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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, 2000 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 August 31, 2000, 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
A. Condensed Statements of Income
Revenues:
Royalty income $1,546,196 $ 1,118,114 $1,979,666 $ 1,562,045
Interest income 8,414 8,378 18,771 20,407
---------- ------------ ---------- ------------
$1,554,610 $ 1,126,492 $1,998,437 $ 1,582,452
Expenses 89,358 112,781 180,976 198,698
---------- ------------ ---------- ------------
Net income $1,465,252 $ 1,013,711 $1,817,461 $ 1,383,754
========== ============ ========== ============
Weighted average number
of units outstanding 13,120,010 13,120,010 13,120,010 13,120,010
Net income per unit (Note 2) $ 0.111681 $ 0.077265 $ 0.138526 $ 0.105469
Distributions declared
per unit $ 0.100 $ 0.080 $ 0.100 $ 0.080
</TABLE>
See Notes to Financial Statements.
2
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B. Condensed Balance Sheets
<TABLE>
<CAPTION>
JULY 31, 2000 JANUARY 31, 2000
------------- ----------------
<S> <C> <C>
Assets:
Cash $ 1,352,536 $ 51,082
U.S. Government securities,
at amortized cost (which approximates
market) 634,294 2,888,947
Accrued income 620,423 235,056
Prepaid insurance 0 4,775
------------ ------------
$ 2,607,253 $ 3,179,860
------------ ------------
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
------------ ------------
$ 2,607,256 $ 3,179,863
============ ============
Liabilities, Unallocated
Reserve and Trust Corpus:
Liabilities:
Distribution payable $ 1,312,001 $ 2,361,602
Accrued expenses 26,415 54,881
------------ ------------
$ 1,338,416 $ 2,416,483
Unallocated reserve (Note 3) 1,268,837 763,377
Trust Corpus 3 3
------------ ------------
$ 2,607,256 $ 3,179,863
============ ============
</TABLE>
See Notes to Financial Statements.
3
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<TABLE>
<CAPTION>
C. Condensed Statements of Cash Flows
SIX MONTHS ENDED
JULY 31,
-------------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Royalties received $ 1,594,318 $1,226,826
Interest received 18,752 20,226
Expenses paid (204,667) (203,084)
------------ ----------
Net cash provided by
operating activities $ 1,408,403 $1,043,968
------------ ----------
Cash flows from investing activities:
Maturities of
U.S. Government
securities $ 2,866,147 $2,792,546
Purchases of U.S.
Government securities (611,494) (3,917,993)
------------- ----------
Net cash provided by (used in)
investing activities $ 2,254,653 $(1,125,447)
------------ -----------
Cash flows from financing activities:
Net cash (used in) financing
activities, distributions
to Unitholders $ (2,361,602) $(2,033,602)
------------- -----------
Net increase/(decrease) in cash $ 1,301,454 $(2,115,081)
Cash, beginning of year 51,082 2,115,273
------------ -----------
Cash, end of quarter $ 1,352,536 $ 192
============ ===========
Reconciliation of net income
to net cash provided by
operating activities:
Net income $ 1,817,461 $ 1,383,754
(Increase) in accrued income (385,368) (335,400)
Decrease in prepaid insurance 4,775 4,861
(Decrease) in accrued expenses (28,466) (9,247)
------------- -----------
Net cash provided by
operating activities $ 1,408,403 $ 1,043,968
============ ===========
</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, 2000) 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, 2000 and 1999, (b) the financial
positions at July 31, 2000 and January 31, 2000, and (c) the cash
flows for the six months ended July 31, 2000 and 1999, 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, 2000, the Unallocated Reserve was
represented by $648,414 in unallocated cash and U.S. Government
securities, and $620,423 of accrued revenue primarily representing
royalties not yet received by the Trust but anticipated to be
received in October 2000 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 2000.
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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 2000
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 the
Trust's revenue. 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:
- 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.
- 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.
- Minimum advance royalties, the third type of royalty, are
discussed below.
With respect to the volume component of royalty calculation,
Northshore Mining Company ("Northshore") is obligated 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 at Mesabi Trust lands (and to a limited extent other
lands) and shipped from Silver Bay, Minnesota. The percentage ranges from
2-1/2% of the gross proceeds for the first one million tons of iron ore
products so shipped annually to 6% of the gross proceeds for all iron ore
products in excess of 4 million tons so shipped annually.
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 $37.29 for calendar year 1997, was $38.21
for calendar year 1998, was $38.22 for calendar year 1999 and is $38.82 for
calendar year 2000. 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
6
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inflation and deflation (but not below $500,000 per annum). Advance royalties
payable were $621,606 for calendar year 1997, were $636,935 for calendar year
1998, were $637,044 for calendar year 1999 and are $647,282 for calendar year
2000. 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 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.
Under the relevant documents, Northshore may mine and ship iron
ore products from lands other than Mesabi Trust lands. To encourage the use
of iron ore products from Mesabi Trust lands, Mesabi Trust receives royalties
on stated percentages of iron ore shipped from Silver Bay, whether or not the
iron ore products are from Mesabi Trust lands. Mesabi Trust receives
royalties at the greater of (i) the aggregate quantity of iron ore products
shipped that were from Mesabi Trust lands, and (ii) a portion of the
aggregate quantity of all iron ore products shipped that were from any lands,
such portion being 90% of the first four million tons shipped during such
year, 85% of the next two million tons shipped during such year, and 25% of
all tonnage shipped during such year in excess of six million tons.
