Back to GetFilings.com

Table of Contents

FORM 10-Q

(Mark One)

OR

Commission File Number 1-12852

ROUGE INDUSTRIES, INC.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     [X]          No     [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes     [   ]          No     [X]

The number of shares of common stock issued and outstanding as of July 29, 2003 was 22,247,554 which includes 15,107,154 shares of Class A Common Stock and 7,140,400 shares of Class B Common Stock.

ROUGE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2003

Table of Contents

INDEX

- 2 -

Table of Contents

Report of Independent Accountants

To the Board of Directors and
Stockholders of Rouge Industries, Inc.

We have reviewed the accompanying consolidated balance sheet of Rouge Industries, Inc. and its subsidiaries as of June 30, 2003, and the related consolidated statements of operations, of changes in stockholders’ equity, and of cash flows for each of the three-month and six-month periods ended June 30, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with general accepted accounting principles.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of operations, of changes in stockholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 8, 2003, which included an explanatory paragraph raising substantial doubt about the Company’s ability to continue as a going concern, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP
Detroit, Michigan
July 28, 2003

- 3 -

Table of Contents

PART I.    FINANCIAL INFORMATION

Item 1.     Consolidated Financial Statements

ROUGE INDUSTRIES, INC.

The accompanying notes are an integral part of the consolidated financial statements.

- 4 -

Table of Contents

ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

- 5 -

Table of Contents

ROUGE INDUSTRIES, INC.

The accompanying notes are an integral part of the consolidated financial statements.

- 6 -

Table of Contents

ROUGE INDUSTRIES, INC.

The accompanying notes are an integral part of the consolidated financial statements.

- 7 -

Table of Contents

ROUGE INDUSTRIES, INC.

The accompanying notes are an integral part of the consolidated financial statements.

- 8 -

Table of Contents

ROUGE INDUSTRIES, INC.

NOTE 1 — BASIS OF PRESENTATION

The interim consolidated financial statements are unaudited. However, in the opinion of the Company, the statements include all adjustments necessary for a fair presentation of the results for the interim periods presented. Such adjustments include normal recurring adjustments as well as additional adjustments discussed in Note 6. The foregoing interim results are not necessarily indicative of the results of operations expected for the full fiscal year ending December 31, 2003.

These consolidated financial statements should be read together with the Company’s audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission. For the purpose of these Notes to Consolidated Financial Statements, “Rouge Industries” or the “Company” refers to Rouge Industries, Inc. and its subsidiaries unless the context requires otherwise.

NOTE 2 — LIQUIDITY MATTERS

During the mid-1990’s, Rouge Industries was experiencing a relatively stable market environment. Then in 1998, an unprecedented amount of steel imports began flooding the U.S. causing domestic steel prices to decline dramatically. In 1999, an explosion and fire at the Rouge Complex Powerhouse (the “Powerhouse”) caused a 93-day shutdown of Rouge Steel’s steelmaking facilities and two years of difficult operations. In 2000, natural gas prices began to rise causing a considerable increase in the Company’s costs of goods sold. In addition, in late 2001, a fire occurred at Double Eagle Steel Coating Company (“Double Eagle”), the Company’s joint venture electrogalvanizing line, which caused that facility to lose production for nine months.

Rouge Industries continues to face difficult market conditions. The depressed steel selling prices for the major portion of the past three years, the cash drain caused by the effects of the 1999 Powerhouse incident, the 2001 Double Eagle fire and the recent explosion at the “C” blast furnace dust catcher (see Note 6), and the delayed startup and operation of the new power plant built and operated by Dearborn Industrial Generation, L.L.C. caused significant operating losses and put considerable pressure on the Company’s liquidity. During the three years ended December 31, 2002, Rouge Industries incurred net losses of $281,170,000. The Company responded to the liquidity deterioration by refinancing its revolving loan facility, procuring two subordinated credit facilities and selling or restructuring three joint venture companies.

The Company’s liquidity is dependent on its operating performance (which is closely related to business conditions in the domestic automotive and steel industries), the implementation of operating and capital cost reduction programs, the cost of energy and raw materials, and its sources of financing. The Company depends on borrowings to fund operations. In the event that market conditions deteriorate, causing operating losses to continue, and Rouge Industries is unable to secure additional financing sources to fund its operations, it may be required to seek bankruptcy protection or commence liquidation or other administrative proceedings.

