EXHIBIT 99.1
CYPRUS NORTHSHORE MINING CORPORATION
AND CONSOLIDATED SUBSIDIARY
FINANCIAL STATEMENTS
DECEMBER 31, 1993
with
REPORT OF INDEPENDENT AUDITORS
5
Report of Independent Auditors
------------------------------
Shareholder and Board of Directors
Northshore Mining Company
We have audited the accompanying statement of consolidated financial position
of Cyprus Northshore Mining Corporation and consolidated subsidiary as of
December 31, 1993, and the related statements of consolidated income, cash
flows and shareholder's equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cyprus Northshore
Mining Corporation and consolidated subsidiary at December 31, 1993, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
November 16, 1994
6
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
(In Thousands)
December 31,
1993
--------------
ASSETS
CURRENT ASSETS
Cash $ 72
Accounts receivable:
Trade 7,601
Other 163
----------
7,764
Inventories:
Concentrates 818
Finished products 14,027
Supplies and coal (net of reserve - $1,467) 9,179
----------
24,024
Deferred income taxes 846
Other current assets 195
----------
TOTAL CURRENT ASSETS 32,901
PROPERTIES
Land 4,526
Plant and equipment 80,221
----------
84,747
Allowance for depreciation and amortization (47,198)
----------
TOTAL PROPERTIES 37,549
OTHER ASSETS
Deferred income taxes 158
Other assets 81
----------
TOTAL OTHER ASSETS 239
----------
TOTAL ASSETS $ 70,689
==========
See notes to consolidated financial statements.
7
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
(In Thousands)
December 31,
1993
--------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 3,725
Taxes payable:
Federal and state income 2,004
Other 4,895
Accrued employment costs 1,709
Royalties payable 1,720
Other current liabilities 3,485
---------
TOTAL CURRENT LIABILITIES 17,538
POSTEMPLOYMENT BENEFIT LIABILITIES 1,271
OTHER LIABILITIES 1,360
SHAREHOLDER'S EQUITY
Capital stock-par value $1 a share
Authorized-1,000 shares
Issued-100 shares --
Capital in excess of
par value of shares 93,104
Intercompany account with
Cyprus Amax Minerals Company (11,266)
Retained deficit (31,318)
---------
TOTAL SHAREHOLDER'S EQUITY 50,520
---------
COMMITMENTS - NOTE D
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 70,689
=========
See notes to consolidated financial statements.
8
STATEMENT OF CONSOLIDATED INCOME
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
(In Thousands)
Year Ended
December 31,
1993
--------------
REVENUES
Product sales and service $ 98,238
Other income 599
----------
98,837
COSTS AND EXPENSES
Cost of sales 71,652
Depreciation and amortization 2,870
Royalties 4,269
State and local taxes 5,766
Administrative, selling and general expenses 1,269
Other expenses 153
----------
Total Costs and Expenses 85,979
----------
INCOME BEFORE INCOME TAXES 12,858
INCOME TAXES 4,544
----------
NET INCOME $ 8,314
==========
See notes to consolidated financial statements.
9
STATEMENT OF CONSOLIDATED CASH FLOWS
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
(In Thousands,
Brackets Indicate
Cash Decrease)
Year Ended
December 31,
1993
--------------
OPERATING ACTIVITIES
Net income $ 8,314
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 2,870
Deferred income tax provision 2,170
Loss on disposal of assets 15
Other 258
---------
Total before changes in operating
assets and liabilities 13,627
Changes in operating assets and liabilities:
Receivables (increase) (1,759)
Inventories (increase) (2,660)
Other current assets decrease 209
Payables and accrued liabilities increase 5,518
---------
Total changes in operating
assets and liabilities 1,308
---------
Net cash from operating activities 14,935
INVESTING ACTIVITIES
Purchase of plant, property and equipment (2,340)
Proceeds from sale of assets 267
---------
Net cash (used by) investing activities (2,073)
FINANCING ACTIVITIES
Increase in intercompany account with
Cyprus Amax Minerals Company (8,116)
Decrease in capital in excess of par value of shares (4,716)
---------
Net cash (used by) financing activities (12,832)
---------
INCREASE IN CASH 30
CASH AT BEGINNING OF YEAR 42
---------
CASH AT END OF YEAR $ 72
=========
State taxes paid on income $ 370
See notes to consolidated financial statements.
10
STATEMENT OF CONSOLIDATED SHAREHOLDER'S EQUITY
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
In Thousands
-------------------------------------------------------------------------
Capital In
Excess of
Capital Par Value Inter- Retained
Stock of Shares Company Deficit Total
------- ----------- --------- --------- --------
Balance, December 31, 1992 $ -- $97,820 $ (3,150) $(39,632) $55,038
Net income -- -- -- 8,314 8,314
Return of capital to
Cyprus Amax Minerals
Company -- (4,716) -- -- (4,716)
Increase in intercompany
account with Cyprus
Amax Minerals Company -- -- (8,116) -- (8,116)
------ ------- -------- -------- -------
Balance, December 31, 1993 $ -- $93,104 $(11,266) $(31,318) $50,520
====== ======= ======== ======== =======
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: Cyprus Northshore Mining Corporation (the "Company")
is a wholly-owned subsidiary of Cyprus Amax Minerals Company ("Cyprus"). The
consolidated financial statements include the accounts of Cyprus Silver Bay
Power Corporation ("Power"), a wholly-owned subsidiary of the Company. All
intercompany balances and transactions between Company and Power have been
eliminated.
