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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______.
COMMISSION FILE NUMBER: 1-8944
CLEVELAND-CLIFFS INC
(Exact name of registrant as specified in its charter)
OHIO 34-1464672
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION)
1100 Superior Avenue, Cleveland, Ohio 44114-2589
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 694-5700
-----------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Shares - par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 1999, the aggregate market value of the voting and
non-voting stock held by non-affiliates of the registrant, based on the closing
price of $35.00 per share as reported on the New York Stock Exchange - Composite
Index was $377,354,670 (excluded from this figure is the voting stock
beneficially owned by the registrant's officers and directors).
The number of shares outstanding of the registrant's $1.00 par value common
stock was 11,209,734 as of March 15, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's 1998 Annual Report to Shareholders are filed as
Exhibits 13(a) through 13(j) and are incorporated by reference into Parts
I, II and IV.
2. Portions of registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held May 11, 1999 are incorporated by
reference into Part III.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
INTRODUCTION
Cleveland-Cliffs Inc (including its consolidated subsidiaries, the
"Company") is the successor to business enterprises whose beginnings can be
traced to earlier than 1850. The Company's headquarters are at 1100 Superior
Avenue, Cleveland, Ohio 44114-2589, and its telephone number is (216) 694-5700.
BUSINESS
The Company has two business segments offering differing iron products
and services to the steel industry, with iron ore being the Company's dominant
segment and ferrous metallics being the other segment. The ferrous metallics
segment is in the development stage, and consists mainly of a hot briquetted
iron venture project located in Trinidad. The Company is seeking additional
investment opportunities, domestically and internationally, to broaden its scope
as a supplier of iron units to the steel industry, including investments in iron
ore mines or ferrous metallics facilities.
IRON ORE
--------
The Company owns, directly or indirectly, three major iron ore
operating subsidiaries, The Cleveland-Cliffs Iron Company ("CCIC"), Cliffs
Mining Company ("CMC") and Northshore Mining Company ("Northshore"). CCIC and
CMC hold interests in various independent iron ore mining ventures ("mining
ventures") and act as managing agent. The operations of Northshore are entirely
owned by the Company. CCIC, CMC and Northshore's business during 1998 was the
production and sale of iron ore, principally iron ore pellets. Collectively,
CCIC, CMC and Northshore control, develop, and lease reserves to mine owners;
manage and own interests in mines; sell iron ore; and provide ancillary services
to the mines. The operations of each mine are independent of the other mines.
Iron ore production activities are conducted in the United States and Canada.
Iron ore is marketed by the subsidiaries in the United States, Canada, and
Europe.
For information on the iron ore business, including royalties and
management fees for the years 1996-1998, see Note C in the Notes to the
Company's Consolidated Financial Statements in the Company's Annual Report to
Security Holders for the year ended December 31, 1998, which Note C is contained
in Exhibit 13(g) and incorporated herein by reference and made a part hereof.
For information concerning operations of the Company, see material
under the heading "Summary of Financial and Other Statistical Data" in the
Company's Annual Report to Security Holders for the year ended December 31,
1998, which Summary of Financial and Other Statistical Data is contained in
Exhibit 13(j) and incorporated herein by reference and made a part hereof.
CCIC owns or holds long-term leasehold interests in active North
American properties containing an estimated 1.5 billion tons of crude iron ore
reserves (approximately 493 million tons of equivalent standard iron ore
pellets). CCIC, CMC and Northshore manage six active mines in North America with
a total rated annual capacity of 41.6 million tons and own equity interests in
five of these mines (see Table on page 4).
CCIC, CMC and Northshore's United States properties are located on the
Marquette Range of the Upper Peninsula of Michigan, which has two active
open-pit mines and pellet plants, and the Mesabi Range in Minnesota, which has
three active open-pit mines and pellet plants. CMC acts only in the capacity of
manager at one of the Mesabi Range facilities. Two railroads, one of which is
99.5% owned by a subsidiary of the Company, link the Marquette Range with Lake
Michigan at the loading port of
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Escanaba and with Lake Superior at the loading port of Marquette. From the
Mesabi Range, pellets are transported by rail to shiploading ports at Superior,
Wisconsin and Taconite Harbor, Minnesota. At Northshore, crude ore is shipped by
rail from the mine to the processing facilities at Silver Bay, Minnesota, which
is also the upper lakes port of shipment. In addition, in Canada, there is an
open-pit mine and concentrator at Wabush, Labrador, Newfoundland and a pellet
plant and dock facility at Pointe Noire, Quebec. At Wabush Mines, concentrates
are shipped by rail from the Scully Mine at Wabush to Pointe Noire, Quebec,
where they are pelletized for shipment via vessel to Canada, United States and
Europe or shipped as concentrates for sinter feed to Europe.
CCIC leases or subleases its reserves to certain mining ventures which
pay royalties to CCIC on such reserves based on the tonnage and the iron
content of iron ore produced. The royalty rates on leased or subleased reserves
per ton are subject to periodic adjustments based on changes in the Bureau of
Labor Statistics producer price index for all commodities or on certain iron
ore and steel price indices. The mining ventures, except for LTV Steel Mining
Company which is wholly-owned by LTV Steel Company, include as participants
CCIC or CMC and steel producers (who are "participants" either directly or
through subsidiaries).
CCIC and CMC, pursuant to management agreements with the participants
having operating interests in the mining ventures, manage the operation of iron
ore mines and concentrating and pelletizing plants to produce iron ore pellets
for steel producers. CCIC and CMC are reimbursed by the participants of the
mining ventures for substantially all expenses incurred by CCIC and CMC in
operating the mines and mining ventures. In addition, CCIC and CMC are paid
management fees based on the tonnage of iron ore produced. A substantial portion
of such fees is subject to escalation adjustments in a manner similar to the
royalty adjustments.
With respect to the active mines in which CCIC and CMC have an equity
interest, such interests range from 15% to 40% (see Table on page 4). Pursuant
to certain operating agreements at each mine, each participant is generally
obligated to take its share of production for its own use. CCIC and CMC's share
of production is resold to steel manufacturers pursuant to multi-year contracts,
usually with price escalation provisions, or one-year contracts. Pursuant to
operating agreements at each mine, each participant is entitled to nominate the
amount of iron ore which will be produced for its account for that year. During
the year, such nomination generally may be increased (subject to capacity
availability) or decreased (subject to certain minimum production levels) by a
specified amount. During 1998, the North American mines operated at or near
capacity levels.
Cliffs Minnesota Minerals Company, a subsidiary of the Company, owns
an iron ore operation (Northshore) and power plant (Silver Bay Power
Company ("Silver Bay Power")) in Minnesota with 4.3 million annual tons of
active capacity for production of standard and flux pellets (equivalent to 4.8
million tons of standard pellet capacity), supported by a 115 megawatt power
generation plant, and an estimated 1.1 billion tons of magnetite crude iron ore
reserves (approximately 355 million tons of equivalent standard iron ore
pellets) leased mainly from the Mesabi Trust. Production in 1998 was 4.3 million
tons of standard and flux pellets.
Effective January 1, 1997, CMC acquired the 15.1% interest of Ispat
Inland Inc. ("Ispat Inland") in Wabush Mines, an iron ore joint venture interest
in Canada, for $15 million, which acquisition raised CMC's ownership interest in
Wabush Mines to 22.8%.
On September 29, 1998, Acme Metals Incorporated ("Acme") petitioned for
protection under Chapter 11 of the U.S. Bankruptcy Code. Acme's subsidiary, Acme
Steel Company, is a partner in the Company's managed Wabush Mines and the
Company has a multi-year pellet sales contract to supply Acme iron ore pellets.
At the time of the bankruptcy filing, the Company had a receivable from Acme of
$1.2 million. Since Acme's bankruptcy filing, Acme has continued its ongoing
commercial relationship with Wabush Mines and the Company. Pellet sales by the
Company to Acme in 1998 represented less than 5% of the Company's total pellet
sales volume and did not have a significant impact on the Company's financial
results for the year 1998.
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Following is a table of production, current defined capacity, and
implied exhaustion dates for the iron ore mines currently managed or owned by
CCIC, CMC and Northshore. The exhaustion dates are based on estimated mineral
reserves and full production rates, which could be affected, among other things,
by future industry conditions, geological conditions, and ongoing mine planning.
Maintenance of effective production capacity or implied exhaustion dates could
require increases in capital and development expenditures. Alternatively,
changes in economic conditions or the expected quality of ore reserves could
decrease capacity or accelerate exhaustion dates. Technological progress could
alleviate such factors or increase capacity or mine life.
<TABLE>
<CAPTION>
Company's Current
Current Pellet Production Current Operating Implied
Operating ----------------------- Annual Continuously Exhaustion
Name and Location Type of Ore Interest 1996 1997 1998 Capacity Since Date(1)
- ----------------- ----------- -------- ---- ---- ---- -------- ----- -------
(Tons in Thousands)(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mining Ventures
- ---------------
Michigan
--------
Marquette Range
- Empire Iron Mining
Partnership (3) Magnetite 22.56% 8,084 8,353 8,114 8,000 1963 2018
- Tilden Mining Hematite and
Company L.C.(3) Magnetite 40.00%(4) 6,702 6,016 6,891 7,800(4) 1974 2041
Minnesota
---------
Mesabi Range
- Hibbing Taconite
Joint Venture (5) Magnetite 15.00% 8,120 7,670 7,777 8,000 1976 2029
- LTV Steel Mining
Company (5) Magnetite 0.00% 7,457 7,709 7,108 7,500 1957 2053
Canada
------
- Wabush Mines
(Newfoundland and Specular
Quebec) (5)(6) Hematite 22.78%(6) 5,309 5,581 6,009 6,000(6) 1965 2042
Wholly-Owned Entities
- ---------------------
Minnesota
---------
Mesabi Range
- Northshore Mining
Company Magnetite 100.00% 4,252 4,245 4,353 4,300(7) 1989 2081
Australia
---------
- Savage River Mines (8)
(Tasmania) Magnetite 100.00% 1,583 -- --(8) --(8) (8) (8)
------ ------ ------ ------
TOTAL 41,507 39,574 40,252 41,600
====== ====== ====== ======
</TABLE>
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(1) Based on full production at current annual capacity without regard to
economic feasibility.
(2) Tons are long tons of 2,240 pounds.
(3) CCIC receives royalties and management fees.
(4) Expenditures in 1998 increased capacity to 7.8 million tons for 1999. The
predominant ore reserves are hematite.
(5) CMC receives no royalty payments with respect to such mine, but does
receive management fees.
(6) In 1996, the mine's annual production capacity was increased to 6 million
tons per year from 5.4 million tons per year. Effective January 1, 1997,
CMC's ownership in the Wabush Mines increased from 7.69% to 22.78%.
(7) Northshore can produce 4.8 million tons of standard pellets.
(8) Savage River Mines terminated operations at the end of 1996 and terminated
shipments in the first quarter of 1997.
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With respect to the Empire Mine, CCIC owns directly approximately
one-half of the remaining mineral reserves and leases the balance of the
reserves from their owners; with respect to the Tilden Mine, CCIC owns all of
the mineral reserves; with respect to the Hibbing Mine, Wabush Mines, Northshore
Mine and the LTV Steel Mining Company, all mineral reserves are owned by others
and leased or subleased directly to those mines.
Each of the mines contains crushing, concentrating, and pelletizing
facilities. The Empire Iron Mining Partnership facilities were constructed
beginning in 1962 and expanded in 1966, 1974 and 1980 with a total cost of
approximately $367 million; the Tilden Mine facilities were constructed
beginning in 1972, expanded in 1979 and modified in 1988 with a total cost of
approximately $523 million; the LTV Steel Mining Company facilities were
constructed beginning in 1954 and expanded in 1967 with a total cost of
approximately $250 million; the Hibbing Taconite Joint Venture facilities were
constructed beginning in 1973 and expanded in 1979 with a total cost of
approximately $302 million; the Northshore Mining Company facilities were
constructed beginning in 1951, expanded in 1963 and significantly modified in
1979 with a total cost estimated in excess of $500 million; and the Wabush Mines
facilities were constructed beginning in 1962 with a total cost of approximately
$103 million. The Company believes the facilities at each site are in
satisfactory condition. However, the older facilities require more capital and
maintenance expenditures on an ongoing basis.
PRODUCTION AND SALES INFORMATION. The Company's sales are subject to or
influenced by seasonal factors in the first quarter of the year, as the
shipments and sale of iron ore are restricted by weather conditions.
The Company's managed capacity is approximately 41.6 million tons, or
46% of total pellet capacity in North America, and the Company's annual North
American pellet sales capacity in 1998 was 11.5 million tons. In 1998, the
Company produced 11.4 million tons of pellets in North America for its own
account.
In 1998, the Company produced 28.7 million gross tons of iron ore in
the United States and Canada for participants other than the Company. The share
of participants having the five largest amounts, Algoma Steel Company, Bethlehem
Steel Corporation, Ispat Inland, LTV Steel Company and Stelco Inc., aggregated
25.5 million gross tons, or 88.2%. The largest such participant accounted for
31.6% of such production.
During 1998, 100% of the Company's sales of iron ore and pellets, that
were produced in the United States and Canada for its own account or purchased
from others, were to 13 U.S., Canadian and European iron and steel manufacturing
companies.
In 1998, Weirton Steel Company, AK Steel, and Ispat Inland, directly
and indirectly accounted for 22%, 15%, and 9%, respectively, of total revenues.
RAIL TRANSPORTATION. The Company, through a wholly-owned subsidiary,
owns a 99.5% stock interest in Lake Superior & Ishpeming Railroad Company. The
railroad operates approximately 49 miles of track in the Upper Peninsula of
Michigan, principally to haul iron ore from the Empire and Tilden Mines to Lake
Superior at Marquette, Michigan, where the railroad has an ore loading dock, or
to interchange points with another railroad for delivery to Lake Michigan at
Escanaba, Michigan. In 1998, 81.9% of the railroad's revenues were derived from
hauling iron ore and pellets and other services in connection with mining
operations managed by CCIC. The railroad's rates are subject to regulation by
the Surface Transportation Board of the Department of Transportation.
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FERROUS METALLICS
-----------------
Cliffs and Associates Limited, a joint venture in Trinidad and Tobago,
is completing construction of a facility to produce premium quality
hot-briquetted iron ("HBI") to be marketed to the steel industry. The venture's
participants, through subsidiaries, include the Company, 46.5 percent; The LTV
Corporation, 46.5 percent; and Lurgi AG of Germany, 7.0 percent, with the
Company acting as manager and sales agent. Project capital expenditures through
December 31, 1998 were $141.1 million (Company share - $65.6 million). Currently
estimated total capital expenditures of $151 million (Company share - $70.2
million) do not include construction claims of $16 million (Company share - $7.5
million) which are being contested. The Company believes the claims are largely
without merit; any payments on these claims are expected to be partially offset
by recoveries from contractors and suppliers. No project financing has been used
during construction. Plant commissioning activities are nearly complete for
start-up. At design, the facility is expected to produce 500,000 metric tons
annually. Full year production volume will depend on market demand.
The Company is studying the feasibility of an investment in a plant at
the Company's Northshore Mine that would produce "pig iron" from North American
iron ore with coal as the reductant. Markets for the product would be primarily
electric furnaces and foundries.
The Company is investigating additional investment opportunities in the
ferrous metallics business that could be developed, including strategic
alliances or joint ventures.
CREDIT AGREEMENT AND SENIOR NOTES
In 1995, the Company entered into a Credit Agreement ("Credit
Agreement") with Chemical Bank (now Chase Manhattan Bank), as Agent for a
six-bank lending group, pursuant to which the Company may borrow up to $100
million as revolving loans. The Credit Agreement was amended at various times to
reduce interest rates and fees and extend the expiration date currently to May
31, 2003. Interest on borrowings will be based on various interest rates as
defined in the Credit Agreement and as selected by the Company pursuant to the
terms of the Credit Agreement. There were no borrowings under the revolving
credit facility.
In 1995, the Company placed privately with a group of
institutional lenders $70 million 7% Senior Notes, due December 15, 2005.
COMPETITION
The iron ore mines, which the Company's subsidiaries operate
in North America and Canada, produce various grades of iron ore which are
marketed in the United States, Canada, and Europe. In North America, the Company
is in competition with several iron ore producers, including Iron Ore Company of
Canada, Quebec Cartier Mining Company, and Evtac Mining Company, as well as
other steel companies which own interests in iron ore mines and/or have excess
iron ore purchase commitments. In addition, significant amounts of iron ore
have, since the early 1980s, been shipped to the United States from Venezuela
and Brazil in competition with iron ore produced by the Company.
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Other competitive forces have effectively become large factors in the
iron ore business. With respect to a significant portion of steelmaking in North
America, electric furnaces built by "minimills" have replaced the use of iron
ore pellets with scrap metal in the steelmaking process. In addition, operators
of sinter plants produce iron agglomerates which substitute for iron ore
pellets. Imported steel slabs also replace the use of iron ore pellets in
producing finished steel products. Imported steel produced from iron ore
supplied by international competitors also effectively competes with the
Company's iron ore pellets. Imported steel, especially in 1998, has had a
significant impact on steelmaking in the United States, which has adversely
affected the demand for iron ore pellets.
The HBI, to be produced by the Cliffs and Associates Limited joint
venture in Trinidad in which the Company has an interest, is in competition
with other direct reduced iron projects (operating both domestically and
internationally), other scrap substitutes, premium grade scrap and pig iron.
