SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 1996 or
----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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Commission file number 1-8245
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NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (IRS Employer Identification Number)
Suite 19A, 43 West Front Street, Red Bank, N.J. 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 908-741-4008
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Units of Beneficial Interest New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of December 31, 1996, 8,696,412 units of beneficial interest of the
Registrant were outstanding, and the aggregate market value of outstanding
units of beneficial interest of the Registrant, which may be voted, held by
non-affiliates of the Registrant was approximately $111,177,846 on such date.
(The Trustees and the Managing Director are the only persons deemed to be
affiliates of the Registrant.)
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Documents Incorporated by Reference
-----------------------------------
Items 10, 11, 12 and 13 of Part III have been partially or wholly omitted from
this report and the information required to be contained therein is
incorporated by reference from the Registrant's definitive proxy statement,
dated January 9, 1997, for the annual meeting to be held on February 12, 1997.
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PART I
Item 1. Business.
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(a) General Development of Business.
--------------------------------
Registrant (the "Trust") is a trust which, on behalf of the owners
of beneficial interest in the Trust (called the "certificate holders" or "unit
owners"), holds overriding royalty rights covering gas and oil production in
certain concessions or leases in the Federal Republic of Germany. The rights
are held under contracts with local German exploration and development
subsidiaries of Mobil Corp., Exxon Corp., and Royal Dutch Group. Under these
contracts, the Trust receives various percentage royalties on the proceeds of
the sales of certain products from the areas involved. At the present time,
royalties are received for sales of natural gas, casinghead gas, crude oil,
distillate and sulfur. See Item 2 for descriptions of certain of these
contracts.
The royalty rights were received by the Trust from North European
Oil Company (the "Company") upon dissolution of the Company in September,
1975. The Company was organized in 1957 as the successor to North European
Oil Corporation (the "Corporation"). The Trust is administered by trustees
(the "Trustees") under an Agreement of Trust dated September 10, 1975, amended
May 13, 1976 and February 10, 1981 and as deemed amended pursuant to the
Delaware Court of Chancery order dated February 26, 1996 (the "Trust
Agreement").
Neither the Trust nor the Trustees on behalf of the Trust conduct
any active business activities or operations. The sole permitted function of
the Trustees is to monitor, verify, collect, hold, invest, and distribute the
royalty payments made to the Trust. Under the Trust Agreement, the Trustees
make quarterly distributions of the net funds received by the Trust on behalf
of the unit owners. Funds temporarily held by the Trust are invested in
interest bearing bank deposits, certificates of deposit, U.S. Treasury Bills
or other government obligations.
There has been no significant change in the principal operation or
purpose of the Trust during the past fiscal year.
(b) Financial Information about Industry Segments.
----------------------------------------------
The Trust conducts no active business operations, and analysis by
industry segments is therefore not applicable to the Trust. To the extent
that royalty income received by the Trust is attributable to sales of
different products, to sales from different geographic areas or to sales by
different operating companies the information is set forth in Item 2 of this
Report and the Exhibit described in that Item 2.
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(c) Narrative Description of Business.
----------------------------------
Under the Trust Agreement, the Trust conducts no active business
operations and is restricted to collection of income from royalty rights and
distribution to unit owners of the net income after payment of administrative
and related expenses.
The overriding royalty rights held by the Trust are derived from
contracts and agreements originally entered into by German subsidiaries of the
predecessor Corporation during the early 1930's. Some of these royalty rights
are based on leases which have expired. However, the leases remain in effect
as long as there is continued production or the lessor does not cancel the
lease. Individual lessors will normally not seek termination of the rights
originally granted because the leases provide for royalty payments to the
lessors if sales of oil or gas result from discoveries made on the leased
land. Additionally, termination by individual lessors would result in the
escheat of mineral rights to the State. The remainder of the Trust's royalty
rights are based on government granted concessions which remain in effect as
long as there are continued production activities and/or exploration efforts
by the operating companies. It is generally anticipated that the operating
companies will continue production where it remains economically profitable
for them to do so.
Royalties are paid to the Trust on sales from production under these
leases and concessions by the operating companies on a regular monthly or
quarterly basis pursuant to the royalty agreements. These royalties are paid
in Deutsche marks and are converted into U.S. dollars. The Trust has
experienced no difficulties converting marks to dollars, although its
financial results are impacted by varying currency exchange rates.
As the holder of overriding royalty rights, the Trust has no legal
ability, whether by contract or operation of law, to compel production.
Moreover, if an operator should determine to terminate production in any
concession or lease area and to surrender the concession or lease, the royalty
rights for that area would thereby be terminated. Under certain royalty
agreements, the operators are required to advise the Trust of any intention to
surrender lease or concession rights. In recent years, no such notices have
been received and management of the Trust has not been informed of any such
intention. The Trust itself is precluded from undertaking any production
activities and only if it could locate an alternate operator for the same
areas would there be any possibility of continued royalty payments for such an
area following any such termination. The likelihood of locating such an
alternate operator is small because the current operating companies would be
unlikely to surrender their rights for areas where continued economic return
from production is reasonably anticipated.
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The exploration for and the production of gas and oil is a
speculative business. The Trust has no means of insuring continued income
from its royalty rights at either their present levels or otherwise. In
addition, fluctuations in prices and supplies of gas and oil and what effect
these fluctuations might have on royalty income to the Trust and on reserves
net to the Trust cannot be accurately projected. The Trustees have no
information with which to make any projections beyond information on economic
conditions which is generally available to the public and thus are unwilling
to make any such projections.
While Germany has laws relating to environmental protection, the
Trustees have no detailed information concerning the present or possible
effect of such laws on operations in areas where the Trust holds royalty
rights on production and sale of product from those areas.
Seasonal demand factors affect the income from royalty rights
insofar as they relate to energy demands and increases or decreases in prices,
but, in the average they are not material to the regular annual income
received under the royalty rights.
The Trust, either itself or in cooperation with holders of parallel
royalty rights, arranges for periodic audits of the books and records of the
operating companies to verify compliance with the computation provisions of
the applicable agreements. From time to time, these examinations disclose
computational errors or errors from inappropriate application of existing
agreements and appropriate adjustments are requested and made.
(d) Financial Information about Foreign and Domestic Operations and
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Export Sales.
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The Trust does not engage in any active business operations, and its
sources of income are the overriding royalty rights covering gas, sulfur and
oil production in certain areas in Germany and interest on the funds
temporarily invested by the Trustees. In Item 2 there is a schedule (by
product, geographic area and operating company) showing the royalty income
received by the Trust during the fiscal year ended October 31, 1996.
(e) Executive Officers of the Trust.
--------------------------------
The affairs of the Trust are managed by not more than five
individual Trustees who receive compensation determined under the Trust
Agreement. One of the Trustees is designated as Managing Trustee and receives
additional compensation in such capacity. The Managing Trustee, John H. Van
Kirk, is responsible for managerial oversight, while day to day matters are
handled by the Managing Director, John R. Van Kirk. John H. Van Kirk, who is
72 years old, has been Managing Trustee since the Trust's inception in 1975.
John R. Van Kirk, who is 44 years old, has held the position of Managing
Director of the Trust since November 1990. John R. Van Kirk is the son of
John H. Van Kirk, the Managing Trustee.
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The Managing Director provides office space and services to the
Trust. In addition to the Managing Trustee and the Managing Director, the
Trust has one secretarial employee in the United States. It also retains a
part-time consultant in Germany on a fixed yearly basis plus associated
expenses. Employee relations or labor contracts are not directly material to
the business or income of the Trust. The Trustees have no specific
information concerning employee relations of the operating companies.
Item 2. Properties.
-----------
The properties of Trust, which the Trust and Trustees hold pursuant
to the Trust Agreement on behalf of the unit owners, are overriding royalty
rights on sales of gas, sulfur and oil under certain concessions or leases in
the Federal Republic of Germany. The actual leases or concessions are held
either by Mobil Oil A.G. ("Mobil"), the German operating subsidiary of Mobil
Corp., or by Oldenburgische Erdol Gesellschaft ("OEG"). The Oldenburg
concession (1,398,000 acres), covering virtually the entire former State of
Oldenburg, is the major source of royalty income for the Trust. Within this
concession Mobil and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture of
Exxon Corp. and the Royal Dutch Group, carry out all exploration, drilling,
production and sales activities.