BUSINESS: The Company's primary business is the production and sale of iron
ore pellets. Crude ore is mined at Babbitt, Minnesota and railed to Silver Bay,
Minnesota where it is concentrated, pelletized and shipped primarily to
integrated steel company customers by lake carriers. One customer accounts for
72.4 percent of the Company's revenues. Electric power is generated at Power's
115 megawatt power station located at Silver Bay, Minnesota for use in iron ore
processing with excess capacity sold to a utility company.
CASH: The Company maintains small cash accounts for local expenditures. All
cash receipts from sales and cash disbursements for employment, material and
service costs are transacted through Cyprus cash accounts (see Note A).
INVENTORIES: Product inventories, primarily finished pellets, are stated at
the lower of cost or market. The cost of product inventories is determined
using the first-in, first-out method. The cost of supplies and coal
inventories is determined by the average cost method.
PROPERTIES: Properties are stated on the basis of cost. Depreciation of plant
and equipment is computed principally by the straight-line method based on
estimated useful lives. Mine development costs are charged to operations as
incurred. Gains or losses upon retirement or replacement of equipment and
facilities are credited or charged to income, as appropriate.
INCOME TAXES: The operations of the Company are included in the consolidated
federal income tax returns filed by Cyprus, the parent company. The
accompanying consolidated financial statements reflect income tax expense on a
separate company basis. The Company has recorded income tax based on statutory
tax rates applied to the Company's reported book income adjusted for permanent
differences.
POSTRETIREMENT BENEFITS: In December, 1990, the Financial Accounting Standards
Board ("FASB") issued Statement 106, "Accounting for Postretirement Benefits
Other than Pensions" which requires that the projected future expense of
providing postretirement benefits, such as health care and life insurance, be
recognized as employees render service instead of when the benefits are paid.
Statement 106 requires the assumption that present benefit plans continue at
escalating costs. The Company adopted the provisions of this standard in its
financial statements for the year ended December 31, 1992.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
ACCOUNTING POLICIES - Continued
POSTEMPLOYMENT BENEFITS: In November, 1992, the FASB issued Statement 112,
"Employers' Accounting for Postemployment Benefits." Statement 112 requires
accrual basis 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 adopted provisions of
this standard in its financial statements for the year ended December 31, 1992.
CONTINGENCIES: The Company's policy is to conduct business in a manner that
promotes environmental quality. The Company's environmental obligations have
been recognized based on specific estimates for known conditions and required
investigations. Any potential insurance recoveries have not been reflected in
the determination of the reserve. At December 31, 1993, the Company had an
environmental reserve of $1,198,000, of which $12,000 was current.
Environmental expenditures under current laws and regulations are not expected
to materially impact the Company's consolidated financial statements.
NOTE A - INTERCOMPANY ACCOUNT WITH CYPRUS
The intercompany account with Cyprus included in the statement of financial
position represents a net balance as the result of various transactions between
the Company and Cyprus. The account is non-interest bearing and is settled
every six months by an adjustment to capital in excess of par value of shares.
The balance is primarily the result of the Company's participation in Cyprus'
central cash management program, wherein virtually all the Company's cash is
received by Cyprus and all significant cash disbursements are made by Cyprus.
Other transactions include the Company's calculated share of the current
portion of Cyprus' consolidated federal income tax liability, and corporate
charges incurred by Cyprus on behalf of the Company. An analysis of
transactions in the intercompany account for the year ended December 31, 1993
follows:
(In Thousands)
------------
Cash receipts from sales and other revenues $97,319
Operating cost and expense disbursements (83,445)
Corporate charges by Cyprus (1,042)
Settlement to capital in excess
of par value of shares (4,716)
-------
Net increase 8,116
Balance:
Beginning of year 3,150
-------
End of year $11,266
=======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTE B - RETIREMENT BENEFITS
PENSION PLANS
- - -------------
A defined benefit pension plan covering all hourly employees of the Company is
sponsored by the Company, and a defined benefit pension plan covering all
salaried employees of Cyprus, including all salaried employees of the Company,
is sponsored by Cyprus. The plans are noncontributory and salaried pension
plan benefits generally are based on employees' years of service and average
earnings for a defined period prior to retirement; hourly pension plan benefits
are based on employees' years of service at a defined rate. Pension costs are
funded to the extent necessary to meet Federal requirements.
