10-Q 1 a2065884z10-q.txt FORM 10Q 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, 2001 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) (615) 835-2749 (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 November 30, 2001, 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 NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, 2001 2000 2001 2000 ---- ---- ---- ---- A. Condensed Statements of Income Revenues: Royalty income $1,641,090 $2,564,615 $3,146,363 $4,544,282 Interest income 12,932 13,193 37,475 31,963 ---------- --------- ---------- --------- $1,654,022 $2,577,808 $3,183,838 $4,576,245 Expenses 79,660 80,683 207,207 261,659 --------- --------- ---------- --------- Net income $1,574,362 $2,497,125 $2,976,631 $4,314,586 ========== ========== ========== ========== Number of units outstanding 13,120,010 13,120,010 13,120,010 13,120,010 Net income per unit (Note 2) $ .119997 $ .190330 $ .226877 $ .328855 Distributions declared per unit $ .105 $ .175 $ .175 $ .275
See Notes to Financial Statements. 2 B. Condensed Balance Sheets
Assets: October 31, 2001 January 31, 2001 ---------------- ---------------- Cash $1,657,996 $1,947,696 U.S. Government securities, at amortized cost (which approximates market) 721,190 505,815 Accrued income 481,568 98,893 Prepaid insurance 6,741 4,347 ---------- ---------- $2,867,495 $2,556,751 ---------- ---------- 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 ---------- ---------- $2,867,498 $2,556,754 ========== ========== Liabilities, Unallocated Reserve and Trust Corpus: Liabilities: Distribution payable $1,377,601 $1,705,601 Accrued expenses 13,347 55,232 ---------- ---------- $1,390,948 $1,760,833 Unallocated reserve (Note 3) 1,476,547 795,918 Trust Corpus 3 3 ---------- ---------- $2,867,498 $2,556,754 ========== ==========
See Notes to Financial Statements. 3 C. Condensed Statements of Cash Flows
NINE MONTHS ENDED OCTOBER 31, -------------------------------------------- 2001 2000 ---- ---- Cash flows from operating activities: Royalties received $ 2,758,672 $ 3,904,874 Interest received 42,491 39,307 Expenses paid (251,486) (315,506) ------------- ------------- Net cash provided by Operating activities $ 2,549,677 $ 3,628,675 ------------- ------------- Cash flows from investing activities: Maturities of U.S. Government Securities $ 3,410,580 $ 4,419,967 Purchases of U.S. Government securities (3,625,955) (4,410,195) ------------- ------------- Net cash (used for) provided by investing activities $ (215,375) $ 9,772 ------------- ------------- Cash flows from financing activities: Net cash (used in) financing activities, distributions to Unitholders $ (2,624,002) $ (3,673,603) ------------- ------------- Net (decrease) increase in cash $ (289,700) $ (35,156) Cash, beginning of year 1,947,696 51,082 ------------- ------------- Cash, end of quarter $ 1,657,996 $ 15,926 ============= ============= Reconciliation of net income to net cash provided by operating activities: Net income $ 2,970,106 $ 4,314,586 (Increase) in accrued income (382,675) (632,064) Decrease in prepaid insurance (2,394) (1,966) (Decrease) in accrued expenses (35,360) (51,881) ------------- ------------- Net cash provided by operating activities $ 2,549,677 $ 3,628,675 ============= =============
See Notes to Financial Statements. 4 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, 2001) 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 nine months ended October 31, 2001 and 2000, (b) the financial positions at October 31, 2001 and January 31, 2001, and (c) the cash flows for the nine months ended October 31, 2001 and 2000, 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 have determined to maintain an Unallocated Reserve of at least $850,000 in liquid assets. The amount of the Unallocated Reserve has been increased over this past calendar year reflecting concern over the general decline and uncertainties in the steel and iron ore industry. The actual amount of such Unallocated Reserve may vary from quarter to quarter depending upon conditions in the industry and the judgment of the Trustees. The Unallocated Reserve consists of these liquid assets and accrued revenue (primarily royalties not yet received). At October 31, 2001, the Unallocated Reserve was represented by $994,979 in unallocated cash and U.S. Government securities, and $481,568 of accrued revenue primarily representing royalties not yet received by the Trust but anticipated to be received in January 2002 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 October 2001. 5 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 2001 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: 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. 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 the 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 $38.22 for calendar year 1999, $38.82 for calendar year 2000 and is $39.82 for calendar year 2001. 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 inflation and deflation (but not below $500,000 per annum). Advance royalties payable were $637,044 for calendar year 1999, were $647,282 for calendar year 2000 and are $663,682 for calendar year 2001. 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. CURRENT DEVELOPMENTS Earlier this year, CCI made several announcements of reductions in iron ore pellet production at the Northshore's pellet plant at Silver Bay, Minnesota, which processes iron ore produced at Mesabi Trust's Peter Mitchell Mine. Most recently, on November 7, 2001, Northshore announced that a previously scheduled eight-week curtailment in pellet production would be extended one additional week, and that Northshore operations are expected to resume on December 15, 2001. These production curtailments have resulted in a revised estimate of iron ore pellet production for the current year at the Northshore plant of approximately 2.8 million tons. As reasons for each production cutback, CCI or Northshore cited the impact on their customers of perceived unfairly traded imports and the general deterioration in overall steel demand in North America. No forecast of the volume of shipments of iron ore pellets for 2001 was provided. On November 14, 2001, CCI announced that it entered into a Memorandum of Understanding with Mesabi Nugget LLC and other parties