**EXHIBIT 13.1**

 

ANNUAL REPORT

OF THE TRUSTEES OF

MESABI TRUST

For the Year Ended January 31, 2003

ADDRESS

 

Mesabi Trust

c/o Deutsche Bank Trust Company Americas

Corporate Trust & Agency Services – GDS

P.O. Box 318

Church Street Station

New York, NY 10008-0318

(615) 835-2749 (telephone)

 

COUNSEL

 

Oppenheimer Wolff & Donnelly LLP, General Counsel

 

TRANSFER AGENT

 

Deutsche Bank Trust Company Americas

 

REGISTRAR

 

Deutsche Bank Trust Company Americas

 

Mesabi Trust does not maintain a Website and therefore does not makeavailable through a Website the annual, quarterly, or other reports it fileswith the Securities and Exchange Commission.

 

Mesabi Trust will provide, however, upon the written request of anycertificate holder addressed to the Trustees at the above address and withoutcharge to such certificate holder, a copy of Mesabi Trust’s Annual Report onForm 10-K for the fiscal year ended January 31, 2003 as filed with theSecurities and Exchange Commission pursuant to the Securities Exchange Act of1934, as amended.

 

Forward-Looking Information

 

Certain statements contained in this document are forward-looking,including specifically those statements estimating 2003 production orshipments.  All such forward-lookingstatements are based on input from the lessee/operator.  The Trust has no control over the operationsand activities of the lessee/operator except within the framework of currentagreements.  Actual results could differmaterially from those indicated in such statements.  For important factors that could cause actual results to differmaterially, see the information under the heading “Important Factors AffectingMesabi Trust” set forth on page 6 of this Annual Report.

 

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**SELECTED FINANCIAL DATA**

 
| **Years ended on January 31**         |   | **2003** |      | **2002** |   | **2001**  |   | **2000** |      | **1999** |   |
|---------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
| Royalty and interest income           |   | $        | 5,100,759 |     | $      | 3,984,721 |   | $        | 5,753,650 |     | $      | 5,359,893 |   | $ | 5,988,143 |   |
| Trust expenses                        |   | 406,228  |      | 340,315  |   | 407,505   |   | 389,465  |      | 353,386  |   |
| Net income(a)                         |   | $        | 4,694,531 |     | $      | 3,644,406 |   | $        | 5,346,145 |     | $      | 4,970,428 |   | $ | 5,634,757 |   |
|                                  |   |     |      |     |   |      |   |     |      |     |   |
| Net income per Unit(b)                |   | $        | .36       |     | $      | .28       |   | $        | .41       |     | $      | .38 |   | $ | .43 |   |
|                                  |   |     |      |     |   |      |   |     |      |     |   |
| Distributions declared per unit(b)(c) |   | $        | .36       |     | $      | .26       |   | $        | .41       |     | $      | .38 |   | $ | .43 |   |
|                                  |   |     |      |     |   |      |   |     |      |     |   |
| At January 31                         |   |     |      |     |   |      |   |     |      |     |   |
| Total Assets                          |   | $        | 3,594,102 |     | $      | 2,218,736 |   | $        | 2,556,754 |     | $      | 3,179,863 |   | $ | 2,790,042 |   |

 

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(a)           The Trust, as agrantor trust, is exempt from federal and state income taxes.

 

(b)           Based on 13,120,010Units of Beneficial Interest outstanding during all years.

 

(c)           Duringthe fiscal year ended January 31, 2003, the Trustees distributed $.25 per Unit(including $.08 per Unit declared in fiscal 2002 and distributed in February2002) and declared an additional distribution of $.19 per Unit, payable inFebruary 2003.  During the fiscal yearended January 31, 2002, the Trustees distributed $.305 per Unit (including $.13per Unit declared in fiscal 2001 and distributed in February 2001) and declaredan additional distribution of $.08 per Unit, payable in February 2002.  During the fiscal year ended January 31,2001, the Trustees distributed $.455 per Unit (including $.18 per Unit declaredin fiscal 2000 and distributed in February 2000) and declared an additionaldistribution of $.13 per Unit, payable in February 2001.  During the fiscal year ended January 31,2000, the Trustees distributed $.35 per Unit (including $.155 per Unit declaredin fiscal 1999 and distributed in February 1999) and declared an additionaldistribution of $.18 per Unit, payable in February 2000.  During the fiscal year ended January 31,1999, the Trustees distributed $.54 per Unit (including $.265 per Unit declaredin fiscal 1998 and distributed in February 1998) and declared an additionaldistribution of $.155 per Unit, payable in February 1999.  See “Reserves and Distributions” on page 12of this Annual Report.

 

**TRUSTEES’ DISCUSSION AND ANALYSIS OFFINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

**General**

** **

Mesabi Trust (“Mesabi Trust” or the “Trust”), formed pursuant to anAgreement of Trust dated July 18, 1961 (the “Agreement of Trust”), is a trustorganized under the laws of the State of New York.  Mesabi Trust holds all of the interests formerly owned by MesabiIron Company, including all right, title and interest in the Amendment ofAssignment, Assumption and Further Assignment of Peters Lease (the “AmendedAssignment of Peters Lease”), the Amendment of Assignment, Assumption andFurther Assignment of Cloquet Lease (the “Amended Assignment of CloquetLease”), the beneficial interest in the Mesabi Land Trust (as such term isdefined below) and all other assets and property identified in the Agreement ofTrust.  The Amended Assignment of PetersLease relates to an Indenture made as of April 30, 1915 among East Mesaba IronCompany, Dunka River Iron Company and Claude W. Peters (the “Peters Lease”) andthe Amended Assignment of Cloquet Lease relates to an Indenture made May 1,1916 between Cloquet Lumber Company and Claude W. Peters (the “CloquetLease”).

 

The Trust will terminate twenty-one (21) years after the death of thesurvivor of twenty-five (25) persons named in an exhibit to the Agreement ofTrust.  The youngest person on thisexhibit is now 42 years old.

 

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The Agreement of Trust specifically prohibits the Trustees fromentering into or engaging in any business. This prohibition applies even to business activities the Trustees deemnecessary or proper for the preservation and protection of the TrustEstate.  Accordingly, the Trustees’ activitiesin connection with the administration of Trust assets are limited to collectingincome, paying expenses and liabilities, distributing net income to the Trust’sCertificate Holders after the payment of, or provision for, such expenses andliabilities, and protecting and conserving the assets held.

 

Pursuant to a ruling from the Internal Revenue Service, which rulingwas based on the terms of the Agreement of Trust including the prohibitionagainst entering into any business, the Trust is not taxable as a corporationfor Federal income tax purposes. Instead, the holders of the Units of Beneficial Interest (the“Unitholders”) are considered as “owners” of the Trust and the Trust’s incomeis taxable directly to the Unitholders.

 

Royalty income constitutes the principal source of the Trust’srevenue.  Royalty rates are determinedin accordance with the terms of Mesabi Trust’s leases and assignments ofleases.  Three types of royaltiescomprise the Trust’s royalty income:

 

•                  Overridingroyalties, which constitute the majority of Mesabi Trust’s royalty income, aredetermined by both the volume and selling price of iron ore products shipped.

 

•                  Fee royalties,historically a smaller component of the Trust’s royalty income, are payable toMesabi Land Trust, a Minnesota land trust of which Mesabi Trust is the solebeneficiary and for which US Bank N.A. acts as trustee (the “Mesabi LandTrust”), and are based on the amount of crude ore mined.  Currently, the fee royalty on crude ore isbased on an agreed price per ton, subject to certain indexing.  Crude ore is used to produce iron orepellets and other products.

 

•                  Minimum advanceroyalties, the third type of royalty, are discussed below.

 

The current royalty rate schedule became effective on August 17, 1989,which was established pursuant to the Amended Assignment of Peters Lease, theAmended Assignment of Cloquet Lease, and the Assumption and Assignment ofMesabi Lease (together with the Amended Assignment of Peters Lease and theAmended Assignment of Cloquet Lease, the “Amended Assignment Agreements”),which the Trust entered into with Cyprus Northshore Mining Corporation NMC(“Cyprus NMC”).  Pursuant to the AmendedAssignment Agreements, overriding royalties are determined by both the volumeand selling price of iron ore products shipped.  In 1994, Cyprus NMC was sold by its parent corporation toCleveland-Cliffs Inc (“CCI”) and renamed Northshore Mining Company(“Northshore”).  CCI now operatesNorthshore as a wholly-owned subsidiary.