- 9 -

Table of Contents

NOTE 3 — INVENTORIES

The major classes of inventories are as follows (dollars in thousands):

NOTE 4 — DEBT

Rouge Industries had borrowings outstanding of $125,431,000 as of June 30, 2003 and $186,181,000 as of December 31, 2002. Rouge Steel has a $200,000,000 revolving loan agreement (the “Credit Agreement”) which expires on March 13, 2004. There is one financial covenant in the Credit Agreement, which is an excess availability minimum of $25,000,000. Borrowings under the Credit Agreement are limited to specified percentages of receivables and inventories. At June 30, 2003, the Company’s receivables and inventories supported availability under the Credit Agreement of $121,927,000, of which it could borrow up to $95,627,000 without a covenant default. The Company had borrowings outstanding under the Credit Agreement of $40,431,000 as of June 30, 2003. The Credit Agreement bears an unused line fee of 0.375%. Interest on loans under the Credit Agreement is calculated by one of two methods: (i) the prime rate plus a margin ranging from 0.25% to 1.00%, depending upon excess availability under the Credit Agreement during the prior quarter or (ii) the London Interbank Offered Rate plus a margin ranging from 2.25% to 3.00%, depending upon excess availability under the Credit Agreement during the prior quarter.

Rouge Industries also has a $10,000,000 loan from Cleveland-Cliffs Inc. (the “Cliffs Facility”). The Cliffs Facility expires on June 30, 2007 and bears interest at 10% per year. Payments of $2,500,000 are due on the Cliffs Facility each June 30, 2004, 2005, 2006 and 2007. The Cliffs Facility is subordinate to the Credit Agreement, has a second security interest in substantially all of the Company’s assets and contains cross default provisions with the Credit Agreement. As of June 30, 2003, the Company had borrowings outstanding under the Cliffs Facility of $10,000,000.

Rouge Industries also has a $75,000,000 credit facility from Ford Motor Company (the “Ford Facility”). The Ford Facility expires on June 30, 2004 and bears interest at approximately the same rate as the Credit Agreement. The Ford Facility is subordinate to the Credit Agreement and the Cliffs Facility, has a third security interest in substantially all of the Company’s assets and contains cross default provisions with the Credit Agreement. As of June 30, 2003, the Company had borrowings outstanding under the Ford Facility of $75,000,000.

- 10 -

Table of Contents

NOTE 5 — COMMON STOCK

Rouge Industries applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for the ODEP and the SIP in 2002 or 2003. 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, the Company’s net loss and net loss per share would have resulted in the pro forma amounts indicated below (dollars in thousands, except per share amounts):

NOTE 6 — INSURANCE CLAIMS

Double Eagle. On December 15, 2001, a fire at Double Eagle halted production. The Company and its joint venture partner, United States Steel Corporation, rebuilt Double Eagle and returned the facility to production in September 2002.

On April 4, 2003, Rouge Industries and its insurers’ representatives reached a final settlement with respect to the Double Eagle fire loss. Total proceeds for the Double Eagle insurance claim will amount to $52,327,000. As a result of the settlement and the receipt of proceeds, the Company recorded $13,917,000 as first quarter 2003 insurance recoveries. Of that amount, $9,461,000 represented the excess of replacement costs over the net book value of the Double Eagle property destroyed. Other components of first quarter 2003 insurance recoveries included the reversal of previously established insurance recovery reserves of $3,400,000 and additional business interruption recovery of $1,056,000. The final proceeds of $7,027,000 are expected to be collected, and corresponding recoveries recognized as income, during the third quarter of 2003.

“C” Blast Furnace Outage. On June 21, 2003, an explosion at the “C” blast furnace dust catcher damaged auxiliary equipment resulting in the temporary shutdown of the furnace. The furnace was returned to operation on July 22, 2003 and is now operating at its rated capacity.

During the second quarter, the Company’s operating income was adversely impacted by $4,845,000 as a result of the “C” blast furnace outage. The Company estimates that the total cost of this incident will approach $20,000,000. The Company plans to record insurance recovery in the third quarter once the $10,000,000 deductible is exceeded.

- 11 -

Table of Contents

Powerhouse-Related Insurance Claim. As a result of a recent settlement reached between the Company’s insurer and Ford Motor Company (“Ford”) related to the 1999 Powerhouse incident, the Company received $14,322,000, or 33% of the settlement amount, pursuant to a 2001 agreement between the Company and Ford.

