by the proposed merger.' It was the desire of the management of the Iron Company to place the Iron Company in the position of being the ore supplier of the proposed new large steel company.

To accomplish this purpose Cliffs was formed and one-half of its shares were issued to the investment companies sponsored by Otis and Company and Cyrus S. Eaton in return for substantial blocks of the common stocks of the four steel companies named above. The stockholders of the Iron Company transferred all of the common stock of the Iron Company to Cliffs in return for the other one-half of the common stock of Cliffs. However, immediately prior to such exchange of Iron Company common stock for Cliffs comomn stock, the Iron Company declared a stock dividend in the form of preferred stock to the holders of its common stock. This stock dividend totaled 500,000 shares of 5% Cumulative Preferred stock entitled on liquidation to a preference in assets of approximately $50,000,000 and entitled to a sinking fund in the amount of $500,000 for each of the first two years, $750,000 for the next two years, and thereafter $1,000,000 per annum.❜

Within a few months after the creation of Cliffs, its essential purpose as a preliminary step in the proposed plan of combination of the Iron Company and the steel companies we have mentioned, for the purpose of creating the second largest steel company in the country, had failed.*

Cliffs presently has outstanding 805,734 shares of capital stock owned by approximately 5,400 stockholders. Approximately 35% of the outstanding stock of Cliffs is owned by interests affiliated with the management of both companies. The portfolio of Cliffs has remained virtually static since the company's inception. The company presently owns all of the outstanding 408,296 shares of common stock of the Iron Company and in addition owns: 160,449 shares of the common stock of Republic Steel; 307,500 shares of the common stock of Inland Steel; 30,000 shares of the common stock of Wheeling Steel; and 100,500 shares of the common stock of Youngstown Sheet and Tube Company. The common

2 William G. Mather, then a director of the Iron Company, stated in a letter to the stockholders of Cleveland-Cliffs Iron Company in respect of the formation of Cliffs:

"In view of the probability of further mergers among the larger steel companies depending for their ore supplies upon the mines of the Lake Superior Company in which event the market for our products might suffer restriction, it has seemed to your directors desirable that our company place itself in a position to participate in such movements. An alliance

has therefore been arranged with a strong finance group headed by Mr. Cyrus S. Eaton of Cleveland which owns large blocks of stock in a number of the stronger companies, which alliance will in case we remain independent help to enlarge our market for iron ore, or place ourselves in a stronger position in connection with the whole industry." Report of the Securities and Exchange Commission on Its Study of Investment Trusts and Investment Companies (1942). Part IV, p. 224.

3 487,238 shares of this preferred stock issued by the Iron Company as a stock dividend are presently outstanding.

As Mr. Greene, now president of Cliffs and chairman of the board of directors of the Iron Company, testified in the Hearings before the Temporary National Economic Committee (76th Cong., 2d Sess. (1939), pp. 10248, 10269):

"That steel company never was formed, and the cause, therefore, of the formation of Cliffs, I would say, may be one of the, if not the most powerful reasons for this relationship was "out the window" within a very few months.

"I would say if the cause of the Cliffs Corporation formation had not existed in 1929 that we would not own those stocks today, or would not purchase them. And I also think that my statement is borne out by this fact, that we have since the formation of the Cliffs Corporation not bought a single share of additional stock in any of these companies, with the exception of a small amount of rights under the market that we were awarded a few years ago. So that we had no intention of carrying on the idea that we bought in 29, or rather-not bought, they were acquired in that merger; and they have continued to be held, even though the reason for being so has been done away with."

The percentages of the voting securities of the steel companies represented by the stocks in such companies owned by Cliffs and the Iron Company as at December 31, 1946, are as follows:

shares of the Iron Company owned by Cliffs have been valued for several years at $5 per share by Cliffs' management for the purposes of the Investment Company Act of 1940, which requires the board of directors of an investment company to determine the fair value, for the purpose of that Act, of securities having no quoted market value. Upon the basis of this valuation of the Iron Company common stock held by Cliffs and the market value of its holdings of marketable steel stocks, the asset value as of December 31, 1946 of each share of Cliffs common stock, that is the value of the assets which each Cliffs stockholder would have received if on that date Cliffs had been dissolved and its assets distributed in kind, would have been $34.13. As of May 1, 1947, such value would have been approximately $31 per share. The great proportion of this asset value is represented by the steel stocks which at December 31, 1946 had an aggregate market value of approximately $24,000,000; the Iron Company's stock is valued by the management at approximately $2,000,000.

