NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Exhibit 13(g)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries, and references to
the "Company" include the Company and consolidated subsidiaries. "Investments
in Associated Companies" are comprised of partnerships and unconsolidated
companies which the Company does not control. Such investments are accounted by
the equity method (see Note C). The Company's equity in earnings of mining
partnerships from which the Company purchases iron ore production is credited
to cost of goods sold upon sale of the product.
BUSINESS: The Company's dominant business is the production and sale of iron
ore pellets. The Company controls, develops, and leases reserves to mine
owners; manages and owns interests in mines; sells iron ore; and owns interests
in ancillary companies providing services to the mines. Iron ore production
activities are conducted in the United States, Canada and Australia. The
Australian operations had total revenues and pre-tax operating profit of $43.5
million and $5.4 million, $41.9 million and $4.4 million, and $40.3 million and
$3.3 million, in 1994, 1993 and 1992, respectively. Total Australian assets,
including long-term investments ($12.9 million, 1994 and $12.4 million, 1993)
to fund eventual shutdown cost, were $38.8 million at December 31, 1994 (1993 -
$29.8 million).
Iron ore is marketed in North America, Europe, Asia, and Australia. The three
largest steel company customers' contribution to the Company's revenues were
14%, 14% and 12% in 1994; 14%, 12% and 11% in 1993; and 13%, 13% and 12% in
1992.
CASH EQUIVALENTS: The Company considers investments in highly liquid debt
instruments with an initial maturity of three months or less to be cash
equivalents.
INVESTMENTS: The Company determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such designation as
of each balance sheet date.
Securities are classified as held-to-maturity when the Company has the intent
and ability to hold the securities to maturity. Held-to-maturity securities are
stated at cost and investment income is included in earnings.
The Company classifies certain highly liquid securities as trading securities.
Trading securities are stated at fair value and unrealized holding gains and
losses are included in income.
Securities that are not classified as held-to-maturity or trading are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized holding gains and losses, net of tax, reported
as a separate component of shareholders' equity.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
FORWARD CURRENCY EXCHANGE CONTRACTS: The Company had $6 million and $20
million of Australian forward currency exchange contracts at December 31, 1994
and 1993, respectively, and $6 million of Canadian forward currency exchange
contracts at December 31, 1994. These forward exchange contracts are hedging
transactions that have been entered into with the objective of managing the
risk associated with currency fluctuations with respect to the on-going
obligations of the Company's Australian and Canadian operations denominated in
those currencies. Gains and losses are recognized in the same period as the
hedged transaction. The fair value of these currency exchange contracts which
have varying maturity dates to December 30, 1995, is estimated to be $6.4
million for the Australian contracts and $6 million for the Canadian contracts,
based on the December 31, 1994 forward rates.
INVENTORIES: Product inventories, primarily finished products, are stated at
the lower of cost or market. The cost of product inventories is determined
using the last-in, first-out ("LIFO") method. The excess of current cost over
LIFO cost of product inventories was $.9 million and $1.5 million at December
31, 1994 and 1993, respectively. The cost of other inventories is determined by
the average cost method.
PROPERTIES: Depreciation of plant and equipment is computed principally by the
straight-line method based on estimated useful lives. Depreciation is not
reduced when operating units are temporarily idled. Depletion of mineral lands
is computed using the units of production method based upon proven mineral
reserves.
EXPLORATION, RESEARCH AND DEVELOPMENT COSTS: Exploration, research and
continuing development costs of mining properties are charged to operations as
incurred. Development costs which benefit extended periods are deferred and
amortized over the period of benefit. At December 31, 1994, deferred
development costs were less than $1.0 million. Startup costs of major new
facilities are deferred and amortized over five years from commencement of
commercial production.
