EX-13 5 grnorth030860_ex13.txt ANNUAL REPORT Exhibit 13 -- Annual Report to Certificate Holders GREAT NORTHERN IRON ORE PROPERTIES ------------------------ NINETY-SIXTH ANNUAL REPORT OF THE TRUSTEES TO CERTIFICATE HOLDERS FOR YEAR ENDED DECEMBER 31, 2002 GREAT NORTHERN IRON ORE PROPERTIES W-1290 First National Bank Building 332 Minnesota Street Saint Paul, Minnesota 55101-1361 (651) 224-2385 Fax (651) 224-2387 ---------------- TRUSTEES OFFICERS JOSEPH S. MICALLEF JOSEPH S. MICALLEF President of the Trustees Chief Executive Officer ROGER W. STAEHLE* THOMAS A. JANOCHOSKI Adjunct Professor Vice President and Secretary University of Minnesota Chief Financial Officer ROBERT A. STEIN* ROGER P. JOHNSON Executive Director Manager of Mines American Bar Association Chief Engineer JOHN H. ROE, III* Chairman of the Board Bemis Company, Inc. *Audit Committee ---------------- SHAREHOLDER RELATIONS DEPARTMENT, TRANSFER OFFICE AND REGISTRAR Wells Fargo Shareowner Services P.O. Box 64854 Saint Paul, Minnesota 55164-0854 Toll-free: 1-800-468-9716 MESABI IRON RANGE OFFICE 801 East Howard Street Hibbing, Minnesota 55746-0429 (218) 262-3886 Fax (218) 262-4295 GREAT NORTHERN IRON ORE PROPERTIES SUMMARY OF OPERATIONS
YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------- ------------- ------------- ------------- Shipments from our mines (tons) ............. 7,094,446 5,677,672 6,942,539 6,133,576 6,384,226 Royalty income .............................. $ 9,141,886 $ 9,810,504 $11,772,582 $10,427,611 $11,234,050 Other income ................................ 443,763 590,286 577,825 498,602 548,707 Net income .................................. 7,661,762 8,646,878 10,790,588 9,353,593 10,152,100 Total assets ................................ 16,873,663 17,455,283 18,995,305 17,206,835 17,341,024 Average shares outstanding .................. 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Earnings per share, based on weighted-average shares outstanding during the year ......... $ 5.11 $ 5.76 $ 7.19 $ 6.24 $ 6.77 Declared distributions per share ............ $ 5.40(1) $ 6.00(2) $ 6.80(3) $ 6.10(4) $ 6.30(5)
---------------- (1) $1.10 pd 4/30/02; $1.40 pd 7/31/02; $1.40 pd 10/31/02; $1.50 pd 1/31/03 (2) $1.40 pd 4/30/01; $1.50 pd 7/31/01; $1.50 pd 10/31/01; $1.60 pd 1/31/02 (3) $1.10 pd 4/28/00; $1.50 pd 7/31/00; $1.80 pd 10/31/00; $2.40 pd 1/31/01 (4) $1.40 pd 4/30/99; $1.50 pd 7/30/99; $1.60 pd 10/29/99; $1.60 pd 1/31/00 (5) $1.20 pd 4/30/98; $1.50 pd 7/31/98; $1.80 pd 10/30/98; $1.80 pd 1/29/99 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: "Royalty income" for 2002 was less than that of 2001 primarily due to credit for previously paid minimum royalties being applied to taconite production in 2002. "Royalty income" for 2001 was less than that of 2000 primarily due to decreased taconite production from Trust lands. "Other income" for 2002 was less than that of 2001 mainly due to a reduced yield on our funds held for investment. "Other income" for 2001 was slightly more than that of 2000 mainly due to improved investment income, offset in part by reduced timber revenues received. Please refer to Note A of the Financial Statements, which provides general information about Great Northern Iron Ore Properties. Liquidity: In the interest of preservation of principal of Court-approved reserves and guided by the restrictive provisions of Section 646 of the Tax Reform Act of 1986, as amended, monies are invested primarily in United States Treasury securities with maturity dates not to exceed three years and, along with cash flows from operations, are deemed adequate to meet currently foreseeable liquidity needs. 2 To Certificate Holders: The Trustees of Great Northern Iron Ore Properties ("Trust") own fee title to certain mineral and nonmineral lands situated on the Mesabi Iron Range of Minnesota. Many of these properties are leased to companies that mine the ores. The Trust has no subsidiaries. During 2002, the major source of income to the Trust was royalty derived from taconite production and minimum royalties. Certain leases provide the mining companies the ability to offset excess royalties due on future production, if any and when mined, against minimum royalties paid in prior periods. Accumulated minimum royalties amounted to $5,508,228 on December 31, 2002. Although production from Trust lands increased over last year, credit for previously paid minimum royalties applied on current year taconite production caused a reduction in royalty income. A Summary of Shipments is tabulated on the last page of this report. The Trustees declared four quarterly distributions in 2002 totaling $5.40 per share. The first, in the amount of $1.10 per