EX-13 3 grnorth050755_ex13.htm Exhibit 13 to Great Northern Iron Ore Properties Form 10-K dated December 31, 2004





EXHIBIT 13 – ANNUAL REPORT TO CERTIFICATE HOLDERS





GREAT NORTHERN IRON
ORE PROPERTIES





__________________________





NINETY-EIGHTH
ANNUAL REPORT OF THE TRUSTEES
TO CERTIFICATE HOLDERS





FOR
YEAR ENDED DECEMBER 31, 2004







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 Bank, N.A.
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
  
  2004
   2003
   2002
   2001
   2000
  
Shipments from our mines (tons)       9,167,200     9,772,338     7,094,446     5,677,672     6,942,539  
Royalty income     $ 14,141,775   $ 11,800,870   $ 9,141,886   $ 9,810,504   $ 11,772,582  
Other income     $ 305,623   $ 382,534   $ 443,763   $ 590,286   $ 577,825  
Net income     $ 12,242,010   $ 9,967,544   $ 7,661,762   $ 8,646,878   $ 10,790,588  
Total assets     $ 18,407,999   $ 17,413,589   $ 16,873,663   $ 17,455,283   $ 18,995,305  
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		     $ 8.16   $ 6.65   $ 5.11   $ 5.76   $ 7.19  
Declared distributions per share     $ 8.20 (1) $ 6.50 (2) $ 5.40 (3) $ 6.00 (4) $ 6.80 (5)

(1)   $1.80 pd 4/30/04; $1.90 pd 7/30/04; $2.10 pd 10/29/04; $2.40 pd 1/31/05
(2)   $1.50 pd 4/30/03; $1.60 pd 7/31/03; $1.70 pd 10/31/03; $1.70 pd 1/30/04
(3)   $1.10 pd 4/30/02; $1.40 pd 7/31/02; $1.40 pd 10/31/02; $1.50 pd 1/31/03
(4)   $1.40 pd 4/30/01; $1.50 pd 7/31/01; $1.50 pd 10/31/01; $1.60 pd 1/31/02
(5)   $1.10 pd 4/28/00; $1.50 pd 7/31/00; $1.80 pd 10/31/00; $2.40 pd 1/31/01


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Trustees’ & Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Overview:   Great Northern Iron Ore Properties (“Trust”) is a conventional nonvoting trust organized under the laws of the State of Michigan pursuant to a Trust Agreement dated December 7, 1906. The Trust owns interests in fee, both mineral and nonmineral lands, on the Mesabi Iron Range in northern Minnesota. With the properties and offices all located in Minnesota, the Trust is under the jurisdiction of the Ramsey County District Court in St. Paul, Minnesota.

The terms of the Great Northern Iron Ore Properties Trust Agreement state that the Trust shall continue for twenty years after the death of the last surviving of eighteen persons named therein. The last survivor of these eighteen named in the Trust Agreement died April 6, 1995. Accordingly, 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 (currently 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 surface lands 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.

The Trust is solely involved with the leasing and care of its properties. The management of the Trust is vested in the Trustees. The Trustees have no duty to sell property unless required to do so to serve both the term beneficiaries and reversionary beneficiary impartially; and, if the need arises, the Trustees may petition the Court for further instructions defining what is required in a particular case to balance the interests of the certificate holders and reversioner. The major source of income to the Trust is earned royalties derived from taconite production from the Trust’s properties by the Trust’s lessees (customers) and minimum royalties, pursuant to mineral leases. “Earned royalties” are based on the taconite tonnage extracted (also referred to as produced or shipped) from the Trust’s lands applied to a royalty rate as defined in the various specific and confidential operating agreements (also referred to as leases) with the Trust’s lessees. Certain


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leases have “minimum royalty” provisions that require payment to the Trust for holding the leasehold interest. The leases are generally very long-term in nature, and while they periodically are amended at the request of a lessee, the Trust is bound by the lease provisions throughout the term of the lease.