INCOME TAXES: Effective January 1, 1992, the Company adopted the Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
INCOME (LOSS) PER COMMON SHARE: Income or loss per common share is based on
the average number of common shares outstanding during each period.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to current year classifications.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE A - ACCOUNTING AND DISCLOSURE CHANGES
In December, 1990, the Financial Accounting Standards Board issued Statement
106, "Accounting for Post-retirement Benefits Other than Pensions," which
requires that the projected future expense of providing post-retirement
benefits, such as health care and life insurance, be recognized as employees
render service instead of when the benefits are paid. The Statement requires
the assumptions that present benefit plans continue at escalating costs. The
Company adopted the provisions of the new standard in its financial statements
for the year ended December 31, 1992. The cumulative effect as of January 1,
1992 of adopting Statement 106 decreased 1992 net income by $42.5 million, or
$3.54 per share (after deferred income tax benefit of $21.8 million).
In February, 1992, the Financial Accounting Standards Board issued Statement
109, "Accounting for Income Taxes." Under Statement 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on temporary differences between financial
reporting and tax bases of assets and liabilities and are measured using
currently enacted tax rates and laws applicable when the differences are
expected to reverse. The Company adopted the provisions of the new standard in
its financial statements for the year ended December 31, 1992. The cumulative
effect as of January 1, 1992 of adopting Statement 109 increased net income by
$3.8 million, or $.31 per share.
In October, 1994, the Financial Accounting Standards Board issued Statement
119, entitled, "Disclosure about Derivative Financial Instruments," which
requires expanded disclosure about such instruments. The Company's exposure to
risk associated with derivative instruments is limited to forward currency
exchange contracts (see Accounting Policies).
NOTE B - NORTHSHORE MINE AND POWER PLANT ACQUISITION
On September 30, 1994, Cliffs Minnesota Minerals Company, a subsidiary of
Cleveland-Cliffs Inc, completed the acquisition of Cyprus Amax Minerals
Company's ("Cyprus Amax") iron ore operation and power plant (renamed
Northshore Mining Company or "Northshore") in Minnesota for $66 million, plus
net working capital of $28 million. The principal Northshore assets are 4
million annual tons of active capacity for production of standard pellets
(equivalent to 3.5 million tons of flux pellet capacity), supported by 6
million tons of active concentrate capacity, a 115 megawatt power generation
plant, and an estimated 1.2 billion tons of magnetite crude iron ore reserves,
leased mainly from the Mesabi Trust. Northshore has a long-term contract to
sell 40 megawatts of excess capacity to an electric utility with approximately
17 years remaining.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The acquisition has been accounted for as a purchase transaction, and the
balance sheet of Northshore has been consolidated on the basis of a preliminary
allocation of the purchase price. The purchase price consisted of:
(In Millions)
-------------
Cash $ 94.3
Acquisition Costs 3.0
------
Purchase Price $ 97.3
======
The purchase price has been initially allocated as follows:
(In Millions)
-------------
Assets
------
Current Assets $ 36.1
Property, Plant and Equipment 68.2
Other Assets 6.5
------
Total Assets 110.8
Liabilities
-----------
Current Liabilities 9.1
Long-Term Liabilities 4.4
------
Total Liabilities 13.5
------
Purchase Price $ 97.3
======
The final allocation of the purchase price will be made when the evaluation of
fair values has been finalized.
Additional payments to Cyprus Amax would be required under certain expansion
conditions. Any payments would occur over a period of years under conditions
expected to be favorable to the Company and are not expected to be material in
any year.
Pro forma results of the Company's operations, assuming the acquisition had
occurred at the beginning of 1993, are shown in the following table.
Pro Forma
(Unaudited)
-------------------------
1994 1993*
------ ------
Total Revenues (Millions) $466.7 $415.0
====== ======
Net Income
----------
Amount (Millions) $ 47.0 $ 36.5
====== ======
Per Common Share $ 3.89 $ 3.04
====== ======
* Year 1993 results exclude the Company's $35.7 million before-tax ($23.2
million after-tax or $1.93 per share) recovery on the settlement of the
Company's bankruptcy claim against LTV Steel Company, Inc. (an integrated
steel company subsidiary of The LTV Corporation, or collectively "LTV").