Competition among the sellers of iron units is predicated upon the
usual competitive factors of price, availability of supply, product performance,
service and cost to the consumer.
ENVIRONMENT, EMPLOYEES, ENERGY, AND RESEARCH AND DEVELOPMENT
ENVIRONMENT. In the construction of the Company's facilities and in its
operating arrangements, substantial costs have been incurred and will be
incurred to avoid undue effect on the environment. The Company's commitment to
environmental preservation resulted in North American capital expenditures of
$6.9 million in 1997 and $5.1 million in 1998. It is estimated that
approximately $5.3 million will be spent in 1999 for environmental control
facilities.
The Company received notice in 1983 from the U.S. Environmental
Protection Agency ("U.S. EPA") that the Company is a potentially responsible
party with respect to the Cliffs-Dow Superfund Site, located in the Upper
Peninsula of the State of Michigan, which is not related to the Company's iron
ore mining business. The Cliffs-Dow site was used prior to 1973 for the disposal
of wastes from charcoal production by a joint venture of the Company, the Dow
Chemical Company and afterward by a successor in interest, Georgia-Pacific
Corporation. The Company and certain other potentially responsible parties have
agreed upon allocation of the costs for investigation and remediation. The
Company and other potentially responsible parties voluntarily participated in
the preparation of a Remedial Investigation and Feasibility Study with respect
to the Cliffs-Dow site, which concluded with the publication by the U.S. EPA of
a Record of Decision dated September 27, 1989 setting forth the selected
remedial action plan adopted by the U.S. EPA for the Cliffs-Dow site. The
Company and other potentially responsible parties have largely implemented
remedial action satisfactory to the U.S. EPA at an estimated total cost of $8
million, of which the Company's share is $1.7 million. Upon the advice of
counsel, the Company believes it has a right to continued contribution from the
other potentially responsible parties for the costs of any further remedial
action required at the Cliffs-Dow site.
The Company has sufficient financial reserves at December 31, 1998 to
provide for its expected share of the cost of the remedial actions at the above
mentioned site.
Generally, various legislative bodies and federal and state agencies
are continually promulgating numerous new laws and regulations affecting the
Company, its customers, and its suppliers in many areas, including waste
discharge and disposal; hazardous classification of materials, products, and
ingredients; air and water discharges; and many other matters. Although the
Company believes that its environmental policies and practices are sound and
does not expect a material adverse effect of any current laws or regulations, it
cannot predict the collective adverse impact of the rapidly expanding body of
laws and regulations.
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EMPLOYEES. As of December 31, 1998, CCIC and CMC and the North American
independent mining ventures had 5,006 employees, of which 4,125 were hourly
employees. The hourly employees are represented by the United Steelworkers of
America ("United Steelworkers") which have collective bargaining agreements. In
1993, a six-year "no strike" labor agreement was entered between the Hibbing
Taconite, Tilden and Empire Mines and the United Steelworkers covering the
period to August 1, 1999, but with provisions for a limited economic reopener on
August 1, 1996. In 1994, a new United Steelworkers labor agreement was entered
into covering employees of LTV Steel Mining Company, which agreement will expire
on August 1, 1999. In 1996, a new United Steelworkers labor agreement was
entered into covering the employees of Wabush Mines, which agreement expired on
March 1, 1999. Negotiations with the United Steelworkers on a new labor
agreement are about to begin with respect to the Wabush Mines and will begin by
early summer 1999 with respect to the Hibbing, Tilden, Empire and LTV Steel
Mining Company Mines.
As of December 31, 1998, Northshore had 508 salaried employees, none of
whom are represented by a union.
As of December 31, 1998, Cliffs Reduced Iron Management Company had 2
salaried employees and Cliffs and Associates Limited had 63 salaried employees.
As of December 31, 1998, Cleveland-Cliffs Inc and its wholly-owned
subsidiary, Cliffs Mining Services Company, had 279 salaried executive,
managerial, administrative and technical employees.
In addition, as of December 31, 1998, the Lake Superior & Ishpeming
Railroad had 171 employees.
ENERGY. In 1996, the Empire and Tilden Mines entered into new
seven-year electric power supply contracts with Wisconsin Electric Power Company
("WEPCo") to furnish electric power to those mines. Various terms and conditions
of the previous power contracts with WEPCo were revised to better accommodate
the operation of those Mines. The new power supply contracts became effective
March 1, 1996 and have curtailable features.
Electric power for Hibbing Taconite is supplied by Minnesota Power,
Inc. under a recently executed agreement, which became effective January 1, 1998
and continues to December, 2008. The Agreement provides for significant cost
reduction, reduction in certain take-or-pay commitments, and an energy price
cap. Electric power requirements will continue to be specified annually by the
Hibbing Taconite venturers corresponding to Hibbing's operating requirements.
LTV Steel Mining Company is currently generating the majority of its
requirements, and an interchange agreement with Minnesota Power, Inc. provides
backup power and allows sale of excess capacity to the Midwestern Area Power
Pool. Effective May 1, 1995, the interchange agreement was extended to April 30,
2000 to provide additional backup power and other cost-effective services.
Silver Bay Power Company, an indirect subsidiary of the Company,
provides the majority of Northshore's energy requirements, has an interchange
agreement with Minnesota Power, Inc. for backup power and sells 40 megawatts of
excess power capacity to Northern States Power Company. The contract with
Northern States Power extends to the year 2011. Effective November 1, 1995, the
interchange agreement was extended to October 31, 2000 to provide additional
backup power and other cost-effective services.
Wabush Mines owns a portion of the Twin Falls Hydro Generation facility
which provides power for Wabush's mining operations in Newfoundland. A twenty
year agreement with Newfoundland Power, which agreement continues until December
31, 2004, allows an interchange of water rights in return for the power
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needs for Wabush's mining operations. The Wabush pelletizing operations in
Quebec are served by Quebec Hydro on an annual contract.
The Company has contracts providing for the transport of natural gas
for its North American iron ore operations.
The Empire and Tilden Mines have the capability of burning natural gas,
coal, or, to a lesser extent, oil. Wabush Mines has the capability of burning
oil and coke breeze. Hibbing Taconite, Northshore and LTV Steel Mining Company
have the capability of burning natural gas and oil. During 1998, the U.S. mines
burned natural gas as their primary fuel. Wabush Mines used oil, supplemented
with coke breeze.
Any substantial interruption of operations or substantial price
increase resulting from future government regulations or energy taxes,
injunctive order, or fuel shortages could be materially adverse to the Company.
RESEARCH AND DEVELOPMENT. The Company maintains a strong commitment to
research and development with engineering staffs that are engaged in full-time
research and development of new iron-bearing products and improvement of
existing products with two research facilities, one located in Hibbing,
Minnesota, and one in Negaunee, Michigan.
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In the paper format version of this document, this page contains a map. The map
is entitled, "Cleveland-Cliffs Inc and Associated Companies Location of Iron Ore
Operations". The map has an outline of the United States and Canada. Located
specifically on the map are arrows and dots representing the location of the
properties described in the Table on page 4 to this report.
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ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries are involved in various
claims and ordinary routine litigation incidental to their businesses, including
claims relating to the exposure of asbestos and silica to seamen who sailed on
the Great Lakes vessels formerly owned and operated by subsidiaries of the
Company. The full impact of these claims and proceedings in the aggregate
continues to be unknown. The Company continues to monitor its claims and
litigation expense, but believes that resolution of currently pending claims and
proceedings are unlikely in the aggregate to have a material adverse effect on
the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Position with the Company
as of March 15, 1999
--------------------
Name Age
---- ---
J. S. Brinzo President and Chief Executive Officer 57
W. R. Calfee Executive Vice President-Commercial 52
T. J. O'Neil Executive Vice President-Operations 58
C. B. Bezik Senior Vice President-Finance 46
E. C. Dowling Senior Vice President-Operations 43
J. W. Sanders Senior Vice President-International
Development 56
A. S. West Senior Vice President-Sales and
Commercial Planning 62
There is no family relationship between any of the executive officers of
the Company, or between any of such executive officers and any of the Directors
of the Company. Officers are elected to serve until successors have been
elected. All of the above-named executive officers of the Company were elected
effective on the effective dates listed below for each such officer.
The business experience of the persons named above for the last five
years is as follows:
J. S. Brinzo Senior Executive-Finance, Company,
October 1, 1993 to September 30, 1995.
Executive Vice President-Finance, Company,
October 1, 1995 to June 30, 1997.
Executive Vice President-Finance and Planning, Company,
July 1, 1997 to November 9, 1997.
President and Chief Executive Officer, Company,
November 10, 1997 to date.
W. R. Calfee Senior Executive-Commercial, Company,
October 1, 1993 to September 30, 1995.
Executive Vice President-Commercial, Company,
October 1, 1995 to date.
T. J. O'Neil Senior Vice President-Technical, Company,
November 18, 1991 to September 30, 1994.
Executive Vice President-CCI Operations
and Technology, Company,
October 1, 1994 to September 30, 1995.
Executive Vice President-Operations, Company,
October 1, 1995 to date.
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C. B. Bezik Manager-Financial Planning, Company,
December 1, 1991 to April 30, 1994.
Director-Financial Planning, Company,
May 1, 1994 to September 30, 1994.
Treasurer and Director-Financial Planning, Company,
October 1, 1994 to September 30, 1995.
Vice President and Treasurer, Company,
October 1, 1995 to November 9, 1997.
Senior Vice President-Finance, Company,
November 10, 1997 to date.
E. C. Dowling Vice President-Downstream Operations,
Cyprus Climax Metals Company,
November, 1993 to October, 1994.
Senior Vice President-Operations,
Cyprus Climax Metals Company,
October, 1994 to September, 1996.
Senior Vice President-Director Process Management
and Engineering,
Cyprus Amax Minerals Company,
September, 1996 to April, 1998.
Senior Vice President-Operations, Company,
April 15, 1998 to date.
J. W. Sanders Senior Vice President and General Manager,
Copper Range Company,
June, 1991 to June, 1994.
President and Chief Operating Officer,
Copper Range Company,
July, 1994 to September 30, 1995.
Senior Vice President-Technical, Company,
October 1, 1995 to June 30, 1997.
Senior Vice President-International Development,
Company,
July 1, 1997 to date.
A. S. West Senior Vice President-Sales, Company,
July 1, 1988 to July 31, 1998.
Senior Vice President-Sales and Commercial
Planning, Company,
August 1, 1998 to date.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated herein by
reference and made a part hereof from that portion of the Company's Annual
Report to Security Holders for the year ended December 31, 1998 contained in the
material under the headings, "Common Share Price Performance and Dividends",
"Investor and Corporate Information" and "Summary of Financial and Other
Statistical Data", such information filed as a part hereof as Exhibits 13(h),
13(i) and 13(j), respectively.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated herein by
reference and made a part hereof from that portion of the Company's Annual
Report to Security Holders for the year ended December 31, 1998 contained in the
material under the heading, "Summary of Financial and Other Statistical Data",
such information filed as a part hereof as Exhibit 13(j).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is incorporated herein by
reference and made a part hereof from that portion of the Company's Annual
Report to Security Holders for the year ended December 31, 1998 contained in the
material under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations", such information filed as a part hereof as
Exhibit 13(a).
ITEM 7. A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated herein by
reference and made a part hereof from that portion of the Company's Annual
Report to Security Holders for the year ended December 31, 1998 contained in the
material under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations", such information located on page 35, and
filed as a part hereof as Exhibit 13(a).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is incorporated herein by
reference and made a part hereof from that portion of the Company's Annual
Report to Security Holders for the year ended December 31, 1998 contained in the
material under the headings "Statement of Consolidated Financial Position",
"Statement of Consolidated Income", "Statement of Consolidated Cash Flows",
"Statement of Consolidated Shareholders' Equity", "Notes to Consolidated
Financial Statements" and "Quarterly Results of Operations", such information
filed as a part hereof as Exhibits 13(c), 13(d), 13(e), 13(f), 13(g) and 13(h),
respectively. Following is the "Report of Independent Auditors":
14
<PAGE> 15
ITEM 8 (continued)
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, 1998 and
1997, and the related statements of consolidated income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
January 29, 1999
15
<PAGE> 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding Directors required by this Item is
incorporated herein by reference and made a part hereof from the Company's Proxy
Statement to Security Holders, dated March 22, 1999, from the material under the
heading "Election of Directors". The information regarding executive officers
required by this item is set forth in Part I hereof under the heading "Executive
Officers of the Registrant", which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by
reference and made a part hereof from the Company's Proxy Statement to Security
Holders, dated March 22, 1999, from the material under the headings "Executive
Compensation" (excluding the Compensation Committee Report on Executive
Compensation), "Pension Benefits", and the first five paragraphs under
"Agreements and Transactions".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by
reference and made a part hereof from the Company's Proxy Statement to Security
Holders, dated March 22, 1999, from the material under the heading "Securities
Ownership of Management and Certain Other Persons".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by
reference and made a part hereof from the Company's Proxy Statement to Security
Holders, dated March 22, 1999, from the material in the fifth paragraph under
the heading "Directors' Compensation".
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2)-List of Financial Statements and Financial Statement
Schedules.
The following consolidated financial statements of the Company,
included in the Annual Report to Security Holders for the year ended December
31, 1998, are incorporated herein by reference in Item 8:
Statement of Consolidated Financial Position -
December 31, 1998 and 1997
Statement of Consolidated Income - Years ended
December 31, 1998, 1997 and 1996
Statement of Consolidated Cash Flows - Years ended
December 31, 1998, 1997 and 1996
Statement of Consolidated Shareholders' Equity - Years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of
the Company is included herein in Item 14(d) and attached as Exhibit 99(a).
Schedule II - Valuation and Qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) List of Exhibits - Refer to Exhibit Index on pages 19-26 which
is incorporated herein by reference.
(b) There were no reports on Form 8-K filed during the three months
ended December 31, 1998.
(c) Exhibits listed in Item 14(a)(3) above are included on pages
27-70.
(d) Financial Statements and Schedule listed above in Item 14(a)(1)
and (2) are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CLEVELAND-CLIFFS INC
By: /s/ John E. Lenhard
---------------------------------------
John E. Lenhard,
Secretary and Associate General Counsel
Date: March 25, 1999
17
<PAGE> 18
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
J. S. Brinzo President and Chief March 25, 1999
Executive Officer and
Principal Executive Officer
and Director
C. B. Bezik Senior Vice President- March 25, 1999
Finance and Principal
Financial Officer
R. J. Leroux Controller and Principal March 25, 1999
Accounting Officer
R. C. Cambre Director March 25, 1999
R. S. Colman Director March 25, 1999
J. D. Ireland, III Director March 25, 1999
G. F. Joklik Director March 25, 1999
L. L. Kanuk Director March 25, 1999
F. R. McAllister Director March 25, 1999
M. T. Moore Director March 25, 1999
J. C. Morley Director and Chairman March 25, 1999
S. B. Oresman Director March 25, 1999
A. Schwartz Director March 25, 1999
A. W. Whitehouse Director March 25, 1999
By: /s/ John E. Lenhard
--------------------------------------
(John E. Lenhard, as Attorney-in-Fact)
Original powers of attorney authorizing John S. Brinzo, Cynthia B.
Bezik, Joseph H. Ballway, Jr., and John E. Lenhard and each of them, to sign
this Annual Report on Form 10-K and amendments thereto on behalf of the
above-named officers and Directors of the Registrant have been filed with the
Securities and Exchange Commission.