NOTE 7 — EARNINGS PER SHARE

There was no difference between basic and diluted earnings per share in the second quarters of 2003 and 2002. The table below presents dilutive securities, which represent stock options granted to members of management or the board of directors with exercise prices lower than the average market price of the Company’s Class A Common Stock, and anti-dilutive securities, which are stock options granted to members of management or the board of directors with exercise prices higher than the average market price of the Company’s Class A Common Stock. All of these stock options will expire between 2004 and 2013.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Other than the matters discussed above, there have been no material changes to the commitments and contingencies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

- 12 -

Table of Contents

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Comparison of the Three - Month Periods Ended June 30, 2003 and 2002

     Total Sales. Total sales for Rouge Industries, Inc. (together with its subsidiaries, “Rouge Industries” or the “Company”) decreased 1.8% in the second quarter of 2003 to $284.3 million from $289.4 million in the second quarter of 2002, a decrease of $5.1 million. The decrease in total sales resulted from lower steel product shipments partially offset by higher steel product selling prices. Steel product shipments decreased 3.1% in the second quarter of 2003 to 680,000 tons from 701,000 net tons in the second quarter of 2002, a decrease of 21,000 tons. The average realized selling prices of the Company’s steel products were 1.2% higher in the second quarter of 2003 at $418 per ton compared to $413 per ton in the second quarter of 2002, an increase of $5 per ton.

     Costs and Expenses. Total costs and expenses increased 1.1% in the second quarter of 2003 to $313.2 million from $309.7 million in the second quarter of 2002, an increase of $3.5 million. Costs of goods sold increased 1.3% in the second quarter of 2003 to $302.6 million from $298.8 million in the second quarter of 2002, an increase of $3.8 million. The increase in costs of goods sold in the second quarter of 2003 can be attributed to higher raw material and natural gas costs and costs related to the “C” blast furnace incident and scheduled and unscheduled outages for mechanical repairs to certain Company facilities. These cost increases were partially offset by lower steel product shipments, lower costs related to the December 2001 fire at Double Eagle Steel Coating Company (“Double Eagle”), the Company’s 50% owned electrogalvanizing joint venture, and an effective cost reduction effort. Costs of goods sold in the second quarter of 2003 were 106.5% of total sales, up from 103.3% of total sales in the second quarter of 2002.

     Operating Loss. The operating loss increased 42.2% in the second quarter of 2003 to $28.9 million from $20.3 million in the second quarter of 2002, an increase of $8.6 million. The increased loss was primarily due to higher raw material and natural gas costs and costs related to the “C” blast

- 13 -

Table of Contents

furnace incident and scheduled and unscheduled outages for mechanical repairs to certain Company facilities, partially offset by higher steel product prices, lower costs related to the Double Eagle fire and an effective cost reduction effort.

     Insurance Recovery. Rouge Industries did not recognize any income for insurance recoveries related to the Double Eagle fire in the second quarter of 2003 compared to $12.1 million recorded in the second quarter of 2002. The Company also did not recognize any income for insurance recoveries related to the June 21, 2003 explosion at the Company’s “C” blast furnace dust catcher. The $10 million deductible had not been reached in the second quarter. The Company expects to begin recording insurance recoveries related to the “C” blast furnace incident during the third quarter of 2003. As a result of a recent settlement reached between the Company’s insurer and Ford Motor Company (“Ford”) related to the 1999 incident at the Rouge Complex Powerhouse (the “Powerhouse”), the Company received $14.3 million, or 33% of the settlement amount, pursuant to a 2001 agreement between Rouge Steel and Ford. The insurance recovery amount recorded for the second quarter of 2003 included $84,000 for funds received upon settlement of a small claim.

     Equity in Unconsolidated Subsidiaries. Equity in loss from unconsolidated subsidiaries was $3.4 million in the second quarter of 2003 compared to equity in income from unconsolidated subsidiaries of $2.5 million in the second quarter of 2002, a change of $5.9 million. The decrease in equity in unconsolidated subsidiaries resulted primarily from losses recorded at Eveleth Mines LLC (“EVTAC”). EVTAC ceased operation in mid-May, after filing for federal bankruptcy protection, and recorded a $4.2 million loss for the second quarter of 2003 compared to income of $600,000 in the second quarter of 2002.

