, that in the event of a
Participant's regular early retirement, special early retirement, total and
permanent disability retirement, or deferred vested benefit commencement under
the Retirement Plan, as applicable, the monthly benefit provided hereunder shall
be reduced and/or adjusted in the same
-5-
<PAGE> 6
manner as Retirement Plan contributory retirement benefits are reduced or
adjusted in the event of a regular early retirement, special early retirement,
total and permanent disability retirement or deferred vested benefits, as
applicable, but determined as if Final Average Monthly Compensation is in excess
of the breakpoint in the Retirement Plan.
ARTICLE V
UNFUNDED AND NON-QUALIFIED PLAN
This Plan is completely separate from the Retirement Plan. The
undertakings of the Company herein to each Participant constitute merely the
obligation to make payments as provided for herein from the Company's general
assets and it is the Company's intention that the Plan be unfunded for tax
purposes and for purposes of Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). Neither a Participant nor any beneficiary nor
any other person shall have, by reason of this Plan, any rights, title or
interest of any kind in or to any property of the Company, nor any beneficial
interest in any trust which may be established by the Company in connection with
this Plan. If the Company transfers any property to a trust in connection with
this Plan such trust shall not be held for the exclusive benefit of
Participants, and any assets held in such trust shall be subject to the claims
of the Company's general creditors in the event of the Company's insolvency or
bankruptcy.
ARTICLE VI
ADMINISTRATION
The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company which shall have full and exclusive power to
interpret the Plan, to determine the amount and manner of any deferrals and
payments and to adopt such rules and regulations as are necessary for its
administration. The Compensation Committee may delegate specific
responsibilities it assumes under this Plan which are administrative or
ministerial in nature by notifying a delegate as to the duties
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<PAGE> 7
and responsibilities delegated. In that regard, the Compensation Committee
delegates responsibility for claims administration to the Retirement Committee
for the Rouge Steel Company Salaried Employee Retirement Plan (the "Retirement
Committee").
Claims for benefits under the Plan shall be made in writing to the
Retirement Committee. If a claim for benefits is wholly or partially denied, the
Retirement Committee shall, within a reasonable period of time, but not later
than ninety (90) days after receipt of the claim, provide the claimant written
notice in a manner calculated to be understood by the claimant of:
(A) The specific reason or reasons for denial;
(B) Specific reference to the pertinent Plan provisions on
which the denial is based;
(C) A description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of
why such material or information is necessary; and
(D) Any explanation of the Plan's claim review procedure. A
Participant or beneficiary whose claim for benefits under the Plan has
been denied, or his or her duly authorized representative, may request
a review upon written application to the Retirement Committee, and may
submit issues and comments in writing. The claimant's written request
for review must be submitted to the Retirement Committee within sixty
(60) days after receipt by the claimant of written notification of the
denial of the claim. A decision by the Retirement Committee shall be
made promptly, and not later than sixty (60) days after the Retirement
Committee's receipt of a request for review, unless special
circumstances require an extension of time for proceeding, in which
case a decision shall be rendered as soon as possible, but not
-7-
<PAGE> 8
later than one hundred twenty (120) days after receipt of the
request for review. The decision on review shall be in writing and
shall include specific reasons for the decision, specific reference to
the pertinent Plan provisions on which the decision is based and be
written in a manner calculated to be understood by the claimant.
The decisions of the Compensation Committee and/or the Retirement
Committee shall be final and conclusive on all persons and neither the
Compensation Committee or the Retirement Committee shall be subject to liability
thereon.
ARTICLE VII
TERMINATION FOR CAUSE
Notwithstanding anything in this Plan to the contrary, if the Company
terminates a Participant's employment for Cause, then the Company shall have no
obligation to such Participant or his or her spouse pursuant to this Plan, and
no payments of any kind shall thereafter be made by the Company to the
Participant hereunder.
For purposes of the foregoing, "Cause" means:
(i) any act or acts of the Participant constituting a felony
(or its equivalent) under the laws of the United States, any state
thereof or any foreign jurisdiction;
(ii) any material breach, as determined by the Company, by the
Participant of any employment agreement with the Company or the
policies of the Company or any of its subsidiaries or the willful and
persistent (after written notice to the Participant) failure or
refusal, as determined by the Company, of the Participant to perform
his duties of employment or comply with any lawful directives of the
Board of Directors of the Company;
(iii) conduct which the Company determines amounts to gross
neglect, willful misconduct or dishonesty; or
-8-
<PAGE> 9
(iv) any misappropriation of material property of the Company
by the Participant or any misappropriation of a corporate or business
opportunity of the Company by the Participant, all as determined by the
Company.