In its Annual Report for the year ended December 31, 1999 ("CCI's
Annual Report"), CCI, parent company of Northshore, the lessee/operator of
Mesabi Trust iron ore interests, stated that it was continuing to evaluate
whether to build a facility to produce pig iron at CCI's Northshore Mine in
Minnesota that would produce premium grade pig iron. CCI stated in the Report
that while progress has been made in a number of areas on the project, a
decision relative to proceeding with this project has been delayed by
uncertainty about market conditions and timing of state environmental
permitting. Such statements were previously included in CCI's Annual Report
for the year ended December 31, 1998. Because of the preliminary nature of
this information, 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.
Following LTV Steel's decision to close the LTV Steel Mining
Company's plant at Hoyt Lakes, Minnesota next year, CCI announced in May 2000
that it has asked the Minnesota Pollution Control Agency to delay a decision
on environmental permitting for the possible pig iron facility at CCI's
Northshore Mine in order to evaluate whether its iron ore pellet production
should be increased to meet CCI's future sales requirements. CCI stated that
the requested delay should not be interpreted to mean that CCI has abandoned
plans for a possible pig iron facility. CCI reported that it will be
supplying LTV with a majority of its iron ore pellets over the next 10 years
with most of the pellets expected to come from Minnesota sources that are
owned or managed by CCI. Besides potential expansion at CCI's Northshore
Mine, CCI announced that it is reviewing ways to increase production levels
at other CCI-managed mines.
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.
7
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Bankers Trust Company, the Corporate Trustee, also performs certain
administrative functions for Mesabi Trust.
IMPORTANT FACTORS AFFECTING MESABI TRUST
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 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 the
Amended Assignment Agreements. The Trust and the Trustees have no control
over the operations and activities of Northshore, except within the framework
of the Amended Assignment Agreements.
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:
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 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 98.9%, 99.3%, 98.3%, 98.4% and 90.6% in calendar years
1999, 1998, 1997, 1996 and 1995, respectively.
8
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COMPARISON OF THREE MONTHS ENDED JULY 31, 2000 AND JULY 31, 1999
Mesabi Trust's net income increased to $1,465,252 for the fiscal
quarter ended July 31, 2000, as compared to net income of $1,013,711 for the
fiscal quarter ended July 31, 1999. Mesabi Trust's gross income for the fiscal
quarter ended July 31, 2000 was $1,554,610 consisting of $0 in minimum advance
royalty income, $1,463,638 in overriding royalty income, $82,558 in fee royalty
income and $8,414 in interest income, as compared to gross income of $1,126,492
consisting of $0 in minimum advance royalty income, $1,041,130 in overriding
royalty income, $76,984 in fee royalty income and $8,378 in interest income, for
the fiscal quarter ended July 31, 1999. 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, 2000 were
$89,358, compared to expenses of $112,781 for the fiscal quarter ended July 31,
1999.
COMPARISON OF SIX MONTHS ENDED JULY 31, 2000 AND JULY 31, 1999
Mesabi Trust's net income increased to $1,817,461 for the six months
ended July 31, 2000, as compared to net income of $1,383,754 for the six months
ended July 31, 1999. Mesabi Trust's gross income for the six months ended July
31, 2000 was $1,998,437, consisting of $0 in minimum advance royalty income,
$1,816,287 in overriding royalty income, $163,379 in fee royalty income and
$18,771 in interest income, as compared to gross income of $1,582,452 consisting
of $0 in minimum advance royalty income, $1,395,597 in overriding royalty
income, $166,448 in fee royalty income and $20,407 in interest income, for the
six months ended July 31, 1999. 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 six months ended July 31, 2000 were $180,976, compared
to expenses of $198,698 for the six months ended July 31, 1999.
Mesabi Trust's Unallocated Reserve aggregated $1,268,837 at July 31,
2000, as compared with an Unallocated Reserve of $1,047,105 at July 31, 1999.
The increase of $221,732 was due to the net effect of: (a) the increase in net
income of $451,541 during the six months ended July 31, 2000 as compared with
the six months ended July 31, 1999, (b) the January 31, 2000 unallocated reserve
balance of $763,377 was $50,425 higher than the January 31, 1999 unallocated
reserve balance of $712,952, and (c) the declared distribution of $0.10 per Unit
of Beneficial Interest in total was $262,400 larger during the six months ended
July 31, 2000 than the declared distribution of $0.08 per Unit of Beneficial
Interest during the six months ended July 31, 1999. 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.
9
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ROYALTY COMPARISONS
The following chart summarizes Mesabi Trust's royalty income for the
six months ended July 31, 2000 and July 31, 1999, respectively:
<TABLE>
<CAPTION>
Six months Ended July 31,
2000 1999
---- ----
<S> <C> <C>
Base overriding royalties $ 1,816,287 $1,395,597
Bonus royalties 0 0
Minimum advance
royalty paid (recouped) 0 0
Fee royalties 163,379 166,448
------------ ------------
Total royalty income $ 1,979,666 $1,562,045
============ ==========
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
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.
(a) Exhibits.
--------
Exhibit
Number Description
------ -----------
27. Financial Data Schedule
10
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(b) REPORTS ON FORM 8-K
On August 1, 2000, Mesabi Trust filed a Current Report on Form
8-K to announce the engagement of Eide Bailly LLP to act as
Mesabi Trust's independent certified public accountants for
their fiscal year ending January 31, 2001.
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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, 2000 By: /s/ Daniel M. Chipko
----------------------------------------------
Name: Daniel M. Chipko
Title: Associate
* There are no directors
or executive officers of
the registrant.
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EXHIBIT INDEX
Item No. Description
------- -----------
27.1 Financial Data Schedule.......................Filed herewith.
13