MANAGEMENT'S DISCUSSION AND ANALYSIS Exhibit 13(a)
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 1996, Cleveland-Cliffs earned $61.0 million, or $5.26 a share, including a
$1.3 million after-tax property damage insurance recovery. Earnings for the year
1995 were $57.8 million, or $4.84 a share, including an extraordinary after-tax
charge of $3.1 million and the effects of two significant "special items."
Excluding the insurance recovery, earnings in 1996 were $59.7 million, or $5.15
a share. Comparable earnings in 1995, excluding the extraordinary charge and the
special items, were $55.4 million, or $4.64 a share.
Following is a summary of results for the years 1996, 1995, and 1994:
(In Millions, Except Per Share)
--------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net Income Before Special Items and
Extraordinary Charge
- Amount $59.7 $55.4 $42.8
- Per Share 5.15 4.64 3.54
Special Items
Prior Years' Tax Credit 12.2
Environmental Reserve (6.7)
Property Damage Insurance Recovery 1.3
----- ----- -----
1.3 5.5
----- ----- -----
Net Income Before Extraordinary Item
- Amount 61.0 60.9 42.8
- Per Share 5.26 5.10 3.54
Extraordinary Loss
on Early Extinguishment of Debt (3.1)
----- ----- -----
Net Income
- Amount $61.0 $57.8 $42.8
===== ===== =====
- Per Share $5.26 $4.84 $3.54
===== ===== =====
Earnings per share in 1996 and 1995 reflect the favorable effect of repurchasing
shares under the Company's stock repurchase program ($.11 a share -1996; $.07 a
share - 1995). Repurchases in 1996 and 1995 were 495,800 shares and 284,500
shares, respectively.
1996 VERSUS 1995
- ----------------
Revenues were $518.1 million in 1996, an increase of $45.0 million from 1995.
Revenues from product sales and services totaled $451.7 million in 1996 compared
to $411.2 million in 1995. The $40.5 million increase was due to higher sales
volume and higher average price realizations. North American iron ore sales were
11.0 million tons in 1996 compared to 10.4 million tons in 1995. Royalties and
management fees revenue in 1996, including amounts paid by the Company as a
participant in the mining ventures, totaled $51.5 million, compared to $49.5
million in 1995.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Net income for the year 1996 was $61.0 million, or $5.26 a share, including a
$1.3 million after-tax property damage insurance recovery on a January, 1996 ore
train derailment.
Earnings for 1995 were $57.8 million, or $4.84 a share, including an
extraordinary after-tax charge of $3.1 million on the early extinguishment of
debt as part of a $70 million long-term debt refinancing.
Net income before the extraordinary item for the year 1995 was $60.9 million, or
$5.10 a share. Included in 1995 earnings were two large special items recorded
in the second quarter: a $12.2 million tax credit resulting from the settlement
of prior years' tax issues, and a $6.7 million after-tax increase in the reserve
for environmental expenditures.
Excluding the special item, 1996 earnings were $59.7 million, or $5.15 a share,
an increase of $4.3 million from comparable earnings in 1995 of $55.4 million,
or $4.64 a share. The $4.3 million increase in comparable earnings was mainly
due to increased North American sales volume and price realizations, higher
Australian earnings, a non-recurring $1.8 million after-tax reserve against
accounts receivable in 1995 and lower interest expense, partly offset by higher
operating costs and a higher effective income tax rate in 1996. Operating costs
in 1996 were impacted by record cold weather in the first quarter and higher
employment and fuel costs.
Australian after-tax earnings were $12.4 million, or $1.07 per share in 1996.
Comparable earnings in 1995 were $9.0 million, or $.75 per share. The Australian
operation terminated production as planned in December, 1996 and is expected to
ship its remaining inventory during the first quarter of 1997.
1995 VERSUS 1994
- ----------------
Revenues were $473.1 million in 1995, an increase of $84.2 million from 1994.
Revenues from product sales and services in 1995 totaled $411.2 million, an
increase of $76.4 million from 1994, mainly due to higher North American sales
volume reflecting the full year effect of the acquisition of Northshore Mining
Company on September 30, 1994. North American iron ore sales were 10.4 million
tons in 1995 compared to 8.2 million tons in 1994. Royalty and management fee
revenue in 1995 totaled $49.5 million, an increase of $4.8 million due primarily
to increased production at Empire Mine in 1995.
Net income for the year 1995 was $57.8 million, or $4.84 a share, including an
extraordinary after-tax charge of $3.1 million incurred in December, 1995 on the
early extinguishment of debt as part of a $70 million long-term debt
refinancing.
Net income in 1994 was $42.8 million, or $3.54 a share.
Net income before the extraordinary item for the year 1995 was $60.9 million, an
increase of $18.1 million from 1994. Included in 1995 earnings were two large
special items recorded in the second quarter: a $12.2 million tax credit
resulting from the settlement of prior years' tax issues, and a $6.7 million
after-tax increase in the reserve for environmental expenditures.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Excluding the special items and the extraordinary charge, earnings for 1995 were
$55.4 million, an increase of $12.6 million from 1994. The increase was mainly
due to the full year effect of the Northshore acquisition, higher Australian
earnings, and increased royalties and management fees, partially offset by a
higher effective income tax rate.
CASH FLOW AND LIQUIDITY
- -----------------------
At December 31, 1996, the Company had cash and marketable securities totaling
$169.4 million. The full amount of a $100.0 million unsecured revolving credit
facility was available. No principal payments are required to be made on
outstanding debt until senior unsecured notes in the amount of $70 million
mature in 2005.
In 1996, cash and marketable securities increased $20.6 million due to cash flow
from operating activities (before changes in operating assets and liabilities),
$89.6 million, partially offset by capital expenditures, $36.7 million,
repurchase of 495,800 of the Company's Common Shares in open market
transactions, $19.5 million, and dividends, $15.1 million.
North American pellet inventory investment at December 31, 1996 was $21.8
million, a decrease of $3.7 million from December 31, 1995. The decrease
occurred despite higher 1996 production, 0.6 million tons, and 0.4 million tons
of purchased ore. Inventories at the Savage River Mines in Australia decreased
$5.1 million, reflecting the planned termination of production.
FOLLOWING IS A SUMMARY OF 1996 CASH FLOW:
(IN MILLIONS)
-------------
Cash Flow from Operations
Before Changes in Operating Assets and Liabilities.............. $ 89.6
Changes in Operating Assets and Liabilities:
Marketable Securities ....................................... (8.2)
Other ....................................................... 2.0
-------
Net Cash From Operations.................................. 83.4
Capital Expenditures............................................... (36.7)
Repurchase of Common Shares........................................ (19.5)
Dividends.......................................................... (15.1)
Other (net)........................................................ .3
-------
Increase in Cash and Cash Equivalents........................... 12.4
Increase in Short-term Marketable Securities....................... 8.2
-------
Increase in Cash and Marketable Securities...................... $ 20.6
=======
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
FOLLOWING IS A SUMMARY OF KEY LIQUIDITY MEASURES:
At December 31
(In Millions)
-----------------------------------
1996 1995 1994
------ ------ ------
Cash and Temporary Investments
Cash and Cash Equivalents ................. $152.3 $139.9 $140.6
Marketable Securities...................... 17.1 8.9 .8
------ ------ ------
Total $169.4 $148.8 $141.4
====== ====== ======
Working Capital.............................. $195.3 $189.2 $169.5
====== ====== ======
Ratio of Current Assets to Current
Liabilities................................ 2.9:1 2.9:1 2.7:1
Additionally, at December 31, 1996, the Company had long-term investments of
$10.8 million, primarily consisting of LTV Common Stock (.8 million shares with
a market value of $10.0 million).
In 1996, $3.8 million of Australian government securities matured and were
converted to cash to finance obligations related to termination of production at
the Savage River Mines. The redemption of these investments, previously
classified as held-to-maturity securities, did not result in the recognition of
a gain or loss.
In 1995, the Company and the Internal Revenue Service reached agreement on
several issues raised during the examination of the Company's Federal income tax
returns for the tax years 1986 through 1988. The income tax settlement favorably
resolved a number of audit issues primarily arising from the Company's
restructuring program in the late 1980s when mining partnerships were
reorganized to cope with steel company bankruptcies and non-core businesses were
divested. During that period, the Company had reserved the potential tax
liabilities. Accordingly, a tax credit of $12.2 million was recorded in the
second quarter of 1995. As a result of the settlement and its related impact on
the tax years 1989 through 1993, the Company made additional tax and interest
payments of $11.8 million in the third quarter of 1995 and is entitled to tax
and interest refunds of $5.3 million, of which $2.3 million was received in
1996.
NORTH AMERICAN IRON ORE
- -----------------------
On September 29, 1995, McLouth Steel Products Company ("McLouth") petitioned for
protection under Chapter 11 of the U.S. Bankruptcy Code. At the time of the
bankruptcy filing, the Company had an unreserved receivable from McLouth of $5.0
million, secured by liens on certain McLouth fixed assets. Reserves of $3.4
million have been recorded against the receivable.
