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 B). 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 operating profit of $41.9
million and $3.2 million, $40.3 million and $2.2 million, and
$44.0 million and $.2 million, in 1993, 1992 and 1991,
respectively. Total Australian assets, including securities to fund
eventual shutdown cost ($12.4 million, 1993 and $9.4 million,
1992), were $29.8 million at December 31, 1993 (1992-$28.6 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%, 12% and 11% in 1993; 13%, 13% and 12% in
1992; and 14%, 13% and 10% in 1991.
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.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
Cleveland-Cliffs Inc and Consolidated Subsidiaries
FORWARD FOREIGN EXCHANGE CONTRACTS: The Company had $20.0 million
and $24.0 million of forward foreign exchange contracts at December
31, 1993 and 1992, respectively, to hedge against fluctuations of
the Australian dollar. The fair value of foreign currency exchange
contracts which have varying maturity dates to November 30, 1994 is
estimated to be $20.5 million, based on the December 31, 1993 forward
rates.
INVENTORIES: Product inventories, primarily finished goods, 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 $1.8 million and $2.0 million at December 31, 1993
and 1992, 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. Initial development and 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." Prior years financial statements have not been
restated, as further explained in Note A.
INCOME (LOSS) PER COMMON SHARE: Income or loss per common share is
based on the average number of common shares outstanding during each
year.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified
to conform to current year classifications.
NOTE A - ACCOUNTING 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 assumption
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).
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
In February, 1992, the Financial Accounting Standards Board issued
Statement 109, "Accounting for Income Taxes." 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 $.31 per share.
Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities
are determined based on temporary differences between financial
reporting and tax bases of assets and liabilities and are measured
using currently enacted tax rates and laws applicable when the
differences are expected to reverse. Deferred tax assets and
liabilities will be adjusted for enacted tax rate changes ($.7 million
benefit was recognized in 1993 when the tax rate changed from 34%
to 35%). Prior to the adoption of Statement 109, income tax
expense was determined using the deferred method. Deferred tax
expense was based on items of income and expense that were reported
in different years in the financial statements and tax returns and
were measured at the tax rates in effect in the years the differences
originated.
In November, 1992, the Financial Accounting Standards Board issued
Statement 112, "Employers' Accounting for Postemployment Benefits."
Statement 112 requires accrual accounting for benefits provided to
former or inactive employees after employment but before retirement.
Although Statement 112 is effective for years beginning after
December 15, 1993, the Company has elected to adopt the provisions
of this standard for the year ended December 31, 1993. The effect
of adopting this statement was not material to the consolidated
financial statements.
In May, 1993, the Financial Accounting Standards Board issued
Statement 115, "Accounting for Certain Investments in Debt and
Equity Securities," which establishes standards of financial
accounting and reporting investments in equity securities that have
readily determinable fair values and for investments in debt
securities. This statement, which is effective for years beginning
after December 15, 1993, has been adopted for the year ended
December 31, 1993. The effect of adopting this statement was not
material to the consolidated financial statements.
NOTE B - 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
(25.05% in 1991) 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
and 1991) 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 other non-operating iron ore mining ventures
and mining service companies.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Following is a summary of combined financial information of the operating iron
ore mining ventures.
(In Millions)
------------------------------
1993 1992 1991
- ------------------------------------------------------------------------
Income
Gross revenue $ 896.5 $ 967.4 $ 944.2
Equity income 82.2 91.7 91.5
Financial Position
Properties - net $ 812.4 $ 848.3 $ 909.1
Other assets 95.8 114.1 114.3
Debt obligations ( 61.0) ( 91.1) (112.9)
Other liabilities (123.1) (124.5) (112.1)
-------- -------- --------
Net assets $ 724.1 $ 746.8 $ 798.4
======== ======== ========
Company's equity in
underlying net assets $ 266.8 $ 278.8 $ 299.2
Company's investment 152.2 166.8 164.9
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 $196.0 million in 1993 (1992-$214.4 million;
1991-$206.2 million) of iron ore from certain associated companies.