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The pro forma results have been prepared for illustrative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
actually been made at the beginning of 1993, nor of results which may occur in
the future. Actual results could be significantly different under the
Company's ownership due to, among other matters, differences in marketing,
operating and investment actions which have been or may be taken by the
Company.
NOTE C - INVESTMENTS IN ASSOCIATED COMPANIES
The Company's investments in associated companies are accounted by the equity
method and consist primarily of its 22.5625% interest in Empire Iron Mining
Partnership ("Empire"), 15% interest in Hibbing Taconite Company ("Hibbing"),
33.33% interest in Tilden Magnetite Partnership ("Tilden Magnetite"), 60%
interest in Tilden Mining Company ("Tilden"), and 7.01% interest (5.2% in 1992)
in Wabush Mines ("Wabush"). These iron ore mining ventures are managed by the
Company in North America. The other interests in these ventures are owned by
U.S., Canadian and European steel companies. The Company's investments in
associated companies also include interests in certain inactive iron ore mining
ventures and mining service companies.
Following is a summary of combined financial information of the operating iron
ore mining ventures.
(In Millions)
-------------------------------
1994 1993 1992
-------------------------------
INCOME
Gross revenue $968.2 $896.5 $967.4
Equity income 99.5 82.2 91.7
FINANCIAL POSITION
Properties - net $774.5 $812.4 $848.3
Other assets 107.1 95.8 114.1
Debt obligations (39.8) (61.0) (91.1)
Other liabilities (147.4) (123.1) (124.5)
------ ------ ------
Net assets $694.4 $724.1 $746.8
====== ====== ======
Company's equity in
underlying net assets $253.6 $266.8 $278.8
Company's investment $151.7 $152.2 $166.8
The Company manages and operates all of the iron ore ventures and leases or
subleases mineral rights to certain ventures. In addition, the Company is
required to purchase its applicable current share, as defined, of the
production decided by the venture participants. The Company purchased $247.2
million in 1994 (1993-$196.0 million; 1992-$214.4 million) of iron ore from
certain associated companies. During 1994, the Company earned royalties and
management fees of $44.7 million (1993-$39.5 million; 1992-$41.9 million) from
iron ore mining ventures of which $12.7 million in 1994 (1993-$10.7 million;
1992-$12.8 million) was paid by the Company as a participant in the ventures.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Costs and expenses incurred by the Company, on behalf of the ventures, are
charged to such ventures in accordance with management and operating
agreements. The Company's equity in the income of iron ore mining ventures is
credited to the cost of goods sold and includes the amortization to income of
the excess of the Company's equity in the underlying net assets over its
investment on the straight-line method based on the useful lives of the
underlying assets. The difference between the Company's equity in underlying
net assets and recorded investment results from the assumption of interests
from former participants in the mining ventures and from acquisition. The
Company's equity in the income of iron ore mining ventures was $19.5 million in
1994 (1993-$23.5 million; 1992-$32.8 million).
In February, 1994, the Company reached general agreement with Algoma Steel Inc.
("Algoma") and Stelco Inc. to restructure and simplify the Tilden Mine
operating agreement effective January 1, 1994. The principal terms of the new
agreement are (1) the participants' tonnage entitlements and cost-sharing are
based on a 6.0 million ton target normal production level instead of the
previous 4.0 million ton base production level, (2) the Company's interest in
the Tilden Magnetite Partnership has increased from 33.33% to 40.0% with an
associated increase in the Company's obligation for its share of mine costs,
(3) the Company is receiving a higher royalty, (4) the Company has the right to
supply any additional iron ore pellet requirements of Algoma from Tilden or the
Company, and (5) any partner may take additional production with payment of
certain fees to the Partnership. The parties implemented the general agreement
effective January 1, 1994 and are negotiating the detailed provisions of the
definitive agreement. The agreement has not had a material financial effect on
the Company's consolidated financial statements.
On June 28, 1993, LTV emerged from bankruptcy. The Company continues to
guarantee the partnership debt applicable to LTV's remaining 25% interest in
Empire which at December 31, 1994 was $9.1 million.