Under one series of rights covering the western part of the
Oldenburg concession (approximately 662,000 acres), the Trust receives a
royalty payment of 4% on gross receipts from sales by Mobil of natural gas,
casinghead gas, crude oil and condensate. The Trust also is entitled to
receive from Mobil a 2% royalty on gross receipts of sales of sulfur obtained
as a by-product of sour gas produced from the western part of Oldenburg. The
payment of the sulfur royalty is conditioned upon sales by Mobil of sulfur at
a selling price above an agreed upon base price. This base price is adjusted
annually by an inflation index. When the average selling price falls below
the adjusted base price, no royalties are payable. No payments were received
under this sulfur royalty during fiscal 1996.
Under another series of rights covering the entire Oldenburg
concession and pursuant to an agreement with OEG (the "OEG Agreement"), the
Trust receives royalties at the rate of 0.6667% on gross receipts from sales
of natural gas, casinghead gas, crude oil, condensate and sulfur (removed
during the processing of sour gas) less 50% of an escalating cost base. This
cost base is recomputed annually based on indexes reflecting changes in
certain prices within Germany. This system will be revised in 2002 unless the
escalating cost base diverges significantly from the actual production costs,
in which case the OEG Agreement provides for the system to be revised in 1999.
In either case, the revised system will provide that 50% of field handling,
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treatment and transport costs, as reported for state governmental royalty
purposes, will be deducted from gross sales receipts prior to the royalty
calculation.
The Trust also holds through Mobil a 2% royalty interest in oil and
gas sales from acreage in Bavaria, and a 0.2117% royalty under the net
interest of the Bayerische Mineral Industries A.G. ("BMI"), a subsidiary of
Mobil, in concessions in Bavaria. The net interest of BMI ranges from 16-1/2
to 100% of the sales, depending on geographic region or area. Due to the low
level of royalty income under this agreement, reserves from this area in
Bavaria are not included in reserve calculations for this report year.
In addition to the areas of Oldenburg and Bavaria, the Trust also
holds overriding royalties on 21 leases in other areas of northwest Germany
ranging in size from 185 to 25,000 acres and totalling 73,214 acres. The
rates of overriding royalties vary from 1.83% to 6.75%. At the present time
all but one of these 21 leases are in the non-producing category. Due to the
low level of income and the intermittent gas production from the single
producing lease, reserves from this lease are not included in reserve
calculations for this report year.
The following is a schedule of royalty income for the fiscal year
ended October 31, 1996 by product, geographic area and operating company:
BY PRODUCT:
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Product Royalty Income
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Natural Gas $ 9,366,239
Sulfur $ 186,827
Oil $ 157,421
BY GEOGRAPHIC AREA:
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Area Royalty Income
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Western Oldenburg $ 7,929,612
Eastern Oldenburg $ 1,720,396
Non-Oldenburg Areas $ 60,479
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BY OPERATING COMPANY:
---------------------
Company Royalty Income
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Mobil Oil A.G. $ 7,058,128
OEG $ 2,652,047
Bayerische Mineral Industries A.G. $ 312
Exhibit 99.1 to this Report is a report dated December 18, 1996
which summarizes certain production data and the estimated net proved
producing reserves as of October 1, 1996, based on the limited information
available, for the Oldenburg area in which the Trust now holds overriding
royalty rights. That report, the Estimate of Remaining Proved Producing
Reserves in the Northwest Basin of the Federal Republic of Germany as of
October 1, 1996, (the "Reserve Report") was prepared by Ralph E. Davis
Associates, Inc., 3555 Timmons Lane, Suite 1105, Houston, Texas 77027 ("Davis
Associates"). Davis Associates is an independent petroleum and natural gas
consulting organization specialized in analyzing hydrocarbon reserves. In
order to permit timely filing of this Report and consistent with prior years,
the information has been prepared for the 12-month period ending September 30,
1996, which is one month prior to the end of the fiscal year of the Trust.
In connection with the information in the Reserve Report, note
should be taken of the limited nature of the information available to the
Trust. Pursuant to the arrangements under which the Trust holds royalty
rights and due to the fact that the Trust is not considered an operating
company within Germany, it has no access to the operating companies'
proprietary information concerning producing field reservoir data. The
Trustees have been advised that publication of such information is not
required under applicable law in Germany and that the royalty rights do not
give rise to the right to require or compel production of such information.
Past efforts to obtain such information voluntarily have not been successful.
The information made available to the Trust by the operating companies does
not include any of the following: reserve estimates, capitalized costs,
production cost estimates, revenue projections, producing field reservoir data
(including pressure data, permeability, porosity and thickness of producing
zone) or other similar information. The limited nature of the information
available to the Trust makes impossible the calculation of the following:
proved undeveloped or probable future net recoverable oil and gas by
appropriate geographic areas, total gross and net productive wells,
availability of oil and gas from the present reserve, contract supply for one
year or acreage concentration.
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The Trust has the authority to audit for certain limited purposes
the operating companies' sales and production from the royalty areas. The
Trust also has access to published materials in Germany from W.E.G. (a German
organization equivalent to the American Petroleum Institute or the American
Gas Association). The use of such statistical information relating to
production and sales necessarily involves extrapolations and projections.
Both Davis Associates and the Trustees believe the use of the material
available is appropriate and suitable for preparation of the reports and
estimates described in the Reserve Report and in the Cost Depletion Report
(described below), which is based on the Reserve Report. Both the Trustees
and Davis Associates believe these reports and estimates to be reasonable and
appropriate but they would possibly vary from statistical projections which
could be made if reservoir production information (of the kind normally
available to domestic producing companies) were available. However, the
limited information available makes it inappropriate to make projections or
estimates of proved or probable reserves of any category or class other than
the estimated net proved producing reserves described in the Reserve Report.
Table I of the Reserve Report is comprised of a schedule of
estimated net proved producing reserves of the Trust's royalty properties,
computed as of October 1, 1996 and a five year schedule of gas, sulfur and oil
sales for the 12 months ended September 30, 1996, 1995, 1994, 1993 and 1992
computed from quarterly sales reports of operating companies received by the
Trust during such periods.
Item 3. Legal Proceedings.
------------------
As previously reported, on February 26, 1996 the settlement of
litigation commenced by the Delaware State Escheator relating to claims
concerning unexchanged shares of predecessor corporate entities was approved
by the Delaware Court of Chancery. The first stage of the settlement,
encompassing the issuance of Trust units without the attributable past
dividends and distributions, was completed on April 17, 1996 with the second
and third stages scheduled for late June of the years 2000 and 2005
respectively. For a complete description of the terms of this settlement see
Note 3 to Financial Statements contained herein or the Current Reports on Form
8-K filed on November 26, 1986, November 1, 1988, December 11, 1995 and
February 28, 1996 (including Exhibits).
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Inapplicable.
<PAGE>
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PART II
Item 5. Market for the Registrant Trust's Units of Beneficial Interest
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and Related Certificate Holder Matters.
---------------------------------------
The Trust's units of beneficial interest ("Units") are traded on the
New York Stock Exchange (the "Exchange") under the symbol NET. In addition,
the Midwest Stock Exchange and the Boston Exchange have granted unlisted
trading privileges in the Trust Units.
Under the Trust Agreement, the Trustees distribute to unit owners,
on a quarterly basis, the net royalty income after deducting expenses.
The following table presents the high and low sales prices for the
quarterly periods ended in fiscal 1996 and 1995 as reported by the Exchange as
well as the cash distributions paid to unit owners by quarter for the past two
fiscal years.
FISCAL YEAR 1996
Low High Distributions
Quarter Ended Sales Sales Per Unit
- ------------- --------- --------- -------------
January 31, 1996 12-1/8 14-3/8 .29
April 30, 1996 12-3/4 14-3/8 .29
July 31, 1996 13 14-1/8 .19
October 31, 1996 12-3/8 13-3/4 .27
FISCAL YEAR 1995
Low High Distributions
Quarter Ended Sales Sales Per Unit
- ------------- --------- --------- -------------
January 31, 1995 12-1/2 14-7/8 .31
April 30, 1995 12-3/8 14-5/8 .42
July 31, 1995 13 14-3/4 .35
October 31, 1995 12-5/8 13-5/8 .35
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The quarterly distributions to unit owners represent their undivided
interest in royalty payments from sales of gas, sulfur and oil during the
previous quarter. Each unit owner is entitled to recover a portion of his or
her investment in these royalty rights through a cost depletion percentage.