     Net Loss. The net loss increased 128.1% in the second quarter of 2003 to $19.9 million from $8.7 million in the second quarter of 2002, an increase of $11.2 million. The increase was primarily due to higher raw material and natural gas costs, costs related to the “C” blast furnace incident and scheduled and unscheduled outages for mechanical repairs to certain Company facilities and the loss

- 14 -

Table of Contents

recorded at EVTAC, partially offset by higher steel product prices, lower costs related to the Double Eagle fire, the favorable settlement of a Powerhouse-related insurance claim and an effective cost reduction effort.

Comparison of the Six-Month Periods Ended June 30, 2003 and 2002

     Total Sales. Total sales for Rouge Industries increased 7.9% in the first half of 2003 to $580.7 million from $538.2 million in the first half of 2002, an increase of $42.5 million. The increase in total sales resulted from higher steel product selling prices partially offset by lower steel product shipments. The average realized selling prices of the Company’s steel products were 8.8% higher in the first half of 2003 at $429 per ton compared to $394 per ton in the first half of 2002, an increase of $35 per ton. Steel product shipments decreased 0.1% in the first half of 2003 to 1,355,000 tons from 1,366,000 tons in the first half of 2002, a decrease of 11,000 tons.

     Costs and Expenses. Total cost and expenses increased 4.7% in the first half of 2003 to $633.1 million from $604.8 million in the first half of 2002, an increase of $28.3 million. Costs of goods sold increased 4.8% in the first half of 2003 to $611.8 million from $583.9 million in the first half of 2002, an increase of $27.9 million. The increase in costs of goods sold in the first half of 2003 can be attributed to higher raw material and natural gas costs and costs related to the “C” blast furnace incident and scheduled and unscheduled outages for mechanical repairs to certain Company facilities. These cost increases were partially offset by lower costs related to the December 2001 fire at Double Eagle and an effective cost reduction effort. Costs of goods sold in the first half of 2003 were 105.4% of total sales, down from 108.5% of total sales in the first half of 2002.

     Operating Loss. The operating loss decreased 21.4% in the first half of 2003 to $52.4 million from $66.7 million in the first half of 2002, a decrease of $14.3 million. The decreased loss was primarily due to higher steel product prices, lower costs related to the Double Eagle fire and an effective cost reduction effort, partially offset by higher raw material and natural gas costs and costs

- 15 -

Table of Contents

related to the “C” blast furnace incident and scheduled and unscheduled outages for mechanical repairs to certain Company facilities.

     Insurance Recovery. Rouge Industries recognized $13.9 million of income for insurance recoveries related to the Double Eagle fire in the first half of 2003 compared to $18.1 million recorded in the first half of 2002. As a result of a recent settlement reached between the Company’s insurer and Ford related to the 1999 Powerhouse incident, the Company received $14.3 million, or 33% of the settlement amount, pursuant to 2001 agreement between Rouge Steel and Ford.

     Equity in Unconsolidated Subsidiaries. Equity in loss from unconsolidated subsidiaries was $2.7 million in the first half of 2003 compared to equity in income from unconsolidated subsidiaries of $3.8 million in the first half of 2002, a change of $6.5 million. The decrease in equity in unconsolidated subsidiaries resulted primarily from losses recorded at EVTAC. EVTAC recorded a $5.3 million loss in the first half of 2003 compared to income of $131,000 in the first half of 2002. Additionally, Spartan Steel Coating Company, the Company’s 48% owned hot dip galvanizing joint venture, recorded lower income in the first half of 2003 than the first half of 2002.

     Net Loss. The net loss decreased 37.7% in the first half of 2003 to $31.3 million from $50.2 million in the first half of 2002, a decrease of $18.9 million. The lower net loss was primarily due to higher steel product prices, lower costs related to the Double Eagle fire, the favorable settlement of a Powerhouse-related insurance claim, and an effective cost reduction effort, partially offset by higher raw material and natural gas costs, costs related to the “C” blast furnace incident and scheduled and unscheduled outages for mechanical repairs to certain Company facilities and the loss recorded at EVTAC.

Liquidity and Capital Resources

     Rouge Industries continues to face difficult market conditions. The depressed steel selling prices for the major portion of the past three years, the cash drain caused by the effects of the 1999 Powerhouse incident, the 2001 Double Eagle fire and the recent explosion at the “C” blast furnace

- 16 -

Table of Contents

dust catcher, and the delayed startup and operation of the new power plant built and operated by Dearborn Industrial Generation, L.L.C. caused significant operating losses and put considerable pressure on the Company’s liquidity. The Company responded to the liquidity deterioration by refinancing its revolving loan facility, procuring two subordinated credit facilities and selling or restructuring three joint venture companies.

