<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, 1998 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 No.)
incorporation or organization)
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 10, 1998, there were 13,120,010 Units of Beneficial Interest in
Mesabi Trust outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (NOTE 1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
A. Condensed Statements of Income
Revenues:
Royalty income $2,596,244 $2,318,000 $4,553,525 $3,810,369
Interest income 13,524 13,438 36,934 30,366
----------- ---------- ---------- ----------
$2,609,768 $2,331,438 $4,590,459 $3,840,735
Expenses 72,098 70,289 238,987 216,798
----------- ---------- ---------- ----------
Net income $2,537,670 $2,261,149 $4,351,472 $3,623,937
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Weighted average number
of units outstanding 13,120,010 13,120,010 13,120,010 13,120,010
Net income per unit (Note 2) $0.193420 $0.172344 0.331667 $0.276215
Distributions declared
per unit $0.165 $0.16 0.275 $0.225
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
B. Condensed Balance Sheets
<TABLE>
<CAPTION>
Assets: October 31, 1998 January 31, 1998
---------------- -----------------
<S> <C> <C>
Cash $ 2,250,482 $ 3,607,221
U.S. Government securities,
at amortized cost (which approximates
market) 571,773 499,073
Accrued income 812,429 176,641
Prepaid insurance 7,508 3,820
------------ ------------
$ 3,642,192 $ 4,286,755
------------ ------------
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
------------ ------------
$ 3,642,195 $ 4,286,758
------------ ------------
------------ ------------
Liabilities, Unallocated
Reserve and Trust Corpus:
Liabilities:
Distribution payable $ 2,164,802 $ 3,476,803
Accrued expenses 14,122 90,153
------------ ------------
$ 2,178,924 $ 3,566,956
Unallocated reserve (Note 3) 1,463,268 719,799
Trust Corpus 3 3
------------ ------------
$ 3,642,195 $ 4,286,758
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
C. Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating
activities:
Royalties received $ 3,896,266 $ 3,183,542
Interest received 43,985 37,977
Expenses paid (304,286) (252,109)
------------ ------------
Net cash provided by
operating activities $ 3,635,965 $ 2,969,410
------------ ------------
Cash flows from investing
activities:
Maturities of
U.S. Government
securities $ 6,309,238 $ 3,910,258
Purchases of U.S.
Government securities (6,381,938) (1,960,146)
------------ ------------
Net cash provided by (used in)
investing activities $ (72,700) $ 1,950,112
------------ ------------
Cash flows from financing
activities:
Net cash (used in) financing
activities, distributions
to Unitholders $ (4,920,004) $ (2,755,202)
------------ ------------
Net increase/(decrease) in cash $ (1,356,739) $ 2,164,320
Cash, beginning of year 3,607,221 918
------------ ------------
Cash, end of quarter $ 2,250,482 $ 2,165,238
------------ ------------
------------ ------------
Reconciliation of net income
to net cash provided by
operating activities:
Net income $ 4,351,472 $ 3,623,937
(Increase)/decrease in accrued income (635,788) (619,218)
(Increase)/decrease in prepaid insurance (3,688) (2,890)
(Decrease) in accrued expenses (76,031) (32,419)
(Decrease) in deferred income -- --
------------ ------------
Net cash provided by
operating activities $ 3,635,965 $ 2,969,410
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
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, 1998) 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, 1998 and 1997, (b) the
financial positions at October 31, 1998 and January 31, 1998, and
(c) the cash flows for the nine months ended October 31, 1998 and
1997, 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, 1998, the Unallocated Reserve was
represented by $650,839 in unallocated cash and U.S. Government
securities, and $812,429 of accrued revenue primarily representing
royalties not yet received by the Trust but anticipated to be
received in January 1999 from Northshore as part of the royalty due
with respect to the fourth fiscal quarter, based upon reported
lessee shipping activity for the month of October 1998.
5
<PAGE>
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 1998 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.
Important factors that could cause actual results to differ materially include
those listed in "Important Factors Affecting Mesabi Trust" below.
BACKGROUND
Leasehold royalty income constitutes the principal source of revenue to
Mesabi Trust. Royalty rates are determined in accordance with the terms of
Mesabi Trust's leases and assignments of leases. Three types of royalties
comprise the Trust's leasehold royalty income:
o Overriding royalties, which constitute the majority of Mesabi
Trust's royalty income, are determined by both the volume and
selling price of iron ore products shipped.
o Fee royalties, historically a smaller component of the Trust's
royalty income, are payable to Mesabi Land Trust, a Minnesota land
trust of which Mesabi Trust is the sole beneficiary ("Mesabi Land
Trust"), and are based on the amount of crude ore mined.
