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 April 30, 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 June 12, 1998, there were 13,120,010 Units of Beneficial Interest in
Mesabi Trust outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (NOTE 1)
THREE MONTHS ENDED
APRIL 30,
------------------------------------
1998 1997
----------- -----------
A. Condensed Statements of Income
Revenues:
Royalty income $ 484,259 $ 238,850
Interest income 15,192 10,895
----------- -----------
$ 499,451 $ 249,745
Expenses 69,718 65,698
----------- -----------
Net income $ 429,733 $ 184,047
----------- -----------
----------- -----------
Weighted average number
of units outstanding 13,120,010 13,120,010
Net income per unit (Note 2) $ 0.032754 $ 0.014028
Distributions declared
per unit $ --- $ ---
See Notes to Financial Statements.
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B. Condensed Balance Sheets
Assets: April 30, 1998 January 31, 1998
-------------- ----------------
Cash $ 297,751 $3,607,221
U.S. Government securities,
at amortized cost (which approximates
market) 502,167 499,073
Accrued income 400,643 176,641
Prepaid insurance 1,772 3,820
---------- ----------
$1,202,333 $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
---------- ----------
$1,202,336 $4,286,758
---------- ----------
---------- ----------
Liabilities, Unallocated
Reserve and Trust Corpus:
Liabilities:
Distribution payable $ --- $3,476,803
Accrued expenses 52,801 90,153
---------- ----------
$ 52,801 $3,566,956
Unallocated reserve (Note 3) 1,149,532 719,799
Trust Corpus 3 3
---------- ----------
$1,202,336 $4,286,758
---------- ----------
---------- ----------
See Notes to Financial Statements.
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C. Condensed Statements of Cash Flows
THREE MONTHS ENDED
APRIL 30,
------------------------------
1998 1997
------------ ------------
Cash flows from operating
activities:
Royalties received $ 253,206 $ 262,154
Interest received 22,243 19,131
Expenses paid (105,022) (67,429)
----------- -----------
Net cash provided by
operating activities $ 170,427 $ 213,856
----------- -----------
Cash flows from investing
activities:
Maturities of
U.S. Government
securities $ 3,958,980 $ 2,644,878
Purchases of U.S.
Government securities (3,962,074) (859,762)
----------- -----------
Net cash provided by (used in)
investing activities $ (3,094) $ 1,785,116
----------- -----------
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 $(3,309,470) $ 96,571
Cash, beginning of year 3,607,221 918
----------- -----------
Cash, end of quarter $ 297,751 $ 97,489
----------- -----------
----------- -----------
Reconciliation of net income
to net cash provided by
operating activities:
Net income $ 429,733 $ 184,047
(Increase)/decrease in accrued
income (224,002) 31,540
Decrease in prepaid insurance 2,048 3,145
(Decrease) in
accrued expenses (37,352) (4,876)
Net cash provided by
operating activities $ 170,427 $ 213,856
----------- -----------
----------- -----------
See Notes to Financial Statements.
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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 three months ended
April 30, 1998 and 1997, (b) the financial position at April 30, 1998
and January 31, 1998, and (c) the cash flows for the three months
ended April 30, 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 April 30, 1998, the Unallocated Reserve was represented
by $748,889 in unallocated cash and U.S. Government securities, and
$400,643 of accrued revenue primarily representing royalties not yet
received by the Trust but anticipated to be received in July 1998 from
Northshore as part of the royalty due with respect to the first fiscal
quarter, based upon reported lessee shipping activity for the month of
April 1998.
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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. 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 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 bonus
royalty 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 bonus royalty 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.
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
6
winter months price fluctuations, and reduced pellet sales resulting from
adverse economic conditions affecting the steel industry generally.
In its most recently released annual report, 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
facility to produce pig iron in the United States using a coal-based process.
CCI also stated that if engineering, marketing and economic evaluations prove
positive, the plant will be located at its Northshore facility in Minnesota
presumably using Mesabi Trust ore. In the same annual report, it was stated
that a decision relative to proceeding with this project is expected to be made
around the middle of 1998. In its quarterly report on Form 10-Q for the
quarterly period ended March 31, 1998, which report was filed on May 1, 1998,
CCI stated that it and Mannesmann Demag are completing an engineering study
for such a plant, that the Company has initiated the environmental review and
permitting process with the Minnesota Pollution Control Agency and that if
the results of the engineering study are positive and other economic and
marketing issues are satisfactorily resolved, a decision whether to proceed
with the plant will likely be made in mid-1998. Finally, at its annual
meeting in May 1998, CCI reportedly confirmed that it was continuing its
evaluation and indicated that a decision would likely be arrived at during
the third quarter of the year. 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:
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
7
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 APRIL 30, 1998 AND APRIL 30, 1997
Mesabi Trust's net income increased to $429,733 for the fiscal quarter
ended April 30, 1998, as compared to net income of $184,047 for the fiscal
quarter ended April 30, 1997. Mesabi Trust's gross income for the fiscal
quarter ended April 30, 1998 was $499,451, consisting of $395,554 in minimum
advance royalty income, $88,705 in fee royalty income and $15,192 in interest
income, as compared to gross income of $249,745 consisting of $155,402 in
minimum advance royalty income, $83,448 in fee royalty income and $10,895 in
interest income, for the fiscal quarter ended April 30, 1997. The increase in
royalty income was primarily due to increased pellet shipments (increasing the
amount of fee royalty income) as compared to the comparable prior period. Mesabi
Trust's expenses for the fiscal quarter ended April 30, 1998 were $69,718,
compared to expenses of $65,698 for the fiscal quarter ended April 30, 1997.
Mesabi Trust's Unallocated Reserve aggregated $1,149,532 at April 30, 1998,
as compared with an Unallocated Reserve of $834,655 at April 30, 1997. The
increase of $314,877 was due to the net effect of: (a) the increase in net
income of 245,686 during the fiscal quarter ended April 30, 1998 as compared
with the fiscal quarter ended April 30, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
8
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.
9
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: June 15, 1998 By: /s/ Robert Caporale
-------------------------------
Name: Robert Caporale
Title: Vice President
* There are no directors
or executive officers of
the registrant.
10
EXHIBIT INDEX
Item No. Description
- -------- -----------
27.1 Financial Data Schedule....................Filed herewith.
11