     The Company’s liquidity is dependent on its operating performance (which is closely related to business conditions in the domestic automotive and steel industries), the implementation of operating and capital cost reduction programs, the cost of energy and raw materials, and sources of financing. The Company depends on borrowings to fund operations. In the event that market conditions deteriorate, causing operating losses to continue, and Rouge Industries is unable to secure additional financing sources to fund its operations, it may be required to seek bankruptcy protection or commence liquidation or other administrative proceedings.

     Cash and cash equivalents on June 30, 2003 totaled $3.9 million compared to $2.6 million on December 31, 2002, an increase of $1.3 million.

     Cash Flows from Operating Activities. Net cash provided by operating activities was $66.4 million in the first six months of 2003 compared to net cash used for operating activities of $13.0 million in the first six months of 2002. The $79.4 million improvement in the first six months of 2003 was primarily attributable to lower net loss, a greater inventory reduction and an increase in accounts payable.

     Capital Expenditures. Cash used for capital expenditures, including investments in unconsolidated subsidiaries, increased in the first six months of 2003 to $6.3 million from $3.9 million in the first six months of 2002, an increase of $2.4 million. The increase is the result of spending on scheduled and unscheduled maintenance projects. During the remainder of 2003, it is anticipated that an additional $12 million will be paid or accrued for capital projects. These projects will be funded with cash provided by operating activities and debt. Overall, the additional capital

- 17 -

Table of Contents

expenditures are non-discretionary and will be generally directed at maintaining plant efficiency and product quality.

     Credit Facilities. Rouge Industries has a $200 million revolving loan agreement (the “Credit Agreement”) which expires on March 13, 2004. Borrowings under the Credit Agreement are limited to specified percentages of receivables and inventories. At June 30, 2003, the Company’s receivables and inventories supported availability under the Credit Agreement of $121.9 million, of which the Company could borrow up to $95.6 million without a covenant default. The Company had borrowings of $40.4 million under the Credit Agreement as of June 30, 2003.

     Rouge Industries also has a $10 million loan from Cleveland-Cliffs Inc (the “Cliffs Facility”). The Cliffs Facility expires on June 30, 2007. Payments of $2.5 million are due on the Cliffs Facility each June 30, 2004, 2005, 2006 and 2007. The Company had borrowings outstanding under the Cliffs Facility of $10 million at June 30, 2003.

     Rouge Industries also has a $75 million credit facility from Ford (the “Ford Facility”). The Ford Facility expires on June 30, 2004. The Company had borrowings outstanding under the Ford Facility of $75.0 million as of June 30, 2003.

     Workers’ Compensation Letter of Credit. The State of Michigan Bureau of Workers’ Compensation has notified Rouge Industries that its $1.0 million standby letter of credit (“LOC”) should be increased to $2.0 million by August 31, 2003, to $2.75 million by November 30, 2003 and to $3.5 million by January 31, 2004. The increase to the LOC will reduce the Company’s availability under the Credit Agreement by a corresponding amount.

- 18 -

Table of Contents

Contractual Obligations and Other Commercial Commitments

     The Company has certain obligations with various parties that include commitments to make future payments. Such obligations are presented below.

Double Eagle Insurance Claim

     On December 15, 2001, a fire at Double Eagle halted production. The Company and its joint venture partner, United States Steel Corporation, rebuilt Double Eagle and returned the facility to production in September 2002.

     On April 4, 2003, Rouge Industries and its insurers’ representatives reached a final settlement with respect to the Double Eagle fire loss. Total proceeds for the Double Eagle insurance claim will

- 19 -

Table of Contents

amount to $52.3 million. As a result of the settlement and the receipt of proceeds, the Company recorded $13.9 million as first quarter 2003 insurance recoveries. Of that amount, $9.5 million represents the excess of replacement costs over the net book value of the Double Eagle property destroyed. Other components of first quarter 2003 insurance recoveries include the reversal of previously established insurance recovery reserves of $3.4 million and additional business interruption recovery of $1.0 million. The final proceeds of $7.0 million are expected to be collected, and corresponding recoveries recognized as income, during the third quarter of 2003.

Recent Developments

     “C” Blast Furnace Outage. On June 21, 2003, an explosion at the “C” blast furnace dust catcher damaged auxiliary equipment resulting in the temporary shutdown of the furnace. The furnace was returned to operation on July 22, 2003 and is now operating at its rated capacity.