The Company's effectively serviced share of long-term obligations of associated
companies, including current portion, was $9.2 million as of December 31, 1994
(1993-$13.6 million). In addition, the Company guaranteed $13.7 million (which
includes the previously mentioned $9.1 million LTV guarantee) of Empire
long-term obligations which are effectively serviced by LTV and
Wheeling-Pittsburgh Steel Corporation. The fair value of the guarantees is
nominal because advances against the guarantees would be supported by ownership
interests in Empire. Maturities of the Company's share of Empire long-term
obligations for the two years after December 31, 1994 are $4.3 million in 1995
and a final $3.9 million in 1996. The Company's share of plant and equipment
and other property interests which secure the effectively serviced obligations
was $45.5 million at December 31, 1994.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE D - INVESTMENTS
The Company elected early adoption of Financial Accounting Standards Board
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities," in 1993. Following is a summary of investment securities:
(In Millions)
---------------------------------------------
Gross Estimated
Unrealized Fair
Cost Gains (Losses) Value
---- -------------- ---------
December 31, 1994
-----------------------------------
Long-Term Investments
---------------------
Available-for-Sale
-------------------
Debt Securities $ .7 $ -- $ .7
LTV Common Stock 11.2 2.3 13.5
----- ----- -----
11.9 2.3 14.2
Held-to-Maturity
-----------------
Australian Government Securities 12.9 (.3) 12.6
----- ----- -----
Total Long-Term Investments $24.8 $ 2.0 $26.8
===== ===== =====
Marketable Securities
---------------------
Available-for-Sale
------------------
Debt Securities $ .8 $ -- $ .8
===== ===== =====
December 31, 1993
-----------------------------------
Long-Term Investments
---------------------
Available-for-Sale
-------------------
Debt Securities $ 6.8 $ .1 $ 6.9
LTV Common Stock 11.2 2.0 13.2
----- ----- -----
18.0 2.1 20.1
Held-to-Maturity
-----------------
Weirton Preferred Stock 25.0 -- 25.0
Australian Government Securities 12.4 .9 13.3
----- ----- -----
37.4 .9 38.3
----- ----- -----
Total Long-Term Investments $55.4 $ 3.0 $58.4
===== ===== =====
Marketable Securities
---------------------
Trading
-------
Debt and Equity Securities $93.0 $ .1 $93.1
===== ===== =====
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The contractual maturities of the Available-for-Sale and Held-to-Maturity
securities at December 31, 1994 and 1993 are shown below.
December 31, 1994 December 31,1993
(In Millions) (In Millions)
--------------------- -------------------
Estimated Estimated
Fair Fair
Cost Value Cost Value
----- --------- ----- ---------
Available-for-Sale
------------------
Debt Instruments:
Due in one year or less $ .8 $ .8 $ -- $ --
Due after one year through three years -- -- .5 .5
Due after three years .7 .7 6.3 6.4
----- ----- ----- -----
1.5 1.5 6.8 6.9
LTV Common Stock 11.2 13.5 11.2 13.2
----- ----- ----- -----
$12.7 $15.0 $18.0 $20.1
===== ===== ===== =====
Held-to-Maturity
----------------
Debt Instruments:
Due in one year or less $ 8.7 $ 8.6 $ .7 $ .7
Due after one year through three years 4.2 4.0 11.7 12.6
----- ----- ----- -----
12.9 12.6 12.4 13.3
Weirton Preferred Stock -- -- 25.0 25.0
----- ----- ----- -----
$12.9 $12.6 $37.4 $38.3
===== ===== ===== =====
Expected maturities may differ from contractual maturities.
In October, 1991, the Company invested $25 million in a special nonmarketable
redeemable preferred stock of Weirton Steel Corporation ("Weirton") with
mandatory redemption at par in 2003. On September 30, 1994, Weirton exercised
its right to redeem the preferred stock for $25 million plus accrued dividends.
The redemption of this investment (previously classified as a held-to-maturity
security) did not result in a gain or loss. The stock paid quarterly dividends
totaling $3.1 million per year. In conjunction with the preferred stock
redemption, agreement was reached to extend the Company's iron ore sales
contract with Weirton by two years through 2005. The contract calls for the
Company to supply Weirton with approximately 1.0 million tons of pellets
annually.
