UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2010
or
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File Number: 1-4488
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
incorporation or organization)
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(I.R.S. Employer Identification No.)
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c/o Deutsche Bank Trust Company Americas
Trust & Securities Services GDS
60 Wall Street
27th Floor
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such files). Yes
o
No
o
*
*
The registrant has not yet been phased into the interactive data requirements.
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
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
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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
o
No
x
As
of September 1, 2010, 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, 2010 and 2009
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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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2010
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2009
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2010
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2009
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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. Condensed
Statements of Income
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Revenues
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Royalty income
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$
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11,228,415
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$
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419,135
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$
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16,216,146
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$
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1,440,847
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Interest income
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5,565
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3,802
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10,661
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6,971
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11,233,980
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422,937
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16,226,807
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1,447,818
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Expenses
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224,686
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201,925
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432,548
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425,760
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Net income
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$
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11,009,294
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$
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221,012
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$
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15,794,259
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$
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1,022,058
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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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0.8391
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$
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0.0168
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$
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1.2038
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$
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0.0779
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Distributions declared per unit (Note 3)
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$
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0.8000
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$
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$
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0.9250
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$
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0.3800
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See Notes to Condensed Financial Statements.
2
Mesabi Trust
Condensed Balance Sheets
July 31, 2010 and January 31, 2010
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July 31, 2010
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January 31, 2010
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(unaudited)
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B. Condensed
Balance Sheets
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Assets
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Cash and cash equivalents
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$
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10,074,143
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$
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8,444,697
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U.S. Government securities, at amortized cost
(which approximates market)
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1,309,376
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1,850,515
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Accrued income receivable
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3,958,383
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873,938
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Prepaid expenses
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16,033
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30,422
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15,357,935
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11,199,572
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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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15,357,938
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$
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11,199,575
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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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10,496,008
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$
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7,216,005
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Accrued expenses
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75,846
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85,735
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Deferred royalty revenue (Note 4)
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2,770,000
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10,571,854
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10,071,740
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Unallocated Reserve (Note 5)
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4,786,081
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1,127,832
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Trust Corpus
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3
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3
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$
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15,357,938
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$
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11,199,575
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See Notes to Condensed Financial Statements.
3
Mesabi Trust
Condensed Statements of Cash Flows
Six Months Ended July 31, 2010 and 2009
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Six Months Ended
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July 31,
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2010
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2009
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(unaudited)
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(unaudited)
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C. 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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10,361,187
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$
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6,173,965
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Interest received
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11,175
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8,205
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Expenses paid
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(428,048
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)
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(432,334
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)
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Net cash provided by operating activities
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9,944,314
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5,749,836
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Cash flows from investing activities
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Maturities of U.S. Government Securities
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1,540,000
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53,000
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Purchases of U.S. Government Securities
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(998,861
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)
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(769,920
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)
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Net cash provided by (used for) investing
activities
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541,139
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(716,920
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)
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Cash flows from financing activities
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Distributions to Unitholders
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(8,856,007
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)
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(6,428,805
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)
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Net change in cash and cash equivalents
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1,629,446
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(1,395,889
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)
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Cash and cash equivalents, beginning of year
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8,444,697
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2,254,107
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Cash and cash equivalents, end of period
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$
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10,074,143
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$
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858,218
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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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15,794,259
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$
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1,022,058
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Decrease (increase) in accrued income receivable
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(3,084,445
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)
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2,167,877
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Decrease in prepaid expenses
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14,389
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14,390
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Decrease in accrued expenses
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(9,889
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)
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(24,489
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(Decrease) Increase in deferred royalty revenue
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(2,770,000
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2,570,000
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Net cash provided by operating activities
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$
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9,944,314
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$
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5,749,836
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See Notes to Condensed Financial Statements.
4
Mesabi Trust
Notes to Condensed Financial Statements
July 31, 2010 (unaudited)
Note 1.