ARTICLE VIII
ERISA COMPLIANCE
NON-QUALIFIED PLAN
Notwithstanding any provisions of this Plan to the contrary, the
Company, by written resolution of the Board of Directors or the Compensation
Committee, may terminate the Plan, or may amend or modify the Plan at any time
and in any respect, including as necessary or advisable in order that the
benefits provided by the Plan shall constitute unfunded deferred compensation
for a select group of management or highly compensated employees as described in
Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. However, no such amendment or
termination shall adversely affect the rights of Participants or their spouses,
if any, to the extent of any vested benefits accrued as of the date of amendment
or termination of the Plan.
ARTICLE IX
NO EMPLOYMENT CONTRACT
Nothing contained in this Plan, or any amendment hereto, shall be
construed as entitling a Participant to be continued in the employ of the
Company for any period of time, or as obliging the Company to keep said
Participant in its employ for any period of time. Furthermore, nothing contained
in this Plan, or any amendment hereto, shall be construed as restricting in any
way the right of the Company to reassign a Participant for any reason to a new
employment position at lower or higher compensation.
-9-
<PAGE> 10
ARTICLE X
NONASSIGNABILITY
No rights of any kind under this Plan shall be transferable, or
assignable by a Participant, spouse or any other person, or be subject to
alienation, encumbrance, garnishment, attachment, execution, or levy of any
kind, voluntary or involuntary.
ARTICLE XI
RULES OF CONSTRUCTION
In the event that any provision of the Plan is determined by any
judicial, quasi-judicial or administrative body to be void or unenforceable for
any reason, all other provisions of the Plan shall remain in full force and
effect as if such void or unenforceable provision had never been part of the
Plan. The singular herein shall include the plural, or vice versa, wherever the
context so requires. A pronoun in the masculine, feminine or neuter gender shall
be deemed, where appropriate, to include also the masculine, feminine or neuter
gender.
ARTICLE XII
WITHHOLDING; PAYROLL TAXES
To the extent required by law in effect at the time payments are made,
the Company shall withhold from payments made hereunder any taxes required to be
withheld from a Participant's wages for the Federal or any state or local
government.
ARTICLE XIII
APPLICABLE LAW
Except as governed by ERISA, and the Internal Revenue Code of 1986, as
amended, the Plan shall be construed in accordance with, and governed by, the
laws of the State of Michigan.
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<PAGE> 11
ARTICLE XIV
HEADINGS
Headings to the Articles of this Plan are included for convenience only
and shall not control the meaning or interpretation of any provision of this
Plan.
IN WITNESS WHEREOF, the Company has adopted this Plan this 22nd day of
December, 1999.
ATTEST: ROUGE STEEL COMPANY
/s/ Martin Szymanski By: /s/ William E. Hornberger
- ----------------------------------- ---------------------------------
Secretary William E. Hornberger
Its: Senior Vice President
--------------------------------
-11-
<PAGE> 12
APPENDIX A
TO THE ROUGE STEEL COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In the event of a Change in Control, each Participant who has entered
into a written Change-In-Control Severance Agreement with Rouge Industries,
Inc., who becomes entitled to Change in Control benefits thereunder, and who
does not otherwise accrue the maximum service under the Retirement Plan
creditable in conjunction with benefits provided pursuant to the Rouge Steel
Company Salaried Income Security Plan ("SISP"), shall have his Rouge Steel
Company Supplemental Executive Retirement Plan benefit, but not his Retirement
Plan benefit, calculated based on such additional service necessary to attain
the maximum service creditable under the Retirement Plan in conjunction with
SISP benefits (no more than 21 months) and based on an increase in Participant's
age at the time at which such maximum service would have been attained if
credited in conjunction with the SISP.
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<PAGE> 1
EXHIBIT 10.39
ROUGE STEEL COMPANY
BENEFIT RESTORATION PLAN
WHEREAS, ROUGE STEEL COMPANY, a Delaware corporation (the "Company"),
adopted the Rouge Steel Company Benefit Restoration Plan effective January 1,
1997, to supplement the Rouge Steel Company Salaried Employee Retirement Plan
(the "Retirement Plan"); and
WHEREAS, the Company desires to amend and restate the Rouge Steel Company
Benefit Restoration Plan effective December 2, 1999.