A. Capitalization

THE CLEVELAND-CLIFFS IRON COMPANY

The Iron Company is a successor to various predecessors which have operated iron ore mines in the Lake Superior ore district since the 1850's. Prior to 1929 it had outstanding only one class of stock. In 1929, as has already been indicated, all the common stock of the Iron Company was conveyed to Cliffs. Imme diately prior to this conveyance, a stock dividend was declared in preferred stock to the holders of Cliffs common stock. This is the preferred stock which the Iron Company now has outstanding. The Iron Company presently has outstanding 487,238 shares of 5% cumulative preferred stock entitled on any involuntary liquidation of the company to a preference in assets of $48,723,809, and entitled to a sinking fund presently in the amount of $1,000,000 per annum. The company, because of the depression beginning in 1929, early defaulted in the payment of dividends upon its preferred stock and at December 31, 1946 arrearages on such preferred stock amounted to $12,746,146.08 or $26.16 per share. The accumulated sinking fund deficit on such preferred stock at the same date was $14,500,000. As a result of these defaults, no dividends can be paid on the common stock of the Iron Company, which is owned by Cliffs, and none have been paid since 1931. The preferred stock because of such arrearages is entitled to one vote per share or approximately 55% of the voting power in the Iron Company. In each of the years 1940 to 1946, inclusive, the regular dividend of $5 per share was paid on the preferred stock and in addition an aggregate amount of $3 a share was paid on accrued arrearages.

Interests, associated with the management of Cliffs and the Iron Company, owned as of April 3, 1947, approximately 33.5% of its outstanding preferred stock. In addition to its outstanding preferred and common stock, the Iron Company and its wholly owned subsidiaries have outstanding notes payable to banks and insurance companies aggregating $7,400,000 of which $750,000 is payable in 1948; $5,000,000 between 1951 and 1955 inclusive; $900,000 between 1949 and 1954 inclusive; and $750,000 between 1955 and 1959 inclusive.

B. Business and Assets

The Iron Company owns, leases or has stock interest in iron mines, located both on the Michigan iron ore ranges and the Mesaba range in Minnesota. In addition, it owns all of the stock of the Cleveland-Cliffs Steamship Company which owns 14 ore carrying vessels and also operates 3 vessels under contract and 5 vessels chartered from the United States Government. It also owns 75% of the outstanding stock of the Lake Superior & Ishpeming Railroad Company, which serves principally iron mines on the Marquette Range in Michigan, and all of the stock of the Cliffs Power and Light Company, which owns and operates hydro-electric plants located in the Upper Peninsula of Michigan. The power company sells power to the Iron Company in connection with its operations and also sells power to other mines and industries and certain communities. In addition the company and its subsidiaries own and operate coal docks and the company owns an undivided one-half interest in the Mather Collieries, a coal mine located in Pennsylvania. The company acts as sales agent for all or part of the production of coal mined by others and makes purchase for resale to others. Also owned by the Iron Company is one of the largest strips of timber in

On May 17, 1947, the over-the-counter market price on the preferred stock was: bid, 85; asked, 89.

the Great Lakes area. This timber is being sold to wood-working plants and to the Cliffs Dow Chemical Company in which the Iron Company owns a substantial stock interest. The timber is also used in connection with the company's mining operations.

All of the vessels of the steamship company are leased to the Iron Company and are used almost exclusively in the transportation of the Iron Company's ore and coal. During the past five years, 50% of the power sold by the Cliffs Power and Light Company has been bought by its parent, the Iron Company. Furthermore, during the past five years 74% of the gross revenues of the Lake Superior & Ishpeming Railroad Company was derived from the transportation of iron ore of which approximately 81% was derived from iron ore carried for the Iron Company itself. It is apparent, therefore, that the steamship company, the railroad company and the power company are, to a substantial extent, merely aspects of the ore business in general and the Iron Company's ore business in particular. The revenues of these subsidiaries will vary directly with the operations of the ore industry in general, and of the Iron Company' in particular.

In addition to these assets the Iron Company at December 31, 1946 had net current assets of $18,093,810.38 and owned in its own right 272,867 shares of the common stock of Republic Steel Corporation, 6,461 shares of the preferred and 81,747 shares of the common stock of Jones and Laughlin Steel Corporation and 1,839 shares of the preferred and 3,540 shares of the common stock of Wheeling Steel Corporation. As at December 31, 1946 these shares in the three steel companies had an aggregate market value of $11,404,451.49. Thus, at that date the Iron Company had net current assets and listed marketable securities having an aggregate value of $29,498,261.87.

A breakdown upon a percentage basis for the years 1943 to 1946, inclusive, of the sources of the net earnings of the Iron Company is as follows:

From these statistics it is clear that the company's ore operations and operations intimately related to the production and transportation of ore, such as the operations of the railroad, the steamship company and the Cliffs Power and Light Company, accounted for between 66 percent and 76 percent of the earnings of the Iron Company for the years covered by the table. Moreover, the item "Other Dividends Received" which accounted for between 11 and 13.7 percent of the company's earnings for the period covered represents almost exclusively dividends received on the portfolio steel stocks owned by the Iron Company. As we will indicate more fully hereafter, these steel companies represented in the portfolio of the Iron Company and in the portfolio of Cliffs are the primary customers of the Iron Company.