During 1993, the Company earned royalties and management fees of
$39.5 million (1992-$41.9 million; 1991-$42.6 million) from iron
ore mining ventures of which $10.7 million in 1993 (1992-$12.8
million; 1991-$12.5 million) was paid by the Company as a participant
in the ventures.
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 $23.5 million in 1993 (1992-$32.8
million; 1991-$23.5 million).
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
On June 5, 1992, Algoma Steel Inc. ("Algoma"), an equity
participant in Tilden Magnetite and Tilden, emerged from Canadian
reorganization proceedings. As part of Algoma's reorganization plan,
the Company entered into a Hematite Entitlement Agreement to
purchase Algoma's Tilden hematite pellet production rights in return
for certain commercial and financial benefits. Algoma also renewed
guarantee of its Tilden obligations. Algoma repaid $4.2 million to
the Company on December 30, 1993 in connection with cancellation of
the Hematite Entitlement Agreement. The agreement did not have a
material effect on the Company's consolidated financial statements.
Algoma's guarantee of its Tilden obligations remains in place.
On July 17, 1986, The LTV Corporation (including its wholly-owned,
integrated steel company subsidiary, LTV Steel Company, Inc.;
collectively, "LTV") filed for protection under Chapter 11 of the
U. S. Bankruptcy laws. At that time, through subsidiaries, LTV
held a 100% interest in LTV Steel Mining Company ("LTV Mining"), a
35% interest in Empire, a 15.6% interest in Wabush, and a 12% interest
in Tilden.
On June 28, 1989, the Company and LTV executed a settlement
agreement (the "Agreement"), which was subsequently approved by the
bankruptcy court, covering substantially all of the Company's
bankruptcy claims against LTV. The Agreement granted to the Company a
$205.0 million allowed unsecured claim, (subsequently reduced by
an assignment of $4.0 million of the allowed claim), the transfer
of a 10% ownership interest in Empire together with related debt
service and other obligations from LTV to the Company effective
January 1, 1990, the rejection by LTV of its remaining interest in
Tilden which was transferred to the Company in 1989, the dismissal of
substantially all of the Company's bankruptcy claims against LTV, the
indemnification of LTV against further liability relating to such
claims, and the rejection by LTV of certain affiliated business
ventures with the Company and the terms of various commercial
relationships with the Company. LTV's subsidiary continued its
Empire participation, including its proportionate share of Empire
debt service and related operating expense payments, as reduced by
the 1990 transfer of the 10% interest in Empire to the Company.
The Company continues to guarantee the partnership debt applicable to
LTV's remaining 25% interest in Empire which at December 31, 1993 was
$13.9 million. On June 28, 1993, LTV emerged from bankruptcy. In
addition to the items noted above, the Company received in final
settlement of its allowed claim, 2.3 million shares of LTV common
stock and 4.4 million Contingent Value Rights. The value of the
settlement reflected in the Company's operating results totalled $35.7
million before tax and $23.2 million after-tax.
LTV in bankruptcy rejected its Wabush interest. On December 20,
1991, the Wabush Participants and LTV executed a settlement
agreement for an allowed unsecured claim totalling $60.0 million,
which was approved by the bankruptcy court on April 2, 1992. The
allowed claim included LTV's share ($10.3 million including accrued
interest at June 30, 1993) of bonded debt.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
On July 27, 1993, the Wabush Participants entered into an
agreement with the Wabush Iron Co. Limited Bondholders for the
retirement of the LTV and Wheeling- Pittsburgh Steel Corporation
("Wheeling") respective shares of the debt obligation ($13.2 million
including accrued interest at June 30, 1993) in exchange for (1)
transfer of $1.8 million held in trust for the benefit of the
Bondholders, (2) the LTV bankruptcy claim proceeds, and (3) other
limited and specific venture related income of the Wabush Joint
Venturers. This agreement extinguished the mortgage on the Wabush
joint venture assets.