share, was paid on April 30, 2002 to certificate holders of record on March 28, 2002; the second, in the amount of $1.40 per share, was paid on July 31, 2002 to certificate holders of record on June 28, 2002; the third, in the amount of $1.40 per share, was paid on October 31, 2002 to certificate holders of record on September 30, 2002; and the fourth, in the amount of $1.50 per share, was paid on January 31, 2003 to certificate holders of record on December 31, 2002. The Trustees declared four quarterly distributions in 2001 totaling $6.00 per share. The first, in the amount of $1.40 per share, was paid on April 30, 2001 to certificate holders of record on March 30, 2001; the second, in the amount of $1.50 per share, was paid on July 31, 2001 to certificate holders of record on June 29, 2001; the third, in the amount of $1.50 per share, was paid on October 31, 2001 to certificate holders of record on September 28, 2001; and the fourth, in the amount of $1.60 per share, was paid on January 31, 2002 to certificate holders of record on December 31, 2001. The Trustees intend to continue quarterly distributions and set the record date as of the last business day of each quarter. The next distribution will be paid in late April 2003 to certificate holders of record on March 31, 2003. Shares of beneficial interest in the Trust are traded on the New York Stock Exchange under the ticker symbol "GNI." There were 1,867 certificate holders of record on December 31, 2002. The high and low prices for the quarterly periods commencing January 1, 2001 through December 31, 2002 were as follows: 2002 2001 ------------------------- ------------------------- QUARTER HIGH LOW HIGH LOW ---------------- ----------- ----------- ----------- ----------- First .......... $ 75.10 $ 59.00 $ 68.65 $ 53.75 Second ......... 67.00 59.10 69.75 56.65 Third .......... 67.00 54.50 77.00 61.00 Fourth ......... 67.00 54.35 77.00 66.35 3 The following is a summary of quarterly results of operations (unaudited) for the years ended December 31, 2002 and 2001 (in thousands of dollars, except per share amounts):
QUARTER ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ----------- ---------- ----------- 2002 Royalty income .................... $ 1,567 $ 2,691 $ 1,983 $ 2,901 Interest and other income ......... 153 101 95 95 ------- ------- ------- ------- Gross income ...................... 1,720 2,792 2,078 2,996 Expenses .......................... 490 457 471 506 ------- ------- ------- ------- Net income ........................ $ 1,230 $ 2,335 $ 1,607 $ 2,490 ======= ======= ======= ======= Earnings per share ................ $ .82 $ 1.56 $ 1.07 $ 1.66 ======= ======= ======= ======= 2001 Royalty income .................... $ 1,930 $ 3,177 $ 2,097 $ 2,607 Interest and other income ......... 157 144 145 144 ------- ------- ------- ------- Gross income ...................... 2,087 3,321 2,242 2,751 Expense ........................... 453 439 421 441 ------- ------- ------- ------- Net income ........................ $ 1,634 $ 2,882 $ 1,821 $ 2,310 ======= ======= ======= ======= Earnings per share ................ $ 1.09 $ 1.92 $ 1.21 $ 1.54 ======= ======= ======= =======
The terms of the Great Northern Iron Ore Properties Trust Agreement, created December 7, 1906, state that the Trust shall continue for twenty years after the death of the last surviving of eighteen named in the Trust Agreement. The last survivor of these eighteen named in the Trust Agreement died April 6, 1995. According to the terms of the Trust Agreement, the Trust now terminates twenty years from April 6, 1995, that being April 6, 2015. The termination of the Trust on April 6, 2015 means that there will be no trading of the Trust's 1,500,000 certificates of beneficial interest (shares) on the New York Stock Exchange beyond that date. At the end of the Trust, all monies remaining in the hands of the Trustees (after paying and providing for all expenses and obligations of the Trust) shall be distributed ratably among the certificate holders (term beneficiaries), while all property other than monies shall be conveyed and transferred to the reversionary beneficiary (formerly Lake Superior Company, Limited), or its successors or assigns (Glacier Park Company, a wholly owned subsidiary of Burlington Resources, Inc.). In addition, by the terms of a District Court Order dated November 29, 1982, the reversioner, in effect, is required to pay the balance in the Principal Charges account (as explained in Note D of the Financial Statements) which primarily represents the costs of acquiring homes and land parcels on the iron formation that are necessary for the orderly mine development by United