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 quarterly period ended July 31, 1998 or
[ ] 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 1-8245
NORTH EUROPEAN OIL ROYALTY TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2084119
----------------------- --------------------------
(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
-------------------------------------------------------------
(Address of principal executive offices)
(732) 741-4008
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Class Outstanding at July 31, 1998
- ----- -------------------------------
Units of Beneficial Interest 8,696,430
ARTHUR ANDERSEN LLP
ACCOUNTANT'S REVIEW REPORT
----------------------------
To North European Oil Royalty Trust:
We have reviewed the accompanying statements of assets, liabilities and trust
corpus of North European Oil Royalty Trust (the "Trust") as of July 31, 1998
and the related statements of income and expenses on a cash basis for the
three months and nine months ended July 31, 1998 and 1997, and the related
statements of changes in cash and cash equivalents and undistributed earnings
for the nine months ended July 31, 1998 and 1997. These financial statements
are the responsibility of the Trust's management.
The statement of assets, liabilities and trust corpus as of October 31, 1997
of the Trust was maintained on the cash basis rather than the accrual basis of
accounting and was audited by us. Our report dated November 1, 1997 indicates
the statement did not purport to present, and in our opinion did not present,
financial position and results of operations in conformity with generally
accepted accounting principles which require the use of the accrual basis of
accounting. We have not performed any auditing procedures since that date.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
The accounts of the Trust are maintained on a 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 require the use of the accrual basis of accounting
(see Note 1).
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with 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 financial statements for the possibility that funds would be required
to satisfy such claims.
/s/ Arthur Andersen LLP
-------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
August 7, 1998
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
----------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1997
-------------------------------------------------
1998 1997
-------------- ---------------
(unaudited)
German gas, oil and sulfur
royalties received $ 3,750,200 $ 3,170,930
----------- -----------
Interest income 26,471 26,257
----------- -----------
Trust expenses ( 118,540) ( 126,261)
----------- -----------
Net income on a cash basis $ 3,658,131 $ 3,070,926
=========== ===========
Net income per unit on a cash basis $ .42 $ .35
====== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .00
Distributions per unit to be paid to
unit owners $ .42 $ .36
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
JULY 31, 1998 AND OCTOBER 31, 1997
----------------------------------
1998 1997
-------------- -------------
(unaudited) (audited)
Current assets - - Cash and
cash equivalents (Note 1) $ 3,706,403 $ 3,024,317
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
$ 3,706,404 $ 3,024,318
Current liabilities - - Cash distributions
payable to unit owners $ 3,652,501 $ 2,956,786
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 53,902 67,531
----------- -----------
$ 3,706,404 $ 3,024,318
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
------------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
--------------------------------------------------
1998 1997
--------------- ---------------
(unaudited)
German gas, oil and sulfur
royalties received $11,043,226 $10,514,118
----------- -----------
Interest income 73,698 67,609
----------- -----------
Trust expenses ( 433,944) ( 532,194)
----------- -----------
Net income on a cash basis $10,682,980 $10,049,533
=========== ===========
Net income per unit on a cash basis $1.23 $1.15
===== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .00
Distributions per unit to be paid
to unit owners $1.23 $1.17
===== ======
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
------------------------------------------------
1998 1997
--------------- ---------------
(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur
royalties $11,043,226 $10,514,118
Interest income 73,698 67,609
----------- -----------
11,116,924 10,581,727
----------- -----------
Uses of cash and cash equivalents:
Payment of Trust expenses 433,944 532,194
Distributions and dividends paid
(Note 3) 10,000,894 9,392,690
----------- -----------
10,434,838 9,924,884
----------- -----------
Net increase(decrease) in cash and
cash equivalents during the period 682,086 656,843
Cash and cash equivalents,
beginning of period 3,024,317 2,477,515
----------- -----------
Cash and cash equivalents,
end of period $ 3,706,403 $ 3,134,358
=========== ===========
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
------------------------------------------------
1998 1997
---------------- ---------------
(unaudited)
Balance, beginning of period $ 67,531 $ 129,484
Net income on a cash basis 10,682,980 10,049,533
----------- -----------
10,750,511 10,179,017
----------- -----------
Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 0 558
Current year distributions paid or
to be paid to unit owners (Note 3) 10,696,609 10,174,816
----------- -----------
10,696,609 10,175,374
----------- -----------
Balance, end of period $ 53,902 $ 3,643
=========== ===========
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
(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 except for the accrual for
distributions to be paid to certificate owners (those distributions
approved by the Trustees for the Trust). The Trust's distributable
incomes represent royalty income received by the Trust during the
period plus interest income less any expenses incurred 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 the remaining
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.
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 both July 31,
1998 and 1997, there were 8,696,430 units of beneficial interest
outstanding.
