Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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

1100 Superior Avenue, Cleveland, Ohio 44114-2589

Registrant’s Telephone Number, Including Area Code: (216) 694-5700

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

YES      X        NO            

As of October 24, 2003, there were 10,318,352 Common Shares (par value $1.00 per share) outstanding.

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED OPERATIONS

See notes to consolidated financial statements.

2

Table of Contents

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

See notes to consolidated financial statements.

3

Table of Contents

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

STATEMENT OF CONSOLIDATED CASH FLOWS

See notes to consolidated financial statements.

4

Table of Contents

CLEVELAND-CLIFFS INC AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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

5

Table of Contents

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.

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. FIN 46 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 FIN 46, which was previously 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, has been deferred until years ending after December 15, 2003, except for those companies which previously issued financial statements implementing the provisions of FIN 46. 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.

6

Table of Contents

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.

7

Table of Contents

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) was 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 nine months of the year from product sales and services includes reimbursement for freight charges ($42.1 million — 2003; $23.8 million — 2002) paid on behalf of customers, and cost reimbursement ($57.3 million — 2003; $26.3 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 September 30, 2003, the most restrictive of which is a minimum EBITDA requirement that the Company exceeded by $13.5 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

8

Table of Contents

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 September 30, 2003, the Company, including its share of ventures, had environmental and mine closure liabilities of $93.3 million, of which $10.8 million was classified as current. Payments in 2003 were $5.1 million (2002 - $5.5 million). Following is a summary of the obligations:

Environmental

      The Company’s environmental liabilities of $16.2 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 six sites which are independent of the Company’s iron mining operations, seven former iron ore-related sites, eight leased land sites where the Company is lessor and miscellaneous

9

Table of Contents

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.

      In September 2002, the Company received a draft of a proposed Administrative Order on Consent from the United States Environmental Protection Agency (“EPA”), for cleanup and reimbursement of costs associated with the Milwaukee Solvay coke plant site in Milwaukee, Wisconsin. The plant was operated by a predecessor of the Company from 1973 to 1983, which predecessor was acquired by the Company in 1986. In January 2003, the Company completed the sale of the plant site and property to a third party. Following this sale, an Administrative Order on Consent (“Consent Order”) was entered into with the EPA by the Company, the new owner and another third party who had operated on the site. In connection with the Consent Order, the new owner agreed to take responsibility for the removal action and agreed to indemnify the Company for all costs and expenses in connection with the removal action. In the third quarter 2003, the new owner, after completing a portion of the removal, experienced financial difficulties. In an effort to continue progress on the removal action, the Company expended approximately $.2 million in the third quarter. The Company will likely be required to expend additional amounts, estimated at approximately $3 million, for the completion of the removal action, which expenditures were previously provided for in the Company’s environmental reserve.

Mine Closure

      The mine closure obligation of $77.1 million includes the accrued obligation at September 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 have declined to $38.1 million at September 30, 2003, as a result of expenditures totaling $11.9 million since 2001.

10

Table of Contents

      The accrued closure obligation for the Company’s active mining operations of $39.0 million at September 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 life for each location. The expense recorded in the first nine months of 2003 was $2.9 million. There were no cash expenditures in the first nine months 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 third quarter 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 nine months of 2003, the Company increased its deferred tax valuation allowance by $8.0 million to $128.6 million to offset increases in its net deferred tax assets. The Company recorded income tax expense of $.5 million in the first nine months 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.

11

Table of Contents

      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.

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 September 30, 2003 are expected to be:

      The Company’s share of total minimum lease payments, $79.4 million, is comprised of the Company’s consolidated obligation of $69.7 million and the Company’s share of unconsolidated ventures’ obligations of $9.7 million.

NOTE I — DISCONTINUED OPERATION

      In September 2002, the Company concluded its 82 percent interest in Cliffs and Associates Limited (“CAL”), an HBI facility located in Trinidad and Tobago, was impaired and accordingly recorded an impairment charge of $121.5 million, or $95.7 million net of minority interest. In the fourth quarter of 2002, the Company wrote-off its remaining investment and exited the ferrous metallics business and abandoned its interest in CAL. In 2002, the Company recorded, including the impairment charge, expense of $98.8

12

Table of Contents

million and $103.3 million in the third quarter and first nine months, respectively, net of minority interest relating to CAL. No expense was recorded in 2003.

NOTE J — RESTRUCTURING

      In the third quarter 2003, the Company initiated a salaried employee reduction program that affected its corporate and central services staff and various mining operations. The action resulted in a staff reduction of 119 employees, with an additional staff reduction of 16 employees expected in the fourth quarter, equating to an overall 20 percent reduction in salaried workforce at the Company’s U.S. operations. Accordingly, the Company recorded a restructuring charge of $6.2 million in the third quarter 2003 and expects to record an additional $2.0 million in the fourth quarter. The restructuring charge is principally related to severance, pension and healthcare benefits, with less than $2 million requiring cash funding in 2003. Included in the third quarter restructuring charge were pension and OPEB plan curtailment credits of $.3 million and $1.5 million, respectively.