Pursuant to a Court Order in 1988, the Trustees filed an election under Section 646 of the Internal Revenue Code with the Internal Revenue Service that allowed the Trust to be taxed as a grantor trust versus a corporation. Accordingly, certificate holders (shareholders) are taxed on their allocable share of the Trust’s income whether or not the income is distributed. A Tax Return Guide is prepared by the Trust and mailed annually to investors, which is intended to assist them in their preparation of their income tax returns with respect to income allocated from the Trust.

Results of Operations:   “Royalty income” for 2004 was greater than that of 2003 primarily due to increases in our royalty rates due to escalation of producer price indices. “Royalty income” for 2003 was greater than that of 2002 primarily due to increased tonnage mined from Trust lands. “Other income” for 2004 was less than that of 2003, which was less than that of 2002, mainly due to reduced yields on our funds held for investment. “Net income” for 2004 was the highest in the history of the Trust, greater than that of 2003 primarily due to increased Royalty income (as explained above). “Net income” for 2003 was greater than that of 2002 primarily due to increased Royalty income, offset in part by an increase in expenses caused mainly by additional pension costs, Trustee compensation and shareholder relations expenditures.

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. The only contractual obligations are operating leases for office facilities (see Note G of the Financial Statements) and deferred compensation listed as Noncurrent Liabilities in the Balance Sheet, both deemed to have a minimal effect on future liquidity.

Critical Accounting Policies:   Royalties from the Trust’s mineral leases are taken into income as earned. Tonnage extracted is agreed upon between Trust and lessee engineers based on various engineering methods. Many of the leases provide for escalation or de-escalation which, for the most part, is based on independent producer price indices as published by the U.S. Department of Labor — Bureau of Labor Statistics. In addition, a number of the Trust’s leases have minimum royalty provisions that require the lessee to pay the Trust a payment for holding the leasehold interest, regardless of production. These minimum royalties can accumulate and do provide the mining companies the ability to offset excess royalties (over the minimum royalty requirements) on future taconite production. Minimum


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royalties, if not recovered before the termination of the lease, are forfeitable. In that event, no minimum royalties will be returned to the lessee.

Pension Plan Valuations are based on a number of assumptions used to determine the benefit obligation and asset valuation. These assumptions are evaluated annually by the Trustees and management in conjunction with outside actuaries. Assumptions affecting the pension plan valuations, which include the discount rate, compensation increase level and expected long-term rate of return, among other items, are not expected to have a significant impact on the Trust’s financial costs and cash flow. Please refer to Note E of the Financial Statements for additional pension plan information.

The Principal Charges account represents a first and prior lien of certificate holders on any property transferable to the reversioner at the end of the Trust and reflects an allocation of beneficiaries’ equity between the certificate holders and the reversioner. This Court-ordered account is neither an asset nor a liability of the Trust. Rather, this account maintains and represents a balance which will be payable to the certificate holders of record from the reversioner at the end of the Trust. The account balance, as stated in Note D of the Financial Statements, primarily represents the costs of acquiring homes and surface lands in accordance with provisions of a lease with United States Steel Corporation. 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.

Forward-Looking and Cautionary Statements:   Certain expectations and projections regarding future performance of the Trust referenced in this report are forward-looking statements. These expectations and projections are based on currently available industry and financial data and may be subject to certain events and uncertainties beyond the Trust’s control. We caution readers that in addition to factors described elsewhere in this report, the following factors and comments, among others, could change and adversely affect the Trust’s operations and financial results.

Lessees (customers) of the Trust primarily include the Minntac and Keewatin Taconite plants, owned and operated by United States Steel Corporation, and the Hibbing Taconite plant, owned by International Steel Group, Cleveland Cliffs Inc. and Stelco, and operated by Cleveland Cliffs Inc. Because the Trust’s revenues are primarily dependent upon a limited number of customers, there are associated inherent risks resulting therefrom. While the steel and taconite industries are currently flourishing, any significant adverse event at any of the Trust’s primary lessees, or the loss of any of the Trust’s primary lessees, could materially adversely affect the Trust’s future financial results.