The financial statements
included herein have been prepared without audit (except for the balance sheet
at January 31, 2010) 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 accounting principles generally accepted in the United States
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, 2010 and 2009, (b) the
financial position at July 31, 2010 and (c) the cash flows for the
six months ended July 31, 2010 and 2009, have been made. For further information, refer to the
financial statements and footnotes included in Mesabi Trusts Annual Report on Form 10-K
for the year ended January 31, 2010.
Note 2.
Net income per unit includes
accrued income receivable. For the three
months ended July 31, 2010 the Trust recorded $3,958,383 of accrued income receivable as reflected on
the Condensed Balance Sheet as of July 31, 2010 (unaudited). Accrued income receivable includes accruals
for anticipated positive pricing adjustments and shipments during the month of
July. Accrued income receivable is
accounted for and reported for the Trusts second fiscal quarter even though
such accrued income receivable is not available for distribution to Unitholders
until it is actually received by the Trust.
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 (Northshore) as to the amount of
royalty 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 the royalty payment 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.
As previously reported, in April 2009,
the Trust received its quarterly distribution payment from Northshore of
approximately $5,200,000. In accordance with the Trusts revenue recognition
policy, the Trust recognized revenue related to tons of iron ore that were
shipped by Northshore, but for which Northshore had indicated that final
pricing was not yet known. As a result of
decreases in estimated pellet pricing subsequent to January 31, 2009, the
cash proceeds received by the Trust in April 2009 exceeded the royalty
revenue recognized by the Trust in fiscal 2010.
Accordingly, the Trust had estimated a $2,770,000 liability in the form
of deferred royalty revenue based on pricing estimates provided by Northshore
as of January 31, 2010.
In
April 2010, the Trust received customary quarterly payment notification
from Northshore, which indicated that the Trust was credited a royalty payment
of approximately $1.9 million. However,
because of declines in the price adjustment mechanisms under the Cliffs Pellet
Agreements, Northshore applied a $2.8 million negative price adjustment with
respect to shipments and sales by Northshore based on estimated pellet
pricing. These negative pricing
adjustments, the corresponding offset against the quarterly royalty payment and
an increase in
5
estimated
pellet pricing subsequent to January 31, 2010, reduced the Trusts
deferred royalty revenue liability from $2,770,000 as of January 31, 2010
to $972,000 as of April 30, 2010.
In
July 2010, the Trust received a quarterly royalty payment notification
from Northshore, which indicated that the Trust was credited a royalty payment
of approximately $10.024 million. The
amount of the royalty payment was reduced by the application of $1.068 million
of negative price adjustments with respect to shipments and sales by Northshore
based on estimated pellet pricing. These
negative pricing adjustments, the corresponding offset against the most recent
quarterly royalty payment and an increase in estimated pellet pricing
subsequent to January 31, 2010, together reduced the Trusts deferred
royalty revenue liability from $2,770,000 as of January 31, 2010 to $0 as
of July 31, 2010. Pricing estimates
are adjusted on a quarterly basis as updated pricing information is received
from Northshore. To the extent that the
Trust has recorded a deferred royalty revenue liability, it is anticipated that
such amounts would be carried forward to subsequent quarters until there are
sufficient positive royalty payments and/or future positive price adjustments
to fully offset any negative price adjustments.
Note 5.
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 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 payments received
quarterly and the level of Trust expenses that the Trustees anticipate the
Trust will incur in subsequent quarters.
As of July 31, 2010, the Unallocated Reserve
consisted of $827,698 in unallocated cash and U.S. Government securities and
$3,958,383 of accrued income receivable primarily representing royalties not
yet received by the Trust but anticipated to be received in future
periods. Pursuant to the Agreement of
Trust, the Trust makes decisions on cash distributions to Unitholders primarily
based on the royalty payments it receives from Northshore when received, rather
than as royalty income is recorded in accordance with the Trusts revenue
recognition policy. Refer to Note 4 for
further information.