States Steel Corporation under its 1959 lease with the Trustees. This account balance, which may increase or decrease, will be added to the cash distributable to the certificate holders of record at the termination of the Trust. As previously reported, Section 646 of the Tax Reform Act of 1986, as amended, provided a special elective provision under which the Trust was allowed 4 to convert from taxation as a corporation to that of a grantor trust. Pursuant to an Order of the Ramsey County District Court, the Trustees filed the Section 646 election with the Internal Revenue Service on December 30, 1988. For years 1989 and thereafter, certificate holders are taxed on their allocable share of the Trust's income whether or not the income is distributed. A Tax Return Guide was mailed in January 2003 to all "record date" certificate holders shown on our stock transfer agent's records during 2002. This guide was intended to assist the investor in addressing many of the issues that arise in reporting the Trust operations for federal and state income tax purposes due to Section 646. We will, upon request, be happy to furnish certificate holders an Annual Report on Form 10-K and a Tax Return Guide for any recent year. Respectfully submitted, Joseph S. Micallef Roger W. Staehle Robert A. Stein John H. Roe, III Saint Paul, Minnesota March 14, 2003 5 GREAT NORTHERN IRON ORE PROPERTIES STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 ---------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- REVENUES Royalties ............................... $ 9,141,886 $ 9,810,504 $11,772,582 Interest earned ......................... 353,874 518,446 476,333 Rent and other .......................... 89,889 71,840 101,492 ----------- ----------- ----------- 9,585,649 10,400,790 12,350,407 EXPENSES Royalties ............................... 4,623 4,623 4,623 Real estate and payroll taxes ........... 124,899 136,828 122,290 Inspection and care of property ......... 466,323 411,483 390,439 Administrative and general .............. 1,083,429 956,948 809,224 Provision for depreciation and amortization ........................... 244,613 244,030 233,243 ----------- ----------- ----------- 1,923,887 1,753,912 1,559,819 ----------- ----------- ----------- NET INCOME ................................ $ 7,661,762 $ 8,646,878 $10,790,588 =========== =========== =========== EARNINGS PER SHARE ........................ $ 5.11 $ 5.76 $ 7.19 =========== =========== ===========
STATEMENTS OF BENEFICIARIES' EQUITY
YEAR ENDED DECEMBER 31 ----------------------------------------------- 2002 2001 2000 ------------ ----------- ----------- Balance at beginning of year .............. $14,962,627 $15,315,749 $14,725,161 Net income for the year ................... 7,661,762 8,646,878 10,790,588 ------------ ----------- ----------- 22,624,389 23,962,627 25,515,749 Deduct declaration of distributions on shares of beneficial interest, per share: 2002 -- $5.40; 2001 -- $6.00; 2000 -- $6.80 ............................ 8,100,000 9,000,000 10,200,000 ------------ ----------- ----------- Balance at end of year .................... $14,524,389 $14,962,627 $15,315,749 ============ =========== ===========
See accompanying notes. 6 GREAT NORTHERN IRON ORE PROPERTIES BALANCE SHEETS ASSETS
DECEMBER 31 ---------------------------- 2002 2001 ----------- ----------- CURRENT ASSETS Cash and cash equivalents .............................. $ 663,230 $ 759,281 United States Treasury securities (NOTE B) ............. 4,242,067 4,344,646 Royalties receivable ................................... 2,635,883 2,308,941 Prepaid expenses ....................................... 2,760 2,760 ----------- ----------- TOTAL CURRENT ASSETS ..................................... 7,543,940 7,415,628 NONCURRENT ASSETS United States Treasury securities (NOTE B) ............. 3,760,674 4,278,541 Prepaid pension expense (NOTE E) ....................... 708,207 701,473 ----------- ----------- 4,468,881 4,980,014 PROPERTIES Mineral lands (NOTES B AND C) .......................... 38,577,007 38,577,007 Less allowances for depletion and amortization ......... 33,873,565 33,665,365 ----------- ----------- 4,703,442 4,911,642 Building and equipment -- at cost, less allowances for accumulated depreciation (2002 -- $197,020; 2001 -- $190,784) .................. 157,400 147,999 ----------- ----------- 4,860,842 5,059,641 ----------- ----------- $16,873,663 $17,455,283 =========== =========== LIABILITIES AND BENEFICIARIES' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses .................. $ 85,574 $ 89,556 Distributions .......................................... 2,250,000 2,400,000 ----------- ----------- TOTAL CURRENT LIABILITIES ................................ 2,335,574 2,489,556 NONCURRENT LIABILITIES ................................... 13,700 3,100 BENEFICIARIES' EQUITY, including certificate holders' equity, represented by 1,500,000 shares of beneficial interest authorized and outstanding, and reversionary interest (NOTES A AND D) ................... 14,524,389 14,962,627 ----------- ----------- $16,873,663 $17,455,283 =========== ===========
