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Great Northern Iron Ore Properties 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Great Northern Iron Ore Properties Form 10-Q dated September 30, 2006

 
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 -
For the Period Ended September 30, 2006

Or

 

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 -
For the Transition Period From ______________ to ______________

 

Commission file number 1-701


GREAT NORTHERN IRON ORE PROPERTIES

(Exact name of registrant as specified in its charter)

 

Minnesota

41-0788355

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

W-1290 First National Bank Building

332 Minnesota Street

Saint Paul, Minnesota

55101-1361

(Address of principal executive office)

(Zip Code)

 

 

(651) 224-2385

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


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 periods 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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o   No x

 

Number of shares of beneficial interest outstanding on September 30, 2006:

1,500,000



 
 



PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

GREAT NORTHERN IRON ORE PROPERTIES

CONDENSED BALANCE SHEETS

September 30
2006
December 31
2005
(Unaudited) (Note)
ASSETS            
 
CURRENT ASSETS  
     Cash and cash equivalents   $ 821,464   $ 774,916  
     United States Treasury securities    5,309,942    6,209,745  
     Royalties receivable    4,078,096    3,881,737  
     Prepaid expenses    23,874    2,110  
   
                            TOTAL CURRENT ASSETS    10,233,376    10,868,508  
 
NONCURRENT ASSETS  
     United States Treasury securities    3,598,540    3,391,684  
     Prepaid pension expense    833,046    855,340  
   
     4,431,586    4,247,024  
 
PROPERTIES  
     Mineral and surface lands    38,691,707    38,691,707  
     Less allowances for depletion and amortization    34,664,560    34,499,185  
   
     4,027,147    4,192,522  
 
     Building and equipment—at cost, less  
          allowances for accumulated depreciation  
          (9/30/06 – $215,402; 12/31/05 – $223,654)    143,441    147,465  
   
     4,170,588    4,339,987  
   
    $ 18,835,550   $ 19,455,519  
   
 
LIABILITIES AND BENEFICIARIES’ EQUITY
 
CURRENT LIABILITIES  
     Accounts payable and accrued expenses   $ 139,775   $ 90,156  
     Distributions    4,200,000    4,500,000  
   
                            TOTAL CURRENT LIABILITIES    4,339,775    4,590,156  
 
NONCURRENT LIABILITIES    60,800    60,800  
 
BENEFICIARIES’ EQUITY, including certificate
     holders’ equity, represented by 1,500,000
     shares of beneficial interest authorized
     and outstanding, and reversionary interest    14,434,975    14,804,563  
   
    $ 18,835,550   $ 19,455,519  
   

Note:   The balance sheet at December 31, 2005, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See notes to condensed financial statements.


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GREAT NORTHERN IRON ORE PROPERTIES

CONDENSED STATEMENTS OF INCOME
(Unaudited)

Three Months Ended
September 30
Nine Months Ended
September 30
2006 2005 2006 2005
Revenues:                    
     Royalties   $ 4,298,949   $ 4,213,124   $ 11,902,756   $ 13,766,446  
     Interest and other income    112,421    90,122    328,629    256,527  
       
     4,411,370    4,303,246    12,231,385    14,022,973  
Costs and expenses    678,145    621,939    2,100,973    1,942,602  
       
 
NET INCOME   $ 3,733,225   $ 3,681,307   $ 10,130,412   $ 12,080,371  
       
 
Weighted-average shares outstanding    1,500,000    1,500,000    1,500,000    1,500,000  
 
BASIC & DILUTED EARNINGS PER SHARE   $ 2.49   $ 2.45   $ 6.75   $ 8.05  
       
 
Distributions declared per share   $ 2.80  (1) $ 2.80  (2) $ 7.00  (3) $ 7.40  (4)


(1)     $ 2.80   declared      9/11/2006                                          
        payable    10/31/2006  
 
(2)   $ 2.80   declared    9/9/2005  
        paid    10/31/2005  
 
(3)   $ 2.00   declared    3/20/2006   plus   $ 2.20   declared    6/12/2006   plus   $ 2.80   declared    9/11/2006  
        paid    4/28/2006           paid    7/31/2006         payable    10/31/2006  
 
(4)   $ 2.20   declared    3/18/2005   plus   $ 2.40   declared    6/16/2005   plus   $ 2.80   declared    9/9/2005  
        paid    4/29/2005           paid    7/29/2005           paid    10/31/2005  


See notes to condensed financial statements.