The components of 1993 pension cost attributed to the Company were as follows:
(In Thousands)
------------
Service cost-benefits earned during the period $ 508
Interest cost on projected benefit obligation 185
Actual return on plan assets (137)
Net amortization and deferral 5
--------
Total pension cost $ 561
========
The Company's pension funds were held in the Cyprus Minerals Master Trust with
the funds contributed by Cyprus and its other affiliated companies. Plan
assets principally include diversified marketable equity securities and
corporate and government debt securities. Salaried plan assets have been
estimated. The following table presents a reconciliation of the funded status
of the Company's plans at December 31, 1993.
(In Thousands)
------------
Plan assets at fair value $ 2,105
Actuarial present value of benefit obligation:
Vested benefits --
Nonvested benefits 2,256
--------
Accumulated benefit obligation 2,256
Effect of projected compensation levels 913
--------
Projected benefit obligation 3,169
--------
Plan assets (less than) projected benefit obligation (1,064)
Unrecognized prior service costs 31
Unrecognized net loss 846
--------
Accrued cost $ (187)
========
The discount rate and rate of increase in compensation levels used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1993 were 7.5 percent and 5.5 percent, respectively. The expected
long-term rate of return on plan assets was 9 percent in 1993.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTE B - RETIREMENT BENEFITS - Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- - -------------------------------------------
In addition to the Company's defined benefit pension plans, the Company
currently provides retirement health care and life insurance benefits. The
medical plans provide benefits for most employees who reach normal, or in
certain cases, early retirement age while employed by the Company. The
postretirement medical plans are contributory, with annual adjustments to
retiree contributions, and contain certain other cost-sharing features such as
deductibles and coinsurance. The Company's practice is to prefund a portion of
the following year's projected medical cost in amounts determined at the
discretion of management.
The following table presents a reconciliation of the funded status of the
Company's plans at December 31, 1993.
(In Thousands)
------------
Accumulated postretirement benefit obligation:
Retirees $ --
Fully eligible active plan participants --
Other active plan participants 1,183
--------
1,183
Plan assets 0
--------
Accumulated postretirement benefit cost 1,183
Unamortized (loss) (99)
--------
Accumulated postretirement benefit obligation $ 1,084
========
Net periodic postretirement benefit cost for 1993 includes the following
components:
(In Thousands)
------------
Service cost $ 320
Interest cost 85
--------
Net periodic postretirement benefit cost $ 405
========
The incremental increase in 1993 postretirement benefit cost was $401,000. The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits was 14 percent for 1993, 13.5 percent for 1994, decreasing .5
percent per year for 13 years reaching 7 percent in 2006 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 would change the accumulated postretirement
benefit obligation as of December 31, 1993, by $56,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for 1993 by $14,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5 percent at December 31, 1993.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTE B - RETIREMENT BENEFITS - Continued
SAVINGS PLAN
- - ------------
Cyprus sponsors a defined contribution savings plan covering all
non-represented employees of Cyprus, including all employees of the Company.
Contributions by employees of up to 16 percent of base pay are matched by 75%
of the first 6 percent of base pay by the Company. The Company matching
contribution may only be used to purchase common stock of Cyprus. Total
purchases for the year ended December 31, 1993 were $446,000.
NOTE C - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1993 were:
(In Thousands)
------------
Deferred tax assets:
Supplies and coal reserves $ 499
Postemployment benefit liabilities 432
Environmental reserve 407
Accrued employment costs 347
All other 139
------
Total deferred tax assets 1,824
Deferred tax liabilities:
Plant and equipment 820
------
Net deferred tax assets $1,004
======
Components of the provision for income taxes for 1993 were as follows:
(In Thousands)
------------
Current:
Federal $1,979
State 395
------
2,374
Deferred 2,170
------
Total income taxes $4,544
======
Reconciliation of the effective income tax rate and United States Federal
statutory rate for 1993 was as follows:
Statutory tax rate 34.0%
Increase (decrease) due to:
Effect of state income taxes 2.1
Stock ownership plan dividends (.8)
----
Effective income tax rate 35.3%
=====
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
CYPRUS NORTHSHORE MINING CORPORATION AND CONSOLIDATED SUBSIDIARY
NOTE D - COMMITMENTS
During 1991, Power and Northern States Power Company (the "Utility") entered
into a 20-year contract which commits Power to make available to the Utility 40
megawatts of excess capacity. Revenue received by Power for this commitment is
subject to escalation. The contract is based on Power maintaining a Qualifying
Facility ("QF") status which obligates Power to maintain steam co-generation
capability. Loss of QF status would reduce revenues received by Power. The
contract may be terminated by either party for breach or force majeure
continuing for 12 months and is at present in good standing.
NOTE E - LITIGATION
The Company is periodically involved in litigation incidental to its
operations. Management believes that any pending litigation will not result in
material liability in relation to the Company's consolidated financial
statements.
NOTE F - SUBSEQUENT EVENT
On September 30, 1994, Cleveland-Cliffs Inc acquired, through its wholly-owned
subsidiary Cliffs Minnesota Minerals Company, all of the outstanding shares of
stock of the Company (renamed Northshore Mining Company) and Power (renamed
Silver Bay Power Company) from Cyprus.
17