<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended October 31, 1997 or
/ / TRANSITION REPORT UNDER 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 13-6022277
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
IN CARE OF BANKERS TRUST COMPANY,
CORPORATE TRUST & AGENCY GROUP
P.O. BOX 318
CHURCH STREET STATION
NEW YORK, NEW YORK 10008-0318
(Address of principal executive offices)
(212) 250-6519
(Registrant's 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 / /
As of December 12, 1997, there were 13,120,010 Units of Beneficial Interest in
Mesabi Trust outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Note 1)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
A. Condensed Statements of Income
Revenues:
Royalty income $2,318,000 $2,682,750 $3,810,369 $4,650,447
Interest income 13,438 11,992 30,366 29,307
---------- ---------- ---------- ----------
$2,331,438 $2,694,742 $3,840,735 $4,679,754
Expenses 70,289 72,123 216,798 244,761
---------- ---------- ---------- ----------
Net income $2,261,149 $2,622,619 $3,623,937 $4,434,993
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number
of units outstanding 13,120,010 13,120,010 13,120,010 13,120,010
Net income per unit (Note 2) $0.172344 $0.199895 $0.276215 $0.338033
Distributions declared
per unit $0.16 $0.19 $0.225 $0.275
</TABLE>
See Notes to Financial Statements.
2
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B. Condensed Balance Sheets
Assets: October 31, 1997 January 31, 1997
---------------- ----------------
Cash $ 2,165,238 $ 918
U.S. Government securities,
at amortized cost (which approximates
market) 534,873 2,484,984
Accrued income 732,834 113,617
Prepaid insurance 6,535 3,645
------------- ------------
$ 3,439,480 $ 2,603,164
------------- ------------
Fixed property, including
intangibles, at nominal values:
Amended Assignment of
Peters Lease $ 1 $ 1
Assignment of Cloquet Lease 1 1
Certificate of beneficial
interest for 13,120,010
units of Land Trust 1 1
$ 3 $ 3
------------- ------------
$ 3,439,483 $ 2,603,167
------------- ------------
------------- ------------
Liabilities, Unallocated
Reserve and Trust Corpus:
Liabilities:
Distribution payable $ 2,099,201 $ 1,902,401
Accrued expenses 17,736 50,155
------------- ------------
$ 2,116,937 $ 1,952,556
Unallocated reserve (Note 3) 1,322,543 650,608
Trust Corpus 3 3
------------- ------------
$ 3,439,483 $ 2,603,167
------------- ------------
------------- ------------
See Notes to Financial Statements.
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C. Condensed Statements of Cash Flows
NINE MONTHS ENDED
OCTOBER 31,
----------------------------
1997 1996
Cash flows from operating
activities:
Royalties received $ 3,183,542 $ 3,791,103
Interest received 37,977 39,204
Expenses paid (252,109) (284,958)
------------- ------------
Net cash provided by
operating activities $ 2,969,410 $ 3,545,349
------------- ------------
Cash flows from investing
activities:
Maturities of
U.S. Government
securities $ 3,910,258 $ 3,979,726
Purchases of U.S.
Government securities (1,960,146) (4,823,642)
------------- ------------
Net cash provided by (used in)
investing activities $ 1,950,112 $ (843,916)
------------- ------------
Cash flows from financing
activities:
Net cash (used in) financing
activities, distributions
to Unitholders $ (2,755,202) $ (2,689,602)
------------- ------------
Net increase in cash $ 2,164,320 $ 11,831
Cash, beginning of year 918 9,183
------------- ------------
Cash, end of quarter $ 2,165,238 $ 21,014
------------- ------------
------------- ------------
Reconciliation of net income
to net cash provided by
operating activities:
Net income $ 3,623,937 $ 4,434,993
(Increase) in accrued income (619,218) (735,102)
(Increase) in prepaid insurance (2,890) (2,833)
(Decrease) in
accrued expenses (32,419) (37,364)
(Decrease) in deferred income -- (114,345)
------------- ------------
Net cash provided by
operating activities $ 2,969,410 $ 3,545,349
------------- ------------
------------- ------------
See Notes to Financial Statements.
4
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MESABI TRUST
NOTES TO FINANCIAL STATEMENTS
Note 1. The financial statements included herein have been prepared without
audit (except for the balance sheet at January 31, 1997) 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 and nine
months ended October 31, 1997 and 1996, (b) the financial position at
October 31, 1997 and January 31, 1997, and (c) the cash flows for the
nine months ended October 31, 1997 and 1996, have been made.
Note 2. Earnings per unit are based on weighted average number of units
outstanding during the period (13,120,010 units).