C. Ore Reserves

The Iron Company and about seven principal merchant ore producers in the Lake Superior area compete in the sale of ore to steel companies, the plants of which are located on or near the lower Great Lakes. In connection with its business the Iron Company presently operates sixteen iron ore mines either as owner, lessee, or as a holder of important stock interests. An additional mine with substantial reserves is now in the development stage. As of March 31, 1947, the company's reserves of "assured" and "prospective" high grade ores (including those of one mine under lease to another operator) aggregated approximately 81,350,000 tons, of which approximately 15,600,000 tons represented ore in open pit mines and the remainder represented ore in underground mines. The company also had reserves of low grade ores of approximately 111,000,000 tons and expects, in addition, to discover substantial tonnages of ore. The company estimates that its present "assured" and "prospective" high grade ore reserves

96347-50-ser. 14, pt. 4b- -51

are sufficient to enable it to conduct operations for approximately 24 years, based on production rates over the past 10 years. However, the company also indicates that future ore discoveries will enable it to conduct operations for an undetermined additional period of time. The Company's ore reserves are exceeded only by those of United States Steel Corporation which are substantially in excess of those of the Iron Company. In addition, in contrast to the Iron Company's assured and prospective ore reserves, the bulk of which is underground ore, the reserves of United States Steel are to a substantial extent open pit ores.'

The management of the Iron Company believes certain competitive advantages will accrue to the company because of the situation of ore reserves in general in the Lake Superior area. Because of the intensive depletion of high-grade open pit ores in the last several years induced by the demands of the war effort, it is asserted that the Iron Company in the future will not be as adversely affected competitively as it has been in the past. The company has predominantly produced and sold underground ores and has been at a competitive disadvantage because of the generally higher cost of production of such ores, a cost of production which tends to increase as operations reach greater depths. As open-pit ores become more depleted in the future, it is the management's belief that there will tend to be available a greater proportion of underground ore. The company has recently acquired two open-pit mines which it estimates will increase the ratio of its future shipments of open-pit ore vis-à-vis underground ores. Nevertheless, the Iron Company's "assured" and "prospective" ore reserves are predominantly underground ores so that its future shipments will presumably still include a greater proportion of underground ores than open pit ores. Moreover, against this possible future competitive advantage to the Iron Company, the possibility of future competition from foreign high-grade ores, including high-grade ore from deposits being investigated in Labrador, cannot be ignored.

D. Customers

Although the Iron Company sells ore to most of the leading steel companies in the United States, its predominant sales have been to the five steel companies whose common stocks will be held by the New Company, namely Republic Steel Corporation, Jones & Laughlin Steel Corporation, Inland Steel Corporation, Wheeling Steel, and Youngstown Sheet and Tube Company. Approximately 79% of the total sales made by the Iron Company during the past three years have been made to five companies, including three of these companies, Republic Steel, Jones & Laughlin, and Wheeling Steel.' By far the greatest part of these sales was made to Republic Steel 10 and Jones & Laughlin. Insignificant amounts of ore have been sold to United States Steel. That company, as we have indicated, has ore reserves substantially in excess of the Iron Company and therefore will presumably not be a large customer of the Iron Company. Although the Iron Company sells ore to Bethlehem Steel Corporation, the second largest steel company in the United States, the amounts sold to such company are much less than the amounts sold in the aggregate by the Iron Company to the steel companies represented in its portfolio and the portfolio of Cliffs." It would appear, therefore, that both the ore operations and the dividends received upon the portfolio investments of the proposed New Company will be somewhat dependent upon the prosperity of the portfolio steel companies.

11

It is estimated that United States Steel Corporation controls over 70% of the open pit reserves now on the Mesaba Range in Minnesota.

8 In common with other companies in the ore industry in the Lake Superior area the Iron Company has interested itself in experimentation to determine the commercial feasibility of converting low grade taconites into a commercial ore product. To date the company, however, has expended only approximately $200,000 on this effort.

For the last several years Wheeling Steel Corporation has purchased between 11% and 18% of its ore requirements from the Iron Company.

10 The Iron Company sold ore to Republic Steel pursuant to an agreement entered into on April 15, 1936, with Republic Steel which provided that for a period of 10 years ending April 30, 1946, the Iron Company would sell and deliver to lower lake ports and Republic Steel would buy an amount of iron ore not less than a specified percentage (but in no event more than 1,800,000 tons of 2 040 pounds in any one year) of all iron ore obtained by Republic Steel in the United States in such year for blast furnace consumption at all northern plants of Republic and its subsidiaries.