As
of July 31, 2010 and January 31, 2010, the Trusts Unallocated
Reserve was comprised of the following components:
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July 31, 2010
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January 31, 2010
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(unaudited)
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(audited)
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Cash and U.S. Government securities
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$
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827,698
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$
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3,023,894
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Accrued income receivable
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3,958,383
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873,938
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Deferred royalty revenue
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(2,770,000
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)
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Unallocated Reserve
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$
|
4,786,081
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$
|
1,127,832
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A reconciliation of the Trusts Unallocated Reserve
from January 31, 2010 to July 31, 2010 is as follows:
Unallocated Reserve, January 31, 2010
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$
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1,127,832
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Net income
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15,794,259
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Distributions declared
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(12,136,010
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)
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Unallocated Reserve, July 31, 2010
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$
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4,786,081
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6
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, shipments or
pricing, 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, environmental hazards, health and
safety conditions, 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 under agreements to which Mesabi Trust is not a
party and that are not known until after the end of a contract year. It is possible that future negative price
adjustments could partially or even completely offset royalties or royalty
income that would otherwise be payable to the Trust in any particular quarter,
or at year-end, thereby potentially reducing cash available for distribution to
the Trusts Unitholders in future quarters.
For a discussion of the factors, including without limitation, 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, 2010. 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.
This
discussion should be read in conjunction with the condensed financial
statements and notes presented in this Form 10-Q and the financial
statements and notes in the last filed Annual Report on Form 10-K filed
for the period ending January 31, 2010 for a full understanding of Mesabi
Trusts financial position and results of operations for the six month period
ended July 31, 2010.
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
7
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 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 Cliffs Natural Resources Inc. (Cliffs). References to Northshore in this quarterly
report, unless the context requires otherwise, are applicable to Cliffs as
well.
Leasehold
royalty income constitutes the principal source of the Trusts revenue. The income of the Trust is highly dependent
upon the activities and operations of Northshore. Royalty rates and the resulting royalty
payments received by the Trust are determined in accordance with the terms of
the 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 the 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 the 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 the 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 Cliffs Pellet Agreements and, as described
elsewhere in this report, such adjustments may be positive or negative.
·
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 $48.48 per
ton for calendar year 2009 and is $48.81 per ton for calendar year 2010. 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 Cliffs Pellet
Agreements and, as described elsewhere in this report, such adjustments may be
positive or negative.
·
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 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.
8
·
Minimum advance royalties
. Northshores obligation to pay base
overriding royalties and royalty bonuses with respect to the sale of iron ore products
generally accrues upon the shipment of those products from Silver Bay. However, regardless of whether any shipment
has occurred, under the terms of the Amended Assignment Agreements, 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 in accordance with the Amended Assignment Agreements. The minimum advance royalty was $808,177 for
calendar year 2009 and is $813,729 for calendar year 2010. 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 documents, Northshore may mine and ship iron ore products from
lands other than Mesabi Trust lands.
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. In the case of base overriding royalties and
royalty bonuses, these quarterly royalty payments are to be made whether or not
the related proceeds of sale have been received by Northshore by the time such
payments become due. 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 mining 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 that
are shipped are actually mined from Mesabi Trust lands. Mesabi Trust receives royalties based on the
greater of following two methods of calculating royalty payments (i) the
aggregate quantity of iron ore products shipped that were produced using iron
ore mined 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 from
Silver Bay during the calendar year, 85% of the next two million tons shipped
during the calendar year, and 25% of all tonnage shipped from Silver Bay during
such year in excess of six million tons.
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, 2010 and July 31, 2009
As
shown in the table below, production of iron ore pellets at Northshore from
Mesabi Trust lands during the fiscal quarter ended July 31, 2010 totaled
approximately 930,000 tons, and actual shipments over the same period totaled
approximately 1,936,000 tons. By
comparison, actual pellet production and actual shipments for the comparable
period in 2009 were approximately 279,000 tons and 278,000 tons, respectively.
The increase in production and shipments at Northshore is the result of a significant increase in orders from
Cliffs customers.