18
<PAGE> 19
EXHIBIT INDEX
Pagination by
Exhibit Sequential
Number Numbering System
------ ----------------
ARTICLES OF INCORPORATION AND BY-LAWS OF
----------------------------------------
CLEVELAND-CLIFFS INC
--------------------
3(a) Amended Articles of Incorporation of
Cleveland-Cliffs Inc (filed as Exhibit
3(a) to Form 10-K of Cleveland-Cliffs Inc
filed on March 26, 1996 and incorporated
by reference) Not Applicable
3(b) Regulations of Cleveland-Cliffs Inc
(filed as Exhibit 3(b) to Form 10-K of
Cleveland-Cliffs Inc filed on March 26,
1996 and incorporated by reference) Not Applicable
INSTRUMENTS DEFINING RIGHTS OF SECURITY
---------------------------------------
HOLDERS, INCLUDING INDENTURES
-----------------------------
4(a) Form of Common Stock Certificate (filed
as Exhibit 4(a) to Form 10-K of
Cleveland-Cliffs Inc filed on March 25,
1998 and incorporated by reference) Not Applicable
4(b) Rights Agreement, dated September 19,
1997, by and between Cleveland-Cliffs Inc
and First Chicago Trust Company of New
York, as Rights Agent (filed as Exhibit
4.1 to Form 8-K of Cleveland-Cliffs Inc
filed on September 19, 1997 and
incorporated by reference) Not Applicable
4(c) Credit Agreement, dated as of March 1,
1995, among Cleveland-Cliffs Inc, the
Banks named therein and Chase Manhattan
Bank, as Agent (successor to Chemical
Bank) (filed as Exhibit 4(o) to Form 10-K
of Cleveland-Cliffs Inc filed on March
27, 1995 and incorporated by reference) Not Applicable
4(d) Amendment dated as of July 19, 1996, to
the Credit Agreement dated as of March 1,
1995, among Cleveland-Cliffs Inc, the
Banks named therein and Chase Manhattan
Bank, as Agent (filed as Exhibit 4(a) to
Form 10-Q of Cleveland-Cliffs Inc filed
on November 13, 1996 and incorporated by
reference) Not Applicable
4(e) Amendment dated as of June 1, 1997, to
the Credit Agreement dated as of March 1,
1995, as amended, among Cleveland-Cliffs
Inc, the Banks named therein and Chase
Manhattan Bank, as Agent (filed as
Exhibit 4(a) to Form 10-Q of
Cleveland-Cliffs Inc filed on August 13,
1997 and incorporated by reference) Not Applicable
19
<PAGE> 20
4(f) Amendment dated as of June 1, 1998, to
the Credit Agreement dated as of March 1,
1995, as amended, among Cleveland-Cliffs
Inc, the financial institutions named
therein and the Chase Manhattan Bank, as
Agent (filed as Exhibit 4(a) to Form 10-Q
of Cleveland-Cliffs Inc filed on August
12, 1998 and incorporated by reference) Not Applicable
4(g) Note Agreement, dated as of December 15,
1995, among Cleveland-Cliffs Inc and each
of the Purchasers named in Schedule I
thereto (filed as Exhibit 4(n) to Form
10-K of Cleveland-Cliffs Inc filed on
March 26, 1996 and incorporated by
reference) Not Applicable
MATERIAL CONTRACTS
------------------
10(a) * Cleveland-Cliffs Inc Supplemental
Retirement Benefit Plan (as Amended and
Restated, effective January 1, 1997),
dated April 24, 1997 (filed as Exhibit
10(l) to Form 10-Q of Cleveland-Cliffs
Inc filed on August 13, 1997 and
incorporated by reference) Not Applicable
10(b) * Amendment No. 1 to Cleveland-Cliffs Inc
Supplemental Retirement Benefit Plan (as
Amended and Restated effective January 1,
1997), as of November 1,1997, dated March
31, 1998 (filed as Exhibit 10(a) to Form
10-Q of Cleveland-Cliffs Inc filed on May
1, 1998 and incorporated by reference) Not Applicable
10(c) * Cleveland-Cliffs Inc Amended and
Restated Employment Agreements with
certain executive officers, dated as of
June 30, 1997 (filed as Exhibit 10(j) to
Form 10-Q of Cleveland-Cliffs Inc filed
on August 13, 1997 and incorporated by
reference) Not Applicable
10(d) * Amendment No. 1, dated as of December
31, 1997, to Amended and Restated
Employment Agreement of John S. Brinzo
(filed as Exhibit 10(c) to Form 10-K of
Cleveland-Cliffs Inc filed on March 25,
1998 and incorporated by reference) Not Applicable
10(e) * Retirement and Consulting Agreement,
dated as of September 2, 1998, by and
between Cleveland-Cliffs Inc and M.
Thomas Moore (filed as Exhibit 10(a) to
Form 10-Q of Cleveland-Cliffs Inc filed
on November 5,1998 and incorporated by
reference) Not Applicable
10(f) * Cleveland-Cliffs Inc and Subsidiaries
Management Performance Incentive Plan,
dated as of January 1, 1994 (Summary
Description) (filed as Exhibit 10(g) to
Form 10-K of Cleveland-Cliffs Inc filed
on March 27, 1995 and incorporated by
reference) Not Applicable
- --------------------
* Reflects management contract or other compensatory arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this Report.
20
<PAGE> 21
10(g) Form of indemnification agreements with
Directors (filed as Exhibit 10(j) to Form
10-K of Cleveland-Cliffs Inc filed on
March 26, 1996 and incorporated by
reference) Not Applicable
10(h) * Cleveland-Cliffs Inc 1987 Incentive
Equity Plan, effective as of April 29,
1987 (filed as Exhibit 10(h) to Form 10-K
of Cleveland-Cliffs Inc filed on March 26,
1997 and incorporated by reference) Not Applicable
10(i) * Cleveland-Cliffs Inc 1992 Incentive
Equity Plan (as Amended and Restated as of
May 13, 1997), effective as of May 13,
1997 (filed as Appendix A to Proxy
Statement of Cleveland-Cliffs Inc filed on
March 24, 1997 and incorporated by
reference) Not Applicable
10(j) * Form of Nonqualified Stock Option
Agreement for Nonemployee Directors (filed
as Exhibit 10(i) to Form 10-K of
Cleveland-Cliffs Inc filed on March 25,
1998 and incorporated by reference) Not Applicable
10(k) * Form of Instrument of Amendment of
Nonqualified Stock Option Agreements for
Nonemployee Directors, dated as of March
17, 1997 (filed as Exhibit 10(a) to Form
10-Q of Cleveland-Cliffs Inc filed on May
9, 1997 and incorporated by reference) Not Applicable
10(l) * Amended and Restated Cleveland-Cliffs
Inc Retirement Plan for Non-Employee
Directors effective as of July 1, 1995
(filed as Exhibit 10(a) to Form 10-Q of
Cleveland-Cliffs Inc filed on November 13,
1996 and incorporated by reference) Not Applicable
10(m) * Trust Agreement No. 1 (Amended and
Restated effective June 1, 1997), dated
June 12, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee, with respect to
the Cleveland-Cliffs Inc Supplemental
Retirement Benefit Plan and certain
employment agreements (filed as Exhibit
10(a) to Form 10-Q of Cleveland-Cliffs Inc
filed on August 13, 1997 and incorporated
by reference) Not Applicable
10(n) * Trust Agreement No. 2 (Amended and
Restated effective June 1, 1997), dated
June 12, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee, with respect to
the Severance Pay Plan for Key Employees
of Cleveland-Cliffs Inc, the
Cleveland-Cliffs Inc Retention Plan for
Salaried Employees, and certain employment
agreements (filed as Exhibit 10(b) to Form
10-Q of Cleveland-Cliffs Inc filed on
August 13, 1997 and incorporated by
reference) Not Applicable
- --------------------
* Reflects management contract or other compensatory arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this Report.
21
<PAGE> 22
10(o) * First Amendment to Trust Agreement No. 2
(Amended and Restated effective June 1,
1997), dated July 15, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(c) to Form 10-Q of Cleveland-Cliffs Inc
filed on August 13, 1997 and incorporated
by reference) Not Applicable
10(p) * Trust Agreement No. 4, dated as of
October 28, 1987, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee, with respect to
the Plan for Deferred Payment of
Directors' Fees (filed as Exhibit 10(p) to
Form 10-K of Cleveland-Cliffs Inc filed on
March 26, 1996 and incorporated by
reference) Not Applicable
10(q) * First Amendment to Trust Agreement No.
4, dated as of April 9, 1991, by and
between Cleveland-Cliffs Inc and Key Trust
Company of Ohio, N.A., Trustee and Second
Amendment to Trust Agreement No. 4, dated
as of March 9, 1992, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(q) to Form 10-K of Cleveland-Cliffs Inc
filed on March 26, 1996 and incorporated
by reference) Not Applicable
10(r) * Third Amendment to Trust Agreement No.
4, dated June 12, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(d) to Form 10-Q of Cleveland-Cliffs Inc
filed on August 13, 1997 and incorporated
by reference) Not Applicable
10(s) * Trust Agreement No. 5, dated as of
October 28, 1987, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee, with respect to
the Cleveland-Cliffs Inc Voluntary
Non-Qualified Deferred Compensation Plan
(filed as Exhibit 10(r) to Form 10-K of
Cleveland-Cliffs Inc filed on March 26,
1996 and incorporated by reference) Not Applicable
10(t) * First Amendment to Trust Agreement No.
5, dated as of May 12, 1989, by and
between Cleveland-Cliffs Inc and Key Trust
Company of Ohio, N.A., Trustee, Second
Amendment to Trust Agreement No. 5, dated
as of April 9, 1991, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee and Third Amendment
to Trust Agreement No. 5, dated as of
March 9, 1992, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(s) to Form 10-K of Cleveland-Cliffs Inc
filed on March 26, 1996 and incorporated
by reference) Not Applicable
- --------------------
* Reflects management contract or other compensatory arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this Report.
22
<PAGE> 23
10(u) * Fourth Amendment to Trust Agreement No.
5, dated November 18, 1994, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(dd) to Form 10-K of Cleveland-Cliffs
Inc filed on March 27, 1995 and
incorporated by reference) Not Applicable
10(v) * Fifth Amendment to Trust Agreement No.
5, dated May 23, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(e) to Form 10-Q of Cleveland-Cliffs Inc
filed on August 13, 1997 and incorporated
by reference) Not Applicable
10(w) * Amended and Restated Trust Agreement No.
6, dated as of March 9, 1992, by and
between Cleveland-Cliffs Inc and Key Trust
Company of Ohio, N.A., Trustee, with
respect to indemnification agreements with
directors (filed as Exhibit 10(t) to Form
10-K of Cleveland-Cliffs Inc filed on
March 26, 1996 and incorporated by
reference) Not Applicable
10(x) * First Amendment to Amended and Restated
Trust Agreement No. 6, dated June 12,
1997, by and between Cleveland-Cliffs Inc
and Key Trust Company of Ohio, N.A.,
Trustee (filed as Exhibit 10(f) to Form
10-Q of Cleveland-Cliffs Inc filed on
August 13, 1997 and incorporated by
reference) Not Applicable
10(y) * Trust Agreement No. 7, dated as of April
9, 1991, by and between Cleveland-Cliffs
Inc and Key Trust Company of Ohio, N.A.,
Trustee, with respect to the
Cleveland-Cliffs Inc Supplemental
Retirement Benefit Plan, as amended by
First Amendment to Trust Agreement No. 7,
by and between Cleveland-Cliffs Inc and
Key Trust Company of Ohio, N.A., Trustee
(filed as Exhibit 10(u) to Form 10-K of
Cleveland-Cliffs Inc filed on March 26,
1996 and incorporated by reference) Not Applicable
10(z) * Second Amendment to Trust Agreement No.
7, dated November 18, 1994, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(ee) to Form 10-K of Cleveland-Cliffs
Inc filed on March 27, 1995 and
incorporated by reference) Not Applicable
10(aa) * Third Amendment to Trust Agreement No.
7, dated May 23, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(g) to Form 10-Q of Cleveland-Cliffs Inc
filed on August 13, 1997 and incorporated
by reference) Not Applicable
- --------------------
* Reflects management contract or other compensatory arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this Report.
23
<PAGE> 24
10(bb) * Fourth Amendment to Trust Agreement No.
7, dated July 15, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(h) to Form 10-Q of Cleveland-Cliffs Inc
filed on August 13, 1997 and incorporated
by reference) Not Applicable
10(cc) * Trust Agreement No. 8, dated as of April
9, 1991, by and between Cleveland-Cliffs
Inc and Key Trust Company of Ohio, N.A.,
Trustee, with respect to the
Cleveland-Cliffs Inc Retirement Plan for
Non-Employee Directors, as amended by
First Amendment to Trust Agreement No. 8,
dated as of March 9, 1992 by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(v) to Form 10-K of Cleveland-Cliffs Inc
filed on March 26, 1996 and incorporated
by reference) Not Applicable
10(dd) * Second Amendment to Trust Agreement No.
8, dated June 12, 1997, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee (filed as Exhibit
10(i) to Form 10-Q of Cleveland-Cliffs Inc
filed on August 13, 1997 and incorporated
by reference) Not Applicable
10(ee) * Trust Agreement No. 9, dated as of
November 20, 1996, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee, with respect to
the Cleveland-Cliffs Inc Nonemployee
Directors' Supplemental Compensation Plan
(filed as Exhibit 10(v) to Form 10-K of
Cleveland-Cliffs Inc filed on March 26,
1997 and incorporated by reference) Not Applicable
10(ff) * Trust Agreement No. 10, dated as of
November 20, 1996, by and between
Cleveland-Cliffs Inc and Key Trust Company
of Ohio, N.A., Trustee, with respect to
the Cleveland-Cliffs Inc Nonemployee
Directors' Compensation Plan (filed as
Exhibit 10(w) to Form 10-K of
Cleveland-Cliffs Inc filed on March 26,
1997 and incorporated by reference) Not Applicable
10(gg) * Severance Pay Plan for Key Employees of
Cleveland-Cliffs Inc (as Amended and
Restated as of February 1, 1997), dated
June 26, 1997 (filed as Exhibit 10(k) to
Form 10-Q of Cleveland-Cliffs Inc filed on
August 13, 1997 and incorporated by
reference) Not Applicable
10(hh) * Amendment No. 1 to Severance Pay Plan
for Key Employees of Cleveland-Cliffs Inc
(as Amended and Restated as of February 1,
1997), effective as of November 1, 1997,
dated March 31, 1998 (filed as Exhibit
10(c) to Form 10-Q of Cleveland-Cliffs Inc
filed on May 1, 1998 and incorporated by
reference) Not Applicable
- --------------------
* Reflects management contract or other compensatory arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this Report.
24
<PAGE> 25
10(ii) * Cleveland-Cliffs Inc Voluntary
Non-Qualified Deferred Compensation Plan,
Amended and Restated as of December 1,
1996 (filed as Exhibit 10(z) to Form 10-K
of Cleveland-Cliffs Inc filed on March 26,
1997 and incorporated by reference) Not Applicable
10(jj) * Amendment No. 1 to Cleveland-Cliffs Inc
Voluntary Non-Qualified Deferred
Compensation Plan (Amended and Restated as
of December 1, 1996) effective as of
November 1, 1997, dated March 31, 1998
(filed as Exhibit 10(b) to Form 10-Q of
Cleveland-Cliffs Inc filed on May 1, 1998
and incorporated by reference) Not Applicable
10(kk) * Cleveland-Cliffs Inc Long-Term
Performance Share Program, effective as of
March 31, 1994, as amended as of January
13, 1997 (filed as Exhibit 10(n) to Form
10-Q of Cleveland-Cliffs Inc filed on
August 13, 1997 and incorporated by
reference) Not Applicable
10(ll) * Cleveland-Cliffs Inc Nonemployee
Directors' Supplemental Compensation Plan,
effective as of July 1, 1995 (filed as
Exhibit 10(b) to Form 10-Q of
Cleveland-Cliffs Inc filed on November 13,
1996 and incorporated by reference) Not Applicable
10(mm) * First Amendment to Cleveland-Cliffs Inc
Nonemployee Directors' Supplemental
Compensation Plan, effective as of January
1, 1999 Filed Herewith
10(nn) * Cleveland-Cliffs Inc Nonemployee
Directors' Compensation Plan, effective as
of July 1, 1996 (filed as Appendix A to
Proxy Statement of Cleveland-Cliffs Inc
filed on March 25, 1996 and incorporated
by reference) Not Applicable
10(oo) * First Amendment to Cleveland-Cliffs Inc
Nonemployee Directors' Compensation Plan,
effective as of November 12, 1996 (filed
as Exhibit 10(dd) to Form 10-K of
Cleveland-Cliffs Inc filed on March 26,
1997 and incorporated by reference) Not Applicable
10(pp) * Second Amendment to Cleveland-Cliffs Inc
Nonemployee Directors' Compensation Plan,
effective as of May 13, 1997 (filed as
Exhibit 10(m) to Form 10-Q of
Cleveland-Cliffs Inc filed on August 13,
1997 and incorporated by reference) Not Applicable
10(qq) * Third Amendment to Cleveland-Cliffs Inc
Nonemployee Directors' Compensation Plan,
effective as of January 1, 1999 Filed Herewith
- --------------------
* Reflects management contract or other compensatory arrangement required to be
filed as an Exhibit pursuant to Item 14(c) of this Report.
25
<PAGE> 26
13 Selected portions of 1998 Annual Report to Security Holders
13(a) Management's Discussion and Analysis of Filed Herewith
Financial Condition and Results of Operations (Page 27-37)
13(c) Statement of Consolidated Financial Position Filed Herewith
(Page 38-39)
13(d) Statement of Consolidated Income Filed Herewith
(Page 40)
13(e) Statement of Consolidated Cash Flows Filed Herewith
(Page 41)
13(f) Statement of Consolidated Shareholders' Equity Filed Herewith
(Page 42)
13(g) Notes to Consolidated Financial Statements Filed Herewith
(Page 43-60)
13(h) Quarterly Results of Operations/Common Share Filed Herewith
Price Performance and Dividends (Page 61)
13(i) Investor and Corporate Information Filed Herewith
(Page 62)
13(j) Summary of Financial and Other Statistical Data Filed Herewith
(Page 63-64)
21 Subsidiaries of the registrant Filed Herewith
(Page 65-67)
23 Consent of independent auditors Filed Herewith
(Page 68)
24 Power of Attorney Filed Herewith
(Page 69)
27 Consolidated Financial Data Schedule submitted
for Securities and Exchange Commission information ---
99 Additional Exhibits
99(a) Schedule II - Valuation and Qualifying Accounts Filed Herewith
(Page 70)
26
<PAGE> 1
Exhibit 10(mm)
FIRST AMENDMENT
TO
CLEVELAND-CLIFFS INC NONEMPLOYEE DIRECTORS'
-------------------------------------------
SUPPLEMENTAL COMPENSATION PLAN
------------------------------
RECITALS
--------
WHEREAS, Cleveland-Cliffs Inc ("Company") established the
Cleveland-Cliffs Inc Nonemployee Directors' Supplemental Compensation Plan
("Plan") effective July 1, 1995; and
WHEREAS, Section 1.2 of the Plan provides that the Company may amend,
suspend or terminate the Plan with the prior approval of a majority of the
Directors present at a meeting of the Board of Directors, at which a "quorum"
(as defined in the Regulations of the Company) is present; and
WHEREAS, the Company desires to amend the Plan to freeze the
eligibility under the Plan to only those Directors who join the Board of
Directors of the Company between July 1, 1995 and December 31, 1998.