(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") or of
North European Oil Company, corporate predecessors of the Trust. From the
liquidation of the Company to October 31, 1997, 721,088 units were issued
in exchanges and dividends of $353,992 and distributions of $4,227,151
were paid to former unlocated Corporation and Company shareholders. For
the nine-month period ended July 31, 1998, there were no units issued in
exchanges and $0 dividends and $0 in distributions 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 representing the unexchanged shares of the Trust's
predecessor corporations. Out of this total, 760,560 units were subject
to the settlement. 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 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 the receipt of the
August, 1998 distribution, the maximum liability of the Escheator will be
$6,154,206.
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 July 31, 1998,
there remained a total of 494,160 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 $27,794,586 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 such claims
will be eliminated in 2005.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
The Trust is a passive investment trust which holds overriding royalty
rights and receives monthly royalties from the operating companies,
subsidiaries of Mobil, Exxon and the Royal Dutch Group, based on their sales
of gas, sulfur and oil. These royalties are paid in Deutsche marks and are
converted into U.S. dollars at the time of their receipt. The Trust does not
engage in any business activities and has no need of funds beyond the funds
available from monthly royalties to cover operating expenses. Accordingly,
neither liquidity nor capital resources are pertinent factors in its
activities or operations. All percentage comparisons, except where otherwise
noted, in the following discussion and analysis refer to the prior year's
comparable period.
Net income of the Trust for the third fiscal quarter ended July 31, 1998
increased by 19.1% from $3,070,926 to $3,658,131. A combination of
uninterrupted operation of the Grossenkneten desulfurization plant and a
significant increase in gas sales from the higher royalty area of western
Oldenburg resulted in the increased royalties paid to the Trust and the
subsequent distribution. For the nine month fiscal period ended July 31,
1998, net income of the Trust increased 6.3% from $10,049,533 to $10,682,980.
For the quarter just ended overall Oldenburg gas sales, subject to a
royalty rate of 0.6667%, increased by 21.8% from 38.1 billion cubic feet
("Bcf") to 46.5 Bcf. The bulk of this increase was concentrated in western
Oldenburg, which is subject to an additional royalty rate of 4% for a combined
total of 4.6667%. Gas sales from western Oldenburg increased by 30% from 19.6
Bcf to 25.4 Bcf. With production capacity at the Grossenkneten
desulfurization plant unaffected by any maintenance during this quarter, the
operating companies could take advantage of the additional sour gas reserves
developed in western Oldenburg through the utilization of horizontal
drilling. Having limited their withdrawals from the major sweet gas field of
Hengslage in eastern Oldenburg to periods of greatest demand, we are seeing a
growing percentage of gas originating from western Oldenburg. In the quarter
just ended nearly 55% of all gas sold from the Oldenburg concession originated
in western Oldenburg. Due to the combined royalty in effect in western
Oldenburg, gas originating in western Oldenburg provided almost 90% of all
royalties received by the Trust.
Partially reflecting the lower prices of oil on the international market,
overall Oldenburg gas prices declined 2.8% and averaged 1.90 pfennigs per Kwh
(Pf/Kwh) for the quarter. Gas prices under the higher royalty agreement in
western Oldenburg declined by 7.1% to an average of 1.80 Pf/Kwh. When
converted into more familiar terms using the respective average exchange
rates, gas prices were equivalent to $2.99 and $2.88 per Mcf, under the lower
and higher royalty agreements respectively.
The Deutsche mark continued its decline falling 2.3% to an average
equivalent value of $0.5595 as compared to last year's average value of
$0.5725. Both interest income and Trust expenses were relatively unchanged
from the prior year's period.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 1998, compared to that at fiscal year end (October 31,
1997), shows an increase in assets due to higher royalty receipts during the
quarter.
The Trust distribution for the third quarter of fiscal 1998 is
$0.42, an increase of 16.7% from last year's distribution of $0.36.
Cumulative distributions for the nine month fiscal period are $1.23 compared
to $1.17 for the prior year's period.
As mandated by the Trust Agreement, distributions of income are made
on a quarterly basis. These distributions, as determined by the Trustees,
constitute substantially all the funds on hand after provision is made for
Trust expenses then anticipated. As permitted by the Trust Agreement, no
provision is made for the retention of reserve funds of any kind. If funds
were to be required for payments to owners for shares of the Trust's
predecessor corporations not previously presented for exchange into Trust
units, quarterly distributions would be reduced to the extent required to
provide funds for such payments.
Part II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURE
---------
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 hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: September 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statements of Assets, Liabilities and Trust Corpus at July 31, 1998 and
the Statements of Income and Expenses on a Cash Basis for the three months ended
July 31, 1998 and is qualified in its entirety by reference to such financial
statements and the accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 3,706,403
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,706,404
<CURRENT-LIABILITIES> 3,652,501
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 53,903
<TOTAL-LIABILITY-AND-EQUITY> 3,706,404
<SALES> 0
<TOTAL-REVENUES> 3,776,671
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 118,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,658,131
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,658,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,658,131
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
