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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

CLEVELAND-CLIFFS INC

1100 Superior Avenue, Cleveland, Ohio 44114-2589

     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 o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES x        NO o

As of July 24, 2003, there were 10,322,352 Common Shares (par value $1.00 per share) outstanding.

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PART I — ITEM 1 — FINANCIAL INFORMATION

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED OPERATIONS

See notes to consolidated financial statements.

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CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

See notes to consolidated financial statements.

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CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS

See notes to consolidated financial statements.

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CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

NOTE A – BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the financial statement footnotes and other information in the Company’s 2002 Annual Report on Form 10-K. In management’s opinion, the quarterly unaudited consolidated financial statements present fairly the Company’s financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

     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. On an on-going basis, management evaluates its estimates and assumptions, including those related to revenue recognition, valuation of inventories, valuation of long-lived assets, post-employment benefits, income taxes, litigation and environmental liabilities. Management bases its estimates on historical experience, current business conditions and expectations and on various other assumptions it believes are reasonable under the circumstances. Actual results could differ from those estimates.

     References to the “Company” mean Cleveland-Cliffs Inc and consolidated subsidiaries. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, including: Tilden Mining Company L.C. (“Tilden”) in Michigan, consolidated since January 31, 2002, when the Company increased its ownership from 40 percent to 85 percent; Empire Iron Mining Partnership (“Empire”) in Michigan, consolidated effective December 31, 2002, when the Company increased its ownership from 35 percent to 79 percent; and 100 percent of Wabush Iron Co. Limited (“Wabush Iron”), consolidated since August 29, 2002. Wabush Iron owns a 26.83 percent interest in the Wabush Mines Joint Venture (“Wabush”) in Canada.

     Quarterly results historically are not representative of annual results due to seasonal and other factors. Certain prior year amounts have been reclassified to conform to current year classifications.

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NOTE B – ACCOUNTING POLICIES

Variable Interest Entities

     In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires that variable interest entities, as defined, should be consolidated by the primary beneficiary, which is defined as the entity that is expected to absorb the majority of the expected losses, receive the majority of the gains, or both. The Interpretation requires that companies disclose certain information about a variable interest entity created prior to February 1, 2003 if it is reasonably possible that the enterprise will be required to consolidate that entity. The application of this Interpretation is required on July 1, 2003 for entities created prior to February 1, 2003 and immediately for any variable interest entities created subsequent to January 31, 2003. The Company has evaluated its unconsolidated entities and does not believe that any entity in which it has an interest, but does not currently consolidate, meets the definition of a variable interest entity.

Stock Compensation

     Effective January 1, 2003, the Company adopted the fair value method, which is considered the preferable accounting method, of recording stock-based employee compensation as contained in SFAS No. 123, “Accounting for Stock-Based Compensation.” As prescribed in SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” the Company elected to use the “prospective method.” The prospective method requires expense to be recognized for all awards granted, modified or settled beginning in the year of adoption. Historically, the Company applied the intrinsic method as provided in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and accordingly, no compensation cost had been recognized for stock options in prior years.

     As a result of adopting the fair value method for stock options, all future awards will be expensed over the stock options vesting period. The Company expects that adoption will not have a significant financial effect in 2003.

     The following illustrates the pro forma effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to all awards unvested in each period.

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Income Taxes

     Income taxes are based on income (loss) for financial reporting purposes and reflect a current tax liability (asset) for the estimated taxes payable (recoverable) on the current year tax return and changes in deferred taxes. Deferred tax assets or liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax laws and rates. A valuation allowance (Note G) is provided on deferred tax assets in recognition of uncertainty regarding realization.

NOTE C – REVENUE RECOGNITION

     Revenue is recognized on sales of products when title has transferred and on services when performed. Revenue for the first half of the year from product sales and services includes reimbursement for freight charges ($26.8 million – 2003; $6.2 million – 2002) paid on behalf of customers, and cost reimbursement ($36.3 million – 2003; $17.6 million – 2002) from minority interest partners for their contractual share of mine costs. Royalty and management fee revenue from venture participants is recognized on production.