Currently, the fee royalty on crude ore is based on an agreed price
per ton, subject to certain indexing. Crude ore is used to produce
iron ore pellets and other products.
o Minimum advance royalties, the third type of royalty, are discussed
below.
Northshore Mining Company ("Northshore") is obligated as lessee to pay
Mesabi Trust base overriding royalties in varying amounts. The volume component
of overriding royalties constitutes a percentage of the gross proceeds of iron
ore products produced from 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 shipped annually.
With respect to the selling price component of overriding royalty
calculation, Northshore is obligated to pay to Mesabi Trust royalty bonuses.
The royalty bonus is 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 on an annual basis for inflation and deflation (but not below $30).
The threshold price was $36.62 for calendar year 1996, was $37.29 for calendar
year 1997 and is $38.21 for calendar year 1998. The royalty bonus percentage
ranges 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. No royalty bonus has been paid to date.
Generally, Northshore's 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 for inflation and deflation (but not below $500,000 per annum).
Minimum advance royalties were
6
<PAGE>
$610,335 for calendar year 1996, were $621,606 for calendar year 1997 and are
$636,935 for calendar year 1998. 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 advance minimum royalties
are essentially prepayments of base overriding and bonus royalties earned
EACH year, any advance minimum royalties paid in a fiscal quarter are
recouped by credits against base overriding and bonus royalties earned in
later fiscal quarters during the year. Historically, advance minimum
royalties have been paid in the first fiscal quarter and recouped in the
second fiscal quarter.
Northshore is obligated to make quarterly royalty payments in January,
April, July and October of each year. In the case of 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.
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, price fluctuations
and reduced pellet sales resulting from adverse economic conditions affecting
the steel industry generally.
In its most recently released quarterly report on Form 10-Q for the
quarter ended September 30, 1998, which report was filed on November 5, 1998,
Cleveland-Cliffs, Inc. ("CCI"), parent company of Northshore, the
lessee/operator of Mesabi Trust iron ore interests, stated that it is continuing
to evaluate whether to build a plant at the Northshore Silver Bay Facility to
produce pig iron. The same report stated that CCI has initiated the
environmental review and permitting process and that uncertainties concerning
environmental permitting and other matters have delayed a decision on this
project. CCI's report gave no indication regarding when a decision would be
made with respect to the plant. The Mesabi Trustees are unable to determine at
this time how the addition of a pig iron facility (if the project proceeds)
would impact overall revenues of Mesabi Trust. As indicated elsewhere in this
report, the Trust's revenues are currently derived principally from iron ore
pellet production and sales.
Mesabi Trust has no employees, but it engages independent consultants
to assist the Trustees in monitoring, among other things, the amount and
sales prices of iron ore products shipped by Northshore from Silver Bay,
Minnesota. As noted above, the information regarding amounts and sales prices
of shipped iron ore products is used to compute the royalties payable to
Mesabi Trust by Northshore. Bankers Trust Company, the Corporate Trustee,
also performs certain administrative functions for Mesabi Trust.
IMPORTANT FACTORS AFFECTING MESABI TRUST
The Agreement of Trust governing Mesabi Trust specifically prohibits the
Trustees from entering into or engaging in any business. This prohibition
applies even to business activities the Trustees 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 and
protecting and conserving the assets held.
Accordingly, the income of the Trust is highly dependent upon the
activities and operations of Northshore, and the terms and conditions of its
leases and assignments of leases. The Trust and the Trustees have no control
over the operations and activities of Northshore, except within the framework of
these leases and assignment of leases.
7
<PAGE>
Due to winter weather, and the increasing royalty percentages based on
tonnage shipped in a calendar year, results for a particular calendar quarter
are 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
the following:
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. Because there
usually is little or no shipping activity in the first calendar quarter,
the Trust typically receives only the minimum advance royalty for that
period.
2. OPERATIONS OF NORTHSHORE. Because the primary portion of the Trust's
revenues derive from iron ore product shipped by Northshore from Silver
Bay, Northshore's processing and shipping activities directly impact the
Trust's revenues in each quarter and for each year. In turn, a myriad
of factors affect Northshore shipment volume. These factors include
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 the pelletizing/processing
facility. If any pelletizing line becomes idle for any reason,
production and shipments (and, consequently, Trust income) could be
adversely impacted.