NOW, THEREFORE, the Company hereby amends and restates the Rouge Steel
Company Benefit Restoration Plan (the "Plan"), effective December 2, 1999, to
read as follows:
ARTICLE I
PLAN PURPOSE
The purpose of this Plan is to attract and retain key management employees
by supplementing retirement benefit payments under the Retirement Plan to those
key management employees designated in writing from time to time by the
Compensation Committee of the Board of Directors of the Company (the
"Participants"), and their spouses, if any, in order to provide each such
Participant and his or her spouse, if any, retirement payments which, together
with the retirement benefit payments that they are entitled to receive under the
Retirement Plan, will not be reduced by applicable law.
-1-
<PAGE> 2
ARTICLE I
BENEFIT DESCRIPTION
A Participant or the Participant's surviving spouse shall be entitled to
benefits under this Plan only when the Participant (i) has accrued at least five
(5) continuous Years of Service after his or her designation as a Participant in
this Plan, and (ii) is entitled to normal retirement, regular early retirement,
special early retirement, total and permanent disability retirement benefits, or
in the event of termination of employment after a Change in Control, deferred
vested benefits pursuant to the Retirement Plan; provided, however, in the event
of a Change in Control, as defined herein, the five (5) continuous Years of
Service requirement for entitlement to benefits under the Plan shall be waived;
and, provided, further, the Compensation Committee of the Board of Directors of
the Company (the "Compensation Committee") may, in its sole discretion by
written resolution, waive or reduce the five (5) continuous Years of Service
requirement for entitlement to benefits under the Plan. Subject to Article VII
of this Plan, and Appendix A hereto if applicable, a Participant entitled to
benefits under this Plan shall be entitled to a monthly benefit, upon the
Participant's retirement under the Retirement Plan, payable pursuant to Article
IV of this Plan, equal to the excess, if any, of:
(a) The amount of annual benefit which would be payable to or
on behalf of such Participant or their spouse under said Retirement
Plan computed under the provisions of said Retirement Plan, plus, if
the Participant is a Group I Employee or a Group II Employee as defined
in the Retirement Plan (a "Group I Employee or a Group II Employee"),
the amount of additional annual benefit which would be payable to or on
behalf of such Participant or their spouse under the Retirement Plan if
such benefit were computed by counting those additional years of
contributory service and non-contributory service with a predecessor
corporation to Rouge Steel Company used to compute Retirement Plan
benefit eligibility for a Group I Employee or Group II Employee as such
years under the Retirement Plan, but computed as if:
-2-
<PAGE> 3
(1) The limitations contained in Section 415 of the
Internal Revenue Code of 1986, as amended from time to time
(the "Code") were inapplicable; and
(2) The limitation of $150,000 ($200,000 prior to
January 1, 1994), multiplied by the applicable adjustment
factor under Internal Revenue Code Section 401(a)(17) on the
amount of "Salary" and/or "Compensation" to be taken into
account for all Retirement Plan purposes in any Plan Year was
inapplicable;
over
(b) The amount of such Participant's or spouse's annual
benefit under (i) the Retirement Plan and (ii) if the Participant was a
Group I Employee or a Group II Employee, under the Ford Motor Company
General Retirement Plan.
For purposes of entitlement to benefits under this Plan, Years of Service
means years of credited service, as defined in the Retirement Plan.
ARTICLE III
CHANGE IN CONTROL
For purposes of this Plan, "Change in Control" means, subject to the last
paragraph of this Section, the occurrence of any of the following events:
(a) Rouge Industries, Inc. or the Company is merged,
consolidated or reorganized into or with another corporation or other
legal person, and as a result of such merger, consolidation or
reorganization less than 55% of the combined voting power of the
then-outstanding Voting Stock of such corporation or person immediately
after such transaction are held in the aggregate by Rouge Industries,
Inc. or the Company or by the holders of Voting Stock of Rouge
Industries, Inc. immediately prior to such transaction;
(b) Rouge Industries, Inc. or the Company sells or otherwise
transfers all or substantially all of its assets to another corporation
or other legal person, and as a result of such sale or transfer less
than 55% of the combined voting power of the then-outstanding Voting
Stock of such corporation or other legal person immediately after such
sale or transfer is held in the aggregate by Rouge Industries, Inc. or
the Company or by the holders of Voting Stock of Rouge Industries, Inc.
immediately prior to such sale or transfer;
-3-
<PAGE> 4
(c) Rouge Industries, Inc. files a report or proxy statement
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 disclosing in response to Form 8-K or Schedule 14A
(or any successor schedule, form or report or item therein) that a
change in control of Rouge Industries, Inc. or the Company will occur
in the future pursuant to a then-existing contract or transaction which
when consummated would be a Change in Control determined without regard
to this subsection (c);
(d) If, during any period of two (2) consecutive years,
individuals who at the beginning of any such period constitute the
directors of Rouge Industries, Inc. cease for any reason to constitute
at least a majority thereof; provided, however, that for purposes of
this subsection (d), each director who is first elected, or first
nominated for election by Rouge Industries, Inc.'s stockholders, by a
vote of at least two-thirds of the directors of Rouge Industries, Inc.