Market demand for steel, and correspondingly taconite, could also affect the Trust’s financial results. However, other related factors include our lessees’ operating levels, ore body quality, metallurgical and geological characteristics, proximity of Trust lands, extreme weather conditions and labor contracts at the mines. Though


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the Trust is not a party to these labor contracts, all pertinent labor contracts affecting production from Trust lands have been ratified by the steelworkers and extend until mid-2008.

Income tax provision compliance with Section 646, as explained in Note F of the Financial Statements, is integral to the level of distributions paid to the certificate holders. Should it be determined that the Trust violated the requirements of Section 646, it would be taxed as a corporation versus a grantor trust. This would mean the Trust’s income would be taxable upon receipt by the Trust and again upon receipt by the certificate holders as distributions. It is the Trustees’ opinion that the Trust has remained in compliance with the provisions of Section 646 since its election.

The outlook for 2005 is expected to be a continuation of the positive trend from 2004. Barring decreases in the producer price indices, which are used in the calculation of royalty rates that are applied to taconite production, 2005 should be another good year for the Trust.












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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Great Northern Iron Ore Properties (“Trust”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Trust’s internal control system was designed to provide reasonable assurance to the Trust’s management and Board of Trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Trust’s management assessed the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria set forth in a report by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on Internal Control — Integrated Framework. Based on our assessment, we believe that, as of December 31, 2004, the Trust’s internal control over financial reporting is effective based on the COSO criteria.

The Trust’s Independent Registered Public Accounting Firm, Ernst & Young LLP, has issued an audit report on our assessment of the Trust’s internal control over financial reporting. Their report appears on pages 21 and 22.

Respectfully submitted,

Joseph S. Micallef,
    Chief Executive Officer and
        President of the Trustees

Thomas A. Janochoski,
    Chief Financial Officer and
        Vice President & Secretary












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Letter 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 2004, 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 $2,496,209 on December 31, 2004. A Summary of Shipments is tabulated on the last page of this report.

        The Trustees declared four quarterly distributions in 2004 totaling $8.20 per share. The first, in the amount of $1.80 per share, was paid on April 30, 2004, to certificate holders of record on March 31, 2004; the second, in the amount of $1.90 per share, was paid on July 30, 2004, to certificate holders of record on June 30, 2004; the third, in the amount of $2.10 per share, was paid on October 29, 2004, to certificate holders of record on September 30, 2004; and the fourth, in the amount of $2.40 per share, was paid on January 31, 2005, to certificate holders of record on December 31, 2004.

        The Trustees declared four quarterly distributions in 2003 totaling $6.50 per share. The first, in the amount of $1.50 per share, was paid on April 30, 2003, to certificate holders of record on March 31, 2003; the second, in the amount of $1.60 per share, was paid on July 31, 2003, to certificate holders of record on June 30, 2003; the third, in the amount of $1.70 per share, was paid on October 31, 2003, to certificate holders of record on September 30, 2003; and the fourth, in the amount of $1.70 per share, was paid on January 30, 2004, to certificate holders of record on December 31, 2003.

        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 2005 to certificate holders of record on March 31, 2005.

        Shares of beneficial interest in the Trust are traded on the New York Stock Exchange under the ticker symbol “GNI” (CUSIP No. 391064102). There were 1,596 certificate holders of record on December 31, 2004. The high and low prices for the quarterly periods commencing January 1, 2003 through December 31, 2004 were as follows:

  2004
   2003
  
Quarter
   High
   Low
   High
   Low
  
First     $ 98.50   $ 84.00   $ 72.50   $ 62.60  
Second       101.00     88.26     80.75     68.25  
Third       120.00     96.03     87.25     76.80  
Fourth       127.75     96.30     97.67     77.25  




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        The following is a summary of quarterly results of operations (unaudited) for the years ended December 31, 2004 and 2003 (in thousands of dollars, except per share amounts):

  Quarter Ended
  
  March 31
   June 30
   Sept. 30
   Dec. 31
  
2004  
     Royalty income     $ 3,467   $ 3,985   $ 3,525   $ 3,165  
     Interest and other income       77     50     108     70  
     
 
 
 
 
     Gross income       3,544     4,035     3,633     3,235  
     Expenses       628     526     526     525  
     