The calculation of this cost depletion percentage is set forth in detail in a
report titled Calculation of Cost Depletion Percentage for 1996 Calendar Year
(the "Cost Depletion Report") attached as Exhibit 99.2. The Cost Depletion
Report has been prepared by Davis Associates using the same limited
information, as described under Item 2, Properties, to which reference is
made. The Trustees and Davis Associates believe that the calculations and
assumptions used in the Cost Depletion Report are reasonable under the facts
and circumstances of available information. The cost depletion percentage
recommended by the Trust's independent petroleum and natural gas consultants
for calendar 1996 is 7.891%. Specific details relative to the Trust's income
and expenses and cost depletion percentage as they apply to the calculation of
taxable income for the 1996 calendar year are included on page 3 of the 1996
Annual Report under "Note to Unit Owners" and have been sent in a separate
letter to all unit owners registered at any time during 1996. (See attached
Exhibit 99.3.)
The Trust maintains no reserve to cover any payments which might be
required if the holders of shares of stock of the predecessor Corporation or
Company, who have not yet exchanged those shares for Units, should surrender
them for exchange. See Item 7 and Note 3 to the Financial Statements in Item
8 of this Report.
As of December 31, 1996, there were 1,969 Unit owners of record,
which figure does not include the owners of unexchanged shares of stock in the
Corporation or the Company (a total of 610 record holders). The owners of
shares of stock in the Corporation are entitled under Section 3.10 of the
Trust Agreement to receive Units upon presentation of those shares or other
evidences of ownership thereof. The owners of unexchanged shares of stock in
the Company, for whom a nominee of the Bank of New York acts as agent under a
shareholder agency agreement, are entitled to receive Units upon presentation
of those shares or other evidences of ownership thereof. See Item 3, Legal
Proceedings, and Note 3 to Financial Statements contained herein.
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ITEM 6. Selected Financial Data
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North European Oil Royalty Trust
--------------------------------
Selected Financial Data (Cash Basis)
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For Five Years Ended October 31, 1996
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1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
German gas, oil
and sulfur
royalties
received $ 9,710,487 $12,477,788 $ 9,476,252 $10,718,289 $13,458,150
=========== =========== =========== =========== ===========
Net Income on a
cash basis $ 9,086,316 $11,941,675 $ 8,777,422 $10,248,982 $12,870,740
=========== =========== =========== =========== ===========
Net Income per unit
on a cash
basis (a) $1.05 $1.43 $1.06 $1.24 $1.55
===== ===== ===== ===== =====
Units of beneficial
interest
outstanding at end
of year (a) 8,696,412 8,313,984 8,312,898 8,298,216 8,294,538
Cash distributions
paid or to be
paid:
Dividends and
distributions
per unit paid
to former
unlocated
shareholders $ .01 $ .00 $ .05 $ .01 $ .01
Distributions per
unit paid or to
be paid to
certificate
holders 1.04 1.43 1.01 1.22 1.55
----- ----- ----- ----- -----
$1.05 $1.43 $1.06 $1.23 $1.56
===== ===== ===== ===== =====
Total assets at
end of year $ 2,477,516 $ 2,951,228 $ 1,848,274 $ 2,733,049 $3,000,624
=========== =========== =========== ========== ===========
(a) Net income per unit on a cash basis was calculated based on the number of
units of beneficial interest outstanding at the end of the year.
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Item 7. Management's Discussion and Analysis of Financial Condition
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and Results of Operations.
--------------------------
General
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The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. The Trust is not involved in any business or extractive
operations of any kind in the areas over which it holds royalty rights and is
precluded from any such involvement by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The Trust does not conduct any active business operations and has
only limited need of funds for its own administrative services. These funds
are used to pay Trustees' fees (computed under the Trust Agreement and based
upon a percentage of royalties and interest income received), the remuneration
fixed by the Trustees for the Managing Trustee and the Managing Director,
expenses associated with the Trustees' meetings, professional fees paid to
consultants, legal advisors and auditors, transfer agent fees, and secretarial
and other general office expenses.
Another requirement for funds by the Trust relates to the occasional
necessity of making lump sum payments of arrearages of dividends of a
corporate predecessor and distributions previously declared by the Trust.
Such payments are required when owners of shares of stock in predecessor
corporate entities, who have not previously presented their shares for
conversion to units of beneficial interest in the Trust, make such a
presentation or furnish properly documented affidavits of loss and obtain an
unlimited, open penalty bond. The procedures for administering such claims
are described in Section 3.10 of the Trust Agreement as deemed amended by the
February 26, 1996 order of the Delaware Court of Chancery. The payment of
such arrearages would require a reduction in the amount of distributions which
otherwise would be made on presently outstanding units. For further
information on this contingent liability and the impact of the Delaware Court
order see Item 3, Legal Proceedings, and Note 3 to Financial Statements
contained herein.
The Trust has no means of assuring continued income from overriding
royalty rights at their present level or otherwise. Economic and political
factors which are not foreseeable may have an impact on Trust income. The
effect of changing economic conditions on the demand for energy throughout the
world and future prices of oil and gas cannot be accurately projected.
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The relatively small amounts required for administrative expenses of
the Trust limit the possible effect of inflation on its financial prospects.
Continued price inflation would be reflected in sales prices, which, with
sales volumes, form the basis on which the royalties paid to the Trust are
computed. In addition, fluctuations in the mark/dollar exchange rate have an
impact on domestic energy prices within Germany and on the amount of dollars
received upon conversion. The impact of inflation or deflation on energy
prices in Germany is delayed by the use in certain long-term gas sales
contracts of a deferred "trailing average" related to light fuel oil prices.
Fiscal 1996 versus Fiscal 1995
- ------------------------------
For fiscal 1996 the Trust's royalty income of $9,710,487 was 22%
lower than the previous year. A combination of production interruptions,
lower sales from the higher royalty area of western Oldenburg, moderately
weaker gas prices and less favorable currency exchange rates contributed to
the decline in royalties. The interruptions in production resulted from two
events: planned improvements to the Grossenkneten desulfurization plant and a
pipeline accident isolating the Visbek and Cappeln gas fields in western
Oldenburg. The plant improvements occurred at two separate times from late
April to early June and during the month of August and increased the plant
capacity to 750,000 cubic meters of gas per hour. During this combined 10
week period, the plant was shut down completely for 2 weeks and partially for
8 weeks. The pipeline accident occurred shortly after the resumption of
production in early June. Production from these fields was totally shut down
for 4 weeks and partially shut down for 2 weeks. The net effect of these
interruptions helped to reduce overall Oldenburg gas sales by only 4.7% to
175.3 billion cubic feet. However, gas sales from western Oldenburg, with an
effective royalty seven times greater than eastern Oldenburg, were reduced by
18.2% to 62.8 billion cubic feet. Gas prices for both eastern and western
Oldenburg declined by 3.9% and 2.5% respectively. From their lowest level
experienced during the second quarter, gas prices have steadily climbed
through the remainder of the year. In addition, the average exchange rate for
eastern and western Oldenburg also declined by 5.3% and 3.3% respectively.
For the year the average value of the Deutsche mark was 67.1 cents down from
last year's average of 69.2 cents.
In prior years, we made note of the steps taken by the operating
companies to maintain current sales levels despite the increasing ratio of
sour gas to sweet gas in the total product mix. These steps included
improvements to the Grossenkneten plant as well as the construction of a
pipeline to the NEAG desulfurization plant to utilize excess capacity at that
plant. With the discovery of additional reserves outside Oldenburg, the
owners of the NEAG desulfurization plant are currently utilizing that plant's
entire capacity for non-Oldenburg gas. Therefore the recent increases to the
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capacity at Grossenkneten do not increase the total production capacity but
instead permit that capacity to be maintained at the previous level of 750,000
cu. meters per hour.
Over 95% of the Trust's current year royalties came from Oldenburg
gas sales; royalties from oil sales were $157,000 and from sulfur sales were
$187,000. During fiscal 1996 the Trust did not receive any royalties under
the Mobil 2% sulfur royalty because prices remained below the threshold level
specified in the agreement. Despite reaching over $62 per metric ton recorded
in the third quarter, sulfur prices ended the year below $40 per metric ton.
Trust expenses of $696,005 increased 10.9% from the prior year
reflecting increased legal expenses in connection with the settlement of the
suit previously commenced by the Delaware State Escheator and with costs
associated with investigations into the status of certain leases in Germany.
Despite higher average interest rates in effect, interest income declined by
6.2% due to the decrease in funds available for investment.
During fiscal 1996 and 1995 respectively, an additional 2,148 and
1,086 Trust units were issued and $64,932 and $31,701 were paid to former
unlocated shareholders of North European Oil Corporation and North European
Oil Company who presented shares for exchange or filed properly documented
affidavits of loss and obtained an unlimited, open penalty indemnity bond. In
addition on April 17, 1996, in compliance with the terms of the settlement
with Delaware, the Trust issued 380,280 units to the Delaware State Escheator.