NOW, THEREFORE, by approval of the Board of Directors of the Company,
the Plan is hereby amended, effective January 1, 1999, as follows:
<PAGE> 2
1. Section 2.1 of the Plan is hereby amended to read:
2.1 PARTICIPANTS. Each Director who has
never been an employee or officer of the Company and
who first serves as a Director on or after July 1,
1995, and before January 1, 1999 (an "Outside
Director") shall become a Participant in the Plan
upon the completion of five years of continuous
service as a Director.
2. Except as amended by this First Amendment, the Plan shall remain in
full force and effect.
IN WITNESS WHEREOF, this Amendment No. 1 has been duly authorized by
the Company as of November 10, 1998.
CLEVELAND-CLIFFS INC
By /s/ J. S. Brinzo
--------------------------------------
President and Chief Executive Officer
<PAGE> 1
Exhibit 10(qq)
THIRD AMENDMENT
TO
CLEVELAND-CLIFFS INC NONEMPLOYEE DIRECTORS'
-------------------------------------------
COMPENSATION PLAN
-----------------
RECITALS
--------
WHEREAS, Cleveland-Cliffs Inc ("Company"), with approval of the
Company's shareholders on May 14, 1996, established the Cleveland-Cliffs Inc
Nonemployee Directors' Compensation Plan ("Plan"), effective July 1, 1996; and
WHEREAS, with approval of the Board of Directors of the Company, the
Plan was amended by the First Amendment to the Plan on November 12, 1996; and
WHEREAS, with the approval of the Board of Directors of the Company,
the Plan was amended by the Second Amendment to the Plan on May 13, 1997, and
WHEREAS, the Company desires to amend the Plan further to provide for
an increase in the number of Restricted Shares automatically awarded to
Directors and to decrease the portion of a Director's Retainer which must be
payable in Shares ("Third Amendment"); and
WHEREAS, the Board of Directors of the Company has approved the Third
Amendment in accordance with the provisions of Section 8.2 of the Plan and such
Third Amendment does not require approval by the shareholders of the Company.
NOW, THEREFORE, the Plan is hereby amended by this Third Amendment,
effective as of January 1, 1999, as follows:
1
<PAGE> 2
1. The Plan is amended by deleting in its entirety Section (z) of
Article I and replacing it with:
"(z) "Required Retainer Shares": An amount, payable in Shares,
constituting 40% of a Director's Retainer."
2. The Plan is amended by deleting in its entirety Section 3.1(a) of
Article III of the Plan and replacing it with:
"(a) Each individual who is first elected or appointed to the
Board as a Director on or after January 1, 1999 shall be awarded 2,000
Restricted Shares."
3. The Plan is amended by deleting in its entirety Section 3.2(a) of
Article III of the Plan and replacing it with:
"(a) Retainer. Commencing with the Retainer for the first
Accounting Period during 1999, 60% of the Retainer established by the
Board from time to time shall be payable in cash and 40% of such
Retainer shall be payable as Required Retainer Shares payable on
January 1 of the following year (unless deferred in accordance with
this Plan)."
4. The Plan is amended by deleting in its entirety Section 3.2(c) of
Article III of the Plan and replacing it with:
"(c) Issuance of Shares. On January 1 of each year beginning
with January 1, 2000, the Company shall issue (i) to each Director a
number of Required Retainer Shares equal to 40% of such Director's
Retainer for each Accounting Period during the prior Plan Year divided
by the Fair Market Value per Share on the first day of such Accounting
Period and (ii) to each Director who has made an election under Section
3.2(b) a number of Voluntary Shares for each such Accounting Period
equal to the portion of such Director's Fees in excess of 40% of such
Director's Retainer for such Accounting Period that such Director has
elected to receive as Voluntary Shares for such Accounting Period
divided by the Fair Market Value per Share on the first day of such
Accounting Period (less, in each case, the portion of the Required
Retainer Shares and Voluntary Shares the Director elected to defer
under Section 4.3). To the extent that the application of the foregoing
formula would result in the issuance of fractional Shares, no
fractional Shares shall be issued, but instead, the Company shall
maintain two separate non-interest-bearing accounts for each Director,
which accounts shall be credited with the amount of any Required
Retainer Shares or Voluntary Shares, as the case may be, not
convertible into
2
<PAGE> 3
whole Shares, which amounts shall be combined with Required Retainer
Shares and Voluntary Shares, respectively, which are paid for the next
following Plan Year. When whole Shares are issued by the Company to the
Director on January 1, the amounts in such accounts shall be reduced by
that amount which (when added to the Required Retainer Shares and
Voluntary Shares for such Director for such quarter) results in the
issuance of the maximum number of Shares to such Director. The Company
shall pay any and all fees and commissions incurred in connection with
the payment of Required Retainer Shares and Voluntary Shares to a
Director in Shares."
5. Except as amended by the First Amendment, the Second Amendment and
this Third Amendment, the Plan shall remain in full force and effect.
Executed in Cleveland, Ohio, as of November 10, 1998.
CLEVELAND-CLIFFS INC
By /s/ J. S. Brinzo
---------------------------------------
President and Chief Executive Officer
And /s/ J. E. Lenhard
---------------------------------------
Secretary
3
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS Exhibit 13(a)
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 1998, Cleveland-Cliffs Inc ("Company") earned $57.4 million, or $5.06 per
share (references to per share earnings are "diluted earnings per share"), an
increase of $2.5 million, or $.26 per share, from 1997. Following is a summary
of results for the years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
- Amount (in millions) $57.4 $54.9 $61.0
- Per share (basic) $5.10 $4.83 $5.26
- Per share (diluted) $5.06 $4.80 $5.23
Average number of shares (in thousands)
- Basic 11,248 11,371 11,594
- Diluted 11,336 11,456 11,678
</TABLE>
1998 VERSUS 1997
- ----------------
Revenues were $503.9 million in 1998, an increase of $47.8 million from 1997.
Revenues from product sales and services totaled $444.1 million in 1998 compared
to $391.4 million in 1997. The $52.7 million increase was due to higher sales
volume and average price realizations. North American iron ore sales were 12.1
million tons in 1998 compared to 10.4 million tons in 1997. Royalty and
management fee revenue in 1998, including amounts paid by the Company as a
participant in the mining ventures, totaled $49.7 million, compared to $47.5
million in 1997, primarily reflecting higher production at the Tilden mine.
Net income for the year 1998 was $57.4 million, or $5.06 per share, an increase
of $2.5 million, or $.26 per share, compared to 1997 earnings of $54.9 million,
or $4.80 per share. The increase in earnings was mainly due to increased North
American sales volume and price realization, a lower effective income tax rate,
increased royalties and management fees, and higher capitalized interest. Partly
offsetting were non-recurring 1997 Australian earnings and higher ferrous
metallics and international development expenses.
Earnings attributable to the Savage River Mines ("Savage River") in Australia,
which produced its last iron ore pellets in December, 1996, were $6.3 million in
1997 including an after-tax credit of $3.2 million from the reversal of
closedown obligations. Net income in 1997, excluding Australian earnings, was
$48.6 million, or $4.25 per share.
Earnings in 1998 and 1997 include tax credits of $3.5 million and $5.6 million,
respectively, that reflect a reassessment of current and prior years' income tax
obligations resulting from audits of prior years' tax returns. The lower
effective tax rate in 1998, relative to 1997, also reflects the absence of the
higher Australian statutory tax rate and the increased benefit of depletion
allowances.
27
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
1997 VERSUS 1996
- ----------------
Revenues were $456.1 million in 1997, a decrease of $62.0 million from 1996.
Revenues from product sales and services in 1997 totaled $391.4 million, a
decrease of $60.3 million from 1996, mainly due to the planned termination of
Savage River operations and lower North American sales volume. North American
iron ore sales were 10.4 million tons in 1997 compared to 11.0 million tons in
1996. Savage River's sales in 1997 were .3 million tons as compared to 1.7
million tons in 1996. Royalty and management fee revenue in 1997, including
amounts paid by the Company as a participant in the mining ventures, totaled
$47.5 million, a decrease of $4.0 million from 1996, mainly due to lower volume.
Net income for the year 1997 was $54.9 million, or $4.80 per share, compared to
net income for the year 1996 of $61.0 million, or $5.23 per share. The $6.1
million decrease in 1997 earnings was mainly due to the termination of Savage
River operations, lower North American sales volume, and higher mine operating
costs, partly offset by a lower effective income tax rate, including a $5.6
million tax credit resulting from settlement of prior years' tax issues. Savage
River earnings in 1997 were $6.3 million, including a $3.2 million reversal of
closedown obligations, versus $12.9 million in 1996. Savage River terminated
production as planned in December, 1996 and shipped its remaining inventory in
the first quarter of 1997.
CASH FLOW AND LIQUIDITY
- -----------------------
At December 31, 1998, the Company had cash and cash equivalents of $130.3
million. In addition, the full amount of a $100 million unsecured revolving
credit facility was available. No principal payments are required until 2005
when the Company's $70 million senior unsecured notes mature.
Following is a summary of 1998 cash flow:
<TABLE>
<CAPTION>
(In Millions)
-----------------
<S> <C>
Cash flow from operations:
Before changes in operating assets and liabilities $75.1
Changes in operating assets and liabilities 17.0
-----
Net cash from operations 92.1
Capital expenditures (31.7)
Investment in Cliffs and Associates Limited (19.7)
Dividends (16.3)
Repurchases of common shares (11.5)
Other 1.5
-----
Increase in cash and cash equivalents $14.4
=====
</TABLE>
The $17.0 million decrease in working capital primarily reflected lower trade
receivables of $13.1 million due to lower December sales. North American iron
ore inventory investment at December 31, 1998 was $43.4 million, a decrease of
$1.2 million from December 31, 1997.
28
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Following is a summary of key liquidity measures:
<TABLE>
<CAPTION>
At December 31 (In Millions)
---------------------------------
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 130.3 $ 115.9 $ 165.4
Marketable securities 4.0
-------- -------- --------
Total cash and temporary investments 130.3 115.9 169.4
Long-term debt 70.0 70.0 70.0
-------- -------- --------
Net cash $ 60.3 $ 45.9 $ 99.4
======== ======== ========
Working capital $ 170.7 $ 174.0 $ 195.3
======== ======== ========
Ratio of current assets to current liabilities 2.9:1 2.9:1 2.9:1
</TABLE>
Additionally at December 31, 1998, the Company had a long-term investment of .8
million shares of The LTV Corporation Common Stock with a value of $4.8 million.
NORTH AMERICAN IRON ORE
- -----------------------
The six North American mines managed by the Company produced a record 40.3
million tons of iron ore in 1998, compared to production of 39.6 million tons in
1997. The Company's share of the North American production was a record 11.4
million tons in 1998 versus 10.9 million tons in 1997. The increases were mainly
due to higher production at the Tilden and Wabush mines. The Company and its
steel company partners have elected to start the year 1999 operating the mines
at near capacity levels. However, production rates are subject to change during
the year.
Labor contracts at the five Company-managed mines, in which all bargaining unit
employees are represented by the United Steelworkers of America, will expire in
1999. The three year Wabush contract in Canada will expire March 1, 1999. Six
year agreements at the Empire, Hibbing, and Tilden mines and a five year
agreement at LTV Steel Mining Company will expire on August 1, 1999.
Steel production in the U.S. and Canada declined significantly in the second
half of 1998 due to a surge in unfairly traded steel imports, adversely
impacting order rates, capacity utilization rates, shipment volumes and profits
of the North American steel industry. Steel inventories have increased, causing
cutbacks in steel production. Industry analysts are projecting 1999 steel
production to be lower than 1998 which could affect iron ore production.
Given the state of the North American steel business, the Company expects 1999
iron ore pellet sales volume will be lower than 1998 record sales. The Company's
sales capacity is largely committed to multi-year sales contracts, which expire
in various years starting in 2000. Maintenance of sales volume is dependent on
the renewal or replacement of such contracts and the demand for iron ore
pellets. The Company has consistently demonstrated its ability to sustain sales
volume through renewed or new contracts. Year 1999 international iron ore price
negotiations are currently taking place, and with the weakness of the Asian and
European steel
29
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
markets, a price decrease is expected. A decline in the international price
would impact prices in certain of the Company's multi-year sales contracts.
The major business risk faced by the Company is the potential financial failure
and shutdown of one or more of its significant customers or partners, with the
resulting loss of ore sales and/or royalty and management fee income. If any
such shutdown were to occur without mitigation through replacement sales volume
or cost reduction, it would represent a significant adverse financial
development to the Company. The iron mining business has relatively high fixed
costs. Therefore, loss of sales volume due to failure of a customer or other
loss of business (e.g., foreign competition) would have a greater impact on
earnings than revenue.
On September 28, 1998, Acme Metals Incorporated and its wholly-owned subsidiary
Acme Steel Company (collectively "Acme"), a partner in Wabush and an iron ore
customer, petitioned for protection under Chapter 11 of the U.S. Bankruptcy
Code. The Company had a $1.2 million pre-petition trade receivable from Acme,
which has been fully provided in the allowance for doubtful accounts. Since its
filing, Acme has maintained operations with debtor-in-possession financing and
has continued its relationship with Wabush and the Company. Sales to Acme in
1998 and 1997 represented less than 5 percent of total sales volume.
The Company and its mining venture partners have made substantial capital
expenditures in recent years to reduce operating costs and maintain production
rates. The following table summarizes 1998 and estimated 1999 capital equipment
additions and replacements, including equipment acquired through lease, for the
six mining ventures and supporting operations in North America.
CAPITAL INVESTMENT
<TABLE>
<CAPTION>
(In Millions)
----------------------------------------
Company's
Share Total
------------------- -------------------
<S> <C> <C>
Actual 1998:
Total* $42.5 $ 113.7
===== =======
Capital $33.0 $ 64.0
===== =======
Estimated 1999:
Total* $36.0 $ 142.0
===== =======
Capital $22.1 $ 60.2
===== =======
</TABLE>
* Includes equipment acquired through leases, which are largely non-recourse
to the Company.
FERROUS METALLICS
- -----------------
The Company's strategy includes extending its business scope to produce and
supply ferrous metallic products to an expanded customer base, including
electric arc furnace steelmakers.
30
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Cliffs and Associates Limited, a joint venture in Trinidad and Tobago, is
completing construction of a facility to produce premium quality hot-briquetted
iron ("HBI") to be marketed to the steel industry. The venture's participants,
through subsidiaries, include the Company, 46.5 percent; The LTV Corporation,
46.5 percent; and Lurgi AG of Germany, 7.0 percent, with the Company acting as
manager and sales agent. Project capital expenditures through December 31, 1998
were $141.1 million (Company share - $65.6 million). Currently estimated total
capital expenditures of $151.0 million (Company share - $70.2 million) do not
include construction claims of $16.0 million (Company share - $7.5 million),
which are being contested. The Company believes the claims are largely without
merit; any payments on these claims are expected to be partially offset by
recoveries from contractors and suppliers. No project financing has been used
during construction. Construction of the facility is near completion, and
commissioning activities are currently in progress. Plant startup is currently
scheduled for March, with HBI production increasing on a planned production
curve. At design, the facility is expected to produce 500,000 metric tons
annually. Full year production volume will depend on market demand.
The Company continues to evaluate an investment in a plant at the Company's
wholly-owned Northshore mine in Minnesota to produce premium grade pig iron.
While progress has been made in a number of areas, uncertainty over market
conditions and timing of state environmental permitting has postponed a decision
on the project.
STRATEGIC INVESTMENTS
- ---------------------
The Company is seeking additional investment opportunities, domestically and
internationally to broaden its scope as a supplier of iron units to the steel
industry, including investments in iron ore mines or ferrous metallics
facilities. In the normal course of business, the Company examines opportunities
to increase profitability and strengthen its business position by evaluating
various investment opportunities consistent with its business strategy. In the
event of any future acquisitions or joint venture opportunities, the Company may
consider using available liquidity, incurring additional indebtedness, project
financing, or other sources of funding to make investments.
CAPITALIZATION
- --------------
Long-term debt of the Company consists of $70 million of senior unsecured notes
payable to an insurance company group. The notes bear a fixed interest rate of
7.0 percent and are scheduled to be repaid on December 15, 2005. In addition to
the senior unsecured notes, the Company, including its share of mining ventures,
had capital lease obligations at December 31, 1998 of $5.4 million.
The Company also has a $100 million revolving credit agreement. No borrowings
are outstanding under this agreement, which was amended in the second quarter
1998 to extend the expiration date from March 1, 2002 to May 31, 2003.
The Company has purchased 1,130,500 of its Common Shares at a total cost of
$46.7 million through December 31, 1998 under its authorization to repurchase up
to 1.5 million Common
31
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Shares in open market or negotiated transactions. The shares will initially be
retained as Treasury Stock.
<TABLE>
<CAPTION>
COMMON SHARE REPURCHASES
Common Cost
Shares (In Millions)
------------------------- -------------------------
<S> <C> <C>
1995 284,500 $10.8
1996 495,800 19.5
1997 113,100 4.9
1998 237,100 11.5
--------- -----
Total 1,130,500 $46.7
========= =====
Average cost per share $41.28
======
</TABLE>
The repurchase program's cumulative effect on earnings per share was $.41, $.33
and $.24 in 1998, 1997 and 1996, respectively.