 
 
 
 
     Net income     $ 2,916   $ 3,509   $ 3,107   $ 2,710  
     
 
 
 
 
     Earnings per share     $ 1.94   $ 2.34   $ 2.07   $ 1.81  
     
 
 
 
 
 
2003    
     Royalty income     $ 2,908   $ 3,387   $ 2,955   $ 2,551  
     Interest and other income       80     147     76     80  
     
 
 
 
 
     Gross income       2,988     3,534     3,031     2,631  
     Expenses       579     550     509     578  
     
 
 
 
 
     Net income     $ 2,409   $ 2,984   $ 2,522   $ 2,053  
     
 
 
 
 
     Earnings per share     $ 1.61   $ 1.99   $ 1.68   $ 1.37  
     
 
 
 
 

        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. 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 2005 to all “record date” certificate holders shown on our stock transfer agent’s records during 2004. 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
Robert A. Stein		 Roger W. Staehle
John H. Roe, III

Saint Paul, Minnesota
January 28, 2005


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GREAT NORTHERN IRON ORE PROPERTIES
 
STATEMENTS OF INCOME

  Year Ended December 31
  
  2004
   2003
   2002
  
REVENUES    
    Royalties     $ 14,141,775   $ 11,800,870   $ 9,141,886  
    Interest earned       179,806     214,072     353,874  
    Rent and other       125,817     168,462     89,889  
     
 
 
 
        14,447,398     12,183,404     9,585,649  
EXPENSES    
    Royalties       4,623     4,623     4,623  
    Real estate and payroll taxes       129,744     140,840     124,899  
    Inspection and care of property       524,695     506,291     466,323  
    Administrative and general       1,302,100     1,317,476     1,083,429  
    Provision for depreciation and amortization       244,226     246,630     244,613  
     
 
 
 
        2,205,388     2,215,860     1,923,887  
     
 
 
 
NET INCOME     $ 12,242,010   $ 9,967,544   $ 7,661,762  
   
 
 
 
EARNINGS PER SHARE     $ 8.16   $ 6.65   $ 5.11  
   
 
 
 
 
 
STATEMENTS OF BENEFICIARIES’ EQUITY    
 
    Year Ended December 31    
     
   
      2004     2003     2002  
     
 
 
 
Balance at beginning of year     $ 14,741,933   $ 14,524,389   $ 14,962,627  
Net income for the year       12,242,010     9,967,544     7,661,762  
     
 
 
 
        26,983,943     24,491,933     22,624,389  
Deduct declaration of distributions on shares of
    beneficial interest, per share: 2004 – $8.20;
    2003 – $6.50; 2002 – $5.40		       12,300,000     9,750,000     8,100,000  
     
 
 
 
Balance at end of year     $ 14,683,943   $ 14,741,933   $ 14,524,389  
     
 
 
 






See accompanying notes.


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GREAT NORTHERN IRON ORE PROPERTIES
 
BALANCE SHEETS
 
ASSETS

  December 31
  
  2004
   2003
  
CURRENT ASSETS    
    Cash and cash equivalents     $ 788,779   $ 856,399  
    United States Treasury securities (Note B)       4,788,363     3,746,640  
    Royalties receivable       2,834,944     2,243,423  
    Prepaid expenses       2,760     4,679  
     
 
 
TOTAL CURRENT ASSETS       8,414,846     6,851,141  
     
NONCURRENT ASSETS    
    United States Treasury securities (Note B)       4,619,534     5,097,676  
    Prepaid pension expense (Note E)       941,327     810,183  
     
 
 
        5,560,861     5,907,859  
 
PROPERTIES    
    Mineral lands (Notes B and C)       38,587,307     38,577,007  
    Less allowances for depletion and amortization       34,289,965     34,081,765  
     
 
 
        4,297,342     4,495,242  
    Building and equipment – at cost, less
       allowances for accumulated depreciation
       (2004 – $214,287; 2003 – $193,279)		       134,950     159,347  
     
 
 
        4,432,292     4,654,589  
     
 
 
      $ 18,407,999   $ 17,413,589  
     
 
 
 
LIABILITIES AND BENEFICIARIES’ EQUITY
 
CURRENT LIABILITIES    
    Accounts payable and accrued expenses     $ 81,756   $ 94,656  
    Distributions       3,600,000     2,550,000  
     
 
 
TOTAL CURRENT LIABILITIES       3,681,756     2,644,656  
 
NONCURRENT LIABILITIES       42,300     27,000  
 
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)		       14,683,943     14,741,933  
     
 
 
      $ 18,407,999   $ 17,413,589  
     
 
 

See accompanying notes.