(or a committee thereof) then still in office who were directors of
Rouge Industries, Inc. at the beginning of any such period will be
deemed to have been a director of Rouge Industries, Inc. at the
beginning of such period;
or
(e) Unless otherwise determined by a majority vote of the
Board of Directors of Rouge Industries, Inc. in the case of a corporate
structure reorganization, the shareholders of Rouge Industries, Inc.
approve, pursuant to applicable state law requirements, a complete
liquidation or dissolution of Rouge Industries, Inc. or the Company.
Notwithstanding the foregoing provisions of subsection (c), unless
otherwise determined in a specific case by a majority vote of the Board of
Directors of Rouge Industries, Inc., a "Change in Control" shall not be deemed
to have occurred for purposes of subsection (c) solely because Rouge Industries,
Inc., the Company, a subsidiary, or any Company-sponsored employee stock
ownership plan or any other employee benefit plan of Rouge Industries, Inc. or
any subsidiary either files or becomes obligated to file a report or a proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or item therein) under
the Securities Exchange Act of 1934 disclosing beneficial ownership by it of
shares of Voting Stock, whether in excess of 20% or otherwise, or because Rouge
Industries, Inc. reports that
-4-
<PAGE> 5
a Change in Control of Rouge Industries, Inc. has occurred or will occur in the
future by reason of such beneficial ownership.
For purposes of this Article III, "Voting Stock" means securities entitled
to vote generally in the election of directors.
Notwithstanding anything to the contrary herein, a "Change in Control"
shall not be deemed to have occurred solely as a result of a transfer of stock
of Rouge Industries, Inc. by Worthington Industries, Inc., or any of its
affiliates or shareholders, to any lender pursuant to the amortization of one or
more certain debt-in-exchange-for-capital loans between such parties which are
referred to as "DECS" and which are evidenced by exchangeable notes due March 1,
2000. However, this paragraph shall not prohibit the occurrence of a "Change In
Control" event if subsequent transactions would otherwise result in the
occurrence of a "Change In Control" event pursuant to this Section.
ARTICLE IV
BENEFIT PAYOUT
The benefits under this Plan shall become payable when a Participant begins
to receive payments under the Retirement Plan, or when the Participant dies and
the Participant's spouse, if any, begins to receive payments, under the
Retirement Plan.
Benefits payable under this Plan shall be payable to a Participant or the
Participant's spouse, if any, in the same form and manner as contributory life
income benefits are paid to the Participant or the Participant's spouse, if any,
pursuant to the Retirement Plan; provided, however, if Retirement Plan benefits
are paid pursuant to a contingent annuitant election for benefits by the
Participant pursuant to Article VII, Section 5B, thereof, benefits payable
pursuant to this Plan shall not be paid in the form of a contingent annuitant
election but instead shall be paid in the same form as the normal
-5-
<PAGE> 6
form of benefit payment for Retirement Plan noncontributory benefits as if the
only life income benefits payable to the Participant under the Retirement Plan
were noncontributory benefits; and, provided, further, that in the event of a
Participant's regular early retirement, special early retirement, total and
permanent disability retirement, or deferred vested benefit commencement under
the Retirement Plan, as applicable, the monthly benefit provided hereunder shall
be reduced and/or adjusted in the same manner as Retirement Plan contributory
retirement benefits are reduced or adjusted in the event of a regular early
retirement, special early retirement, total and permanent disability retirement
or deferred vested benefits, as applicable.
