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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, 2002
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)

1100 Superior Avenue, Cleveland, Ohio 44114-2589
(Address of principal executive offices) (Zip Code)
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            

     As of October 18, 2002, there were 10,185,083 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

SEPTEMBER 30, 2002

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 2001 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 generally accepted accounting principles 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 the Tilden Mining Company L.C. (“Tilden”) since January 31, 2002 when the Company increased its ownership from 40 percent to 85 percent. On August 29, 2002, the Company acquired 100 percent ownership in Wabush Iron Co. Ltd. (“Wabush Iron”), which owns 26.83 percent of the Wabush Mines Joint Venture, when Acme Steel Company rejected its interest in Wabush Iron. As a result, Wabush Iron became a consolidated subsidiary in the third quarter; previously, the Company accounted for its Wabush Iron interest in the Investment in Associated Iron Ore Ventures. 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

Asset Impairment

     The Company monitors conditions that may affect the carrying value of its long-lived and intangible assets when events and circumstances indicate that the carrying value of the asset may be impaired. The Company determines impairment on the

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asset’s ability to generate cash flows greater than the carrying value of the asset, using an undiscounted probability-weighted analysis. If projected undiscounted cash flows are less than the carrying value of the asset, the assets are adjusted to their fair value (Note J).

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) in 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 if it cannot be determined that it is more likely than not that the asset will be realized.

Iron Ore Reserves

     The Company periodically reviews the iron ore reserves at each of its managed mining ventures based on long-term expectations of revenues and costs, which are subject to change. Iron ore reserves include only proven and probable quantities of ore which can be economically mined and processed utilizing existing technology. Depreciable asset lives and mine closure accruals are based on remaining economic iron ore reserves.

NOTE C — ACCOUNTING AND DISCLOSURE CHANGES

     Effective January 1, 2001, the Company changed its method of accounting for investment gains and losses on pension assets for the calculation of net periodic pension cost from a method that deferred and amortized realized and unrealized gains and losses over five years for most pension plans to a method that recognizes the changes immediately. The cumulative effect of this accounting change related to prior years was a one-time non-cash credit of $9.3 million ($14.3 million pre-tax) recognized as of January 1, 2001. The pro forma effect of this change on 2001 results for the third quarter and first nine months would have been less than $.1 million of income.

     In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 142 requires testing of goodwill and intangible assets with indefinite lives for impairment rather than amortizing them. The adoption of this statement in the first quarter of 2002 did not have a significant impact on the Company’s financial results.

     In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. When a liability is initially recorded, the entity capitalizes the cost by increasing the carrying value of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon

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settlement of the liability, a gain or loss is recorded. The statement is effective for fiscal years beginning after June 15, 2002 with early adoption encouraged. The Company may decide in the fourth quarter to adopt the standard early (in 2002) as opposed to waiting until January 1, 2003. Based on preliminary analysis, the Company does not expect the cumulative effect charge, upon adoption of this standard, to exceed $20 million; however, the Company continues to refine its estimate and the effect of this standard on its consolidated financial statements. The Company has been accruing closure costs on a prospective basis since 1999.

     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” Although retaining many of the provisions of SFAS No. 121, SFAS No. 144 establishes a uniform accounting model for long-lived assets to be disposed. This statement also requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows to be generated by the asset. If the carrying value of the asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company’s adoption of this statement in the first quarter of 2002 did not have a significant impact on its asset impairment policy.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The principal difference between this statement and EITF 94-3 relates to its requirement to recognize cost when the liability is incurred and not just as a result of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The Company plans to implement this standard effective January 1, 2003, when required.

NOTE D — 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 ($23.8 million – 2002; $9.6 million – 2001) paid on behalf of customers, and cost reimbursement of $26.3 million from January 31, 2002 from a minority interest partner for its contractual share of mine costs.

     Royalty and management fee revenue is recognized on production. Royalties and fees paid by the Company as a partner in the mines, which were previously reported in both revenues and cost of goods sold and operating expenses, have been eliminated. As a result, third quarter and first nine months 2001 revenues and cost of goods sold have been restated and reduced by $4.5 million and $8.6 million, respectively. There was no impact on financial results.

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NOTE E — ENVIRONMENTAL AND CLOSURE OBLIGATIONS

     At September 30, 2002, the Company, including its share of associated iron ore ventures, had an environmental and closure liability of $66.7 million, of which $8.8 million was classified as current. Activity in the first nine months of 2002 included cost accruals of $.7 million and expenditures of $5.5 million, of which $4.1 million represents expenditures for mine closure responsibilities assumed in the October 2001 LTV Steel Mining Company (“LTVSMC”) transaction.