 

Fee royalties payable to the Mesabi Land Trust are based on the amountof crude ore mined.  Crude ore is usedto produce iron ore pellets and other products.  Under the Amended Assignment Agreements, overriding royalties aredetermined by both the volume and selling price of iron ore products sold.  For more information on overriding royaltiesand the manner in which they are determined, see the section entitled“Leasehold Royalties” set forth on page 9 of this Annual Report.

 

Under the relevant documents, Northshore may mine and ship iron oreproducts from lands other than Mesabi Trust lands.  To encourage the use of iron ore products from Mesabi Trustlands, Mesabi Trust receives royalties on stated percentages of iron oreshipped from Silver Bay, whether or not the iron ore products are from MesabiTrust lands.  Mesabi Trust receivesroyalties at the greater of (i) the aggregate quantity of iron ore productsshipped that were from Mesabi Trust lands, and (ii) a portion of the aggregatequantity of all iron ore products shipped that were from any lands, suchportion being 90% of the first four million tons shipped during such year, 90%of the next two million tons shipped during such year, and 25% of all tonnageshipped during such year in excess of six million tons.

 

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Royalty income constitutes the principal source of the Trust’s revenue,which comprised 99.1%, 98.7%, and 99.2% of the total revenue of the Trust infiscal years 2003, 2002, and 2001, respectively (years ending January 31).  A more complete discussion of royalty ratesand the manner in which they are determined is set forth under the headings“Trustees’ Discussion and Analysis of Financial Condition and Results ofOperation” and “Leasehold Royalties,” on pages 2 and 9, respectively, of thisAnnual Report.

 

**Current Developments**

** **

***General***.  Production of iron ore pellets at Northshorefrom Mesabi Trust lands during fiscal year 2002 totaled approximately 4.15million tons, and actual shipments over the same period totaled approximately3.95 million tons.  By comparison,actual pellet production for fiscal year 2001 approximated 2.71 million tons,and actual shipments approximated 3.17 million tons.  These increases in production and shipments are attributable toincreases in sales volume of Northshore’s iron ore pellets during 2002, whichresulted from CCI’s capture of additional customer contracts and somewhathigher demand from its customers.

 

Northshore has advised the Trustees that total calendar year 2003production from Mesabi Trust lands may be approximately 4.5 million tonsof iron ore pellets.  In addition, inits January 29, 2003 press release, CCI announced that it currently expects tooperate all five of its mines (which are located in Eastern Canada and theUnited States) at capacity levels in 2003.

 

However, Northshore has not provided the Trust with an estimate fortotal calendar year 2003 shipments. (See description of the uncertainty of market conditions in the iron oreand steel industry under “Important Factors Affecting Mesabi Trust”below.)  During calendar years 2002,2001, 2000, 1999, and 1998, the percentage of shipments of iron ore productsfrom Mesabi Trust lands was approximately 97.5%, 99.2%, 99.8%, 98.9%, and 99.3%,respectively, of total shipments.  Northshorehas not advised the Trustees as to the percentage of iron ore products itanticipates shipping from Mesabi Trust lands in calendar year 2003.

 

***Mesabi NuggetProject***. On November 14, 2001, CCI announced that it entered into a Memorandum ofUnderstanding with Mesabi Nugget LLC and other parties to participate in theMesabi Nugget Project.  The project’sobjective is to develop a new iron making technology (Kobe Steel’s Itmk3process) for converting iron ore into nearly pure iron nugget form (the term“nugget” is apparently used to differentiate the product from lower-ironcontent pellets produced from current technology).  The project’s initial phase, Phase I, was completed in the earlypart of fiscal year 2002.  On April 4,2002, IronUnits LLC, a subsidiary of CCI, signed an agreement to commit itselfthrough Phase II, which involves construction of a pilot plant at Northshore totest the Kobe Steel Itmk3 process and its ability to convert iron ore intonearly pure iron.  Furthermore, asreported by Skillings Mining Review on March 2, 2002, the Iron Range Resourcesand Rehabilitation Board and the Minnesota Department of Trade and EconomicDevelopment have each approved loans of $8.0 million to assist in the fundingof Phase II of the Mesabi Nugget Project.

 

Construction of the pilot plant’s furnace at the Northshore facilitycommenced in September 2002.  Accordingto published reports of CCI, the pilot plant at Northshore is expected tobecome operational in the first half of 2003, and if successful, constructionof a commercial-sized facility capable of producing within a range of 300,000to 700,000 tons of iron nuggets could commence as early as 2004.  Although CCI has chosen to locate the pilotplant at Northshore, it is not certain that if CCI decides to build a fullyoperational facility, it will do so on Mesabi Trust lands.

 

Although Mesabi Trust is not a direct party to the Mesabi NuggetProject and its involvement in this project was not solicited, it appears thatin the event that the fully-operational plant is located at the Northshorefacility, the project may involve the use of iron ore from the Mesabi Trustlands.  Nevertheless, because it isstill uncertain as to whether the Mesabi Nugget Project will successfullyachieve commercialization (in addition to the uncertainty surrounding whetherCCI will elect to locate any such fully-operational plant at Northshore and useiron ore from the Mesabi Trust lands for the Project), the Trustees are unableto make projections as to any future royalties that might be payable to theTrust.

 

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CCI has indicated that if the Mesabi Nugget Project successfullyachieves commercialization, iron nuggets from this new process would be used asan alternative or supplement to pig iron in the steel making process.

 

***Other Information***.  On March 20, 2002, a three-year tariffschedule adopted by President Bush took effect, imposing tariffs ranging fromeight percent to thirty percent on a significant number of imported steelproducts.  Although the quantity ofimported steel products initially fell, their levels have been rebuilding sinceJune 2002.  Moreover, some steelconsumers and steel industry analysts have commented that the tariffs did, atleast initially upon becoming effective, result in increases in the prices ofcertain domestic steel products.  TheTrustees are unable, however, to quantify the effect that such price increasesmay have had on royalties paid to the Trust. In addition, although the tariffs may have also had a favorable impacton the amount of the Trust’s income by providing an impetus to sales of ironore pellets by reason of increased domestic demand, the Trustees are unable toverify such an effect or quantify it. The Trustees do not transact business directly with steel producers andaccordingly lack information as to the extent to which iron ore pellets may bein demand by steel producers for the production of various steel products andthe degree to which production of such products (and the prices of suchproducts) may be affected by the tariffs and the various tariff exemptions thathave been adopted by the President to date.

 

On March 21, 2003, the administration announced that the President’soriginal three-year tariff schedule would be modified to lower the top tariffrate from thirty percent to twenty-four percent, and the lower tariff rate fromeight percent to seven percent. Furthermore, the President has previously warned the nation’s steelmakersthat he would cut short the three-year tariffs if he determined that the steelindustry was not wisely using the tariffs to improve their competitive positionin the world marketplace.

 

On March 26, 2003, the World Trade Commission (WTO) issued apreliminary ruling that the steel tariffs imposed by President Bush are inviolation of global trade rules.  TheWTO’s ruling will not be made public until it becomes final, which isanticipated to occur within the next several months.  U.S. trade officials have indicated that the administration willappeal the decision if it is finalized without change.  At this time, in view of the preliminarynature of the WTO’s ruling, the Trust is unable to determine the extent towhich the final WTO ruling will affect the steel tariffs and the impact, if any,it will have on royalties payable to the Trust during fiscal year 2003.

 

The Trustees are therefore not in a position to determine what, if any,reductions in tariffs may take place or the extent to which the tariffs andmodifications to the tariff schedule may impact the demand and pricing of ironore pellets mined from the Mesabi Trust lands. In addition, in light of the Presidential exemptions and the uncertainfuture of the tariffs in light of the International Trade Commission’s ongoingreviews and the WTO ruling, the Trustees are unable to determine at this timewhether the tariffs will ultimately have any material impact on the demand for,and prices of, iron ore pellets during fiscal year 2003.

 

Mesabi Trust has no employees, but it engages independent consultantsto assist the Trustees in monitoring, among other things, the amount and salesprices of iron ore products shipped by Northshore from Silver Bay,Minnesota.  As noted above, theinformation regarding amounts and sales prices of shipped iron ore products isused to compute the royalties payable to Mesabi Trust by Northshore.  Deutsche Bank Trust Company Americas, theCorporate Trustee, also performs certain administrative functions for MesabiTrust.