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GREAT NORTHERN IRON ORE PROPERTIES
 
STATEMENTS OF CASH FLOWS

  Year Ended December 31
  
  2004
   2003
   2002
  
OPERATING ACTIVITIES    
    Cash received from royalties and rents     $ 13,665,771   $ 12,361,792   $ 8,904,833  
    Cash paid to suppliers and employees       (2,087,987 )   (2,050,743 )   (1,679,390 )
    Interest received       188,621     272,497     399,320  
     
 
 
 
        NET CASH PROVIDED BY
          OPERATING ACTIVITIES		       11,766,405     10,583,546     7,624,763  
 
INVESTING ACTIVITIES    
    United States Treasury securities purchased       (4,297,396 )   (5,075,000 )   (3,725,000 )
    United States Treasury securities matured       3,725,000     4,175,000     4,300,000  
    Net expenditures for equipment       (11,629 )   (40,377 )   (45,814 )
     
 
 
 
        NET CASH (USED IN) PROVIDED BY
          INVESTING ACTIVITIES		       (584,025 )   (940,377 )   529,186  
 
FINANCING ACTIVITIES    
    Distributions paid       (11,250,000 )   (9,450,000 )   (8,250,000 )
     
 
 
 
        NET CASH USED IN
          FINANCING ACTIVITIES		       (11,250,000 )   (9,450,000 )   (8,250,000 )
 
 
 
 
    NET (DECREASE) INCREASE IN CASH
      AND CASH EQUIVALENTS		       (67,620 )   193,169     (96,051 )
 
    CASH AND CASH EQUIVALENTS
      AT BEGINNING OF YEAR		       856,399     663,230     759,281  
   
 
 
 
    CASH AND CASH EQUIVALENTS
      AT END OF YEAR		     $ 788,779   $ 856,399   $ 663,230  
   
 
 
 
RECONCILIATION OF NET INCOME TO NET
  CASH PROVIDED BY OPERATING ACTIVITIES		    
    Net income     $ 12,242,010   $ 9,967,544   $ 7,661,762  
    Adjustments to reconcile net income to net
      cash provided by operating activities:		    
        Depreciation and amortization       244,226     246,630     244,613  
        Net decrease (increase) in assets:    
            Accrued interest       8,815     58,425     45,446  
            Royalties receivable       (591,521 )   392,460     (326,942 )
            Prepaid expenses       (129,225 )   (103,895 )   (6,734 )
            Surface lands       (10,300 )   —     —  
        Net increase in liabilities:    
            Accrued liabilities       2,400     22,382     6,618  
     
 
 
 
                NET CASH PROVIDED BY
                  OPERATING ACTIVITIES		     $ 11,766,405   $ 10,583,546   $ 7,624,763  
 
 
 
 

See accompanying notes.


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GREAT NORTHERN IRON ORE PROPERTIES
 
NOTES TO FINANCIAL STATEMENTS
 
December 31, 2004

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: 2004 — $8,942,000 and $5,197,000; 2003 — $9,048,000 and $2,714,000; and 2002 — $5,614,000 and $3,398,000.

        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. Accordingly, 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 (currently 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 surface lands 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 term and reversionary interests; and, if the need arises, the Trustees may petition


13


NOTE A – BUSINESS AND TERMINATION OF THE TRUST AND LEGAL PROCEEDINGS (continued)

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 March 9, 2004, certificate holders of record as of December 31, 2003, and the reversioner were notified of a Hearing on May 26, 2004, in Ramsey County Courthouse, Saint Paul, Minnesota, for the purpose of settling and allowing the Trust accounts for the year 2003. By Court Order signed and dated May 26, 2004, the 2003 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 2005 to certificate holders of record with holdings on any of the four quarterly record dates during 2004. This information included a:

Substitute Form 1099-MISC — This form reported one’s 2004 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 2004.