     During the second quarter, the Company’s operating income was adversely impacted by $4.8 million as a result of the “C” blast furnace outage. The Company estimates that the total cost of this incident will approach $20 million. The Company plans to record insurance recovery in the third quarter once the $10 million deductible is exceeded.

     Powerhouse-Related Insurance Claim. As a result of a recent settlement reached between the Company’s insurer and Ford related to the 1999 Powerhouse incident, the Company received $14.3 million, or 33% of the settlement amount, pursuant to a 2001 agreement between the Company and Ford.

     SRS Consent Order. The Company has signed a Consent Order with the U.S. Environmental Protection Agency (the “EPA”) for the cleanup of a Detroit area superfund site. The Company has recorded an accrual of $429,000 for its share of the estimated cost of the cleanup.

     New Boston Coke Corporation Hazardous Material Removal. The EPA has issued a letter to the Company naming Rouge Steel as a potentially responsible party for the removal of stored hazardous material at New Boston Coke Corporation (“New Boston”). The Company has responded to the

- 20 -

Table of Contents

EPA that the Company disagrees with the EPA’s position that Rouge Steel is a potentially responsible party and the EPA’s theory of liability. The Company intends to vigorously defend its position with respect to the New Boston issue. Until early 2002, the Company acquired coke through a tolling agreement with New Boston, whose total productive capacity was dedicated to the Company. During 2002, New Boston closed its facilities.

     EVTAC Bankruptcy. EVTAC, the Company’s 45% owned pellet producing subsidiary, filed for federal bankruptcy protection on May 1, 2003 and ceased operation on May 14, 2003. The Company believes that it does not have any further obligations related to the funding of EVTAC’s operation or liabilities. The Company has a long-term agreement with Cleveland-Cliffs for all of its iron ore pellet requirements. As a result, EVTAC’s situation will not affect the Company’s supply or price of pellets.

     Cost Reduction Effort. In 2002, the Company commenced an extensive cost reduction effort. This ongoing endeavor involves reducing spending on services, supplies and labor and improving productivity, yield, fuel rate and quality. The Company expects to achieve significant savings in 2003 as a result of its cost reduction efforts. During the first six months of 2003, total savings attributable to the cost reduction program included yield and productivity improvements in the Company’s finishing facilities and certain labor, landfill and property tax cost reductions.

     Ethics and Compliance Hotline. The Sarbanes-Oxley Act of 2002 requires the Company’s audit committee, among other things, to establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Company has contracted with an independent service firm to provide an ethics and compliance hotline (the “Hotline”) which is available 24 hours a day, 7 days a week where unethical or improper activities, including questionable accounting or auditing matters, may be reported. Information regarding the Hotline is available on the Company’s web site at www.rougeindustries.com.

- 21 -

Table of Contents

     New Accounting Pronouncements. During the first quarter of 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This pronouncement had no impact on the Company’s results of operations or financial position.

     In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” to include more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, while the interim disclosure provisions are effective for periods beginning after December 15, 2002.

     As permitted, the Company will continue to follow the accounting guidelines of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” for stock-based compensation and to furnish the pro forma disclosures required under SFAS No. 148.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

     The matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements that involve risks and uncertainties. These forward-looking statements may include, among others, statements concerning projected levels of production, sales, shipments and income, pricing trends, cost reduction strategies, product mix, anticipated capital expenditures and other future plans and strategies.

     As permitted by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Rouge Industries is identifying in this Quarterly Report on Form 10-Q a number of factors which could cause the Company’s actual results to differ materially from those anticipated. These

- 22 -

Table of Contents

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) plant operating performance, given the age of the Company’s facilities, (v) product quality, in light of increasingly tighter standards required by the Company’s customers, (vi) potential environmental liabilities, (vii) the availability and prices of raw materials, supplies, utilities and other services and items required by the Company’s operations, (viii) the volume and price of imports in the Company’s markets, (ix) the availability of sufficient cash to support the Company’s operations and (x) higher than expected operating costs.

- 23 -

Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

     The Company is exposed to certain market risks that exist as part of its ongoing business. These risks include fluctuations in the cost of energy and raw materials and interest rates. Rouge Industries generally relies upon competitive market purchases for its energy and raw materials. The Company holds raw materials in inventory to ensure uninterrupted supply, not as a hedge against price fluctuations. The Company’s debt is floating based on market rates and the Company does not use swaps or other interest rate protection agreements to hedge this risk.

     The table below presents the Company’s debt that is sensitive to changes in interest rates (dollars in millions).