Cleveland-Cliffs
Annual Report 2000

Plain-text annual report

C l e v e l a n d - C l i f f s 2 0 0 0 A n n u a l R e p o r t CLEVELAND-CLIFFS INC PRODUCING AN ESSENTIAL RAW MATERIAL FOR NORTH AMERICA’S CRITICAL INDUSTRIAL BASE 1100 SUPERIOR AVENUE CLEVELAND, OH 44114-2589 www.cleveland-cliffs.com CORE VALUES In support of the Company’s objective to be the most admired minerals company, we are building on a framework of strong corporate values. SAFE PRODUCTION - record production with: lack of injuries....good housekeeping and orderly work areas.... well-maintained equipment....proper training and procedures....looking out for and correcting each other....safe conditions, safe behavior....Sentinel of Safety award winner. CUSTOMER FOCUS - listening to the customer....being responsive and on time....meeting quality expectations....helping the customer succeed. CREATING ECONOMIC VALUE - doing the right things right the first time....elimination of waste and inefficiency....breakthroughs in productivity and technology. BIAS FOR ACTION - getting things done....reduced red tape....barrierless....call anybody you want.... management by fact....plan the work – work the plan. TRUST, RESPECT AND OPEN COMMUNICATION - open access to information....constructive conflict.... delegation to the appropriate level....toleration of failure in pursuit of business success.... encouraging and accepting different views....feeling an obligation to explain your actions to those it affects....gender and racial diversity. GROUP AND INDIVIDUAL ACCOUNTABILITY - behaving in line with our core values....being responsible for our actions....providing plans/standards/expectations....holding yourself and/or the group to a high standard of performance....walk the talk. INTEGRITY - doing what you say you’re going to do....no hidden agendas....doing the right thing....being truthful....zero tolerance – not walking away from a situation....be credible. TEAMWORK - actively involve others in decision making....know when to take a leadership role and when to be an active member....recognize the value of teamwork and the synergy it creates. RECOGNIZE AND REWARD ACHIEVEMENT - celebrating successes....stress training and development....an effective appraisal of performance....giving a simple thank you. T H E S E C O R E VA L U E S A R E I M P O R T A N T T O O U R F U T U R E . E V E R Y O N E W I L L B E J U D G E D O N T H E I R S U P P O R T O F A N D C O M M I T M E N T T O T H E M . D I R E C TO R S O R G A N I Z AT I O N C H A N G E S At the Annual Meeting of Shareholders in May 2000, Robert S. Coleman did not stand for re-election to the Board of Directors due to the demands of his business. Mr. Coleman’s wise counsel over the nine years he served on the Board is missed. A. Stanley West, who was Senior Vice President-Sales and Commercial Planning, retired after 33 years with Cliffs and a 41-year career in the iron and steel industry. Mr. West’s in-depth knowledge of the steel industry in the United States and Canada was instrumental in Cliffs being the leading producer and merchant of iron ore in North America. George N. Chandler, II, Vice President-Reduced Iron, and Richard F. Novak, Vice President-Labor Relations, retired after 38 and 31 years of service, respectively. They made many contributions to Cliffs. Richard L. Shultz, formerly Director of Iron Making Technology, was named Vice President-Reduced Iron Sales and Business Development. Randy L. Kummer joined Cliffs as Vice President-Human Resources. Mr. Kummer was formerly Vice President-Human Resources, Government and Public Affairs of Kennecott Energy Company. Director Since 1997 1996 John S. Brinzo (4,6,7) Chairman and Chief Executive Officer of the Company Ronald C. Cambre (1,3,4,6) Chairman of the Board Newmont Mining Corporation International mining company 1999 Ranko Cucuz (1,5,6) Chairman and Chief Executive Officer Hayes Lemmerz International, Inc. International supplier of wheels to the auto industry 1986 James D. Ireland III (2,4,5,6,7) Managing Director/Capital One Partners, Inc. 1994 1991 1999 1996 1995 1991 Private merchant banking firm G. Frank Joklik (2,6) Chairman and Chief Executive Officer MK Gold Company International mining company, and Retired President and Chief Executive Officer Kennecott Corporation International mining company Leslie L. Kanuk (2,4,5,6) Professor Emeritus Zicklin School of Business Baruch College, City University of New York Anthony A. Massaro (1,6,7) Chairman and Chief Executive Officer Lincoln Electric Holdings, Inc. Global manufacturer of welding and cutting products and consumables Francis R. McAllister (3,4,5,6,7) Chairman and Chief Executive Officer Stillwater Mining Company Palladium and platinum producer John C. Morley (2,3,4,6,7) President/Evergreen Ventures, Ltd. Private investment firm, and Retired President and Chief Executive Officer Reliance Electric Company Major industrial manufacturer Stephen B. Oresman (3,5,6,7) President/Saltash Ltd. Management consultants 1991 Alan Schwartz (1,2,6) Professor, Yale Law School and Yale School of Management COMMITTEES: (1) Audit (2) Board Affairs (3) Compensation and Organization (4) Executive (5) Finance (6) Long Range Planning (7) Strategic Advisory Recycled Paper 41 COMPARATIVE HIGHLIGHTS Financial (In Millions Except Per Share Amounts) For the Year: Operating Revenues: Product Sales and Services Royalties and Management Fees Total Income Before Special Items: Amount Per Diluted Share Net Income: Amount Per Diluted Share At December 31: Cash and Cash Equivalents Long-Term Debt Shareholders’ Equity Book Value Per Common Share Market Value Per Common Share Iron Ore Production and Sales (Millions of Gross Tons) Production At Mines Managed by Cliffs: Total Cliffs’ Share Cliffs’ Sales 2000 1999 Increase (Decrease) $379.4 50.7 430.1 10.1 .97 18.1 1.73 29.9 70.0 402.0 39.73 21.56 41.0 11.8 10.4 $316.1 48.5 364.6 .4 .04 4.8 .43 67.9 70.0 407.3 38.27 31.13 36.2 8.8 8.9 $63.3 2.2 65.5 9.7 .93 13.3 1.30 (38.0) (5.3) 1.46 (9.57) 4.8 3.0 1.5 COMPANY PROFILE Cleveland-Cliffs Inc is the largest supplier of iron ore products to the North American steel industry. Iron ore is the fundamental raw material for integrat- ed steel companies that make steel in blast furnaces. Subsidiaries of the Company manage and hold equity interests in five iron ore mines in Michigan, Minnesota and Eastern Canada. Nearly all the integrated steel companies in North America are partners or customers. Cliffs has a major iron ore reserve postition in the United States and is a substantial iron ore merchant. Cliffs is developing a significant ferrous metallics business to primarily serve steel companies that make steel in electric arc furnaces. The Company’s first project is the hot briquetted iron (HBI) plant in Trinidad and Tobago. Cliffs is in its 154th year of service to the steel industry. 1 LETTER TO OUR SHAREHOLDERS Dear Fellow Shareholder: A year ago, we told you that we were glad to put capacity levels. However, the large steel consumers 1999 behind us. That statement was, of course, a also began to import increasingly large amounts of reaction to the very difficult year our Company had in steel. As the import volumes rose, North American 1999 when we had to cope with an unexpected dip steel operating rates fell and prices collapsed. At the in pellet sales. We also told you we were anticipating same time, energy prices surged and the once strong a significant improvement in year 2000 earnings that economies in the United States and Canada began to would be driven by higher sales volume and better rapidly weaken. sales margins due to higher production volumes and By the fourth quarter of 2000, deteriorating cost reduction. At that time, our biggest uncertainty business conditions in the steel industry had reached was the ramp-up of production at the Cliffs and catastrophic dimensions, and most of our partners Associates Limited (CAL) reduced iron plant in and customers reported substantial losses for the Trinidad. quarter. A growing list of steel company bankruptcy Unfortunately, the strength of the U.S. and filings demonstrated the severity of the crisis. Two fil- Canadian economies in the first half of 2000 proved ings in the fourth quarter were of particular signifi- to be a double-edged sword for the steel and iron ore cance to Cliffs – the November 16th filing by business. Accelerating demand from the automotive, Wheeling-Pittsburgh Steel Corporation and the appliance and construction industries pushed operat- December 29th filing by LTV Corporation. ing rates at North American steel plants to near 2 Despite the rapid deterioration of the North to significant production curtailments in 1999 and American steel business in the second half of 2000, higher pellet sales volume in 2000. The margin on Cliffs-managed mines operated at near-capacity lev- pellet sales in 2000 was a major disappointment, els and produced a record 41.0 million tons. Cliffs' even as we operated at full production and eliminat- share of production was 11.8 million tons versus 8.8 ed the high fixed cost penalties incurred in 1999 million tons in 1999. The Company sold 10.4 million when we curtailed production by 3.0 million tons. tons of iron ore pellets in 2000. This was a major While we made progress in pursuing productivity and improvement from the 8.9 million tons sold in 1999, cost reduction objectives, our successes were over- but less than our original sales expectation. While whelmed by higher energy costs, notably natural gas we planned to build inventory in 2000 to meet pro- and diesel fuels, and cost inflation in other areas jected demand in future years, a steep decline in such as medical costs. Operating difficulties, partic- fourth quarter shipments caused our year-end ularly at the Empire and Wabush Mines, also con- inventory to increase to 3.3 million tons, well tributed to the poor cost performance. beyond the planned level. Disappointments in 2000 were not restricted Net income was $18.1 million in 2000 versus to our core iron ore business. After struggling with $4.8 million in 1999. Excluding special items, net the start-up of its plant in Trinidad for more than a income was $10.1 million, a $9.7 million increase year, CAL decided in mid-May to suspend start-up from the $.4 million recorded in 1999, primarily due 3 Millions 40 TOTAL STEEL IMPORTS TO THE UNITED STATES – NET TONS 30 20 10 0 4 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 2000 “Unfairly dumped steel imports, including steel slabs, totaled 38.0 million tons in 2000, the second highest amount in history” activities in order to evaluate plant reliability and make modifications to portions of the plant. After several key modifications were completed, the plant was restarted and operated for a month to test the modifications and gain additional operating experi- ence. The results of this test were very positive. Plant operations improved significantly, and we pro- duced several thousand tons of high quality commer- cial HBI, despite the known flaws in a portion of the flowsheet. At the end of July, the plant was shut down again to evaluate on-going economics and decide whether or not to complete the remaining modifications. In the third quarter, LTV withdrew its financial support of CAL, and Cliffs and Lurgi decided to complete the plant modifications and acquire LTV's 46.5 percent share of CAL for a nominal upfront payment. For the balance of the year, the plant remained idle while mod- ifications were undertaken. The decision to proceed was based on the successful July test, a favorable beginning in 2001, the LTV bankruptcy filing has made this expectation more problematic. The increase in our ownership of Empire has raised Cliffs' total sales capacity from 11.8 million tons to 12.8 million tons. The LTV bankruptcy filing resulted in a relatively modest charge to fourth quarter results. However, there are substantial contractual obligations and management relationships between Cliffs and LTV, and non-performance by LTV could have a significant impact on Cliffs and/or the Empire Mine. The closure of LTV's wholly-owned mine in Minnesota on January 5th is expected to make LTV a major iron ore cus- tomer of Cliffs in 2001 and beyond, under a multi-year sales contract executed in 2000. LTV is also a 25 percent partner in the Empire Mine. Since its filing, LTV has continued to meet its obligations as a partner of Empire, and we expect LTV will purchase its iron ore pellet requirements from Cliffs. However, LTV has neither affirmed nor rejected its ownership in Empire or its ore purchase contract with Cliffs. In addition, there is much uncer- tainty relating to the level at which LTV's steelmak- ing facilities will operate. Bill Calfee, Cliffs' executive vice president-commercial, is chairman of the LTV Unsecured Creditors Committee, and we are com- mitted to achieving a satisfactory outcome. The steel and iron ore business in North America is going through a painful process of restructuring whereby only the strongest facilities are likely to survive. This will ultimately produce a stronger, more financial arrangement on the buyout of the LTV inter- est, and a comprehensive evaluation of the project economics. CLIFFS TODAY Given the business outlook, the recent bank- ruptcies of Wheeling-Pittsburgh and LTV and the weak financial position of other partners and cus- tomers, Cliffs has significant challenges ahead. Prior to the Wheeling filing, which did not have a significant adverse impact on Cliffs' results in 2000, the Company exercised its right to acquire Wheeling's 12.5 percent indirect interest in the Empire Mine. No cash was paid to Wheeling for the interest, only assumption of additional mine liabili- ties. The acquisition of Wheeling's interest increased Cliffs' ownership in Empire to 35 percent and raised Cliffs' share of the mine's 8-million-ton-production capacity from 1.8 million tons to 2.8 million tons. While we expect to sell the additional tonnage to LTV 5 competitive industry, but the path in the near term is