On March 15, 1996, McLouth announced that it had begun a shutdown of its
operations due to inadequate funds. The Company had supplied 300,000 tons of
pellets to McLouth in 1996 prior to shutdown. The Company reserved all financial
exposure from the McLouth shutdown, except the remaining unreserved receivable
which is secured by first liens on property and equipment.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
On June 26, 1996, the bankruptcy court approved the sale of McLouth's assets and
an agreement to settle secured claims, including the Company's secured claim.
Based on the terms of the agreement, the Company expects to recover the carrying
value of its secured claim. Proceeds from the sale of McLouth's assets will be
used primarily to satisfy administrative claims, including the Company's
administrative claim.
The Company's total shipments in 1996 were not affected by McLouth's bankruptcy
filing or the shutdown of its operations. Although sales to McLouth in 1996 were
only 0.3 million tons prior to shutdown in the first quarter, compared to 1.3
million tons for the full year 1995, sales of the remaining available tons in
1996 were made to other customers.
Three U.S. iron ore mining operations managed by subsidiaries of the Company are
operating under six-year, no strike labor agreements with the United
Steelworkers of America. The contracts, which were effective August 1, 1993,
cover the Empire and Tilden mines in Michigan and the Hibbing mine in Minnesota.
The agreements called for a limited economic re-opener in 1996, with interest
arbitration if the parties did not reach a negotiated settlement. The re-openers
were settled based on the pattern of recent steel company labor contract
settlements, plus certain features to motivate productivity. The contracts
expire on August 1, 1999. A labor agreement with the Wabush Mines' bargaining
unit reached in March, 1994, expired on March 1, 1996. A new Wabush labor
agreement was negotiated effective March 1, 1996 and will expire March 1, 1999.
The six North American mines managed by the Company produced a record 39.9
million tons of iron ore in 1996 compared with 39.6 million tons in 1995. The
Company's share of the North American production was 10.4 million tons in 1996
versus 9.8 million tons in 1995.
Most industry analysts are projecting continued strong North American steel
production and shipments in 1997 by integrated steel companies. The mines
managed by the Company are scheduled to operate at nearly full capacity again in
1997. The Company's nominated share of such capacity is 10.8 million tons.
Production schedules are subject to change during the year.
More than 85 percent of the Company's nominated capacity in 1997 has been
committed under multi-year contracts. The Company's current multi-year contracts
expire in various years starting in 1999. Maintenance of present sales volume is
dependent on renewal of such contracts and the general iron ore demand level.
The Company has demonstrated its ability to sustain sales volume through renewed
or new contracts. In December, 1996, the Company renewed its contract with AK
Steel, its largest customer, for up to 2.5 million tons annually through 1999.
AUSTRALIA
- ---------
Savage River Mines in Tasmania, Australia operated at its capacity of
approximately 1.6 million tons in 1996 and 1.5 million tons in 1995. Net income
increased to $12.4 million in 1996 from $9.0 million in 1995 due to higher sales
price realizations and volume, and lower operating cost, partially offset by a
higher Australian effective income tax rate and exchange rate effect.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Production at Savage River Mines was terminated prior to year-end 1996 due to
exhaustion of the economically recoverable iron ore from surface mining.
Remaining inventory is expected to be shipped during the first quarter of 1997.
No significant earning contribution is expected in 1997. The mine operated two
years beyond the original schedule established when the Company acquired full
ownership in 1990. Termination costs have been provided in the Capacity
Rationalization Reserve.
The Company's subsidiary, Pickands Mather & Co. International ("PMI"), received
notice from the Tasmanian government in 1996 asserting certain environmental
obligations in connection with rehabilitating the Savage River Mine site. PMI
has asserted that all obligations to rehabilitate the mine and plant sites are
specified in the Rehabilitation Plan agreement between the State of Tasmania and
PMI, which agreement was formalized in June, 1990 by an Act of Parliament and
was a condition of PMI's acquisition of interests in the mine from Japanese
steel companies. PMI has provided reserves for all environmental and other
rehabilitation obligations specified in the Rehabilitation Plan.
On December 5, 1996, PMI and the State of Tasmania entered into a Deed of
Arrangement whereby the assets (including $8.7 million in cash) and all
environmental and rehabilitation obligations of the Savage River Mines will be
transferred to the Tasmanian government. The transfer is contingent on certain
events which are anticipated to be completed in March, 1997.
COAL
- ----
Pursuant to the Coal Industry Retiree Health Benefit Act of 1992 ("Benefit
Act"), the Trustees of the UMWA Combined Benefit Fund have assigned
responsibility to the Company for premium payments with respect to retirees,
dependents, and "orphans" (unassigned beneficiaries), representing less than
one-half of one percent of all "assigned beneficiaries." The Company is making
premium payments under protest and is contesting the assignments that it
believes were incorrect. Premium payments by the Company in 1996 were $.8
million ($.7 million in 1995). Additionally, in December, 1993, a complaint was
filed by the Trustees of the United Mine Workers of America 1992 Benefit Plan
against the Company demanding the payment of premiums on additional
beneficiaries related to two formerly operated joint venture coal mines. The
Company has actively contested the complaint and is awaiting a court decision.
Monthly premiums are being paid into an escrow account (80% by a former joint
venture participant and 20% by the Company) by joint agreement with the Trustee,
pending outcome of the litigation. Company payments in 1996 and 1995 were
approximately $.1 million. At December 31, 1996, the Company's coal retiree
reserve was $10.2 million, of which $1.4 million was current. The reserve is
reflected at present value, using a discount rate of 7.75%. Constitutional and
other legal challenges to various provisions of the Benefit Act by other former
coal producers are pending in the Federal Courts.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
ACTUARIAL ASSUMPTIONS
- ---------------------
As a result of an increase in long-term interest rates, the Company re-evaluated
the interest rates used to calculate its pension and other postretirement
benefit ("OPEB") obligations. Financial accounting standards require that the
discount rate used to calculate the actuarial present value of such benefits
reflect the rate of interest on high-quality fixed income securities. The
discount rate used to calculate the Company's pension and OPEB obligations was
increased to 7.75% at December 31, 1996 from 7.25% at December 31, 1995. The
assumed long-term rate of return on pension assets was 8.75% at December 31,
1996 and 1995. The Company also adjusted its assumed long-term rate of return on
deposits on life insurance contracts to fund retiree life insurance benefits to
6.0% at December 31, 1996 from 8.0% at December 31, 1995 to reflect contract
provisions. The medical cost trend rate assumption used in the calculation of
its OPEB obligation reflects medical cost growth of 8.0% in 1997, decreasing by
.5% per year to a growth rate of 5.0% in the year 2003 and annually thereafter.
The changes in actuarial assumptions did not affect 1996 financial results;
however, in 1997 and subsequent years, the changes are projected to decrease
pension and OPEB expense by approximately $.4 million.
The Company is funding pension plans to the maximum amount deductible for income
tax purposes. For Plan Year 1996 (largely funded in calendar year 1997), the
Company plans to contribute $3.0 million, including its share of associated
companies' funding, a decrease of $2.1 million from Plan Year 1995.
ENVIRONMENTAL COSTS
- -------------------
The Company has a formal code of environmental conduct which promotes
environmental protection and restoration. The Company's obligations for known
environmental conditions at active mining operations, idle and closed mining
operations and other sites have been recognized based on estimates of the cost
of investigation and remediation at each site. If the cost can only be estimated
as a range of possible amounts with no specific amount being most likely, the
minimum of the range is accrued in accordance with generally accepted accounting
principles. Estimates may change as additional information becomes available.
Actual costs incurred may vary from the estimates due to the inherent
uncertainties involved. Any potential insurance recoveries have not been
reflected in the determination of the financial reserves.
At December 31, 1996, the Company had a reserve for environmental obligations,
including its share of the environmental obligations of associated companies, of
$23.7 million ($22.9 million at December 31, 1995), of which $4.0 million was
current. During 1996 and 1995, the Company provided $2.4 million and $13.2
million of additional environmental reserves respectively. The additional
environmental provisions reflect the Company's continuing review of estimated
investigation and remediation expense at all known sites. Net payments in 1996
were $1.6 million (1995 - $2.4 million).
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
CAPITAL INVESTMENT
- ------------------
North American Iron Ore
- -----------------------
The Company and its North American mine partners have substantially increased
capital expenditures in recent years to reduce operating costs and satisfy
orebody development requirements for maintenance of high production rates.
Capital equipment additions and replacements, including equipment acquired
through lease, totaled approximately $89.3 million (the Company's share - $26.4
million) in 1996 for the six Company-managed mines and supporting operations in
North America, of which $56.2 million (the Company's share - $22.2 million) was
classified as capital expenditures. Capital additions and replacements,
including leased equipment, are projected to total approximately $103.9 million
(the Company's share - $27.7 million) in 1997, with approximately $58.2 million
(the Company's share - $21.2 million) classified as capital expenditures, at the
six Company-managed mines and supporting operations in North America.
Reduced Iron
- ------------
The Company's strategy includes extending its business scope to produce and
supply reduced iron products to steelmakers. Reduced iron products contain
approximately 90% iron versus 65% for traditional iron ore pellets and are
higher quality than most scrap steel feed. The market for reduced iron is
relatively small, but is projected to increase at a higher rate than other iron
ore products.