See accompanying notes. 7 GREAT NORTHERN IRON ORE PROPERTIES STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------------------- 2002 2001 2000 ------------ ------------- ------------ OPERATING ACTIVITIES Cash received from royalties and rents .............. $ 8,904,833 $ 10,731,058 $ 11,146,281 Cash paid to suppliers and employees ................ (1,679,390) (1,614,403) (1,479,149) Interest received ................................... 399,320 542,970 455,519 ------------ ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. 7,624,763 9,659,625 10,122,651 INVESTING ACTIVITIES United States Treasury securities purchased ......... (3,725,000) (5,384,625) (5,268,478) United States Treasury securities matured ........... 4,300,000 6,228,103 4,350,000 Net expenditures for equipment ...................... (45,814) (19,663) (93,174) ------------ ------------- ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ............................. 529,186 823,815 (1,011,652) FINANCING ACTIVITIES Distributions paid .................................. (8,250,000) (10,200,000) (9,000,000) ------------ ------------- ------------ NET CASH USED IN FINANCING ACTIVITIES ............................. (8,250,000) (10,200,000) (9,000,000) ------------ ------------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................... (96,051) 283,440 110,999 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................... 759,281 475,841 364,842 ------------ ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR ..................................... $ 663,230 $ 759,281 $ 475,841 ============ ============= ============ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income .......................................... $ 7,661,762 $ 8,646,878 $ 10,790,588 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................... 244,613 244,030 233,243 Net decrease (increase) in assets: Accrued interest ................................ 45,446 24,524 (20,814) Royalties receivable ............................ (326,942) 848,714 (588,632) Prepaid expenses ................................ (6,734) (117,621) (150,455) Surface lands ................................... -- -- (139,161) Net increase (decrease) in liabilities: Accrued liabilities ............................. 6,618 13,100 (2,118) ------------ ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ $ 7,624,763 $ 9,659,625 $ 10,122,651 ============ ============= ============
See accompanying notes. 8 GREAT NORTHERN IRON ORE PROPERTIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 NOTE A - BUSINESS AND TERMINATION OF THE TRUST AND LEGAL PROCEEDINGS Great Northern Iron Ore Properties ("Trust") is presently involved solely with the leasing and maintenance of mineral lands owned by the Trust on the Mesabi Iron Range of Minnesota. Royalty income is derived from taconite production and minimums. Royalty income (which is not in direct ratio to tonnage shipped) from two significant operating lessees was as follows: 2002 -- $5,614,000 and $3,398,000; 2001 -- $6,422,000 and $3,157,000; and 2000 -- $6,327,000 and $4,890,000. The terms of the Great Northern Iron Ore Properties Trust Agreement, created December 7, 1906, state that the Trust shall continue for twenty years after the death of the last surviving of eighteen named in the Trust Agreement. The last survivor of these eighteen named in the Trust Agreement died April 6, 1995. According to the terms of the Trust Agreement, the Trust now terminates twenty years from April 6, 1995, that being April 6, 2015. The termination of the Trust on April 6, 2015 means that there will be no trading of the Trust's 1,500,000 certificates of beneficial interest (shares) on the New York Stock Exchange beyond that date. At the end of the Trust, all monies remaining in the hands of the Trustees (after paying and providing for all expenses and obligations of the Trust) shall be distributed ratably among the certificate holders (term beneficiaries), while all property other than monies shall be conveyed and transferred to the reversionary beneficiary (formerly Lake Superior Company, Limited), or its successors or assigns (Glacier Park Company, a wholly owned subsidiary of Burlington Resources, Inc.). In addition, by