The increase in the number of issued units resulted in a 4.57% dilution
reducing subsequent per unit income by that percentage. Beyond the dilution
from this and future issuances of units, the settlement will have no impact on
the Trust's financial condition, result of operations or long or short term
liquidity. The termination of liability for payment of arrears of dividends
or distributions after the year 2005 as specified in the settlement approval
order of the Delaware Court of Chancery is expected to benefit the Trust's
financial condition. See Note 3 to Financial Statements contained herein.
Fiscal 1995 versus Fiscal 1994
- ------------------------------
For fiscal 1995 the Trust's royalty income of $12,477,788 was 31.7%
higher than the previous year. A combination of increased sales from the
higher royalty area of western Oldenburg and a strong Deutsche mark yielded
the increased royalties. In contrast to the prior year, when the partial
shutdown of the Grossenkneten desulfurization plant significantly affected the
amount of royalties received in the third and fourth quarters, no such unusual
or extended interruption of production occurred during fiscal 1995. Since
last year's partial shutdown affected production of saleable gas from the
higher royalty western portion of Oldenburg to a greater degree, in 1995 the
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increase in production and sales was slanted toward gas from the west. Total
gas sales of 76.8 billion cubic feet from the higher royalty western area
increased by 15.45% while gas sales of 183.8 billion cubic feet for all of
Oldenburg only increased by 2.4%. In addition, the continued strength of the
Deutsche mark throughout the year contributed to the amount of dollars
received by the Trust upon the transfer of funds from Germany. For the year,
the average value of the Deutsche mark increased from 60.3 cents to 69.2
cents, an improvement of 14.6%. While gas prices, which averaged 1.46
Pfennigs per Kwh, declined somewhat from the prior year (1.65% and 3.9% for
western and overall Oldenburg respectively), the negative effect of that
decline was easily offset by the increases in sales and exchange rates.
There have been no payments under the Mobil sulfur royalty, since
the most recent sulfur price of DM 91 per metric ton is well below the
threshold for the resumption of royalty payments. The world sulfur situation
looks to deteriorate further as a result of world wide over supply and
continued increases in the removal of sulfur from petroleum products for
environmental compliance.
Trust expenses of $612,682 showed a decrease of nearly 18%,
reflecting a reduction in legal expenses as well as the absence of audit
expenses in the off year of the biennial audit cycle of the operating
companies in Germany. The increase in interest income to $76,569 reflects
both the increase of funds available for investment as well as
somewhat higher rates available through the exclusive use of Treasury bills
for short term investments.
During fiscal 1995 and 1994 respectively, an additional 1,086 and
14,682 Trust units were issued and $31,701 and $412,306 were paid to former
unlocated shareholders of North European Oil Corporation and North European
Oil Company who presented shares for exchange or filed properly documented
affidavits of loss and obtained an unlimited, open penalty indemnity bond.
- 17 -
Item 8. Financial Statements and Supplementary Data
--------------------------------------------
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
------------------------------------------
Page Number
-----------
Report of Independent Public Accountants F-1
Financial Statements:
Statements of Assets, Liabilities and
Trust Corpus as of October 31, 1996 and 1995 F-2
Statements of Income and Expenses on a Cash Basis
for the Years Ended October 31, 1996, 1995 and 1994 F-3
Statements of Undistributed Earnings
for the Years Ended October 31, 1996, 1995 and 1994 F-4
Statements of Changes in Cash and Cash Equivalents
for the Years Ended October 31, 1996, 1995 and 1994 F-5
Notes to Financial Statements F-6 - F-9
Schedules are omitted because they are not applicable or not required or
because the required information is included in the financial statements or
notes thereto.
- 18 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To North European Oil Royalty Trust:
We have audited the accompanying statements of assets, liabilities and trust
corpus of North European Oil Royalty Trust as of October 31, 1996 and 1995 and
the related statements of income and expenses on a cash basis, undistributed
earnings and changes in cash and cash equivalents for each of the three years
in the period ended October 31, 1996. 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 generally accepted accounting
standards. 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.
The accounts of the Trust are maintained on the cash basis of accounting under
which income is not recorded until collected instead of when earned, and
expenses are recorded when paid instead of when incurred. Thus, the
accompanying financial statements are not intended to present financial
position and results of operations in conformity with generally accepted
accounting principles which requires the use of the accrual basis of
accounting (see Note 1).
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities and trust corpus of North
European Oil Royalty Trust as of October 31, 1996 and 1995, and its income and
expenses, undistributed earnings and changes in cash and cash equivalents
for each of the three years in the period ended October 31, 1996, all on the
cash basis of accounting.
As discussed in Note 3, the Trust has a contingent liability relating to
unclaimed units and distributions. No reserves are established or reflected
in the fanancial statements for the possibility that funds would be required
to satisfy such claims.
/s/ Arthur Andersen LLP
Roseland, New Jersey
November 1, 1996
F-1
- 19 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
OCTOBER 31, 1996 AND 1995
-------------------------
ASSETS 1996 1995
------ ------------ ------------
Current Assets --
Cash and cash equivalents (Note 1) $2,477,515 $2,951,227
Producing gas and oil
royalty rights (Note 1) 1 1
------------ ------------
$2,477,516 $2,951,228
============ ============
LIABILITIES AND TRUST CORPUS
----------------------------
Current liabilities --
Cash distributions payable
to unit owners, paid
November 1996 and 1995 $2,348,031 $2,909,894
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 129,484 41,333
------------ ------------
$2,477,516 $2,951,228
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-2
- 20 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
---------------------------------------------------
1996 1995 1994
------------ ------------ ------------
German gas, oil and
sulfur royalties
received $ 9,710,487 $12,477,788 $ 9,476,252
Interest income 71,834 76,569 45,798
Trust expenses ( 696,005) ( 612,682) ( 744,628)
------------ ------------ ------------
Net income on
a cash basis $ 9,086,316 $11,941,675 $ 8,777,422
============ ============ ============
Net income per unit
on a cash basis $1.05 $1.43 $1.06
======= ======= =======
Cash distributions paid
or to be paid:
Dividends and
distributions per
unit paid or to be
paid to former unlocated
shareholders (Note 3) $ .01 $ .00 $ .05
Distributions per unit
paid or to be paid to
unit owners (Note 4) 1.04 1.43 1.01
------- ------- -------
$1.05 $1.43 $1.06
======= ======= =======
The accompanying notes to financial statements
are an integral part of these statements.
F-3
- 21 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
---------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Balance,
beginning of year $ 41,333 $ 19,435 $ 43,897
Net income on
a cash basis 9,086,316 11,941,675 8,777,422
------------ ------------ ------------
9,127,649 11,961,110 8,821,319
------------ ------------ ------------
Less:
Dividends and
distributions paid
to former unlocated
shareholders (Note 3) 64,178 30,781 412,306
Current year
distributions paid
or to be paid to unit
owners (Note 4) 8,933,987 11,888,996 8,389,578
------------ ------------ ------------
8,998,165 11,919,777 8,801,884
------------ ------------ ------------
Balance, end of year $ 129,484 $ 41,333 $ 19,435
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-4
- 22 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
---------------------------------------------------
1996 1995 1994
------------ ------------ ------------
Sources of cash and
cash equivalents:
German gas, oil
and sulfur
royalties received $ 9,710,487 $12,477,788 $ 9,476,252
Interest income 71,834 76,569 45,798
------------ ------------ ------------
9,782,321 12,554,357 9,522,050
Uses of cash and
cash equivalents:
Payment of Trust
expenses 696,005 612,682 744,628
Distributions and
dividends paid
(Note 3) 9,560,028 10,838,721 9,662,197
------------ ------------ ------------
10,256,033 11,451,403 10,406,825
------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents
during the year ( 473,712) 1,102,954 ( 884,775)
Cash and cash
equivalents,
beginning of year 2,951,227 1,848,273 2,733,048
------------ ------------ ------------
Cash and cash
equivalents,
end of year $ 2,477,515 $ 2,951,227 $ 1,848,273
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-5
- 23 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 1996, 1995 AND 1994
-------------------------------
(1) Summary of significant
accounting policies:
----------------------
Basis of accounting -
---------------------
The accounts of North European Oil Royalty Trust (the "Trust") are
maintained on a cash basis of accounting with the exception of the
accrual for distributions to be paid to certificate owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable incomes represents royalty income received by the Trust
during the period plus interest income less any expenses incured by
the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the cash basis provides a more meaningful presentation to unit
owners of the results of operations of the Trust.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company
(the "Company") (see Note 2). The net book value of the royalty rights
has been reduced to one dollar ($1) in view of the fact that any
remaining net book value of royalty rights is de minimis relative to
annual royalties received and distributed by the Trust and does not
bear any meaningful relationship to the fair value of such rights or
the actual amount of proved producing reserves.