On April 15, 1996, the Company announced an international joint venture to
produce and market premium quality reduced iron briquettes to the steel
industry. All project documents were signed on May 8, 1996. The venture's
participants, through subsidiaries, are Cleveland-Cliffs Inc, 46.5 percent; The
LTV Corporation, 46.5 percent; and Lurgi AG of Germany, 7.0 percent. The Company
manages the $150 million project, located in Trinidad and Tobago, and will be
responsible for sales by the venture company, Cliffs and Associates Limited. The
Company's share of capital expenditures is estimated to be $70 million, of which
$13.1 million was spent in 1996 and $46 million is expected to be spent in 1997.
No project financing will be used. Start-up is projected to occur in the fourth
quarter, 1998.
Cliffs and Associates Limited has entered into forward currency exchange
contracts to hedge the Deutsche Mark as part of the construction project. The
purpose of the contracts is to manage the risk of exchange rate fluctuations
with respect to a portion of project construction costs denominated in the
Deutsche Mark. The Company's share of outstanding contracts, which have varying
maturity dates to June 1, 1998, have an aggregate contract value of $10.8
million and an aggregate estimated fair value of $10.3 million, at December 31,
1996.
The Company anticipates further investment in reduced iron projects.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Other
- -----
The Company periodically examines opportunities to increase profitability and
strengthen its business position by increasing its ownership of existing iron
ore mining ventures. Also, the Company is seeking investment opportunities to
broaden its scope as an operator of mining and pelletizing projects
internationally.
CAPITALIZATION
- --------------
In December, 1995, the Company completed a private placement of $70 million of
senior unsecured notes to an insurance company group. The notes bear a fixed
interest rate of 7.0 percent and are scheduled to be repaid with a single
principal payment in December, 2005. Proceeds from the placement were utilized
to retire $70 million of existing notes with an average interest rate of 8.77
percent and remaining annual principal repayments of $12.1 million per year in
the years 1996 through 1999 and $7.2 million in the years 2000 through 2002. In
1995, a $3.1 million after-tax ($4.8 million before tax) extraordinary charge
was incurred in the early extinguishment of the debt retired. Following is a
summary of long-term obligations:
LONG-TERM OBLIGATIONS AT DECEMBER 31
(In Millions)
---------------------------------------------------------------------------------------
Effectively Serviced Obligations
--------------------------------
Share of
Associated Guaranteed Total
Consolidated Companies Total Obligations Obligations
------------ --------- ----- ----------- -----------
1996 $ 70.0 $ 2.9 $ 72.9 $ - $ 72.9
1995 70.0 6.3 76.3 6.6 82.9
1994 75.0 9.2 84.2 13.7 97.9
In addition to the senior unsecured notes, the Company has a $100 million
revolving credit agreement. No borrowings are outstanding under this agreement
which was amended in July, 1996 to extend the expiration date by one year to
March 1, 2001.
At December 31, 1995, guaranteed obligations principally represented Empire Mine
debt obligations of LTV and Wheeling-Pittsburgh Steel Corporation. The Empire
Mine long-term debt was fully extinguished in December, 1996 (the Company's
share of Empire long-term debt principal payments was $3.9 million in 1996 and
$4.3 million in 1995 and 1994).
The ratio of effectively serviced long-term obligations to shareholders' equity
was .2:1 at December 31, 1996, .2:1 at December 31, 1995, and .3:1 at December
31, 1994.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
In January, 1995, the Company announced a program to repurchase up to 600,000 of
its Common Shares in the open market or in negotiated transactions. In July,
1996, the Company announced the expansion of this program to 1.0 million shares.
Under the combined program the Company has repurchased 780,300 shares through
December 31 at a total cost of $30.3 million (average price of $38.84 per
share). The shares will initially be retained as Treasury Stock.
FORWARD-LOOKING STATEMENTS
- --------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. In addition to historical information, this
report contains forward-looking statements that are subject to risks and
uncertainties that could cause future results to differ materially from expected
results. Such statements are based on management's beliefs and assumptions made
on information currently available to it.
The Company's dominant business is the production and sale of iron ore pellets,
which is subject to the cyclical nature of the integrated steel industry.
Factors that could cause the Company's actual results to be materially different
from projected results include the following:
- Changes in the financial condition of integrated steel company
partners and customers;
- Domestic or international economic and political conditions;
- Unanticipated geological conditions or ore processing changes;
- Substantial changes in imports of steel or iron ore;
- Development of alternative steel-making technologies;
- Displacement of integrated steel production by electric furnace
production;
- Displacement of steel by competitive materials;
- Energy costs and availability;
- Labor contract negotiations;
- Changes in tax laws directly affecting mineral exploration and
development;
- Changes in laws, regulations or enforcement practices governing
environmental site remediation requirements and the technology
available to complete required remediation. Additionally, the
impact of inflation, the identification and financial condition of
other responsible parties, as well as the number of sites and
quantity and type of material to be removed, may significantly
affect estimated environmental remediation liabilities;
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
- Changes in laws, regulations or enforcement practices governing
compliance with environmental and safety standards at operating
locations; and,
- Accounting principles or policies imposed by the Financial
Accounting Standards Board or the Securities and Exchange
Commission.
The North American integrated steel industry has experienced high operating
rates in recent years. Most steel company partners and customers of the Company
have improved their financial condition due to improved operating results and
increased equity capital. However, the integrated steel industry continues to
have relatively high fixed costs and obligations.
The improvement in most integrated steel companies' financial positions has
reduced the major integrated business risk faced by the Company, i.e., the
potential financial failure and shutdown of one or more of its significant
customers or partners, with the resulting loss of ore sales or royalty and
management fee income. However, if any such shutdown were to occur without
mitigation through replacement sales or cost reduction, it would represent a
significant adverse financial development to the Company.
The Company is under no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
39
EXHIBIT 13(b)
REPORT OF INDEPENDENT AUDITORS
------------------------------
Shareholders and Board of Directors
Cleveland-Cliffs Inc
We have audited the accompanying statement of consolidated financial position of
Cleveland-Cliffs Inc and consolidated subsidiaries as of December 31, 1996 and
1995, and the related statements of consolidated income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. Our audits also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cleveland-Cliffs Inc and consolidated subsidiaries at December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Cleveland, Ohio
February 13, 1997
40
STATEMENT OF CONSOLIDATED FINANCIAL POSITION Exhibit 13(c)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
(In Millions)
December 31
-----------
1996 1995
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 152.3 $ 139.9
Marketable securities 17.1 8.9
------ ------
169.4 148.8
Trade accounts receivable
(net of allowance, $1.1 in 1996 and $7.7 in 1995) 53.6 45.2
Receivables from associated companies 16.6 16.6
Inventories
Finished products 28.7 38.0
Work in process .9 .7
Supplies 15.4 17.0
------ ------
45.0 55.7
Deferred income taxes 4.4 14.1
Other 11.8 12.3
------ ------
TOTAL CURRENT ASSETS 300.8 292.7
PROPERTIES
Plant and equipment 249.7 240.3
Minerals 19.6 19.7
------ ------
269.3 260.0
Allowances for depreciation and depletion (141.6) (140.0)
------ ------
TOTAL PROPERTIES 127.7 120.0
INVESTMENTS IN ASSOCIATED COMPANIES 161.9 152.0
OTHER ASSETS
Long-term investments 10.8 16.3
Deferred charges 9.3 8.3
Deferred income taxes 11.9 11.2
Prepaid Pension 34.8 28.2
Miscellaneous 16.5 15.9
------ ------
TOTAL OTHER ASSETS 83.3 79.9
------ ------
TOTAL ASSETS $673.7 $644.6
====== ======
41
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
Cleveland-Cliffs Inc and Consolidated Subsidiaries
(In Millions)
December 31
-----------
1996 1995
- ---------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 11.9 $ 16.0
Payables to associated companies 19.6 17.3
Accrued employment costs 26.5 27.2
Accrued expenses 19.2 17.5
Income taxes payable 5.3 .3
Reserve for capacity rationalization 11.1 10.5
Other 11.9 14.7
------ ------
TOTAL CURRENT LIABILITIES 105.5 103.5
LONG-TERM OBLIGATIONS 70.0 70.0
POSTEMPLOYMENT BENEFIT LIABILITIES 67.5 67.3
RESERVE FOR CAPACITY RATIONALIZATION 15.5 17.2
OTHER LIABILITIES 44.6 44.0
SHAREHOLDERS' EQUITY
Preferred Stock
Class A - no par value
Authorized - 500,000 shares;
Issued-none -- --
Class B - no par value
Authorized - 4,000,000 shares;
Issued-none -- --
Common Shares-par value $1 a share
Authorized - 28,000,000 shares;
Issued - 16,827,941 shares 16.8 16.8
Capital in excess of par value of shares 68.8 65.2
Retained income 432.0 386.1
Foreign currency translation adjustments .1 .3
Unrealized gain (loss) on available for sale securities,
net of tax (1.0) .1
Cost of 5,458,224 Common Shares in
treasury (1995 - 4,998,674 shares) (142.5) (123.8)
Unearned compensation (3.6) (2.1)
------ ------
TOTAL SHAREHOLDERS' EQUITY 370.6 342.6
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 673.7 $ 644.6
====== ======
See notes to consolidated financial statements.