NOTE K — BANKRUPTCY OF CUSTOMERS

      On September 16, 2003, WCI Steel Inc. (“WCI”) petitioned for protection under Chapter 11 of the U.S. Bankruptcy Code. At the time of the filing, the Company had a trade receivable exposure of $4.9 million, which was reserved in the third quarter. WCI purchased 1.4 million tons of pellets, or 9 percent of total tons sold in 2002, and has purchased 1.1 million tons, or 8 percent of total tons sold in the first nine months of 2003. WCI continues to operate and purchase pellets from the Company. The Company’s sales contract with WCI expires at the end of 2004.

      On May 19, 2003, Weirton Steel Corporation (“Weirton”) petitioned for protection under Chapter 11 of the U.S. Bankruptcy Code. Weirton purchased 2.9 million tons, or 20 percent of total tons sold in 2002, and has purchased 2.3 million tons, or 17 percent of total tons sold in the first nine months of 2003. Weirton has continued to perform on its sales contract since the filing. The sales contract, which runs through 2009, will be

13

Table of Contents

extended by contract for the life of the power-related lease (discussed below), which is scheduled to be completed at the end of 2012.

      The Company is a 40.6 percent participant in a joint venture which acquired certain power-related assets from a subsidiary of Weirton in 2001, in a purchase-leaseback arrangement. The Company’s investment at September 30, 2003 of $10.6 million, which is included in “Other investments”, is accounted for utilizing the “equity method.” Subsequent to its filing, Weirton has continued to meet its obligations under the lease agreement which extends through 2012. In the second quarter of 2003, the Company recorded a provision of $2.6 million for Weirton bankruptcy exposures.

NOTE L — SUBSEQUENT EVENT — BANKRUPTCY OF ROUGE

      Rouge Industries, Inc. (“Rouge”), a significant pellet sales customer of the Company, filed for Chapter 11 bankruptcy protection on October 23, 2003, and announced that it had reached agreement on a non-binding letter of intent to sell substantially all of its assets to OAO Severstal, Russia’s second largest steel producer. Rouge has obtained Bankruptcy Court interim approval for a $150 million debtor-in-possession credit facility, which will provide Rouge up to $35 million of incremental liquidity during the period required to complete the sale. Rouge indicated that it will continue to manufacture and ship steel products and provide uninterrupted service to its customers during the bankruptcy process.

      The Company sold 1.4 million tons of pellets to Rouge in 2002 and 2.1 million tons in 2003 through October 23rd. At the time of Rouge’s filing, the Company had no trade receivable exposure to Rouge; however, the Company has a $10 million secured loan to Rouge with a final maturity in 2007. As of September 30, 2003, the loan had a balance of $11.2 million including accrued interest. Management will continue to assess events as they occur pertaining to collectability of the loan and interest. The Company’s sales contract with Rouge provides that it will be the sole supplier of pellets to Rouge through 2012, with minimum annual obligations through 2007. At this time, the long-term impact of the announced sale and bankruptcy filing on the Company’s sales contract with Rouge is unknown; however it is anticipated that the Company will continue to sell pellets to Rouge in the near-term.

14

Table of Contents

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

COMPARISON OF THIRD QUARTER AND FIRST NINE MONTHS — 2003 AND 2002

      The net loss was $4.8 million, or $.47 per share (all per share earnings are “diluted earnings per share” unless stated otherwise) in the third quarter of 2003 and a net loss of $23.8 million, or $2.33 per share, for the first nine months of 2003. In the third quarter and first nine months of 2002, the Company had a net loss of $92.7 million, or $9.18 per share, and a net loss of $117.5 million, or $11.61 per share, respectively, including the loss and impairment charge relating to 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:

Third Quarter

      The loss from continuing operations was $4.8 million in the third quarter of 2003 compared to income from continuing operations of $6.1 million for the third quarter of 2002. The pre-tax loss from continuing operations was $4.5 million in 2003 compared to pre-tax income of $8.0 million in the third quarter of 2002. The $12.5 million increase in the pre-tax loss was primarily due to a $6.2 million restructuring charge, provision for

15

Table of Contents

bankruptcy exposure of $4.9 million, and lower other income, partly offset by higher sales margin, increased interest income and lower interest expense.

      In the third quarter 2003, the Company initiated a salaried employee reduction program that affected its corporate and central services staff and various mining operations. The action resulted in a staff reduction of 119 employees, with an additional staff reduction of 16 employees expected in the fourth quarter, equating to an overall 20 percent reduction in salaried workforce at the Company’s U.S. operations. Accordingly, the Company recorded a restructuring charge of $6.2 million in the third quarter 2003 and expects to record an additional $2.0 million in the fourth quarter. The restructuring charge is principally related to severance, pension and healthcare benefits with less than $2 million requiring cash funding in 2003 (see Pensions and Other Postretirement Benefits).

      A provision for bankruptcy exposure of $4.9 million was recorded in the third quarter 2003 relating to the WCI Steel Inc. (“WCI”) Chapter 11 filing (see Bankruptcy of Customers). Other income decreased $3.6 million to $2.2 million in 2003 primarily due to recoveries on two insurance claims in the amount of $3.5 million in 2002.

      The sales margin in the third quarter of 2003 was $7.3 million versus $5.5 million in 2002. The $1.8 million increase was principally due to higher sales price and volume partly offset by higher operating costs as summarized below. The operating cost increase reflected the impact of higher energy costs, production throughput challenges at the Michigan operations, and rising pension and medical benefit costs. Included in third quarter 2002 was the unfavorable impact of production curtailments, $3.4 million, necessitated by reduced demand for pellets.

16

Table of Contents