NOTE E - RESERVE FOR CAPACITY RATIONALIZATION
The Company initially established a reserve of $70 million in 1983 to provide
for expected costs of reorienting its mining joint ventures and facilities to
adjust to changed market conditions. During 1990, the Company increased the
reserve by $24.7 million as a result of restructuring Savage River Mines. In
1992 and 1993, $5.7 million and $5.6 million, respectively, were charged to the
reserve. During 1994, $3.8 million was credited to the reserve, primarily due
to foreign currency effects on the Australian closedown reserve. The balance at
December 31, 1994 was $34.3 million, with $7.1 million classified as a
reduction of other current assets.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The reserve balance is principally for the eventual shutdown of Savage River
Mines, scheduled for early 1997, and the holding cost and eventual permanent
shutdown of the Republic Mine. The year of Republic Mine permanent shutdown has
not been determined. The Republic Mine is a potential site for a direct reduced
iron project. The Savage River Mines shutdown provision has been funded.
NOTE F - LONG-TERM OBLIGATIONS
(In Millions)
December 31
---------------------
1994 1993
----- -----
Term notes $75.0 $75.0
Other -- --
----- -----
Total 75.0 75.0
Less current portion 5.0 --
----- -----
$70.0 $75.0
===== =====
In 1992, the Company completed a $75.0 million, medium-term, unsecured senior
note agreement with an insurance company group. One-third of the notes have an
interest rate of 8.5 percent, and two-thirds have an interest rate of 8.8
percent. The notes require annual repayments of principal beginning in 1995 and
1996, respectively, with final maturities in 1999 and 2002, respectively.
Aggregate maturities of long-term obligations in the five years succeeding
December 31, 1994 are $5.0 million for 1995 and $12.1 million in each of the
years 1996 through 1999.
The fair value of the Company's long-term debt (which had a carrying value of
$75.0 million) at December 31, 1994, was estimated at $73.6 million based on a
discounted cash flow analysis and estimates of current borrowing rates.
The senior unsecured note agreement requires the Company to maintain a minimum
consolidated adjusted net worth, excluding the effects of adoption of FAS 106
($218.2 million at December 31, 1994), an interest coverage ratio, and a
leverage ratio. The Company was in compliance with these covenants at December
31, 1994.
Effective March 1, 1995, the Company will terminate its existing $75 million
three-year revolving credit agreement, orginally due to expire on April 30,
1995, and will enter into a five-year, $100 million agreement. No borrowings
are outstanding under the revolving credit facilities.
NOTE G - RETIREMENT BENEFITS
Pensions
--------
The Company and its associated companies sponsor defined benefit pension plans
covering substantially all employees. The plans are noncontributory and
benefits generally are based on employees' years of service and average
earnings for a defined period prior to retirement. Pension obligations are
funded to the extent necessary to meet Federal requirements.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Pension costs, including the Company's proportionate share of the costs of
associated companies, was $.2 million in 1994 and credits of $2.7 million and
$2.1 million, in 1993 and 1992, respectively. The costs (credits) included
credits of $3.4 million, $3.2 million, and $3.0 million in 1994, 1993, and
1992, respectively, related to an idled operation which increased the Capacity
Rationalization Reserve and were not credited to income. Components of the
pension costs (credits) were as follows:
(In Millions)
------------------------------------------
1994 1993 1992
-------- -------- --------
Service cost $ 3.7 $ 3.0 $ 3.1
Interest cost 14.4 13.4 13.1
Actual loss (return) on plan assets 1.5 (27.7) (10.9)
Net amortization and deferral (19.4) 8.6 (7.4)
----- ------ ------
$ .2 $ (2.7) $ (2.1)
===== ====== ======
Most of the Company's pension funds are held in diversified collective trusts
with the funds contributed by partners in the mining ventures. Plan assets
principally include diversified marketable equity securities and corporate and
government debt securities, which are selected by professional asset managers.