to participate in the Mesabi Nugget Project. Final agreement on the project is anticipated by CCI to be reached by the end of January 2002. The project's objective is to develop a new iron making technology (Kobe Steel's ITmk3 process) for converting iron ore into nearly pure iron nugget form. The project's initial phase is currently in progress. It includes permitting and preliminary engineering for a pilot demonstration plant, development of project agreements, and due diligence reviews by the project participants. If phase one is successful, CCI indicated it will consider a second phase, which includes hosting a pilot plant at NorthShore's facility in Silver Bay in order to test and develop the process for commercial application and collection of data for environmental review. Although Mesabi Trust is not a direct party to this project and its involvement in this project was not solicited, it appears that the project will involve the use of iron ore from the Mesabi Trust lands. CCI indicated that iron nuggets from this new process would be used as an alternative or supplement to pig iron in the steel making process. Based on the information available to the Mesabi Trustees at this time, the Trustees are not able to appropriately project the impact on royalties that would be received by the 7 Mesabi Trust in the future, even if the iron nugget project successfully achieves commercialization. CCI has not reported any update on its several years old announcement that it was evaluating whether to build a facility at NorthShore's Silver Bay location to produce premium grade pig iron through a direct reduced iron process. 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 specifically prohibits the Trustees from entering into or engaging in any business. This prohibition seemingly 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, 8 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 99.8%, 98.9%, 99.3%, 98.3% and 98.4% in calendar years 2000, 1999, 1998, 1997 and 1996, respectively. 5. UNCERTAINTY OF MARKET CONDITIONS IN THE STEEL AND IRON ORE INDUSTRY. After a modest improvement in the first half of 2000, North American steel industry fundamentals deteriorated significantly in the second half of the year. Weak steel demand, steel industry consolidation and price decreases attributable to slowing economies in the United States and Canada, high volumes of steel imports, and significantly rising energy costs have caused crisis conditions and uncertainty in the North American steel and iron ore industry. Such current conditions in the steel and iron ore industry are having an adverse impact on the royalties that are being paid to the Trust during 2001 and will possibly impact royalties during subsequent periods. COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 2001 AND OCTOBER 31, 2000 Mesabi Trust's net income decreased to $1,574,362 for the three months ended October 31, 2001, as compared to net income of $2,497,125 for the three months ended October 31, 2000. Mesabi Trust's gross income for the three months ended October 31, 2001 was $1,654,022, consisting of $0 in minimum advance royalty income, $1,587,277 in overriding royalty income, $53,813 in fee royalty income and $12,932 in interest income, as compared to gross income of $2,577,808 consisting of $0 in minimum advance royalty income, $2,485,382 in overriding royalty income, $79,233 in fee royalty income and $13,193 in interest income, for the three months ended October 31, 2000. The decrease in royalty income was primarily due to decreased pellet shipments as compared to the comparable prior period. Mesabi Trust's expenses for the three months ended October 31, 2001 were $79,660, compared to expenses of $80,683 for the three months ended October 31, 2000. COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 2001 AND OCTOBER 31, 2000 Mesabi Trust's net income decreased to $2,976,631 for the nine months ended October 31, 2001, as compared to net income of $4,314,586 for the nine months ended October 31, 2000. Mesabi Trust's gross income for the nine months ended October 31, 2001 was $3,183,838, consisting of $0 in minimum advance royalty income, $2,946,624 in overriding royalty income, $199,739 in fee royalty income and $37,475 in interest income, as compared to gross income of $4,576,245 consisting of $0 in minimum advance royalty income, $4,301,670 in overriding royalty income, $242,612 in fee royalty income and $31,963 in interest income, for the nine months ended October 31, 2000. The decrease in royalty income was primarily due to decreased pellet shipments as compared to the comparable prior period. Mesabi Trust's expenses for the nine months ended October 31, 2001 were $207,207, compared to expenses of $261,659 for the nine months ended October 31, 2000. Mesabi Trust's Unallocated Reserve aggregated $1,476,547 at October 31, 2001, as compared with an Unallocated Reserve of $1,469,960 at October 31, 2000. The increase of $6,587 was due to the net effect of: (a) a decrease in the total declared distributions of $0.10 per Unit of Beneficial Interest in total was $1,312,001, from the nine month period ended October 31, 2000 to the nine month period ended October 31, 2000, (b) the January 31, 2001 unallocated reserve balance of $795,918 was $32,541 higher 9 than the January 31, 2000 unallocated reserve balance of $763,377, and (c) the decrease in net income of $1,337,955 during the nine months ended October 31, 2001 as compared with the nine months ended October 31, 2000. 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 nine months ended October 31, 2001 and October 31, 2000, respectively:
Nine months Ended October 31, 2001 2000 ---- ---- Base overriding royalties $2,946,624 $4,301,670 Bonus royalties 0 0 Minimum advance royalty paid (recouped) 0 0 Fee royalties 199,739 242,612 --------- --------- Total royalty income $3,146,363 $4,544,282 ========== ==========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. 10 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. None. (b) REPORTS ON FORM 8-K None. 11 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 14, 2001 By: /s/ Rodney Gaughan --------------------------------------- Name: Rodney Gaughan Title: Associate * There are no directors or executive officers of the registrant. 12