ACTUARIAL ASSUMPTIONS
- ---------------------
As a result of a decrease in long-term interest rates, the Company re-evaluated
the interest rates used to calculate its pension and other postretirement
benefit ("OPEB") obligations. The discount rate used to calculate the Company's
pension and OPEB obligations was decreased to 6.75 percent at December 31, 1998
from 7.25 percent at December 31, 1997. The change in the discount rate
assumption did not affect 1998 financial results; however, in 1999 and
subsequent years, the changes are projected to increase pension and OPEB expense
by approximately $.4 million.
The Company makes annual contributions to the pension plans within income tax
deductibility restrictions in accordance with statutory requirements. In 1998,
the Company contributed $2.8 million, including its share of associated
companies' funding, a decrease of $.3 million from 1997. In 1999, the Company
plans to contribute $1.4 million, including its share of mining ventures'
funding.
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 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.
Potential insurance recoveries have not been reflected in the determination of
the financial reserves.
32
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
At December 31, 1998, the Company had a reserve for environmental obligations,
including its share of the environmental obligations of ventures, of $21.5
million ($22.7 million at December 31, 1997), of which $2.0 million was current.
Payments in 1998 were $.9 million (1997 - $2.4 million).
On March 25, 1997, the remaining assets of Savage River and all related
environmental and rehabilitation obligations were transferred to the Tasmanian
government. The release from these obligations includes previously identified
environmental and rehabilitation obligations and from any such obligations that
may be asserted in the future, whether presently known or unknown.
YEAR 2000 TECHNOLOGY
- --------------------
Year 2000 compliance is a major business priority of the Company and is being
addressed at all operations. A Company-wide Year 2000 Compliance Program
("Compliance Program") is underway with a dedicated team headed by a Project
Executive, with representation from Internal Control, Information Technology and
Process Control, including functional project leaders from the Company's
ventures. Additionally, two outside engineering firms and one information
technology service firm have been engaged to support and assist in process
control compliance activities. The status of the Compliance Program is reported
regularly to the Year 2000 Compliance Steering Committee, consisting of the
Chief Executive Officer and other Officers of the Company, and to the Company's
Board of Directors.
The Compliance Program has been divided into five phases: 1) inventory, 2)
assessment, 3) renovation, 4) unit testing, and 5) system integration testing.
The Company has substantially completed the inventory, assessment, renovation
and unit testing phases in 1998. Renovation and unit testing on a limited number
of items have been delayed into the first half of 1999 pending availability of
vendor technical resources, replacement equipment and software. System
integration testing is scheduled to be completed during the third quarter of
1999.
A substantial portion of Year 2000 information technology compliance will be
achieved as a result of the Company's Information Technology Plan ("IT Plan").
The IT Plan, initiated in 1996, involves the implementation of a purchased,
mining-based, Year 2000 compliant, software suite to replace legacy programs for
operations and administrative mainframe systems servicing most domestic
locations. In addition to avoiding any potential Year 2000 problems, the IT Plan
is expected to result in improved system and operating effectiveness. Following
is a summary of the IT Plan total project cost estimate and costs incurred to
date:
33
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
<TABLE>
<CAPTION>
(In Millions)
--------------------
COMPANY'S
SHARE Total
------- -------
<S> <C> <C>
Total project:
Capital $ 15.3* $ 16.5
Operating 2.4 8.5
------- -------
Total $ 17.7 $ 25.0
======= =======
Incurred through December 31, 1998:
Capital $ 9.2* $ 10.1
Operating .8 2.8
------- -------
Total $ 10.0 $ 12.9
======= =======
</TABLE>
* Includes amounts reimbursable by mining ventures of $12.9 million
for the total project and $7.6 million through December 31, 1998.
The Company is charging to operations current state assessment, process
re-engineering, and training costs associated with the IT Plan. For legacy
programs and locations not included in the IT Plan, modifications and/or
replacement of existing programs are underway for achieving Year 2000 compliance
with an expected cost of $1.0 million.
In addition to addressing software legacy program issues, the Year 2000
Compliance Program is addressing the impact of the date change with respect to
the Company's mainframe computer system, technical infrastructure, end-user
computing, process control systems, environmental and safety monitoring, and
security and access systems. Emphasis has been placed on those systems which
affect production, quality or safety.
The Company has also included investigation of major suppliers' and customers'
Year 2000 readiness as part of the program. Major suppliers and customers of the
Company have been requested to complete a Year 2000 compliance questionnaire.
For those which the Company considers critical to its operations, on site
verifications are being performed as required. Interruption of electrical power
supplied to the Company's ventures has been identified as having the greatest
potential adverse impact. Failure of electric power suppliers of the Company's
mining ventures to become Year 2000 compliant could cause power interruptions
resulting in significant production losses and potential equipment damage. The
Company's wholly-owned Northshore and managed LTV Steel Mining Company mines are
equipped with electric power generation facilities capable of providing nearly
all of their power requirements.
The incremental expense of achieving Year 2000 compliance on systems not covered
by the IT Plan and other software legacy programs is estimated to be $4.0
million for the Company and its ventures. Completion of this program is targeted
for mid-1999. The Company has completed internal audits at various operations to
verify that progress is on schedule toward timely completion of the Compliance
Program.
34
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The Company is developing specific contingency plans at each location to
mitigate year 2000 compliance failures, of the Company or any of its key
suppliers or customers. The contingency plans involve specific actions designed
to maintain employee safety, production and quality. The contingency plans
include a range of actions, including low technology or manual alternatives to
current automated processes. Alternatives for key suppliers are being
identified, and, where alternate suppliers do not exist, other actions (e.g.,
increased inventory) are being considered. While focused on continuing
production, by necessity the plans include procedures for reducing production or
orderly temporary suspension of operations, if required to protect employees,
property and the environment. Initial contingency plans are expected to be
completed at all sites in the first quarter of 1999. Contingency plans will
continue to be refined throughout 1999, incorporating assessments of areas where
risk is greatest.
The Company expects to be Year 2000 compliant; however, statements with regard
to such expectations are subject to various risk factors which may materially
affect the Company's Year 2000 compliance efforts. These risk factors include
the availability of trained personnel, the ability to detect, locate and correct
system codes, the evaluation of the wide variety of IT software and hardware,
failure of software vendors to deliver upgrades or make repairs as promised, and
failure of key vendors to become compliant. Although the Company has taken
actions that it believes are appropriate and reasonable to determine the
readiness of third parties, it must in part rely on third party representations.
The Company is attempting to reduce these risks and others by utilizing an
organized approach, conducting audits and extensive testing, identifying
alternative sources of supply and other contingency plans.
MARKET RISK
- -----------
The Company is exposed to a variety of risks, including those caused by changes
in the market value of equity investments, foreign currency fluctuations and
changes in interest rates. The Company has established policies and procedures
to manage such risks.
The Company's investment policy relating to its short-term investments
(classified as cash equivalents) is to preserve principal and liquidity while
maximizing the return through investment of available funds. The carrying value
of these investments approximates fair value on the reporting dates.
The value of the Company's long-term equity investment in Common Stock of The
LTV Corporation is subject to changes in market value as reflected in the
trading price. This investment has been classified as an available-for-sale
investment, and accordingly, changes in value have been recorded in
Shareholders' Equity. If the market price of the stock at December 31, 1998,
were to increase or decrease 10 percent, the value of the investment would
change approximately $.3 million after-tax.
A portion of the Company's operating costs are subject to change in the value of
the Canadian dollar. Derivative financial instruments, in the form of forward
currency exchange contracts, are used by the Company to manage its risk of
operating costs at its Canadian venture. Forward exchange contracts are hedging
transactions that have been entered into with the objective of managing the
impact of exchange rate fluctuations of the Canadian dollar on the Company's
35
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
operating costs. The Company's normal procedure is to use forward contracts to
fix the cost in U.S. dollars of a portion of the annual Canadian dollar
requirements. The Company does not engage in acquiring or issuing derivative
financial instruments for trading purposes. At December 31, 1998, the notional
amount of the outstanding forward currency exchange contracts was $13.9 million
with a market value of $13.9 million based on the December 31, 1998 forward
rates. If the Canadian dollar forward rates were to change 10 percent from the
year-end rates, the value and potential cash flow effect would be approximately
$1.4 million.
The Company currently has $70 million of long-term debt outstanding at a fixed
interest rate of 7 percent due in December, 2005. A hypothetical increase or
decrease of 10 percent from year-end interest rates would change the fair value
of the debt by $1.8 million.
FORWARD-LOOKING STATEMENTS
- --------------------------
The preceding discussion and analysis of the Company's operations, financial
performance and results, as well as material included elsewhere in this report,
includes statements not limited to historical facts. Such statements are
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995) 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. Factors that could cause the Company's actual results to be
materially different from the Company's expectations include the following:
- Changes in the financial condition of the Company's partners
and/or customers. The potential financial failure of one or
more significant customers or partners without mitigation
could represent a significant adverse development;
- Unanticipated changes in the market value of steel, iron ore
or ferrous metallics;
- Substantial changes in imports of steel, iron ore, or ferrous
metallic products;
- Development of alternate steel-making technologies;
- Displacement of steel by competing materials;
- Displacement of North American integrated steel production
and/or electric furnace production by imported semi-finished
steel or pig iron;
- Domestic or international economic and political conditions;
- Major equipment failure, availability, and magnitude and
duration of repairs;
- Unanticipated geological conditions or ore processing changes;
- Process difficulties, including the failure of new technology
to perform as anticipated;
36
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
- Availability and cost of the key components of production
(e.g., labor, electric power, fuel, water);
- Labor contract negotiations;
- Weather conditions (e.g., extreme winter weather, availability
of process water due to drought);
- Timing and successful completion of construction projects;
- Failure or delay in achieving Year 2000 compliance by the
Company or any of its key suppliers or customers;
- Changes in tax laws (e.g., percentage depletion allowance);
- 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;
- Changes in laws, regulations or enforcement practices
governing compliance with environmental and safety standards
at operating locations; and,
- Accounting principle or policy changes by the Financial
Accounting Standards Board or the Securities and Exchange
Commission.
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.
37
<PAGE> 1
STATEMENT OF CONSOLIDATED FINANCIAL POSITION Exhibit 13(c)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
<TABLE>
<CAPTION>
(In Millions)
December 31
------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 130.3 $ 115.9
Trade accounts receivable
(net of allowance, $2.2 in 1998 and $1.0 in 1997) 42.4 55.5
Receivables from associated companies 16.4 17.9
Inventories
Iron ore 43.4 44.6
Supplies and other 16.2 16.8
------ ------
59.6 61.4
Deferred income taxes 5.1 7.5
Other 6.1 7.6
------ ------
TOTAL CURRENT ASSETS 259.9 265.8
PROPERTIES
Plant and equipment 191.8 253.1
Minerals 19.1 19.2
------ ------
210.9 272.3
Allowances for depreciation and depletion (60.9) (138.3)
------ ------
TOTAL PROPERTIES 150.0 134.0
INVESTMENTS IN ASSOCIATED COMPANIES 235.4 218.3
OTHER ASSETS
Prepaid pensions 40.0 40.4
Miscellaneous 38.2 35.8
------ ------
TOTAL OTHER ASSETS 78.2 76.2
------ ------
TOTAL ASSETS $723.5 $694.3
====== ======
</TABLE>
38
<PAGE> 2
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
Cleveland-Cliffs Inc and Consolidated Subsidiaries
<TABLE>
<CAPTION>
(In Millions)
December 31
--------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 14.8 $ 13.4
Payables to associated companies 23.2 22.6
Accrued expenses 33.6 37.6
State and local taxes payable 10.3 10.2
Income taxes payable 2.0 .3
Other 5.3 7.7
--------- ---------
TOTAL CURRENT LIABILITIES 89.2 91.8
LONG-TERM DEBT 70.0 70.0
POSTEMPLOYMENT BENEFIT LIABILITIES 70.5 70.1
OTHER LIABILITIES 56.2 55.0
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 70.9 69.8
Retained income 513.2 472.1
Accumulated other comprehensive loss, net of tax (4.3) (2.0)
Cost of 5,677,287 Common Shares in
treasury (1997 - 5,519,027 shares) (155.9) (146.2)
Unearned compensation (3.1) (3.1)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 437.6 407.4
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $723.5 $694.3
====== ======
</TABLE>
See notes to consolidated financial statements.
39
<PAGE> 1
STATEMENT OF CONSOLIDATED INCOME Exhibit 13(d)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
<TABLE>
<CAPTION>
(In Millions, Except Per Share Amounts)
Year Ended December 31
-------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
- --------
Product sales and services $ 444.1 $ 391.4 $ 451.7
Royalties and management fees 49.7 47.5 51.5
--------- --------- ---------
Total Operating Revenues 493.8 438.9 503.2
Investment income (securities) 5.4 6.3 9.5
Recovery of excess closedown provision 5.0
Other income 4.7 5.9 5.4
--------- --------- ---------
Total Revenues 503.9 456.1 518.1
COSTS AND EXPENSES
- ------------------
Cost of goods sold and operating expenses 398.0 354.9 392.9
Administrative, selling and general expenses 18.7 17.1 16.7
Interest expense .4 2.6 4.6
Other expenses 15.0 8.9 8.4
--------- --------- ---------
Total Costs and Expenses 432.1 383.5 422.6
--------- --------- ---------
INCOME BEFORE INCOME TAXES 71.8 72.6 95.5
INCOME TAXES 14.4 17.7 34.5
--------- --------- ---------
NET INCOME $ 57.4 $ 54.9 $ 61.0
========= ========= =========
NET INCOME PER COMMON SHARE
- ---------------------------
Basic $ 5.10 $ 4.83 $ 5.26
Diluted $ 5.06 $ 4.80 $ 5.23
AVERAGE NUMBER OF SHARES
- ------------------------
Basic 11.2 11.4 11.6
Diluted 11.3 11.5 11.7
</TABLE>
See notes to consolidated financial statements.
40
<PAGE> 1
STATEMENT OF CONSOLIDATED CASH FLOWS Exhibit 13(e)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
<TABLE>
<CAPTION>
(In Millions,
Brackets Indicate Cash Decrease)
Year Ended December 31
-----------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 57.4 $ 54.9 $ 61.0
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization:
Consolidated 7.8 6.7 6.6
Share of associated companies 12.5 12.2 11.0
Provision for deferred income taxes 3.1 16.4 10.9
Tax credit (3.5) (5.6)
Decrease in Savage River closedown reserve (13.8) (1.1)
Other (2.2) 3.5 1.2
-------- -------- --------
Total before changes in operating assets and liabilities 75.1 74.3 89.6
Changes in operating assets and liabilities:
Marketable securities (4.0)
Inventories and prepaid expenses 2.3 (13.3) 11.3
Receivables 13.4 (3.2) (8.4)
Payables and accrued expenses 1.3 (15.5) (.9)
-------- -------- --------
Total changes in operating assets and liabilities 17.0 (32.0) (2.0)
-------- -------- --------
Net cash from operating activities 92.1 42.3 87.6
INVESTING ACTIVITIES
Purchase of property, plant and equipment:
Consolidated (24.5) (14.1) (16.5)
Share of associated companies (7.2) (5.5) (6.1)
Investment in Cliffs and Associates Limited (19.7) (42.3) (14.1)
Purchase of Wabush interest (15.0)
Other 1.5 4.9 4.4
-------- -------- --------
Net cash (used by) investing activities (49.9) (72.0) (32.3)
FINANCING ACTIVITIES
Dividends (16.3) (14.8) (15.1)
Repurchases of Common Shares (11.5) (4.9) (19.5)
Principal payment on long-term debt of associated companies (3.9)
-------- -------- --------
Net cash (used by) financing activities (27.8) (19.7) (38.5)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (.1) (.2)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14.4 (49.5) 16.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 115.9 165.4 148.8
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 130.3 $ 115.9 $ 165.4
======== ======== ========
Taxes paid on income $ 12.5 $ 17.1 $ 20.6
Interest paid on debt obligations $ 4.9 $ 4.9 $ 4.9
</TABLE>
See notes to consolidated financial statements.
41
<PAGE> 1
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY Exhibit 13(f)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
<TABLE>
<CAPTION>
(In Millions)
---------------------------------------------------------------------------------------
Capital In
Excess of Common
Common Par Value Retained Shares in Comprehensive
Shares Of Shares Income Treasury Other Total Income
------ ---------- -------- --------- ----- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $16.8 $65.2 $386.1 $(123.8) $(1.7) $342.6
Comprehensive income
Net income 61.0 61.0 $61.0
Other comprehensive income (loss)
Unrealized (losses) on securities (1.1)
Foreign currency translation adj. (.2)
-----
Total (1.3) (1.3) (1.3)
-----
Comprehensive income $59.7
=====
Cash dividends - $1.30 a share (15.1) (15.1)
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)
----- ----- ------ ------- ----- ------
Balance December 31, 1996 16.8 68.8 432.0 (142.5) (4.5) 370.6
Comprehensive income
Net income 54.9 54.9 $54.9
Other comprehensive income (loss)
Unrealized (losses) on securities (1.0)
Foreign currency translation adj. (.1)
-----
Total (1.1) (1.1) (1.1)
-----
Comprehensive income $53.8
=====
Cash dividends - $1.30 a share (14.8) (14.8)
Stock plans
Restricted stock/stock options .2 .4 (.5) .1
Performance shares .8 .7 1.0 2.5
Repurchases of Common Shares (4.9) (4.9)
Other .1 .1
----- ----- ------ ------- ----- ------
Balance December 31, 1997 16.8 69.8 472.1 (146.2) (5.1) 407.4
Comprehensive income
Net income 57.4 57.4 $57.4
Other comprehensive income (loss)
Unrealized (losses) on securities (2.3)
-----
Total (2.3) (2.3) (2.3)
-----
Comprehensive income $55.1
=====
Cash dividends - $1.45 a share (16.3) (16.3)
Stock plans
Restricted stock/stock options .3 .6 .2 1.1
Performance shares .7 1.1 (.2) 1.6
Repurchases of Common Shares (11.5) (11.5)
Other .1 .1 .2
----- ----- ------ ------- ----- ------
Balance December 31, 1998 $16.8 $70.9 $513.2 $(155.9) $(7.4) $437.6
===== ===== ====== ======= ===== ======
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 1
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
("ventures") 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 ventures from which the Company purchases
iron ore is credited to "Cost of Goods Sold and Operating Expenses" upon sale of
the product. Pre-operating expenses incurred during construction of the Trinidad
reduced iron venture are charged to "Other Expenses" as incurred.