9
Fiscal Quarter Ended
|
|
Pellets Produced from
Trust Lands (tons)
|
|
Pellets Shipped from
Trust Lands (tons)
|
|
July 31, 2010
|
|
929,634
|
|
1,936,164
|
|
July 31, 2009
|
|
278,887
|
|
278,444
|
|
As
shown in the table below, during the six months ended July 31, 2010,
production of iron ore pellets at Northshore from Mesabi Trust lands totaled
approximately 2,251,000 tons, and actual shipments over the same period totaled
approximately 3,018,000 tons. By
comparison, actual pellet production and actual shipments for the comparable
period in 2009 were approximately 960,000 tons and 516,000 tons, respectively. The increase in production and shipments at
Northshore for the sixth months ended July 31, 2010 is the result of a significant increase in orders from
Cliffs customers.
Six Months Ended
|
|
Pellets Produced from
Trust Lands (tons)
|
|
Pellets Shipped from
Trust Lands (tons)
|
|
July 31, 2010
|
|
2,251,040
|
|
3,018,094
|
|
July 31, 2009
|
|
960,065
|
|
515,897
|
|
Comparison
of Royalty Income for the Three and Six Months Ended July 31, 2010 and July 31,
2009
Total
royalty income for the quarter increased $10,809,280 over the comparable prior
period. The increase in total royalty
income is due to higher sales prices per ton of iron ore pellets sold and an
increase in the total volume of iron ore pellets shipped during the three
months ended July 31, 2010, each as compared to the three months ended July 31,
2009. The higher sales prices per ton
and the increase in the volume of iron ore pellets shipped both contributed to
an increase in the base overriding royalty and the bonus royalty payments.
The
table below shows that the base overriding royalties, the bonus royalties, and
the fee royalties increased by $6,702,732, $4,022,906, and $83,642
respectively, for the three months ended July 31, 2010. The increases in the base overriding
royalties and the bonus royalties are both attributable to the higher sales
prices per ton of iron ore pellets and the increase in the volume of tons
shipped during the three months ended July 31, 2010, each as compared to
the three months ended July 31, 2009.
The
table below summarizes the components of Mesabi Trusts royalty income for the
three months ended July 31, 2010 and July 31, 2009, respectively:
|
|
Three Months Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
Base overriding royalties
|
|
$
|
6,761,523
|
|
$
|
58,791
|
|
Bonus royalties
|
|
4,363,816
|
|
340,910
|
|
Minimum advance royalty paid (recouped)
|
|
|
|
|
|
Fee royalties
|
|
103,076
|
|
19,434
|
|
Total royalty income
|
|
$
|
11,228,415
|
|
$
|
419,135
|
|
10
The
Trusts total royalty income for the six months ended July 31, 2010 increased
$14,775,299 as compared to the six months ended July 31, 2009. The increase is the result of higher realized
sales prices per ton of iron ore pellets and a 485% increase
in the total volume of iron ore pellets shipped during the
six months ended July 31, 2010, each as compared to the six
months ended July 31, 2009. The higher
sales prices per ton and the increase in the volume of iron ore pellets shipped
both contributed to an increase in the base overriding royalty and the bonus
royalty payments.
The
table below shows that the base overriding royalties, the bonus royalties, and
the fee royalties increased $8,408,459, $6,210,598 and $156,242 respectively,
for the six months ended July 31, 2010, from the comparable period in
2009. The increases in the base
overriding royalties and the bonus royalties are both attributable to the
higher sales prices per ton of iron ore pellets and the increase in the volume
of tons shipped during the six months ended July 31, 2010, each as compared to
the six months ended July 31, 2009.
The
table below summarizes the components of Mesabi Trusts royalty income for the
six months ended July 31, 2010 and July 31, 2009:
|
|
Six Months Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
Base overriding royalties
|
|
$
|
9,037,815
|
|
$
|
629,356
|
|
Bonus royalties
|
|
6,935,269
|
|
724,671
|
|
Minimum advance royalty paid (recouped)
|
|
|
|
|
|
Fee royalties
|
|
243,062
|
|
86,820
|
|
Total royalty income
|
|
$
|
16,216,146
|
|
$
|
1,440,847
|
|
Comparison
of Net Income, Expenses and Distributions for the Three and Six Months Ended
July 31, 2010 and July 31, 2009
Net
income for the three months ended July 31, 2010 was $11,009,294, an increase of
$10,788,282
compared to the three months
ended July 31, 2009. As with the
increase in total royalty income, the increase in net income for the quarter
ended July 31, 2010 was the result of higher sales prices per ton of iron ore
pellets shipped and an increase in the volume of tons shipped. The Trusts expenses increased $22,761 for
the three months ended July 31, 2010, as compared to the three month period
ended July 31, 2009, as a result of slightly higher expenses related to the
administration of the Trust. The table
below summarizes the Trusts income and expenses for the three months ended
July 31, 2010 and July 31, 2009, respectively.