42
STATEMENT OF CONSOLIDATED INCOME Exhibit 13(d)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
(In Millions, Except Per Share Amounts)
Year Ended December 31
---------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
REVENUES
- --------
Product sales and service $ 451.7 $ 411.2 $ 334.8
Royalties and management fees 51.5 49.5 44.7
------- ------- -------
Total Operating Revenues 503.2 460.7 379.5
Property damage claim recovery 2.0 -- --
Investment income (securities) 9.5 9.3 7.9
Other income 3.4 3.1 1.5
------- ------- -------
Total Revenues 518.1 473.1 388.9
COSTS AND EXPENSES
- ------------------
Cost of goods sold and operating expenses 392.9 356.4 299.9
Administrative, selling and general expenses 16.7 15.1 15.9
Interest expense 4.6 6.5 6.6
Other expenses 8.4 23.5 9.0
------- ------- -------
Total Costs and Expenses 422.6 401.5 331.4
------- ------- -------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 95.5 71.6 57.5
INCOME TAXES 34.5 10.7 14.7
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 61.0 60.9 42.8
EXTRAORDINARY LOSS
ON EARLY EXTINGUISHMENT OF DEBT
(NET OF TAX BENEFIT, $1.7 MILLION) -- (3.1) --
------- ------- -------
NET INCOME $ 61.0 $ 57.8 $ 42.8
======= ======= =======
NET INCOME PER COMMON SHARE
Before Extraordinary Item $ 5.26 $ 5.10 $ 3.54
Extraordinary Item -- (.26) --
------- ------- -------
Net Income $ 5.26 $ 4.84 $ 3.54
======= ======= =======
See notes to consolidated financial statements.
43
STATEMENT OF CONSOLIDATED CASH FLOWS Exhibit 13(e)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
(In Millions,
Brackets Indicate Cash Decrease)
Year Ended December 31
-----------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 61.0 $ 57.8 $ 42.8
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization:
Consolidated 6.6 6.1 3.7
Share of associated companies 11.0 10.7 10.7
Provision for deferred income taxes 10.9 5.5 (1.8)
Tax credit -- (12.2) --
Increases to environmental reserve 2.4 13.2 2.2
Extraordinary loss on debt extinguishment -- 4.8 --
Other (2.3) (1.2) (3.1)
------ ------ ------
Total before changes in operating assets and liabilities 89.6 84.7 54.5
Changes in operating assets and liabilities:
Marketable securities (8.2) (8.1) 92.3
Inventories and prepaid expenses 11.3 (15.7) 13.6
Receivables (8.4) 3.9 (11.6)
Payables and accrued expenses (.9) (6.8) 19.1
------ ------ ------
Total changes in operating assets and liabilities (6.2) (26.7) 113.4
------ ------ ------
Net cash from operating activities 83.4 58.0 167.9
INVESTING ACTIVITIES
Acquisition of Northshore Mining -- -- (97.3)
Weirton Preferred Stock redemption -- -- 25.0
Purchase of property, plant and equipment:
Consolidated (16.5) (16.6) (6.9)
Share of associated companies (20.2) (5.9) (4.0)
Sale of long-term investments 4.0 8.8 5.3
Other .4 (4.4) --
------ ------ ------
Net cash (used by) investing activities (32.3) (18.1) (77.9)
FINANCING ACTIVITIES
Principal payments on long-term debt:
Consolidated -- (75.0) --
Share of associated companies (3.9) (4.3) (4.3)
Debt prepayment fees -- (4.8) --
Proceeds from long-term debt -- 70.0 --
Repurchases of Common Shares (19.5) (10.7) --
Dividends (15.1) (15.5) (14.8)
Other -- .3 .6
------ ------ ------
Net cash (used by) financing activities (38.5) (40.0) (18.5)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (.2) (.6) 1.2
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12.4 (.7) 72.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 139.9 140.6 67.9
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 152.3 $ 139.9 $ 140.6
====== ====== ======
Taxes paid on income $ 20.6 $ 29.0 $ 17.6
Interest paid on debt obligations $ 4.9 $ 7.2 $ 6.5
See notes to consolidated financial statements.
44
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY Exhibit 13(f)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
(In Millions)
-----------------------------------------------------------------------------------------
Capital In Foreign
Excess of Currency Available Common
Common Par Value Retained Translation For Sale Shares Unearned
Shares Of Shares Income Adjustments Securities In Treasury Compensation Total
------ --------- -------- ----------- ---------- ----------- ----------- ------
BALANCE December 31, 1993 $ 16.8 $ 61.4 $ 315.8 $ (.3) $ 1.3 $ (114.3) $ (.3) $ 280.4
Net income 42.8 42.8
Cash dividends - $1.23 a share (14.8) (14.8)
Change in unrealized gains,
net of tax .2 .2
Stock plans
Restricted stock/stock options .2 .9 1.1
Performance shares 1.5 (1.0) .5
Other 1.2 1.2
----- ----- ------ --- --- ----- ----- -----
BALANCE December 31, 1994 16.8 63.1 343.8 .9 1.5 (113.4) (1.3) 311.4
Net income 57.8 57.8
Cash dividends - $1.30 a share (15.5) (15.5)
Change in unrealized gains,
net of tax (1.4) (1.4)
Stock plans
Restricted stock/stock options .3 .3
Performance shares 2.1 (.8) 1.3
Repurchases of Common Shares (10.7) (10.7)
Other (.6) (.6)
----- ----- ------ --- --- ----- ----- -----
BALANCE December 31, 1995 16.8 65.2 386.1 .3 .1 (123.8) (2.1) 342.6
Net income 61.0 61.0
Cash dividends - $1.30 a share (15.1) (15.1)
Change in unrealized gains,
net of tax (1.1) (1.1)
Stock plans
Restricted stock/stock options .4 .8 (1.1) .1
Performance shares 3.2 (.4) 2.8
Repurchases of Common Shares (19.5) (19.5)
Other (.2) (.2)
----- ----- ------ --- --- ----- ----- -----
BALANCE December 31, 1996 $ 16.8 $ 68.8 $ 432.0 $ .1 $ (1.0) $(142.5) $ (3.6) $ 370.6
===== ===== ====== === === ===== ===== =====
See notes to consolidated financial statements.
45
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 and include, where appropriate, capitalized interest incurred during the
construction phase of qualifying assets (see Note C). The Company's share of
earnings of mining partnerships and companies 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 to integrated steel companies. 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 wholly-owned Australian operations had total revenues and pre-tax
operating profit of $56.1 million and $20.2 million, $45.8 million and $13.2
million, and $43.5 million and $5.6 million, in 1996, 1995 and 1994,
respectively. Total Australian assets were $28.5 million at December 31, 1996
(1995 - $31.8 million). The Australian operation terminated production as
planned in December, 1996 and is expected to ship its remaining inventory during
the first quarter of 1997.
Iron ore is marketed in North America, Europe, Asia, and Australia. The three
largest steel company customers' contributions to the Company's revenues were
15%, 12% and 11% in 1996; 17%, 11% and 10% in 1995; and 14%, 14% and 12% in
1994.
BUSINESS RISK: The North American steel industry experienced high operating
rates and generally positive financial results in 1996, 1995 and 1994. The
Company's integrated steel company partners and customers have generally
improved their financial condition over the three-year period as a result of
continued earnings and increased equity capital.
In recent years, the improvement in most steel companies' financial positions
has significantly reduced the major business risk faced by the Company, i.e.,
the potential financial failure and shutdown of significant customers or
partners with a resulting unmitigated loss of ore sales or royalty and
management fee income.
If any such shutdown were to occur without mitigation through replacement sales
or cost reduction, it would represent a significant adverse financial
development to the Company. The iron mining business has high operating leverage
because "fixed" costs are a large portion of the cost structure. Therefore,
unmitigated loss of sales or other income due to failure of a customer or
partner would have an adverse income effect proportionately greater than the
revenue effect (see Note E - McLouth Bankruptcy).
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cleveland-Cliffs Inc and Consolidated Subsidiaries
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 financial statement 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.
From time to time 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.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company does not engage in acquiring or
issuing derivative financial instruments for trading purposes. Derivative
financial instruments, in the form of forward currency exchange contracts, are
used by the Company to manage foreign exchange risks. These forward exchange
contracts are hedging transactions that have been entered into with the
objective of managing the risk of exchange rate fluctuations with respect to the
ordinary local currency obligations of the Company's operations. Gains and
losses are recognized in the same period as the hedged transaction.
The Company had $2.7 million and $4.5 million of Australian forward currency
exchange contracts at December 31, 1996 and 1995, respectively, and $7.1 million
and $4.8 million of Canadian forward currency exchange contracts at December 31,
1996 and 1995, respectively. The fair value of these currency exchange
contracts, which have varying maturity dates (to February 28, 1997 - Australian;
to December 31, 1997 - Canadian), is estimated to be $2.8 million for the
Australian contracts and $7.0 million for the Canadian contracts, based on the
December 31, 1996 forward rates.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Cliffs and Associates Limited has entered into a forward currency exchange
contract to hedge Deutsche Mark payments required to be made as part of the
Trinidad construction project (see Note C). The Company's share of outstanding
contracts, which have varying maturity dates to June 1, 1998, has an aggregate
contract value of $10.8 million and an aggregate estimated fair value of $10.3
million, at December 31, 1996.