The following table presents a reconciliation of the funded status of the
Company's plans, including its proportionate share of the plans of associated
companies, at December 31, 1994 and 1993.
(In Millions)
-------------------------------
1994 1993
--------- ---------
Plan assets at fair value $228.4 $239.6
Actuarial present value of benefit
obligation:
Vested benefits 156.7 168.8
Nonvested benefits 23.4 24.3
------ ------
Accumulated benefit obligation 180.1 193.1
Effect of projected compensation levels 13.3 21.8
------ ------
Projected benefit obligation 193.4 214.9
------ ------
Plan assets in excess of projected
benefit obligation 35.0 24.7
Unrecognized prior service costs 11.1 10.2
Unrecognized net asset at date of adoption
of FAS 87, net of amortization (34.1) (36.7)
Unrecognized net loss 9.0 22.2
------ ------
Prepaid cost $ 21.0 $ 20.4
====== ======
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The weighted average discount rate and rate of increase in compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 8.5% and 4.0% at December 31, 1994 (7.25% and 4.0% at December
31, 1993), respectively. The expected long-term rate of return assumption
utilized for determining pension cost (credit) for the years 1994, 1993 and
1992 was 8%, 9% and 9% respectively. The assumption was changed to 8.5% on
December 31, 1994 for year 1995 pension cost (credit) determination.
In the event of plan termination, the sponsors could be required to fund
shutdown and early retirement obligations which are not included in the
accumulated benefit obligation.
Other Postretirement Benefits
-----------------------------
In addition to the Company's defined benefit pension plans, the Company and its
managed associated companies currently provide retirement health care and life
insurance benefits to most full-time employees who meet certain length of
service and age requirements. These benefits are provided through programs
administered by insurance companies whose charges are based on the benefits
paid during the year. If such benefits are continued, most active employees
would become eligible for these benefits when they retire.
In 1992, the Company adopted Financial Accounting Standard 106, "Accounting for
Postretirement Benefits Other than Pensions" (see Note A).
The following table presents a reconciliation of the funded status of the
Company's related plans, including its proportionate share of the plans of
associated companies, at December 31, 1994 and 1993.
(In Millions)
------------------------------
1994 1993
--------- --------
Accumulated postretirement benefit obligation:
Retirees $46.7 $55.4
Fully eligible active plan participants 2.2 5.2
Other active plan participants 16.8 21.6
----- -----
65.7 82.2
Plan assets (10.4) 0
----- -----
Accumulated postretirement benefit cost
obligation in excess of plan assets 55.3 82.2
Unrecognized prior service credit .1 0
Unrecognized gain (loss) 17.3 (11.8)
----- -----
Accrued postretirement benefit cost $72.7 $70.4
===== =====
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Net periodic postretirement benefit cost, including the Company's proportionate
share of the costs of associated companies, includes the following components:
(In Millions)
-----------------------------------
1994 1993 1992
----- ----- -----
Service cost $1.1 $1.2 $1.0
Interest cost 5.6 5.7 5.5
Return on plan assets (.5) -- --
Net amortization and deferral .1 -- --
---- ---- ----
Net periodic postretirement benefit cost $6.3 $6.9 $6.5
==== ==== ====
Consistent with prior years, the weighted average annual assumed rate of
increase in the per capita cost of Company-provided benefits was 13% for 1992
and 1993, 11% for 1994, 9% for 1995, decreasing to 5 percent for 1997 and
remaining at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, changing the
assumed health care cost trend rate by one percentage point in each year would
change the accumulated postretirement benefit obligation, as of December 31,
1994 by $15.5 million, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1994 by $1.4
million. Amounts include the Company's proportionate share of the costs of
associated companies. Plan assets include $9.3 million of deposits, relating to
funded life insurance contracts, at January 1, 1994, that the Company
determined were available to fund retired employees' life insurance
obligations. As part of the 1993 labor contracts at Empire, Hibbing, and Tilden
Magnetite, Voluntary Employee Benefit Association Trusts ("VEBAs") have been
established. Funding of the VEBAs began in 1994 to cover a portion of the
postretirement benefit obligations of these associated companies. As a
participant, the Company's minimum annual contribution is $.7 million per year.