 

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**Important Factors Affecting Mesabi Trust**

** **

The Agreement of Trust specifically prohibits the Trustees fromentering into or engaging in any business. This prohibition seemingly applies even to business activities theTrustees deem necessary or proper for the preservation and protection of theTrust Estate.  Accordingly, theTrustees’ activities in connection with the administration of Trust assets arelimited to collecting income, paying expenses and liabilities, distributing netincome to the Trust’s Certificate Holders after the payment of, or provisionfor, such expenses and liabilities, and protecting and conserving the assetsheld.

 

Accordingly, the income of the Trust is highly dependent upon theactivities and operations of Northshore, and the terms and conditions of theAmended Assignment Agreements.  TheTrust and the Trustees have no control over the operations and activities ofNorthshore, except within the framework of the Amended Assignment Agreements.

 

Due to winter weather, and the increasing royalty percentages based ontonnage shipped in a calendar year, results for a particular calendar quarterare typically not indicative of results for future quarters or the year as awhole.  Factors which can impact theresults of the Trust in any quarter or year include:

 

1.                             Shipping Conditions inthe Great Lakes.  Shipping activityby Northshore is dependent upon when the Great Lakes shipping lanes freeze forthe winter months (typically in January) and when they re-open in the spring(typically late-March or April).  Baseoverriding royalties to Mesabi Trust are based on shipments made in a calendarquarter.  Because there typically islittle or no shipping activity in the first calendar quarter, the Trusttypically receives only the minimum royalty for that period.

 

2.                             Operations ofNorthshore.  Because the primaryportion of the Trust’s revenues derive from iron ore product shipped byNorthshore from Silver Bay, Northshore’s processing and shipping activitiesdirectly impact the Trust’s revenues in each quarter and for each year.  In turn, a number of factors affectNorthshore shipment volume.  Thesefactors include economic conditions in the iron ore industry, pricing bydomestic and international competitors, long-term customer contracts or arrangementsby Northshore or its competitors, availability of ore boats, production atNorthshore’s mining operations, and production at the pelletizing/processingfacility.  If any pelletizing linebecomes idle for any reason, production and shipments (and, consequently, Trustincome) could be adversely impacted.

 

3.                             Increasing Royalties.  As described elsewhere in this Report, theroyalty percentage paid to the Trust increases as the aggregate tonnage of ironore products shipped, attributable to the Trust, in any calendar yearincreases.  Assuming a consistent salesprice per ton throughout a calendar year, shipments of iron ore productattributable to the Trust later in the year generate a higher royalty to the Trust.

 

4.                             Percentage of MesabiTrust Ore.  As described elsewherein this Report, Northshore has the ability to process and ship iron oreproducts from lands other than Mesabi Trust lands.  In certain circumstances, the Trust may be entitled to royaltieson those other shipments, but not in all cases.  In general, the Trust will receive higher royalties (assuming allother factors are equal) if a higher percentage of shipments are from MesabiTrust lands.  The percentages ofshipments that came from Mesabi Trust lands were 97.5%, 99.2%, 99.8%, 98.9%,and 99.3% in calendar years 2002, 2001, 2000, 1999, and 1998, respectively.

 

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5.                             Uncertainty of MarketConditions in the Steel and Iron Ore Industry.  Although CCI reported in its Form 10-K for its fiscal year endingDecember 31, 2002 that it experienced a record year in iron ore pellet salesand is projecting a further increase of pellet sales for its fiscal year 2003,CCI also stated in such Form 10-K that it continues to face a significant numberof business risks and other potentially adverse factors.  Such risks and factors include, but are notlimited to, lower customer demand, an increase in certain steel imports andiron ore substitutes, a decrease in iron ore production in North America, customerfailure, and customer or potential customer restructuring and financialdifficulty (which could result in reduced production capacity over time).  Furthermore, despite the intendedameliorative effects of the Presidential tariffs on the price and demand fordomestic steel products, there still exists a high degree of uncertainty andsignificant consolidation and restructuring in the domestic steel market.

 

In light of the current steel industry environment, uncertaintiesarising from war and other global events, and the above-mentioned risks andfactors, it is uncertain whether prices on domestic steel products will bemaintained at these current relatively higher levels, and whether steel millswill be able to operate at capacity levels in fiscal year 2003 and beyond.  Furthermore, although overall there appearsto have been an increase in the demand for domestic steel products over thelast fiscal year, it is nevertheless uncertain whether this increase in demandwill continue and the extent to which it will impact royalties paid to theTrust in fiscal year 2003 and beyond.

 

**Comparisonof Fiscal Years ended January 31, 2003 and January 31, 2002**

 

Mesabi Trust’s gross income for the fiscal year ended January 31, 2003was $5,100,759, an increase of $1,116,038 (or approximately 28.0%) from thegross income of $3,984,721 for the fiscal year ended January 31, 2002.  The increase in gross income primarily wasdue to increased pellet shipments. Mesabi Trust’s expenses of $406,228 for the fiscal year ended January31, 2003 increased $65,913 (or approximately 19.4%) from expenses of $340,315for the fiscal year ended January 31, 2002. Total expenses, by category, for each of the last three fiscal years isset forth under “Income and Expense” on page 12 of this Annual Report.  Net income for the fiscal year ended January31, 2003 was $4,694,531, which represents an increase of $1,050,125 from thenet income of $3,644,406 for the fiscal year ended January 31, 2002.

 

Mesabi Trust’s Unallocated Reserve aggregated $1,066,048 at January 31,2003, as compared with an Unallocated Reserve of $1,094,721 at January 31,2002.  During the fiscal year endedJanuary 31, 2003, the Trustees distributed $.25 per Unit of BeneficialInterest.  These distributions toUnitholders totaled $3,280,003.

 

The following chart summarizes Mesabi Trust’s royalty income for thefiscal years ended January 31, 2003 and January 31, 2002, respectively:

 
|                                      |   | **Fiscal  Years Ended on January 31** |      |
|-------------------------------------------|--------|---------------------------------------|-----------|
|                                      |   | **2003**                              |      | **2002** |   |
| Base overriding royalties                 |   | $                                     | 4,728,321 |   | $ | 3,709,014 |   |
| Bonus royalties                           |   | —                                |      | — |   |
| Minimum advance   Royalty paid (recouped) |   | —                                |      | — |   |
| Fee royalties                             |   | 324,635                               |      | 224,857 |   |
| Total royalty income                      |   | $                                     | 5,052,956 |   | $ | 3,933,871 |   |
|                                           |        |                                       |           |  |  |  |  |  |  |

 

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**Comparisonof Fiscal Years ended January 31, 2002 and January 31, 2001**

 

Mesabi Trust’s gross income for the fiscal year ended January 31, 2002was $3,984,721, a decrease of $1,768,929 (or approximately 30.7%) from thegross income of $5,753,650 for the fiscal year ended January 31, 2001.  The decrease in gross income primarily wasdue to decreased pellet shipments. Mesabi Trust’s expenses of $340,315 for the fiscal year ended January31, 2002 decreased $67,190 (or approximately 16.5%) from expenses of $407,505for the fiscal year ended January 31, 2001. Total expenses, by category, for each of the last three fiscal years isset forth under “Income and Expense” on page 12 of this Annual Report.  Net income for the fiscal year ended January31, 2002 was $3,644,406, which represents a decrease of $1,701,739 from the netincome of $5,346,145 for the fiscal year ended January 31, 2001.

 

Mesabi Trust’s Unallocated Reserve aggregated $1,094,721 at January 31,2002, as compared with an Unallocated Reserve of $795,918 at January 31,2001.  During the fiscal year endedJanuary 31, 2002, the Trustees distributed $.305 per Unit of BeneficialInterest.  These distributions toUnitholders totaled $4,001,603.

 

The following chart summarizes Mesabi Trust’s royalty income for thefiscal years ended January 31, 2002 and January 31, 2001, respectively:

 
|                                      |   | **Fiscal  Years Ended on January 31** |      |
|-------------------------------------------|--------|---------------------------------------|-----------|
|                                      |   | **2002**                              |      | **2001** |   |
| Base overriding royalties                 |   | $                                     | 3,709,014 |   | $ | 5,376,626 |   |
| Bonus royalties                           |   | —                                |      | — |   |
| Minimum advance   Royalty paid (recouped) |   | —                                |      | — |   |
| Fee royalties                             |   | 224,857                               |      | 330,139 |   |
| Total royalty income                      |   | $                                     | 3,933,871 |   | $ | 5,706,765 |   |

 

**TO THE HOLDERS OF**

**CERTIFICATES OF BENEFICIAL INTEREST IN**

**MESABI TRUST**

** **

**THE TRUST ESTATE**

** **

The principal assets of Mesabi Trust consist of two different interestsin certain properties in the Mesabi Iron Range: (i) Mesabi Trust’sinterest as assignor in the Amended Assignment of Peters and the AmendedAssignment of Cloquet Lease, which together cover properties aggregatingapproximately 9,750 contiguous acres in St. Louis County, Minnesota (the“Peters Lease Lands” and the “Cloquet Lease Lands,” respectively, andcollectively, the “Peters and Cloquet Lease Lands”), and (ii) MesabiTrust’s ownership of the entire beneficial interest in Mesabi Land Trust, whichhas a 20% interest as fee owner in the Peters Lease Lands and a 100% feeownership in certain non-mineral-bearing lands adjacent to the Peters andCloquet Lease Lands (the “Mesabi Lease Lands”).

 

The Peters Lease provides that each leasehold estate will continueuntil the reserves of iron ore, taconite and other minerals or materials on theland subject to the Peters Lease are exhausted.  The Mesabi Lease terminates when the Peters Leaseterminates.  The Cloquet Lease, executedin 1916, terminates in the year 2040. If Northshore decides to terminate or surrender one or more of theseleases, it must first give Mesabi Trust at least six months’ notice of itsintention to do so and, at Mesabi Trust’s request, reassign all of such leasesto Mesabi Trust.  If any suchreassignment occurs, Northshore must transfer the lease interests to MesabiTrust free and clear of liens, except public highways.  In return, Mesabi Trust must assumeNorthshore’s future obligations as lessee under the reassigned leases.

 

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The Peters and Cloquet Lease Lands are located at the eastern end ofthe Mesabi Iron Range and contain low-grade iron ore known as taconite,approximately three tons of which must be beneficiated to produce one ton ofhigh-grade pellets.  The Trustees havenot had any surveys or test drillings performed to ascertain the iron orereserves on the Peters and Cloquet Lease Lands.  However, initial surveys and test drillings made by Mesabi IronCompany many years ago indicated that these lands contained accessible taconitereserves capable of yielding approximately 500 million tons of high grade ironore pellets.  In CCI’s 2002 AnnualReport, CCI estimated that there currently remains enough ore reserve in thePeters and Cloquet Lease Lands to produce, at capacity-level extraction rates,concentrated product for approximately 70 years of mining.  The Mesabi Lease Lands provide an area forlocation of service roads, supporting plants and equipment and dump sites for overburden.

 

Under the Amended Assignment Agreements, Northshore produces iron orefrom the Peters and Cloquet Lease Lands for the manufacture of pellets to besold to various users, and Mesabi Trust receives royalties on the crude oreextracted from such Lands and the pellets produced from such crude ore.

 

**LEASEHOLD ROYALTIES**

** **

Northshore is obligated to pay to Mesabi Trust base overridingroyalties and royalty bonuses on all pellets (and other iron ore products)produced from the Peters and Cloquet Lease Lands (“Mesabi Ore”) and shippedfrom Silver Bay, Minnesota in each calendar year.  The royalties are based on prices per unit of product, volumes ofproduct shipped and where on the escalating scale of royalties—2-1/2% on thefirst million tons to 6% on shipments above four million long tons per calendaryear—each shipment falls.

 

Base overriding royalties are calculated on the basis of an escalatingscale of percentages of gross sales proceeds of iron ore shipped.  The applicable percentage is determined byreference to the tonnage of pellets previously shipped in the then currentcalendar year, as follows:

 
| **Tons of iron ore products   shipped in calendar year** |   | **Applicable  royalty   (expressed as a percentage   of gross sales proceeds      within each tranche)** |   |
|----------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|
| one million or less                                      |   | 2-1/2                                                                                                                        | %      |   |
| more than one but not more than two million              |   | 3-1/2                                                                                                                        | %      |   |
| more than two but not more than three  million           |   | 5                                                                                                                            | %      |   |
| more than three but not more than four  million          |   | 5-1/2                                                                                                                        | %      |   |
| more than four million                                   |   | 6                                                                                                                            | %      |   |

 

For example, assume that no shipments of iron ore products were madeduring the first calendar quarter of 2003, and further assume that pellets wereshipped from Silver Bay, Minnesota in the second and third calendar quarters of2003 in the following tonnage quantities and rendering the following grossproceeds:

 
|         |   | **Tonnage** |   | **Gross  Proceeds** |       |
|--------------|--------|-------------|--------|---------------------|------------|
| 2ndQuarter:  |   | 500,000     |   | $                   | 14,000,000 |   |
| 3rd Quarter: |   | 500,000     |   | $                   | 14,000,000 |   |
|         |   | 1,000,000   |   | $                   | 27,000,000 |   |
|         |   | 1,000,000   |   | $                   | 26,000,000 |   |
|         |   | 1,000,000   |   | $                   | 25,000,000 |   |
|         |   | 1,500,000   |   | $                   | 37,500,000 |   |

 

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In this example, the base overriding royalties payable in respect ofthe second and third calendar quarters of 2003 would be as follows:

 
| 2ndQuarter:  |   | $ | 14,000,000 |  x 2-1/2%  |   | ($350,000   | ) |
|--------------|--------|---|------------|-----------------|--------|-------------|---|
| 3rd Quarter: |   | $ | 14,000,000 |  x 2-1/2%  |   | ($350,000   | ) |
|         |   | $ | 27,000,000 |  x  3-1/2% |   | ($945,000   | ) |
|         |   | $ | 26,000,000 |  x  5%     |   | ($1,300,000 | ) |
|         |   | $ | 25,000,000 |  x  5-1/2% |   | ($1,375,000 | ) |
|         |   | $ | 37,500,000 |  x  6%     |   | ($2,250,000 | ) |

 

Based on the same example, the percentage applicable for all iron oreproducts shipped in the fourth calendar quarter of 2003 would be 6%, becausemore than four million tons were shipped during the first three quarters.

 

The above figures are provided only to illustrate the method forcalculating base overriding royalties and do not indicate the amount of baseoverriding royalties the Trustees expect Mesabi Trust to earn in calendar 2003or any other calendar or fiscal year. Accordingly, the foregoing example illustrating the calculation of baseoverriding royalties should not be considered a prediction of the amount ofbase overriding royalties Mesabi Trust will receive.

 

Royalty bonuses are payable on all iron ore products sold at pricesabove a threshold price (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $39.82 perton for calendar 2001, $40.61 per ton for calendar 2002, and will be $41.13 forcalendar 2003.  The Adjusted ThresholdPrice is subject to adjustment (but not below $30 per ton) for inflation anddeflation and is determined each year on the basis of the change in a broadbased index of inflation and deflation published quarterly by the U.S.Department of Commerce.

 

The amount of royalty bonuses payable for any period is calculated onthe basis of an escalating scale of percentages of the gross sales proceeds toNorthshore of pellets sold at prices above the Adjusted Threshold Price.  The applicable percentage is determined byreference to the amount by which the sales prices for a particular quantity ofpellets exceeds the Adjusted Threshold Price, as follows:

 
| **Amount by which  sales price per ton  exceeds Adjusted  Threshold Price** |   | **Applicable  Percentage** |   |
|-----------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                        |   |                       |   |
| $2 or less                                                                  |   | 1/2 of 1                   | %      |
| more than $2 but not more than $4                                           |   | 1                          | %      |
| more than $4 but not more than $6                                           |   | 1-1/2                      | %      |
| more than $6 but not more than $8                                           |   | 2                          | %      |
| more than $8 but not more than $10                                          |   | 2-1/2                      | %      |
| more than $10                                                               |   | 3                          | %      |

 

Nevertheless, because the sales prices for pellets has not exceeded theapplicable Adjusted Threshold Price for several years, no royalty bonus hasbeen paid to the Trust in recent years.

 

Northshore also must pay base overriding royalties and royalty bonuseson pellets produced from lands other than Mesabi Lease Lands (“Other Ore”) tothe extent necessary to assure payment of base overriding royalties and royaltybonuses on at least 90% of the first four million tons of pellets shipped fromSilver Bay in each calendar year, at least 85% of the next two million tons ofpellets shipped therefrom in each calendar year, and at least 25% of alltonnage of pellets shipped therefrom in each calendar year in excess of sixmillion tons.  Base overriding royaltiesand royalty bonuses payable on Other Ore can be recouped by Northshore out ofbase overriding royalties and royalty bonuses paid on Mesabi Ore.  The amount of Other Ore royalties and OtherOre royalty bonuses which can be recouped on any payment date cannot, however,exceed 20% of the amount of Mesabi Ore royalties and royalty bonuses which areotherwise payable on that payment date.

 

10

----

 

Northshore is obligated to pay to Mesabi Trust advance royalties inequal quarterly installments.  Theadvance royalty was $663,682 for the calendar year 2001, $676,814 for thecalendar year 2002, and is $685,630 for calendar year 2003.  The amount of advance royalties payable issubject to adjustment (but not below $500,000 per annum) for inflation anddeflation and is determined each year in the same manner as the AdjustedThreshold Price.  All payments ofadvance royalties are credited against payments of base overriding royaltiesand royalty bonuses payable on Mesabi Ore until fully recouped.  The amount of advance royalties payable inrespect of each calendar quarter constitutes the minimum overriding royaltyamount payable by Northshore in respect of that calendar quarter.

 

Base overriding royalties and royalty bonuses are payable quarterly andaccrue upon shipment, whether or not the actual sales proceeds for any shipmentare received by Northshore.  The amountof base overriding royalties and royalty bonuses payable with respect to thefirst three quarters in any calendar year are determined on the basis oftonnage shipped during each such calendar quarter and the actual sales proceedsof such shipments, with an adjustment made to the royalties payable withrespect to the last quarter in any calendar year to account for errors,adjustments and returns.

 

In addition, in the event that Northshore commences mining andproduction of quarry stone for shipment, Northshore must pay base overridingroyalties on all quarry stone so shipped on the basis of the same scale ofpercentages used in calculating base overriding royalties payable on pelletsand other iron ore product.  Northshorehas not informed Mesabi Trust of any present intention to commence mining andproduction of quarry stone.

 

**LAND TRUST AND FEE ROYALTIES**

** **

Mesabi Land Trust holds a 20% interest as fee owner in the Peters LeaseLands and a 100% interest as fee owner in the Mesabi Lease Lands as lessor ofthe Mesabi Lease.  Mesabi Trust holdsthe entire beneficial interest in Mesabi Land Trust and is entitled to receivethe net income of Mesabi Land Trust after payment of expenses.  Northshore is not obligated to pay royaltiesor rental to Mesabi Land Trust as fee owner of the non-mineral bearing MesabiLease Lands, a consideration having been paid in that respect at the inceptionof the Mesabi Lease.

 

Northshore is required to pay a base royalty to the fee owners in anamount which, at its option, is either (a) 11-2/3¢ per gross ton of crude oreit mines from the Peters Lease Lands, or (b) $.0056 for each 1% of metalliciron ore natural contained in each gross ton of pellets it produces from thePeters Lease Lands and ships.  The basefee royalty rate is adjusted up or down each quarter (but not below the baseroyalty specified above) by addition or subtraction of an amount to bedetermined by reference to changes in Lower Lake Mesabi Range pellet prices andthe All Commodities Producer Price Index. The adjustment factor is computed by multiplying the base fee royaltyrate specified above by a percentage that is the sum of (a) one-half of thepercentage change, if any, by which the then prevailing price per iron unit ofMesabi Range taconite pellets delivered by rail or vessel at Lower Lake Erieports exceeds 80.5¢ (the price per iron unit in effect in January 1982), plus(b) one-half of the percentage change, if any, by which the All CommoditiesProducer Price Index exceeds 295.8 (the level of the Index for December 1981).

 

Fee royalties aggregating $324,635 with respect to crude ore mined byNorthshore were earned by Mesabi Land Trust during the fiscal year endedJanuary 31, 2003.

 

11

----

 

**INCOME AND EXPENSE**

** **

Total income for Mesabi Trust for the fiscal year ended January 31,2003 was $5,100,759, consisting of $47,803 in interest earned on the investmentof the Unallocated Reserve, $324,635 in fee income, $4,728,321 in minimumadvance royalty income, and $0 in overriding royalty income, compared with$3,984,721 in total income for the previous fiscal year.  Total expenses for the fiscal year were$406,228, compared with $340,315 in total expenses for the previous fiscalyear.  There were distributions paid perUnit of Beneficial Interest totaling $.25 for the fiscal year ended January 31,2003, compared with distributions paid for the fiscal year ended January 31,2002 of $.305 per Unit.

 

Total expenses by categories were as follows:

 
|                                                                          |   | **Fiscal  Years ended on January 31** |    |
|-------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                          |   | **2003**                              |    | **2002** |   | **2001** |   |
| Compensation of Trustees                                                      |   | $                                     | 134,907 |   | $ | 131,767 |   | $ | 136,325 |   |
| Fees and Disbursements                                                        |   |                                  |    |   |   |   |   |
| Administrative                                                                |   | 62,500                                |    | 62,500 |   | 62,500 |   |
| Accounting                                                                    |   | 28,577                                |    | 32,155 |   | 33,230 |   |
| Inspection trips, travel and other expenses  of Trustees                      |   | 33,785                                |    | 31,684 |   | 41,664 |   |
| Legal                                                                         |   | 88,322                                |    | 39,590 |   | 53,038 |   |
| Mining consultant and field representatives                                   |   | 13,786                                |    | 14,217 |   | 14,480 |   |
| Printing of annual and quarterly reports,  and letters to certificate holders |   | 8,644                                 |    | 267 |   | 35,004 |   |
| Transfer Agent and Registrar                                                  |   | 15,838                                |    | 18,635 |   | 21,335 |   |
| Transfer Agent miscellaneous disbursements                                    |   | 19,869                                |    | 9,500 |   | 9,929 |   |
|                                                                          |   | $                                     | 406,228 |   | $ | 340,315 |   | $ | 407,505 |   |

 

Pursuant to the Amendment to the Agreement of Trust datedOctober 25, 1982 (the “Amendment”), each Individual Trustee receivesannual compensation for services as Trustee of $20,000, adjusted up or down(but not below $20,000) in accordance with changes from the November 1981 levelof 295.5 (the “1981 Escalation Level”) in the All Commodities Producer PriceIndex (with 1967 = 100 as a base), which is published by the U.S. Department ofLabor.  The adjustment is made at theend of each fiscal year and is calculated on the basis of the proportionbetween (a) the level of such index for the November preceding the end ofsuch fiscal year, and (b) the 1981 Escalation Level.

 

**RESERVES AND DISTRIBUTIONS**

** **

Mesabi Trust’s Unallocated Reserve aggregated$1,066,048 at January 31, 2003, compared with an Unallocated Reserve of$1,094,721 at January 31, 2002.  TheTrustees have determined that the Unallocated Reserve should be maintained at aprudent level.  Accordingly, althoughthe actual amount of the Unallocated Reserve will fluctuate from time to time,and may increase or decrease from its current level, it is currently intendedthat future distributions will be highly dependent upon royalty income as it isreceived and the level of Trust expenses. The amount of future royalty income available for distribution will besubject to the volume of iron ore product shipments and the dollar level ofsales by Northshore.  Shipping activityis greatly reduced during the winter months and economic conditions,particularly those affecting the steel industry, may adversely affect theamount and timing of such future shipments and sales.

 

12

----

 

The Trustees will continue to monitor the economic circumstances of theTrust to strike a responsible balance between distributions to Unitholders andthe need to maintain adequate reserves at a prudent level, given theunpredictable nature of the iron ore industry, the Trust’s dependence on theactions of the lessee/operator, and the fact that the Trust essentially has noother liquid assets.

 

Payments to Unitholders during the fiscal year ended January 31, 2002totaled $4,001,603 and payments to Unitholders during the fiscal year endedJanuary 31, 2003 totaled $3,280,003.

 

**CERTIFICATES OF BENEFICIAL INTEREST**

** **

The Certificates of Beneficial Interest are traded on the New YorkStock Exchange.  During the past twofiscal years, the market ranges of the certificates for each quarterly periodand the distributions declared for such quarterly periods were as follows:

 
| **Fiscal Quarter Ended** |   | **High** |   | **Low** |   | **Amount   Declared** |      | **Per Unit** |   |
|--------------------------|--------|----------|--------|---------|--------|-----------------------|-----------|--------------|--------|
| April 30, 2002           |   | $        | 4.30   |    | $      | 2.98                  |      | $            | — |   | $ | — |   |
| July 31, 2002            |   | 4.74     |   | 3.00    |   | 656,001               |      | .05          |   |
| October 31, 2002         |   | 4.24     |   | 3.25    |   | 1,574,401             |      | .12          |   |
| January 31, 2003         |   | 4.90     |   | 3.65    |   | 2,492,802             |      | .19          |   |
|                     |   |     |   |    |   | $                     | 4,723,204 |         | $      | .36 |   |
|                     |   |     |   |    |   |                  |      |         |   |   |   |
| **Fiscal Quarter Ended** |   | **High** |   | **Low** |   | **Amount  Declared**  |      | **Per Unit** |   |
| April 30, 2001           |   | $        | 3.13   |    | $      | 2.85                  |      | $            | — |   | $ | — |   |
| July 31, 2001            |   | 3.45     |   | 2.92    |   | 918,401               |      | .070         |   |
| October 31, 2001         |   | 3.02     |   | 2.50    |   | 1,377,601             |      | .105         |   |
| January 31, 2002         |   | 3.26     |   | 2.47    |   | 1,049,601             |      | .080         |   |
|                     |   |     |   |    |   | $                     | 3,345,603 |         | $      | .255 |   |

 

As of the close of business on March 27, 2003, the beneficial interestin Mesabi Trust was represented by 13,120,010 Units registered in the names ofapproximately 2,021 individuals holding of record approximately 1,987,993Units, and in the names of approximately 113 brokers, nominees, or fiduciariesholding of record approximately 11,132,017 Units.

 

13

----

 

**THE TRUSTEES**

** **

The name and address of each Trustee and the principal occupation ofeach individual Trustee are as follows:

 
| **Name and Address of Trustee**                                                                                                                         |   | **Principal Occupation**                                                                                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                    |   |                                                                                                                       |
| Deutsche Bank Trust Company Americas  Corporate Trustee   280 Park Avenue  New York, New York 10017                                                     |   | New York banking corporation                                                                                               |
|                                                                                                                                                    |   |                                                                                                                       |
| David J. Hoffman   Individual Trustee  P.O. Box 10444   Sedona, Arizona 86339                                                                           |   | Mining geologist                                                                                                           |
|                                                                                                                                                    |   |                                                                                                                       |
| Richard G. Lareau   Individual Trustee   Oppenheimer Wolff & Donnelly LLP   3400 Plaza VII   45 South Seventh Street   Minneapolis, Minnesota 55402 |   | Partner in the law firm of Oppenheimer Wolff & Donnelly LLP                                                            |
|                                                                                                                                                    |   |                                                                                                                       |
| Ira A. Marshall, Jr.   Individual Trustee   12 Fincher Way   Rancho Mirage, California 92270                                                            |   | Private investor; self-employed petroleum engineer                                                                         |
|                                                                                                                                                    |   |                                                                                                                       |
| Norman F. Sprague III   Individual Trustee   11600 Wilshire Boulevard   Los Angeles, California 90025                                                   |   | Private investor; orthopedic surgeon                                                                             |
|                                                                                                                                                    |   | Respectfully submitted,                                                                                                    |
|                                                                                                                                                    |   |                                                                                                                       |
| New York, New York   April 18, 2003                                                                                                                     |   | DEUTSCHE BANK TRUST  COMPANY AMERICAS

DAVID J. HOFFMAN   RICHARD G. LAREAU   IRA A. MARSHALL, JR.   NORMAN F. SPRAGUE III |

 

14

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**INDEPENDENT AUDITOR’S REPORT**

 

 

To the Trustees

Mesabi Trust

New York, New York

 

We have audited theaccompanying balance sheets of Mesabi Trust as of January 31, 2003 and 2002,and the related statements of income, unallocated reserve and trust corpus andcash flows for the years ended January 31, 2003, 2002, and 2001.  These financial statements are theresponsibility of the Trust’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Mesabi Trust as of January 31, 2003 and2002, and the results of its operations and cash flows for the years endedJanuary 31, 2003, 2002, and 2001, in conformity with accounting principlesgenerally accepted in the United States of America.

 
|                | EIDE BAILLY LLP     |
|---------------------|---------------------|
| Fargo, North Dakota |                |
| March 10, 2003      |                |
|                | /s/ Eide Bailly LLP |   |

** **

**F-1**

----

** **

**INDEPENDENT AUDITOR’S REPORT**

 

 

To the Trustees

Mesabi Trust

New York, New York

 

We have audited theaccompanying balance sheet of Mesabi Trust as of January 31, 2000, and therelated statements of income, unallocated reserve and trust corpus and cashflows for each of the two years in the period ended January 31, 2000.  These financial statements are theresponsibility of the Trust’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with generally accepted auditing standards.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provides a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Mesabi Trust as of January 31, 2000,and the results of its operations and its cash flows for each of the two yearsin the period ended January 31, 2000, in conformity with generally acceptedaccounting principles.

 
|               | MCGLADREY & PULLEN, LLP     |
|--------------------|---------------------------------|
| New York, New York |                            |
| April 19, 2001     |                            |
|               | /s/ McGladrey & Pullen, LLP |   |

 

F-2

----

 

**MESABI TRUST**

** **

**BALANCE SHEETS**

 
|                                                                        |   | **January 31** |      |
|-----------------------------------------------------------------------------|--------|----------------|-----------|
|                                                                        |   | **2003**       |      | **2002** |   |
| ASSETS                                                                      |   |           |      |   |   |
| Cash                                                                        |   | $              | 2,515,457 |   | $ | 1,223,246 |   |
| U.S. Government securities,   At amortized cost (which approximates market) |   | 891,243        |      | 892,916 |   |
| Accrued income                                                              |   | 175,978        |      | 98,224 |   |
| Prepaid insurance                                                           |   | 11,421         |      | 4,347 |   |
|                                                                        |   | 3,594,099      |      | 2,218,733 |   |
|                                                                        |   |           |      |   |   |
| Fixed  property, including intangibles, at nominal values:                  |   |           |      |   |   |
| Assignments  of leased property:                                            |   |           |      |   |   |
| Amended  Assignment of Peters Lease                                         |   | 1              |      | 1 |   |
| Assignment  of Cloquet Lease                                                |   | 1              |      | 1 |   |
|                                                                        |   |           |      |   |   |
| Certificate of beneficial Interest for  13,120,010 units of Land Trust      |   | 1              |      | 1 |   |
|                                                                        |   | 3              |      | 3 |   |
|                                                                        |   | $              | 3,594,102 |   | $ | 2,218,736 |   |
|                                                                        |   |           |      |   |   |
| LIABILITIES, UNALLOCATED RESERVE AND TRUST CORPUS                           |   |           |      |   |   |
|                                                                        |   |           |      |   |   |
| Liabilities:                                                                |   |           |      |   |   |
| Distribution payable                                                        |   | $              | 2,492,802 |   | $ | 1,049,601 |   |
| Accrued expenses                                                            |   | 35,249         |      | 74,411 |   |
|                                                                        |   | 2,528,051      |      | 1,124,012 |   |
|                                                                        |   |           |      |   |   |
| Unallocated reserve                                                         |   | 1,066,048      |      | 1,094,721 |   |
|                                                                        |   |           |      |   |   |
| Trust Corpus                                                                |   | 3              |      | 3 |   |
|                                                                        |   | $              | 3,594,102 |   | $ | 2,218,736 |   |

 

See Notes to Financial Statements.

 

F-3

----

 

**MESABI TRUST**

** **

**STATEMENTS OF INCOME**

 
|                                            |   | **Years  ended on January 31** |      |
|-------------------------------------------------|--------|--------------------------------|-----------|
|                                            |   | **2003**                       |      | **2002** |   | **2001** |   |
| REVENUE                                         |   |                           |      |   |   |   |   |
|                                            |   |                           |      |   |   |   |   |
| Royalties under amended lease agreements        |   | $                              | 4,728,321 |   | $ | 3,709,014 |   | $ | 5,376,626 |   |
| Royalties under Peters Lease fee                |   | 324,635                        |      | 224,857 |   | 330,139 |   |
| Interest                                        |   | 47,803                         |      | 50,850 |   | 46,885 |   |
|                                            |   |                           |      |   |   |   |   |
| Total revenue                                   |   | 5,100,759                      |      | 3,984,721 |   | 5,753,650 |   |
|                                            |   |                           |      |   |   |   |   |
| EXPENSES                                        |   |                           |      |   |   |   |   |
|                                            |   |                           |      |   |   |   |   |
| Compensation of Trustees                        |   | 134,907                        |      | 131,767 |   | 136,325 |   |
| Corporate Trustee’s administrative fees    |   | 62,500                         |      | 62,500 |   | 62,500 |   |
| Professional fees and expenses:                 |   |                           |      |   |   |   |   |
| Legal and accounting                            |   | 116,899                        |      | 71,745 |   | 86,268 |   |
| Mining consultant and field representatives     |   | 13,786                         |      | 14,217 |   | 14,480 |   |
| Transfer agent’s and registrar’s fees |   | 15,838                         |      | 18,635 |   | 21,335 |   |
| Other Trust expenses                            |   | 62,298                         |      | 41,451 |   | 86,597 |   |
|                                            |   |                           |      |   |   |   |   |
| Total expenses                                  |   | 406,228                        |      | 340,315 |   | 407,505 |   |
|                                            |   |                           |      |   |   |   |   |
| Net income                                      |   | $                              | 4,694,531 |   | $ | 3,644,406 |   | $ | 5,346,145 |   |
|                                            |   |                           |      |   |   |   |   |
| Weighted average number of units  outstanding   |   | 13,120,010                     |      | 13,120,010 |   | 13,120,010 |   |
|                                            |   |                           |      |   |   |   |   |
| Net income per unit                             |   | $                              | .36       |   | $ | .28 |   | $ | .41 |   |

 

See Notes to Financial Statements.

 

F-4

----

 

**MESABI TRUST**

** **

**STATEMENTS OF UNALLOCATED RESERVEAND TRUST CORPUS**

**YearsEnded January 31, 2003, 2002 and 2001**

 
|                                                                             |   | **Unallocated  Reserve** |   |
|----------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                             |   | **Number of  Units**     |   | **Amount** |   | **Trust  Corpus** |   |
|                                                                             |   |                     |   |   |   |   |   |
| Balance, January 31, 2000                                                        |   | 13,120,010               |   | $ | 763,377 |   | $ | 3 |   |
|                                                                             |   |                     |   |   |   |   |   |
| Net income                                                                       |   | —                   |   | 5,346,145 |   | — |   |
| Distribution paid August 20, 2000,   $.100 per unit                              |   | —                   |   | (1,312,001 | ) | — |   |
| Distribution paid November 20, 2000,   $.175 per unit                            |   | —                   |   | (2,296,002 | ) | — |   |
| Distribution declared January 18, 2001,  paid February 20, 2001,  $.130 per unit |   | —                   |   | (1,705,601 | ) | — |   |
|                                                                             |   |                     |   |   |   |   |   |
| Balance,  January 31, 2001                                                       |   | 13,120,010               |   | $ | 795,918 |   | $ | 3 |   |
|                                                                             |   |                     |   |   |   |   |   |
| Net income                                                                       |   | —                   |   | 3,644,406 |   | — |   |
| Distribution paid August 20, 2001,  $.070 per unit                               |   | —                   |   | (918,401 | ) | — |   |
| Distribution paid November 20, 2001,  $.105 per unit                             |   | —                   |   | (1,377,601 | ) | — |   |
| Distribution declared January 16, 2002,  paid February 20, 2002,  $.080 per unit |   | —                   |   | (1,049,601 | ) | — |   |
|                                                                             |   |                     |   |   |   |   |   |
| Balance, January 31, 2002                                                        |   | 13,120,010               |   | $ | 1,094,721 |   | $ | 3 |   |
|                                                                             |   |                     |   |   |   |   |   |
| Net income                                                                       |   | —                   |   | 4,694,531 |   | — |   |
| Distribution paid August 20, 2002,  $.05 per unit                                |   | —                   |   | (656,001 | ) | — |   |
| Distribution paid November 20, 2002,  $.12 per unit                              |   | —                   |   | (1,574,401 | ) | — |   |
| Distribution declared January 14, 2003,  paid February 20, 2003,  $.19 per unit  |   | —                   |   | (2,492,802 | ) | — |   |
|                                                                             |   |                     |   |   |   |   |   |
| Balance, January 31, 2003                                                        |   | 13,120,010               |   | $ | 1,066,048 |   | $ | 3 |   |

 

See Notes to Financial Statements.

 

F-5

----

 

**MESABI TRUST**

** **

**STATEMENTS OF CASH FLOWS**

** **
|                                                                        |   | **Years  ended on January 31** |      |
|-----------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                        |   | **2003**                       |      | **2002** |   | **2001** |   |
| Cash flows from operating activities:                                       |   |                           |      |   |   |   |   |
| Royalties received                                                          |   | $                              | 4,972,730 |   | $ | 3,941,797 |   | $ | 5,843,339 |   |
| Interest received                                                           |   | 50,274                         |      | 43,593 |   | 46,473 |   |
| Expenses paid                                                               |   | (452,463                       | )         | (321,136 | ) | (406,725 | ) |
| Net cash provided by operating activities                                   |   | 4,570,541                      |      | 3,664,254 |   | 5,483,087 |   |
| Cash flows from investing activities:                                       |   |                           |      |   |   |   |   |
| Maturities of U.S. Government securities                                    |   | 3,384,186                      |      | 5,010,366 |   | 6,975,801 |   |
| Purchases of U.S. Government securities                                     |   | (3,382,513                     | )         | (5,397,467 | ) | (4,592,669 | ) |
| Net cash (used in) provided by investing  activities                        |   | 1,673                          |      | (387,101 | ) | 2,383,132 |   |
| Cash flows from financing activities:                                       |   |                           |      |   |   |   |   |
| Net cash (used in) financing activities,  distributions to unitholders      |   | (3,280,003                     | )         | (4,001,603 | ) | (5,969,605 | ) |
|                                                                        |   |                           |      |   |   |   |   |
| Net increase (decrease) in cash                                             |   | 1,292,211                      |      | (724,450 | ) | 1,896,614 |   |
|                                                                        |   |                           |      |   |   |   |   |
| Cash, beginning of year                                                     |   | 1,223,246                      |      | 1,947,696 |   | 51,082 |   |
|                                                                        |   |                           |      |   |   |   |   |
| Cash, end of year                                                           |   | $                              | 2,515,457 |   | $ | 1,223,246 |   | $ | 1,947,696 |   |
|                                                                        |   |                           |      |   |   |   |   |
| Reconciliation of net income to net cash  provided by operating activities: |   |                           |      |   |   |   |   |
| Net income                                                                  |   | $                              | 4,694,531 |   | $ | 3,644,406 |   | $ | 5,346,145 |   |
| Decrease (increase) in accrued income                                       |   | (77,754                        | )         | 669 |   | 136,163 |   |
| Decrease in prepaid insurance                                               |   | (7,074                         | )         | — |   | 428 |   |
| Increase in accrued expenses                                                |   | (39,162                        | )         | 19,179 |   | 351 |   |
| Net cash provided by operating activities                                   |   | $                              | 4,570,541 |   | $ | 3,664,254 |   | $ | 5,483,087 |   |

 

See Notes to Financial Statements.

 

F-6

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**NOTESTO FINANCIAL STATEMENTS**

 

**JANUARY31, 2003, 2002 AND 2001**

 

**Note 1.****           ****Nature of Business and Organization**

 

Nature ofbusiness:

 

Mesabi Trust wascreated in 1961 upon the liquidation of Mesabi Iron Company.  The sole purpose of the Trust, as set forthin the Agreement of Trust dated as of July 18, 1961, is to conserve and protectthe Trust Estate and to collect and distribute the income and proceedstherefrom to the Trust’s certificate holders after the payment of, or provisionfor, expenses and liabilities.  TheAgreement of Trust prohibits the Trust from engaging in any business.