the terms of a District Court Order dated November 29, 1982, the reversioner, in effect, is required to pay the balance in the Principal Charges account (see Note D) which primarily represents the costs of acquiring homes and land parcels on the iron formation that are necessary for the orderly mine development by United States Steel Corporation under its 1959 lease with the Trustees. This account balance, which may increase or decrease, will be added to the cash distributable to the certificate holders of record at the termination of the Trust. In proceedings commenced in 1972, the Minnesota Supreme Court determined that while by the terms of the Trust, the Trustees are given discretionary powers to convert Trust assets to cash and to distribute the proceeds to certificate holders, they are limited in their exercise of those powers by the legal duty imposed by well-established law of trusts to serve the interests of both term beneficiaries and the reversionary beneficiary with impartiality. Thus, the Trustees have no duty to exercise the powers of sale and distribution unless required to do so to serve both 9 NOTE A - BUSINESS AND TERMINATION OF THE TRUST AND LEGAL PROCEEDINGS (CONTINUED) term and reversionary interests; and, if the need arises, the Trustees may petition the District Court of Ramsey County, Minnesota, for further instructions defining what is required in a particular case to balance the interests of certificate holders and reversioner. Also, the Court, in effect, held that the Trust is a conventional trust, rather than a business trust, and must operate within the framework of well-established trust law. By a letter dated April 1, 2002, certificate holders of record as of March 1, 2002 and the reversioner were notified of a Hearing on May 1, 2002 in Ramsey County Courthouse, Saint Paul, Minnesota, for the purpose of settling and allowing the Trust accounts for the year 2001. By Court Order signed and dated May 1, 2002, the 2001 accounts were settled and allowed in all respects. By previous Orders, the Court settled and allowed the accounts of the Trustees for preceding years of the Trust. As previously reported, Section 646 of the Tax Reform Act of 1986, as amended, provided a special elective provision under which the Trust was allowed to convert from taxation as a corporation to that of a grantor trust. Pursuant to an Order of the Ramsey County District Court, the Trustees filed the Section 646 election with the Internal Revenue Service on December 30, 1988. On January 1, 1989, the Trust became exempt from federal and Minnesota corporate income taxes. For years 1989 and thereafter, certificate holders are taxed on their allocable share of the Trust's income whether or not the income is distributed. For certificate holder tax purposes, the Trust's income is determined on an annual basis, one-fourth then being allocated to each quarterly record date. The Trustees provided annual income tax information in January 2003 to certificate holders of record with holdings on any of the four quarterly record dates during 2002. This information included a: SUBSTITUTE FORM 1099-MISC -- This form reported one's 2002 allocable share of income from the Trust, distributions declared and any taxes withheld. (Foreign certificate holders received a Form 1042S.) TRUST SUPPLEMENTAL STATEMENT -- This statement reported the number of units (shares) held on any of the four quarterly record dates in 2002. TAX RETURN GUIDE -- This guide instructed the certificate holders as to the preparation of their income tax returns with respect to income allocated from the Trust and various deductions allowable. 10 NOTE B - SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, the Trust considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. SECURITIES: United States Treasury securities are classified as "held-to-maturity" securities and are carried at cost, adjusted for accrued interest and amortization of premium or discount. Securities listed as noncurrent assets will mature in 2004. Following is an analysis of the securities as of December 31:
CURRENT NONCURRENT -------------------------- -------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Aggregate fair value ......... $4,233,297 $4,394,750 $3,798,859 $4,286,086 Gross unrealized holding gains ....................... (41,928) (92,021) (57,196) (66,177) Gross unrealized holding losses ...................... -- -- -- 7,934 ---------- ---------- ---------- ---------- Amortized cost basis ......... 4,191,369 4,302,729 3,741,663 4,227,843 Accrued interest ............. 50,698 41,917 19,011 50,698 ---------- ---------- ---------- ---------- $4,242,067 $4,344,646 $3,760,674 $4,278,541 ========== ========== ========== ==========