The Company's estimated actual contribution will approximate $1.3 million per
year based on its share of tons produced. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 8.5%
at December 31, 1994 (7.25% and 8.5% at December 31, 1993 and 1992,
respectively). The expected long-term rate of return on plan assets was 5.5%
in 1994.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE H - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1994, 1993 and 1992 are as follows:
(In Millions)
--------------------------------
1994 1993 1992
------ ------ ------
Deferred tax assets:
Post-retirement benefits other than pensions $21.4 $21.1 $22.5
Other liabilities 19.3 10.6 5.2
Deferred development 9.4 7.1 3.7
Reserve for capacity rationalization 6.7 6.9 9.9
Accounts receivable 4.1 3.9 3.1
Current liabilities 4.4 3.7 3.3
Other assets 3.2 -- --
Product inventories 2.5 4.0 7.0
Plant and equipment -- 1.5 4.3
All other .1 2.1 5.2
----- ----- -----
Total deferred tax assets 71.1 60.9 64.2
Deferred tax liabilities:
Investment in associated companies 26.2 28.9 34.0
All other 21.5 11.4 6.7
----- ----- -----
Total deferred tax liabilities 47.7 40.3 40.7
----- ----- -----
Net deferred tax assets $23.4 $20.6 $23.5
===== ===== =====
The components of provision for income taxes before accounting changes are as
follows:
(In Millions)
--------------------------------
1994 1993 1992
------ ------ ------
Current $16.5 $19.0 $12.4
Deferred (1.8) 2.1 (1.8)
----- ----- -----
14.7 $21.1 $10.6
===== ===== =====
The provision for income taxes included Australian federal income taxes of $1.9
million, $.9 million, and $.6 million for the years 1994, 1993 and 1992,
respectively.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The reconciliation of effective income tax rate and United States statutory
rate is as follows:
1994 1993 1992
---- ---- ----
Statutory tax rate 35.0% 35.0% 34.0%
Increase (decrease) due to:
Percentage depletion in excess
of cost depletion (7.9) (4.5) (10.9)
Effect of foreign taxes .2 -- .2
Prior years' tax adjustment ( .9) (2.9) 2.2
Corporate dividends received (1.0) (1.0) (1.8)
Other items - net .2 1.2 1.9
---- ---- ----
Effective tax rate 25.6% 27.8% 25.6%
==== ==== ====
NOTE I - BANKRUPTCY SETTLEMENT
Following a 1986 filing, LTV emerged from bankruptcy in June, 1993. In final
settlement of its allowed claim, the Company received 2.3 million shares of LTV
Common Stock and 4.4 million Contingent Value Rights, valued at $31.6 million
and $4.1 million, respectively, resulting in a total gain in 1993 of $35.7
million ($23.2 million after-tax, or $1.93 per share). On July 13, 1993, the
Company distributed to its common stockholders, a special dividend of 1.5
million shares of LTV Common Stock, valued at $20.4 million, and $12.0 million
($1.00 per share) cash. The Company has retained the remaining .8 million
shares of LTV stock as an investment.
