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 April 30, 1999 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 April 30, 1999
- ---------------------------- -------------------------------
Units of Beneficial Interest 8,696,496
ARTHUR ANDERSEN LLP
ACCOUNTANTS' 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 April 30, 1999
and the related statements of income and expenses on a cash basis for the
three and six months ended April 30, 1999 and 1998, and the related
statements of changes in cash and cash equivalents and undistributed earnings
for the six months ended April 30, 1999 and 1998. These financial statements
are the responsibility of the Trust's management.
The statement of assets, liabilities and trust corpus as of October 31, 1998
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 9, 1998
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
May 10, 1999
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
----------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
-----------------------------------------------------
1999 1998
------------ ------------
(unaudited)
German gas, oil and sulfur
royalties received $ 2,751,008 $ 3,504,753
----------- -----------
Interest income 17,237 25,180
----------- -----------
Trust expenses ( 163,991) ( 170,414)
----------- -----------
Net income on a cash basis $ 2,604,254 $ 3,359,519
=========== ===========
Net income per unit on a cash basis $ .30 $ .39
====== ======
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 $ .30 $ .39
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
APRIL 30, 1999 AND OCTOBER 31, 1998
-------------------------------------
1999 1998
------------ ------------
(unaudited) (audited)
Current assets - - Cash and
cash equivalents (Note 1) $ 2,650,962 $ 2,765,901
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
$ 2,650,963 $ 2,765,902
Current liabilities - - Cash distributions
payable to unit owners $ 2,608,949 $ 2,695,903
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 42,013 69,998
----------- -----------
$ 2,650,963 $ 2,765,902
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 SIX MONTHS ENDED APRIL 30, 1999 AND 1998
--------------------------------------------------
1999 1998
------------ ------------
(unaudited)
German gas, oil and sulfur
royalties received $ 6,005,370 $ 7,293,026
----------- -----------
Interest income 37,495 47,227
----------- -----------
Trust expenses ( 330,977) ( 315,404)
----------- -----------
Net income on a cash basis $ 5,711,888 $ 7,024,849
=========== ===========
Net income per unit on a cash basis $.66 $.81
==== ====
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 $.66 $.81
==== ====
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 SIX MONTHS ENDED APRIL 30, 1999 AND 1998
----------------------------------------------------
1999 1998
------------ ------------
(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur
royalties $ 6,005,370 $ 7,293,026
Interest income 37,495 47,227
Reimbursement for prior payment of
past dividends and distributions 1,017 0
----------- -----------
6,043,882 7,340,253
=========== ===========
Uses of cash and cash equivalents:
Payment of Trust expenses 330,977 315,404
Distributions and dividends paid
(Note 3) 5,827,844 6,609,286
----------- -----------
6,158,821 6,924,690
----------- -----------
Net(decrease)increase in cash and
cash equivalents during the period ( 114,939) 415,563
Cash and cash equivalents,
beginning of period 2,765,901 3,024,317
----------- -----------
Cash and cash equivalents,
end of period $ 2,650,962 $ 3,439,880
=========== ===========
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND 1998
----------------------------------------------------
1999 1998
------------ ------------
(unaudited)
Balance, beginning of period $ 69,998 $ 67,531
Reimbursement for prior payment of
past dividends and distributions 1,017 0
Net income on a cash basis 5,711,888 7,024,849
----------- -----------
5,782,903 7,092,380
----------- -----------
Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 1,203 0
Current year distributions paid or
to be paid to unit owners (Note 3) 5,739,687 7,044,108
----------- -----------
5,740,890 7,044,108
----------- -----------
Balance, end of period $ 42,013 $ 48,272
=========== ===========
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 with the exception of the
accrual for distributions to be paid to Unit Owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents 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. As of April 30, 1999 and 1998,
there were 8,696,496 and 8,696,430 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
North European Oil Company, corporate predecessors of the Trust.
From the liquidation of the Company to October 31, 1998, 721,148 units
were issued in exchanges and dividends of $354,028 and distributions
of $4,229,149 were paid to former unlocated Corporation and Company
shareholders. For the six-month period ended April 30, 1999 12 units
were issued in exchanges and $0 in dividends and $1,207 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 May,
1999 distribution, the maximum liability of the Escheator is
$6,489,620.
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 April 30, 1999,
there remained a total of 494,094 units that could be issued to
unlocated or unknown Corporation and Company shareholders. Of this
total, 380,250 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, $487,096 in dividends and $28,270,661 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 initially paid in Deutsche
marks, which are subsequently converted into euros at a fixed rate. Just
prior to their transfer, the royalties, now denominated in euros, are
converted into U.S. dollars at the agreed upon euro/dollar exchange rate.
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 second fiscal quarter ended
April 30, 1999 declined by 22.5% from $3,359,519 to $2,604,254. This level
of income permitted a distribution of 30 cents per unit outstanding compared to
39 cents last year. Despite an overall increase in gas sales, the impact of
lower gas prices was much more significant and more than offset the higher sales
levels. The exchange rate was essentially unchanged and had no appreciable
effect on the Trust's royalties. For the first six months of fiscal 1999, net
income declined 18.7% from $7,024,849 to $5,711,888. The total distributions
for the first six months of fiscal 1999 were 66 cents compared to 81 cents for
fiscal 1998.