ARTICLE V
UNFUNDED AND NON-QUALIFIED PLAN
This Plan is completely separate from the Retirement Plan. The undertakings
of the Company herein to each Participant constitute merely the obligation to
make payments as provided for herein, and it is the Company's intention that the
Plan be unfunded for tax purposes and for purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Neither a
Participant nor any beneficiary nor any other person shall have, by reason of
this Plan, any rights, title or interest of any kind in or to any property of
the Company, nor any beneficial interest in any trust which may be established
by the Company in connection with this Plan. If the Company transfers any
property to a trust in connection with this Plan, such trust shall not be held
for the exclusive benefit of Participants, and any assets held in such trust
shall be subject to the claims of the Company's general creditors in the event
of the Company's insolvency or bankruptcy.
-6-
<PAGE> 7
ARTICLE VI
ADMINISTRATION
The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company which shall have full and exclusive power to
interpret the Plan, to determine the amount and manner of any deferrals and
payments and to adopt such rules and regulations as are necessary for its
administration. The Compensation Committee may delegate specific
responsibilities it assumes under this Plan which are administrative or
ministerial in nature by notifying a delegate as to the duties and
responsibilities delegated. In that regard, the Compensation Committee delegates
responsibility for claims administration to the Retirement Committee for the
Rouge Steel Company Salaried Employee Retirement Plan (the "Retirement
Committee").
Claims for benefits under the Plan shall be made in writing to the
Retirement Committee. If a claim for benefits is wholly or partially denied, the
Retirement Committee shall, within a reasonable period of time, but not later
than ninety (90) days after receipt of the claim, provide the claimant written
notice in a manner calculated to be understood by the claimant of:
(A) The specific reason or reasons for denial;
(B) Specific reference to the pertinent Plan provisions on which the
denial is based;
(C) A description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why such material or
information is necessary; and
(D) Any explanation of the Plan's claim review procedure.
A Participant or beneficiary whose claim for benefits under the Plan
has been denied, or his or her duly authorized representative, may request a
review upon written application to the Retirement Committee, and may submit
issues and comments in writing. The claimant's written request for review must
be submitted to the Retirement Committee within sixty (60) days after receipt
-7-
<PAGE> 8
by the claimant of written notification of the denial of the claim. A decision
by the Retirement Committee shall be made promptly, and not later than sixty
(60) days after the Retirement Committee's receipt of a request for review,
unless special circumstances require an extension of time for proceeding, in
which case a decision shall be rendered as soon as possible, but not later than
one hundred twenty (120) days after receipt of the request for review. The
decision on review shall be in writing and shall include specific reasons for
the decision, specific reference to the pertinent Plan provisions on which the
decision is based and be written in a manner calculated to be understood by the
claimant.
The decisions of the Compensation Committee and/or the Retirement Committee
shall be final and conclusive on all persons and neither the Compensation
Committee or the Retirement Committee shall be subject to liability thereon.
ARTICLE VII
TERMINATION FOR CAUSE
Notwithstanding anything in this Plan to the contrary, if the Company
terminates a Participant's employment for Cause, then the Company shall have no
obligation to such Participant or his or her spouse pursuant to this Plan, and
no payments of any kind shall thereafter be made by the Company to the
Participant hereunder.
For purposes of the foregoing, "Cause" means:
(i) any act or acts of the Participant constituting a felony
(or its equivalent) under the laws of the United States, any state
thereof or any foreign jurisdiction;
(ii) any material breach, as determined by the Company, by the
Participant of any employment agreement with the Company or the
policies of the Company or any of its subsidiaries or the willful and
persistent (after written notice to the Participant) failure or
-8-
<PAGE> 9
refusal, as determined by the Company, of the Participant to perform
his or her duties of employment or comply with any lawful directives of
the Board of Directors of the Company;
(iii) conduct which the Company determines amounts to gross
neglect, willful misconduct or dishonesty; or
(iv) any misappropriation of material property of the Company
by the Participant or any misappropriation of a corporate or business
opportunity of the Company by the Participant, all as determined by the
Company.
ARTICLE VIII
ERISA COMPLIANCE
NON-QUALIFIED PLAN
Notwithstanding any provisions of this Plan to the contrary, the Company by
written resolution of the Board of Directors or the Compensation Committee may
terminate the Plan, or may amend or modify the Plan at any time and in any
respect, including as necessary or advisable in order that the benefits provided
by the Plan shall constitute unfunded deferred compensation for a select group
of management or highly compensated employees as described in Sections 201(2),
301(a)(3) and 401(a)(1) of ERISA. However, no such amendment or termination
shall adversely affect the rights of Participants or their spouses, if any, to
the extent of any vested benefits accrued as of the date of amendment or
termination of the Plan.
-9-
<PAGE> 10
ARTICLE IX
NO EMPLOYMENT CONTRACT
Nothing contained in this Plan, or any amendment hereto, shall be construed
as entitling a Participant to be continued in the employ of the Company for any
period of time, or as obliging the Company to keep said Participant in its
employ for any period of time. Furthermore, nothing contained in this Plan, or
any amendment hereto, shall be construed as restricting in any way the right of
the Company to reassign a Participant for any reason to a new employment
position at lower or higher compensation.
ARTICLE X
NONASSIGNABILITY
No rights of any kind under this Plan shall be transferable, or assignable
by a Participant, spouse or any other person, or be subject to alienation,
encumbrance, garnishment, attachment, execution, or levy of any kind, voluntary
or involuntary.
ARTICLE XI
RULES OF CONSTRUCTION
In the event that any provision of the Plan is determined by any judicial,
quasi-judicial or administrative body to be void or unenforceable for any
reason, all other provisions of the Plan shall remain in full force and effect
as if such void or unenforceable provision had never been part of the
Plan. The singular herein shall include the plural, or vice versa, wherever the
context so requires. A pronoun in the masculine, feminine or neuter gender shall
be deemed, where appropriate, to include also the masculine, feminine or neuter
gender.
-10-
<PAGE> 11
ARTICLE XII
WITHHOLDING; PAYROLL TAXES
To the extent required by law in effect at the time payments are made, the
Company shall withhold from payments made hereunder any taxes required to be
withheld from a Participant's wages for the Federal or any state or local
government.
ARTICLE XIII
APPLICABLE LAW
Except as governed by ERISA, and the Internal Revenue Code of 1986, as
amended, the Plan shall be construed in accordance with, and governed by, the
laws of the State of Michigan.
ARTICLE XIV
HEADINGS
Headings to the Articles of this Plan are included for convenience only and
shall not control the meaning or interpretation of any provision of this Plan.
IN WITNESS WHEREOF, the Company has adopted this Plan this 22nd day of
December, 1999.
ATTEST: ROUGE STEEL COMPANY
/s/ Martin Szymanski By: /s/ William E. Hornberger
- -------------------------------- --------------------------------
Secretary William E. Hornberger
Its: Senior Vice President
-------------------------------
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<PAGE> 12
APPENDIX A
TO THE ROUGE STEEL COMPANY
BENEFIT RESTORATION PLAN
In the event of a Change in Control, each Participant who has entered into
a written Change-In-Control Severance Agreement with Rouge Industries, Inc., who
becomes entitled to Change in Control benefits thereunder, and who does not
otherwise accrue the maximum service under the Retirement Plan creditable in
conjunction with benefits provided pursuant to the Rouge Steel Company Salaried
Income Security Plan ('SISP'), shall have his Rouge Steel Company Benefit
Restoration Plan benefit, but not his Retirement Plan benefit, calculated based
on such additional service necessary to attain the maximum service creditable
under the Retirement Plan in conjunction with SISP benefits (no more than 21
months) and based on an increase in Participant's age at the time at which such
maximum service would have been attained if credited in conjunction with the
SISP.
-12-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation
or
Wholly-Owned Subsidiaries of the Registrant Organization
- ------------------------------------------- ------------
Rouge Steel Company Delaware
QS Steel Inc. Michigan
Eveleth Taconite Company Minnesota
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-88518, No. 33-88520, No. 333-53741 and
No. 333-53743) of Rouge Industries, Inc. of our report dated February 2, 2000,
except as to the subsequent events described in Note 12 which is as of March 1,
2000, relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Detroit, Michigan
March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,861
<SECURITIES> 0
<RECEIVABLES> 197,313
<ALLOWANCES> 15,997
<INVENTORY> 269,808
<CURRENT-ASSETS> 480,515
<PP&E> 399,911
<DEPRECIATION> 121,301
<TOTAL-ASSETS> 867,606
<CURRENT-LIABILITIES> 282,217
<BONDS> 0
0
0
<COMMON> 222
<OTHER-SE> 409,553
<TOTAL-LIABILITY-AND-EQUITY> 867,606
<SALES> 967,642
<TOTAL-REVENUES> 967,642
<CGS> 1,137,151
<TOTAL-COSTS> 1,200,418
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,843
<INCOME-PRETAX> (79,957)
<INCOME-TAX> (30,494)
<INCOME-CONTINUING> (47,811)
<DISCONTINUED> (47,811)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,811)
<EPS-BASIC> (2.16)
<EPS-DILUTED> (2.16)
</TABLE>