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.


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.


14


NOTE B – SIGNIFICANT ACCOUNTING POLICIES (continued)

        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 2006. Following is an analysis of the securities as of December 31:

  Current
   Noncurrent
  
  2004
   2003
   2004
   2003
  
Aggregate fair value     $ 4,754,254   $ 3,751,117   $ 4,566,156   $ 5,082,656  
Gross unrealized holding gains       (1,882 )   (23,487 )   —     (11,251 )
Gross unrealized holding losses       20,872     —     33,258     4,985  
     
 
 
 
 
Amortized cost basis       4,773,244     3,727,630     4,599,414     5,076,390  
Accrued interest       15,119     19,010     20,120     21,286  
     
 
 
 
 
      $ 4,788,363   $ 3,746,640   $ 4,619,534   $ 5,097,676  
     
 
 
 
 

        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 amount of $208,200 for each of the years 2004, 2003 and 2002 (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 $2,496,209 on December 31, 2004, and $3,874,635 on December 31, 2003.

        Use of Estimates:   The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 are determined by dividing net income for the period by the number of weighted-average shares of beneficial interest outstanding. Basic and diluted weighted-average shares outstanding were 1,500,000 as of December 31, 2004, 2003 and 2002.


15


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 a portion of 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 of certificate holders on any property transferable to the reversioner and reflects an allocation of beneficiaries’ equity between the certificate holders and the reversioner. This account is neither an asset nor a liability of the Trust. Rather, this account maintains and represents a balance which will be payable to the certificate holders of record from the reversioner at the end of the Trust. 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 Agreement and the costs of homes and 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:

  2004
   2003
  
Attorneys’ fees and expenses     $ 1,024,834   $ 1,024,834  
Cost of surface lands       5,713,565     5,703,265  
Cumulative shipment credits       (1,304,692 )   (1,181,887 )
Asset disposition credits       (57,950 )   (57,950 )
     
 
 
Principal Charges account     $ 5,375,757   $ 5,488,262  
     
 
 

        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.

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 2004, 2003 and 2002 is as follows:


16


NOTE E – PENSION PLAN (continued)

  2004
   2003
   2002
  
Service cost     $ 117,426   $ 92,219   $ 68,225  
Interest cost       210,396     214,006     200,623  
Expected return on assets       (303,219 )   (260,583 )   (302,688 )
Net amortization       5,764     38,648     27,106  
     
 
 
 
Net pension cost (benefit)     $ 30,367   $ 84,290   $ (6,734 )
     
 
 
 

        Weighted-average assumptions used in the measurement of the benefit obligation and net periodic pension cost as of December 31 were:

  2004
   2003
  
Discount rate for benefit obligation       5.75 %   6.25 %
Discount rate for net periodic pension cost       6.25 %   6.50 %
Rate of compensation increase       3.50 %   3.50 %
Expected long-term return on plan assets       7.50 %   8.00 %

        The determination of the expected long-term return on plan assets is based on historical returns and a consideration of the Trust’s termination date.

        The following table sets forth the change in projected benefit obligation:

  2004
   2003
  
Projected benefit obligation at January 1     $ 3,487,979   $ 3,407,885  
Service cost       117,426     92,219  
Interest cost       210,396     214,006  
Actuarial loss       389,145     38,344  
Benefit payments       (258,513 )   (264,475 )
     
 
 
Projected benefit obligation at December 31     $ 3,946,433   $ 3,487,979  
     
 
 

        The following table sets forth the change in the fair value of plan assets:

  2004
   2003
  
Fair value of plan assets at January l     $ 3,818,748   $ 3,372,778  
Contributions       161,511     186,266  
Actual return on plan assets       279,631     524,179  
Benefit payments       (258,513 )   (264,475 )
     
 
 
Fair value of plan assets at December 31     $ 4,001,377   $ 3,818,748  
     
 
 

        The future benefit payments for the plan are estimated to be $258,513 for each of the years from 2005 through 2009, inclusive, and for the period from 2010 through 2014, inclusive, are estimated to be $1,360,122 in aggregate. The next contribution to the plan is estimated to be $161,511; however, said amount will be recalculated upon the completion of the plan’s annual actuarial valuation performed as of the plan’s fiscal year-end, March 31.