For the quarter just ended, overall Oldenburg gas sales, subject to a
royalty rate of 0.6667%, were 63.5 billion cubic feet ("Bcf") compared to
56.1 Bcf, an increase of 13.1%. The increase in gas sales was concentrated
in the eastern half of Oldenburg and was made possible through the completion of
the installation of field compressors in the sweet gas field of Hengstlage.
For the six month period, overall Oldenburg gas sales increased 9.4% from
117.1 Bcf to 128.1 Bcf.
Gas sales from western Oldenburg, subject to an additional royalty
rate of 4% for a combined total of 4.6667%, were 24.9 Bcf for the quarter
just ended. This amount represents a 3.1% decrease over last year's sales of
25.7 Bcf. The impact on Trust royalties of a decline in gas sales from western
Oldenburg is magnified by the application of the royalty rate that is
approximately seven times higher than the royalty in eastern Oldenburg. For
the six month period, gas sales from western Oldenburg increased 1.9% from
49 Bcf to 50 Bcf.
Although the Trust itself does not have access to the specific
sales contracts under which the Oldenburg gas is sold, these contracts are
reviewed periodically by our auditors. They have informed the Trust that these
contracts contain pricing mechanisms which use a number of factors with
varying time delays to price the gas being sold. For the Trust there are two
elements of these contracts that are very significant. The first element is the
utilization of the price of light heating oil in Germany as the primary pricing
factor in many of these contracts. The price of light heating oil is in turn
affected by the price of oil on the international market. The second element
is a six to nine month delay before changes in pricing factors are translated
into changes in the price of gas.
For the second quarter of fiscal 1999, the negative impact on Trust
royalties caused by the decline in Oldenburg gas prices far outweighed the
impact of all other factors. Overall Oldenburg gas prices, under the lower
royalty agreement, declined 23.7% to an average of 1.29 pfennigs per Kwh
(Pf/Kwh) for the quarter. Gas prices under the higher royalty agreement in
western Oldenburg declined by 21.7% to an average of 1.26 Pf/Kwh. When
converted into more familiar terms using the average exchange erage gas price
was equal to $2.00 per Mcf.
Interest income was lower reflecting the decreased funds available
for investment. Trust expenses declined due to the absence of audit costs
associated with the Trust's biannual audits of the operating companies in
Germany and lower Trustees' fees due to lower Trust royalty income.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 1999, compared to that at fiscal year end
(October 31, 1998), shows a decline in assets due to lower royalty receipts
during the quarter.
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 of units not previously presented for issuance,
quarterly distributions would be reduced to the extent required to provide funds
for such payments.
The Trust has conducted an internal review of its readiness for
Year 2000 ("Y2K") computer compliance issues and has communicated with its
principal business relationships concerning their respective Y2K computer
readiness as well. Based on this review and the inquiries to third parties,
management of the Trust believes that its level of readiness will be adequate
in a timely manner and will not adversely impact on the continued ability of
the Trust to manage its affairs.
The Trust's internal technology system is limited to stand-alone
personal computers. They have been examined with respect to hardware and
software issues and are already compliant, at a direct cost to the Trust of
$3,000.
Inquiries have also been made to the principal third parties with
which the Trust's business is conducted. These include BEB and Mobil, the
German operating companies; The Bank of New York and Deutsche Bank, the
Trust's principal banks and Registrar and Transfer Co., the Trust's transfer
agent. These third party entities have confirmed that they have in place
substantial management personnel devoted to the Y2K compliance requirements
and have instituted comprehensive testing and remediation programs to
complete necessary compliance efforts in a timely manner. Both BEB and
The Bank of New York have confirmed that their mission critical systems are
Y2K compliant and that they anticipate the completion of the remediation and
testing of the remaining systems in the near future. Mobil has estimated
that, as of March 31, 1999, it has completed 95% of the implementation of
Y2K compliant major information technology ("IT") systems and 92% of non-IT
systems. As of April 30, 1999 the Deutsche Bank has updated 96% of its IT
systems with 72% confirmed through testing. Registrar and Transfer Company
has confirmed that its systems are Y2K compliant.
The Trust has not made any direct inquiries to vendors to the
operating companies or to other parties with important relationships with the
operating companies and has relied on their compliance review programs for
that purpose. These are reported to be in place to effect timely compliance
in a manner which will avoid any disruption of the activities of the operating
companies, but the Trust has no direct information concerning such other
parties.
To the extent that the Trust relies on statistical and other
information and analysis from its consultant in Germany and its consulting
organization, Davis Associates, the Trust has been advised that computer
software and hardware review and remediation has been completed to assure Y2K
compliance. No costs to the Trust are anticipated in connection with these
matters.
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
--------------------------------
(Registrant)
By: /S/ John R. Van Kirk
----------------------------
John R. Van Kirk
Managing Director
Dated: June 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statements of Assets, Liabilities and Trust Corpus at April 30, 1999 and the
Statements of Income and Expenses on a Cash Basis for the period ended April 30,
1999 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-31-1999
<PERIOD-END> APR-30-1999
<CASH> 2,650,962
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,650,963
<CURRENT-LIABILITIES> 2,608,949
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 42,014
<TOTAL-LIABILITY-AND-EQUITY> 2,650,963
<SALES> 0
<TOTAL-REVENUES> 2,768,245
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 163,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,604,254
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,604,254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,604,254
<EPS-BASIC> .30
<EPS-DILUTED> .30
</TABLE>