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 $2.9 million and $1.2 million at December 31, 1996 and
1995, respectively. The cost of other inventories is determined by the average
cost method.
PROPERTIES: Properties are stated at cost. Depreciation of plant and equipment
is computed principally by the straight-line method based on estimated useful
lives, not to exceed the life of the operating unit, and is not reduced when
operating units are temporarily idled. Depreciation on buildings, mining and
processing equipment is provided over the following estimated useful lives:
Buildings 45 Years
Mining Equipment 10-20 Years
Processing Equipment 15-45 Years
Depletion of mineral lands is computed using the units of production method
based upon proven mineral reserves.
ENVIRONMENTAL REMEDIATION COSTS: The Company accrues environmental remediation
obligations when the obligations are probable and can be reasonably estimated.
Costs of future expenditures are not discounted to their present value.
Recoveries from insurance companies or other parties are not recognized until
they become probable.
STOCK COMPENSATION: The Company applies the provisions of the Accounting
Principles Board Opinion No. 25 ("APB 25") and related Interpretations in
accounting for its stock option plans. Accordingly, compensation expense is not
recognized for stock options when the stock option price at the grant date is
equal to or greater than the fair market value of the stock at that date.
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, 1996, deferred development
costs were less than $1.0 million.
INCOME PER COMMON SHARE: Income 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.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE A - ACCOUNTING AND DISCLOSURE CHANGES
In October, 1996, Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 96-1,
"Environmental Remediation Liabilities," the purpose of which is to improve the
manner in which existing authoritative accounting literature is applied in
recognizing, measuring and disclosing environmental remediation liabilities. The
statement is effective for fiscal years beginning after December 15, 1996. The
Company is evaluating the recording and disclosure requirements of this
statement, believes that it is substantially in compliance with the
requirements, and expects no significant financial statement effect.
NOTE B - NORTHSHORE MINE AND POWER PLANT ACQUISITION
On September 30, 1994, Cliffs Minnesota Minerals Company, a subsidiary of
Cleveland-Cliffs Inc, acquired Cyprus Amax Minerals Company's iron ore operation
and power plant (renamed Northshore Mining Company or "Northshore") in
Minnesota. The principal Northshore assets acquired were 4 million annual tons
of active capacity for production of standard pellets (equivalent to 3.5 million
tons of flux pellet capacity), supported by 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 15
years remaining at December 31, 1996.
The acquisition was accounted for as a purchase transaction. Pro forma results
of the Company's operations, assuming the acquisition had occurred at the
beginning of 1994, are shown in the following table:
Pro Forma (Unaudited) 1994
--------------------- ----
Total Revenues (Millions) $466.7
======
Net Income
----------
Amount (Millions) $ 47.0
======
Per Common Share $ 3.89
======
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 1994, nor of results which may occur in
the future. Actual results could have been 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.
In June 1995, a $6 million pellet expansion project, at Northshore, which
involved the re-commissioning of an idled pelletizing unit, was completed. On an
annualized basis, the project added approximately .9 million tons of pellets, a
23 percent expansion of Northshore production.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE C - INVESTMENTS IN ASSOCIATED COMPANIES
NORTH AMERICAN IRON ORE
- -----------------------
The Company's investments in associated mining companies ("ventures") are
accounted by the equity method and consist of its 40% interest in Tilden Mining
Company L.C. ("Tilden"), 22.5625% interest in Empire Iron Mining Partnership
("Empire"), 15% interest in Hibbing Taconite Company ("Hibbing"), and 7.69%
(7.01% in 1994) interest in Wabush Mines ("Wabush"). These ventures are managed
by the Company in North America. The other interests are owned by U.S. and
Canadian integrated steel companies.
Following is a summary of combined financial information of the operating
ventures:
(In Millions)
-------------------------------------
1996 1995 1994
-------------------------------------
INCOME
Gross revenue $1,043.7 $1,025.9 $968.2
Equity income 121.0 143.3 99.5
======== ======== ======
FINANCIAL POSITION
Properties - net $ 745.6 $ 761.5 $ 774.5
Other assets 163.4 138.6 107.1
Debt obligations -- (22.5) (39.8)
Other liabilities (204.9) (163.9) (147.4)
-------- ------- -------
Net assets $ 704.1 $ 713.7 $ 694.4
======== ======= =======
Company's equity in
underlying net assets $ 177.9 $ 185.1 $ 253.6
Company's investment $ 147.5 $ 152.0 $ 151.7
======== ======= =======
The Company manages and operates all of the 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 $228.0 million in 1996 (1995-
$217.8 million; 1994-$212.5 million) of iron ore from certain ventures. During
1996, the Company earned royalties and management fees of $51.5 million (1995-
$49.5 million; 1994-$44.7 million) from ventures, of which $14.4 million in 1996
(1995-$13.7 million; 1994-$12.7 million) was paid by the Company as a
participant in the ventures. The payments made by the Company, as a participant
in the ventures, are reflected in royalties and management fees revenue and cost
of goods sold upon the sale of the product.
50
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 the 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 ventures, acquisitions, and the Tilden reorganization. The Company's equity
in the income of ventures was $24.1 million in 1996 (1995-$24.3 million;
1994-$19.5 million).
The Company's effectively serviced share of long-term obligations of ventures,
including current portion, was $2.9 million as of December 31, 1996 (1995-$6.3
million).
REDUCED IRON
- ------------
On April 15, 1996, the Company announced an international joint venture to
produce and market premium quality reduced iron briquettes to the steel
industry. All project documents were signed on May 8, 1996. The venture's
participants, through subsidiaries, are the Company, 46.5 percent; The LTV
Corporation ("LTV"), 46.5 percent; and Lurgi AG of Germany, 7 percent. The
Company manages the project, located in Trinidad and Tobago, and will be
responsible for sales by the venture company, Cliffs and Associates Limited. The
Company's share of capital expenditures is estimated to be $70 million, of which
$13.1 million was spent in 1996 and $46 million is expected to be spent in 1997.
Start-up is projected to occur in the fourth quarter 1998.
The Company's investment in the venture is accounted by the equity method. The
investment at December 31, 1996 was $14.4 million and includes capitalized
interest on qualifying assets of $.3 million.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE D - INVESTMENTS
Following is a summary of investment securities:
(In Millions)
-------------------------------------------
Gross Estimated
Unrealized Fair
Cost Gains (Losses) Value
---- -------------- -----
December 31, 1996
-----------------
Long-Term Investments
- ---------------------
Available-for-Sale
------------------
LTV Common Stock $11.5 $(1.5) $10.0
Held-to-Maturity
----------------
Australian Government Securities .8 -- .8
----- ----- -----
Total Long-Term Investments $12.3 $(1.5) $10.8
===== ===== =====
Marketable Securities
- ---------------------
Debt Instruments
----------------
Available-for-Sale $16.3 $ -- $16.3
Held-to-Maturity .8 -- .8
----- ----- -----
$17.1 $ -- $17.1
===== ===== =====
December 31, 1995
-----------------
Long-Term Investments
- ---------------------
Available-for-Sale
------------------
Debt Securities $ .1 $ -- $ .1
LTV Common Stock 11.5 .1 11.6
----- ----- -----
11.6 .1 11.7
Held-to-Maturity
----------------
Australian Government Securities 4.6 .3 4.9
----- ----- -----
Total Long-Term Investments $16.2 $ .4 $16.6
===== ===== =====
Marketable Securities
- ---------------------
Trading
-------
Debt Securities $ 8.9 $ -- $ 8.9
===== ===== =====
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The contractual maturities of the long-term investments classified as
available-for-sale and held-to-maturity securities at December 31, 1996 and 1995
are shown below:
December 31, 1996 December 31, 1995
(In Millions) (In Millions)
----------------- -----------------
Estimated Estimated
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
Held-to-Maturity
- ----------------
Debt Instruments:
Due in one year or less $ .8 $ .8 $ 3.9 $ 4.1
Due after one year through three years -- -- .7 .8
----- ----- ----- -----
$ .8 $ .8 $ 4.6 $ 4.9
===== ===== ===== =====
In 1996 and 1995, $3.8 million and $8.3 million of Australian government
securities, respectively, matured and were converted to cash and cash
equivalents. The redemption of these investments, previously classified as
held-to-maturity securities, did not result in the recognition of a gain or
loss.
NOTE E - MCLOUTH BANKRUPTCY
On September 29, 1995, McLouth Steel Products Company ("McLouth") petitioned for
protection under Chapter 11 of the U.S. Bankruptcy Code. At the time of the
bankruptcy filing, the Company had an unreserved receivable from McLouth of $5.0
million, secured by liens on certain McLouth fixed assets. Reserves of $3.4
million have been recorded against the receivable.
On March 15, 1996, McLouth announced that it had begun a shutdown of its
operations due to inadequate funds. The Company had supplied approximately .3
million tons of pellets to McLouth in 1996 prior to shutdown. The Company
reserved all financial exposure from the McLouth shutdown, except the remaining
unreserved receivable which is secured by first liens on property and equipment.