17


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:

  2004
   2003
  
Accumulated benefit obligation     $ 2,982,757   $ 2,791,180  
Effect of future compensation increases       963,676     696,799  
     
 
 
Projected benefit obligation       3,946,433     3,487,979  
Fair value of plan assets       4,001,377     3,818,748  
     
 
 
Plan assets in excess of benefit obligation       54,944     330,769  
Unrecognized net loss       886,383     479,386  
Unrecognized prior service cost       —     28  
     
 
 
Prepaid pension expense     $ 941,327   $ 810,183  
     
 
 

        The following table sets forth the plan’s weighted-average asset allocations by category as of December 31:

  2004
   2003
  
Equity securities       55 %   53 %
Debt securities       39 %   42 %
Other (cash, money market, accrued income)       6 %   5 %
     
 
 
        100 %   100 %
     
 
 

        The investment policy of the plan is to have up to approximately 55% invested in an equity index fund and the remaining monies invested in fixed income (debt) securities and cash.

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.


18


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 in each of the years 2004, 2003 and 2002.





















19


REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
ON AUDIT OF FINANCIAL STATEMENTS



The Trustees
Great Northern Iron Ore Properties

        We have audited the accompanying balance sheets of Great Northern Iron Ore Properties as of December 31, 2004 and 2003, and the related statements of income, beneficiaries’ equity and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Great Northern Iron Ore Properties’ internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated January 28, 2005, expressed an unqualified opinion thereon.



/s/   Ernst & Young LLP

Minneapolis, Minnesota
January 28, 2005




20


REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
ON MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING



The Trustees
Great Northern Iron Ore Properties

        We have audited management’s assessment, included in the accompanying Management’s Report On Internal Control Over Financial Reporting, that Great Northern Iron Ore Properties maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). Great Northern Iron Ore Properties’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Great Northern Iron Ore Properties’ internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of


21

unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, management’s assessment that Great Northern Iron Ore Properties maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Great Northern Iron Ore Properties maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2004 financial statements of Great Northern Iron Ore Properties, and our report dated January 28, 2005, expressed an unqualified opinion thereon.



/s/   Ernst & Young LLP

Minneapolis, Minnesota
January 28, 2005













22


GREAT NORTHERN IRON ORE PROPERTIES
 
SUMMARY OF SHIPMENTS

      Full Tons Shipped
  
No.
   Mine
   Ownership
Interest
   2004
   2003
   2002
   Total to
January 1,
2005
  
  1.   Mahoning       100%   1,047,642     501,289     1,358,481     155,847,304  
  2.   Ontario 100%       100%     1,391,614     680,184     10,927     10,820,032  
  3.   Ontario 50%       50%     1,343,700     2,356,994     1,840,736     21,547,857  
  4.   Section 18       100%     29,645     3,612     —     27,951,106  
  5.   Russell Annex       50%     —     —     9,924     3,557,057  
  6.   Mississippi #3       100%     396,194     76,571     82,429     4,302,329  
  7.   Minntac       100%     4,958,405     6,153,688     3,791,949     53,617,729  
     
 
 
 
 
                    9,167,200     9,772,338     7,094,446     277,643,414  
 
      Shipments from inactive mines and those exhausted, surrendered or sold prior to this year             —     —     —     361,308,055  
     
 
 
 
 
          TOTAL             9,167,200     9,772,338     7,094,446     638,951,469  
     
 
 
 
 

           
No.
   Operating Interest
  1-3   Hibbing Taconite Company
  4-6   National Steel Corporation up until May 20, 2003; thereafter
  United States Steel Corporation
     7   United States Steel Corporation











23



NOTES





















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




















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