|
|
Three Months Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
Total Royalty Income
|
|
$
|
11,228,415
|
|
$
|
419,135
|
|
Interest Income
|
|
5,565
|
|
3,802
|
|
Gross Income
|
|
11,233,980
|
|
422,937
|
|
Expenses
|
|
224,686
|
|
201,925
|
|
Net income
|
|
$
|
11,009,294
|
|
$
|
221,012
|
|
Net
income for the six months ended July 31, 2010 was $15,794,259, an increase of
$14,772,201 as compared to the six
months ended July 31, 2009. As with the
increase in total royalty income, the increase in net income for the six months
ended July 31, 2010 was the result of higher sales prices per ton of iron ore
pellets shipped and an increase in the volume of tons shipped. The Trusts
expenses of
11
$432,548
for the six months ended July 31, 2010 were consistent with the Trusts
expenses for the six month period ended July 31, 2009. The table below summarizes the Trusts income
and expenses for the six months ended July 31, 2010 and July 31, 2009, respectively
|
|
Six Months Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
Total royalty income
|
|
$
|
16,216,146
|
|
$
|
1,440,847
|
|
Interest income
|
|
10,661
|
|
6,971
|
|
Gross income
|
|
16,226,807
|
|
1,447,818
|
|
|
|
|
|
|
|
Expenses
|
|
432,548
|
|
425,760
|
|
Net income
|
|
$
|
15,794,259
|
|
$
|
1,022,058
|
|
As presented on the Trusts Condensed Statements of
Income on page 2 of this quarterly report, the Trusts net income per unit
increased $0.8223 per unit to $0.8391 per unit for the three months ended July
31, 2010. For the six months ended July
31, 2010, the Trusts net income per unit increased $1.1259 per unit to $1.2038
per unit, as compared to the prior year period. On July 15, 2010, the Trust
declared a distribution of $0.80 per unit payable to Unitholders of record on
July 30, 2010. Comparatively, the Trust
did not declare any distributions to Unitholders in July 2009. During the six months ended July 31, 2010 and
July 31, 2009, the Trust had declared total distributions per unit of $0.925
and $0.38, respectively.
Distributions, if any, 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 and such royalty payments may include pricing adjustments
with respect to shipments during prior periods.
The Trust accounts for and reports accrued income receivable based on
shipments during the last month of the Trusts fiscal quarter (April, July,
October and January) and price adjustments under the Cliffs Pellet Agreements
(which can be positive or negative and can result in significant variations in
royalties received by Mesabi Trust and cash available for distribution to
Unitholders). The Trust accounts for
these amounts by using estimated prices and reports such amounts even though
accrued income receivable is not available for distribution to Unitholders
until it is received by the Trust.
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.
Comparison of Unallocated Reserve (Deficit) as of July 31,
2010, July 31, 2009 and January 31, 2010
As
set forth in the table below, Unallocated Reserve (Deficit), which is comprised
of accrued income receivable, cash reserve for potential fixed or contingent
future liabilities and deferred royalty revenue, increased from ($171,365) as
of July 31, 2009 to $4,786,081 as of July 31, 2010. The increase in Unallocated Reserve as of
July 31, 2010, as compared to July 31, 2009, is the result of an increase of
approximately $3,400,000 of accrued income receivable, which resulted from an
increase in shipments during July 2010.