3. INCREASING ROYALTIES. As described elsewhere in this Report, the
royalty percentage paid to the Trust increases as the aggregate tonnage
of iron ore products shipped, attributable to the Trust, in any calendar
year increases. Assuming a consistent volume and sales price per ton
throughout a calendar year, shipments of iron ore product attributable
to the Trust generate a higher royalty income to the Trust later in the
year.
4. PERCENTAGE OF MESABI TRUST ORE. As described elsewhere in this Report,
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 percentages of shipments that came from
Mesabi Trust lands were 98.3%, 98.4%, 90.6% and 88.3% in calendar years
1997, 1996, 1995 and 1994, respectively.
COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
Mesabi Trust's net income increased to $2,537,670 for the fiscal quarter
ended October 31, 1998, as compared to net income of $2,261,149 for the fiscal
quarter ended October 31, 1997. Mesabi Trust's gross income for the fiscal
quarter ended October 31, 1998 was $2,609,768, consisting of $265,391 in minimum
advance royalty income, $2,260,457 in overriding royalty income, $70,396 in fee
royalty income and $13,524 in interest income, as compared to gross income of
$2,331,438 consisting of $259,002 in minimum advance royalty income, $1,977,505
in overriding royalty income, $81,493 in fee royalty income and $13,438 in
interest income, for the fiscal quarter ended October 31, 1997. The increase in
royalty income was primarily due to increased pellet shipments as compared to
the comparable prior period. Mesabi Trust's expenses for the fiscal quarter
ended October 31, 1998 were $72,098, compared to expenses of $70,289 for the
fiscal quarter ended October 31, 1997.
8
<PAGE>
COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 1998 AND OCTOBER 31, 1997
Mesabi Trust's gross income for the nine months ended October 31, 1998 was
$4,590,459, an increase of $749,724 from the gross income of $3,840,735 for the
nine months ended October 31, 1997. The increase in royalty income was
primarily due to increased pellet shipments and increased crude ore production
(increasing the amount of fee royalty income). Interest income was slightly
higher in the 1998 period. Expenses of $238,987 for the nine months ended
October 31, 1998 increased $22,189 from expenses of $216,798 for the nine months
ended October 31, 1997. The increased income and increased expenses resulted in
net income of $4,351,472 for the nine months ended October 31, 1998 as compared
to net income of $3,623,937 for the nine months ended October 31, 1997.
Mesabi Trust's Unallocated Reserve aggregated $1,463,268 at October 31,
1998, as compared with an Unallocated Reserve of $1,322,543 at October 31, 1997.
The increase of $140,725 was due to the net effect of: (a) the increase in net
income of $727,535 during the nine months ended October 31, 1998 as compared
with the nine months ended October 31, 1997 and (b) the January 31, 1998
unallocated reserve balance of $719,799 was $69,191 higher than the January 31,
1997 unallocated reserve balance of $650,608. 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.
ROYALTY COMPARISONS
The following chart summarizes Mesabi Trust's royalty income for the
quarters and nine-month periods ended October 31, 1998 and October 31, 1997,
respectively:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Base overriding royalties $2,525,848 $2,236,507 $4,306,559 $3,574,273
Bonus Royalties 0 0 0 0
Minimum advance
royalty paid (recouped) 0 0 0 0
---------- ---------- ---------- ----------
$2,525,848 $2,236,507 $4,306,559 $3,574,273
Fee royalties 70,396 81,493 246,966 236,096
---------- ---------- ---------- ----------
Total royalty income $2,596,244 $2,318,000 $4,553,525 $3,810,369
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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.
10
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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 15, 1998 By: /s/ Robert Caporale
------------------------------------
Name: Robert Caporale
Title: Vice President
* There are no directors
or executive officers of
the registrant.
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Item No. Description
-------- -----------
<S> <C>
27.1 Financial Data Schedule......................................Filed herewith.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF EARNINGS AND THE CONSOLIDATED BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,250
<SECURITIES> 572
<RECEIVABLES> 812
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,642
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,642
<CURRENT-LIABILITIES> 2,179
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,642
<SALES> 4,553
<TOTAL-REVENUES> 4,590
<CGS> 0
<TOTAL-COSTS> 217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,351
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,351
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
