<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 July 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 September 9, 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 SIX MONTHS ENDED
JULY 31, JULY 31,
------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
A. Condensed Statements of Income
Revenues:
Royalty income $1,473,022 $1,253,519 $1,957,281 $1,492,369
Interest income 8,218 6,033 23,410 16,928
---------- ---------- ---------- ----------
$1,481,240 $1,259,552 $1,980,691 $1,509,297
Expenses 97,172 80,811 166,889 146,509
---------- ---------- ---------- ----------
Net income $1,384,068 $1,178,741 $1,813,802 $1,362,788
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number
of units outstanding 13,120,010 13,120,010 13,120,010 13,120,010
Net income per unit (Note 2) $0.105493 $0.089843 0.138247 $0.103871
Distributions declared
per unit $0.110 $0.065 0.110 $0.065
</TABLE>
See Notes to Financial Statements.
2
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B. Condensed Balance Sheets
<TABLE>
<CAPTION>
Assets: July 31, 1998 January 31, 1998
------------- ----------------
<S> <C> <C>
Cash $ 34,887 $ 3,607,221
U.S. Government securities,
at amortized cost (which approximates
market) 2,064,732 499,073
Accrued income 482,910 176,641
Prepaid insurance --- 3,820
------------- ----------------
$ 2,582,529 $ 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
------------- ----------------
$ 2,582,532 $ 4,286,758
------------- ----------------
------------- ----------------
Liabilities, Unallocated
Reserve and Trust Corpus:
Liabilities:
Distribution payable $ 1,443,201 $ 3,476,803
Accrued expenses 48,928 90,153
------------- ----------------
$ 1,492,129 $ 3,566,956
Unallocated reserve (Note 3) 1,090,400 719,799
Trust Corpus 3 3
------------- ----------------
$ 2,582,532 $ 4,286,758
------------- ----------------
------------- ----------------
</TABLE>
See Notes to Financial Statements.
3
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<TABLE>
<CAPTION>
C. Condensed Statements of Cash Flows
SIX MONTHS ENDED
JULY 31,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating
activities:
Royalties received $ 1,651,461 $ 1,043,744
Interest received 22,960 19,706
Expenses paid (204,293) (170,775)
------------- ----------------
Net cash provided by
operating activities $ 1,470,128 $ 892,675
------------- ----------------
Cash flows from investing
activities:
Maturities of
U.S. Government
securities $ 4,364,263 $ 2,829,304
Purchases of U.S.
Government securities (5,929,922) (1,027,782)
------------- ----------------
Net cash provided by (used in)
investing activities $ (1,565,659) $ 1,801,522
------------- ----------------
Cash flows from financing
activities:
Net cash (used in) financing
activities, distributions
to Unitholders $ (3,476,803) $ (1,902,401)
------------- ----------------
Net increase/(decrease) in cash $ (3,572,334) $ 791,796
Cash, beginning of year 3,607,221 918
------------- ----------------
Cash, end of quarter $ 34,887 $ 792,714
------------- ----------------
------------- ----------------
Reconciliation of net income
to net cash provided by
operating activities:
Net income $ 1,813,802 $ 1,362,788
(Increase)/decrease in accrued income (306,269) (445,847)
(Increase)/Decrease in prepaid insurance 3,820 (4,851)
(Decrease) in accrued expenses (41,225) (19,415)
------------- ----------------
Net cash provided by
operating activities $ 1,470,128 $ 892,675
------------- ----------------
------------- ----------------
</TABLE>
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, 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 six months ended
July 31, 1998 and 1997, (b) the financial positions at July 31, 1998
and January 31, 1998, and (c) the cash flows for the six months ended
July 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 July 31, 1998, the Unallocated Reserve was represented
by $607,490 in unallocated cash and U.S. Government securities, and
$482,910 of accrued revenue primarily representing royalties not yet
received by the Trust but anticipated to be received in October 1998
from Northshore as part of the royalty due with respect to the third
fiscal quarter, based upon reported lessee shipping activity for the
month of July 1998.