MINERAL LANDS: Mineral lands, including surface lands, are carried at amounts which represent, principally, either cost at acquisition or values on March 1, 1913. The value of the merchantable ore deposits was established on March 1, 1913 for federal income tax purposes. No value has been estimated or recorded for taconite deposits held on March 1, 1913 since they were not then thought to be merchantable. The cost of surface lands acquired to facilitate mining operations was amortized (noncash expense) in the amounts of $208,200, $208,200 and $198,444 for the years 2002, 2001 and 2000, respectively (see Note C). ROYALTY INCOME: Royalties from mineral leases (with cancellation terms varying from six months to one year) are taken into income as earned. Certain leases provide the mining companies the ability to offset excess royalties due on future production, if any and when mined, against minimum royalties paid in prior periods. Accumulated minimum royalties amounted to $5,508,228 on December 31, 2002 and $6,116,215 on December 31, 2001. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EARNINGS PER SHARE: Earnings per share is determined by dividing net income for the period by the number of weighted-average shares of beneficial 11 NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) interest outstanding. Weighted-average shares outstanding were 1,500,000 as of December 31, 2002, 2001 and 2000. Basic and diluted earnings per share are the same. NOTE C - LAND ACQUISITION A mining agreement dated January 1, 1959 with United States Steel Corporation provides that one-half of annual earned royalty income, after satisfaction of minimum royalty payments, shall be applied to reimburse the lessee for its cost of acquisition of surface lands overlying the leased mineral deposits, which surface lands are then conveyed to the Trustees (see Note B). There are surface lands yet to be purchased, the costs of which are yet unknown and will not be known until the actual purchases are made. NOTE D - PRINCIPAL CHARGES ACCOUNT Pursuant to the Court Order of November 29, 1982, the Trustees were directed to create and maintain an account designated as "Principal Charges." This account constitutes a first and prior lien between the certificate holders and the reversioner, and reflects an allocation of beneficiaries' equity between the certificate holders and the reversioner. The balance in this account consists of attorneys' fees and expenses of counsel for adverse parties pursuant to the Court Order in connection with litigation commenced in 1972 relating to the Trustees' powers and duties under the Trust Instrument and the cost of surface lands acquired in accordance with provisions of a lease with United States Steel Corporation, net of an allowance to amortize the cost of the land based on actual shipments of taconite and net of a credit for disposition of tangible assets. Following is an analysis of this account as of December 31: 2002 2001 ---------- ---------- Attorneys' fees and expenses .......... $1,024,834 $1,024,834 Cost of surface lands ................. 5,703,265 5,703,265 Cumulative shipment credits ........... (1,032,462) (940,354) Asset disposition credits ............. (20,106) (20,106) ---------- ---------- Principal Charges account ............. $5,675,531 $5,767,639 ========== ========== Upon termination of the Trust, the Trustees shall either sell tangible assets or obtain a loan with tangible assets as security to provide monies for distribution to the certificate holders in the amount of the Principal Charges account balance. 12 NOTE E - PENSION PLAN The Trust has a noncontributory defined benefit plan which covers all employees. The Trustees are not eligible for pension benefits under the plan based on services as Trustees. A summary of the components of net periodic pension cost (benefit), a noncash item, for 2002, 2001 and 2000 is as follows:
2002 2001 2000 -------- --------- --------- Service cost. ...................... $ 68,225 $ 60,327 $ 58,977 Interest cost ...................... 200,623 199,131 206,767 Expected return on assets .......... (302,688) (331,298) (350,238) Net amortization ................... 27,106 (45,781) (65,961) -------- --------- --------- Net pension benefit ................ $ (6,734) $(117,621) $(150,455) ======== ========= =========
Weighted-average assumptions used in the measurement of the benefit obligation as of December 31 were:
2002 2001 ---------- ---------- Discount rate ........................... 6.50% 7.25% Rate of compensation increase ........... 3.50% 3.50% Expected return on plan assets .......... 8.00% 8.00%