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of the Company's financial instruments at
December 31, 1994 are as follows:
(In Millions)
------------------------
Carrying Fair
Amount Value
-------- -------
Cash and cash equivalents $140.6 $140.6
Marketable securities:
Available-for-Sale 12.7 15.0
Held-to-Maturity 12.9 12.6
------ ------
Total securities 25.6 27.6
Long-term debt 75.0 73.6
The Company also has forward currency contracts at December 31, 1994 of $12.0
million with a fair value of $12.4 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE K - STOCK PLANS
The 1987 Incentive Equity Plan authorizes the Company to make grants and awards
of stock options, stock appreciation rights and restricted or deferred stock
awards to officers and key employees, for up to 750,000 Common Shares (plus an
additional 89,045 Common Shares reserved for issuance, but not issued, under
the Company's 1979 Restricted Stock Plan). The 1992 Incentive Equity Plan
authorizes the Company to issue up to 595,000 Common Shares upon the exercise
of Options Rights, as Restricted Shares, in payment of Performance Shares or
Performance Units that have been earned, as Deferred Shares, or in payment of
dividend equivalents paid with respect to awards made under the Plan. Such
shares may be shares of original issuance or treasury shares or a combination
of both. Stock options may be granted at a price not less than the fair market
value of the stock on the date the option is granted and must be exercisable
not later than ten years and one day after the date of grant. Stock
appreciation rights may be granted either at or after the time of grant of a
stock option. Common shares may be awarded or sold to certain employees with
restrictions as to disposition over specified periods. The market value of
restricted stock awards and Performance Shares is charged to expense over the
vesting period. Option prices were adjusted in 1991 and 1993 to recognize the
effect of special dividends to shareholders.
Stock option, restricted stock award, and performance share activities are
summarized as follows:
1994 1993 1992
------------------------ --------------------- -----------------------
Shares Price Shares Price Shares Price
-------- ----------- -------- ---------- -------- -----------
Stock options:
Options outstanding
beginning of year 105,125 $ 8.51-34.80 160,650 $6.68-37.50 229,433 $6.68-28.13
Granted 5,500 35.50-37.13 5,000 32.56 5,000 37.50
Exercised (27,943) 8.51-34.80 (60,525) 6.68-26.31 (66,783) 6.68-26.31
Cancelled (500) 35.50 -0- -- (7,000) 21.77
-------- -------- --------
Options outstanding at end of year 82,182 8.51-37.13 105,125 8.51-34.80 160,650 6.68-37.50
Options exercisable at end of year 82,182 8.51-37.13 105,125 8.51-34.80 114,275 6.68-37.50
Restricted awards:
Awarded and restricted at beginning
of year 20,218 10,990 20,083
Awarded during the year 8,000 15,277 500
Vested (14,954) (6,049) (9,593)
Cancelled -0- -0- -0-
-------- -------- --------
Awarded and restricted at end of year 13,264 20,218 10,990
Performance shares:
Allocated beginning of year -0-
Allocated during the year 42,067
Forfeited (750)
--------
Allocated end of year 41,317
Reserved for future grants or awards at end
of year 521,907 576,224 596,501
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE L - SHAREHOLDERS' EQUITY
As of December 31, 1994, the Company is authorized to issue up to 500,000
shares of Class A voting preferred stock, without par value, and up to
4,000,000 shares of Class B non-voting preferred stock, without par value.
A share purchase right ("Right") is attached to each of the Company's Common
Shares outstanding as of December 31, 1993, or subsequently issued. Each Right
entitles the holder to buy from the Company eleven one-thousandths (.011) of
one Common Share at an exercise price per whole share of $39.11. The Rights
become exercisable if a person or group acquires, or tenders for, 20% or more
of the Company's Common Shares. The Company is entitled to redeem the Rights at
5 cents per Right at any time until ten days after any person or group has
acquired 20% of the Common Shares and in certain circumstances thereafter. If a
party owning 20% or more of the Company's Common Shares merges with the Company
or engages in certain other transactions with the Company, each Right, other
than Rights held by the acquiring party, entitles the holder to buy $78.22
worth of the shares of the surviving company at a 50% discount. The Rights
expire on September 18, 1997 and are not exercisable until the occurrence of
certain triggering events, which include the acquisition of, or a tender or
exchange offer for, 15% or more of the Company's Common Shares. There are
168,279 Common Shares reserved for these Rights.
In January, 1995, the Company announced a program of periodic repurchases of up
to 600,000 shares of its Common Stock in the open market or in negotiated
transactions. This represents about 5% of the approximately 12.1 million Common
shares outstanding. The stock will initially be retained as Treasury Stock.
NOTE M - LITIGATION
The Company and its associated companies are periodically involved in
litigation incidental to their operations. Management believes that any pending
litigation will not result in a material liability in relation to the Company's
consolidated financial statements.
63