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 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. Overriding royalties are
determined by both the volume and selling price of iron ore products shipped.
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. Currently, 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.
Northshore Mining Corporation ("Northshore") is obligated as lessee to pay
Mesabi Trust base overriding royalties in varying amounts. The volume royalties
constitute a percentage of the gross proceeds of iron ore products produced at
Mesabi Trust lands (and to a limited extent other lands) and shipped from Silver
Bay, Minnesota. The royalty 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).
With respect to the selling price component of 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 ever been payable.
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, Northshore also is
obligated to pay to Mesabi Trust a minimum advance royalty in equal quarterly
installments. Royalty advances are credited against certain base overriding
royalties and royalty bonuses. The amount of advance royalties payable is
subject to adjustment for inflation and deflation (but not below $500,000 per
annum). Advance royalties payable were $610,335 for calendar year 1996, were
$621,606 for calendar year 1997 and are $636,935 for calendar year 1998.
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 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.
6
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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 June 30, 1998, which report was filed on August 12, 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 Mine 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 almost entirely 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 minerals shipped by Northshore from Silver Bay, Minnesota. As noted
above, the information regarding amounts and sales prices of shipped minerals is
used to compute the royalties payable to Mesabi Trust by Northshore. Bankers
Trust Company, one of the Trustees, 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.
Due to winter weather, and the increasing royalty percentages based on
tonnage shipped in a calendar year, results for a particular calendar 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 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 typically
is little or no shipping activity in the first calendar quarter, the Trust
typically receives only the minimum 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
7
<PAGE>
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 sales price per ton throughout a calendar
year, shipments of iron ore product attributable to the Trust later in the
year generate a higher royalty to the Trust.
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 JULY 31, 1998 AND JULY 31, 1997
Mesabi Trust's net income increased to $1,384,068 for the fiscal quarter
ended July 31, 1998, as compared to net income of $1,178,741 for the fiscal
quarter ended July 31, 1997. Mesabi Trust's gross income for the fiscal quarter
ended July 31, 1998 was $1,481,240, consisting of $1,385,157 in minimum advance
royalty income, $87,865 in fee royalty income and $8,218 in interest income, as
compared to gross income of $1,259,552 consisting of $414,326 in minimum advance
royalty income, $839,193 in fee royalty income and $6,033 in interest income,
for the fiscal quarter ended July 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 July 31, 1998 were
$97,172, compared to expenses of $80,811 for the fiscal quarter ended July 31,
1997.
COMPARISON OF SIX MONTHS ENDED JULY 31, 1998 AND JULY 31, 1997
Mesabi Trust's gross income for the six months ended July 31, 1998 was
$1,980,691, an increase of $471,394 from the gross income of $1,509,297 for the
six months ended July 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 $166,889 for the six months ended July 31, 1998
increased $20,380 from expenses of $146,509 for the six months ended July 31,
1997. The increased income and increased expenses resulted in net income of
$1,813,802 for the six months ended July 31, 1998 as compared to net income of
$1,362,788 for the six months ended July 31, 1997.
Mesabi Trust's Unallocated Reserve aggregated $1,090,400 at July 31, 1998,
as compared with an Unallocated Reserve of $1,160,595 at July 31, 1997. The
decrease of $70,195 was due to the net effect of: (a) the increase in net income
of $451,014 during the six months ended July 31, 1998 as compared with the
six months ended July 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,
8
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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.
9
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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: September 11, 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>
12
<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> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 34
<SECURITIES> 2,064
<RECEIVABLES> 483
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,582
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,582
<CURRENT-LIABILITIES> 1,492
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,582
<SALES> 1,957
<TOTAL-REVENUES> 1,981
<CGS> 0
<TOTAL-COSTS> 167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,813
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,813
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