On June 26, 1996, the bankruptcy court approved the sale of McLouth's assets and
an agreement to settle secured claims, including the Company's secured claim.
Based on the terms of the agreement, the Company expects to recover the carrying
value of its secured claim. Proceeds from the sale of McLouth's assets will be
used primarily to satisfy administrative claims, including the Company's
administrative claim.
The Company's total shipments in 1996 were not affected by McLouth's bankruptcy
filing or the shutdown of its operations. Although sales to McLouth in 1996 were
only 0.3 million tons prior to shutdown in the first quarter, compared to 1.3
million tons for the full year 1995 (representing 12.5 percent of the Company's
sales volume), sales of the remaining available tons in 1996 were made to other
customers.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE F - 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 a restructuring of Savage River Mines
under which the previous participants in the venture paid $19.0 million to the
Company for closedown obligations. In 1996, $1.1 million was charged to the
reserve. During 1995 and 1994, $.5 million and $3.8 million, respectively, were
credited to the reserve. The balance at December 31, 1996 was $33.7 million,
with $7.1 million classified as a reduction of other current assets.
The reserve balance is principally for the termination of Savage River Mines
production and the permanent shutdown of the Republic Mine. The Republic Mine
shutdown was announced on January 30, 1996. The Savage River Mines provision has
been funded.
NOTE G - ENVIRONMENTAL RESERVES
The Company has a formal code of environmental conduct which promotes
environmental protection and restoration. The Company's obligations for known
environmental problems at active mining operations, idle and closed mining
operations and other sites have been recognized based on estimates of the cost
of required investigation and remediation at each site. If the cost can only be
estimated as a range of possible amounts with no specific amount being most
likely, the minimum of the range is accrued in accordance with generally
accepted accounting principles. Estimates may change as additional information
becomes available. Actual costs incurred may vary from the estimates due to the
inherent uncertainties involved. Any potential insurance recoveries have not
been reflected in the determination of the financial reserves.
The Company provided $2.4 million and $13.2 million of additional environmental
reserves in 1996 and 1995, respectively. In 1995, $9.9 million ($6.7 million
after-tax) was recorded in the second quarter. The additional environmental
provisions reflect the Company's continuing review of estimated investigation
and remediation expense at all known sites. Net payments in 1996 were $1.6
million (1995 - $2.4 million).
At December 31, 1996, the Company had an environmental reserve of $23.7 million
($22.9 million at December 31, 1995), of which $4.0 million was classified as
current. The reserve includes the Company's obligations for:
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
- Federal and state Superfund and Clean Water Act sites where the
Company is named as a potential responsible party, including the
Cliffs-Dow and Kipling sites in Michigan, the Summitville mine
site in Colorado, and the Rio Tinto mine site in Nevada, all of
which sites are independent of the Company's iron mining
operations. The reserves are based on engineering studies
prepared by outside consultants engaged by the potential
responsible parties. The Company continues to evaluate the
recommendations of the studies and other means of site clean-up.
Significant site clean-up activities have taken place at
Cliffs-Dow since late 1993.
- Wholly-owned active and idle operations, including the Northshore
mine and Silver Bay power plant in Minnesota, acquired on
September 30, 1994. The Northshore/Silver Bay reserve is based on
an environmental investigation conducted by the Company and an
outside consultant in connection with the purchase.
- Other sites, including former operations, for which reserves are
based on the Company's estimated cost of investigation and
remediation of sites where expenditures may be incurred.
NOTE H - LONG-TERM OBLIGATIONS
In December, 1995, the Company completed a private placement of $70.0 million of
senior unsecured notes to an insurance company group. The proceeds were used to
retire existing notes in the same amount, held by another group of insurance
companies. The new notes, due in December, 2005, have a fixed interest rate of
7.0 percent, and replaced notes which had an average interest rate of 8.77
percent and remaining annual principal payments of $12.1 million per year in the
years 1996 through 1999 and $7.2 million in the years 2000 through 2002. The
retiring of the notes resulted in an extraordinary charge of $3.1 million
after-tax ($4.8 million before-tax). The senior unsecured note agreement
requires the Company to meet certain covenants related to net worth ($215.3
million at December 31, 1996), leverage, and other provisions. The Company was
in compliance with the debt covenants at December 31, 1996.
Effective March 1, 1995, the Company terminated its $75 million three-year
revolving credit agreement which was scheduled to expire on April 30, 1995, and
entered into a five-year, $100 million agreement. The agreement was amended in
July, 1996 to extend the expiration date by one year to March 1, 2001. No
borrowings are outstanding under the agreement.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE I - LEASE OBLIGATIONS
The Company and its managed ventures lease certain mining, production, data
processing and other equipment under operating leases. The Company's operating
lease expense, including its share of the ventures, was $7.6 million in 1996,
$6.9 million in 1995 and $4.5 million in 1994.
The Company's share of properties of the Company's managed ventures at December
31, 1996 and 1995 include $4.3 million and $3.3 million, respectively, of
production equipment and service vehicles acquired under capital leases. The
Company's share of accumulated amortization of capital leases included in
respective allowances for depreciation, was $2.0 million and $1.2 million at
December 31, 1996 and 1995, respectively.
The Company's share of future minimum payments under capital leases and
noncancellable operating leases at December 31, 1996 is:
(In Millions)
-------------
Year Ending Capital Operating
December 31 Leases Leases
----------- ------ ------
1997 $ .9 $ 8.0
1998 .8 7.8
1999 .7 6.9
2000 .6 5.8
2001 .3 4.3
2002 and thereafter .2 7.1
---- -----
Total minimum lease payments 3.5 $39.9
=====
Amounts representing interest (.7)
----
Present value of net minimum lease payments $2.8
====
NOTE J - RETIREMENT BENEFITS
Pensions
- --------
The Company and its managed ventures 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 costs, including the Company's proportionate share of the costs of
ventures, were credits of $1.0 million and $1.2 million, in 1996 and 1995,
respectively, and a cost of $ .2 million in 1994. Components of the pension
(credits) costs were as follows:
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
(In Millions)
------------------------------------------
1996 1995 1994
-------- -------- ------
Service cost $ 3.8 $ 3.4 $ 3.7
Interest cost 13.2 15.3 14.4
Actual loss (return) on plan assets (32.4) (42.6) 1.5
Net amortization and deferral 14.4 22.7 (19.4)
------ ------ ------
$ (1.0) $ (1.2) $ .2
====== ====== ======
Most of the Company's pension funds are held in diversified collective trusts
with the funds contributed by partners in the 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 ventures, at
December 31, 1996 and 1995:
(In Millions)
-----------------------
1996 1995
---- ----
Plan assets at fair value $ 247.9 $ 249.1
Actuarial present value of benefit
obligation:
Vested benefits 152.1 187.9
Nonvested benefits 21.5 22.4
------- -------
Accumulated benefit obligation 173.6 210.3
Effect of projected compensation levels 14.0 23.3
------- -------
Projected benefit obligation 187.6 233.6
------- -------
Plan assets in excess of projected
benefit obligation 60.3 15.5
Unrecognized prior service costs 7.0 8.3
Unrecognized net asset at date of adoption
of FAS 87, net of amortization (23.7) (26.2)
Unrecognized net loss (gain) (14.1) 25.9
------- -------
Prepaid cost $ 29.5 $ 23.5
======= =======
At December 31, 1996 and 1995, the Company had an additional liability of $2.3
million and $1.6 million, respectively, for certain plans where the fair value
of plan assets was less than the accumulated benefit obligation. The minimum
liability recognition resulted in the recording of a $2.3 million and $1.6
million intangible asset at December 31, 1996 and 1995, respectively.
The discount rate and weighted average rate of increase in compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.75% and 4.30% at December 31, 1996 (7.25% and 4.32% at
December 31, 1995), respectively. The expected long-term rate of return
assumption utilized for determining pension (credit) cost for the years 1996,
1995 and 1994 was 8.75%, 8.5% and 8%, respectively. The assumption remained
unchanged at 8.75% on December 31, 1996 for year 1997 pension cost (credit)
determination.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The Company is funding its pension plans at the maximum amount deductible for
income tax purposes. For Plan Year 1996 (largely funded in calendar year 1997),
the Company plans to contribute $3.0 million, including its share of associated
companies' funding, a decrease of $2.1 million from Plan Year 1995. 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 ("OPEB")
- --------------------------------------
In addition to the Company's defined benefit pension plans, the Company and its
managed ventures currently provide retirement health care and life insurance
benefits to most full-time employees who meet certain length of service and age
requirements (a portion of which are pursuant to collective bargaining
agreements). 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.