     Mine closure obligations represent $47.7 million of the total obligation, including $43.1 million for LTVSMC, which closed early in 2001, and $4.6 million of accrued obligations at the Company’s five operating mines.

     Environmental liabilities of $19.0 million represent the balance of the total obligation. The Company’s obligations for known environmental 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 exposures could be incurred, the extent of which cannot be assessed.

     The environmental liability includes the Company’s obligations related to:

	•		Seven sites which are independent of the Company’s iron mining operations. These include three State and Clean Water Act sites where the Company is named as a potentially responsible party, the Kipling and Deer Lake sites in Michigan, and the Rio Tinto mine site in Nevada where significant site clean-up activities have taken place. Additionally, in September 2002, the Company received a draft of a proposed Administrative Consent Order from the United States Environmental Protection Agency for cleanup and reimbursement of costs associated with the Milwaukee Solvay Coke plant site in Milwaukee, Wisconsin. This plant was last operated by a predecessor of the Company during the years 1973 to 1983, which predecessor was acquired by the Company in 1986. The associated cost of removal and expense reimbursement is not expected to exceed $4 million; exposure for Milwaukee Solvay was previously accrued. The extent of any liability related to other potentially responsible parties has not been determined.
	•		Non-operating locations in Michigan, including ten former iron ore related sites and twelve leased land sites.
	•		Miscellaneous remediation obligations at the Company’s operating units.

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NOTE F — 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 consists of the hot briquetted iron (“HBI”) project in Trinidad and Tobago and other development activities. “Other” includes non-reportable segments, and unallocated corporate administrative expense and other income and expense.

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NOTE G — INCOME TAXES

     In March 2002, the “Job Creation and Worker Assistance Act of 2002” (“Act”) was enacted by Congress. Provisions of the Act provide for the carryback of net operating losses for tax years 2002 and 2001 for up to five years. Previously, the limitation was two years. As a result, the Company was able to utilize its tax loss generated in 2001 and reduce loss carryforwards by approximately $45 million and related deferred tax assets by about $15 million from December 31, 2001. Partially offsetting was an increase in alternative minimum tax credit carryforwards by approximately $8 million since December 31, 2001. The Company received a cash refund in the second quarter of 2002 of $11.6 million, an increase of $7.7 million compared to the year-end receivable. There was no impact on earnings as a result of this change. In the second quarter 2002, a favorable tax adjustment of $4.4 million was recorded reflecting the Company’s assessment of its tax obligations and expected outcome of certain audit issues for prior tax years.

     The Company uses the liability method whereby income taxes are recognized during the year in which transactions enter into the determination of financial statement income. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial statement and tax basis of assets and liabilities. The Company assesses the recoverability of its deferred tax assets in accordance with the provisions of SFAS No. 109. The Company is required to record a valuation allowance against deferred tax assets when the Company cannot provide objective evidence that “more likely than not” the deferred tax assets will be utilized before they expire. In the third quarter, the Company’s recording of an impairment of its investment in Cliffs and Associates Limited (“CAL”) caused the Company’s net deferred asset position to increase to a level that required it to record a deferred tax valuation allowance of $33.5 million. Net deferred tax assets of $23.9 million including loss carryforwards ($14.4 million — relating to capital losses), remain at September 30, 2002 based on the Company’s assessment of available strategies to realize the tax assets. The capital loss carryforwards begin to expire in 2005, with expiration of the ordinary loss carryforwards commencing in 2019. The Company intends to maintain a valuation allowance for its net deferred tax assets and net loss carryforwards until sufficient positive evidence exists to support the reversal of the reserve. Until such time, except for minor state, local and foreign tax provisions, the Company will have no reported tax provision, net of valuation allowance adjustments. In the event the Company was to determine, based on the existence of sufficient positive evidence, that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was 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 December 31, 2002 are expected to be:

     The $70.5 million of total minimum lease payments is comprised of the Company’s direct obligation of $12.5 million and the Company’s share of ventures’ obligations of $58.0 million, which are largely non-recourse to the Company.

NOTE I — INVESTMENTS IN ASSOCIATED IRON ORE VENTURES

     The Company’s investments in mining ventures at September 30 consist of its 35 percent ownership (46.7 percent participating) in Empire Iron Mining Partnership and 23 percent in Hibbing Taconite Company. The remaining interests in the ventures are owned by U.S. and Canadian integrated steel companies.