Federal and state income taxes-
-------------------------------
The Trust, as a grantor trust, is exempt from Federal and state income
taxes under a private letter ruling issued by the Internal Revenue
Service.
Cash and cash equivalents-
--------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with maturities of three months or less.
F-6
- 24 -
Net income per unit on the cash basis-
--------------------------------------
Net income per unit on the cash basis is based upon the number of units
outstanding at the end of the period (see Note 3). As of October 31,
1996, 1995 and 1994, there were 8,696,412, 8,313,984 and 8,312,898
units of beneficial interest outstanding, respectively.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975, the
Company was liquidated and the remaining assets and liabilities of the
Company, including its royalty rights, were transferred to the Trust.
(3) Contingent liability:
---------------------
The Trust serves as fiduciary for certain unlocated or unknown
shareholders of North European Oil Corporation (the "Corporation") and
of North European Oil Company, corporate predecessors of the Trust.
From the liquidation of the Company to October 31, 1995, 718,992 Trust
units were issued in exchange for Corporate or Company shares and
dividends of $353,230 and distributions of $4,162,423 were paid to
former unlocated Corporation and Company shareholders. For the year
ended October 31, 1996, 2,148 units were issued in exchanges and
dividends of $762 and distributions of $64,170 were paid to former
unlocated Corporation and Company shareholders.
On February 26, 1996 the settlement of litigation between the Trust and
the Delaware State Escheator was approved by the Delaware Court of
Chancery. As of that date, there were a total of 875,748 authorized but
unissued units, of which 760,560 were subject to the settlement,
representing the unexchanged shares of the Trust's predecessor
corporations. Under the settlement, 380,280 units were issued to the
Escheator on April 17, 1996. Of the units remaining to be issued to the
Escheator, 50% would be issued to the Escheator by June 30, 2000 and the
balance by June 30, 2005. Until June 30, 2000, claims by unlocated or
unknown shareholders of the Trust's corporate predecessors for units and
past dividends and distributions thereon ("subsequent claims") will be
paid by the Escheator and the Trust on a 50:50 basis. From July 1, 2000
to June 30, 2005, subsequent claims will be paid by the Escheator and
the Trust on a 75:25 basis. Any subsequent claims will reduce the
number of units to be issued to the Escheator in 2000 or 2005. Following
the final issuance of units to the Escheator in 2005, the Trust's
contingent liability for past dividends and distributions attributable
to all unexchanged Corporation and Company shares subject to the
settlement will be completely eliminated. Under the terms of the
settlement, the maximum liability of the Escheator for subsequent claims
F-7
- 25 -
is limited to the value of the units received, plus current
distributions on units retained, less the Escheator's share of
subsequent claims. As of October 31, 1996, the maximum liability of the
Escheator is $5,110,136.
Under the Trust Agreement as deemed amended by the February 26, 1996
Delaware Court Order, the Trust is not required to make payments of
arrearages of Company dividends or Trust distributions with respect to
units issued or to be issued to the Escheator. As of October 31, 1996,
there remained a total of 494,178 units that could be issued to
unlocated or unknown Corporation and Company shareholders. Of this
total, 380,280 units are subject to the settlement and remain to be
issued to the Escheator. If all shares, represented by the units
already issued as well as the units remaining to be issued, were
presented for exchange, $487,132 in dividends and $26,543,814 in
distributions would be payable. In the opinion of the Trustees, based
in part on the history of exchanges during the last ten fiscal years,
the maximum liability of the Escheator would be adequate to cover the
Escheator's share of any subsequent claims. In any event, the Trust's
contingent liability for all claims for arrearages will be eliminated in
2005.
F-8
- 26 -
(4) Quarterly results (unaudited):
------------------------------
The table below summarizes the quarterly results and distributions of the
Trust for the years ended October 31, 1996 and 1995.
Fiscal 1996 by Quarter and Year
-------------------------------------------------------------
1st 2nd 3rd 4th Year
---------- ---------- ---------- ---------- -------------
Royalties
received $2,688,592 $2,671,845 $1,796,511 $2,553,539 $ 9,710,487
Net income on
a cash basis 2,466,261 2,507,064 1,674,327 2,438,664 9,086,316
Net income
per unit on
a cash basis .30 .29 .19 .28 1.05
Current year cash
distributions
paid or
to be paid 2,411,304 2,522,316 1,652,336 2,348,031 8,933,987
Current year cash
distributions
per unit .29 .29 .19 .27 1.04
Fiscal 1995 by Quarter and Year
-------------------------------------------------------------
1st 2nd 3rd 4th Year
---------- ---------- ---------- ---------- -------------
Royalties
received $2,760,129 $3,633,648 $3,056,999 $3,027,012 $12,477,788
Net income on
a cash basis 2,590,726 3,476,434 2,952,057 2,922,458 11,941,675
Net income
per unit on
a cash basis .31 .42 .35 .35 1.43
Current year cash
distributions
paid or
to be paid 2,576,998 3,491,943 2,910,161 2,909,894 11,888,996
Current year cash
distributions
per unit .31 .42 .35 .35 1.43
F-9
- 27 -
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure.
-------------------------
Inapplicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The identity, business experience, relationships, and other
information about the Trustees as set forth under the caption "Election of
Trustees" in Registrant's definitive Proxy Statement, dated January 9, 1997,
as filed with the Commission, are incorporated herein by reference in
accordance with Instruction G(3) to Form 10-K. See "Executive Officers of the
Trust" under Item 1 for information concerning the executive officers of the
Trust.
Item 11. Executive Compensation.
-----------------------
The information about remuneration of the Trustees and Management as
set forth under the caption "Management Compensation" in Registrant's
definitive Proxy Statement, dated January 9, 1997, as filed with the
Commission, is incorporated herein by reference in accordance with Instruction
G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information about security ownership of certain beneficial
owners and Management as set forth in the introduction to and under the
caption "Election of Trustees" in Registrant's definitive Proxy Statement
dated January 9, 1997, as filed with the Commission, is incorporated herein by
reference in accordance with Instruction G(3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information about certain relationships and related transactions
as set forth under the captions "Election of Trustees" and "Management
Compensation" in Registrant's definitive Proxy Statement, dated January 9,
1997 as filed with the Commission, is incorporated herein by reference in
accordance with Instruction G(3) to Form 10-K.
- 28 -
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
-----------------------------------------------------------------
(a) The following is a list of the documents filed as part of this
report:
1. Financial Statements
Index to Financial Statements and Schedule for the Years Ended
October 31, 1996, 1995 and 1994
Report of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus as of
October 31, 1996 and 1995
Statements of Income and Expenses on a Cash Basis for the Years
Ended October 31, 1996, 1995 and 1994
Statements of Undistributed Earnings for the Years Ended
October 31, 1996, 1995 and 1994
Statements of Changes in Cash and Cash Equivalents for the
Years Ended October 31, 1996, 1995 and 1994
Notes to Financial Statements
2. Exhibits
The Exhibit Index following the signature page lists all
exhibits filed with this report or incorporated by reference.
(b) No Current Report on Form 8-K was filed during the last quarter
of the period covered by this Report.
- 29 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
Dated: January 7, 1997 By: /s/ John H. Van Kirk
---------------------
John H. Van Kirk,
Managing Trustee
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: January 7, 1997 /s/ John H. Van Kirk
-----------------------------
John H. Van Kirk, Trustee
Dated: January 7, 1997 /s/ Robert P. Adelman
------------------------------
Robert P. Adelman, Trustee
Dated: January 7, 1997 /s/ Robert J. Castle
------------------------------
Robert J. Castle, Trustee
Dated: January 7, 1997 /s/ Samuel M Eisenstat
-------------------------------
Samuel M Eisenstat, Trustee
Dated: January 7, 1997 /s/ Willard B. Taylor
--------------------------------
Willard B. Taylor, Trustee
- 30 -
Exhibit Index
-------------
Exhibit Page
- ------- ----
(3) Trust Agreement, dated September 10, 1975,
amended May 13, 1976, and February 10, 1981,
(incorporated by reference to Exhibit 4(i) to
Form 10-Q for the quarter ended April 30, 1981
(File No. 0-8378)).