The following table presents a reconciliation of the funded status of the
Company's OPEB obligations, including its proportionate share of the obligations
of ventures, at December 31, 1996 and 1995:
(In Millions)
----------------------------
1996 1995
---- ----
Accumulated postretirement benefit obligation:
Retirees $ 54.6 $ 67.5
Fully eligible active plan participants 6.2 3.2
Other active plan participants 20.7 24.8
------ ------
Total obligation 81.5 95.5
Plan assets (14.3) (12.1)
------ ------
Accumulated postretirement benefit cost
obligation in excess of plan assets 67.2 83.4
Unrecognized prior service (cost) (.1) (.1)
Unrecognized gain (loss) 6.5 (9.2)
------ ------
Accrued postretirement benefit cost $ 73.6 $ 74.1
====== ======
Net periodic postretirement benefit cost, including the Company's proportionate
share of the costs of ventures, includes the following components:
(In Millions)
--------------------------------------
1996 1995 1994
----- ----- -----
Service cost $ 1.3 $ 1.2 $ 1.1
Interest cost 5.9 5.8 5.6
Return on plan assets (.9) (.6) (.5)
Net amortization and deferral -- (.4) .1
----- ----- -----
Net periodic postretirement benefit cost $ 6.3 $ 6.0 $ 6.3
===== ===== =====
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The Company's medical cost trend rate assumption reflects projected medical cost
growth of 8.0% in 1997, decreasing by .5% per year to a growth rate of 5% for
the year 2003 and annually thereafter. The medical cost trend rate assumption
has a significant effect on the amounts reported. For example, changing the
assumed medical cost trend rate by one percentage point in each year would
change the accumulated postretirement benefit obligation, as of December 31,
1996 by $11.0 million, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1996 by $1.1 million.
Amounts include the Company's proportionate share of the costs of ventures.
Plan assets include deposits relating to funded life insurance contracts that
are available to fund retired employees' life insurance obligations.
Additionally, as part of the 1993 labor contracts at Empire, Hibbing, and
Tilden, Voluntary Employee Benefit Association Trusts ("VEBAs") were
established. Funding of the VEBAs began in 1994 to cover a portion of the
postretirement benefit obligations of these ventures. 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 discount rate used in determining the
accumulated postretirement benefit obligation was 7.75% at December 31, 1996
(7.25% and 8.5% at December 31, 1995 and 1994, respectively). The expected
long-term rate of return on life insurance contract deposits was decreased to
6.0% at December 31, 1996 from 8.0% at December 31, 1995 to reflect contract
provisions. The expected return on VEBAs was increased to 7.75% at December 31,
1996 from 5.5% at December 31, 1995.
NOTE K - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 and 1995 are as follows:
(In Millions)
---------------
1996 1995
---- ----
Deferred tax assets:
Postretirement benefits other than pensions $21.2 $20.9
Other liabilities 18.8 20.1
Reserve for capacity rationalization 8.2 7.3
Deferred development 8.0 9.2
Product inventories 1.9 3.6
Current liabilities -- 6.7
Other 4.5 2.4
----- -----
Total deferred tax assets 62.6 70.2
Deferred tax liabilities:
Investment in ventures 25.2 24.5
Other 21.1 20.4
----- -----
Total deferred tax liabilities 46.3 44.9
----- -----
Net deferred tax assets $16.3 $25.3
===== =====
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The components of provisions for income taxes before the extraordinary item are
as follows:
(In Millions)
-------------------------------
1996 1995 1994
---- ---- ----
Current $23.6 $11.9 $16.5
Deferred 10.9 (1.2) (1.8)
----- ----- -----
$34.5 $10.7 $14.7
===== ===== =====
In 1995, the Company and the Internal Revenue Service reached agreement on
several issues raised during the examination of the Company's federal income tax
returns for the tax years 1986 through 1988. The income tax settlement favorably
resolved a number of audit issues primarily arising from the Company's
restructuring program in the late 1980s when mining partnerships were
reorganized to cope with steel company bankruptcies and non-core businesses were
divested. During that period, the Company had reserved the potential tax
liabilities. Accordingly, a tax credit of $12.2 million was recorded in the
second quarter of 1995. As a result of the settlement and its related impact on
the tax years 1989 through 1993, the Company made additional tax and interest
payments of $11.8 million in the third quarter of 1995 and is entitled to tax
and interest refunds of $5.3 million of which $2.3 million was received in 1996.
The provision for income taxes included Australian federal income taxes of $7.5
million, $3.7 million, and $1.9 million for the years 1996, 1995 and 1994,
respectively.
The reconciliation of effective income tax rate before the extraordinary item
and United States statutory rate is as follows:
1996 1995 1994
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
Increase (decrease) due to:
Percentage depletion in excess
of cost depletion (5.9) (7.8) (7.9)
Effect of foreign taxes 5.3 1.7 .2
Prior years' tax adjustment (.2) (15.2) (1.5)
Corporate dividends received -- -- (1.0)
Other items - net 2.0 1.3 .8
---- ---- ----
Effective tax rate 36.2% 15.0% 25.6%
===== ===== =====
Prior years' tax adjustment in 1995 includes the effect of the $12.2 million tax
credit.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE L - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of the Company's financial instruments at
December 31, 1996 are as follows:
(In Millions)
-----------------------
Carrying Fair
Amount Value
------ -----
Cash and cash equivalents $152.3 $152.3
Marketable securities:
Available-for-Sale 26.3 26.3
Held-to-Maturity 1.6 1.6
------ ------
Total securities 27.9 27.9
Long-term debt 70.0 68.0
The fair value of the Company's long-term debt was determined based on a
discounted cash flow analysis and estimated borrowing rates. The Company,
including its share of the Trinidad venture, also has forward currency contracts
with a contract value of $20.6 million and a fair value of $20.1 million at
December 31, 1996.
NOTE M - 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.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The 1996 Nonemployee Directors' Compensation Plan authorizes the Company to
issue up to 50,000 Common Shares to nonemployee Directors. The Plan provides for
the grant of 1,000 Restricted Shares to nonemployee Directors first elected
after June 30, 1995 and also provides that nonemployee Directors must take at
least 50%, and may elect up to 100%, of their annual retainer and all other fees
in Common Shares. The Restricted Shares vest five years from the date of award.
In accordance with the provisions of the Financial Accounting Standards Board
Statement 123, "Accounting for Stock-Based Compensation," ("FASB 123") the
Company has elected to continue applying the provisions of the Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its stock-based compensation plans and, accordingly, does not recognize
compensation expense for stock options when the stock option price at the grant
date is equal to or greater than the fair market value of the stock at that
date. Had the Company applied the fair value method for valuing stock options,
as prescribed by FASB 123, the impact would not have been material to reported
net income or earnings per share for 1996 or 1995.
Stock option, restricted stock award, and performance share activities are
summarized as follows:
1996 1995 1994
------------------------- ------------------------ -----------------------
Shares Price Shares Price Shares Price
------- --------- -------- --------- -------- -------
Stock options:
Options outstanding
beginning of year 72,775 $ 8.51-40.56 82,182 $ 8.51-37.13 105,125 $ 8.51-34.80
Granted 109,500 41.69-45.00 5,000 39.44-40.56 5,500 35.50-37.13
Exercised (6,250) 20.12-24.32 (14,407) 8.51-35.50 (27,943) 8.51-34.80
Cancelled (18,600) 45.00 -- -- (500) 35.50
------- ------- --------
Options outstanding at end of year 157,425 8.51-45.00 72,775 8.51-40.56 82,182 8.51-37.13
Options exercisable at end of year 72,525 8.51-41.69 72,775 8.51-40.56 82,182 8.51-37.13
Restricted awards:
Awarded and restricted at beginning
of year 10,854 13,264 20,218
Awarded during the year 30,000 -0- 8,000
Vested (1,189) (2,410) (14,954)
Cancelled -- -- --
------- ------- -------
Awarded and restricted at end of year 39,665 10,854 13,264
Performance shares:
Allocated beginning of year 88,767 41,317 --
Allocated during the year 57,400 47,450 42,067
Forfeited (1,000) -- (750)
------- ------- -------
Allocated end of year 145,167 88,767 41,317
Reserved for future grants or awards
at end of year 342,157 469,457 521,907
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE N - SHAREHOLDERS' EQUITY
As of December 31, 1996, 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, 1996, 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 approximately 185,000 Common Shares
reserved for these Rights.
In January, 1995, the Company announced a program to repurchase up to .6 million
of its Common Shares in the open market or in negotiated transactions. In July,
1996, the Company announced the expansion of this program to 1.0 million shares.
Under the combined program, the Company has repurchased 780,300 shares through
December 31, 1996 at a total cost of $30.3 million (average price of $38.84 per
share). The shares will initially be retained as Treasury Stock.
NOTE O - LITIGATION
The Company and its managed ventures 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
QUARTERLY RESULTS OF OPERATIONS-(Unaudited) Exhibit 13(h)
(In Millions, Except Per Share Amounts)
1996
----------------------------------------------------
Quarters
-----------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
Total Revenues $59.8 $140.8 $166.7 $150.8 $518.1
Gross Profit 10.4 30.1 37.1 32.7 110.3
Net Income
Amount 3.6 17.8 21.3 18.3 61.0
Per Common Share .30 1.52 1.84 1.60 5.26
Second quarter results included a $1.3 million after-tax property damage
insurance recovery on a January, 1996 ore train derailment.
1995
----------------------------------------------------
Quarters
-----------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
Total Revenues $63.6 $118.9 $144.6 $146.0 $473.1
Gross Profit 10.4 26.4 33.4 34.1 104.3
Income Before Extraordinary Item
Amount 5.0 20.9 17.3 17.7 60.9
Per Common Share .41 1.75 1.45 1.49 5.10
Extraordinary Item -- -- -- (3.1) (3.1)
----- ------ ------ ------ ------
Net Income
Amount 5.0 20.9 17.3 14.6 57.8
Per Common Share .41 1.75 1.45 1.23 4.84
Second quarter results included two special items: a $12.2 million tax credit
resulting from the settlement of prior years' tax issues, and a $6.7 million
after-tax increase in the reserve for environmental expenditures. Third quarter
results included a $1.8 million reserve against McLouth receivables. The fourth
quarter included an extraordinary after-tax charge of $3.1 million for
refinancing long-term debt.
Earnings per share reflect the favorable periodic repurchase of shares under the
Company's stock repurchase program. Total shares repurchased through December
31, 1996 were 780,300 shares (through December 31, 1995 - 284,500).
- --------------------------------------------------------------------------------
Common Share Price Performance and Dividends
Price Performance
-------------------------------------------------
1996 1995 Dividends
----------------- ----------------- ------------
High Low High Low 1996 1995
------- ------- ------- ------- ------ -----
First Quarter $46-7/8 $40-1/4 $40-1/8 $36-1/2 $.325 $.325
Second Quarter 44-1/4 37-3/4 40-5/8 36-1/8 .325 .325
Third Quarter 40-1/8 36-1/4 46-3/4 38-5/8 .325 .325
Fourth Quarter 46-1/8 38 41-1/8 37 .325 .325
----- -----
Year 46-7/8 36-1/4 46-3/4 36-1/8 $1.30 $1.30
===== =====
64
INVESTOR AND CORPORATE INFORMATION Exhibit 13(i)
STOCK EXCHANGE INFORMATION
The principal market for Cleveland-Cliffs Inc common shares (ticker symbol CLF)
is the New York Stock Exchange. The common shares are also listed on the Chicago
Stock Exchange.
65
SUMMARY OF FINANCIAL AND OTHER STATISTICAL DATA Exhibit 13(j)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR
Operating Earnings From Continuing Operations:
Operating Revenues - Product Sales and Services . . . . . . . . . $451.7 $411.2 $334.8
- Royalties and Management Fees . . . . . . . 51.5 49.5 44.7
-------------------------
- Total . . . . . . . . . . . . . . . . . . . 503.2 460.7 379.5
Cost of Goods Sold and Operating Expenses and AS&G Expenses . . . 409.6 371.5 315.8
-------------------------
Operating Earnings . . . . . . . . . . . . . . . . . . . . . . . 93.6 89.2 63.7
Net Income (Loss) - From Continuing Operations (a) . . . . . . . . 61.0 57.8 42.8
- From Discontinued Operations. . . . . . . . . . --- --- ---
-------------------------
- Total . . . . . . . . . . . . . . . . . . . . . 61.0 57.8 42.8
Net Income (Loss) Per Common Share - From Continuing Operations(a) 5.26 4.84 3.54
- From Discontinued Operations --- --- ---
-------------------------
- Total. . . . . . . . . . . . . 5.26 4.84 3.54
Distributions to Common Shareholders:
Quarterly Cash Dividends - Per Share . . . . . . . . . . . . . . 1.30 1.30 1.23
- Total . . . . . . . . . . . . . . . . 15.1 15.5 14.8
Special Dividends - Per Share . . . . . . . . . . . . . . --- --- ---
- Total . . . . . . . . . . . . . . . . --- --- ---
Spin-off of Securities - Per Share . . . . . . . . . . . . . . --- --- ---
- Total . . . . . . . . . . . . . . . . --- --- ---
Repurchase (Sale) of Common Shares . . . . . . . . . . . . . . . . 19.5 10.7 ---
Capital Expenditures (c). . . . . . . . . . . . . . . . . . . . . . 36.7 22.5 10.9
AT YEAR-END
Cash and Marketable Securities. . . . . . . . . . . . . . . . . . . 169.4 148.8 141.4
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 673.7 644.6 608.6
Long-Term Obligations Effectively Serviced (c) . . . . . . . . . . 72.9 76.3 84.2
Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 370.6 342.6 311.4
Book Value Per Common Share . . . . . . . . . . . . . . . . . . . . 32.59 28.96 25.74
Market Value Per Common Share. . . . . . . . . . . . . . . . . . . 45.38 41.00 37.00
- --------------------------------------------------------------------------------------------------------
IRON ORE PRODUCTION AND SALES STATISTICS (MILLIONS OF
GROSS TONS)
Production From Mines Managed By Cliffs:
North America . . . . . . . . . . . . . . . . . . . . . . . . . . 39.9 39.6 35.2
Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1.5 1.5
-------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.5 41.1 36.7
Cliffs' Share . . . . . . . . . . . . . . . . . . . . . . . . . 12.0 11.3 8.3
Cliffs' Sales From:
North American Mines . . . . . . . . . . . . . . . . . . . . . . 11.0 10.4 8.2
Australian Mine . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.5 1.5
-------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.7 11.9 9.7
- ----------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Common Shares Outstanding (Millions) - Average For Year . . . . . . 11.6 11.9 12.1
Common Shares Outstanding (Millions) - At Year End . . . . . . . . 11.4 11.8 12.1
Common Shares Price Range - High . . . . . . . . . . . . . . . . . $46-7/8 $46-3/4 $45-1/2
Common Shares Price Range - Low . . . . . . . . . . . . . . . . . . 36-1/4 36-1/8 34
Employees at Year-End (d) . . . . . . . . . . . . . . . . . . . . . 6,065 6,224 6,309
(a) Results include after-tax net contributions of special items and
extraordinary charge of $2.4 million in 1995, recoveries on bankruptcy
claims of $23.2 million ($1.93 per share) and $47.1 million ( $4.03 per
share) in 1993 and 1990, respectively, and a $38.7 million ($3.23 per
share) after-tax charge for accounting changes in 1992. In addition, see
note B to the consolidated financial statements.
66
1993 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------
$268.1 $266.9 $271.6 $272.2 $294.9 $247.9 $303.5
39.7 43.8 45.8 37.7 55.6 50.2 40.8
- ---------------------------------------------------------------------------------------------
307.8 310.7 317.4 309.9 350.5 298.1 344.3
268.5 275.5 275.0 279.7 257.8 227.6 327.5
- ---------------------------------------------------------------------------------------------
39.3 35.2 42.4 30.2 92.7 70.5 16.8
54.6 (7.9) 53.8 73.8 62.5 42.6 30.2
--- --- --- --- (1.9) (3.4) (17.5)
- ---------------------------------------------------------------------------------------------
54.6 (7.9) 53.8 73.8 60.6 39.2 12.7
4.55 (.66) 4.55 6.31 5.37 3.12 1.88
--- --- --- --- (.17) (.26) (1.31)
- ---------------------------------------------------------------------------------------------
4.55 (.66) 4.55 6.31 5.20 2.86 .57
1.20 1.18 1.03 .80 .40 --- ---
14.4 14.1 12.1 9.3 4.7 --- ---
2.70 (b) --- 4.00 --- --- .79 (b) ---
32.4 (b) --- 47.0 --- --- 12.8 (b) ---
--- --- --- --- --- 3.55 (b) ---
--- --- --- --- --- 41.3 (b) ---
--- --- --- --- --- 125.2 (62.4)
5.0 5.2 7.3 11.2 14.6 8.4 2.0
161.0 128.6 95.9 96.0 95.5 52.4 109.8
549.1 537.2 478.7 510.9 415.2 390.6 665.6
88.6 92.1 65.0 82.4 93.4 145.7 183.5
280.4 269.5 290.8 290.8 226.0 168.6 395.4
23.25 22.47 24.40 24.88 19.36 14.53 21.02
37.38 35.63 36.13 27.13 29.00 26.63 14.88
- ---------------------------------------------------------------------------------------------
32.3 32.9 32.1 31.7 39.3 39.0 34.3
1.5 1.5 1.3 2.2 2.3 2.4 2.0
- ---------------------------------------------------------------------------------------------
33.8 34.4 33.4 33.9 41.6 41.4 36.3
6.8 7.3 7.0 6.6 8.9 9.1 5.0
6.4 6.0 6.0 6.5 7.5 6.7 5.5
1.4 1.3 1.3 0.3 --- --- ---
- ---------------------------------------------------------------------------------------------
7.8 7.3 7.3 6.8 7.5 6.7 5.5
- ---------------------------------------------------------------------------------------------
12.0 12.0 11.8 11.7 11.6 13.2 13.4
12.1 12.0 11.9 11.7 11.7 11.6 16.4
$37-1/2 $40-3/8 $36-1/2 $35 $34 $28 $21-3/8
28-3/4 29-1/2 25 19-5/8 25-3/4 14-1/4 9-1/4
5,973 6,388 6,500 6,695 7,522 7,638 8,328
(b) Includes securities at market value on distribution date.
(c) Includes Cliffs'share of associated companies and equipment acquired on capital leases.
(d) Includes employees of managed mining ventures.
At December 31, 1996, the Company had 2,942 shareholders of record.
67