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 North America. Iron ore is
marketed in North America and Europe. The three largest steel company customers'
contribution to the Company's revenues were 22 percent, 15 percent and 9 percent
in 1998; 20 percent, 13 percent and 10 percent in 1997; and 15 percent, 12
percent and 11 percent in 1996.
The Company is developing a ferrous metallics business, with its initial entry
being a 46.5 percent interest in a joint venture, located in Trinidad and
Tobago, to produce and market hot-briquetted iron ("HBI"). See Note C - Ferrous
Metallics.
The Savage River Mines operation terminated production, as planned, in December,
1996 and shipped its remaining iron ore inventory during the first quarter of
1997. The Australian operation had total revenues and pre-tax earnings of $10.9
million and $4.6 million, and $58.4 million and $20.2 million, in 1997 and 1996,
respectively. On March 25, 1997, the remaining assets and all related
environmental and rehabilitation obligations were transferred to the Tasmanian
government. As a result, the Company recorded in 1997 a $3.2 million after-tax
credit ($5.0 million pre-tax), to reverse an accrual for closedown obligations
recorded in prior years.
REVENUE RECOGNITION: Revenue is recognized on sales of products when title has
transferred, and on services when services have been performed. Royalty revenue
from the Company's share of ventures' production is recognized when the product
is sold. Royalty revenue from the ventures' other participants is recognized on
production.
BUSINESS RISK: The North American steel industry had been experiencing high
operating rates and generally positive financial results in recent years.
However, strong steel production through the first half of 1998 has declined
significantly due to record levels of unfairly traded steel imports in the
second half of 1998.
The major business risk faced by the Company is the potential financial failure
and shutdown of one or more of its significant customers and partners, with the
resulting loss of ore sales and/or royalty and management fee income. If any
such shutdown were to occur without mitigation
43
<PAGE> 2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
through replacement sales or cost reduction, it would represent a significant
adverse financial development to the Company. The iron mining business has a
high level of fixed costs. Therefore, unmitigated loss of sales and/or royalty
and management fee income due to failure of a customer or partner would have a
greater impact on earnings than revenue.
Labor contracts at the five Company-managed mines, in which all bargaining unit
employees are represented by the United Steelworkers of America, will expire in
1999. The Wabush three year contract in Canada expires March 1, 1999. Six year
agreements at the Empire, Hibbing and Tilden mines and a five year agreement at
LTV Steel Mining Company will expire on August 1, 1999.
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 estimates.
CASH EQUIVALENTS: The Company considers investments in highly liquid debt
instruments with an initial maturity of three months or less, or with put
options exercisable in 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. Accordingly, the Company has classified its
long-term equity investment 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 to manage foreign exchange risks. Designated 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.
INVENTORIES: Iron ore inventories are stated at the lower of cost or market. The
cost is determined using the last-in, first-out ("LIFO") method. The excess of
current cost over LIFO cost of iron ore inventories was $3.6 million and $2.9
million at December 31, 1998 and 1997, respectively. The cost of supplies and
other inventories are 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:
44
<PAGE> 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Buildings 45 Years
Mining Equipment 10 to 20 Years
Processing Equipment 15 to 45 Years
Depletion of mineral lands is computed using the units of production method
based upon proven mineral reserves.
On January 5, 1998, the Company sold plant and equipment of its wholly-owned
Republic Mine in Michigan, which ceased operations in 1981 and was permanently
closed in 1996. The assets, which had a recorded cost of $85.3 million and a net
book value of $1.2 million, were sold for $1.3 million.
ENVIRONMENTAL REMEDIATION COSTS: The Company has a formal code of environmental
protection and restoration. The Company's obligations for known environmental
problems at active 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. Costs
of future expenditures are not discounted to their present value. Potential
insurance recoveries have not been reflected in the determination of the
liabilities.
STOCK COMPENSATION: The Company applies the provisions of 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.
EXPLORATION, RESEARCH AND DEVELOPMENT COSTS: Exploration, research and
development costs of mining properties are charged to operations as incurred.
INCOME PER COMMON SHARE: Basic income per common share is calculated on the
average number of common shares outstanding during each period. Diluted income
per common share is based on the average number of common shares outstanding
during each period, adjusted for the effect of outstanding stock options,
restricted stock and performance shares.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to current year classifications.
45
<PAGE> 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE A - ACCOUNTING AND DISCLOSURE CHANGES
The Financial Accounting Standards Board's ("FASB") Statement 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income and its components, was adopted in the first quarter of
1998. Prior financial statements have been reclassified to reflect this change
in disclosure.
FASB's Statement 131, "Disclosures About Segments of an Enterprise and Related
Information," changed the way that segment information is defined and reported
in annual and interim financial statements. The standard was adopted by the
Company in 1998.
FASB's Statement 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," is intended to improve and standardize pension and
other postretirement benefit disclosures. The Statement, which was adopted by
the Company, does not change measurement or recognition of pensions or other
postretirement benefits.
In June, 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and for Hedging Activities." This Statement, effective for fiscal
years beginning after June 15, 1999, provides comprehensive and consistent
standards for recognition and measurement of derivatives and hedging activities.
The Company does not expect that compliance with the Statement to have a
material effect on the Company's consolidated financial statements.
In March, 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The Statement, effective for fiscal years beginning
after December 15, 1998, is intended to eliminate the diversity in practice in
accounting for internal-use software costs and improve financial reporting. The
Company does not expect the adoption of the Statement to have a material impact
on the Company's consolidated financial statements.
In April, 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires such costs to be expensed as incurred instead of
being capitalized and amortized. The adoption of the SOP, effective for
financial statements for fiscal years beginning after December 15, 1998, is not
expected to have a material impact on the Company's consolidated financial
statements.
46
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE B - OTHER COMPREHENSIVE INCOME
Components of Other Comprehensive Income (Loss) and related tax effects
allocated to each are shown below:
<TABLE>
<CAPTION>
(In Millions)
---------------------------------------------------------
Pre-Tax Tax After-Tax
Amount Benefit Amount
------------------ -------------- ------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Unrealized (losses) on securities $(1.6) $ .5 $(1.1)
Foreign currency translation adjustment (.2) (.2)
----- ----- -----
Total $(1.8) $ .5 $(1.3)
===== ===== =====
YEAR ENDED DECEMBER 31, 1997
Unrealized (losses) on securities $(1.7) $ .7 $(1.0)
Foreign currency translation adjustment (.1) (.1)
----- ----- -----
Total $(1.8) $ .7 $(1.1)
===== ===== =====
YEAR ENDED DECEMBER 31, 1998
Unrealized (losses) on securities $(3.5) $1.2 $(2.3)
===== ==== =====
</TABLE>
Other Comprehensive Income (Loss) balances are as follows:
<TABLE>
<CAPTION>
(In Millions)
-----------------------------------------------------------
Accumulated
Unrealized Foreign Other
(Losses) on Currency Comprehensive
Securities Items Income (Loss)
----------------- -------------- ---------------------
<S> <C> <C> <C>
Balance December 31, 1995 $ .1 $ .3 $ .4
Change during 1996 (1.1) (.2) (1.3)
------ ----- ------
Balance December 31, 1996 (1.0) .1 (.9)
Change during 1997 (1.0) (.1) (1.1)
------ ----- ------
Balance December 31, 1997 (2.0) (2.0)
Change during 1998 (2.3) (2.3)
------ ------- ------
Balance December 31, 1998 $(4.3) $(4.3)
===== ======= =====
</TABLE>
NOTE C - INVESTMENTS IN ASSOCIATED COMPANIES
NORTH AMERICAN IRON ORE
- -----------------------
The Company's investments in North America mining ventures consist of its 40
percent interest in Tilden Mining Company L.C., 22.5625 percent interest in
Empire Iron Mining Partnership, 15 percent interest in Hibbing Taconite Company,
and 22.78 percent (7.69 percent in 1996) interest in Wabush Mines ("Wabush").
The remaining interests in the ventures are owned by U.S. and Canadian
integrated steel companies.
47
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Following is a summary of combined financial information of the operating
ventures:
<TABLE>
<CAPTION>
(In Millions)
----------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
INCOME
Gross revenue $ 1,072.4 $1,027.0 $1,043.7
========= ======== ========
Equity income $ 134.3 $ 111.1 $ 121.0
========= ======== ========
FINANCIAL POSITION
Current assets $ 187.0 $ 144.9 $ 134.6
Properties - net 691.4 713.8 745.6
Other long-term assets 30.0 29.0 28.8
Current liabilities (159.8) (143.3) (145.8)
Long-term liabilities (79.6) (74.4) (59.1)
--------- -------- --------
Net assets $ 669.0 $ 670.0 $ 704.1
========= ======== ========
Company's equity in
underlying net assets $ 194.3 $ 196.7 $ 189.2
========= ======== ========
Company's investment $ 156.0 $ 160.8 $ 147.5
========= ======== ========
</TABLE>
The Company manages 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 ventures' production. The Company
purchased $253.9 million in 1998 (1997-$243.3 million; 1996-$228.0 million) of
iron ore pellets from certain ventures. During 1998, the Company earned
royalties and management fees of $49.7 million (1997-$47.5 million; 1996-$51.5
million) from ventures, of which $13.3 million in 1998 (1997-$11.8 million;
1996-$14.4 million) was the Company's share as a participant in the ventures.
Payments 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.
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 difference of the
Company's equity in the underlying net assets and 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 reorganizations. The Company's equity in the
income of ventures was $25.6 million in 1998 (1997-$19.8 million; 1996-$19.8
million).
The Company acquired Ispat Inland Inc.'s 15.1 percent interest in Wabush for
$15.0 million effective January 1, 1997, raising the Company's interest to 22.78
percent. Depending on the magnitude of future tonnage, additional payments to
Ispat Inland may be required, but are not expected to be material in any year.
48
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
On September 28, 1998, Acme Metals Incorporated and its wholly-owned subsidiary
Acme Steel Company (collectively "Acme"), a partner in Wabush and an iron ore
customer, petitioned for protection under Chapter 11 of the U.S. Bankruptcy
Code. The Company had a $1.2 million pre-petition trade receivable from Acme,
which has been fully provided in the allowance for doubtful accounts. Since its
filing, Acme has continued its relationship with Wabush and the Company. Sales
to Acme in 1998 and 1997 represented less than 5 percent of total sales volume.
FERROUS METALLICS
- -----------------
Cliffs and Associates Limited, a joint venture in Trinidad and Tobago, is
completing construction of a facility to produce premium quality HBI to be
marketed to the steel industry. The venture's participants, through
subsidiaries, include the Company, 46.5 percent; The LTV Corporation ("LTV"),
46.5 percent; and Lurgi AG of Germany, 7 percent, with the Company as manager
and sales agent. Project capital expenditures were $141.1 million (Company share
- - $65.6 million) through December 31, 1998. Currently estimated total capital
expenditures of $151.0 million (Company share - $70.2 million) do not include
disputed contractors' claims, which are not expected to be material to the
consolidated financial statements. Following is a summary of project
expenditures:
<TABLE>
<CAPTION>
(In Millions)
-----------------------------------------------
COMPANY'S Total
SHARE Project
---------------------- ----------------------
<S> <C> <C>
Capital expenditures:
1996 $ 13.1 $ 28.2
1997 35.8 77.0
1998 16.7 35.9
------ -------
Total $ 65.6 $ 141.1
====== =======
Start-up expense:
1996 $ $ .1
1997 1.5 3.2
1998 2.3 4.8
------ -------
Total $ 3.8 $ 8.1
====== =======
Investment at December 31*:
1996 $14.4
1997 57.5
1998 79.4
Capitalized interest:
1996 $ .3
1997 2.3
1998 4.5
------
Total $ 7.1
======
</TABLE>
* Includes the Company's capitalized interest on qualifying assets.
49
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE D - SEGMENT REPORTING
The Company has two reportable segments offering different iron products and
services to the steel industry. Iron Ore is the Company's dominant segment. The
Ferrous Metallics segment is in the development stage, consisting mainly of the
HBI venture project in Trinidad and Tobago. "Other" includes non-reportable
segments, closed Australian operation and unallocated corporate other income and
expense.
<TABLE>
<CAPTION>
(IN MILLIONS)
-----------------------------------------------------------------------------
IRON FERROUS SEGMENTS CONSOLIDATED
ORE METALLICS TOTAL OTHER TOTAL
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1998
- ----
SALES AND SERVICES TO EXTERNAL $444.1 $ $444.1 $ $444.1
CUSTOMERS
ROYALTIES AND MANAGEMENT FEES(1) 49.7 49.7 49.7
------- ------- -------- ------ --------
TOTAL OPERATING REVENUES 493.8 493.8 493.8
======= ======= ======== ====== ========
INCOME (LOSS) BEFORE TAXES 76.7 (5.5) 71.2 .6 71.8
DEPRECIATION AND AMORTIZATION(2) 20.3 20.3 20.3
EQUITY INCOME (LOSS) (2.3) (2.3) (2.3)
INVESTMENTS IN EQUITY METHOD INVESTEES 156.0 79.4 235.4 235.4
OTHER IDENTIFIABLE ASSETS 468.0 .8 468.8 19.3 488.1
------- ------ -------- ------ -------
TOTAL ASSETS 624.0 80.2 704.2 19.3 723.5
======= ======= ======== ====== ========
PROPERTY EXPENDITURES(2) 31.7 16.7 48.4 48.4
<CAPTION>
(In Millions)
-----------------------------------------------------------------------------
Iron Ferrous Segments Consolidated
Ore Metallics Total Other Total
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Sales and services to external $381.9 $ $381.9 $ 9.5 $391.4
customers
Royalties and management fees(1) 47.4 47.4 .1 47.5
------- ------- -------- ------ --------
Total operating revenues 429.3 429.3 9.6 438.9
======= ======= ======== ====== ========
Income (loss) before taxes 66.1 (3.8) 62.3 10.3 72.6
Depreciation and amortization(2) 18.9 18.9 18.9
Equity income (loss) (1.5) (1.5) .1 (1.4)
Investments in equity method investees 160.8 57.5 218.3 218.3
Other identifiable assets 458.0 .5 458.5 17.5 476.0
------- ------- -------- ------ --------
Total assets 618.8 58.0 676.8 17.5 694.3
======= ======= ======== ====== ========
Property expenditures(2) 19.6 35.8 55.4 55.4
<CAPTION>
(In Millions)
-----------------------------------------------------------------------------
Iron Ferrous Segments Consolidated
Ore Metallics Total Other Total
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1996
- ----
Sales and services to external $395.1 $ $395.1 $56.6 $451.7
customers
Royalties and management fees(1) 51.3 51.3 .2 51.5
------- ------- -------- ------ --------
Total operating revenues 446.4 446.4 56.8 503.2
======= ======= ======== ====== ========
Income (loss) before taxes 77.0 (2.4) 74.6 20.9 95.5
Depreciation and amortization(2) 17.6 17.6 17.6
Investments in equity method investees 147.5 14.4 161.9 161.9
Other identifiable assets 486.5 .3 486.8 25.0 511.8
------- ------- -------- ------ --------
Total assets 634.0 14.7 648.7 25.0 673.7
======= ======= ======== ====== ========
Property expenditures(2) 22.6 13.1 35.7 35.7
</TABLE>
(1) Includes revenue from the Company's share of ventures' production that is
recognized when the product is sold.
(2) Includes Company's share of associated companies.
50
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Included in the consolidated financial statements are the following amounts
relating to geographic locations:
<TABLE>
<CAPTION>
(In Millions)
-------------------------------------------------------
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenue(1)
- ----------
United States $444.3 $383.2 $399.2
Canada 42.1 38.9 39.1
Australia 9.5 48.1
Other Countries 7.4 7.3 16.8
------ ------- ------
$493.8 $438.9 $503.2
====== ====== ======
Long-Lived Assets(2)
- --------------------
United States $644.2 $700.3 $692.1
Canada 56.8 62.2 21.7
Trinidad and Tobago 65.6 48.9 13.1
Other Countries 2.3
------ ------- ------
$766.6 $811.4 $729.2
====== ======= ======
</TABLE>
(1) Revenue is attributed to countries based on the location of the customer.
(2) Gross properties, before allowance for depreciation, including Company's
share of associated companies.