NOTE D – LONG-TERM DEBT

     In June 2003, the Company amended its $55 million senior unsecured note agreement to provide modifications to its financial covenants adjusting the required minimum levels of EBITDA and fixed charge ratios. The Company was in compliance with the amended covenants at June 30, 2003, the most restrictive of which is a minimum EBITDA requirement that the Company exceeded by about $19.5 million. As a result of the amendment, the Company made a principal payment of $5.0 million on June 30, reducing the outstanding balance of the notes to $50.0 million. Remaining principal payments were rescheduled to $15.0 million in December 2003 and the lesser of $35.0 million or the remaining principal balance in December 2004. Accelerated principal payments may be required to the extent the Company generates defined excess cash flow, asset sales above certain levels, or insurance recoveries resulting

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from the power outage and production loss. The interest rate remains 7.0 percent through December 14, 2003, and increases to 9.5 percent from December 15, 2003 until final maturity on December 15, 2004. Additionally, in June 2003, the Company cancelled a 364-day unsecured revolving credit facility in the amount of $20.0 million.

NOTE E – ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS

     At June 30, 2003, the Company had environmental and mine closure liabilities of $94.4 million, of which $9.1 million was classified as current. Payments in 2003 were $3.0 million (2002 — $3.5 million). Following is a summary of the obligations:

Environmental

     The Company’s environmental liabilities of $17.0 million, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated 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 SFAS No. 5. Future expenditures are not discounted, and potential insurance recoveries have not been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed.

     The environmental liability includes the Company’s obligations related to five sites which are independent of the Company’s iron mining operations, seven former iron ore-related sites, eight leased land sites and miscellaneous remediation obligations at the Company’s operating units. Included in the obligation are Federal and State sites where the Company is named as a potentially responsible party, the Rio Tinto mine site in Nevada, where significant site cleanup activities have taken place, and the Kipling, Deer Lake and Pellestar sites in Michigan.

Mine Closure

     The mine closure obligation of $77.4 million includes the accrued obligation at June 30, 2003 for a closed operation formerly known as the LTV Steel Mining Company, and for the Company’s active operating mines. The closed operation obligation results from an October 2001 transaction where subsidiaries of the Company received a net payment of $50 million and certain other assets and assumed environmental and certain facility closure obligations of $50 million, which obligations

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have declined to $39.4 million at June 30, 2003, as a result of expenditures totaling $10.6 million since 2001.

     The accrued closure obligation for the Company’s active mining operations of $38.0 million at June 30, 2003 ($36.1 million at December 31, 2002), reflects the adoption of SFAS No. 143 in 2002, to provide for contractual and legal obligations associated with the eventual closure of the mining operations and the effects of mine ownership increases during 2002. The Company determined the obligations, based on detailed estimates, adjusted for factors that an outside third party would consider (i.e., inflation, overhead and profit), escalated to the estimated closure dates, and then discounted using a credit adjusted risk-free interest rate of 10.25 percent. The closure date for each location was determined based on the projected exhaustion date of the remaining economic iron ore reserves. The accretion of the liability is being recognized over the estimated mine lives for each location. The expense recorded in the first half of 2003 was $1.9 million. There were no expenditures in the first half of 2003.

NOTE F – SEGMENT REPORTING

     The Company operated in one reportable segment in 2003 and 2002 offering iron products and services to the steel industry. The Ferrous Metallics segment, which included a hot briquetted iron (“HBI”) project in Trinidad and Tobago, was discontinued in 2002 and reported as a discontinued operation, see Note I – Discontinued Operation.

NOTE G – INCOME TAXES

     In the second half of 2002, the Company provided a valuation allowance to fully reserve its net deferred tax assets, in recognition of uncertainty regarding their realization. Through the first half of 2003, the Company increased its deferred tax valuation allowance by $5.0 million to $125.6 million to offset comparable increases in its net deferred tax assets. The Company recorded income tax expense of $.2 million in the first half of 2003 to recognize estimated state and foreign income tax liabilities. The Company’s reserved deferred tax assets include significant net operating loss carryforwards for regular income tax, but no operating loss carryforwards for alternative minimum tax.

     If in the future it is determined that it is more likely than not that some or all of the net deferred tax assets will be realized, a reversal of the valuation allowance will be made. This reversal will increase income in the period such determination is made.

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NOTE H – LEASE OBLIGATIONS

     The Company and its ventures lease certain mining, production and other equipment under operating and capital leases. Future minimum payments under capital leases and non-cancellable operating leases, including the Company’s share of ventures, at June 30, 2003 are expected to be:

     The Company’s share, of total minimum lease payments, $88.1 million, is comprised of the Company’s consolidated obligation of $77.4 million and the Company’s share of unconsolidated ventures’ obligations of $10.7 million.