11 Bethlehem Steel Corporation owns extensive foreign and domestic ore reserves. In a registration statement filed with the Commission pursuant to the Securities Act of 1933 (File No. 2-6819), Bethlehem Steel Corporation stated that as at January 1, 1946, its domestic and foreign iron ore properties, excluding its properties on the North coast of Cuba, were estimated to contain at least 105,900,000 net tons of iron ore (excluding tonnages applicable to interests not owned directly or indirectly by the company). Bethlehem Steel Corporation ships Cuban and South American iron ore to its Sparrows Point, Maryland, steel plants.

THE PLAN AND ITS EFFECTS UPON THE CLIFFS SHAREHOLDERS

As we have already stated, the original purpose of the creation of Cliffs had failed within a few months after its organization. Thereafter the management from time to time for a period of many years considered various plans for the combination of the two companies but was unable to agree upon a plan. The management of Cliffs from time to time also considered dissolving Cliffs. Nothing was done however prior to 1946. In letters dated December 23 and December 27, 1946, signed by William G. Mather, then chairman of the board, and by Edward B. Greene, president, the management announced a proposed plan to liquidate Cliffs by a pro rata distribution in kind of its assets to Cliffs shareholders." It further stated that a proxy statement shortly would be sent to shareholders of Cliffs in respect of a meeting of shareholders for the purpose of dissolving the corporation.

However, on February 18, 1947, the board of directors of Cliffs informed its stockholders that they had suspended the consideration of liquidation plans in order to place before the shareholders of both companies the proposed plan of reorganization which is the subject of this report. A meeting of stockholders to vote on acceptance or rejection of the plan called for May 16, 1947, has been recessed to June 9, 1947.

13

In explanation of this change in position the management has stated in the proxy statement sent to Cliffs stockholders in connection with the proposal made by the Clark Foundation and other stockholders to dissolve Cliffs: "Your directors believe that this plan which provides a permanent investment in a consolidated company is preferable to breaking up the large capital fund now held by Cliffs."

Briefly described, the plan seeks to accomplish two objectives: (1) the combination of the assets of Cliffs and the present Iron Company into a new company to be called The Cleveland-Cliffs Iron Company, and (2) the reduction of the dividend rate, and the elimination of the dividend arrearages and the sinking fund deficits which have accrued in respect of the present preferred stock of the Iron Company thereby releasing earnings for the common stock. Under the plan, for each share of Cliffs common stock there will be issued 24 shares of the New Company common stock. The existing Iron Company common stock held by Cliffs will be eliminated in the consolidation. Each preferred shareholder of the present Iron Company will receive a new share of 42% cumulative preferred stock with a par value of $100 per share, an involuntary liquidating preference of $100 per share and entitled to one vote per share, irrespective of defaults. In addition each share of the present preferred stock of the Iron Company will be entitled to receive one share of the common stock of the New Company. Accrued dividend arrears of $12,746,146.08 on the present preferred stock and the accrued sinking fund deficit of $14,500,000 at December 31, 1946, will be eliminated and a new annual sinking fund equivalent to 15% of the net earnings of the New Company after deduction of preferred stock dividends will be created for the benefit of the new preferred stock." If the plan is completely consummated, the New Company will have a capital structure consisting of $7,400,000 of funded debt; 487,238 shares of preferred stock having a par value of $100 per share and a liquidating preference of $48,723,800; and 2,300,140 shares of common stock of which approximately 79% will be issued to the present shareholders of Cliffs and approximately 21% to the preferred stockholders of the present Iron Company.

The proposed management of the New Company has stated that it presently intends to maintain the portfolio of steel stocks to be acquired from Cliffs in the form of stocks and not to convert them into cash. It states that it has made no specific allocation of the funds to be acquired from Cliffs but that these funds will provide a source of funds for future corporate needs for the production and

12 The letter of December 23, 1946, stated in part:

"Such a program has been discussed and considered from time to time over the past few years.

"While definite action on the matter by the Board of Directors is not to be taken until December 27, 1946, the management will then recommend that, since the purpose of the organization of the Corporation no longer exists and the Corporation's large holdings of steel stocks are not important in the operation of the Cleveland-Cliffs Iron Company, the best interests of the Cliffs shareholder will be served by distributing to them all of the common stock of the Cleveland-Cliffs Iron Company as well as the steel stocks and cash now held by the Corporation."

13 These stockholders are opposed to the consolidation plan.

14 The new sinking fund will take effect after 1956, or at the date all of the New Company's funded debt is retired, whichever date occurs first.