NOTE E - ENVIRONMENTAL RESERVES
At December 31, 1998, the Company had an environmental reserve, including its
share of ventures, of $21.5 million ($22.7 million at December 31, 1997), of
which $2.0 million was classified as current. Payments in 1998 were $.9 million
(1997 - $2.4 million and 1996 - $1.6 million). The reserve includes the
Company's obligations related to Federal and State Superfund and Clean Water Act
sites where the Company is named as a potentially responsible party, including
Cliffs-Dow and Kipling sites in Michigan 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 potentially responsible parties. The Company continues to
evaluate the recommendations of the studies and other means for site clean-up.
Significant site clean-up activities have taken place at Rio Tinto and
Cliffs-Dow. The City of Marquette, Michigan purchased the Cliffs-Dow plant site
from the Company and has assumed any future environmental responsibilities with
respect to that site. Also included in the reserve are wholly-owned active and
closed mining operations, and other sites, including former operations, for
which reserves are based on the Company's estimated cost of investigation and
remediation.
51
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE F - LONG-TERM DEBT
Long-term debt of the Company consists of $70 million of senior unsecured notes
payable to an insurance company group. The notes, due in December, 2005, have a
fixed interest rate of 7.0 percent. The note agreement requires the Company to
meet certain covenants related to net worth ($243.5 million at December 31,
1998), leverage, and other provisions. The Company was in compliance with the
debt covenants at December 31, 1998.
The Company's $100 million revolving credit agreement was amended in June, 1998
to extend the expiration date to May 31, 2003. No borrowings are outstanding
under this agreement. Additionally, the Company has outstanding $5.9 million of
unsecured letters of credit, including its share of ventures.
NOTE G - LEASE OBLIGATIONS
The Company and its ventures lease certain mining, production, data processing
and other equipment under operating leases. The Company's operating lease
expense, including its share of ventures, was $9.1 million in 1998, $8.5 million
in 1997 and $7.5 million in 1996.
Assets acquired under capital leases by the Company, including its share of
ventures, were $9.2 million and $8.1 million, respectively, at December 31, 1998
and 1997. Corresponding accumulated amortization of capital leases included in
respective allowances for depreciation was $4.0 million and $3.3 million at
December 31, 1998 and 1997, respectively.
Future minimum payments under capital leases and noncancellable operating
leases, including the Company's share of ventures, at December 31, 1998 were:
<TABLE>
<CAPTION>
(In Millions)
-------------------------------
Year Ending Capital Operating
December 31 Leases Leases
----------- -------------- --------------
<S> <C> <C>
1999 $1.9 $ 9.1
2000 1.7 7.9
2001 1.3 6.4
2002 .8 4.6
2003 .3 3.7
2004 and thereafter .3 7.6
---- -----
Total minimum lease payments 6.3 $39.3
=====
Amounts representing interest .9
----
Present value of net minimum lease payments $5.4
====
</TABLE>
The Company's share of ventures' capital and operating lease obligations (total
minimum lease payments - $38.0 million) are largely non-recourse to the Company.
52
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE H - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company and its ventures sponsor defined benefit pension plans covering
substantially all employees. The plans are largely noncontributory, and benefits
are generally based on employees' years of service and average earnings for a
defined period prior to retirement. In addition, the Company and its ventures
currently provide retirement health care and life insurance benefits ("Other
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). Other Benefits are provided through programs administered by
insurance companies whose charges are based on benefits paid. The following
table presents a reconciliation of funded status of the Company's plans,
including its proportionate share of plans of its ventures, at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
(In Millions)
-------------------------------------------------------------
Pension Benefits Other Benefits
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $293.2 $267.5 $ 17.3 $ 14.7
Actual return on plan assets 35.4 42.7 1.3 1.1
Contributions 2.8 3.5 1.3 1.5
Benefits paid (15.2) (14.3)
Dissolution of one plan (6.2)
------- ------- ------ -------
Fair value of plan assets at end of year 316.2 293.2 19.9 17.3
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year 215.5 204.9 88.4 82.7
Service cost 4.5 4.0 1.6 1.3
Interest cost 15.6 15.1 6.3 6.2
Amendments .6 .5
Actuarial losses 17.1 11.5 6.7 2.8
Benefits paid (15.2) (14.3) (5.3) (4.6)
Dissolution of one plan (6.2)
------- ------- ------ -------
Benefit obligation at end of year 238.1 215.5 97.7 88.4
------- ------- ------ -------
Funded status of the plan (underfunded) 78.1 77.7 (77.8) (71.1)
Unrecognized prior service cost 6.8 8.0 1.6 .7
Unrecognized net actuarial (gain) loss (30.0) (28.4) 2.1 (3.6)
Unrecognized net asset at date of adoption (19.7) (22.2)
------- ------- ------ -------
Prepaid (accrued) benefit cost $ 35.2 $ 35.1 $(74.1) $(74.0)
======= ======= ====== =======
ASSUMPTIONS AS OF DECEMBER 31
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected long-term return on plan assets 9.00% 9.00% 6.50% 7.25%
Rate of compensation increase - average 4.30% 4.31%
</TABLE>
<TABLE>
<CAPTION>
(In Millions)
------------------------------------------------------------------------
Pension Benefits Other Benefits
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 4.5 $ 4.0 $ 3.9 $ 1.6 $1.3 $ 1.3
Interest cost 15.6 15.1 13.6 6.3 6.2 5.9
Expected return on plan assets (22.5) (20.8) (17.9) (1.3) (1.0) (.9)
Amortization and other 4.6 (.4) (.5) .1
------ ------ ------ ----- ---- -----
Net periodic benefit cost (credit) $ 2.2 $ (2.1) $ (.9) $ 6.7 $6.5 $ 6.3
====== ====== ====== ===== ==== =====
</TABLE>
53
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Annual contributions to the pension plans are made within income tax
deductibility restrictions in accordance with statutory regulations. The Company
plans to contribute $1.4 million in 1999, including its share of ventures'
funding, a decrease of $1.4 million from 1998. In the event of termination, the
sponsors could be required to fund shutdown and early retirement obligations
which are not included in the pension benefit obligations.
Other Benefits assets include deposits relating to funded life insurance
contracts that are available to fund retired employees' life insurance
obligations. Additionally, Voluntary Employee Benefits Association Trusts were
established for certain mining ventures. As a participant, the Company's minimum
annual contribution is $.7 million per year. The Company's estimated
contribution will approximate $1.4 million per year based on its share of tons
produced.
For measurement purposes, a 7.0 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999, decreasing by
.5 percent per year to an annual rate of 5 percent for the year 2003 and
annually thereafter.
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one percentage point change in the assumed health care cost trend
rate would have the following effects:
<TABLE>
<CAPTION>
(In Millions)
---------------------------------
Increase Decrease
--------------- ---------------
<S> <C> <C>
Effect on total of service and interest cost components in 1998 $ 1.2 $ (1.0)
Effect on Other Benefits obligation as of December 31, 1998 13.3 (11.7)
</TABLE>
NOTE I - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In Millions)
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions $21.8 $22.3
Other liabilities 13.7 14.7
Product inventories 3.8 4.2
Other 16.2 10.4
------ ------
Total deferred tax assets 55.5 51.6
Deferred tax liabilities:
Investment in ventures 21.2 23.0
Properties 14.8 11.5
Other 6.8 6.4
------- -------
Total deferred tax liabilities 42.8 40.9
------ ------
Net deferred tax assets $12.7 $10.7
===== =====
</TABLE>
54
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
The components of provisions for income taxes are as follows:
<TABLE>
<CAPTION>
(In Millions)
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Current $14.8 $11.9 $23.6
Deferred (.4) 5.8 10.9
----- ----- -----
$14.4 $17.7 $34.5
===== ===== =====
</TABLE>
In the fourth quarter of 1998, a favorable tax adjustment of $3.5 million was
recorded reflecting the Company's continuing assessment of its tax obligations.
The reevaluation of the current and prior years' tax provision primarily
reflects the expected outcome of audit issues for tax years 1993 and 1994.
In 1997, the Company and the Internal Revenue Service reached agreement settling
issues raised during examination of the Company's federal income tax returns for
tax years 1991 and 1992. As a result, the Company made additional tax and
interest payments of $3.3 million and recorded a $5.6 million reversal of prior
years' tax accruals in 1997.
The provision for income taxes included Australian federal income taxes of $2.1
million and $7.5 million for the years 1997 and 1996, respectively.
Reconciliation of effective income tax rate and United States statutory rate
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Increase (decrease) due to:
Percentage depletion in excess
of cost depletion (8.2) (5.8) (5.9)
Effect of foreign taxes .1 3.0 5.3
Prior years' tax adjustment (6.6) (10.0) (.2)
Other items - net (.2) 2.2 2.0
----- ----- -----
Effective tax rate 20.1% 24.4% 36.2%
===== ===== =====
</TABLE>
55
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and fair value of the Company's financial instruments at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
(In Millions)
--------------------------------
Carrying Fair
Amount Value
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents $130.3 $130.3
Long-term investments 4.8 4.8
Long-term debt 70.0 71.3
</TABLE>
At December 31, 1998, the Company had .8 million shares of The LTV Corporation
Common Stock recorded as a long-term investment (included in Other Assets -
miscellaneous) and classified as available-for-sale. These shares, which had an
original cost of $11.5 million, had an estimated fair value and carrying value
of $4.8 million and $8.3 million at December 31, 1998 and 1997, respectively.
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 had $13.9 million and $22.0 million of Canadian forward currency
exchange contracts at December 31, 1998 and 1997, respectively. The market value
of the Canadian forward currency exchange contracts, which have varying maturity
dates to December 1, 1999, was estimated to be $13.9 million, based on the
December 31, 1998 forward rates.
NOTE K - STOCK PLANS
During the term of the 1987 Incentive Equity Plan, 838,144 Common Shares were
granted or awarded in the form of stock options, stock appreciation rights and
restricted or deferred stock awards. Effective April 29, 1997, no further grants
or awards may be made from this Plan.
The 1992 Incentive Equity Plan authorizes the Company to issue up to 1,150,000
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, generally are not subject to
re-pricing, 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.
56
<PAGE> 15
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 (2,000 Restricted Shares, effective January
1, 1999) to nonemployee Directors first elected after June 30, 1995. The Plan
also provides that nonemployee Directors must take at least 50 percent (40
percent, effective January 1, 1999) of their annual retainer, and may elect to
take the balance of their 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 FASB Statement 123, "Accounting for
Stock-Based Compensation," ("Statement 123"), the Company has elected to
continue applying the provisions of APB 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, the Company 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. However, the Company recorded $2.5 million, $3.0 million, and $2.7
million in 1998, 1997 and 1996, respectively, relating to other stock-based
compensation, primarily the Performance Share program.
Statement 123 requires pro forma disclosure of net income and earnings per share
as if the fair value method for valuing stock options, as prescribed by
Statement 123, had been applied. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net income (millions) $56.5 $54.7 $61.1
Earnings per share:
Basic $5.02 $4.81 $5.27
Diluted $4.98 $4.78 $5.24
</TABLE>
The fair value of these options was estimated at the date of grant using a
Black-Sholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Risk-free interest rate 5.47% 6.04% 6.04%
Dividend yield 3.15% 2.97% 3.00%
Volatility factor - market
price of Company's common stock .224 .221 .219
Expected life of options - years 4.31 4.31 4.22
</TABLE>
Compensation costs included in the pro forma information reflect fair values
associated with options granted after January 1, 1995. Pro forma information may
not be indicative of future pro forma information applicable to future
outstanding awards.
57
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Stock option, restricted stock award, and performance share activities under the
Company's 1987 and 1992 Incentive Equity Plans, and the 1996 Nonemployee
Directors' Compensation Plan are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stock options:
Options outstanding at
beginning of year 252,625 $39.00 157,425 $35.99 72,775 $23.66
Granted during the year 128,450 44.56 114,950 43.38 109,500 44.82
Exercised (18,616) 34.96 (3,000) 21.52 (6,250) 20.29
Cancelled (15,717) 44.26 (16,750) 43.95 (18,600) 45.00
------- ------- ------
Options outstanding
at end of year 346,742 41.04 252,625 39.00 157,425 35.99
Options exercisable
at end of year 138,609 36.22 96,925 31.10 72,525 25.45
Restricted awards:
Awarded and restricted
at beginning of year 49,449 39,665 10,854
Awarded during the year 5,000 13,200 30,000
Vested (2,153) (816) (1,189)
Cancelled (2,600)
------- ------- ------
Awarded and restricted
at end of year 52,296 49,449 39,665
Performance shares:
Allocated at beginning of year 161,000 145,167 88,767
Allocated during the year 73,554 63,126 57,400
Issued (58,504) (45,293)
Forfeited (2,000) (1,000)
------- ------- ------
Allocated at end of year 176,050 161,000 145,167
Required retainer and voluntary shares:
Awarded at beginning of year 4,548 3,150
Awarded during the year 6,649 4,540 3,150
Issued (4,548) (3,142)
------- ------- ------
Awarded at end of year 6,649 4,548 3,150
Reserved for future grants
or awards at end of year 520,704 718,640 339,007
Weighted-average fair value of
options granted during the year $8.86 $8.65 $8.75
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$20.12 to $45.00, with 84 percent of options outstanding having exercise prices
in the range of $40.00 to $45.00 per share. The weighted-average remaining
contractual life of options outstanding is 7.3 years at December 31, 1998.
58
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE L - SHAREHOLDERS' EQUITY
On September 19, 1997, the Company adopted a new share purchase rights
("Rights") plan that replaced an expired rights plan. A Right is attached to
each of the Company's Common Shares outstanding or subsequently issued, which
entitles the holder to buy from the Company one-hundredth of one (.01) Common
Share at an exercise price per whole share of $160.00. The Rights expire on
September 19, 2007 and are not exercisable until the occurrence of certain
triggering events, which include the acquisition of, or tender or exchange offer
for, 20 percent or more of the Company's Common Shares. There are approximately
168,000 Common Shares reserved for these Rights. The Company is entitled to
redeem the Rights at one cent per Right upon the occurrence of certain events.
Through December 31, 1998, the Company has purchased 1,130,500 of its Common
Shares under its authorization to repurchase up to 1.5 million Common Shares in
open market or negotiated transactions. Following is a summary of purchases by
year since inception:
<TABLE>
<CAPTION>
Common Cost
Shares (In Millions)
---------------------- -----------------------
<S> <C> <C>
1995 284,500 $10.8
1996 495,800 19.5
1997 113,100 4.9
1998 237,100 11.5
--------- -----
Total 1,130,500 $46.7
========= =====
Average cost per share $41.28
======
</TABLE>
NOTE M - EARNINGS PER SHARE
The following table summarizes the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
(In Millions, Except Per Share)
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 57.4 $ 54.9 $ 61.0
Basic weighted-average shares 11.2 11.4 11.6
Effect of dilutive shares:
Stock options/performance shares .1 .1 .1
------- ------- -------
Diluted weighted-average shares 11.3 11.5 11.7
======= ======= =======
Basic earnings per share $ 5.10 $ 4.83 $ 5.26
======= ======= =======
Diluted earnings per share $ 5.06 $ 4.80 $ 5.23
======= ======= =======
</TABLE>
59
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Cleveland-Cliffs Inc and Consolidated Subsidiaries
NOTE N - LITIGATION
The Company and its 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.
60
<PAGE> 1
QUARTERLY RESULTS OF OPERATIONS - (Unaudited) Exhibit 13(h)
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Quarters
----------------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ -------
<S> <C> <C> <C> <C> <C>
Total revenues $38.0 $158.1 $176.1 $131.7 $503.9
Gross profit 5.3 28.7 32.6 29.2 95.8
Net income
Amount .5 16.9 20.1 19.9 57.4
Per common share
Basic .04 1.49 1.80 1.77 5.10
Diluted .04 1.48 1.78 1.76 5.06
Average number of shares
Basic 11.3 11.3 11.2 11.1 11.2
Diluted 11.4 11.4 11.3 11.3 11.3
</TABLE>
Fourth quarter results included a $3.5 million tax credit reflecting a
reassessment of current and prior years' tax obligations resulting from the
audit of prior years' tax returns.
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Quarters
----------------------------------------------------
First Second Third Fourth Year
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Total revenues $31.3 $122.1 $149.0 $153.7 $456.1
Gross profit 7.8 19.0 28.4 28.8 84.0
Net income
Amount 3.0 12.9 21.1 17.9 54.9
Per common share
Basic .26 1.14 1.86 1.57 4.83
Diluted .26 1.13 1.85 1.56 4.80
Average number of shares
Basic 11.4 11.4 11.4 11.4 11.4
Diluted 11.4 11.4 11.5 11.5 11.5
</TABLE>
Second quarter results included a $2.8 million after-tax credit resulting from
reversal of Savage River Mine closedown obligations recorded in prior years.
Third quarter results included a $5.6 million tax credit resulting from the
settlement of prior years' tax issues.
- --------------------------------------------------------------------------------
Common Share Price Performance and Dividends
<TABLE>
<CAPTION>
Price Performance
-----------------------------------------
1998 1997 Dividends
--------------- -------------- ------------------
High Low High Low 1998 1997
---- --- ---- --- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $55.18 $42.75 $45.88 $41.50 $.325 $.325
Second Quarter 57.31 49.81 43.50 40.00 .375 .325
Third Quarter 57.69 36.06 44.88 40.69 .375 .325
Fourth Quarter 41.88 37.00 47.13 40.88 .375 .325
------ ------
Year 57.69 36.06 47.13 40.00 $1.45 $1.30
====== ======
</TABLE>
61
<PAGE> 1
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.