The Company's effectively serviced share of long-term obligations
of associated companies, including current portion, was $13.6
million as of December 31, 1993 (1992-$17.0 million). In addition,
the Company guaranteed $20.8 million of Empire long- term obligations
which are effectively serviced by LTV and Wheeling (see Note H). The
fair value of the guarantees is nominal because advances against the
guarantees would be supported by ownership interests in Empire.
Effective January 1, 1992, the Company transferred 2.4875% of its
Empire interest to Wheeling which reduced the Company's effectively
serviced obligations by $2.3 million, with a corresponding
increase in guaranteed obligations, and decreased annual
maturities of long-term obligations by $.5 million. Maturities of
the Company's share of long-term obligations for the three years
after December 31, 1993 are $4.3 million in 1994 and 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 $46.8 million at December 31, 1993.
NOTE C - INVESTMENTS
The Company elected early adoption of FAS 115 for recording investments in debt and equity securities. Following is a summary
of investment securities:
December 31, 1993
(In Millions)
------------------------------------------
Estimated
Gross Unrealized Fair
Cost Gains Value
---- ---------- ---------
Long-Term Investments
- ----------------------
Available-for-Sale
-------------------
Municipal Securities $ 6.6 $ -- $ 6.6
Other Debt Securities .2 .1 .3
------ ----- -----
Total Debt Securities 6.8 .1 6.9
Equity Securities 11.2 2.0 13.2
------ ----- -----
18.0 2.1 20.1
Held-to-Maturity
-----------------
Redeemable Equity Securities 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
===== ===== =====
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The amortized cost and estimated fair value of the Available-for-Sale
and Held-to-Maturity securities at December 31, 1993 are shown below.
December 31, 1993
(In Millions)
-----------------------------------
Estimated
Fair
Cost Value
-------- ----------
Available-for-Sale
- ------------------
Debt Instruments:
Due in one year or less $ -- $ --
Due after one year through three years .5 .5
Due after three years 6.3 6.4
-------- ---------
6.8 6.9
Equity Securities 11.2 13.2
-------- ---------
$ 18.0 $ 20.1
======== =========
Held-to-Maturity
- ----------------
Debt Instruments:
Due in one year or less $ .7 $ .7
Due after one year through three years 11.7 12.6
-------- --------
12.4 13.3
Redeemable Equity Securities 25.0 25.0
-------- --------
$ 37.4 $ 38.3
======== ========
Expected maturities may differ from contractual maturities because the
issuers of certain securities have the right to prepay obligations.
On July 13, 1993, the Company received 2.3 million shares of LTV
Common Stock and other consideration in satisfaction of the Company's
bankruptcy settlement. The Company then distributed to its
shareholders 1.5 million shares of the LTV stock plus a special cash
dividend of $1.00 per share of the Company's common stock. The
Company intends to retain the remaining .8 million shares, $13.2
million fair value at December 31, 1993, as an investment.
In October, 1991, the Company invested $25.0 million in a special
nonmarketable issue of redeemable preferred stock of Weirton Steel
Corporation ("Weirton"). The terms of the preferred stock include
a 12-1/2% cumulative cash dividend, mandatory redemption at par
value of $25 million in 2003, certain rights to convert into new
equity security issues, and various protective features. Weirton
has the right to call the preferred stock, at par plus full
cumulative dividends, at any time. The estimated discounted cash
flow value of Weirton preferred stock approximates its carrying value
at December 31, 1993.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE D - 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 market conditions. During 1990,
the Company increased the reserve by $24.7 million as a result of
restructuring Savage River Mines. During 1993 and 1992, $5.6
million and $5.7 million, respectively, were charged and in 1991,
$1.3 million was credited to the reserve. The balance at December
31, 1993 was $30.5 million, with $7.1 million classified as a
reduction of other current assets.