fraught with difficulty and uncertainty. We are man- aging our iron ore business with the expectation that integrated steel and iron ore production capacity will continue to shrink, and foreign competition will remain intense. We believe Cliffs can be a stronger factor in a consolidating North American pellet market. Most of our pellet capacity is competitive, on both a cost and quality basis, but all of our mines can improve their position. While we have always focused on cost and quality, we need to make dramatic changes in the way we operate to serve a "new" steel industry. Our objective is to be the most admired minerals compa- ny, and we are not going to let any barriers to improve- ment get in our way. Cost reduction is a key element of our corporate- wide initiative called ForCE 21 (For Competitive Excellence in the 21st Century). ForCE 21 is de- Millions 10 SEMI-FINISHED STEEL IMPORTS TO THE UNITED STATES – NET TONS 8 6 4 2 0 6 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 2000 “The steel import problem that is particularly troubling to Cliffs is the dump- ing of semi-finished steel slabs, which totaled 8.6 million tons in 2000.” signed to produce organizational and operational larger volumes and longer-term contracts. We have excellence through employee involvement and cultural achieved significant cost savings utilizing the change. It promotes accelerated change with a focus "reverse auction" process available with our e-com- on improvements in cost, quality and safety. merce software platform and expect to realize addi- Employee teams, including hourly employees at all tional savings with this technology. facilities, are challenging existing practices in a • Labor contracts negotiated in 1999 resulted search for better, more cost effective ways of improv- in a strategic alliance with the United ing operating performance. On the inside front cover Steelworkers' Union, which is providing a unique of this report are Cliffs' core values that provide a opportunity to cooperatively pursue objectives that framework for ForCE 21. Although this initiative is are focused on cost reduction, improved labor pro- just beginning, we have achieved impressive results ductivity and safety. in a number of areas and are optimistic about its • All operations are taking actions to minimize potential. energy costs. Energy costs represent almost 25 per- We recognize that we must do more and are cent of mine operating costs depending on the mine, challenging all areas of our organization to ensure so actions taken in this area are vitally important. that we are being as cost efficient as possible: The increase in energy costs from 1999 to 2000 • Productivity improvements will result in lower penalized Cliffs' operating earnings in 2000 by about employment levels at most locations, and the out- $14 million. The adverse impact of high energy costs sourcing of various support services is being imple- is expected to continue in 2001. mented. The cost savings of these actions when While our business plans are not dependent on complete will be significant. reducing imports of steel and iron ore, Cliffs and its • We are working with suppliers of purchased materials and equipment to reduce prices. Over the last two years, we have entered into alliance agree- ments with a number of suppliers. These suppliers have made major price reductions in exchange for 7 steel company partners and customers need a level getting the U.S. Commerce Department to com- playing field to deal with foreign trade. Unfairly mence an investigation of whether imports of iron ore dumped foreign steel imports are systematically and steel slabs are jeopardizing the national security. eliminating North American steel capacity, and OUTLOOK unfairly imported steel slabs are cutting into the iron Business conditions in the iron and steel indus- ore market. U.S. steel imports, including steel slabs, try are as bad as they have been in many decades totaled 38.0 million tons in 2000, the second high- and are expected to remain difficult through at least est amount in history. the first half of 2001. Given the harsh environment There is significant excess steelmaking capaci- confronting our steel company partners and cus- ty in the world, and the United States is a magnet for tomers, there is significant uncertainty regarding the surplus due to our weak enforcement of existing Cliffs' pellet sales volume in 2001 and production lev- trade laws and a strong dollar. Foreign steel compa- els at managed mines. We expect the financial nies are selling steel in the United States at prices results of our core iron ore business will be severely that are below what it costs to produce, and that is impacted by production curtailments. a violation of U.S. trade laws. We are hopeful that the If the generally anticipated increase in the Bush Administration and the 107th Congress will international pellet prices occurs, we would expect work together, on an urgent basis, to address our to realize a modest increase in price realizations in country's steel emergency. This is also a vital issue 2001 because the pricing formulas in our multi-year in Canada, and the Canadian government has a steel sales contracts allow us to realize about half of any anti-dumping investigation in progress following com- change in the international price. Prices in our plaints by steel producers in Canada. multi-year contracts increase or decrease over the The import problem that is particularly troubling contract term using a number of factors including to Cliffs is the dumping of semi-finished steel slabs. the international pellet price, energy costs, labor Companies that import slabs in lieu of producing their costs and steel prices. hot metal requirements reduce or eliminate their iron Losses from CAL are expected to be somewhat ore requirements. When foreign producers dump lower in 2001, but first half losses will be greater slabs into this country, domestic steelmakers can than first-half 2000. Modifications to the Trinidad buy slabs at a cost that is lower than the cost to pro- plant were completed on schedule and on budget, duce raw steel in their primary steel operations. The and the plant will begin briquette production in unchecked availability of semi-finished steel imports March. CIRCALTM briquettes were trial tested in two could result in the premature closure of certain blast U.S. electric furnaces in November and December furnaces. Congressmen James Oberstar of Minnesota and Bart Stupak of Michigan were instrumental in 8 2000 with positive results. We are receiving numer- We cannot control the demand for iron ore and ous inquiries regarding trial shipments and tests at other ferrous metallics products, but we can mini- other electric furnace operations and at some blast mize the impact by producing the highest quality furnace operations as soon as additional briquettes products at the lowest possible cost. We also can are available. The pricing for all metallics in the be proactive in pursuing business opportunities that United States is still very weak, but we expect some are created by the adversities in our business. We improvement as the year develops. In today's high- intend to be relentless in pursuing the goals and energy-cost environment that has forced the closure objectives that will allow Cliffs to steer the uncertain of all reduced iron plants located in the United road that is ahead and restore Cliffs value. We appre- States, CAL is exceptionally well positioned with low- ciate your support. cost, stable gas prices in Trinidad. We continue to expect an increase in global electric-arc-furnace steel production, and consequently an improving mar- ket for our CIRCALTM briquettes. On January 9th, your Board of Directors reduced the quarterly dividend from 37.5 cents per share to 10 cents per share. Based on the 10.1 million shares currently outstanding, this action will reduce the annual cash outlay for dividends by more than $11 million. While the Board regretted the action, we believe it was appropriate during this period of extreme uncertainty in the North American steel industry. We are also making a significant reduction in our capital spending in 2001. Excluding expenditures at CAL, we spent over $23 million on capital in 2000, which was slightly less than depreciation of $26 mil- lion. We would expect comparable spending to be only $14 million in 2001, again excluding CAL. We will also be reducing our pellet inventory by at least 1.3 million tons during the year, which will generate cash flow of $35 million. We fully expect our cash flow in 2001 will allow us to repay by year-end the $65 million borrowed in January under our revolving credit facility. We believe our strong balance sheet, and the actions we have taken with respect to the dividend, capital spending and cost reductions will provide the liquidity we need to meet the challenges and take advantage of the John S. Brinzo Chairman and Chief Executive Officer Thomas J. O'Neil President and Chief Operating Officer opportunities that are ahead of us in 2001. February 28, 2001 9 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In 2000, Cleveland-Cliffs Inc (“Company”) had net income of $18.1 million, or $1.73 per share (references to per share earnings are “diluted earnings per share”) versus net income for the year 1999 of $4.8 million, or $.43 per share. Following is a summary of results for the years 2000, 1999 and 1998: ( I N M I L L I O N S E X C E P T P E R S H A R E A M O U N T S ) 2000 $10.1 $18.0 $18.1 $1.74 $1.73 1999 $57.4 $54.4 $54.8 $5.43 $5.43 1998 $53.9 $53.5 $57.4 $5.10 $5.06 10,393 10,439 11,076 11,124 11,248 11,336 Net income before special items Special items Net income – Amount – Per share (basic) – Per share (diluted) Average number of shares (in thousands) – Basic – Diluted 2000 VERSUS 1999 Net income for the year 2000 of $18.1 million, or $1.73 per share, included three special items: • a $9.9 million after-tax recovery on an insurance claim related to lost 1999 sales; • a $5.2 million tax credit reflecting a reassessment of income tax obligations based on current audits of prior years’ federal tax returns; and • a $7.1 million after-tax charge to recognize the decrease in value of the Company’s investment in LTV common stock. Year 1999 net income included favorable after-tax income adjustments of $4.4 million that related primarily to prior years’ state tax refunds. Excluding special items in both years, net income in 2000 of $10.1 million was $9.7 million higher than 1999 net income of $.4 million. The $9.7 million improvement in 2000 net income before special items reflected higher income before income taxes, $14.4 million, partially offset by higher income taxes, $4.7 million. The increase in pre-tax income before special items was primarily due to: • An improvement of $19.2 million in pellet sales margin from the 1999 negative margin of $20.0 million. Following is a summary comparison of sales margin for 2000 and 1999: ( I N M I L L I O N S ) Increase (Decrease) 2000 1999 Amount Percent Sales (Tons) 10.4 8.9 1.5 17% Revenue from product sales and services $379.4 $316.1 $ 63.3 20% Cost of goods sold and operating expenses 380.2 336.1 44.1 Sales margin (loss) $ (.8) $ (20.0) $ 19.2 13% 96% Revenue from product sales and services increased $63.3 million primarily due to the 1.5 million ton sales volume increase along with a modest improvement in average sales price realization. The increase in cost of goods sold and operating expenses reflected the increase in volume, production curtailments in 1999 and significant increases in energy rates, which added almost $14 million to cost in 2000. • Royalty and management fees, including amounts paid by the Company as a participant in the mining ventures, of $50.7 million in 2000 versus $48.5 million in 1999, an increase of $2.2 million, primarily due to increased production at Tilden Mine. • Higher other income, $3.3 million, including insurance company demutualization proceeds, favorable settle- ment of a legal dispute, and gains from sales of non- strategic lands. Partially offsetting were: • Higher Cliffs and Associates Limited (“CAL”) pre- operating losses, $4.5 million, reflecting continuing plant start-up difficulties, holding costs during plant modifications, and the Company’s increased ownership in the venture as of November 20, 2000. (See Ferrous Metallics.) • Increased administrative, selling and general expense, $2.6 million, due to higher active and retiree medical costs and pensions, and increased management incen- tive compensation expense. • Higher other expenses, $2.0 million, largely reflecting the reserving of amounts related to administrative services and management fees from LTV’s wholly-owned LTV Steel Mining Company (“LTVSMC”) as a result of A & D M 10 the LTV filing for protection under Chapter 11 of the U.S. Bankruptcy Code on December 29, 2000. • Higher interest expense, $1.2 million, resulting from the cessation of interest capitalization in April, 1999 on the construction of CAL’s hot briquetted iron (“HBI”) facility in Trinidad and Tobago. The $4.7 million increase in income taxes before special items was principally due to higher pre-tax income. 