(10.1) Agreement with OEG, dated April 2, 1979,
exhibit to Current Report on Form 8-K,
filed May 11, 1979 (incorporated by
reference as Exhibit 1 to Current Report
on Form 8-K, filed May 11, 1979
(File No. 0-8378)).
(10.2) Agreement with Mobil Oil, A.G. concerning
sulfur royalty payment, dated March 30,
1979, (incorporated by reference to Exhibit 3
to Current Report on Form 8-K, filed
May 11, 1979 (File No. 0-8378)).
(22) There are no parents and no subsidiaries
of the Trust.
(99.1) Estimate of Remaining Proved Producing Reserves 32
in the Northwest Basin of the Federal Republic of
Germany as of October 1, 1996 prepared by
Ralph E. Davis Associates, Inc.
(99.2) Calculation of Cost Depletion Percentage 42
for 1996 Tax Year by
Ralph E. Davis Associates, Inc.
(99.3) 1996 Tax Letter mailed to Unit Owners registered 47
during the 1996 calendar year and included in the
1996 Annual Report.
- 31 -
(99.4) Notice to Unit Owners of hearing date and terms
of the Joint Petition for Approval of Settlement
of Pending Litigation on Form 8-K, filed
December 11, 1995.
(99.5) Order Approving Settlement signed by Vice
Chancellor Jack Jacobs of the Delaware
Court of Chancery on Form 8-K, filed
February 26, 1996.
Exhibit 99.1 - 32 -
NORTH EUROPEAN OIL ROYALTY TRUST
ESTIMATE OF REMAINING
PROVED PRODUCING RESERVES
IN THE NORTHWEST BASIN OF THE
FEDERAL REPUBLIC OF GERMANY
AS OF
OCTOBER 1, 1996
RALPH E. DAVIS ASSOCIATES, INC.
HOUSTON, TEXAS DECEMBER, 1996
- 33 -
T A B L E O F C O N T E N T S
--------------------------------
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Description of Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Limitations of Available Data . . . . . . . . . . . . . . . . . . . . . . . .3
Oldenburg Area - Sales and Reserves . . . . . . . . . . . . . . . . . . . . .4
Net Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 1 . . . . .Reserve Summary and Five Year
Net Sales History . . . . . . . . . . . . . . . . . . . . . 7
Certificate of Qualification . . . . . . . . . . . . . . . . . . . . . . . . 8
- 34 -
Ralph E. Davis Associates, Inc.
Consultants - Petroleum and Natural Gas
3555 Timmons Lane - Suite 1105
Houston, Texas 77027
(713) 622-8955
December 18, 1996
The Trustees of
North European Oil Royalty Trust
P. O. Box 456
Red Bank, New Jersey 07701
Gentlemen:
In accordance with your request, we have prepared a report of the
estimated remaining proved producing reserves attributable to the overriding
royalty interest of North European Oil Royalty Trust (the "Trust" or "NEORT")
in the Northwest German Basin of the Federal Republic of Germany as of October
1, 1996 (the "Reserve Report"). The proved producing reserves are as of
October 1, 1996 and the reported sales are for the twelve month period ending
September 30, 1996. The use of the period ending September 30, 1996 is
consistent with prior years and allows the timely calculation of the royalty
reserves and the cost depletion percentage.
In annual reserve reports prepared for the Trust prior to 1992, reserve
estimates were presented for the Trust's interests in fields located in the
Alpine Foreland Area of Bavaria and other non-Oldenburg areas. Reports from
1992 forward omit such estimates. The Trust continues to receive royalty
payments from these interests. However, these royalties represent less than
two (2) percent of the Trust's total royalties and the expenses involved in
the determination of reserve estimates for these interests are not warranted
by the royalties received. We will continue to monitor the quarterly
statements and if increases are noted that could add reserves to the Trust, we
will resume estimating future reserves.
- 35 -
The Trust normally receives from Mobil Oil A.G. ("Mobil"), the
German subsidiary of Mobil Corp., a 2% royalty on gross receipts from sales of
sulfur obtained as a by-product of sour gas produced from the western portion
of Oldenburg. This agreement is subject to an escalation clause which
provides that if Mobil's selling price is below the escalated base price,
payment of royalties is deferred until such time as the selling price again
exceeds the escalated base price. Throughout fiscal 1996, Mobil's selling
price was below the escalated base price. We will continue to monitor this
situation, but until the point that Mobil's selling price again exceeds the
escalated base price, reserves subject to this royalty will not be included in
overall reserve calculations.
DESCRIPTION OF HOLDINGS
-----------------------
The Trust holds various overriding royalty rights on sales of gas,
sulfur and oil from certain concessions and leases in the Federal Republic of
Germany. The Oldenburg concession (1,398,000 acres), covering virtually the
entire former State of Oldenburg and located in the State of Lower Saxony, is
the major source of royalty income for the Trust. Although the Trust holds
overriding royalty rights on other areas outside the Oldenburg concession, the
reserve calculations for this year do not include reserves from these areas
due to the low level of royalty income and intermittent production.
1. The Oldenburg concession is held by Oldenburgische Erdol
Gesellschaft ("OEG"). Within this concession Mobil and BEB
Erdgas und Erdol GmbH ("BEB"), a joint venture of Exxon Corp.
and Royal Dutch Group, carry out all exploration, drilling,
production and sales activities.
(a) Under one series of rights covering the western part of
the Oldenburg concession (approximately 662,000 acres),
the Trust receives a royalty payment of 4% on gross
receipts from sales by Mobil of natural gas, casinghead
gas, crude oil and condensate. The Trust also receives
from Mobil a 2% royalty payment on gross receipts of sales
of sulfur obtained as a by-product of sour gas produced
- 2 -
- 36 -
from the western part of Oldenburg. The payment of
the sulfur royalty is conditioned upon sales by Mobil of
sulfur at a selling price above an agreed upon base
price, which base price is adjusted by an inflation
index. Where the average selling price falls below the
adjusted base price, no royalties are payable.
(b) Under another series of rights covering the entire
Oldenburg concession and pursuant to an agreement with OEG
(the "OEG Agreement"), the Trust receives royalties at the
rate of 0.6667% on gross receipts from sales of natural
gas, casinghead gas, crude oil, condensate and sulfur
(removed during the processing of sour gas) less 50% of an
escalating cost base. This cost base is recomputed
annually based on indexes reflecting changes in certain
prices within Germany. This system will be revised in
2002 unless the escalating cost base diverges
significantly from the actual production costs, in which
case the system will be revised in 1999. In either case,
the revised system provides that 50% of field handling,
treatment and transport costs, as reported for state
governmental royalty purposes, will be deducted from gross
sales receipts prior to the royalty calculation.
LIMITATIONS OF AVAILABLE DATA
-----------------------------
The reserves considered in this report are defined as proved
producing reserves. Proved producing reserves are limited to those quantities
which can be expected to be recoverable commercially from known reservoirs at
current prices and costs, under existing regulatory practices and with
existing conventional equipment and operating methods. Proved producing
reserves do not include either proved developed non-producing reserves or any
class of probable reserves.
The reserve estimates were prepared using engineering methods generally
accepted by the petroleum industry. The reliability of any reserve estimate
- 3 -
- 37 -
is a function of the quality of available information and of engineering
interpretation and judgment.
The Trust, as an overriding royalty interest owner, is not entitled
to receive proprietary data from the various operators on producing wells.
Data (such as logs, core analysis, reservoir tests, pressure tests, gas
analyses, geologic maps, and individual well production histories, which are
used in volummetric and material balance type reserve estimates) are not
available to the Trust.
The Trust receives various monthly and quarterly statements that
report production, sales and revenue data from the operators. Utilizing the
same procedures as in prior years, this information, plus published
information received from W.E.G. (a German organization comparable to the
American Petroleum Institute or the American Gas Association), has been used
to prepare this annual report. We believe the reserve estimates prepared
using this data represent realistic values. However, due to the limitation of
data, this estimate of reserves can not have the same degree of accuracy that
an estimate of reserves prepared using all pertinent data would have. Our
experience in the evaluation of reserves using such limited data compensates
somewhat for the limitations of available data.
The data in the reports received by the Trust is in metric tons and
cubic meters. The following Metric to English Unit conversion factors were
used:
Oil: 7.23 barrels per metric ton
Gas: 37.25 cubic feet per cubic meter at 14.7 psia
and 60 degrees Fahrenheit
Sulfur: 1.1 short tons per metric ton
OLDENBURG AREA - SALES AND RESERVES
------------------------------------
The Trust's royalty income comes primarily from the Oldenburg area.
Gas production accounts for the majority of the income; however, the high
hydrogen sulfide content of much of the gas produced necessitates its removal
before the gas can be sold.