The reserve balance is principally for the eventual shutdown of
Savage River Mines, currently 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 being considered as a potential site
for a direct reduced iron project. The Savage River Mines shutdown
provision has been funded.
NOTE E - LONG-TERM OBLIGATIONS
(In Millions)
December 31
-----------------------
1993 1992
------- -------
Term notes $75.0 $ 75.0
Other -- .1
------ -------
Total 75.0 75.1
Less current portion -- .1
------ -------
$75.0 $ 75.0
====== =======
On May 21, 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.
The senior unsecured note agreement requires the Company to maintain
a consolidated adjusted net worth of not less than $200.9 million for
1993 (excluding the effects of adoption of FAS 106), with such amount
to increase by a percent of net income over time, an interest
expense cash coverage ratio of 2.5 to 1, and a leverage ratio of
consolidated funded debt to consolidated total capitalization of .6 to
1. The Company was in compliance with these covenants at December 31,
1993.
On April 30, 1992, the Company entered into a $75.0 million
three-year revolving credit agreement. No borrowings are
outstanding under the revolving credit facility. The Company may
convert amounts outstanding at the end of three years to a
three-year term loan. The new revolving credit agreement contains
interest rate alternatives including LIBOR plus 1/2 percent,
certificate of deposit rates plus 5/8 percent, and prime, and
various financial covenants and restrictions. The credit agreement
requires the Company to maintain at December 31, 1993 a
consolidated tangible net worth of not less than $257.4 million
(excluding the
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
effect of adoption of FAS 106), with such amount to increase over time by a
percent of net income, and a leverage ratio of total debt to total debt plus
consolidated tangible net worth not to exceed .45 to 1. The Company was in
compliance with these covenants at December 31, 1993.
Aggregate maturities of long-term obligations in the five years succeeding
December 31, 1993 are $5.0 million for 1995 and $12.1 million for 1996
through 1998.
The fair value of the Company's long-term debt (which had a carrying value
of $75.0 million) at December 31, 1993, was estimated at $81.3 million based
on a discounted cash flow analysis and estimates of current borrowing rates.
NOTE F - RETIREMENT BENEFITS
The Company and its associated companies sponsor defined benefit 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 costs are funded to
the extent necessary to meet Federal requirements.
Pension costs, including the Company's proportionate share of the costs of associated companies, were credits of $2.7 million,
$2.1 million, and $3.7 million, in 1993, 1992, and 1991, respectively. The credits included $3.2 million, $3.0 million, and
$2.8 million in 1993, 1992, and 1991, respectively, related to an idled operation which increased the Capacity Rationalization
Reserve and were not credited to income. Components of the credits are as follows:
(In Millions)
------------------------------------------
1993 1992 1991
-------- -------- --------
Service cost-benefits earned during
the period $ 3.0 $ 3.1 $ 3.0
Interest cost on projected benefit
obligation 13.4 13.1 13.3
Actual return on plan assets (27.7) (10.9) (35.8)
Net amortization and deferral 8.6 ( 7.4) 15.8
------- ------- -------
$(2.7) $( 2.1) $( 3.7)
======= ======= =======
Most of the Company's pension funds are held in diversified collective trusts
with the funds contributed by the other partners of 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, 1993 and 1992.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
(In Millions)
----------------------------
1993 1992
------------ ---------
Plan assets at fair value $ 239.6 $ 221.4
Actuarial present value of benefit
obligation:
Vested benefits 168.8 146.2
Nonvested benefits 24.3 16.7
-------- --------
Accumulated benefit obligation 193.1 162.9
Effect of projected compensation levels 21.8 24.7
-------- --------
Projected benefit obligation 214.9 187.6
-------- --------
Plan assets in excess of projected
benefit obligation 24.7 33.8
Unrecognized prior service costs 10.2 3.7
Unrecognized net asset at date of adoption
of FAS 87, net of amortization (36.7) (40.1)
Unrecognized net loss 22.2 19.9
-------- --------
Prepaid cost $ 20.4 $ 17.3
======== ========
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 7.25% and 4.0% at
December 31, 1993 (8.0% and 4.4% at December 31, 1992),
respectively. The expected long-term rate of return on plan assets was
8.0% in 1993 (9.0% in 1992 and 1991).