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GREAT NORTHERN IRON ORE PROPERTIES

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended
September 30
2006 2005
Cash flows from operating activities:            
     Cash received from royalties and rents   $ 11,775,208   $ 12,707,793  
     Cash paid to suppliers and employees    -1,857,785    -1,764,098  
     Interest received    236,781    157,577  
   
          NET CASH PROVIDED BY OPERATING ACTIVITIES    10,154,204    11,101,272  
 
Cash flows from investing activities:  
     U.S. Treasury securities purchased    -3,850,000    -3,741,342  
     U.S. Treasury securities matured    4,565,984    3,247,396  
     Net expenditures for building and equipment    -23,640    -20,809  
   
          NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES    692,344    -514,755  
 
Cash flows from financing activities:
     Distributions paid    -10,800,000    -10,500,000  
   
          NET CASH USED IN FINANCING ACTIVITIES    -10,800,000    -10,500,000  
   
 
Net increase in cash and cash equivalents    46,548    86,517  
 
Cash and cash equivalents at beginning of year    774,916    788,779  
   
 
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30   $ 821,464   $ 875,296  
   

See notes to condensed financial statements.



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GREAT NORTHERN IRON ORE PROPERTIES

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

Periods of Three and Nine Months ended September 30, 2006 and September 30, 2005

 

Note A – BASIS OF PRESENTATION

 

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the periods stated above are not necessarily indicative of the results that may be expected for each respective full year. For further information, refer to the financial statements and footnotes included in the Great Northern Iron Ore Properties (“Trust”) Annual Report on Form 10-K for the year ended December 31, 2005.

 

Note B – BENEFICIARIES’ EQUITY

 

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 September 30, 2006:

 

Attorneys’ fees and expenses     $ 1,024,834  
Cost of surface lands    5,817,965  
Cumulative shipment credits    -1,547,578  
Asset disposition credits    -57,950  
 
 
Principal Charges account   $ 5,237,271  
 

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.

 


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Note C – PENSION PLAN

 

A summary of the components of net periodic pension cost is as follows:

 

 >Three Months Ended
September 30
 >Nine Months Ended
September 30
 >2006  >2005  >2006  >2005
Service cost     $ 58,881   $ 59,174   $ 176,644   $ 154,952  
Interest cost    77,400    75,919    232,200    206,810  
Expected return on assets    -78,094    -75,479    -234,284    -225,207  
Net amortization    45,919    46,643    137,758    100,883  
       
Net periodic pension cost   $ 104,106   $ 106,257   $ 312,318   $ 237,438  
       

The plan’s annual actuarial valuation was performed as of the plan’s fiscal year-end March 31. The recommended contribution to the plan for 2006 was $290,024, which contribution was made in August, 2006.

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Periods of Three and Nine Months ended September 30, 2006 and September 30, 2005

 

The Trust owns interest in 12,033 acres on the Mesabi Iron Range Formation in northern Minnesota, most of which are under lease to major iron ore producing companies. Due to the Trustees’ election pursuant to Section 646 of the Tax Reform Act of 1986, as amended, commencing with year 1989 the Trust is not subject to federal and Minnesota corporate income taxes. The Trust is now a grantor trust. Shares of beneficial interest in the Trust are traded on the New York Stock Exchange under the ticker symbol “GNI” (CUSIP No. 391064102).

 

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 persons named in the Trust Agreement. The last survivor of these eighteen named in the Trust Agreement died April 6, 1995. Accordingly, the Trust terminates twenty years from April 6, 1995.

 

At the end of the Trust, that being April 6, 2015, the certificates of beneficial interest (shares) in the Trust will cease to trade on the New York Stock Exchange and thereafter will represent only the right to receive certain distributions payable to the certificate holders of record at the time of the termination of the Trust. Upon termination, the Trust is obligated to distribute ratably to these certificate holders the net monies remaining in the hands of the Trustees (after paying and providing for all expenses and obligations of the Trust), plus the balance in the Principal Charges account (this account is explained in the Trust’s Annual Report sent to all certificate holders every year). All other Trust property (most notably the Trust’s mineral properties) must be conveyed and transferred to the reversioner under the terms of the Trust Agreement.