- 4 -
- 38 -
The facilities at the Grossenkneten desulfurization plant are the primary
means by which the hydrogen sulfide is removed. Following renovations and
improvements to the plant in 1994 and again in 1996, the plant's input
capacity has been increased from 600,000 cu. meters per hour to its present
capacity of 750,000 cu. meters per hour. In 1994, a 60 Km. pipeline
connecting the Oldenburg concession with the NEAG desulfurization plant was
completed. Initially, this pipeline provided access to additional and excess
capacity at NEAG of up to approximately 90,000 cu. meters per hour. However,
following the development of additional reserves outside the Oldenburg
concession this former excess capacity will not be available for the
processing of Oldenburg gas for some period of time.
During the 12 months ending September 30, 1996 total sales for the
Oldenburg area were 333,997 barrels of oil and condensate, 174,970 million
cubic feet (MMcf) of non-associated gas, 332 MMcf of associated gas and
828,804 short tons of sulfur. The sales from the western portion of
Oldenburg, where the Trust has a greater interest, were 188,859 barrels of
condensate and oil, 63,188 MMcf of non-associated gas, 133 MMcf of associated
gas and 208,661 short tons of sulfur.
Estimated gross remaining proved producing reserves attributable to
the total Oldenburg area are 3,504,974 barrels of condensate and oil,
2,152,001 MMcf of non-associated gas, 3,392 MMcf of associated gas and
9,479,718 short tons of sulfur.
NET RESERVES
------------
To present an accurate picture of estimated proved producing
reserves net to the Trust, the gross reserve figures outlined above must be
modified by the impact of the different royalty rates in effect in the
Oldenburg concession. A comparison of the Trust's overriding royalty rates in
both the western and eastern areas of Oldenburg is as follows:
- 5 -
- 39 -
Mobil Oil A. G. West East
--------------- ---- ----
Oil & Gas 4% 0%
Sulfur 2%* 0%
BEB
---------------
Oil & Gas 0.6667%** 0.6667%**
Sulfur 0.6667%** 0.6667%**
*Temporarily suspended. (See explanation above.)
**Prior to the calculation of royalties, a portion of the field
handling, transport and manipulation costs for products produced
and sold is deducted.
The application of these royalty rates to the estimated gross
remaining proved producing reserves attributable to the western and eastern
Oldenburg areas yields the combined estimated proved producing reserves net to
the Trust. As of October 1, 1996, these figures stand at 89,141 barrels of
oil and condensate, 40,644 MMcf of gas and 48,754 short tons of sulfur.
A summary of net proved producing reserves by product and a five
year history of net sales attributable to the royalty interests of the Trust
are presented in Table 1.
Sincerely yours,
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Larry A. Barnett
-------------------------------
Larry A. Barnett, P. E.
Senior Vice-President
LAB:sw
- 6 -
- 40 -
TABLE 1
NORTH EUROPEAN OIL ROYALTY TRUST
RESERVE SUMMARY AND FIVE YEAR NET SALES HISTORY
ESTIMATED NET PROVED PRODUCING RESERVES
AS OF OCTOBER 1, 1996
OLDENBURG
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
-------- ---------- -------------- ----------
89,141 62 40,644 48,754**
**Note: At current prices, no royalties are presently
being paid under the Mobil sulfur royalty.
FIVE YEAR NET SALES SUMMARY
12 MONTHS ENDING SEPTEMBER 30
OLDENBURG
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
-------- ---------- -------------- ----------
1996 9,348 8 3,450 4,268**
1995 9,226 8 4,098 4,081**
1994 8,984 11 3,681 2,391**
1993 10,550 18 4,031 3,790**
1992 10,100 10 4,056 8,102
**Note: At current prices, no royalties are presently
being paid under the Mobil sulfur royalty.
- 7 -
- 41 -
CERTIFICATE OF QUALIFICATION
I, Larry A. Barnett, Registered Professional Engineer, do hereby
certify:
1. That I am senior vice-president of the consulting firm of Ralph E.
Davis Associates, Inc. with offices at 3555 Timmons Lane, Suite
1105, Houston, Texas 77027.
2. That I have prepared a reserve report on the interests of the North
European Oil Royalty Trust in the Northwest Basin of the Federal
Republic of Germany for the twelve month period ending September 30,
1996.
3. That I have no direct or indirect interest, nor do I expect to
receive any direct or indirect interest, in the properties or in any
securities of the North European Oil Royalty Trust.
4. That I attended The University of Texas and that I graduated with a
Bachelor of Science Degree in Petroleum Engineering in 1958.
5. That I am a Registered Professional Engineer in the States of Texas
and Louisiana, Registration Numbers 23399 and 9647 respectively, and
that I am a member in good standing of the Society of Petroleum
Engineers, the Society of Petroleum Evaluation Engineers and the
Society of Professional Well Log Analysts.
6. That I have in excess of thirty-five years experience in the
evaluation of oil and gas properties in the United States, Canada,
Mexico, South America and Germany, and that I have been practicing
as a consultant in petroleum engineering and geology since 1987.
RALPH E. DAVIS ASSOCIATES, INC.
/S/ Larry A. Barnett
-------------------------------
Larry A. Barnett, P. E.
Senior Vice-President
- 8 -
Exhibit 99.2 - 42 -
NORTH EUROPEAN OIL ROYALTY TRUST
CALCULATION OF COST DEPLETION PERCENTAGE
For 1996 Tax Year
RALPH E. DAVIS ASSOCIATES, INC.
HOUSTON, TEXAS DECEMBER, 1996
- 43 -
Ralph E. Davis Associates, Inc.
Consultants - Petroleum and Natural Gas
3555 Timmons Lane - Suite 1105
Houston, Texas 77027
(713) 622-8955
December 18, 1996
The Trustees of
North European Oil Royalty Trust
P. O. Box 456
Red Bank, New Jersey 07701
Gentlemen:
In accordance with your request, we have prepared a report of the
estimated remaining proved producing reserves attributable to the overriding
royalty interest of North European Oil Royalty Trust (the "Trust" or "NEORT")
in the Northwest German Basin of the Federal Republic of Germany as of
September 30, 1996 (the "Reserve Report"). The Reserve Report forms the basis
on which this report, the Calculation of the Cost Depletion Percentage for the
1996 Calendar Year (the "Cost Depletion Report"), is made. As detailed in
Attachment A, the total cost depletion percentage to be taken for the twelve
month period ending December 31, 1996 is 7.891 percent.
In the annual reserve reports prepared for the Trust prior to
1992, reserve estimates were presented for the Trust's interests in fields
located in the Alpine Foreland Area of Bavaria and other non-Oldenburg areas.
Reserves and net sales for these areas were used in the calculation of cost
depletion in those prior years. Reports since 1992 do not include such
estimates. The Trust continues to receive royalty payments from these
interests. However, these royalties represent less than two (2) percent of
the Trust's total royalties and the expenses involved in the determination of
reserve estimates for these interests are not warranted by the royalties
received. The exclusion of these reserves does not have a material efffect on
the calculation of the cost depletion percentage.
- 44 -
The Trust's estimated remaining net proved producing reserves as of
October 1, 1996 and net sales for the twelve month period ending September 30,
1996 are as follows:
Reserves Sales
-------- -----
Oil, Barrels 89,141 9,348
Associated Gas, MMcf 62 8
Non-Associated Gas, MMcf 40,644 3,450
Sulfur, Short Tons 45,311** 4,268**
(MMcf = million cubic feet @ 14.7 psia and 60 degrees Fahrenheit)
** Note: At current price levels no royalties are being paid under
the Mobil sulfur royalty.
Computation of Total Cost Depletion Percentage
----------------------------------------------
The categories of reserves considered in the computation of total
cost depletion percentage are oil, associated gas and non-associated gas.
Sulfur is a by-product of the gas production and is not considered in the cost
depletion calculation. For each category of reserves, a cost base for the
Trust was established as of January 1, 1976. This cost base is adjusted
(reduced) each year by an amount of depletion that is calculated by
multiplying the remaining cost base at the beginning of the current year by a
unit cost depletion factor. The unit cost depletion factor is the ratio of
the net sales during the current year to the adjusted net proved producing
reserves at the beginning of the current year.
Significant items in the cost depletion percentage calculation that
appear on Attachment A as specific item numbers ( ) and their sources are as
follows:
The cost base as of 1-1-95 (2) and the depletion taken during 1995
(3) were obtained from the previous year's report. The cost base as of 1-1-96
(4) forms the initial starting point for the calculation of the cost depletion
percentage for the 1996 tax year. The cost base for 1-1-96 (4) then is
(2) - (3).