1999 VERSUS 1998 Net income for 1999 was $4.8 million, or $.43 per share, compared to 1998 net income of $57.4 million, or $5.06 per share. Year 1999 net income included favorable after-tax income adjustments of $4.4 million that related primarily to prior years’ state tax refunds (recorded as a reduction to cost of goods sold). Year 1998 net income included a $3.5 million favorable income tax adjustment related to audits of prior years’ federal tax returns. Excluding special items in both years, net income was $.4 million in 1999, a decrease of $53.5 million from 1998. The $53.5 million decrease in net income before special items reflected lower income before income taxes of $73.9 million, partially offset by a $20.4 million decrease in income taxes. The decrease in pre-tax income before special items was primarily due to: • Negative pellet sales margin of $20.0 million in 1999 compared to a margin of $46.1 million in 1998, a decrease of $66.1 million summarized as follows: ( I N M I L L I O N S ) Increase (Decrease) 1999 1998 Amount Percent Sales (Tons) 8.9 12.1 (3.2) (26)% Revenue from product sales and services $316.1 $465.7 $(149.6) (32)% Cost of goods sold and operating expenses 336.1 419.6 (83.5) (20)% Sales margin (loss) $ (20.0) $ 46.1 $ (66.1) (143)% Revenue from product sales and services decreased by $149.6 million, primarily due to decreased sales volume due to blast furnace outages, and lower average sales price realization, reflecting lower pellet pricing and the mix of contracts. The decrease in cost of goods sold and operating expenses was not proportional to the decrease in sales volume due to fixed costs incurred during production curtailments to balance production with the lower sales volume. • Higher pre-operating losses from CAL, $6.8 million, reflecting start-up and commissioning costs on CAL’s HBI project in Trinidad and Tobago. • Higher interest expense, $3.3 million, resulting from the cessation of interest capitalization when construc- tion of the HBI facility was completed in April, 1999. • Lower interest income, $2.1 million, due to lower aver- age cash balances throughout the year. • Lower royalty and management fees in 1999, including amounts paid by the Company as a participant in the mining ventures, $1.2 million, mainly due to lower production. • Partially offsetting was lower administrative, selling and general expense, $2.6 million, including lower man- agement incentive compensation, cost reduction initia- tives and a 10 percent reduction of corporate staff in the first quarter of 1999. • Other expenses also decreased $3.9 million, including lower business development expenses and an increase in the allowance for doubtful accounts recorded in 1998 related to the Acme bankruptcy. The $20.4 million decrease in income taxes before special items was primarily due to the decrease in pre-tax income and the favorable impact of percentage depletion. 11 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS C ASH FLOW AND LIQUIDITY At December 31, 2000, the Company had cash and cash equivalents of $29.9 million. In addition, the full amount of a $100 million unsecured revolving credit facility was available. Following is a summary of 2000 cash flow activity: ( I N M I L L I O N S ) Cash flow from operations: Before changes in operating assets and liabilities Changes in operating assets and liabilities Net cash from operations Capital expenditures Investment and advances in Cliffs and Associates Limited Purchase of CAL interest from LTV Dividends Repurchases of common shares Contributions to CAL of minority shareholder Other Decrease in cash and cash equivalents $(76.9 (48.9) 28.0 (23.4) (13.8) (1.7) (15.7) (15.6) 4.2 .3 $(37.7) The $48.9 million increase in operating assets and liabilities primarily reflected higher iron ore inventories, $54.2 million. Following is a summary of key liquidity measures: AT D E C E M B E R 3 1 ( I N M I L L I O N S ) 2000 1999 1998 Cash and cash equivalents $129.9 $167.6 $130.3 Working capital $145.8 $143.4 $176.1 Ratio of current assets to current liabilities 2.4:1 3.0:1 3.1:1 In 2001, the Company expects to receive refunds of approximately $14 million of current and prior years’ federal tax payments associated with the Company’s adjustment of its CAL tax basis of properties. Separately, an additional tax and interest payment of approximately $5 million related to the anticipated settlement of audit issues for tax years 1995 and 1996 is expected in 2001. A $5.2 million non-cash favor- able adjustment of the Company’s tax obligations related to the audit was recorded in 2000 results. From time to time, in the normal course of business, the Company enters into contracts to purchase iron ore to meet customer quality specifications or fulfill anticipated or forecasted shortfalls. The Company has committed to pur- chase approximately $19 million of pellets in 2001. The Company anticipates that its share of capital expenditures related to the iron ore business, which were $23.4 million in 2000, will be significantly reduced in 2001. The estimate for 2001 capital expenditures is highly uncertain, and will depend on production levels at the Company-managed mines and the financial position of the mine owners. The Company expects to fund its share of capital expenditures from current operations. C APITALIZATION Long-term debt of the Company consists of $70 million of senior unsecured notes, with a fixed interest rate of 7.0 percent, which 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, 2000 of $4.0 million, which are largely non-recourse to the Company. The Company has a $100 million revolving credit agreement, which expires on May 31, 2003. On January 8, 2001, the Company bor- rowed $65 million on the facility for general operating and working capital requirements. The loan interest rate, based on the LIBOR rate plus a premium, is fixed at 6.1 percent through July 8, 2001. Loan repayment timing is subject to future uncertainty, but the Company expects to repay the loan by the end of 2001. In 2000 and 1999, the Company purchased .7 million and .6 million shares of its Common Shares at a cost of $15.6 million and $17.2 million, respectively. Through December 31, 2000, the Company has purchased 2.4 million shares at a total cost of $79.5 million under its authorization to re- purchase up to 3.0 million Common Shares. The shares will initially be retained as Treasury Stock. On January 9, 2001, the Company announced a reduction in its quarterly dividends on Common Shares to $.10 per share from the previous dividend rate of $.375 per share. A & D M 12 IRON ORE After a modest improvement in the first half of 2000, North American steel industry fundamentals deteriorated significantly in the second half of the year. Weak steel order books and price decreases attributable to slowing economies in the United States and Canada, high volumes of steel imports, and soaring energy costs have caused crisis condi- tions in the North American iron and steel industry. The Company is supporting steel industry efforts to combat unfair imports. LTV and Wheeling-Pittsburgh Steel Corporation (“Wheeling-Pittsburgh”) filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the fourth quarter of 2000, and several of the Company’s other partners and customers have curtailed raw steel production and experienced financial difficulties in the fourth quarter. Given the current conditions in the industry, significant uncertainty exists concerning the Company’s sales and production at its mines in 2001. The Company ended the year 2000 with 3.3 million tons of iron ore pellet inventory, an increase of 1.9 million tons from 1999. Increased pellet sales of 1.5 million tons in 2000 were more than offset by an increase in the Company’s share of 2000 production. The six mines managed by the Company produced 41.0 million tons of iron ore in 2000, compared to production of 36.2 million tons in 1999. The Company’s share of production was 11.8 million tons in 2000 versus 8.8 million tons in 1999. The increase was mainly due to production curtail- ments in 1999 which were undertaken to reduce inventory levels because of lower sales volume. The Company expects production at its five active mines in 2001 to be significantly below the combined 34.1 million ton capacity. The Company’s iron ore pellet sales were 10.4 million tons in 2000 versus 8.9 million tons in 1999. The increase in iron ore pellet sales in 2000 was mainly due to the return of blast furnace operations at two customers that were out for most of 1999. The Company’s sales volume is largely com- mitted under multi-year sales contracts, which are subject to changes in customer requirements. International iron ore pellet price changes impact certain of the Company’s multi- year sales contracts, which use international prices as price adjustment factors. Other factors impacting the Company’s average price realization under various sales contracts include mine operating costs, energy costs, and steel prices. A wholly-owned subsidiary of LTV is a 25 percent part- ner in the Company-managed Empire Mine in Michigan. Since the bankruptcy filing, LTV has remained current with its Empire obligations. At the time of the bankruptcy filing, LTV owed the Company approximately $2.3 million related to the Company’s management of LTVSMC in Minnesota, which amount the Company has reserved. In May 2000, LTV announced its intention to close LTVSMC in mid-2001 and later the intended closing date was advanced to February 22, 2001. Subse- quent to its bankruptcy filing, LTV ceased operations at LTVSMC on January 5, 2001, more than a month ahead of schedule, due to conditions in the steel market and cost reduction efforts associated with the bankruptcy filing. The Company signed a long-term agreement in May, 2000 to supply LTV with the majority of the iron ore it will need to purchase as a result of the closing of LTVSMC. Sales over the 10-year contract term could total more than 50 mil- lion tons if LTV continues to produce at or near current levels and performs under the contract terms. To date in the bank- ruptcy proceeding, LTV has neither affirmed nor rejected this agreement. Sales under the contract were less than .2 million tons in 2000; expected sales in 2001 will be impacted by the liquidation of LTVSMC’s remaining pellet inventory and business conditions. The Company had no trade accounts receivable exposure to LTV at the time of bankruptcy filing. In May, 2000, LTV granted the Company an exclusive option to purchase the LTVSMC assets in exchange for assumption of environmental and reclamation obligations and other consideration at LTVSMC. The Company has until March 31, 2001 to exercise the option. The Company does not believe iron ore pellets can be produced there economi- cally, but is investigating whether alternative uses or the disposition of the assets would be advantageous. Prior to Wheeling-Pittsburgh’s filing for protection under Chapter 11 of the U.S. Bankruptcy Code on November 16, 2000, the Company exercised its rights under existing agreements to acquire Wheeling-Pittsburgh’s 12.4375 per- cent indirect interest in Empire Mine. The acquisition of 13 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Wheeling-Pittsburgh’s interest in the Empire Mine increased the Company’s ownership share to 35 percent and share of production capacity from 1.8 million tons to 2.8 million tons. Subsequent to its Chapter 11 filing, Wheeling-Pittsburgh has requested an accounting for the acquisition transaction. At the time of the filing, the Company did not have a term sales contract with Wheeling-Pittsburgh and the Company’s trade receivable exposure was negligible. In 1998, Acme Metals Incorporated and its wholly- owned subsidiar y Acme Steel Company (collectively “Acme”), a partner in Wabush and an iron ore customer, peti- tioned 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. Since its filing, Acme has continued its relationship with Wabush and the Company. Sales to Acme in 2000 represented 3 percent of total sales volume. The major business risk faced by the Company in iron ore is lower customer or venture partner consumption of iron ore from the Company’s managed mines which may result from competition from other iron ore suppliers; use of iron ore substitutes, including imported semi-finished steel; steel industry consolidation, rationalization or financial failure; or decreased North American steel production, resulting from increased imports or lower steel consumption. Loss of sales and/or royalty and management fee income on any such unmitigated loss of business would have a significantly greater impact on earnings than revenue, due to the high level of fixed costs in the iron mining business. In 1999, the Company lost more than one million tons of iron ore pellet sales to Rouge Industries as a result of the extended shutdown of two blast furnaces following an explo- sion at the power plant that supplies Rouge. In 2000, the Company recorded a pre-tax insurance recovery and received proceeds on the claim of $15.3 million ($9.9 million after- tax). The Company continues to pursue modest additional recoveries, but given the complexity of the insurance issues, any additional amounts will not be recorded until all out- standing matters are resolved. The Company held 842,000 shares of LTV common stock, which were originally valued at $11.5 million, or $13.65 per share. As of June 30, 2000, the investment was reclassi- fied to “trading” and accordingly changes in market value were recognized in earnings as they occurred. The Company has recognized a reduction to 2000 earnings of $10.9 million pre-tax ($7.1 million after-tax) related to the investment. In August 2000, the Company commenced a program to reduce its investment in the LTV common stock and through December 31, had sold 300,000 shares, with the remaining shares sold in January, 2001. Five-year labor agreements between the United Steelworkers of America (“USWA”) and the Empire, Hibbing, and Tilden mines were ratified in August 1999. The agree- ments, which were patterned after agreements negotiated by major steel companies, provide employees with improvements in pensions, wages, and other benefits. The agreements also commit the mines and the union jointly to seek operating cost improvements. The Wabush Mine in Canada also settled on a five-year contract in July, 1999. FERROUS METALLICS The Company’s strategy includes extending its busi- ness scope to produce and supply ferrous metallic products to an expanded customer base, including electric arc furnace steelmakers. CAL, a venture in Trinidad and Tobago, completed construction in April, 1999 of a facility designed to produce premium quality HBI to be marketed to the steel industry. The HBI facility has produced sufficient reduced iron to demonstrate that the Circored® process technology will yield a product that meets