NOTE I – DISCONTINUED OPERATION

     In the fourth quarter of 2002, the Company exited the ferrous metallics business and abandoned its 82 percent interest in Cliffs and Associates Limited (“CAL”), an HBI facility located in Trinidad and Tobago, and accordingly wrote off the carrying value of its investment in CAL.

     In 2002, the Company recorded expense of $1.9 million and $4.5 million in the second quarter and first six months, respectively, net of minority interest relating to CAL. No expense was recorded in 2003.

NOTE J – SUBSEQUENT EVENT – THIRD QUARTER RESTRUCTURING

     In the third quarter 2003, the Company initiated a salaried employee reduction program affecting its corporate and central services staff and various mining operations. The action is expected to result in an approximate 20 percent overall staff reduction at the affected locations. The Company currently expects to record a restructuring charge in the third quarter 2003 in excess of $10 million principally related to pension and healthcare benefits. Less than 10 percent of the restructuring charge is expected to require cash funding in 2003.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPARISON OF SECOND QUARTER AND FIRST SIX MONTHS — 2003 AND 2002

     The net loss was $21.2 million, or $2.07 per share (all per share earnings are “diluted earnings per share” unless stated otherwise) in the second quarter and a net loss of $19.0 million, or $1.86 per share, for the first six months. In the second quarter and first six months of 2002, the Company had net income of $.1 million, or $.01 per share, and a net loss of $24.8 million, or $2.43 per share, respectively, including the loss from a discontinued operation and a first quarter charge relating to the cumulative effect of the accounting change relating to adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations.” Following is a summary of results:

Second Quarter

     The loss from continuing operations was $21.2 million in the second quarter of 2003 compared to income from continuing operations of $2.0 million for the second quarter of 2002. Included in the second quarter 2003 net loss was a $.9 million tax credit compared to a tax credit of $6.2 million in the second quarter 2002, which included a $4.4 million favorable adjustment of prior years’ tax liabilities. The pre-tax loss from continuing operations was $22.1 million in 2003 compared to a pre-tax loss of $4.2 million in the second quarter of 2002. The $17.9 million increase in the pre-tax loss was primarily due to a decreased sales margin, summarized as follows:

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*

Excludes revenues and cost of goods sold and operating expenses related to freight and minority interests.

The loss on sales in the second quarter of 2003 was $17.9 million versus a sales loss of $.4 million in 2002. The $17.5 million decline in sales margin was principally due to higher operating costs partly offset by an increase in sales volume. The operating cost increase reflects the adverse impact of higher energy costs, significant production throughput challenges at the Michigan operations, and rising pension and medical benefit costs. Included in 2003 operating costs was the $11.0 million fixed cost impact of a five-week production curtailment at the Empire and Tilden mines as a result of the loss of electric power supply (see Electric Power Curtailment). Included in second quarter 2002 was the unfavorable impact of production curtailments, $3.4 million, necessitated by a weak market for pellets.

     Royalties and fees from partners decreased $1.0 million primarily due to lower production at the Michigan mines. Other expense increased principally reflecting a $2.6 million reserve for exposures related to Weirton Steel Corporation (“Weirton”), which filed for Chapter 11 bankruptcy protection in May. Offsetting the decreases in earnings, were lower administrative, selling and general expense, $2.3 million, primarily due to a decrease in incentive compensation expenses, higher interest income, $1.6 million, mainly due to interest on the long-term receivables from Ispat Inland Inc., and lower interest expense, $.7 million, reflecting a lower principal balance on the Company’s long-term debt and the repayment of the bank credit facility borrowings in 2002.

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First Half

     The loss from continuing operations for the first six months 2003 was $19.0 million versus an after-tax loss from continuing operations of $6.9 million in 2002. The first six months of 2003 included state and foreign taxes of $.2 million and no federal tax credit due to the valuation reserve. The first six months of 2002 included a tax credit of $12.9 million, including a $4.4 million favorable adjustment of prior years’ tax liabilities. The loss from continuing operations before income taxes for the first six months 2003 was $18.8 million, an earnings improvement of $1.0 million from the $19.8 million pre-tax loss from continuing operations for the comparable 2002 period. The change was primarily due to increased interest income, higher other income, lower interest expense and decreased administrative, selling and general expense, largely offset by higher other expense and lower sales margin. The decrease in sales margin reflected higher cost of goods sold largely offset by increased sales volume, summarized as follows: