UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
July 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission
File Number: 1-4488
MESABI TRUST
(Exact name of registrant as specified in its
charter)
New York
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13-6022277
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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c/o Deutsche Bank Trust Company
Americas
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Trust & Securities
Services GDS
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60 Wall Street
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27th Floor
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New York, New York
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10005
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(Address of principal executive offices)
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(Zip code)
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(615)
835-2749
(Registrants telephone number, including area code)
Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer
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Accelerated filer
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x
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Non-accelerated filer
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Smaller reporting company
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Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
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No
x
As of September 3,
2008, there were 13,120,010 Units of Beneficial Interest in Mesabi Trust
outstanding.
PART I - FINANCIAL INFORMATION
Item
1.
Financial
Statements. (Note 1)
Mesabi Trust
Condensed Statements of Income
Three and Six Months Ended July 31,
2008 and 2007
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Three Months Ended
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Six Months Ended
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July 31,
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July 31,
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2008
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2007
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2008
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2007
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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A.
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Condensed Statements of Income
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Revenues
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Royalty
income
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$
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16,766,563
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$
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4,427,036
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$
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20,614,273
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$
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6,206,177
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Interest
income
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5,240
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8,448
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19,337
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14,362
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16,771,803
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4,435,484
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20,633,610
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6,220,539
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Expenses
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201,486
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261,345
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423,640
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346,783
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Net income
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$
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16,570,317
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$
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4,174,139
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$
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20,209,970
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$
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5,873,756
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Number of units outstanding
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13,120,010
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13,120,010
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13,120,010
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13,120,010
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Net income per unit (Note 2)
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$
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1.2630
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$
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0.3182
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$
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1.5404
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$
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0.4477
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Distributions declared per unit (Note 3)
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$
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1.0000
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$
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0.3100
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$
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1.1200
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$
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0.3550
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See
Notes to Condensed Financial Statements.
2
Mesabi
Trust
Condensed
Balance Sheets
July 31,
2008 and January 31, 2008
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July 31, 2008
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January 31, 2008
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(unaudited)
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B.
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Condensed Balance Sheets
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Assets
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Cash
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$
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13,472,832
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$
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6,959,701
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U.S.
Government securities, at amortized cost (which approximates market)
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438,198
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544,193
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Accrued
income receivable
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6,453,966
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959,925
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Prepaid
expenses
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15,929
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24,687
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20,380,925
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8,488,506
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Fixed
property, including intangibles, at nominal values
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Amended
Assignment of Peters Lease
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1
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1
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Assignment
of Cloquet Lease
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1
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1
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Certificate
of beneficial interest for 13,120,010 units of land trust
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1
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1
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3
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3
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$
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20,380,928
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$
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8,488,509
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Liabilities, Unallocated Reserve and Trust
Corpus
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Liabilities
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Distribution
payable
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$
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13,120,010
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$
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6,756,805
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Accrued
expenses
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85,336
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71,680
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13,205,346
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6,828,485
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Unallocated
Reserve (Note 4)
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7,175,579
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1,660,021
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Trust
Corpus
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3
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3
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$
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20,380,928
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$
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8,488,509
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See Notes to Condensed
Financial Statements.
3
Mesabi
Trust
Condensed
Statements of Cash Flows
Six Months
Ended July 31, 2008 and 2007
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Six Months Ended
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July 31,
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2008
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2007
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(unaudited)
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(unaudited)
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C.
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Condensed Statements of Cash Flows
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Cash flows from operating activities
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Royalties
received
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$
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15,113,023
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$
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4,853,799
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Interest
received
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23,996
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20,398
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Expenses
paid
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(398,676
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(417,636
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Net
cash provided by operating activities
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14,738,343
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4,456,561
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Cash flows from investing activities
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Maturities
of U.S. Government Securities
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209,643
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5,231,254
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Purchases
of U.S. Government Securities
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(103,649
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(4,938,331
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Net
cash provided by (used for) investing activities
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105,994
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292,923
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Cash flow from financing activities Distributions
to Unitholders
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(8,331,206
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(4,723,204
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Net change in cash
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6,513,131
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26,280
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Cash, beginning of year
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6,959,701
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4,258,201
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Cash, end of period
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$
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13,472,832
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$
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4,284,481
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Reconciliation of net income to net cash
provided by operating activities
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Net income
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$
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20,209,970
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$
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5,873,756
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Increase in accrued income receivable
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(5,494,041
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(1,346,343
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Decrease (increase) in prepaid expenses
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8,758
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(35,653
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(Decrease) increase in accrued expenses
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13,656
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(35,199
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Net
cash provided by operating activities
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$
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14,738,343
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$
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4,456,561
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See Notes to Condensed Financial Statements.
4
Mesabi
Trust
Notes to Condensed Financial
Statements
July 31, 2008 (unaudited)
Note 1.
The financial statements included herein have
been prepared without audit (except for the balance sheet at January 31,
2008) in accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Trustees,
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of (a) the results of operations for the three months and
six months ended July 31, 2008 and 2007, (b) the financial position
at July 31, 2008 and (c) the cash flows for the six months ended July 31,
2008 and 2007, have been made.
Note 2.
Net income per unit includes accrued income
receivable. For the three months ended July 31,
2008 the Trust recorded $6,453,966 of accrued income receivable as reflected on
the Consolidated Balance Sheet as of July 31, 2008 (unaudited). Accrued income receivable is accounted for
and reported for the Trusts second fiscal quarter based on shipments during
the month of July even though such accrued income receivable is not
available for distribution to unitholders until it is actually received by the
Trust at the end of October. Net income
per unit is based on 13,120,010 units outstanding during the period.
Note 3.
The Trust declares distributions each year in
April, July, October and January.
Distributions are declared after receiving notification from Northshore
Mining Company as to the amount of royalty income that is expected to be paid
to the Trust based on shipments through the end of each calendar quarter. The Trusts financial statements are prepared
on an accrual basis and present the Trusts results of operations based on each
fiscal quarter which ends one month after the close of each calendar
quarter. Because distributions are
declared based on royalty income that is payable as of the end of each calendar
quarter and the Trusts Net Income is calculated as of the end of each fiscal
quarter, the distributions declared by the Trust are not equivalent to the
Trusts Net Income during the periods reported in this quarterly report on Form 10-Q.
Note 4.
The Trustees have determined that the
unallocated cash and U.S. Government securities portion of the Unallocated
Reserve should be maintained at a prudent level, usually within the range of
$500,000 to $1,000,000, to meet present or future potential liabilities of the
Trust. Accordingly, although the actual
amount of the Unallocated Reserve will fluctuate from time to time, and may
increase or decrease from its current level, it is currently intended that
future distributions will be highly dependent upon royalty income as it is
received quarterly and the level of Trust expenses that the Trustees anticipate
in subsequent quarters. At July 31,
2008, the Unallocated Reserve was represented by $721,613 in unallocated cash
and U.S. Government securities, and $6,453,966 of accrued revenue primarily
representing royalties not yet received by the Trust but anticipated to be
received from Northshore Mining Company in October 2008 based upon
reported lessee shipping activity during the month of July 2008.
5
Item 2. Trustees Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-Looking Statements
Certain information included in this Quarterly Report
on Form 10-Q contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 and Section 27A of the Securities
Act of 1933. All such forward-looking
statements, including those statements estimating iron ore pellet production or
shipments, are based on information from the lessee/operator (and its parent
corporation) of the mine located on the lands owned and held in trust for the
benefit of the holders of units of beneficial interest of Mesabi Trust. These statements may be identified by the use
of forward-looking words, such as may, will, could, project, predict,
intend, believe, anticipate, expect, estimate, continue, potential,
plan, should, assume, forecast and other similar words. Such forward-looking statements are
inherently subject to known and unknown risks and uncertainties. Actual results and future developments could
differ materially from the results or developments expressed in or implied by
these forward-looking statements. These
risks and uncertainties include volatility of iron ore and steel prices,
product supply and demand, competition, regulation or government action,
litigation and uncertainties about estimates of reserves.
Further, substantial portions of royalties
earned by Mesabi Trust are based on estimated prices that are subject to
interim and final adjustments which can be positive or negative and are
dependent in part on multiple price and inflation index factors that are not
known until after the end of a contract year.
For a
discussion of the factors, including but not limited to, those that could
materially and adversely affect Mesabi Trusts actual results and performance,
see Risk Factors in Part I Item 1A of Mesabi Trusts Annual Report on Form
10-K for the year-ended January 31, 2008.
Mesabi Trust undertakes no obligation, other than that imposed by law,
to make any revisions to the forward-looking statements contained in this
filing or to update them to reflect circumstances occurring after the date of
this filing.
Background
Mesabi Trust (Mesabi
Trust or the Trust), formed pursuant to an Agreement of Trust dated July 18,
1961 (the Agreement of Trust), is a trust organized under the laws of the
State of New York. Mesabi Trust holds
all of the interests formerly owned by Mesabi Iron Company (MIC), including
all right, title and interest in the Amendment of Assignment, Assumption and
Further Assignment of Peters Lease (the Amended Assignment of Peters Lease),
the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease
(the Amended Assignment of Cloquet Lease and together with the Amended
Assignment of Peters Lease, the Amended Assignment Agreements), the
beneficial interest in the Mesabi Land Trust (as such term is defined below)
and all other assets and property identified in the Agreement of Trust. The
Amended Assignment of Peters Lease relates to an Indenture made as of April 30,
1915 among East Mesaba Iron Company (East Mesaba), Dunka River Iron Company (Dunka
River) and Claude W. Peters (the Peters Lease) and the Amended Assignment of
Cloquet Lease relates to an Indenture made May 1, 1916 between Cloquet
Lumber Company and Claude W. Peters (the Cloquet Lease).
The Agreement of
Trust specifically prohibits the Trustees from entering into or engaging in any
business. This prohibition applies even
to business activities the Trustees may deem necessary or proper for the
preservation and protection of the Trust Estate. Accordingly, the Trustees activities in
connection with the administration of Trust assets are limited to collecting
income, paying expenses and liabilities, distributing net income to the holders
of Certificates of Beneficial Interest in Mesabi Trust (Unitholders) after
the payment of, or provision for, such expenses and liabilities, and protecting
and conserving the assets held.
The Trustees do
not intend to expand their responsibilities beyond those permitted or required
by the Agreement of Trust, the Amendment to the Agreement of Trust dated October 25,
1982 (the
6
Amendment),
and those required under applicable law.
Mesabi Trust has no employees, but it engages independent consultants to
assist the Trustees in, among other things, monitoring the volume and sales
prices of iron ore products shipped from Silver Bay, Minnesota, based on
information supplied to the Trustees by Northshore Mining Company (Northshore),
the lessee/operator of the Mesabi Trust lands, and its parent company
Cleveland-Cliffs Inc (CCI). References
to Northshore in this quarterly report, unless the context requires otherwise,
are applicable to CCI as well.
Leasehold
royalty income constitutes the principal source of the Trusts revenue. Royalty rates are determined in accordance
with the terms of Mesabi Trusts leases and assignments of leases.
Three types of
royalties, as well as royalty bonuses, comprise the Trusts leasehold royalty
income:
·
Base overriding royalties
.
Base overriding royalties have historically constituted the majority of
Mesabi Trusts royalty income. Base
overriding royalties are determined by both the volume and selling price of
iron ore products shipped. Northshore is
obligated to pay Mesabi Trust base overriding royalties in varying amounts,
based on the volume of iron ore products shipped. Base overriding royalties are calculated as a
percentage of the gross proceeds of iron ore products produced at Mesabi Trust
lands (and to a limited extent other lands) and shipped from Silver Bay,
Minnesota. The percentage ranges from
2-1/2% of the gross proceeds for the first one million tons of iron ore
products so shipped annually to 6% of the gross proceeds for all iron ore products
in excess of 4 million tons so shipped annually. Base overriding royalties are subject to
price adjustments under the CCI Pellet Agreements and, as described elsewhere
in this report, such adjustments may be positive or negative. See the section entitled Royalty Comparisons
below for more information.
·
Royalty bonuses
. The
Trust earns royalty bonuses when iron ore products shipped from Silver Bay are
sold at prices above a threshold price per ton.
The royalty bonus is based on a percentage of the gross proceeds of
product shipped from Silver Bay and sold at prices above a threshold
price. The threshold price is adjusted
(but not below $30.00 per ton) on an annual basis for inflation and deflation
(the Adjusted Threshold Price). The
Adjusted Threshold Price was $45.98 per ton for calendar year 2007 and is
$47.43 per ton for calendar year 2008.
The royalty bonus percentage ranges from 1/2 of 1% of the gross proceeds
(on all tonnage shipped for sale at prices between the Adjusted Threshold Price
and $2.00 above the Adjusted Threshold Price) to 3% of the gross proceeds (on
all tonnage shipped for sale at prices $10.00 or more above the Adjusted
Threshold Price). Royalty bonuses are
subject to price adjustments under the CCI Pellet Agreements and, as described
elsewhere in this report, such adjustments may be positive or negative. See the section entitled Royalty Comparisons
below for more information.
·
Fee royalties.
Fee
royalties have historically constituted a smaller component of the Trusts
total royalty income. Fee royalties are
payable to the Mesabi Land Trust, a Minnesota land trust, which holds a 20%
interest as fee owner in the Amended Assignment of the Peters Lease. Mesabi Trust holds the entire beneficial
interest in the Mesabi Land Trust for which U.S. Bank N.A. acts as the
corporate trustee. Mesabi Trust receives the net
income of the Mesabi Land Trust, which is generated from royalties on the
amount of crude ore mined after the payment of expenses to U.S. Bank N.A. for
its services as corporate trustee. Crude
ore is the source of iron oxides used to make iron ore pellets and other
products. The fee royalty on crude ore
is based on an agreed price per ton, subject to certain indexing.
·
Minimum advance royalties
.
Generally, Northshores obligation to pay base overriding royalties and
royalty bonuses with respect to the sale of iron ore products accrues upon the
shipment of those products from Silver Bay.
However, regardless of whether any shipment has occurred, Northshore is
obligated to pay to Mesabi Trust a minimum advance royalty. Each year, the amount of the minimum advance
royalty is adjusted (but not below $500,000 per annum) for inflation and
deflation. The
7
minimum advance
royalty was $766,510 for calendar year 2007 and is $790,721 for calendar year
2008. Until overriding royalties (and
royalty bonuses, if any) for a particular year equal or exceed the minimum
advance royalty for the year, Northshore must make quarterly payments of up to
25% of the minimum advance royalty for the year. Because minimum advance royalties are
essentially prepayments of base overriding royalties and royalty bonuses earned
each year, any minimum advance royalties paid in a fiscal quarter are recouped
by credits against base overriding royalties and royalty bonuses earned in
later fiscal quarters during the year.
Under the
relevant agreements, Northshore may mine and ship iron ore products from lands
other than Mesabi Trust lands.
Northshore alone determines whether to mine off Trust and/or such other
lands, based on its current mining and engineering plan. The Trustees do not exert any influence over
mining operational decisions. To
encourage the use of iron ore products from Mesabi Trust lands, Mesabi Trust
receives royalties on stated percentages of iron ore shipped from Silver Bay,
whether or not the iron ore products are from Mesabi Trust lands. Mesabi Trust receives royalties at the
greater of (i) the aggregate quantity of iron ore products shipped that
were from Mesabi Trust lands, and (ii) a portion of the aggregate quantity
of all iron ore products shipped from Silver Bay that were mined from any
lands, such portion being 90% of the first four million tons shipped during
such year, 85% of the next two million tons shipped from Silver Bay during such
year, and 25% of all tonnage shipped during such year in excess of six million
tons.
Northshore is
obligated to make quarterly royalty payments in January, April, July and October of
each year based on shipments of iron ore products from Silver Bay, Minnesota
during each calendar quarter. The Trust
accounts and reports accrued income receivable based on shipments during the
last month of the Trusts fiscal quarter (April, July, October and
January) even though such accrued income receivable is not available for
distribution to unitholders until it is received by the Trust. The Trust declares distributions each year in
April, July, October and January.
Distributions are declared after receiving notification from Northshore
Mining Company as to the amount of royalty income that is expected to be paid
to the Trust based on shipments through the end of each calendar quarter. Accordingly, distributions declared by the
Trust are not equivalent to the Trusts Net Income during the periods reported
in this quarterly report on Form 10-Q.
Deutsche Bank
Trust Company Americas, the Corporate Trustee, performs certain administrative
functions for Mesabi Trust. The Trust
maintains a website at www.mesabi-trust.com. The Trust makes available (free of
charge) its annual, quarterly and current reports (and any amendments thereto)
filed with the Securities and Exchange Commission (the SEC) through its
website as soon as reasonably practicable after electronically filing or
furnishing such material with or to the SEC.
Results of Operations
Comparison of Iron Ore Pellet Production and Shipments
for the Three and Six Months Ended July 31, 2008 and July 31, 2007
As shown in the
table below, production of iron ore pellets from Mesabi Trust lands during the
fiscal quarter ended July 31, 2008 totaled approximately 1.47 million
tons, and actual shipments over the same period totaled approximately 2.55
million tons. By comparison, production
of iron ore pellets from Mesabi Trust lands during the same period in 2007
totaled approximately 1.25 million tons, and actual shipments approximated 1.12
million tons.
8
Three Months Ended
|
|
Pellets Produced from
Trust Lands (tons)
|
|
Shipments from Trust
Lands (tons)
|
|
July 31, 2008
|
|
1,473,683
|
|
2,548,888
|
|
July 31, 2007
|
|
1,255,510
|
|
1,119,828
|
|
As shown in the table below, during the six months
ended July 31, 2008, production of iron ore pellets from Mesabi Trust
lands totaled approximately 2.69 million tons, and actual shipments over the
same period totaled approximately 3.59 million tons. By comparison, production of iron ore pellets
from Mesabi Trust lands during the same period in 2007 totaled approximately
2.21 million tons, and actual shipments approximated 1.59 million tons.
Six Months Ended
|
|
Pellets Produced from
Trust Lands (tons)
|
|
Shipments from Trust
Lands (tons)
|
|
July 31, 2008
|
|
2,689,784
|
|
3,589,002
|
|
July 31, 2007
|
|
2,209,067
|
|
1,589,298
|
|
Comparison of Royalty Income for the Three and Six
Months Ended July 31, 2008 and July 31, 2007
Base overriding
royalties for the three months ended July 31, 2008 increased by 310% to
$10,156,568 as compared to the three months ended July 31, 2007. At the same time, bonus royalties increased
by 220% to $6,451,312 as compared to the three months ended July 31,
2007. The increase in the base
overriding and bonus royalties is the result of a significant increase in the volume
of shipments and an increase in the sales prices of iron ore products which
exceeded the 2008 Adjusted Threshold Price of $47.43 per ton by a wider margin
as compared to the comparable prior period.
Consequently, total royalty income for the three months ended July 31,
2008 increased 279% to $16,766,563 as compared to the three months ended July 31,
2007. The following table provides a
summary of Mesabi Trusts royalty income for the three months ended July 31,
2008 and July 31, 2007:
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
Base overriding royalties
|
|
$
|
10,156,568
|
|
$
|
2,479,304
|
|
Bonus royalties
|
|
6,451,312
|
|
2,016,291
|
|
Minimum advance royalty paid (recouped)
|
|
|
|
(191,628
|
)
|
Fee royalties
|
|
158,683
|
|
123,069
|
|
Total royalty income
|
|
$
|
16,766,563
|
|
$
|
4,427,036
|
|
Base overriding royalties
for the six months ended July 31, 2008 increased by 297% to $11,912,740 as
compared to the six months ended July 31, 2007. At the same time, bonus royalties increased
by 182% to $8,410,036 as compared to the six months ended July 31,
2007. As was the case for the three
months ended July 31, 2008, the increase in the base overriding and bonus
royalties for the six months ended July 31, 2008 is the result of a
significant increase in the volume of shipments and an increase in the sales
prices of iron ore products which exceeded the 2008 Adjusted Threshold Price of
$47.43 per ton by a wider margin as compared to the comparable prior
period. Consequently, total
9
royalty income for the six months ended July 31, 2008 increased
approximately 232% to $20,614,273, as compared to the six months ended July 31,
2007. The following table provides a
summary of Mesabi Trusts royalty income for the six months ended July 31,
2008 and July 31, 2007:
|
|
Six Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
Base overriding royalties
|
|
$
|
11,912,740
|
|
$
|
3,004,080
|
|
Bonus royalties
|
|
8,410,036
|
|
2,983,348
|
|
Minimum advance royalty paid (recouped)
|
|
|
|
|
|
Fee royalties
|
|
291,497
|
|
218,749
|
|
Total royalty income
|
|
$
|
20,614,273
|
|
$
|
6,206,177
|
|
Comparison of Trust Income
for the Three and Six Months Ended July 31, 2008 and July 31, 2007
Net income for the three months ended July 31,
2008 was $16,570,317 an increase of approximately 297% as compared to net
income of $4,174,139 for the three months ended July 31, 2007. This increase was due to increases in the
base overriding royalties paid to the Trust, resulting from a significant
increase in the volume of shipments, and higher bonus royalties during the
quarter due to higher pellet prices. In addition, Trust expenses decreased by
23% as compared to the three months ended July 31, 2007 primarily because
of a decrease in the Trusts professional service fees that were accrued for
during the three months ended April 30, 2008. The following table provides
a summary of Mesabi Trusts results for the three months ended July 31,
2008 and July 31, 2007:
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
Total royalty income
|
|
$
|
16,766,563
|
|
$
|
4,427,036
|
|
Interest income
|
|
5,240
|
|
8,448
|
|
Gross income
|
|
16,771,803
|
|
4,435,484
|
|
|
|
|
|
|
|
Expenses
|
|
201,486
|
|
261,345
|
|
Net income
|
|
$
|
16,570,317
|
|
$
|
4,174,139
|
|
Net income for
the six months ended July 31, 2008 was $20,209,970, an increase of
approximately 244% as compared to net income of $5,873,756 for the six months
ended July 31, 2007. As was the case for the three months ended July 31,
2008, this increase was due to the increase in the base overriding royalties
paid to the Trust, resulting from a significant increase in the volume of
shipments, and higher bonus royalties during the quarter due to higher pellet
prices. Trust expenses increased by 22%
as compared to the six months ended July 31, 2007 primarily because of an
increase the Trusts operating expenses, including professional service
fees. The following table provides a
summary of Mesabi Trusts results for the six months ended July 31, 2008
and July 31, 2007:
10
|
|
Six Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
Total royalty income
|
|
$
|
20,614,273
|
|
$
|
6,206,177
|
|
Interest income
|
|
19,337
|
|
14,362
|
|
Gross income
|
|
20,633,610
|
|
6,220,539
|
|
|
|
|
|
|
|
Expenses
|
|
423,640
|
|
346,783
|
|
Net income
|
|
$
|
20,209,970
|
|
$
|
5,873,756
|
|
Unallocated
Reserve
The Unallocated Reserve as of July 31, 2008 was
$7,175,579, an increase of 205% as compared to the $2,355,828 in Unallocated
Reserve as of July 31, 2007. The
increase in the Unallocated Reserve is the result of a significant increase in
the royalty revenue accrued on the Trusts balance sheet at the end of the
fiscal quarter ended July 31, 2008, but not yet paid to the Trust, and an
increase in the unallocated cash and U.S. Government securities held by the
Trust. At July 31, 2008,
$6,453,966, or approximately 90% of the Unallocated Reserve was accrued income
receivable, representing royalties not yet received by the Trust but
anticipated to be received from Northshore in October 2008 for shipments
during the third calendar quarter. By
comparison, at July 31, 2007, $1,756,107, or approximately 75% of the
Unallocated Reserve was accrued income receivable. The significant increase in
accrued income receivable, which is based upon reported lessee shipping
activity for the month of July 2008, is reflected on the Trusts balance
sheet at July 31, 2008 and at July 31, 2007. The Trustees anticipate that substantially
all of the $6,453,966 in accrued income receivable will be distributed to
Unitholders in October 2008, after the Trustees provide for expenses and
unexpected loss contingencies.
The Trustees
have determined that a portion of the Unallocated Reserve, usually within the
range of $500,000 to $1,000,000 or such other amount as the Trustees may deem
prudent, should be maintained for unexpected loss contingencies. As of July 31, 2008, $721,613, or 10% of
the Unallocated Reserve, was represented by unallocated cash and U.S.
Government securities, whereas, at July 31, 2007, $599,721, or 25% of the
Unallocated Reserve was unallocated cash and U.S. Government securities.
The Trusts
Unallocated Reserve for the six months ended July 31, 2008 increased 332%
or $5,515,558 as compared to the Unallocated Reserve at January 31,
2008. This increase in the Unallocated
Reserve is primarily due to the accrual of royalty income for shipments from
Northshore during the month of July 2008.
At January 31, 2008, approximately 58% of the Unallocated Reserve
or $959,925 was represented by accrued income receivable while 42% or $700,096
was represented by unallocated cash and U.S. Government securities.
The Trustees
will continue to monitor the economic circumstances of the Trust to strike a
responsible balance between distributions to Unitholders and the need to
maintain reserve for unexpected loss contingencies at a prudent level, given
the unpredictable nature of the iron ore industry, the Trusts dependence on
the actions of the lessee/operator, and the fact that the Trust essentially has
no other liquid assets.
11
Although the actual amount of the Unallocated
Reserve will fluctuate from time to time, and may increase or decrease from its
current level, it is currently intended that future distributions will be
highly dependent upon royalty income as it is received and the level of Trust
expenses. The amount of future royalty
income available for distribution will be subject to the volume of iron ore
product shipments and the dollar level of sales by Northshore.
Recent Developments
Production and Shipments
.
During calendar years 2007, 2006, 2005, 2004 and 2003, the percentage of
shipments of iron ore products from Mesabi Trust lands was approximately 88.2%,
90.9%, 90.1%, 92.0% and 95.5%, respectively, of total shipments. In its Form 10-Q filed May 6, 2008,
CCI reported that it is estimating total production of 5.7 million tons of iron
ore pellets at Northshore during calendar year 2008. Northshore has not advised the Trustees as
to the percentage of iron ore products from Mesabi Trust lands it anticipates
shipping in calendar year 2008. See the
description of the uncertainty of market conditions in the iron ore and steel
industry under Important Factors Affecting Mesabi Trust below and the
information under the heading Risk Factors in Part I Item 1A of the
Trusts Annual Report on Form 10-K for the year-ended January 31,
2008.
Northshore
Administrative Permit Amendment
. As reported in
the Trusts Form 10-K filed April 11, 2008, according to CCIs Form 10-K
filed February 29, 2008, on December 16, 2006, CCI submitted an administrative
permit amendment application to the Minnesota Pollution Control Agency (MPCA)
with respect to Northshores Title V operating permit. CCI reported that Northshore requested an
amendment to its permit to delete a 30 year old control city monitoring
requirement but the MPCA denied Northshores application on February 23,
2007. In its Form 10-K, CCI
further reported that it had appealed the denial of its application to the
Minnesota Court of Appeals and that subsequent to the filing of the appeal, the
MPCA advised Northshore that the MPCA considered Northshore to be in violation
of the control city standard. CCI also reported that it was in discussions with
the MPCA with respect to the terms of a compliance schedule in which it would
agree to take certain actions in settlement of the alleged violation. According to CCIs Form 10-K, the
Minnesota Center for Environmental Advocacy had since filed a motion with the
Court of Appeals to intervene in Northshores appeal of the denial of an
administrative amendment to Northshores Title V operating permit.
On May 20, 2008, the
Minnesota Court of Appeals issued a ruling on Northshores appeal and held that
the MPCA did not err in concluding that Northshore proceeded under the wrong
permit modification procedures when it applied to amend its permit to eliminate
the control city standard from its Title V operating permit. The Minnesota Court of Appeals ruled that
Northshores administrative amendment application should have been dealt with
through the major permit amendment process rather than through the
administrative permit amendment process, which is used to address insignificant
amendments. The Trustees are unable to
predict what impact the administrative proceedings discussed above will have on
Northshores compliance with its Title V operating permit or on future
royalties payable to the Trust.
Northshore
Notice of Violation.
In its Form 10-Q filed July 31,
2008, CCI reported that on July 28, 2008, the MPCA issued a Notice of
Violation (NOV) to Northshore alleging violations related to the Control City
Standard for the period of March 2006 through October 2007,
specifically with respect to MPCAs interpretation of the Control City Standards
emission limits and related monitoring and reporting requirements. CCI reported
that the NOV states that Northshore has been in compliance with MPCAs
interpretation of the Standard since October 2007, but requires corrective
actions relating to operating and maintaining facilities of treatment and control
to remain in compliance. Although the NOV does not seek civil penalties, it
contains various requests for information and reserves the right for MPCA to
take further action. CCI also reported that Northshore disputes the allegations
contained in the NOV and that it is currently assessing its
legal/administrative options. The
Trustees are unable to predict what impact, if any, the NOV may have on
Northshores operations or on future royalties payable to the Trust.
12
Important Factors
Affecting Mesabi Trust
The Agreement of Trust specifically prohibits the
Trustees from entering into or engaging in any business. This prohibition seemingly applies even to
business activities the Trustees deem necessary or proper for the preservation
and protection of the Trust Estate (as such term is defined below). Accordingly, the Trustees activities in
connection with the administration of Trust assets are limited to collecting
income, paying expenses and liabilities, distributing net income to Mesabi
Trusts Unitholders after the payment of, or provision for, such expenses and
liabilities, and protecting and conserving the assets held. Consequently, the income of Mesabi Trust is
highly dependent upon the activities and operations of Northshore, and the
terms and conditions of the leases and assignments of leases between Mesabi
Trust and Northshore. Moreover, shipping
activity is greatly reduced during the winter months and economic conditions,
particularly those affecting the steel industry, may adversely affect the
amount and timing of such future shipments and sales. For a discussion of additional factors,
including but not limited to those that could adversely affect Mesabi Trusts
actual results and performance, see Risk Factors in Part I Item 1A of
Mesabi Trusts Annual Report on Form 10-K for the year-ended January 31,
2008.
Neither Mesabi
Trust nor the Trustees have any control over the operations and activities of
Northshore, except within the framework of the Amended Assignment
Agreements. CCI alone controls (i) historical
operating data, including iron ore production volumes, marketing of iron ore
products, operating and capital expenditures as they relate to Northshore,
environmental and other liabilities and the effects of regulatory changes; (ii) plans
for Northshores future operating and capital expenditures; (iii) geological
data relating to reserves (iv) projected production of iron ore products;
and (v) the decision to mine off Mesabi Trust and/or state lands, based on
CCIs current mining and engineering plan.
The Trustees do not exert any influence over mining operational
decisions at Northshore, nor do the Trustees provide any input regarding the
ore reserve estimate at Northshore as reported by CCI. While the Trustees request material
information for use in periodic reports as part of their evaluation of Mesabi
Trusts disclosure controls and procedures, the Trustees do not control this
information and they rely on the information in CCIs periodic and current
filings with the SEC to provide accurate and timely information in Mesabi Trusts
reports filed with the SEC.
In accordance
with the Agreement of Trust and the Amendment, the Trustees are entitled to,
and in fact do, rely upon certain experts in good faith, including (i) the
independent consultants with respect to monthly production and shipment
reports, which include figures on crude ore production and iron ore pellet
shipments, and discussions concerning the condition and accuracy of the scales
and plans regarding the development of Mesabi Trusts mining property; and (ii) the
accounting firm they have contracted with for non-audit services, including
reviews of financial data related to shipping and sales reports provided by
Northshore and a review of the schedule of leasehold royalties payable to
Mesabi Trust.
13
Iron Ore Pricing and Contract Adjustments
During the course of its
fiscal year some portion of the royalties paid to Mesabi Trust are based on
estimated prices for iron ore products sold under term contracts between CCI
and its subsidiaries and certain of their customers (the CCI Pellet Agreements).
Mesabi Trust is not a party to any of the CCI Pellet Agreements. These prices
are subject to interim and final pricing adjustments, which can be positive or
negative, and which adjustments are dependent in part on a variety of price and
inflation index factors, including but not limited to the international
benchmark pellet price, hot band steel prices and various Producer Price
Indexes. Although Northshore makes interim adjustments to the royalty payments
on a quarterly basis, these price adjustments cannot be finalized until after
the end of a contract year. This may result in significant and frequent
variations in royalties received by Mesabi Trust (and in turn the resulting
amount of funds available for distribution to Unitholders by the Trust) from
quarter to quarter and on a comparative historical basis, and these variations,
which can be positive or negative, cannot be predicted by Mesabi Trust.
Effects of Securities Regulation
The Trust is a publicly-traded trust listed on the
New York Stock Exchange (NYSE) and is therefore subject to extensive
regulation under, among others, the Securities Act of 1933, the Securities
Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the
rules and regulations of the NYSE.
Issuers failing to comply with such authorities risk serious
consequences, including criminal as well as civil and administrative
penalties. In most instances, these
laws, rules and regulations do not specifically address their
applicability to publicly-traded trusts such as Mesabi Trust. In particular, Sarbanes-Oxley mandated the
adoption by the Securities and Exchange Commission (the SEC) and NYSE of
certain rules and regulations that are impossible for the Trust to
literally satisfy because of its nature as a pass-through trust. Pursuant to NYSE rules currently in
effect, the Trust is exempt from many of the corporate governance requirements
that apply to publicly traded corporations.
The Trust does not have, nor does the Agreement of Trust provide for, a
board of directors, an audit committee, a corporate governance committee or a
compensation committee. The Trustees
intend to closely monitor the SECs and the NYSEs rulemaking activity and will
attempt to comply with such rules and regulations where applicable.
In May 2008, the Trust established a website
in response to the NYSEs interpretation of Rule 203.01 of the NYSE Listed
Company Manual.
The Trusts website is located at
www.mesabi-trust.com.
Critical Accounting Policies
This Trustees
Discussion and Analysis of Financial Condition and Results of Operations is
based upon the Trusts financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these
financial statements requires the Trustees to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. These estimates form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. The
Trustees base their estimates and judgments on historical experience and on
various other assumptions that the Trustees believe are reasonable under the
circumstances. However, future events
are subject to change and the best estimates and judgments may require
adjustment.
Critical
accounting policies are those that have meaningful impact on the reporting of
the Trusts financial condition and results, and that require significant
management judgment and estimates. The
Trustees have determined that there are no critical accounting policies.
14
Item
3. Quantitative and Qualitative
Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls
and Procedures
.
The Trustees maintain disclosure
controls and procedures designed to ensure that information required to be
disclosed by the Trust in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the rules and
regulations of the Securities and Exchange Commission. Disclosure controls and procedures include
controls and procedures designed to ensure that information required to be
disclosed by the Trust is accumulated and communicated by Northshore, and
consultants to the Trustees as appropriate, to allow timely decisions regarding
required disclosure.
As part of their
evaluation of the Trusts disclosure controls and procedures, the Trustees rely
on quarterly shipment and royalty calculations provided by Northshore. Because Northshore has declined to support
this information with a written certification attesting to whether Northshore
has established disclosure controls and procedures and internal controls
sufficient to enable it to verify that the information furnished to the
Trustees is accurate and complete, the Trustees also rely on (a) an annual
certification from Northshore and Northshores parent, CCI, certifying as to
the accuracy of the royalty calculations, and (b) the related due
diligence review performed by the Trusts external accountants. In addition, the Trusts consultants review
the schedule of leasehold royalties payable and shipping and sales reports
provided by Northshore against production and shipment reports prepared by the
Eveleth Fee Office, Inc., an independent consultant to the Trust (Eveleth
Fee Office). The Eveleth Fee Office gathers production and shipping
information from Northshore and prepares monthly production and shipment
reports for the Trustees. Furthermore, as part of its engagement by the Trust,
the Eveleth Fee Office also attends Northshores calibration and testing of its
crude ore scales and boat loader scales which are conducted on a periodic
basis.
As of the end of
the period covered by this report, the Trustees carried out an evaluation of
the Trusts disclosure controls and procedures.
The Trustees have concluded that such disclosure controls and procedures
are effective.
Changes in Internal Control Over
Financial Reporting
.
To the knowledge of the
Trustees, there has been no change in the Trusts internal control over
financial reporting that occurred during the Trusts last fiscal quarter that
has materially affected, or is likely to materially affect, the Trusts
internal control over financial reporting.
The Trustees note for purposes of clarification that they have no
authority over, and make no statement concerning, the internal controls of
Northshore or CCI.
15
PART II - OTHER INFORMATION
Item 1A.
|
|
Risk Factors
|
|
|
|
|
|
There have been no material changes in the Trusts
risk factors as described in Part I Item 1A, Risk Factors in the
Trusts Annual Report on Form 10-K for the year ended January 31,
2008.
|
|
|
|
Item 6.
|
|
Exhibits.
|
|
|
|
|
|
31
|
Certification of Corporate Trustee of Mesabi Trust
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
32
|
Certification of Corporate Trustee of Mesabi Trust
pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
99.1
|
Report of Gordon, Hughes & Banks, LLP,
dated September 5, 2008 regarding its review of the unaudited interim
financial statements of Mesabi Trust as of and for the quarter ended
July 31, 2008.
|
16
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
MESABI TRUST
|
|
(Registrant)
|
|
|
September 5, 2008
|
By:
|
DEUTSCHE BANK TRUST COMPANY
AMERICAS
|
|
|
Corporate Trustee
|
|
Principal Administrative Officer and duly authorized
signatory:*
|
|
|
|
|
By:
|
DEUTSCHE BANK NATIONAL TRUST
COMPANY
|
|
|
|
|
* There are no
principal executive officers or principal financial officers of the registrant.
17
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