Note 3. The Trustees attempt to maintain $500,000 of liquid assets as part of
an Unallocated Reserve. The Unallocated Reserve consists of these
liquid assets and accrued revenue (primarily royalties not yet
received). At October 31, 1997, the Unallocated Reserve was
represented by $589,709 in unallocated cash and U.S. Government
securities, and $732,834 of accrued revenue primarily representing
royalties not yet received by the Trust but anticipated to be received
in January 1998 from Northshore as part of the royalty due for the
fourth calendar quarter, based upon reported lessee shipping activity
for the month of October 1997.
5
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ITEM 2. TRUSTEES' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING INFORMATION
Certain statements contained in this document are forward-looking,
including specifically those statements estimating calendar year 1997 production
or shipments. All such forward-looking statements are based on input from the
lessee/operator. The Trust has no control over the operations and activities of
the lessee/operator except within the framework of current agreements. Actual
results could differ materially from those indicated in such statements. For
important factors that could cause actual results to differ materially, see
"Important Factors Affecting Mesabi Trust" below.
BACKGROUND
Leasehold royalty income constitutes the principal source of revenue to
Mesabi Trust. Royalty rates are determined by the terms of Mesabi Trust's
leases and assignments of leases. Overriding royalties are determined by both
the volume and selling price of iron ore products sold. Fee royalties payable
to Mesabi Land Trust, a Minnesota land trust of which Mesabi Trust is the sole
beneficiary ("Mesabi Land Trust"), are based on the amount of crude ore mined,
which crude ore is used to produce iron ore products.
Northshore Mining Corporation ("Northshore") is obligated as lessee to pay
Mesabi Trust base overriding royalties, in varying amounts constituting a
percentage of the gross proceeds of shipments from Silver Bay, Minnesota of
pellets produced from Mesabi Trust lands or, to a limited extent, other lands,
ranging from 2-1/2% of the gross proceeds for the first one million tons of
pellets so shipped annually to 6% of the gross proceeds for all pellets shipped
in excess of four million tons annually. In addition, Northshore is obligated
to pay to Mesabi Trust royalty bonuses constituting a percentage of the gross
proceeds of pellets shipped from Silver Bay, Minnesota for sale at prices above
a threshold price (which is adjusted on an annual basis for inflation and
deflation and is $37.29 for calendar year 1997), ranging from 1/2 of 1% of the
gross proceeds on all tonnage shipped for sale at prices between the threshold
price and $2.00 above the threshold price, to 3% of the gross proceeds on all
tonnage shipped for sale at prices $10.00 or more above the threshold price.
Generally, the obligation of Northshore to pay base overriding royalties and
royalty bonuses with respect to the sale of pellets accrues upon the shipment of
those pellets from Silver Bay. Northshore also is obligated to pay to Mesabi
Trust a minimum advance royalty in equal quarterly installments, which is
credited against certain base overriding royalties and royalty bonuses. The
amount of advance royalties payable is subject to adjustment for inflation and
deflation and is $621,606 for calendar year 1997. Northshore is obligated to
make quarterly royalty payments in January, April, July and October of each
year. In the case of base overriding royalties and royalty bonuses, these
quarterly 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.
Due to a combination of factors, shipments from quarter to quarter and from
year to year fluctuate greatly. These factors include the normal reduction of
Great Lakes shipping activity during the winter months, and reduced pellet sales
resulting from adverse economic conditions affecting the steel industry
generally.
IMPORTANT FACTORS AFFECTING MESABI TRUST
Under the Agreement of Trust, the activities of the Trust are limited to
the collection of income, the payment of expenses and liabilities, the
distribution of net income and the protection and
6
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conservation of the assets held. The Trustees are specifically prohibited from
entering into or engaging in any business. This prohibition applies
irrespective of whether the conduct of business activities is deemed by the
Trustees to be necessary or proper for the preservation and protection of the
Trust Estate.
Accordingly, the income of the Trust is highly dependent upon the
activities and operations of its assignee/lessee, Northshore, and the terms and
conditions of the Amended Assignment Agreements. The Trust and the Trustees
have no control over the operations and activities of Northshore except within
the framework of current agreements.
Due to winter weather, and the increasing royalty percentages based on
tonnage shipped in a calendar year, results for a particular quarter are
typically not indicative of results for future quarters or the year as a whole.
Factors which can impact the results of the Trust in any quarter or year
include:
1. SHIPPING CONDITIONS IN THE GREAT LAKES. Shipping activity by
Northshore is dependent upon when the Great Lakes shipping lanes
freeze for the winter months (typically in January) and when they
re-open in the spring (typically late-March or April). Base
overriding royalties to Mesabi Trust are based on shipments made in a
calendar quarter. If there is little or no shipping activity in the
first calendar quarter, the Trust only receives the minimum royalty
for that period.