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.
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 full-time
employees who have 30 years of service with the Company or who are
age 60 with 15 years of service. 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 of the active employees would become eligible
for these benefits when they retire. The expense applicable to
retired employees, including the Company's proportionate share of
associated companies' costs, was $3.2 million in 1991.
In 1992, the Company adopted Financial Accounting Standard 106,
"Accounting for Post-retirement Benefits Other than Pensions" (see
Note A).
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
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, 1993 and 1992.
(In Millions)
------------------------------
1993 1992
-------- ---------
Accumulated postretirement benefit obligation:
Retirees $ 55.4 $ 47.3
Fully eligible active plan participants 5.2 3.8
Other active plan participants 21.6 15.9
-------- ---------
82.2 67.0
Plan assets 0 0
-------- ---------
Accrued postretirement benefit cost 82.2 67.0
Unamortized prior service cost 0 ( .5)
Unamortized gain (loss) (11.8) 1.2
-------- ---------
Accumulated postretirement benefit obligation $ 70.4 $ 67.7
======== =========
Net periodic postretirement benefit cost, including the Company's proportionate share of the costs of associated companies,
includes the following components:
(In Millions)
------------------------------
1993 1992
-------- ---------
Service cost $ 1.2 $ 1.0
Interest cost 5.7 5.5
-------- --------
Net periodic postretirement benefit cost $ 6.9 $ 6.5
======== ========
The incremental increase in 1993 and 1992 postretirement benefit cost was
$2.8 million and $2.7 million, respectively. The weighted average annual
assumed rate of increase in the per capita cost of covered benefits was 13
percent for 1993, 11% for 1994, decreasing gradually 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, 1993 by $15.7 million, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1993
by $2.1 million. Amounts include the Company's proportionate share of the
costs of associated companies. As part of the 1993 labor contracts at Empire,
Hibbing, and Tilden Magnetite, Voluntary Employee Benefit Association Trusts
("VEBAs") will be established. Funding of the VEBAs will begin in 1994 and
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 7.25 percent at December 31, 1993 (8.5
percent at December 31, 1992).
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE G - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1993 and 1992 are as follows:
(In Millions)
-----------------------
1993 1992
------- ------
Deferred tax assets:
Post-retirement benefits other than pensions $21.1 $22.5
Other liabilities 10.6 5.2
Deferred development 7.1 3.7
Reserve for capacity rationalization 6.9 9.9
Product inventories 4.0 7.0
Accounts receivable 3.9 3.1
Current liabilities 3.7 3.3
Plant and equipment 1.5 4.3
All other 2.1 5.2
------ ------
Total deferred tax assets 60.9 64.2
Deferred tax liabilities:
Investment in associated companies 28.9 34.0
All other 11.4 6.7
------ ------
Total deferred tax liabilities 40.3 40.7
------ ------
Net deferred tax assets $20.6 $23.5
====== ======
COMPONENTS OF PROVISION FOR INCOME TAXES FROM
CONTINUING OPERATIONS ARE AS FOLLOWS:
(In Millions)
------------------------------
1993 1992 1991
----- ----- -----
Current $19.0 $12.4 $37.8
Deferred 2.1 (1.8) (21.5)
----- ----- -----
$21.1 $10.6 $16.3
===== ===== =====
COMPONENTS OF DEFERRED TAX PROVISION FOR YEAR
ENDED DECEMBER 31, 1991 ARE AS FOLLOWS:
(In Millions)
-------------
1991
-------
Recovery from bankruptcy claims $(24.2)
Deferred foreign development costs ( 3.8)
Effect of associated companies ( 2.7)
Effect of alternative minimum tax