The following table sets forth the change in benefit obligation:
2002 2001 ---------- ---------- Obligation at January 1 ............ $2,885,049 $2,769,265 Service cost ....................... 68,225 60,327 Interest cost ...................... 200,623 199,131 Actuarial loss ..................... 499,972 101,831 Benefit payments ................... (245,984) (245,505) ---------- ---------- Obligation at December 31 .......... $3,407,885 $2,885,049 ========== ==========
The following table sets forth the change in the fair value of plan assets:
2002 2001 ---------- ---------- Fair value of plan assets at January l ............ $3,901,435 $4,255,408 Actual loss on plan assets ........................ (282,673) (108,468) Benefit payments .................................. (245,984) (245,505) ---------- ---------- Fair value of plan assets at December 31 .......... $3,372,778 $3,901,435 ========== ==========
13 NOTE E - PENSION PLAN (CONTINUED) The following table sets forth the plan's funded status and amounts recognized in the balance sheets at December 31:
2002 2001 ---------- ---------- Benefit obligation ....................... $3,407,885 $2,885,049 Fair value of plan assets ................ 3,372,778 3,901,435 ---------- ---------- Plan assets (less than) in excess of benefit obligation ...................... (35,107) 1,016,386 Unrecognized net loss (gain) ............. 726,041 (359,292) Unrecognized prior service cost .......... 17,273 44,379 ---------- ---------- Prepaid pension expense. ................. $ 708,207 $ 701,473 ========== ==========
NOTE F - INCOME TAXES The Trustees filed an election under Section 646 of the Tax Reform Act of 1986, as amended. As discussed in Note A, beginning in 1989 the Trust is no longer subject to federal or Minnesota corporate income taxes provided the requirements of Section 646 are met. The principal requirements are: The Trust must be exclusively engaged in the leasing of mineral properties and activities incidental thereto. The Trust must not acquire any additional property other than permissible acquisitions as provided by Section 646. If these requirements are violated, the Trust will be treated as a corporation for the taxable year in which the violation occurs and for all subsequent taxable years. Since the election of Section 646, the Trust has remained in compliance with these requirements. NOTE G - LEASE COMMITMENTS The Trust leases office facilities in Saint Paul, Minnesota. These leases include various renewal options and exclude any contingent rental provisions. Rental expense for these operating leases amounted to $61,823, $60,455 and $60,771 for the years 2002, 2001 and 2000, respectively. 14 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Trustees Great Northern Iron Ore Properties We have audited the accompanying balance sheets of Great Northern Iron Ore Properties as of December 31, 2002 and 2001, and the related statements of beneficiaries' equity, income and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Great Northern Iron Ore Properties at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota January 31, 2003 15 GREAT NORTHERN IRON ORE PROPERTIES SUMMARY OF SHIPMENTS
FULL TONS SHIPPED -------------------------------------------------- TOTAL TO OWNERSHIP JANUARY 1, NO. MINE INTEREST 2002 2001 2000 2003 ------ ------------------------- ----------- ----------- ----------- ----------- -------------- 1. Mahoning ................ 100% 1,358,481 1,065,096 2,101,371 154,298,373 2. Ontario 100% ............ 100% 10,927 9,660 -- 8,748,234 3. Ontario 50% ............. 50% 1,840,736 213,075 353,310 17,847,163 4. Section 18 .............. 100% -- 302 5,790 27,917,849 5. Russell Annex ........... 50% 9,924 134,432 477,678 3,557,057 6. Mississippi #3 .......... 100% 82,429 2,724 -- 3,829,564 7. Wentworth ............... 100% -- -- 34,721 6,505,859 8. Minntac ................. 100% 3,791,949 4,252,383 3,969,669 42,505,636 --------- --------- --------- ----------- 7,094,446 5,677,672 6,942,539 265,209,735 Shipments from inactive mines and those exhausted, surrendered or sold prior to this year ............... -- -- -- 354,802,196 --------- --------- --------- ----------- TOTAL .................. 7,094,446 5,677,672 6,942,539 620,011,931 ========= ========= ========= ===========
NO. OPERATING INTEREST ----- -------------------------------------------------------- 1-3 Hibbing Taconite Company 4-6 National Steel Corporation 7 Cleveland Cliffs Erie LLC 8 United States Steel LLC 16 GREAT NORTHERN IRON ORE PROPERTIES W-1290 FIRST NATIONAL BANK BUILDING 332 MINNESOTA STREET SAINT PAUL, MINNESOTA 55101-1361 FIRST CLASS U.S. POSTAGE PAID PERMIT #43 MINNEAPOLIS, MN FIRST CLASS MAIL