Additionally, the Trusts deferred royalty revenue liability, which was
($2,570,000) as of July 31, 2009, has been eliminated due to Northshores
offsetting of negative pricing adjustments against the Trusts quarterly
royalty payments received during 2010.
The Trusts cash reserve for potential fixed or contingent future
liabilities decreased from $1,844,534 as of July 31, 2009 to $827,698 as of
July 31, 2010. The decrease in the cash
reserve for potential fixed or contingent future liabilities is due to the
Trustees decision to use a portion of the cash reserve to pay distributions to
Unitholders during the six months ended July 31, 2010, as the Trusts deferred
royalty revenue liability was reduced and then eliminated.
12
|
|
Three Months Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
Accrued Income Receivable
|
|
$
|
3,958,383
|
|
$
|
554,101
|
|
Deferred Royalty Revenue
|
|
|
|
(2,570,000
|
)
|
Cash Reserve
|
|
827,698
|
|
1,844,534
|
|
Unallocated Reserve (Deficit)
|
|
$
|
4,786,081
|
|
$
|
(171,365
|
)
|
As
stated in the preceding paragraph, the remaining balance of the Trusts
deferred royalty revenue was eliminated during the most recent fiscal quarter,
as Northshore offset $1,068,000 of royalty payments. Although the Trust does not currently have
any deferred revenue liability, it is possible that future negative price
adjustments could offset, or even eliminate, royalties or royalty income that
would otherwise be payable to the Trust in any particular quarter, or at year
end, thereby potentially reducing cash available for distribution to the Trusts
Unitholders in future quarters. See the
discussion under the heading Risk Factors beginning on page 3 of the Trusts
Annual Report on Form 10-K for the fiscal year ended January 31, 2010.
The
Trusts Unallocated Reserve as of July 31, 2010 increased $3,658,249 as
compared to the fiscal year ended January 31, 2010. The increase in the Unallocated Reserve is
due to the decrease in deferred royalty revenue and an increase in accrued
income receivable due to the increased shipments from Northshore during the
month of July 2010, offset by a decrease in the cash reserve portion of the
Unallocated Reserve. At January 31,
2010, the Unallocated Reserve consisted of $3,023,894 in unallocated cash and
U.S. Government securities, $873,938 of accrued income receivable, primarily
representing royalties not yet received by the Trust but anticipated to be
received in fiscal 2011, less deferred royalty revenue of ($2,770,000).
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 liabilities of the Trust. The
actual amount of the Unallocated Reserve will fluctuate from time to time and
may increase or decrease from its current level. Future distributions will be
highly dependent upon royalty income as it is received, changes in estimated
pricing, potential for future price adjustments 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. 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. The Trustees will
continue to monitor the economic and other 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.
Recent Developments
Production and Shipments
. In its Form 10-Q filed July 29, 2010, Cliffs
reported that production at Northshore for the six months ended June 30, 2010
was 2.1 million tons of iron ore pellets, and production for the three months
ended June 30, 2010 was 0.9 million tons of iron ore pellets. Cliffs reported that Northshore was operating
three of its four furnaces with the fourth expected to restart in October
2010. Comparatively, production of iron
ore pellets at Northshore for the six months ended June 30, 2009 was 1.0
million tons, and there was no production for the three months ended June 30,
2009, as Northshore was idled due to economic conditions. Northshore has not provided the Trustees with
an estimate of total expected shipments of iron ore pellets for calendar year
2010. 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, 2010.
13
Arbitration between Cliffs and ArcelorMittal.
In its Form 10-Q filed July
29, 2010, Cliffs provided an update to the matters previously reported
regarding Cliffs arbitration with its customer ArcelorMittal. As previously reported, Northshore, along
with The Cleveland-Cliffs Iron Company, Cliffs Mining Company and Cliffs Sales
Company, filed two arbitration demands against ArcelorMittal USA Inc., ISG
Cleveland Inc., ISG Indiana Harbor Inc. and Mittal Steel USA Weirton Inc.