62
<PAGE> 1
SUMMARY OF FINANCIAL AND OTHER STATISTICAL DATA Exhibit 13(j)
CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR
Operating Earnings (a)
Operating Revenues - Product Sales and Services $444.1 $391.4 $451.7
- Royalties and Management Fees 49.7 47.5 51.5
----------------------------------
- Total 493.8 438.9 503.2
Cost of Goods Sold and Operating Expenses and AS&G Expenses 416.7 372.0 409.6
----------------------------------
Operating Earnings 77.1 66.9 93.6
Net Income (Loss) (a) 57.4 54.9 61.0
Net Income (Loss) Per Common Share (a)
Basic 5.10 4.83 5.26
Diluted 5.06 4.80 5.23
Distributions to Common Shareholders:
Regular Cash Dividends - Per Share 1.45 1.30 1.30
- Total 16.3 14.8 15.1
Special Dividends - Per Share
- Total
Spin-off of Securities - Per Share
- Total
Repurchases of Common Shares 11.5 4.9 19.5
AT YEAR-END
Cash and Marketable Securities 130.3 115.9 169.4
Total Assets 723.5 694.3 673.7
Long-Term Obligations Effectively Serviced (c) 75.4 74.9 72.9
Shareholders' Equity 437.6 407.4 370.6
Book Value Per Common Share 39.25 36.02 32.59
Market Value Per Common Share 40.31 45.81 45.38
- -------------------------------------------------------------------------------------------------------------
IRON ORE PRODUCTION AND SALES STATISTICS (MILLIONS OF GROSS TONS)
Production From Mines Managed By Cliffs:
North America 40.3 39.6 39.9
Australia 1.6
----------------------------------
Total 40.3 39.6 41.5
Cliffs' Share 11.4 10.9 12.0
Cliffs' Sales From:
North American Mines 12.1 10.4 11.0
Australian Mine .3 1.7
----------------------------------
Total 12.1 10.7 12.7
- -------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Common Shares Outstanding (Millions) - Average For Year 11.3 11.4 11.6
- At Year-End 11.2 11.3 11.4
Common Shares Price Range - High $57.69 $47.13 $46.88
- Low 36.06 40.00 36.25
Employees at Year-End (d) 6,029 5,951 6,251
</TABLE>
(a) Results include an after-tax credit of $3.5 million ($.31 per diluted
share) in 1998, after-tax credits of $8.8 million ($.77 per diluted share) in
1997, net contributions from non-recurring items and extraordinary charge of
$2.4 million ($.20 per diluted share) in 1995, recoveries on bankruptcy
claims of $23.2 million ($1.92 per diluted share) and $47.1 million ($4.00
per diluted share) in 1993 and 1990, respectively, and a $38.7 million ($3.23
per diluted share) after-tax charge for accounting changes in 1992. Operating
results reflect the acquisition of Northshore Mining Company in the fourth
quarter of 1994. Represents revenues and income from continuing operations
for 1989 and 1988.
63
<PAGE> 2
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$411.2 $334.8 $268.1 $266.9 $271.6 $272.2 $294.9 $247.9
49.5 44.7 39.7 43.8 45.8 37.7 55.6 50.2
- ------------------------------------------------------------------------------------------------
460.7 379.5 307.8 310.7 317.4 309.9 350.5 298.1
371.5 315.8 268.5 275.5 275.0 279.7 257.8 227.6
- ------------------------------------------------------------------------------------------------
89.2 63.7 39.3 35.2 42.4 30.2 92.7 70.5
57.8 42.8 54.6 (7.9) 53.8 73.8 62.5 42.6
4.84 3.54 4.55 (.66) 4.55 6.31 5.37 3.12
4.82 3.53 4.53 (.66) 4.51 6.26 5.32 3.08
1.30 1.23 1.20 1.18 1.03 .80 .40
15.5 14.8 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)
10.8 125.2
148.8 141.4 161.0 128.6 95.9 96.0 95.5 52.4
644.6 608.6 549.1 537.2 478.7 510.9 415.2 390.6
76.3 84.2 88.6 92.1 65.0 82.4 93.4 145.7
342.6 311.4 280.4 269.5 290.8 290.8 226.0 168.6
28.96 25.74 23.25 22.47 24.40 24.88 19.36 14.53
41.00 37.00 37.38 35.63 36.13 27.13 29.00 26.63
- ------------------------------------------------------------------------------------------------
39.6 35.2 32.3 32.9 32.1 31.7 39.3 39.0
1.5 1.5 1.5 1.5 1.3 2.2 2.3 2.4
- ------------------------------------------------------------------------------------------------
41.1 36.7 33.8 34.4 33.4 33.9 41.6 41.4
11.3 8.3 6.8 7.3 7.0 6.6 8.9 9.1
10.4 8.2 6.4 6.0 6.0 6.5 7.5 6.7
1.5 1.5 1.4 1.3 1.3 .3
- ------------------------------------------------------------------------------------------------
11.9 9.7 7.8 7.3 7.3 6.8 7.5 6.7
- ------------------------------------------------------------------------------------------------
11.9 12.1 12.0 12.0 11.8 11.7 11.6 13.2
11.8 12.1 12.1 12.0 11.9 11.7 11.7 11.6
$46.75 $45.50 $37.50 $40.38 $36.50 $35.00 $34.00 $28.00
36.13 34.00 28.75 29.50 25.00 19.63 25.75 14.25
6,411 6,504 6,173 6,594 6,709 6,900 7,729 7,832
</TABLE>
(b) Includes securities at market value on distribution date.
(c) Includes the Company's share of ventures and equipment acquired on capital
leases.
(d) Includes employees of managed mining ventures.
At December 31, 1998, the Company had 2,819 shareholders of record.
64
<PAGE> 1
Exhibit 21
Subsidiaries of Cleveland-Cliffs Inc
- ------------------------------------
Jurisdiction
of
Incorporation
or
Name of Subsidiary Organization
- ------------------ ------------
Cleveland-Cliffs Company (1) Ohio
Cleveland-Cliffs Ore Corporation (1), (2) Ohio
Cliffs and Associates Limited (3) Trinidad
Cliffs Australia Company (4) Delaware
Cliffs Biwabik Ore Corporation (2) Minnesota
Cliffs Copper Corp. Ohio
Cliffs Empire, Inc. (1), (5) Michigan
Cliffs Engineering, Inc. (1) Colorado
Cliffs Forest Products Company (1) Michigan
Cliffs Fuel Service Company (1) Michigan
Cliffs IH Empire, Inc. (1) Michigan
Cliffs International Inc. Delaware
Cliffs Marquette, Inc. (1), (2) Michigan
Cliffs MC Empire, Inc. (1), (5) Michigan
Cliffs Mining Company Delaware
Cliffs Mining Services Company Delaware
Cliffs Minnesota Minerals Company Minnesota
Cliffs Oil Shale Corp. (2) Colorado
Cliffs of Canada Limited (1) Ontario, Canada
Cliffs Reduced Iron Corporation Delaware
Cliffs Reduced Iron Management Company (6) Delaware
Cliffs Resources, Inc. Delaware
Cliffs Synfuel Corp. (2) Utah
Cliffs TIOP, Inc. (1), (7) Michigan
Empire-Cliffs Partnership (5) Michigan
Empire Iron Mining Partnership (8) Michigan
Escanaba Properties Company (1), (9) Michigan
Escanaba Properties Partnership (9) Michigan
Hibbing Taconite Company, a joint venture (10) Minnesota
Kentucky Coal Company Delaware
Lake Superior & Ishpeming Railroad Company (11) Michigan
Lasco Development Corporation (11) Michigan
Marquette Iron Mining Partnership (2) Michigan
Minerais Midway Ltee-Midway Ore Company Ltd. (12) Quebec, Canada
Mines Hilton Ltee-Hilton Mines, Ltd. (12) Quebec, Canada
Northshore Mining Company (13) Delaware
Northshore Sales Company (14) Ohio
Peninsula Land Corporation (12) Michigan
- -----------------------------------------------------
See footnote explanation on pages 66-67.
65
<PAGE> 2
Jurisdiction
of
Incorporation
or
Name of Subsidiary Organization
- ------------------ ------------
Pickands Erie Corporation (12) Minnesota
Pickands Hibbing Corporation (10) Minnesota
Pickands Mather & Co. International Delaware
Pickands Radio Co. Ltd. (12) Quebec, Canada
Robert Coal Company (15) Delaware
Seignelay Resources, Inc. (12) Delaware
Silver Bay Power Company (14) Delaware
Syracuse Mining Company (12) Minnesota
Tetapaga Mining Company Limited (1) Ohio
The Cleveland-Cliffs Iron Company Ohio
The Cleveland-Cliffs Steamship Company (1) Delaware
Tilden Mining Company L.C. (7) Michigan
Virginia Eastern Shore Land Co. (1) Delaware
- --------------------------------------------------------------------------------
(1) The named subsidiary is a wholly-owned subsidiary of The Cleveland-Cliffs
Iron Company, which in turn is a wholly-owned subsidiary of
Cleveland-Cliffs Inc.
(2) Marquette Iron Mining Partnership ("Marquette Partnership") is a Michigan
partnership. Cleveland-Cliffs Ore Corporation and Cliffs Marquette, Inc.,
wholly-owned subsidiaries of The Cleveland-Cliffs Iron Company, have a
combined 100% interest in the Marquette Partnership. Cleveland-Cliffs Ore
Corporation also owns 100% of Cliffs Biwabik Ore Corporation. The Marquette
Partnership owns 100% of Cliffs Oil Shale Corp. and Cliffs Synfuel Corp.
(3) Cliffs and Associates Limited is a Trinidad corporation. Cliffs Reduced
Iron Corporation has a 46.5% interest in Cliffs and Associates Limited.
(4) The named subsidiary is a wholly-owned subsidiary of Cliffs International
Inc., which in turn is a wholly-owned subsidiary of Cleveland-Cliffs Inc.
(5) Empire-Cliffs Partnership is a Michigan partnership. Cliffs MC Empire, Inc.
and Cliffs Empire, Inc., wholly-owned subsidiaries of The Cleveland-Cliffs
Iron Company, have a combined 100% interest in Empire-Cliffs Partnership.
(6) The named subsidiary is a wholly-owned subsidiary of Cliffs Reduced Iron
Corporation, which in turn is a wholly-owned subsidiary of Cleveland-Cliffs
Inc.
(7) Tilden Mining Company L.C. is a Michigan limited liability company. Cliffs
TIOP, Inc., a wholly-owned subsidiary of The Cleveland-Cliffs Iron Company,
has a 40% interest in Tilden Mining Company L.C.
66
<PAGE> 3
(8) Empire Iron Mining Partnership is a Michigan partnership. The
Cleveland-Cliffs Iron Company has a 22.56% indirect interest in the Empire
Iron Mining Partnership.
(9) Escanaba Properties Partnership is a Michigan partnership. Escanaba
Properties Company, a wholly-owned subsidiary of The Cleveland-Cliffs Iron
Company, has a 87.5% interest in the Escanaba Properties Partnership.
(10) Cliffs Mining Company has a 10% and Pickands Hibbing Corporation, a
wholly-owned subsidiary of Cliffs Mining Company, has a 5% interest in
Hibbing Taconite Company, a joint venture.
(11) Cliffs Resources, Inc. owns a 99.5% interest in Lake Superior & Ishpeming
Railroad Company. Lasco Development Corporation is a wholly-owned
subsidiary of Lake Superior & Ishpeming Railroad Company.
(12) The named subsidiary is a wholly-owned subsidiary of Cliffs Mining Company,
which in turn is a wholly-owned subsidiary of Cleveland-Cliffs Inc.
(13) The named subsidiary is a wholly-owned subsidiary of Cliffs Minnesota
Minerals Company, which in turn is a wholly-owned subsidiary of
Cleveland-Cliffs Inc.
(14) The named subsidiary is a wholly-owned subsidiary of Northshore Mining
Company, which in turn is a wholly-owned subsidiary of Cliffs Minnesota
Minerals Company.
(15) The named subsidiary is a wholly-owned subsidiary of Kentucky Coal Company,
which in turn is a wholly-owned subsidiary of Cleveland-Cliffs Inc.
67
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment Number
1 to the Registration Statement (Form S-8 No. 33-4555) pertaining to the
Restricted Stock Plan of Cleveland-Cliffs Inc, in the Registration Statement
(Form S-8 No. 33-208033) pertaining to the 1987 Incentive Equity Plan of
Cleveland-Cliffs Inc and the related prospectus, in the Registration Statement
(Form S-8 No. 333-30391) pertaining to the 1992 Incentive Equity Plan (as
amended and restated as of May 13, 1997) and the related prospectus, in the
Post-Effective Amendment Number 1 to the Registration Statement (Form S-8 No.
33-56661) pertaining to the Northshore Mining Company and Silver Bay Power
Company Retirement Savings Plan and the related prospectus and in the
Registration Statement (Form S-8 No. 333-06049) pertaining to the
Cleveland-Cliffs Inc Nonemployee Directors' Compensation Plan of our report
dated January 29, 1999, with respect to the consolidated financial statements
and schedule of Cleveland-Cliffs Inc and consolidated subsidiaries included in
this Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Cleveland, Ohio
March 22, 1999
68
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors
and officers of Cleveland-Cliffs Inc, an Ohio corporation ("Company"), hereby
constitute and appoint John S. Brinzo, Cynthia B. Bezik, Joseph H. Ballway, Jr.,
and John E. Lenhard and each of them, their true and lawful attorney or
attorneys-in-fact, with full power of substitution and revocation, for them and
in their name, place and stead, to sign on their behalf as a Director or officer
of the Company, or both, as the case may be, an Annual Report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K for the
fiscal year ended December 31, 1998, and to sign any and all amendments to such
Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney or attorneys-in-fact, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Executed as of the 9th day of March, 1999.
/s/ J. S. Brinzo /s/ M. T. Moore
- -------------------------------- -----------------------------------
J. S. Brinzo M. T. Moore, Director
President and Chief
Executive Officer and Director
(Principal Executive Officer) /s/ J. C. Morley
-----------------------------------
J. C. Morley, Director and Chairman
/s/ R. C. Cambre /s/ S. B. Oresman
- -------------------------------- -----------------------------------
R. C. Cambre, Director S. B. Oresman, Director
/s/ R. S. Colman /s/ A. Schwartz
- -------------------------------- -----------------------------------
R. S. Colman, Director A. Schwartz, Director
/s/ J. D. Ireland /s/ A. W. Whitehouse
- -------------------------------- -----------------------------------
J. D. Ireland, Director A. W. Whitehouse, Director
/s/ G. F. Joklik /s/ C. B. Bezik
- -------------------------------- -----------------------------------
G. F. Joklik, Director C. B. Bezik
Senior Vice President-Finance
(Principal Financial Officer)
/s/ L. L. Kanuk
- --------------------------------
L. L. Kanuk, Director
/s/ R. J. Leroux
-----------------------------------
R. J. Leroux
Controller
/s/ F. R. McAllister (Principal Accounting Officer)
- --------------------------------
F. R. McAllister, Director
69
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF CONSOLIDATED INCOME, CONSOLIDATED FINANCIAL POSITION AND COMPUTATION OF
EARNINGS PER SHARE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000764065
<NAME> CLEVELAND-CLIFFS INC
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 130
<SECURITIES> 0
<RECEIVABLES> 59
<ALLOWANCES> 2
<INVENTORY> 60
<CURRENT-ASSETS> 260
<PP&E> 211
<DEPRECIATION> 61
<TOTAL-ASSETS> 724
<CURRENT-LIABILITIES> 89
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 421
<TOTAL-LIABILITY-AND-EQUITY> 724
<SALES> 444
<TOTAL-REVENUES> 504
<CGS> 398
<TOTAL-COSTS> 416
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 72
<INCOME-TAX> 15
<INCOME-CONTINUING> 57
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57
<EPS-PRIMARY> 5.10
<EPS-DILUTED> 5.06
</TABLE>
<PAGE> 1
Exhibit 99(a)
Cleveland-Cliffs Inc and Consolidated Subsidiaries
Schedule II - Valuation and Qualifying Accounts
(Dollars in Millions)
<TABLE>
<CAPTION>
Additions
-----------------------
Charged
Balance at to Cost Charged Balance at
Beginning And to Other End
Classification of Year Expenses Accounts Deductions of Year
- -------------------------------------- ------------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Reserve for Capacity
Rationalization $19.9 $ -- $ -- $10.4 $ 9.5
Allowance for Doubtful Accounts 1.0 1.2 -- -- 2.2
Other 7.4 -- -- 3.3 4.1
Year Ended December 31, 1997:
Reserve for Capacity
Rationalization $33.7 $4.2 $ -- $18.0 $19.9
Allowance for Doubtful Accounts 1.1 -- -- .1 1.0
Other 8.3 .1 -- 1.0 7.4
Year Ended December 31, 1996:
Reserve for Capacity
Rationalization $34.8 $6.6 $ -- $ 7.7 $33.7
Allowance for Doubtful Accounts 7.7 -- -- 6.6 1.1
Other 12.8 .7 1.5 6.7 8.3
</TABLE>
Additions charged to other accounts in 1996 were charged to revenues.
Deductions to the reserve for capacity rationalization represent charges
associated with idle expense in 1998, 1997 and 1996. Deductions to the allowance
for doubtful accounts in 1996 represent write-off of bankruptcy receivables
against the reserve.
70