2. OPERATIONS OF NORTHSHORE. Since the primary portion of the Trust's
revenues are from the shipments of iron ore product by Northshore,
Northshore's processing and shipping activities directly impact the
Trust's revenues in any quarter or year. Shipments by Northshore are
impacted by a myriad of factors, including economic conditions in the
iron ore industry, pricing by competitors, long-term customer
contracts or arrangements by Northshore or its competitors,
availability of ore boats, production at Northshore's mining
operations, and production at Northshore's pelletizing/processing
facility. If any pelletizing line becomes idle for any reason,
production (and shipments) could be adversely impacted.
3. INCREASING ROYALTIES. As described elsewhere, the royalty percentage
paid to the Trust increases as the aggregate tonnage of iron ore
products shipped in any calendar year increases up to a maximum of
4,000,000 tons above which the royalty percentage is fixed at 6%.
Assuming a consistent sales price per ton throughout a calendar year,
shipments of iron ore product later in the year generate a higher
royalty to the Trust.
4. PERCENTAGE OF MESABI TRUST ORE. As described elsewhere, Northshore
has the ability to process and ship iron ore product from lands other
than Mesabi Trust lands. In certain circumstances, the Trust may be
entitled to royalties on those other shipments, but not in all cases.
In general, the Trust will receive higher royalties (assuming all other
factors are equal) if a higher percentage of shipments are from Mesabi
Trust lands. The percentage of shipments from Mesabi Trust lands were
98.4%, 90.6%, 88.3% and 87.8% in calendar years 1996, 1995, 1994, and 1993,
respectively.
7
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COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 1997 AND OCTOBER 31, 1996
Mesabi Trust's net income decreased to $2,261,149 for the fiscal quarter
ended October 31, 1997, as compared to net income of $2,622,619 for the fiscal
quarter ended October 31, 1996. The decrease in royalty income was primarily
due to decreased pellet shipments, decreased crude ore production (decreasing
the amount of fee royalty income) and a decrease in the deferred income amount
in the comparable prior period which did not recur in the current period.
Mesabi Trust's gross income for the fiscal quarter ended October 31, 1997 was
$2,331,438, consisting of $2,236,507 in overriding royalty income, $81,493 in
fee royalty income and $13,438 in interest income, as compared to gross income
of $2,694,742 for the fiscal quarter ended October 31, 1996. Mesabi Trust's
expenses for the fiscal quarter ended October 31, 1997 were $70,289, compared to
expenses of $72,123 for the fiscal quarter ended October 31, 1996.
COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 1997 AND OCTOBER 31, 1996
Mesabi Trust's gross income for the nine months ended October 31, 1997 was
$3,840,735, a decrease of $839,019 from the gross income of $4,679,754 for the
nine months ended October 31, 1996. The decrease in royalty income was
primarily due to decreased pellet shipments, decreased crude ore production
(decreasing the amount of fee royalty income) and a decrease in the deferred
income amount in the comparable prior period which did not recur in the current
period. Interest income was slightly higher in the 1997 period. Expenses of
$216,798 for the nine months ended October 31, 1997 decreased $27,963 from
expenses of $244,761 for the nine months ended October 31, 1996. The decreased
income and decreased expenses resulted in net income of $3,623,937 for the nine
months ended October 31, 1997, as compared to net income of $4,434,993 for the
nine months ended October 31, 1996.
Mesabi Trust's Unallocated Reserve aggregated $1,322,543 at October 31,
1997, as compared with an Unallocated Reserve of $1,368,393 at October 31, 1996.
The Trustees anticipate that the amount of Unallocated Reserve will fluctuate
from time to time, depending upon a number of factors, including but not limited
to the income for a particular period, the amount and timing of distributions,
uncertainty about future royalty income and the uncertainty of future expenses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
8
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
27.1 Financial Data Schedule.........................Filed herewith.
9
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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)
By: BANKERS TRUST COMPANY
Corporate Trustee
Principal Administrative Officer and duly
authorized signatory:*
Date: December 12, 1997 By: /s/ Matthew J. Seeley
--------------------------------------
Name: Matthew J. Seeley
Title: Vice President
* There are no directors
or executive officers of
the registrant.
10
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EXHIBIT INDEX
Item No. Description
-------- -----------
27.1 Financial Data Schedule......................Filed herewith.
11
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF EARNINGS AND THE CONSOLIDATED BALANCE SHEET AND IS
QUALIFIED BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 2,165
<SECURITIES> 535
<RECEIVABLES> 733
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,439
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,439
<CURRENT-LIABILITIES> 2,117
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,439
<SALES> 2,318
<TOTAL-REVENUES> 2,331
<CGS> 0
<TOTAL-COSTS> 70
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,261
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,261
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