(collectively, ArcelorMittal) related to attempts by ArcelorMittal to revise
the nomination of ArcelorMittals pellet requirements and a corresponding
shipping schedule for 2009 and to reverse an election to defer certain tonnage
for 2009. Cliffs reported that these two
arbitration demands were settled on April 14, 2010. Under the settlement, Cliffs reached an
agreement with ArcelorMittal as to the final nomination for 2009 and the
binding nomination for 2010. Cliffs also reported that on June 7, 2010,
ArcelorMittal filed a complaint in the Circuit Court of Cook County, Illinois
seeking a declaratory judgment that Cliffs must permit it to change the amounts
and types of pellets to be shipped to its Indiana Harbor East facility in 2010
from the amounts and types set forth in the settlement agreement as part of
ArcelorMittals 2010 nomination. Cliffs also reported that on June 25, 2010, it
filed a motion to stay the case and to compel arbitration and on July 9, 2010,
Cliffs filed an amended demand seeking a declaration that Cliffs is entitled to
a price reopener for 2010.
The
Trustees are unable to predict what impact, if any, the proceedings between
Cliffs and ArcelorMittal described above will have on shipments from Northshore
or future royalties payable to the Trust.
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 Trusts assets. 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.
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. Cliffs 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 ore reserves (iv) projected production of
iron ore products; (v) contracts between Cliffs and Northshore with their
customers; and (vi) the decision to mine off Mesabi Trust and/or state lands,
based on Cliffs 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 estimated at Northshore as reported by Cliffs. 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 Cliffs 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. For a discussion of
additional factors, including but not limited to those that could adversely
affect Mesabi
14
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, 2010.
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 Cliffs
and its subsidiaries and certain of their customers (the Cliffs Pellet
Agreements). Mesabi Trust is not a party to any of the Cliffs 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. It is possible that future
negative price adjustments could partially or even completely offset royalties
or royalty income that would otherwise be payable to the Trust in any
particular quarter, or at year-end, thereby potentially reducing cash available
for distribution to the Trusts Unitholders in future quarters.
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.
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. Critical accounting policies are those that
have meaningful impact on the reporting of the Trusts financial condition and
results, and that require significant judgment and estimates. During the preparation of financial statements,
the Trust makes estimates, assumptions and judgments that affect reported
amounts. These estimates, assumptions and judgments include those related to
revenue recognition and accrued expenses. The Trust bases its estimates on
various assumptions and historical experience, which are believed to be
reasonable; however, due to the inherent nature of estimates, actual results
may differ significantly due to changed conditions or assumptions. On a regular
basis, the Trust reviews the accounting policies, assumptions, estimates and
judgments to ensure that the financial statements are fairly presented in
15
accordance
with accounting principles generally accepted in the United States. However,
because future events and their effects cannot be determined with certainty,
actual results could differ from assumptions and estimates, and such
differences could be material.
The
Trust did not have any changes in critical accounting policies or in
significant accounting estimates during the three months ended July 31,
2010. For a complete description of the
Trusts significant accounting policies, please see Note 2 to the financial
statements included in the Trusts Annual Report on Form 10-K for the year
ended January 31, 2010.
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, Cliffs, 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 reasonably 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 control over financial reporting of
Northshore or Cliffs.
16
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, 2010.
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.
|
|
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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 Wipfli LLP, dated September 3, 2010 regarding its review of the unaudited
interim financial statements of Mesabi Trust as of and for the three and six
months ended July 31, 2010.
|
17
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.
|
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MESABI TRUST
|
|
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(Registrant)
|
|
|
|
|
|
|
By:
|
DEUTSCHE
BANK TRUST COMPANY AMERICAS
|
|
|
|
Corporate
Trustee
|
|
|
Principal
Administrative Officer and duly authorized signatory:*
|
|
|
|
|
|
By:
|
DEUTSCHE
BANK NATIONAL TRUST COMPANY
|
|
|
|
|
September
3, 2010
|
|
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By:
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/s/
Kenneth R. Ring
|
|
|
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Name:
|
Kenneth
R. Ring
|
|
|
|
Title:
|
Vice
President
|
* There are no principal executive officers or principal
financial officers of the registrant.
18
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