the quality specifications that were established, including high metalization rates. However, sustained levels A & D M 14 of briquette production could not be achieved, and in May, 2000, start-up activities were temporarily suspended in order to evaluate plant reliability and make modifications to por- tions of the plant. The plant was restarted on July 1, 2000 to test the functionality and reliability of the initial modifications and to gain additional operating experience. Results of this five-week test were positive. Although a small quantity of commercial grade briquettes was produced, replacing the dis- charge system was necessary to improve material flow and obtain consistent feed of HBI to the briquetting machines. The modifications are targeted for completion in the first quarter of 2001. On November 20, 2000, a subsidiary of the Company and Lurgi Metallurgie GmbH (“Lurgi”) completed the acqui- sition of LTV’s 46.5 percent interest in CAL for $2 million (Company share – $1.7 million) and additional future pay- ments, that could total $30 million through 2020 dependent on CAL’s production, sales volume and price realizations. LTV announced its decision to withdraw its financial support for CAL on July 28, 2000. Upon acquisition, the Company’s ownership in CAL increased to 86.9 percent (previously 46.5 percent). The Company has consolidated CAL for financial reporting purposes since the acquisition. Subsequent to LTV’s withdrawal of financial support for CAL, it was estimated that $45 million of additional invest- ment (of which $16.6 million has been invested through December 31, 2000) would be required for CAL to attain sus- tained production and generate positive cash flow, consisting of capital expenditures of $15 million, working capital of $15 million and cash start-up costs of $15 million. Lurgi has agreed to fund a disproportionate share of the capital expenditures through in kind contribution of the new discharge system, which increases its ownership. As a result, the Company’s ownership in CAL at December 31, 2000 de- creased to 84.4 percent. If the full $45 million is required, the Company’s additional investment will be $33 million (of which $11.6 million has been funded at December 31, 2000), and the Company will own approximately 82.4 percent of CAL. The primary business risk faced by the Company in fer- rous metallics is the as yet undemonstrated capability of the Trinidad facility to produce a sustained quantity of commer- cial grade HBI at a cost level necessary to achieve profitable operations given the market for HBI. ACTUARIAL ASSUMPTIONS As a result of a decrease in long-term interest rates, the Company re-evaluated the rates used to calculate its pen- sion and other postretirement benefit (“OPEB”) obligations. The discount rate used to calculate the Company’s pension and OPEB obligations was decreased to 7.75 percent at December 31, 2000 from 8.0 percent at December 31, 1999. The change in the discount rate assumption is projected to increase pension and OPEB expense for 2001 by approxi- mately $.3 million. Additionally, as a result of recent experience, the Company increased the medical trend rate assumption it utilizes in determining its OPEB obligation. An annual rate of increase in the per capita cost of covered healthcare benefits of 8.0 percent was assumed for 2001 (6.5 percent in 2000) decreasing to an annual rate of 5.0 percent in 2008 and annually thereafter. The increase in the trend rate assumption will increase the Company’s OPEB expense by $1.2 million in 2001. The Company makes contributions to the pension plans within income tax deductibility restrictions in accordance with statutory requirements. In 2000, the Company con- tributed $1.7 million, including its share of ventures funding, an increase of $.6 million from 1999. 15 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENVIRONMENTAL COSTS The Company has a formal code of environmental con- duct which promotes environmental protection and restora- tion. 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 uncer tainties involved. Potential insurance recoveries have not been reflected in the determination of the financial reserves. At December 31, 2000, the Company had a reserve for environmental obligations, including its share of the environ- mental obligations of ventures, of $20.0 million ($20.6 mil- lion at December 31, 1999), of which $4.5 million is current. Payments in 2000 were $1.9 million (1999 – $1.0 million). MARKET RISK The Company is subject to a variety of market risks, including those caused by changes in the foreign currency fluctuations and changes in interest rates. The Company has established policies and procedures to manage such risks; however, certain risks are beyond the control of the Company. 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. A portion of the Company’s operating costs are subject to change in the value of the Canadian dollar. Derivative finan- cial instruments, in the form of forward currency exchange contracts, have been utilized by the Company to manage exchange rate fluctuations of the Canadian dollar on the Company’s operating costs. The Company had no forward currency exchange contracts as of December 31, 2000. The Company does not engage in acquiring or issuing derivative financial instruments for trading purposes. At December 31, 1999, the notional amounts of the outstanding forward cur- rency exchange contracts was $22.5 million, with a fair value of $.4 million, based on the December 31, 1999 forward rate. As a result of significantly increasing natural gas prices in 2000, the Company’s managed mines entered into forward contracts as a hedge against continued expected price increases. Such contracts, which are in quantities expected to be delivered and used in the production process, are a means to limit exposure to price fluctuations. At December 31, 2000, the notional amounts of the outstanding forward contracts were $16.1 million (Company share – $5.4 million), with an unrecognized fair value gain of $11.4 million (Company share – $3.8 million) based on December 29, 2000 forward rates. The contracts mature at various times through April, 2001. No such contracts were utilized in 1999. If the forward rates were to change 10 percent from the year-end rate, the value and potential cash flow effect on the contracts would be approximately $2.8 million (Company share – $.9 million). The Company has $70 million of long-term debt out- standing at a fixed interest rate of 7 percent due in December, 2005. A hypothetical increase or decrease of 10 percent from 2000 year-end interest rates would change the fair value of the debt by $1.4 million. A & D M 16 FORWARD-LOOKING STATEMENTS • Unanticipated geological conditions or ore processing 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 dif- fer 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, but are not limited to the following: • Displacement of iron production by North American integrated steel producers due to electric furnace production or imports of semi-finished steel or pig iron; • Loss of major iron ore sales contracts, or failure of cus- tomers to perform under existing contracts; • Changes in the financial condition of the Company’s partners and/or customers; • Substantial changes in imports of steel, iron ore, or ferrous metallic products; • Development of alternate steel-making technologies; • Displacement of steel by competing materials; • Unanticipated changes in the market value of steel, iron ore or ferrous metallics; • Domestic or international economic and political conditions; • Major equipment failure, availability, and magnitude and duration of repairs; changes; • Process difficulties, including the failure of new tech- nology to perform as anticipated; • Availability and cost of the key components of produc- tion (e.g., labor, electric power, fuel, water); • Weather conditions (e.g., extreme winter weather, availability of process water due to drought); • Changes in tax laws (e.g., percentage depletion allowance); • Changes in laws, regulations or enforcement practices governing remediation requirements at existing envi- ronmental sites, remediation technology advance- ments, the impact of inflation, the identification and financial condition of other responsible parties, and the number of sites and the extent of remediation activity; • Changes in laws, regulations or enforcement practices governing compliance with safety, health and environ- mental 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. 17 STATEMENT OF CONSOLIDATED INCOME Cleveland-Cliffs Inc and Consolidated Subsidiaries E M O C N I 18 REVENUES Product sales and services Royalties and management fees Total Operating Revenues Insurance recovery Interest income Other income Total Revenues COSTS AND EXPENSES Cost of goods sold and operating expenses Administrative, selling and general expenses Write-down of common stock investment Pre-operating loss of Cliffs and Associates Limited Interest expense Other expenses Total Costs and Expenses INCOME BEFORE INCOME TAXES INCOME TAXES (CREDIT) NET INCOME NET INCOME PER COMMON SHARE Basic Diluted AVERAGE NUMBER OF SHARES Basic Diluted See notes to consolidated financial statements. ( I N M I L L I O N S , E X C E P T P E R S H A R E A M O U N T S ) Ye a r E n d e d D e c e m b e r 3 1 2000 1999 1998 $379.4 $316.1 $465.7 50.7 430.1 15.3 2.9 6.7 48.5 364.6 3.0 3.4 49.7 515.4 5.4 4.7 455.0 371.0 525.5 380.2 18.7 10.9 13.3 4.9 10.4 329.3 16.1 8.8 3.7 8.4 438.4 366.3 16.6 (1.5) 4.7 (.1) 419.6 18.7 2.3 .4 12.7 453.7 71.8 14.4 $ 18.1 $ 54.8 $ 57.4 $ 1.74 $ 1.73 $ 5.43 $ 5.43 $ 5.10 $ 5.06 10.4 10.4 11.1 11.1 11.2 11.3 STATEMENT OF CONSOLIDATED CASH FLOWS Cleveland-Cliffs Inc and Consolidated Subsidiaries OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from operations: Depreciation and amortization: Consolidated Share of associated companies Pre-operating loss of Cliffs and Associates Limited Deferred income taxes Tax credit Write-down of common stock investment Other Total before changes in operating assets and liabilities Changes in operating assets and liabilities: Inventories and prepaid expenses Receivables Payables and accrued expenses Total changes in operating assets and liabilities Net cash from operating activities INVESTING ACTIVITIES Purchase of property, plant and equipment: Consolidated Share of associated companies Investment and advances in Cliffs and Associates Limited Purchase of additional interest in Cliffs and Associates Limited Other Net cash used by investing activities FINANCING ACTIVITIES Dividends Repurchases of Common Shares Contributions to Cliffs and Associates Limited of minority shareholder Net cash used by financing activities INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR Taxes paid on income Interest paid on debt obligations See notes to consolidated financial statements. ( I N M I L L I O N S , B R A C K E T S I N D I C AT E C A S H D E C R E A S E ) Ye a r E n d e d D e c e m b e r 3 1 2000 1999 1998 $ 18.1 $ 54.8 $ 57.4 12.9 12.7 13.3 9.6 (5.2) 10.9 4.6 76.9 (60.3) 18.8 (7.4) (48.9) 28.0 (17.8) (5.6) (13.8) (1.7) .3 (38.6) (15.7) (15.6) 4.2 (27.1) (37.7) 67.6 $ 29.9 $ 1.0 $ 4.9 10.5 12.0 8.8 (.2) (.3) 35.6 6.4 (23.5) (14.5) (31.6) 4.0 (15.4) (5.4) (12.5) .5 (32.8) (16.7) (17.2) (33.9) (62.7) 130.3 $167.6 $116.9 $114.9 7.8 12.5 2.3 3.1 (3.5) (4.5) 75.1 2.3 13.1 1.6 17.0 92.1 (24.5) (7.2) (19.7) 1.5 (49.9) (16.3) (11.5) (27.8) 14.4 115.9 $130.3 $112.5 $114.9 S W O L F H S A C 19 STATEMENT OF CONSOLIDATED FINANCIAL POSITION Cleveland-Cliffs Inc and Consolidated Subsidiaries ASSETS CURRENT ASSETS Cash and cash equivalents Trade accounts receivable Receivables from associated companies Product inventories – iron ore Supplies and other inventories Deferred and refundable income taxes Other TOTAL CURRENT ASSETS PROPERTIES Plant and equipment Minerals Allowances for depreciation and depletion TOTAL PROPERTIES ( I N M I L L I O N S ) D e c e m b e r 3 1 2000 1999 $ 29.9 $167.6 46.3 18.5 90.8 22.4 27.3 12.8 66.0 16.6 36.6 16.0 7.7 6.6 248.0 217.1 337.7 19.2 356.9 (84.2) 272.7 204.9 19.1 224.0 (70.1) 153.9 INVESTMENTS IN ASSOCIATED COMPANIES 138.4 233.4 OTHER ASSETS Prepaid pensions Miscellaneous TOTAL OTHER ASSETS 38.1 30.6 68.7 40.8 34.5 75.3 TOTAL ASSETS $727.8 $679.7 I N O T I S O P I L A C N A N I F 20 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Trade accounts payable Payables to associated companies Accrued expenses Taxes payable Other TOTAL CURRENT LIABILITIES LONG-TERM DEBT POSTEMPLOYMENT BENEFIT LIABILITIES OTHER LIABILITIES MINORITY INTEREST IN CLIFFS AND ASSOCIATES LIMITED SHAREHOLDERS’ EQUITY Preferred Stock – no par value Class A – 500,000 shares authorized and unissued Class B – 4,000,000 shares authorized and unissued Common Shares – par value $1 a share Authorized – 28,000,000 shares; Issued – 16,827,941 shares Capital in excess of par value of shares Retained income Cost of 6,708,539 Common Shares in Treasury (1999 – 6,180,742 shares) Accumulated other comprehensive loss, net of tax Unearned compensation TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY See notes to consolidated financial statements. ( I N M I L L I O N S ) D e c e m b e r 3 1 2000 1999 $ 12.4 $ 19.5 22.7 44.1 16.1 6.9 102.2 70.0 71.7 58.0 23.9 19.6 30.3 9.8 4.5 73.7 70.0 68.1 60.6 16.8 67.3 503.7 16.8 67.1 501.3 (183.8) (171.5) (2.0) (5.2) (1.2) 402.0 407.3 $727.8 $679.7 21 STATEMENT OF CONSOLIDATED SHAREHOLDERS’ EQUITY Cleveland-Cliffs Inc and Consolidated Subsidiaries I Y T U Q E ’ S R E D L O H E R A H S 22 ( I N M I L L I O N S ) C a p i t a l I n E x c e s s o f P a r Va l u e O f S h a r e s R e t a i n e d I n c o m e C o m m o n S h a r e s C o m m o n S h a r e s I n C o m p r e h e n s i v e Tr e a s u r y I n c o m e O t h e r O t h e r To t a l January 1, 1998 Comprehensive income Net income Other comprehensive income Unrealized losses on securities Total comprehensive income Cash dividends – $1.45 a share Stock options and other incentive plans Repurchases of Common Shares Other