credit carryforwards 4.0
Depreciation 1.4
Pensions ( .1)
Investment tax credit carryovers
recognized 3.1
Inventory reserves ( 1.3)
Other items - net 2.1
------
$(21.5)
=======
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
RECONCILIATION OF EFFECTIVE INCOME TAX RATE AND UNITED STATES FEDERAL STATUTORY RATE IS AS FOLLOWS:
(In Millions)
----------------------------------
1993 1992 1991
---- ---- ------
Statutory tax rate 35.0% 34.0% 34.0%
Increase (decrease) due to:
Percentage depletion in excess
of cost depletion (4.5) (10.9) (5.7)
Effect of foreign taxes -- .2 ( .9)
Prior years' tax adjustment (2.9) 2.2 ( .1)
Corporate dividends received (1.0) ( 1.8) ( .3)
Investment Credit Employee
Stock Ownership
Plan contribution -- -- (2.1)
Other items - net 1.2 1.9 (1.6)
----- ------ ------
Effective tax rate 27.8% 25.6% 23.3%
===== ====== ======
In 1991, the Company recorded $2.3 million as a reduction in
Federal income tax and charged administrative, selling, and general
expenses as compensation expense for investment tax credit
benefits realized pursuant to the Company's Investment Credit
Employee Stock Ownership Plan. No tax reduction or corresponding
investment tax credit benefits were realized in 1993 or 1992.
NOTE H - BANKRUPTCY SETTLEMENTS
On January 8, 1991, the Company declared a $46.9 million ($4.00
per share) special dividend paid on February 15, 1991, principally
representing recoveries and anticipated recoveries from Wheeling
and Sharon Steel Corporation following their emergence from
bankruptcy in 1990.
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 currently intends to retain the remaining .8 million shares
of LTV stock as an investment.
NOTE I - SALE OF ASSETS
In 1991, the Company sold its forest lands and associated assets in
the Upper Peninsula of Michigan, resulting in an after-tax gain of
$14.4 million or $1.22 per share.
The Company completed its exit from the coal business with the sale
of Turner Elkhorn Mining Company in early 1993 resulting in an
after-tax loss of $.4 million.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE J - 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 the awards, as determined on
the date of award, is charged to expense when the restrictions on
the common shares are removed. Option prices were adjusted in 1991
and 1993 to recognize the effect of special dividends.
Stock option and restricted award transactions are summarized as follows:
1993 1992 1991
--------------------- --------------------- ----------------------
Stock options: Shares Price Shares Price Shares Price
-------- --------- -------- ---------- -------- ----------
Options outstanding
beginning of year 160,650 $6.68-37.50 229,433 $6.68-28.13 422,783 $ 6.68-28.13
Granted 5,000 32.56 5,000 37.50 -0- --
Exercised (60,525) 6.68-26.31 (66,783) 6.68-26.31 (191,683) 6.68-26.31
Cancelled -0- -- ( 7,000) 21.77 ( 1,667) 21.77-26.19
-------- -------- ---------
Options outstanding at end of year 105,125 8.51-34.80 160,650 6.68-37.50 229,433 6.68-28.13
Options exercisable at end of year 105,125 8.51-34.80 114,275 6.68-37.50 125,183 6.68-28.13
Restricted awards:
Awarded and restricted at beginning
of year 10,990 20,083 21,977
Awarded during the year 15,277 500 12,059
Cancelled -0- -0- 334
Awarded and restricted at end of year 20,218 10,990 20,083
Reserved for future grants or awards at end
of year 576,224 596,501 -0-
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE K - SHAREHOLDERS' EQUITY
As of December 31, 1993, 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 one one-hundredth of one Common
Share at an exercise price per whole share of $42.50. 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 $85.00 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.
NOTE L - 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.
61