 

Thelessee/operator of Mesabi Trust’s mineral interests is Northshore MiningCompany (NMC), a subsidiary of Cleveland-Cliffs Inc (CCI).  CCI is among the world’s largest producersof iron ore products.  Prior to September30, 1994, the lessee/operator had been a subsidiary of Cyprus Amax MineralsCompany and was named Cyprus Northshore Mining Corporation (Cyprus NMC).

 

Organization:

 

The beneficialinterest in Mesabi Trust is represented by 13,120,010 transferable unitsdistributed on July 27, 1961 to shareholders of Mesabi Iron Company.

 

The Trust’sstatus as a grantor trust was confirmed by letter ruling addressed to MesabiIron Company from the Internal Revenue Service in 1961.  As a grantor trust, Mesabi is exempt fromFederal income taxes and its income is taxable directly to the Unitholders.

 

 

**Note 2.****            A summaryof Mesabi Trust’s significant accounting policies follows:**

** **

Investments:

** **

The Trust invests solelyin U.S. Government securities. Management determines the appropriate classifications of the securitiesat the time they are acquired and evaluates the appropriateness of suchclassifications as of each balance sheet date.

 

The U.S. Government securities are classified asheld-to-maturity securities as the Trust has the positive intent and ability tohold to maturity and are stated at amortized cost.

 

F-7

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Revenue recognition:

** **

Royalty income under the amended lease agreements with NMC (Cyprus NMCthrough September 30, 1994) is recognized as it is earned.  Under such agreements, royalties are earnedupon shipment, regardless of whether the actual sales proceeds for any shipmentare received by NMC.

 

Royalty income under the Peters Lease fee agreementalso is recognized as it is earned. Under such agreement, however, royalties are earned (at the option ofNMC (Cyprus NMC through September 30, 1994)) either upon mining of crude orefrom Peters Lease lands or upon shipment of iron ore product produced fromPeters Lease lands.

** **

Fixedproperty, including intangibles:

 

The Trust’s fixed property, including intangibles, is recorded atnominal values and includes the following:

 

(1)                                  The entire beneficialinterest as assignor in the Amended Peters Lease Assignment and the AmendedCloquet Lease Assignment covering taconite properties in Minnesota which areleased to NMC (Cyprus NMC through September 30, 1994).

 

(2)                                  The entire beneficialinterest in Mesabi Land Trust which owns a 20% fee interest in the landssubject to the Peters Lease and the entire fee interest in other properties inMinnesota.

Accounting estimates:

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Fair value of financial instruments

 

The carryingamounts of financial instruments including cash, distributions payable andaccrued expenses approximated fair value as of January 31, 2003 and 2002because of the relative short maturity of these instruments.

 

F-8

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**Note3.****                                                      U.S.Government Securities**

** **

U.S. governmentsecurities at January 31, 2003 and 2002 are classified as held-to-maturity andmature as follows:

** **
|                                 |   | **January 31, 2003** |        | **January 31, 2002** |   |
|--------------------------------------|--------|----------------------|-------------|----------------------|--------|
|                                 |   |                 |        |                 |   |   |   |   |   |
|                                 |   | **Carrying Value**   |        | **Fair Value**       |   | **Carrying Value** |   | **Fair Value** |   |
| **Due Within One Year**              |   | **$**                | **199,923** | ** **           | **$**  | **201,969** | ** ** | **$** | **102,176** | ** ** | **$** | **100,344** | ** ** |
| Due after one year through six years |   | 691,320              |        | 734,656              |   | 790,740 |   | 806,197 |   |
|                                 |   | $                    | 891,243     |                 | $      | 936,625 |   | $ | 892,916 |   | $ | 905,541 |   |
|                                      |        |                      |             |                      |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4.****                                                        RoyaltyAgreement**

** **

The current royalty rate schedule became effective onAugust 17, 1989, which was established pursuant to certain agreements (the“Amended Assignment Agreements”) the Trust entered into with Cyprus NorthshoreMining Corporation NMC (“Cyprus NMC”). Pursuant to the Amended Assignment Agreements, overriding royalties aredetermined by both the volume and selling price of iron ore products shipped.

** **

On September 30, 1994, Cyprus Amax Minerals Companysold its iron ore operations, including Cyprus NMC, to Cleveland-Cliffs Inc(CCI).  CCI renamed the operationNorthshore Mining Company (NMC).  CCI isamong the world’s largest producers of iron ore products.

 

Pursuant to the Amended Assignment Agreements, NMC(Cyprus NMC through September 30, 1994) is obligated to pay Mesabi Trustbase overriding royalties, in varying amounts constituting a percentage of thegross proceeds of shipments, from Silver Bay, Minnesota, of iron ore productproduced from Mesabi Trust lands or, to a limited extent, other lands.  NMC (Cyprus NMC through September 30, 1994)is obligated to make payments of overriding royalties on product shipmentswithin 30 days following the calendar quarter in which such shipmentsoccur.  NMC (Cyprus NMC throughSeptember 30, 1994) resumed mining operations and shipping product from SilverBay in the second calendar quarter of 1990, and the first payment of overridingroyalties was made in July 1990.

 

F-9

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NMC (Cyprus NMC throughSeptember 30, 1994) also is obligated to pay to Mesabi Trust a minimum advanceroyalty of $500,000 per annum, subject to adjustment for inflation anddeflation (but not below $500,000), which is credited against base overridingroyalties and royalty bonuses.  NMC(Cyprus NMC through September 30, 1994) is obligated to make quarterlypayments of the minimum advance royalty in January, April, July and October ofeach year.  For the calendar year endingDecember 31, 2003, the minimum advance royalty is $685,630.  The minimum annual advance royalty was$676,814, $663,862, and $647,282 for the calendar years ended December 31,2002, 2001, and 2000, respectively.

** **

**Note 5.                   UnallocatedReserve and Distributions**

** **

The Unallocated Reserveaggregated $1,066,048, at January 31, 2003, as compared with an unallocatedreserve of $1,094,721 and $795,918 at January 31, 2002 and 2001,respectively.  The Trustees havedetermined that the Unallocated Reserve should be maintained at a prudentlevel.  Accordingly, although the actualamount of the Unallocated Reserve will fluctuate from time to time, and mayincrease or decrease from its current level, it is currently intended thatfuture distributions will be highly dependent upon royalty income as it is receivedand the level of Trust expenses.

 

During the fiscal yearsended January 31, 2003, 2002, and 2001, the Trustees distributed cash paymentstotaling $3,280,003 (or $.25 per Unit), $4,001,603 (or $.305 per Unit), and$5,969,605 (or $.455 per Unit), respectively, of beneficial interest in MesabiTrust.  In addition, in January 2003 theTrustees declared a distribution of $.19 per Unit of beneficial interest, whichwas paid in February 2003.

 

**Note 6.                   Summaryof Quarterly Earnings (Unaudited)**

 

The quarterly results of operations for the yearsended January 31, 2003 and 2002 are presented below:

 
|                |   | **Year ended  January 31, 2003** |       |
|---------------------|--------|----------------------------------|------------|
|                |   | **First  Quarter**               |       | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
| Revenue             |   | $                                | 266,518    |   | $ | 753,390 |   | $ | 1,964,772 |   | $ | 2,116,079 |   |
| Expenses            |   | 71,390                           |       | 126,692 |   | 95,995 |   | 112,151 |   |
| Net income          |   | $                                | 195,128    |   | $ | 626,698 |   | $ | 1,868,777 |   | $ | 2,003,928 |   |
|                |   |                             |       |   |   |   |   |   |   |
| Net income per unit |   | $                                | 0.01       |   | $ | 0.05 |   | $ | 0.14 |   | $ | 0.16 |   |
|                |   |                             |       |   |   |   |   |   |   |
|                |   | **Year ended  January 31, 2002** | ** ** |
|                |   | **First  Quarter**               |       | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
| Revenue             |   | $                                | 489,122    |   | $ | 1,040,694 |   | $ | 1,654,022 |   | $ | 800,882 |   |
| Expenses            |   | 66,565                           |       | 60,982 |   | 79,660 |   | 133,108 |   |
| Net income          |   | $                                | 422,557    |   | $ | 979,712 |   | $ | 1,574,362 |   | $ | 667,774 |   |
|                |   |                             |       |   |   |   |   |   |   |
| Net income per unit |   | $                                | 0.03       |   | $ | 0.08 |   | $ | 0.12 |   | $ | 0.05 |   |

 

F-10

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