 

We have previously provided information in our various Securities & Exchange Commission filings, including our Annual Report, about the final distribution payable to the certificate holders upon the Trust’s termination. The exact final distribution, though not determinable at this time, will generally consist of the sum of the Trust’s net monies (essentially, total assets less liabilities and properties) and the balance in the Principal Charges account, less any and all expenses and


-6-




obligations of the Trust upon termination. To offer a hypothetical example, without factoring in any expenses and obligations of the Trust upon its termination, and using the financial statement values as of December 31, 2005, the net monies were approximately $10.5 million and the Principal Charges account balance was approximately $5.3 million, resulting in a final distribution payable of approximately $15.8 million, or about $10.53 per share. After payment of this final distribution, the certificates of beneficial interest (shares) would be cancelled and will have no further value. It is important to note, however, that the actual net monies on hand and the Principal Charges account balance will most likely fluctuate during the ensuing years, and will not be “final” until after the termination and wind-down of the Trust. We offer this example to further inform investors about the conceptual nature of the final distribution and do not imply or guarantee a specific known final distribution amount.

 

Results of Operations:

Royalties decreased $1,863,690 during the nine months ended September 30, 2006, as compared to the same period in 2005, due mainly to an overall lower average earned royalty rate during the nine month period, the result of which was caused by our lessees mining more from our partial fee interest lands with lower effective royalty rates. Royalties increased $85,825 during the three months ended September 30, 2006, as compared to the same period in 2005, due mainly to overall increased tonnage mined from Trust lands during the quarter.

 

Interest and other income increased $72,102 and $22,299 during the nine months and three months ended September 30, 2006, respectively, as compared to the same periods in 2005, due mainly to improved yields on our funds held for investment.

 

Costs and expenses increased $158,371 and $56,206 during the nine months and three months ended September 30, 2006, respectively, as compared to the same periods in 2005, due mainly to higher pension costs incurred during the year associated with funding the plan and expensing these costs by the Trust’s termination date, as well as higher Trustee fee compensation pursuant to the Court Order approved on October 20, 2005.

 

At their meeting held on September 11, 2006, the Trustees declared a third quarter distribution of $2.80 per share, amounting to $4,200,000 payable October 31, 2006 to certificate holders of record at the close of business on September 29, 2006. The Trustees have now declared three quarterly distributions in 2006. The first, in the amount of $2.00 per share, was paid on April 28, 2006 to certificate holders of record on March 31, 2006; the second, in the amount of $2.20 per share, was paid on July 31, 2006 to certificate holders of record on June 30, 2006; and the third, that being the current distribution. The first, second and third quarter 2005 distributions were $2.20, $2.40 and $2.80 per share, respectively. 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 January 2007 to certificate holders of record on December 29, 2006.

 

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. 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.


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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 U.S. 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.

 

Recent Accounting Pronouncements:

During September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Adoption of the new Statement for public companies is required for years ending after December 15, 2006. Hence, the Statement will be adopted by the Trust for its year ending December 31, 2006.

 

The Statement requires employers with pension plans to recognize the funded status of a plan on the face of the Balance Sheet versus in the footnotes. The funded status is determined by comparing the plan assets at fair value to the projected (future) benefit obligation as of the company’s fiscal year-end.

 

It is anticipated that adoption of the new Statement will eliminate the Trust’s asset account “Prepaid Pension Expense” and set up a “Liability for Pension Benefits” account. Although 2006 financial pension information is not yet available, had the Statement been effective last year, it would have resulted in a Liability for Pension Benefits of approximately $1.3 million and a reduction in Beneficiaries’ Equity of approximately $2.2 million under the caption “Other Comprehensive Income.” No Income Statement impact is anticipated.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

- None

 

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Trust conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the Trust’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Trust’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Trust in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There was no change in the Trust’s internal control over financial reporting during the Trust’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.

 

 

 

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

- None

 

Item 1A. Risk Factors

There are no material changes from the risk factors previously disclosed in the Trust’s December 31, 2005 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

- None

 

Item 3. Defaults Upon Senior Securities

- None

 

Item 4. Submission of Matters to a Vote of Certificate Holders

- None

 

Item 5. Other Information

- None

 

Item 6. Exhibits

Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Exhibit 31.2 – Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002

Exhibit 32 – Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (Furnished but not filed)

 

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.

 

 

 

 

 

GREAT NORTHERN IRON ORE PROPERTIES
                            (Registrant)

Date


   October 24, 2006

 

By 


/s/ Joseph S. Micallef

 

 

 

 

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

 

Date


   October 24, 2006

 

By 


/s/ Thomas A. Janochoski

 

 

 

 

Thomas A. Janochoski, Vice President &

Secretary and Chief Financial Officer




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