- 2 -
- 45 -
The adjusted net proved producing reserves as of 10-1-95 (8) is
obtained by adding the net sales (7) to the estimated remaining net proved
producing reserves as of 10-1-96 (6). Therefore (8) = (6) + (7).
The unit cost depletion factor (10) is obtained by dividing the net
sales (7) by the adjusted net proved producing reserves as of 10-1-95 (8).
Therefore (10) = (7) / (8).
The cost depletion to be taken for each category of reserves (11)
that is used to reduce the original cost base each year then is the product of
the unit cost depletion factor (10) multiplied by the cost base as of 1-1-96
(4). Therefore (11) = (4) x (10).
The total NEORT or Trust cost depletion percentage (12) then is the
sum of the cost depletion to be taken for each category Sum (11) divided by
the sum of the cost base as of 1-1-96 for each category Sum (4). Therefore
(12) = Sum (11) / Sum (4).
The Trust's total cost depletion percentage represents the allowable
cost depletion for the current tax year, expressed as a percentage of the cost
base at the beginning of the tax year.
Sincerely yours,
RALPH E. DAVIS ASSOCIATES, INC.
/S/ Larry A. Barnett, P. E.
-------------------------------
Larry A. Barnett, P. E.
Senior Vice-President
LAB:sw
- 3 -
- 46 -
ATTACHMENT A
NORTH EUROPEAN OIL ROYALTY TRUST
COMPUTATION OF COST DEPLETION PERCENTAGE
For the Year Ending December 31, 1996
OLDENBURG
-----------------------------------------
1. Product Associated Non-Assoc.
Oil Gas Gas
Barrels MMCF MMCF
-------- ---------- ----------
NEORT COST BASE ALLOCATION (%)
- -------------------------------
2. Cost base as of 1-1-95 0.66294 0.05698 18.68911
3. Less depletion taken during 1995 0.06654 0.00651 1.74032
4. Cost base as of 1-1-96 0.59640 0.05047 16.94879
NEORT NET RESERVES (Barrels of Oil and Million Cubic Feet)
- -----------------------------------------------------------
5. Estimated remaining net proved
producing reserves as of 10-1-95 82,687 62 39,910
6. Estimated remaining net proved
producing reserves as of 10-1-96 89,141 62 40,644
7. Net sales from 10-1-95 to 9-30-96 9,348 8 3,450
8. Adjusted net proved producing
reserves as of 10-1-95 98,489 70 44,094
9. Adjustments to reserves during period 15,802 8 4,184
COST DEPLETION CALCULATION (%)
- -------------------------------
10. Unit cost depletion factor 0.09491 0.11429 0.07824
11. 1996 cost depletion to be taken 0.05661 0.00577 1.32611
12. Total NEORT cost depletion percentage = 7.891 Percent of 1-1-96 cost base
Footnotes:
Line (2) from 1995 depletion computations Line (8) = Line (6) + Line (7)
Line (3) from 1995 depletion computations Line (9) = Line (8) - Line (5)
Line (4) = Line (2) - Line (3) Line (10) = Line (7) / Line (8)
Line (5) from reserves review as of 10-1-95 Line (11) = Line (10) x Line (4)
Line (6) from reserves review as of 10-1-96 Line (12) = Sum (11) / Sum (4)
Line (7) from OEG and MOBIL statements
Exhibit 99.3 - 47 -
North European Oil Royalty Trust
Office of the Managing Director
P.O. Box 456
Red Bank, New Jersey 07701
(908) 741-4008
IMPORTANT
RETAIN THIS LETTER FOR PREPARATION OF YOUR
1996 INCOME TAX RETURNS
THE TRUST DOES NOT FILE NOR FURNISH TO OWNERS FORM 1099
January 9, 1997
To the Present and Former Unit Owners of
North European Oil Royalty Trust:
This letter sets forth the information you will require for preparation
of your personal income tax returns in connection with ownership of units of
beneficial interest ("Units") in North European Oil Royalty Trust (the
"Trust") during 1996.
For Federal income tax reporting purposes, each owner of Units in the
Trust is considered to be a grantor or substitute grantor as well as a
beneficiary of the Trust. As such, you are deemed to have received your pro
rata share of overriding royalties when paid to the Trust and are permitted to
deduct your share of Trust expenses. Consequently, your net taxable income
may not correspond exactly to the cash distributions received.
TRUST DISTRIBUTIONS SHOULD NOT BE INCLUDED ON INCOME TAX RETURNS AS "DIVIDEND
- -----------------------------------------------------------------------------
INCOME" AND ARE NOT ELIGIBLE FOR THE DIVIDENDS RECEIVED DEDUCTION
- -----------------------------------------------------------------
FOR CORPORATIONS.
- -----------------
The Internal Revenue Service has ruled that the overriding royalty rights
held by the Trust represent economic interest in oil and gas deposits.
Consequently, income realized from such interests is taxable to each Unit
owner as ordinary income subject to cost depletion. Each Unit owner's basis
for computing cost depletion is the adjusted cost basis for their Units. This
adjusted cost basis is to be reduced annually by the depletion previously
allowed. Ralph E. Davis Associates, Inc. of Houston, Texas, based upon
computations of proven reserves estimated in accordance with accepted
engineering analytical principles, has recommended that the percentage to be
applied to the cost basis to determine deductions for cost depletion for the
year 1996 is 7.891%. The suggested percentage for cost depletion deduction
will be adjusted annually in accordance with reported production results and
revised reserve estimates. Since the above percentage covers the entire year
1996, if you owned Units for only a portion of the year, you are required to
pro rate the percentage depletion in the ratio that the total income per Unit
shown on the schedule below for the period of your ownership bears to the
total income per Unit for the entire year.
If you owned Units for the period January 1, 1996 through December 31,
1996, you will be considered to have received and expended, on the cash basis,
the respective totals shown below for each Unit. On the other hand, if you
- 48 -
owned Units during only a portion of that period, then the schedule shows the
amounts of income and deductible expenses reportable by you for each Unit
owned for the respective months. For your information, income is received
between the 24th and the end of each month.
Income per Unit Expenses per Unit
January 1996 $ 0.0890 $ 0.0129
February 0.0949 0.0051
March 0.1046 0.0075
April 0.1076 0.0063
May 0.0892 0.0032
June 0.0667 0.0103
July 0.0507 0.0050
August 0.0729 0.0023
September 0.1041 0.0054
October 0.1167 0.0056
November 0.1397 0.0044
December 0.1067 0.0058
--------- ---------
TOTAL 1996 $ 1.1428 $ 0.0738
========= =========
Income and expenses should be reported on Federal Income Tax Form 1040,
Schedule E. Under Part I, Income or Loss from Rentals and Royalties, line 1
enter property description as "oil and gas overriding royalty rights, Germany
through North European Oil Royalty Trust." Your income and expenses are
calculated by multiplying the above per Unit figures by the number of Units
you owned. Your income should be entered on line 4. Expenses should be
entered on line 18 as "miscellaneous Trust expenses." Your cost depletion
deduction should be entered on line 20. This figure is derived by multiplying
the total adjusted cost of all your Units by .07891. Your adjusted cost is
your original cost minus depletion deducted in prior years. Your net
reportable income or loss should be entered on lines 22 and 26 in Part I and
on line 40 in Part V and is determined by subtracting the amounts entered on
lines 18 and 20 from the amount on line 4. All of the above entries should be
adjusted for the period of time you owned your Units, if you did not own them
throughout 1996.
The royalty income received by the Trust represents income from Germany.
Although there are no German taxes imposed on this income, this information
should be considered if you have available foreign tax credits from other
sources.
The Trust will submit this letter and the listing of Unit owners during
- ----------------------------------------------------------------------------
1996 to the Internal Revenue Service. This list will contain names,
- -------------------------------------
addresses, tax ID or Social Security numbers; you may wish to attach a copy
of this letter to your tax returns.
Most sincerely,
/S/ John R. Van Kirk
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statements of Assets, Liabilities and Trust Corpus at October 31, 1996 and the
Satements of Income and Expenses on a Cash Basis for the Year Ended October 31,
1996 and is qualified in its entirety by reference to suchfinancial statements
and the accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 2,477,515
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,477,515
<PP&E> 1
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,477,516
<CURRENT-LIABILITIES> 2,348,031
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 129,485
<TOTAL-LIABILITY-AND-EQUITY> 2,477,516
<SALES> 0
<TOTAL-REVENUES> 9,782,321
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 696,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,086,316
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,086,316
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