December 31, 1998 Comprehensive income Net income Other comprehensive income Unrealized losses on securities Total comprehensive income Cash dividends – $1.50 a share Stock options and other incentive plans Repurchases of Common Shares Other December 31, 1999 Comprehensive income Net income Other comprehensive income Unrealized losses on securities Reclassification adjustment-loss included in net income Total comprehensive income Cash dividends – $1.50 a share Stock options and other incentive plans Repurchases of Common Shares Other $16.8 $69.8 $472.1 $(146.2) $(2.0) $(3.1) $407.4 57.4 (16.3) (2.3) 1.0 .1 1.7 (11.5) .1 57.4 (2.3) 55.1 (16.3) 2.7 (11.5) .2 16.8 70.9 513.2 (155.9) (4.3) (3.1) 437.6 4.8 (16.7) (.9) (3.9) .1 1.7 (17.2) (.1) 16.8 67.1 501.3 (171.5) (5.2) 18.1 (15.7) (1.2) 6.4 .1 .1 3.1 (15.6) .2 4.8 (.9) 3.9 (16.7) (.2) (17.2) (.1) 407.3 18.1 (1.2) 6.4 23.3 (15.7) 2.4 (15.6) .3 2.0 (.1) (1.2) (.8) December 31, 2000 $16.8 $67.3 $503.7 $(183.8) $(5.2) $(2.0) $402.0 See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (“Company”), including Cliffs and Associates Limited (“CAL”) since November 20, 2000, when the Company obtained majority control of CAL (see note 2). Intercompany accounts are eliminated in consolida- tion. “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. The Company’s share of earnings of mining ventures from which the Company pur- chases iron ore is credited to “Cost of Goods Sold and Operating Expenses” upon sale of the product. CAL results prior to and after November 20, 2000 are reflected as “Pre- Operating Loss of Cliffs and Associates Limited.” Business: The Company’s dominant business is the pro- duction and sale of iron ore pellets to integrated steel com- panies. The Company manages and owns interests in mines; sells iron ore; controls, develops, and leases reserves to mine owners; and owns 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 customer and partner contributions to the Company’s revenues were 17 percent, 14 percent and 13 percent in 2000; 19 percent, 19 percent and 10 percent in 1999; and 22 percent, 15 percent and 9 percent in 1998. The Company is developing a ferrous metallics business, with its initial entry being the investment in CAL, located in Trinidad and Tobago, to produce and market hot briquetted iron (“HBI”). See Note 2 – Ferrous Metallics. Revenue Recognition: Revenue is recognized on sales of products when title has transferred, and on services when services have been performed. Revenue from product sales includes reimbursement for freight charges ($15.5 million – 2000; $10.4 million – 1999; $21.6 million – 1998) paid on behalf of customers. 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 major business risk faced by the Company in iron ore is lower customer or venture partner consumption of iron ore from the Company’s managed mines which may result from competition from other iron ore sup- pliers; use of iron ore substitutes, including imported semi- finished steel; steel industry consolidation, rationalization or financial failure; or decreased North American steel produc- tion, resulting from increased imports or lower steel con- sumption. Loss of sales and/or royalty and management fee income on any such unmitigated loss of business would have a greater impact on earnings than revenue, due to the high level of fixed costs in the iron mining business. The primary business risk faced by the Company in ferrous metallics is the as yet undemonstrated capability of the Trinidad facility to produce a sustained quantity of market- quality HBI to achieve profitable operations. Use of Estimates: The preparation of financial state- ments, 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 to be cash equivalents. Derivative Financial Instruments: Derivative financial instruments, in the form of forward currency exchange con- tracts, have been utilized to manage foreign exchange risks, with gains and losses recognized in the same period as the hedged transaction. The Company has not engaged in acquiring or issuing derivative financial instruments for trading purposes. The Company had no forward currency exchange contracts as of December 31, 2000. In the normal course of business, the Company may enter into forward contracts for the purchase of commodities which are used in the operation, primarily natural gas. Such contracts are in quantities expected to be delivered and used in the production process and are not intended for re-sale or speculative purposes. Inventories: Product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the last-in, first-out (“LIFO”) method. The excess of current cost over LIFO cost of iron ore inventories was $7.3 million and $5.9 million at December 31, 2000 and 1999, S E T O N 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cleveland-Cliffs Inc and Consolidated Subsidiaries S E T O N 24 respectively. Supplies and other inventories reflect the aver- age cost method. Repairs and Maintenance: The cost of power plant major overhauls is amortized over the estimated useful life, which is generally the period until the next scheduled over- haul. All other planned and unplanned repairs and maintenance costs are expensed during the year incurred. Properties: Properties are stated at cost. Depreciation of plant and equipment is computed principally by straight- line methods based on estimated useful lives, not to exceed the life of the operating unit. Depreciation is provided over the following estimated useful lives: Buildings . . . . . . . . . . . . . . . .45 Years Mining Equipment . . . . . . . . . .10 to 20 Years Processing Equipment . . . . . . .15 to 45 Years Information Technology . . . . . .2 to 7 Years In iron ore, depreciation is not reduced when operating units are temporarily idled. At CAL, depreciation rates range from 25 percent to 125 percent of straight line amounts based on production. Asset Impairment: The Company monitors conditions that may affect the carrying value of its long-lived and intan- gible assets when events and circumstances indicate that the carrying value of the assets may be impaired. If projected undiscounted cash flows are less than the carrying value of the asset, the assets are adjusted to their fair value. 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: In accordance with the provisions of Financial Accounting Standard Board’s (“FASB”) Statement 123, “Accounting for Stock-Based Compensation,” the Company has elected to continue applying the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”) and related inter- pretations in accounting for its stock-based compensation plans. Accordingly, the Company does not recognize compen- sation 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. The market value of restrict- ed stock awards and performance shares is charged to expense over the vesting period. Exploration, Research and Development Costs: Exploration, research and development costs 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 out- standing stock options, restricted stock and performance shares. Reclassifications: Certain prior year amounts have been reclassified to conform to current year classifications. N OT E 1 – ACCOUNTING AND DISCLOSURE CHANGES In December, 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition,” which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. Adoption of SAB No. 101 in the fourth quarter 2000 did not have any effect on the Company’s consolidated financial statements. In July, 2000, the Emerging Issues Task Force of the American Institute of Certified Public Accountants (“EITF”) reached a consensus on Issue 00-10, “Accounting for Shipping and Handling Fees and Costs” which requires all shipping and handling billings to a customer in a sales transaction to be classified as revenue in the income statement. The Company applied the EITF consensus as of December 31, 2000 and restated prior periods, as required. Application of the con- sensus had no effect on net income; however revenues from product sales and services and cost of goods and operating expenses were increased by $15.5 million, $10.4 million and $21.6 million in 2000, 1999 and 1998, respectively. In March, 2000, the FASB issued Interpretation 44, “Accounting for Cer tain Transactions Involving Stock Compensation.” The Interpretation provides guidance on cer- tain implementation issues related to APB 25 on accounting for stock issued to employees and others. The Interpretation, which was effective July 1, 2000, did not have a material effect on the Company’s consolidated financial statements. In June, 1998, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” as amended in June, 2000 by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities – an amendment of SFAS No. 133.” These statements provide the accounting treatment for all derivatives activity and require the recognition of all derivatives as either assets or liabilities on the balance sheet and their measurement at fair value. Adoption of SFAS No. 133 and SFAS No. 138 in the first quar- ter 2001 is not expected to have a material effect on the Company’s consolidated financial statements. N OT E 2 – INVESTMENTS IN ASSOCIATED COMPANIES IRON ORE The Company’s investments in mining ventures at December 31 consist of its 40 percent interest in Tilden Mining Company L.C. (“Tilden”), 35 percent (22.5625 percent in 1999 and 1998) interest in Empire Iron Mining Partnership (“Empire”), 22.78 percent interest in Wabush Mines (“Wabush”), and 15 percent interest in Hibbing Taconite Company (“Hibbing”). The remaining interests in the ventures are owned by U.S. and Canadian integrated steel companies. Following is a summary of combined financial informa- tion of the operating ventures: ( I N M I L L I O N S ) 2000 1999 1998 Income Gross revenue $1,062.1 $922.3 $1,072.4 Income $1,070.1 $165.8 $1,134.3 Financial Position at December 31 Current assets Properties – net Other long-term assets Current liabilities Long-term liabilities $1,174.5 636.1 33.5 (131.2) (115.0) $196.5 660.1 30.7 (145.7) (106.5) $1,187.0 691.4 30.0 (159.8) (79.6) Net assets $1,597.9 $635.1 $1,669.0 Company’s equity in underlying net assets $1,193.3 $184.8 $1,194.3 Company’s investment $1,138.4 $149.3 $1,156.0 The Company manages all of the ventures and leases or subleases mineral rights to Empire and Tilden. In addition, the Company is required to purchase its applicable current share, as defined, of the ventures’ production. The Company purchased $273.6 million in 2000 (1999 – $174.7 million; 1998 – $253.9 million) of iron ore pellets from the ventures. Following is a summary of royalties and management fees earned by the Company and the Company’s share as a participant in the ventures: Other venture partners’ share Company’s share as a participant Total royalties and management fees ( I N M I L L I O N S ) 2000 $36.5 14.2 1999 $40.9 7.6 1998 $36.4 13.3 $50.7 $48.5 $49.7 Payments by the Company, as a participant in the ven- tures, are reflected in royalties and management fees revenue and cost of goods sold upon sale of the product. Costs and expenses incurred by the Company, on behalf of the ventures, are charged to the ventures in accordance with management and operating agreements. The Company’s equity in income of the ventures is credited to cost of goods sold and includes amortization to income of the difference of the Company’s equity in underlying net assets and its invest- ment on the straight-line method based on the useful lives of 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cleveland-Cliffs Inc and Consolidated Subsidiaries S E T O N 26 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 $19.3 million in 2000 (1999 – $4.0 million; 1998 – $29.3 million). B ANKRUPTCIES OF MINE PARTNERS AND CUSTOMERS On December 29, 2000, The LTV Corporation (“LTV”) filed for protection under Chapter 11 of the U.S. Bankruptcy Code. A wholly-owned subsidiary of LTV is a 25 percent part- ner in the Company-managed Empire Mine in Michigan. Since the bankruptcy filing, LTV has remained current with its Empire obligations. At the time of the filing, LTV owed the Company approx- imately $2.3 million related to the Company’s management of LTV Steel Mining Company (“LTVSMC”) in Minnesota, which amount the Company has reserved. In May, 2000, LTV announced its intention to close LTVSMC in mid-2001, and later the intended closing date was advanced to February 22, 2001. Subsequent to the bankruptcy filing, LTV ceased oper- ations at LTVSMC on January 5, 2001, more than a month ahead of schedule, due to conditions in the steel market and cost reduction associated with the bankruptcy filing. The Company signed a long-term agreement in May, 2000 to supply LTV with the majority of the iron ore it will need to purchase as a result of closing of LTVSMC. Sales over the 10-year contract term could total more than 50 million tons if LTV continues to produce at or near current levels and performs under the contract terms. To date in the bankruptcy proceeding, LTV has neither affirmed nor rejected this agree- ment. Sales under the contract were less than .2 million tons in 2000; expected sales in 2001 will be impacted by the liquidation of LTVSMC’s remaining pellet inventory and business conditions. The Company had no trade receivable exposure to LTV at the time of bankruptcy filing. In May 2000, LTV granted the Company an exclusive option to purchase the LTVSMC assets in exchange for assumption of environmental and reclamation obligations and other consideration at LTVSMC. The Company has until March 31, 2001 to exercise the option. The Company does not believe iron ore pellets can be produced there economically, but is investigating whether alternative uses or the disposition of the assets would be advantageous. Prior to Wheeling-Pittsburgh Steel Corporation’s (“Wheeling-Pittsburgh”) filing for protection under Chapter 11 of the U.S. Bankruptcy Code on November 16, 2000, the Company exercised its rights under agreements with Wheeling-Pittsburgh to acquire Wheeling-Pittsburgh’s 12.4375 percent indirect interest in Empire. The acquisition of Wheeling-Pittsburgh’s interest in Empire increased the Company’s ownership share to 35 percent and its share of production capacity from 1.8 million tons to 2.8 million tons. Subsequent to the filing, Wheeling-Pittsburgh has requested an accounting for the acquisition transaction. At the time of the filing, the Company did not have a term sales contract with Wheeling-Pittsburgh and the Company’s trade receivable exposure was negligible. Acme Metals Incorporated and its wholly-owned sub- sidiary Acme Steel Company (collectively “Acme”), a partner in Wabush and an iron ore customer, has continued its rela- tionship with Wabush and the Company since its 1998 Chapter 11 bankruptcy filing. The Company had a $1.2 mil- lion pre-petition trade receivable from Acme, which has been fully provided. At December 31, 2000, the Company had an additional allowance for doubtful accounts of $1.0 million. Sales to Acme in 2000 represented 3 percent of the Company’s total sales volume. FERROUS METALLICS CAL, a venture in Trinidad and Tobago, completed construction in April, 1999 of a facility designed to produce premium quality HBI to be marketed to the steel industry. The HBI facility has produced sufficient reduced iron to demon- strate that the Circored® process technology will yield a product that meets the quality specifications that were expected, including high metalization rates. However, sustained levels of briquette production could not be achieved and, in May, 2000, start-up activities were temporarily suspended in order to evaluate plant reliability and make modifications to portions of the plant. The plant was restarted on July 1, 2000 to test the functionality and reliability of the initial modifications and to gain additional operating experience. Results of the five-week Subsequent to LTV’s withdrawal of financial support for CAL, it was estimated that $45 million of additional invest- ment (of which $16.6 million has been invested through December 31, 2000) would be required for CAL to attain sus- tained production and generate positive cash flow, consisting of capital expenditures of $15 million, working capital of $15 million and cash start-up costs of $15 million. Lurgi has agreed to fund a disproportionate share of the capital expenditures through in kind contribution of the new discharge system, which increases its ownership. As a result, the Company’s ownership in CAL at December 31, 2000 decreased to 84.4 percent. If the full $45 million is required, the Company’s addi- tional investment will be $33 million (of which $11.6 million has been funded at December 31, 2000), and the Company will own approximately 82.4 percent of CAL. N OT E 3 – 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 HBI project in Trinidad and Tobago and other developmental activities. “Other” includes non- reportable segments, the insurance claim recovery, the long- term investment write-down of publicly traded common stock, unallocated corporate administrative expense and other income and expense. test were positive. Although a small quantity of commercial grade briquettes was produced, replacing the discharge system was necessary to improve material flow and obtain consistent feed of HBI to the briquetting machines. The modifications are targeted for completion in the first quarter of 2001. On November 20, 2000, a subsidiary of the Company and Lurgi Metallurgie GmbH (“Lurgi”) completed the acquisi- tion of LTV’s 46.5 percent interest in CAL for $2 million (Company share – $1.7 million) and additional future pay- ments that could total $30 million through 2020 dependent on CAL’s production, sales volume and price realizations. LTV had announced its decision to withdraw its financial support for CAL on July 28, 2000. At December 31, 1999, the Company’s “Investment in Associated Companies” account for its then 46.5 percent ownership totaled $84.1 million, which included the Company’s capitalized interest. At the date of acquisition, the Company’s ownership in CAL increased to 86.9 percent. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the balance sheet of CAL has been consolidated on the basis of a prelim- inary allocation of the purchase price with the Company’s investment in CAL at November 20, 2000, $84.8 million, plus the additional purchase price of $1.7 million allocated princi- pally to property, plant and equipment. At December 31, 2000, the Company’s consolidated financial statements included the following amounts related to CAL: Property, plant and equipment (including capitalized interest) Working capital deficit Minority Interest Total ( M I L L I O N S ) $119.1 (3.0) (23.9) $492.2 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cleveland-Cliffs Inc and Consolidated Subsidiaries S E T O N 28 2000 Sales and services to external customers Royalties and management fees(1) Total operating revenues Income (loss) before taxes Depreciation and amortization(2) Pre-operating loss of CAL(3) Investments in associated companies Other identifiable assets Total assets Property expenditures(2) 1999 Sales and services to external customers Royalties and management fees(1) Total operating revenues Income (loss) before taxes Depreciation and amortization(2) Pre-operating loss of CAL(3) Investments in associated companies Other identifiable assets Total assets Property expenditures(2) 1998 Sales and services to external customers Royalties and management fees(1) Total operating revenues Income (loss) before taxes Depreciation and amortization(2) Pre-operating loss of CAL(3) Investments in associated companies Other identifiable assets Total assets Property expenditures(2) I r o n O r e F e r r o u s M e t a l l i c s S e g m e n t s T o t a l ( I N M I L L I O N S ) $379.4 50.7 430.1 46.2 25.6 138.4 428.8 567.2 18.3 $316.1 48.5 364.6 31.7 22.5 149.3 423.3 572.6 20.8 $465.7 49.7 515.4 91.6 20.3 156.0 468.3 624.3 31.7 $00.0 (16.4) (13.3) 128.3 128.3 5.1 $00.0 (11.7) (8.8) 84.1 1.5 85.6 11.2 $00.0 (5.5) (2.3) 79.4 .8 80.2 16.7 $379.4 50.7 430.1 29.8 25.6 (13.3) 138.4 557.1 695.5 23.4 $316.1 48.5 364.6 20.0 22.5 (8.8) 233.4 424.8 658.2 32.0 $465.7 49.7 515.4 86.1 20.3 (2.3) 235.4 469.1 704.5 48.4 O t h e r $00.0 (13.2) 32.3 32.3 $00.0 (15.3) 21.5 21.5 $00.0 (14.3) 19.3 19.3 C o n s o l i d a t e d T o t a l $379.4 50.7 430.1 16.6 25.6 (13.3) 138.4 589.4 727.8 23.4 $316.1 48.5 364.6 4.7 22.5 (8.8) 233.4 446.3 679.7 32.0 $465.7 49.7 515.4 71.8 20.3 (2.3) 235.4 488.4 723.8 48.4 (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. (3) Includes equity losses from CAL through November 20, 2000 and consolidated losses, net of minority interest, thereafter. Included in income (loss) before taxes. Included in the consolidated financial statements are the following amounts relating to geographic locations: Revenue(1) United States Canada Other Countries Long-Lived Assets(2) United States Canada Trinidad and Tobago ( I N M I L L I O N S ) 2000 1999 1998 $380.8 38.7 10.6 $321.0 36.4 7.2 $430.1 $364.6 $296.5 15.0 119.1 $295.9 16.0 76.8 $430.6 $388.7 $465.9 42.1 7.4 $515.4 $298.1 16.8 65.6 $380.5 (1) Revenue is attributed to countries based on the location of the customer. (2) Net properties include Company’s share of associated companies. N OT E 4 – ENVIRONMENTAL OBLIGATIONS At December 31, 2000, the Company had an environ- mental reserve, including its share of ventures, of $20.0 million ($20.6 million at December 31, 1999), of which $4.5 million was classified as current. Payments in 2000 were $1.9 mil- lion (1999 – $1.0 million and 1998 – $.9 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, the Summitville site in Colorado, and the Rio Tinto mine site in Nevada, all of which sites are independent of the Company’s iron mining opera- tions. Reserves are based on Company estimates and engi- neering 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. Also included in the reserve are wholly-owned active and closed mining opera- tions, and other sites, including former operations, for which reserves are based on the Company’s estimated cost of investigation and remediation. N OT E 5 – LONG-TERM DEBT No borrowings were outstanding under this agreement at December 31, 2000. On January 8, 2001, the Company borrowed $65 million under the revolving credit agreement for general operating and working capital requirements. The loan interest rate, based on the LIBOR rate plus a premium, is fixed at 6.1 percent through July 8, 2001. Loan repayment timing is subject to future uncertainty, but the Company expects to repay the loan by the end of 2001. The revolving credit agreement expires on May 31, 2003. The note and revolving credit agreements require the Company to meet certain covenants related to net worth, leverage, and other provisions. The Company exceeds the requirements by more than $50 million at December 31, 2000 for the most restric- tive covenant (net worth). The Company was in compliance with the debt covenants at December 31, 2000. The Company also has unsecured letters of credit outstanding of $15.4 million, including its share of ventures. N OT E 6 – LEASE OBLIGATIONS The Company and its ventures lease certain mining, production, data processing and other equipment under oper- ating leases. The Company’s operating lease expense, including its share of ventures, was $12.9 million in 2000, $10.0 million in 1999 and $9.1 million in 1998. Assets acquired under capital leases by the Company, including its share of ventures, were $10.5 million and $10.3 million, respectively, at December 31, 2000 and 1999. Corre- sponding accumulated amortization of capital leases included in respective allowances for depreciation was $5.9 million and $5.2 million at December 31, 2000 and 1999, respectively. Future minimum payments under capital leases and noncancellable operating leases, including the Company’s share of ventures, at December 31, 2000 were: Year Ending December 31 2001 2002 2003 2004 2005 2006 and thereafter Long-term debt of the Company consists of $70 million of senior unsecured notes due in December, 2005, with a fixed interest rate of 7 percent. The Company has a $100 million revolving credit agreement which expires on May 31, 2003. Total minimum lease payments Amounts representing interest Present value of net minimum lease payments ( I N M I L L I O N S ) Capital Leases Operating Leases $13.3 10.9 10.1 7.5 5.4 8.9 $56.1 $1.7 1.4 .8 .5 .2 .1 4.7 .7 $4.0 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cleveland-Cliffs Inc and Consolidated Subsidiaries S E T O N The $60.8 million of total minimum lease payments comprises the Company’s direct obligation of $4.8 million and the Company’s share of ventures’ obligations of $56.0 million, which are largely non-recourse to the Company. N OT E 7 – 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 pre- sents a reconciliation of funded status of the Company’s plans, including its proportionate share of plans of its ventures, at December 31, 2000 and 1999: Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Contributions Effect of change in Empire ownership Benefits paid Fair value of plan assets at end of year Change in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Amendments Actuarial losses (gains) Effect of change in Empire ownership Benefits paid Benefit obligation at end of year Funded status of the plan (underfunded) Unrecognized prior service cost Unrecognized net actuarial (gain) loss Unrecognized net asset at date of adoption ( I N M I L L I O N S ) P e n s i o n B e n e f i t s O t h e r B e n e f i t s 2000 1999 2000 1999 $335.9 17.3 1.7 18.0 (20.2) 352.7 249.3 5.9 22.6 25.0 20.9 (20.2) 303.5 49.2 28.4 (36.1) (15.2) $316.2 34.9 1.1 (16.3) 335.9 238.1 4.6 17.2 24.5 (18.8) (16.3) 249.3 86.6 29.5 (65.7) (17.1) $(21.5 1.2 1.4 2.7 (2.3) 24.5 84.6 1.7 9.1 .2 47.1 7.1 (7.8) 142.0 (117.5) 1.5 37.8 $ 19.9 1.8 1.5 (1.7) 21.5 97.7 1.8 6.3 (15.2) (6.0) 84.6 (63.1) 1.5 (13.4) Prepaid (accrued) benefit cost – net $126.3 $133.3 $(78.2) $(75.0) Assumptions as of December 31 Discount rate Expected long-term return on plan assets Rate of compensation increase – average 7.75% 9.00% 4.26% 8.00% 9.00% 4.26% 7.75% 8.26% 8.00% 7.62% P e n s i o n B e n e f i t s O t h e r B e n e f i t s 2000 1999 1998 2000 1999 1998 ( I N M I L L I O N S ) $15.9 22.6 (29.0) 6.4 $15.9 $14.6 17.2 (24.9) 6.2 $13.1 $14.5 15.6 (22.5) 4.6 $12.2 $1.7 9.1 (2.1) 1.2 $9.9 $1.8 6.3 (1.5) .1 $6.7 $1.6 6.3 (1.3) .1 $6.7 Components of net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization and other Net periodic benefit cost (credit) 30 Annual contributions to the pension plans are made within income tax deductibility restrictions in accordance with statutory regulations. In the event of termination, the sponsors could be required to fund shutdown and early retire- ment obligations which are not included in the pension bene- fit obligations. Assets for Other Benefits include deposits relating to insurance contracts and Voluntar y Employee Benefit Association (“VEBA”) Trusts for certain mining ventures that are available to fund retired employees’ life insurance obliga- tions and medical benefits. The Company’s estimated annual contribution to the VEBAs will approximate $1.6 million based on its share of tons produced. As a result of recent experience, the Company increased its medical trend rate assumption effective December 31, 2000. An annual rate of increase in the per capita cost of covered health care benefits of 8.0 percent was assumed for 2001, (6.5 percent in 2000) decreasing .25 to .5 percent per year to an annual rate of 5.0 percent for 2008 and annually thereafter. A one percentage point change in this assumption would have the following effects: ( I N M I L L I O N S ) Increase Decrease Effect on total service and interest cost components in 2000 $11.3 $1(1.1) Effect on Other Benefits obligation as of December 31, 2000 15.5 (13.0) Deferred tax assets: Postretirement benefits other than pensions Capital loss carryforward Other liabilities Alternative minimum tax credit carryforwards Product inventories Pre-operating loss of CAL Other Total deferred tax assets Deferred tax liabilities: CAL properties Investment in ventures Properties Other Total deferred tax liabilities ( I N M I L L I O N S ) 2000 1999 $21.7 18.5 12.9 4.2 6.3 13.2 76.8 30.4 17.0 21.8 11.4 80.6 $21.4 13.2 8.9 2.5 4.5 12.2 62.7 20.7 20.2 8.4 49.3 Net deferred tax assets (liability) $ (3.8) $13.4 “Deferred and refundable income taxes” include a refund of approximately $14 million of current and prior years’ federal tax payments associated with the Company’s adjust- ment in its CAL tax basis of properties. Capital loss carryfor- wards totaling $53 million are available to offset capital gains through 2005. The components of the Company’s provision for income taxes are as follows: N OT E 8 – INCOME TAXES Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows: Current Deferred ( I N M I L L I O N S ) 2000 $(5.9) 4.4 $(1.5) 1999 $(.1 (.2) $(.1) 1998 $14.8 (.4) $14.4 In the fourth quarter of 2000, a favorable tax adjust- ment of $5.2 million was recorded reflecting the Company’s continuing assessment of its tax obligations, relating to the expected outcome of federal audit issues for tax years 1995 and 1996. Additional tax and interest payment of approxi- mately $5 million related to the audit are expected to occur in 2001. In 1999, the Company made additional tax and interest payments of $1.5 million related to final settlement of audit issues for years 1993 and 1994. In 1998, a favorable tax adjust- ment of $3.5 million was recorded which primarily reflected the expected outcome of 1993 and 1994 audit issues. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cleveland-Cliffs Inc and Consolidated Subsidiaries S E T O N Reconciliation of the Company’s income tax to the tax at the United States statutory rate follows: ( I N M I L L I O N S ) 2000 1999 1998 which mature at various times through April, 2001, was esti- mated to be $11.4 million (Company share – $3.8 million) based on December 29, 2000 forward rates. No such con- tracts were utilized in 1999. $ 5.8 $1.7 $25.1 N OT E 1 0 – STOCK PLANS Tax at statutory rate of 35 percent Increase (decrease) due to: Percentage depletion in excess of cost depletion Effect of foreign taxes Prior years’ tax adjustments Other items – net (2.6) (.2) (4.9) .4 Income tax expense (credit) $(1.5) (1.8) .2 (.3) .1 $ (.1) (5.9) (4.7) (.1) $14.4 N OT E 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and fair value of the Company’s financial instruments at December 31, 2000 and 1999 were as follows: ( I N M I L L I O N S ) 2000 1999 Carrying Amount Fair Value Carrying Amount Fair Value $29.9 $29.9 $67.6 $67.6 Cash and cash equivalents Investments in LTV common stock Long-term debt 70.0 70.0 3.5 70.0 3.5 63.4 Investments in LTV common stock reflect the market value at December 31, 2000 and 1999 on 542,000 shares and 842,000 shares, respectively. See note 13 – Non-Recurring Special Items. The fair value of the Company’s long-term debt was determined based on a discounted cash flow analysis and estimated current borrowing rates. The Company had Canadian forward currency exchange contracts in the notional amount of $22.5 million at December 31, 1999. The fair value of the contracts, which had varying maturity dates of less than twelve months, was estimated to be $.4 million, based on December 31, 1999 forward rates. At December 31, 2000, the Company did not have any forward currency exchange contracts. At December 31, 2000, the Company’s managed mines had in place forward contracts for the purchase of natural gas in the notional amount of $16.1 million (Company share – $5.4 million). The unrecognized fair value gain on the contracts, 32 The 1992 Incentive Equity Plan as amended in 1999, authorizes the Company to issue up to 1,700,000 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 pay- ment of dividend equivalents paid on awards made under the Plan. Such shares may be shares of original issuance, treas- ury 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 sub- ject 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 a stock option grant. Common Shares may be awarded or sold to cer- tain employees with disposition restrictions over specified periods. The 1996 Nonemployee Directors’ Compensation Plan authorizes the Company to issue up to 50,000 Common Shares to nonemployee Directors. The Plan was amended effective in 1999 to provide for the grant of 2,000 Restricted Shares to nonemployee Directors first elected on or after January 1, 1999, and also provides that nonemployee Directors must take at least 40 percent of their annual retain- er in Common Shares. The Restricted Shares vest five years from the date of award. The Company recorded expense of $.9 million in 2000, a credit of $.3 million in 1999, and expense of $2.5 million in 1998 relating to other stock-based compensation, primarily the Performance Share program. FASB Statement 123 requires pro forma disclosure of net income and earnings per share as if the fair value method for valuing stock options had been applied. The Company’s pro forma information follows: Net income (millions) Earnings per share: Basic Diluted 2000 $17.3 $1.67 $1.66 1999 $3.1 $.28 $.28 1998 $57.2 $5.09 $5.05 The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998: Risk-free interest rate Dividend yield Volatility factor – market price of Company’s common stock Expected life of options – years Weighted-average fair value of 2000 6.67% 4.04% .241 4.31 1999 4.79% 3.42% .223 6.15 1998 5.47% 3.15% .224 4.31 options granted during the year $5.93 $5.52 $8.65 Compensation costs included in the pro forma informa- tion 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 outstand- ing awards. Stock option, restricted stock award, deferred stock allocation, and performance share activities under the Company’s Incentive Equity Plans, and the Nonemployee Directors’ Compensation Plan are summarized as follows: 2000 1999 1998 Stock options: Options outstanding at beginning of year Granted during the year Exercised Expired Cancelled Options outstanding at end of year Options exercisable at end of year Restricted awards: Awarded and restricted at beginning of year Awarded during the year Vested Issued as performance shares Awarded and restricted at end of year Deferred stock awards: Awarded at beginning of year Issued as performance shares Awarded during the year Awarded at end of year Performance shares: Allocated at beginning of year Allocated during the year Issued Forfeited/cancelled Allocated at end of year Required retainer and voluntary shares: Awarded at beginning of year Awarded during the year Issued Awarded at end of year Reserved for future grants or awards at end of year W e i g h t e d - A v e r a g e E x e r c i s e P r i c e $39.00 44.56 34.96 44.26 41.04 36.22 W e i g h t e d - A v e r a g e E x e r c i s e P r i c e $41.04 58.88 21.98 43.98 51.59 39.90 W e i g h t e d - A v e r a g e E x e r c i s e P r i c e $51.59 29.56 20.12 20.12 44.14 48.81 43.69 S h a r e s 774,242 171,950 (28,375) (5,400) (39,720) 872,697 285,333 53,223 (19,287) 26,051 59,987 22,315 7,112 29,427 174,950 101,816 (48,366) 228,400 9,980 9,394 (9,980) 9,394 S h a r e s 346,742 454,150 (6,750) (19,900) 774,242 221,126 52,296 4,000 (3,073) 53,223 176,050 69,472 (59,672) (10,900) 174,950 6,649 10,255 (6,924) 9,980 S h a r e s 252,625 128,450 (18,616) (15,717) 346,742 138,609 49,449 5,000 (2,153) 52,296 161,000 73,554 (58,504) 176,050 4,548 6,649 (4,548) 6,649 313,075 563,627 520,704 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cleveland-Cliffs Inc and Consolidated Subsidiaries S E T O N 34 Exercise prices for options outstanding as of December 31, 2000 ranged from $29.56 to $75.80, with 80 percent of options outstanding having exercise prices greater than $43.00. The weighted-average remaining contractual life of options outstanding is 8.6 years at December 31, 2000. NOTE 11 – SHAREHOLDERS’ EQUITY Under the Company’s share purchase rights (“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. 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. In 2000, the Company expanded its stock repurchase program by 1.0 million shares, which raised the total author- ization to 3.0 million shares. Through December 31, 2000, the Company has purchased 2.4 million shares (.7 million shares in 2000), at a total cost of $79.5 million ($15.6 million in 2000). NOTE 12 – EARNINGS PER SHARE The following table summarizes the computation of basic and diluted earnings per share. ( I N M I L L I O N S , E X C E P T P E R S H A R E ) Net income Basic weighted-average shares Effect of dilutive shares: Stock options/ performance shares 2000 $18.1 10.4 1999 $14.8 11.1 Diluted weighted-average shares 10.4 Basic earnings per share Diluted earnings per share $1.74 $1.73 11.1 $1.43 $1.43 1998 $57.4 11.2 .1 11.3 $5.10 $5.06 NOTE 13 – NON-RECURRING SPECIAL ITEMS In 1999, the Company lost more than one million tons of iron ore pellet sales to Rouge Industries as a result of the extended shutdown of two blast furnaces following an explo- sion at the power plant that supplies Rouge. In 2000, the Company recorded a pre-tax insurance recovery and received proceeds on the claim of $15.3 million ($9.9 million after- tax). The Company continues to pursue modest additional recoveries, but given the complexity of the insurance issues, any additional amounts will not be recorded until all out- standing matters are resolved. The Company held 842,000 shares of LTV common stock, which were originally valued at $11.5 million, or $13.65 per share. As of June 30, 2000, the investment was reclassi- fied to “trading” and accordingly changes in market value are recognized in earnings as they occurred. The Company rec- ognized a reduction to 2000 earnings of $10.9 million pre-tax ($7.1 million after-tax) related to the investment. In August, 2000, the Company commenced a program to reduce its investment in the LTV common stock and through December 31, had sold 300,000 shares, with the balance sold in January, 2001. NOTE 14 – COMMITMENTS AND CONTINGENCIES From time to time, in the normal course of business, the Company enters into contracts to purchase iron ore to meet customer quality specifications or fulfill anticipated or forecasted shortfalls. The Company has committed to pur- chase approximately $19 million of pellets in 2001. 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. REPORT OF ERNST & YOUNG LLP, Independent Auditors SHAREHOLDERS AND BOARD OF DIRECTORS C L E V E L A N D - C L I F F S I N C We have audited the accompanying statement of con- solidated financial position of Cleveland-Cliffs Inc and consol- idated subsidiaries as of December 31, 2000 and 1999, and the related statements of consolidated income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company’s management. Our respon- sibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 examin- ing, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signif- icant 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 sub- sidiaries at December 31, 2000 and 1999, and the consoli- dated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Cleveland, Ohio January 24, 2001 T R O P E R ’ S R O T D U A I 35 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) I N M I L L I O N S E X C E P T P E R S H A R E A M O U N T S S T L U S E R Y L R E T R A U Q 36 Total revenues Gross profit Net income (loss) Amount Per common share Basic Diluted Average number of shares Basic Diluted 2000 Q u a r t e r s F i r s t $36.3 3.2 (3.5) (.32) (.32) 10.7 10.7 S e c o n d $152.4 19.6 T h i r d $152.5 16.8 F o u r t h $113.8 10.3 Ye a r $455.0 49.9 11.0 1.03 1.03 10.5 10.6 6.3 .60 .60 10.4 10.4 4.3 .43 .42 10.1 10.1 18.1 1.74 1.73 10.4 10.4 Annual results include the pre-tax effects of a $15.3 million ($15.0 million in the second quarter) recovery of an insurance claim, a $5.2 million fourth quarter tax credit re- flecting a reassessment of income tax obligations from audits of prior years’ federal tax returns, and a $10.9 million pre-tax ($9.1 million in the second quar ter) charge to recognize the decrease in value of the Company’s investment in LTV common stock. Total revenues Gross profit (loss) Net income (loss) Amount Per common share Basic Diluted Average number of shares Basic Diluted Q u a r t e r s F i r s t $25.1 9.9 2.7 .24 .24 11.2 11.2 S e c o n d $101.7 18.7 7.8 .70 .70 11.2 11.2 1999 T h i r d $94.2 (10.0) (10.7) (.96) (.96) 11.1 11.1 F o u r t h $150.0 16.7 Ye a r $371.0 35.3 5.0 .45 .45 10.8 10.9 4.8 .43 .43 11.1 11.1 First and third quarter results included pre-tax favor- able adjustments of $4 million and $2 million, respectively, primarily relating to recoveries of prior years’ state taxes. Third and fourth quarter results also included approximately $25 million and $7 million, respectively, of pre-tax fixed costs related to production curtailments. C O M M O N S H A R E P R I C E P E R F O R M A N C E A N D D I V I D E N D S P r i c e P e r f o r m a n c e 2000 1999 H i g h L o w H i g h L o w D i v i d e n d s 2000 1999 First Quarter Second Quarter Third Quarter Fourth Quarter Year $31.38 26.25 27.25 23.19 31.38 $22.00 21.94 22.56 19.69 19.69 $43.56 41.44 34.50 31.94 43.56 $32.94 31.81 30.06 26.81 26.81 $1.375 .375 .375 .375 $1.50 $1.375 .375 .375 .375 $1.50 CLIFFS – MANAGED MINES PRODUCTION (Gross Tons In Millions) Marquette Range (Michigan) Empire Tilden Mesabi Range (Minnesota) Hibbing Taconite LTV Steel Mining Company [b] Northshore Newfoundland/Quebec, Canada Wabush Total Annual Capacity 2000 Actual Exhaustion Year [a] 8.0 7.8 8.0 — 4.3 6.0 34.1 7.6 7.2 8.2 7.8 4.3 5.9 41.0 2019 2041 2029 — 2081 2042 OWNERSHIP PERCENTAGE Owners [c] Acme Metals Incorporated Algoma Steel Inc. Bethlehem Steel Corporation Cleveland-Cliffs Inc Dofasco Inc. Ispat International N.V. The LTV Corporation Stelco Inc. Empire Tilden Hibbing Taconite Northshore Wabush 45.0 35.0 40.0 70.3 15.0 100.0 40.0 25.0 15.0 14.7 15.1 22.8 24.2 37.9 [a] Assumes production at annual capacity and the economic development of available ore reserves. Actual production levels may differ from annual capacity. Capacity and mine life may be changed by economic conditions or other factors. [b] Mine permanently closed January 5, 2001. [c] As of February 28, 2001. Ownership may be held through subsidiaries. I S E N M D E G A N A M 37 SUMMARY OF FINANCIAL AND OTHER STATISTICAL DATA Cleveland-Cliffs Inc and Consolidated Subsidiaries Y R A M M U S R A E Y 1 1 38 Financial Data ( I N M I L L I O N S , E X C E P T P E R S H A R E A M O U N T S ) For The Year Operating Earnings (a) Operating Revenues – Product Sales and Services Operating Revenues – Royalties and Management Fees Operating Revenues – Total Cost of Goods Sold and Operating Expenses and AS&G Expenses Operating Earnings Net Income (Loss) (a) Net Income (Loss) Per Common Share (a) Basic Diluted Cash Flow from Operations Before Changes in Operating Assets and Liabilities Distributions to Common Shareholders: Regular Cash Dividends – Per Share Regular Cash Dividends – Total Special Dividends – Per Share Special Dividends – Total Repurchases of Common Shares At Year-End Cash and Marketable Securities Total Assets Long-Term Obligations Effectively Serviced (c) Shareholders’ Equity Book Value Per Common Share Market Value Per Common Share Iron Ore Production and Sales Statistics (Millions of Gross Tons) Production From Mines Managed By Cliffs: North America Australia Total Cliffs’ Share Cliffs’ Sales From: North American Mines Australian Mine Total Other Information Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (d) Earnings Before Interest and Taxes (EBIT) (d) Common Shares Outstanding (Millions) – Average For Year Common Shares Outstanding (Millions) – At Year-End Common Shares Price Range – High Common Shares Price Range – Low Employees at Year-End (e) 2000 1999 1998 $379.4 50.7 430.1 398.9 31.2 18.1 1.74 1.73 76.9 1.50 15.7 15.6 29.9 727.8 74.0 402.0 39.73 21.56 41.0 41.0 11.8 10.4 10.4 $ 44.2 18.6 10.4 10.1 $31.38 19.69 5,645 $316.1 48.5 364.6 345.4 19.2 4.8 .43 .43 35.6 1.50 16.7 17.2 67.6 679.7 74.7 407.3 38.27 31.13 36.2 36.2 8.8 8.9 8.9 $ 27.9 5.4 11.1 10.6 $43.56 26.81 5,947 $465.7 49.7 515.4 438.3 77.1 57.4 5.10 5.06 75.1 1.45 16.3 11.5 130.3 723.8 75.4 437.6 39.25 40.31 40.3 40.3 11.4 12.1 12.1 $ 87.1 66.8 11.3 11.2 $57.69 36.06 6,029 (a) Results include an after-tax, $9.9 million, recovery of an insurance claim, $5.2 million federal income tax credit, and a $7.1 million charge relating to a common stock investment (combined $.77 per share) in 2000; 1999 $4.4 million ($.39 per share) recovery relating primarily to prior years’ state tax refunds; 1998 federal income tax credit $3.5 million ($.31 per share); 1997 after-tax credits of $8.8 million ($.77 per share); net contributions from non-recurring items extraordinary charge of $2.4 million ($.20 per share) in 1995, recoveries on bankruptcy claims of $23.2 million ($1.92 per share) and $47.1 million ($4.00 per share) in 1993 and 1990, respectively, and a $38.7 million ($3.23 per share) after-tax charge for accounting changes in 1992. Operating results reflect the acquisition of a majority interest of CAL in the fourth quarter of 2000, and the acquisition of Northshore in the fourth quarter of 1994. 1997 1996 1995 1994 1993 1992 1991 1990 $406.1 47.5 453.6 386.7 66.9 54.9 4.83 4.80 74.3 1.30 14.8 $470.1 51.5 521.6 428.0 93.6 61.0 5.26 5.23 89.6 1.30 15.1 $424.8 49.5 474.3 385.1 89.2 57.8 4.84 4.82 84.7 1.30 15.5 4.9 19.5 10.8 115.9 694.3 7 4.9 407 .4 36.02 45.81 39.6 39.6 10.9 10.4 .3 10.7 $ 87.8 68.9 11.4 11.3 $47 .13 40.00 5,951 169.4 673.7 72.9 370.6 32.59 45.38 39.9 1.6 41.5 12.0 11.0 1.7 12.7 $108.2 90.6 11.6 11.4 $46.88 36.25 6,251 148.8 644.6 76.3 342.6 28.96 41.00 39.6 1.5 41.1 11.3 10.4 1.5 11.9 $ 85.6 68.8 11.9 11.8 $46.75 36.13 6,411 $348.5 44.7 393.2 329.5 63.7 42.8 3.54 3.53 54.5 1.23 14.8 141.4 608.6 84.2 311.4 25.74 37.00 35.2 1.5 36.7 8.3 8.2 1.5 9.7 $ 70.6 56.2 12.1 12.1 $45.50 34.00 6,504 $280.4 39.7 320.1 280.8 39.3 54.6 4.55 4.53 34.8 1.20 14.4 2.70 (b) 32.4 (b) 161.0 549.1 88.6 280.4 23.25 37.38 32.3 1.5 33.8 6.8 6.4 1.4 7.8 $ 86.7 73.2 12.0 12.1 $37.50 28.75 6,173 $288.9 43.8 332.7 297.5 35.2 (7.9) (.66) (.66) 49.7 1.18 14.1 128.6 537.2 92.1 269.5 22.47 35.63 32.9 1.5 34.4 7.3 6.0 1.3 7.3 $ 50.9 36.8 12.0 12.0 $40.38 29.50 6,594 $290.8 45.8 336.6 294.2 42.4 53.8 4.55 4.51 106.0 1.03 12.1 4.00 47.0 95.9 478.7 65.0 290.8 24.40 36.13 32.1 1.3 33.4 7.0 6.0 1.3 7.3 $ 81.3 65.3 11.8 11.9 $36.50 25.00 6,709 $299.5 37.7 337.2 307.0 30.2 73.8 6.31 6.26 32.1 .80 9.3 96.0 510.9 82.4 290.8 24.88 27.13 31.7 2.2 33.9 6.6 6.5 .3 6.8 $119.2 103.8 11.7 11.7 $35.00 19.63 6,900 (b) Includes securities at market value on distribution date. (c) Includes the Company’s share of ventures and equipment acquired on capital leases. (d) EBITDA and EBIT are not presented as substitute measures of operating results or cash flow from operations, but because they are widely accepted indicators of a company’s ability to acquire and service debt. (e) Includes employees of managed mining ventures, of which 1,141 (at December 31, 2000) were employees of LTV Steel Mining Company that ceased operations on January 5, 2001. At December 31, 2000, the Company had 2,579 shareholders of record. 39 CLEVELAND-CLIFFS INC I N V E S TO R A N D C O R P O R AT E I N F O R M AT I O N O F F I C E R S Corporate Office Cleveland-Cliffs Inc 1100 Superior Avenue Cleveland, OH 44114-2589 Telephone: 216.694.5700 Fax: 216.694.4880 Stock Exchange Information The principal market for Cleveland- Cliffs Inc common shares (ticker symbol CLF) is the New York Stock Exchange. The shares are also list- ed on the Chicago Stock Exchange. Transfer Agent and Registrar First Chicago Trust Company of New York is the transfer agent, reg- istrar and dividend disbursing agent for Cliffs. Questions and communi- cations regarding transfer of stock, replacement of lost certificates, dividends and address changes should be directed to: First Chicago Trust Company, a division of EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 Telephone: 800.446.2617 Internet: http://www.equiserve.com Dividend Reinvestment Plan Cliffs has a Dividend Reinvestment Plan which offers registered share- holders the opportunity to reinvest their dividends and/or make sup- plemental cash investments in additional common shares. Cliffs pays all service charges and bro- kerage commissions in connection with the purchase of stock. If you would like to participate or receive a brochure describing in more detail the features of the Plan, you can call First Chicago, administra- tor of the Plan, at 800.446.2617. Direct Deposit of Dividends Electronic deposit of dividends is available to shareholders who wish to have their dividends directly deposited into a checking, savings or other account. To participate call First Chicago at 800.870.2340. Investor Relations Questions and comments regarding Cliffs or any information appearing in this report or any other Company publication are welcome and may be directed to Fred Rice, Director- Investor Relations at the corporate office, or telephone 800.214.0739 or 216.696.5459. E-Mail address: fbrice@cleveland-cliffs.com News releases and other informa- tion on the Company are available on the Internet at: http://www.cleveland-cliffs.com Annual Meeting Cliffs’ Annual Meeting of Shareholders will be May 8, 2001 at 11:30 a.m. at The Forum Conference Center, located in One Cleveland Center, 1375 East 9th Street, Cleveland, Ohio. Formal notice of the meeting and the proxy statement will be mailed to each shareholder. 10-K Report A copy of Cliffs’ annual report on Form 10-K filed with the Securities and Exchange Commission is avail- able to interested shareholders upon request. 40 Years with Company 31 Age John S. Brinzo, 59 Chairman and Chief Executive Officer Thomas J. O’Neil, 60 President and Chief Operating Officer William R. Calfee, 54 Executive Vice President-Commercial Cynthia B. Bezik, 48 Senior Vice President-Finance Edward C. Dowling, Jr., 45 Senior Vice President-Operations James A. Trethewey, 56 Senior Vice President-Operations Services Robert Emmet, 55 Vice President-Financial Planning and Treasurer Donald J. Gallagher, 48 Vice President-Sales Randy L. Kummer, 44 Vice President-Human Resources Richard L. Shultz, 58 Vice President-Reduced Iron Sales and Business Development John E. Lenhard, 61 Secretary and Associate General Counsel Robert J. Leroux, 50 Controller 9 28 21 3 28 25 19 1 7 32 25 O P E R AT I N G U N I T M A N AG E M E N T 5 32 11 2 23 12 John W. Sanders, 58 President, Wabush Mines Robert C. Berglund, 54 General Manager, Northshore Mine Steven A. Elmquist, 50 General Manager, Cliffs and Associates Limited Paul A. Korpi, 46 General Manager, Empire Mine Michael P. Mlinar, 47 General Manager, Tilden Mine John N. Tuomi, 51 General Manager, Hibbing Taconite Mine (Age and service at March 5, 2001) CORE VALUES In support of the Company’s objective to be the most admired minerals company, we are building on a framework of strong corporate values. SAFE PRODUCTION - record production with: lack of injuries....good housekeeping and orderly work areas.... well-maintained equipment....proper training and procedures....looking out for and correcting each other....safe conditions, safe behavior....Sentinel of Safety award winner. CUSTOMER FOCUS - listening to the customer....being responsive and on time....meeting quality expectations....helping the customer succeed. CREATING ECONOMIC VALUE - doing the right things right the first time....elimination of waste and inefficiency....breakthroughs in productivity and technology. BIAS FOR ACTION - getting things done....reduced red tape....barrierless....call anybody you want.... management by fact....plan the work – work the plan. TRUST, RESPECT AND OPEN COMMUNICATION - open access to information....constructive conflict.... delegation to the appropriate level....toleration of failure in pursuit of business success.... encouraging and accepting different views....feeling an obligation to explain your actions to those it affects....gender and racial diversity. GROUP AND INDIVIDUAL ACCOUNTABILITY - behaving in line with our core values....being responsible for our actions....providing plans/standards/expectations....holding yourself and/or the group to a high standard of performance....walk the talk. INTEGRITY - doing what you say you’re going to do....no hidden agendas....doing the right thing....being truthful....zero tolerance – not walking away from a situation....be credible. TEAMWORK - actively involve others in decision making....know when to take a leadership role and when to be an active member....recognize the value of teamwork and the synergy it creates. RECOGNIZE AND REWARD ACHIEVEMENT - celebrating successes....stress training and development....an effective appraisal of performance....giving a simple thank you. T H E S E C O R E VA L U E S A R E I M P O R T A N T T O O U R F U T U R E . E V E R Y O N E W I L L B E J U D G E D O N T H E I R S U P P O R T O F A N D C O M M I T M E N T T O T H E M . D I R E C TO R S O R G A N I Z AT I O N C H A N G E S At the Annual Meeting of Shareholders in May 2000, Robert S. Coleman did not stand for re-election to the Board of Directors due to the demands of his business. Mr. Coleman’s wise counsel over the nine years he served on the Board is missed. A. Stanley West, who was Senior Vice President-Sales and Commercial Planning, retired after 33 years with Cliffs and a 41-year career in the iron and steel industry. Mr. West’s in-depth knowledge of the steel industry in the United States and Canada was instrumental in Cliffs being the leading producer and merchant of iron ore in North America. George N. Chandler, II, Vice President-Reduced Iron, and Richard F. Novak, Vice President-Labor Relations, retired after 38 and 31 years of service, respectively. They made many contributions to Cliffs. Richard L. Shultz, formerly Director of Iron Making Technology, was named Vice President-Reduced Iron Sales and Business Development. Randy L. Kummer joined Cliffs as Vice President-Human Resources. Mr. Kummer was formerly Vice President-Human Resources, Government and Public Affairs of Kennecott Energy Company. Director Since 1997 1996 John S. Brinzo (4,6,7) Chairman and Chief Executive Officer of the Company Ronald C. Cambre (1,3,4,6) Chairman of the Board Newmont Mining Corporation International mining company 1999 Ranko Cucuz (1,5,6) Chairman and Chief Executive Officer Hayes Lemmerz International, Inc. International supplier of wheels to the auto industry 1986 James D. Ireland III (2,4,5,6,7) Managing Director/Capital One Partners, Inc. 1994 1991 1999 1996 1995 1991 Private merchant banking firm G. Frank Joklik (2,6) Chairman and Chief Executive Officer MK Gold Company International mining company, and Retired President and Chief Executive Officer Kennecott Corporation International mining company Leslie L. Kanuk (2,4,5,6) Professor Emeritus Zicklin School of Business Baruch College, City University of New York Anthony A. Massaro (1,6,7) Chairman and Chief Executive Officer Lincoln Electric Holdings, Inc. Global manufacturer of welding and cutting products and consumables Francis R. McAllister (3,4,5,6,7) Chairman and Chief Executive Officer Stillwater Mining Company Palladium and platinum producer John C. Morley (2,3,4,6,7) President/Evergreen Ventures, Ltd. Private investment firm, and Retired President and Chief Executive Officer Reliance Electric Company Major industrial manufacturer Stephen B. Oresman (3,5,6,7) President/Saltash Ltd. Management consultants 1991 Alan Schwartz (1,2,6) Professor, Yale Law School and Yale School of Management COMMITTEES: (1) Audit (2) Board Affairs (3) Compensation and Organization (4) Executive (5) Finance (6) Long Range Planning (7) Strategic Advisory Recycled Paper 41 C l e v e l a n d - C l i f f s 2 0 0 0 A n n u a l R e p o r t CLEVELAND-CLIFFS INC PRODUCING AN ESSENTIAL RAW MATERIAL FOR NORTH AMERICA’S CRITICAL INDUSTRIAL BASE 1100 SUPERIOR AVENUE CLEVELAND, OH 44114-2589 www.cleveland-cliffs.com 

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