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, 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
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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: 732-741-4008
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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]
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As of December 30, 1998, 8,696,484 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 $115,957,968 on such date.
(The Trustees and the Managing Director are the only persons deemed to be
affiliates of the Registrant.)
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 7, 1999, for the annual meeting to be held on
February 11, 1999.
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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 (the "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 the 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 accordingly 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 passed their original expiration dates.
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, 1998.
(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 74 years old, has been Managing Trustee since the
Trust's inception in 1975. John R. Van Kirk, who is 46 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.
- 6 -
The Managing Director provides office space and services at cost 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. We note that Exxon and Mobil have announced
a proposed merger of their two companies. There is no information available
on what impact, if any, such a merger might have on the Trust properties or
royalty income.
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 1998.
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 indices 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 earlier years, in which case the OEG Agreement provides for the
computation system to be revised in 1999. In either case, the revised system
will provide
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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.
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. While
both Mobil and BMI have suspended production in their concessions in Bavaria,
the concessions remain open. They are considering possible wildcat drilling
or other methods to increase production.
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 totaling 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, 1998 by product, geographic area and operating company:
BY PRODUCT:
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Product Royalty Income
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Natural Gas $ 13,646,910
Sulfur $ 148,689
Oil $ 86,271
BY GEOGRAPHIC AREA:
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Area Royalty Income
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Western Oldenburg $ 12,035,987
Eastern Oldenburg $ 1,785,249
Non-Oldenburg Areas $ 60,634
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BY OPERATING COMPANY:
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Company Royalty Income
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Mobil Oil A.G. $ 10,486,165
OEG $ 3,395,669
Bayerische Mineral Industries A.G. $ 36
Exhibit 99.1 to this Report is a report dated December 18, 1998
which summarizes certain production data and the estimated net proved
producing reserves as of October 1, 1998, 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, 1998 and Calculation of Cost Depletion Percentage for the 1998
Calendar Year, (the "Reserve and Depletion 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 the practice of the Trust in prior years, the information has
been prepared for the 12-month period ending September 30, 1998, which is
one month prior to the end of the fiscal year of the Trust. Unit owners are
referred to the full text of the Reserve and Depletion Report for further
details.
In connection with the information in the Reserve and Depletion
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 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 estimates
described in the Reserve and Depletion Report. Both the Trustees and Davis
Associates believe this report and these 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. 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 and
Depletion Report.
Attachment A of the Reserve and Depletion Report is comprised of a
schedule of estimated net proved producing reserves of the Trust's royalty
properties, computed as of October 1, 1998 and a five year schedule of gas,
sulfur and oil sales for the 12 months ended September 30, 1998, 1997, 1996,
1995 and 1994 computed from quarterly sales reports of operating companies
received by the Trust during such periods.
Item 3. Legal Proceedings.
------------------
For relevant information see Note 3 to Financial Statements
contained herein.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Inapplicable.
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PART II
Item 5. Market for the Registrant Trust's Units of Beneficial Interest
--------------------------------------------------------------
and Related Unit Owner Matters.
-------------------------------
The Trust's units of beneficial interest ("Units") are traded on
the New York Stock Exchange (the "NYSE") 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 and
reserving limited funds for anticipated administrative expenses.
The following table presents the high and low closing prices for
the quarterly periods ended in fiscal 1998 and 1997 as reported by the NYSE
as well as the cash distributions paid to unit owners by quarter for the past
two fiscal years.
FISCAL YEAR 1998
Low High Distribution
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- ------------
January 31, 1998 14.7500 16.5000 .42
April 30, 1998 15.3750 17.1875 .39
July 31, 1998 15.0000 16.1250 .42
October 31, 1998 15.0000 16.6875 .31
FISCAL YEAR 1997
Low High Distribution
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- ------------
January 31, 1997 12.5000 14.2500 .42
April 30, 1997 13.1250 14.3750 .39
July 31, 1997 13.3750 14.7500 .36
October 31, 1997 14.8125 17.5000 .34
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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 Attachment B to the Reserve and Depletion Report
attached as Exhibit 99.1. This report has been prepared by Davis Associates
using the limited information described under Item 2, Properties, to which
reference is made. The Trustees believe that the calculations and
assumptions used in this 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 1998 is 9.039%. 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 1998 calendar year are included on a special
removable page in the 1998 Annual Report under "Note to Unit Owners" and have
been sent in a separate letter to all unit owners who were registered at any
time during 1998 and who are no longer registered owners as of year end.
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 30, 1998, there were 1,755 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 608 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 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, 1998
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1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
German gas,
sulfur
and oil
royalties
received $13,881,870 $13,651,678 $ 9,710,487 $12,477,788 $ 9,476,252
=========== =========== =========== =========== ===========
Net Income on a
cash basis $13,397,013 $13,070,207 $ 9,086,316 $11,941,675 $ 8,777,422
=========== =========== =========== =========== ===========
Net Income per unit
on a cash
basis (a) $1.54 $1.50 $1.05 $1.43 $1.06
===== ===== ===== ===== =====
Units of beneficial
interest
outstanding at end
of year (a) 8,696,460 8,696,430 8,696,412 8,313,984 8,312,898
Cash distributions
paid or to be
paid:
Dividends and
distributions
per unit paid
to former
unlocated
shareholders $0.00 $0.00 $0.01 $0.00 $0.05
Distributions per
unit paid or to
be paid to
unit owners $1.54 $1.51 $1.04 $1.43 $1.01
----- ----- ----- ----- -----
$1.54 $1.51 $1.05 $1.43 $1.06
===== ===== ===== ===== =====
Total assets at
end of year $ 2,765,902 $ 3,024,318 $ 2,477,516 $ 2,951,228 $1,848,274
=========== =========== =========== ========== ===========
(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
-----------------------------------------------------------
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. 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.
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 Deutsche 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.
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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 an estimated 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 Company, the Trust's
transfer agent. All of 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.
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
program and hardware review will be completed to assure Y2K compliance not
later than the second half of 1999. No costs to the Trust are anticipated in
connection with these matters.
Fiscal 1998 versus Fiscal 1997
- ------------------------------
For fiscal 1998 the Trust's royalty income of $13,881,870 increased
1.68% over the amount for the prior year. This increase in royalty income,
along with higher interest income and lower expenses, resulted in a 2.5%
increase in net Trust income to $13,397,013. Increases in gas sales offset
the effects both of lower gas prices and lower exchange rates throughout the
year.
Increases in overall gas sales and in gas sales from the higher
royalty area of western Oldenburg more than offset the negative impact of
lower gas prices and weaker exchange rates. Overall gas sales from the
Oldenburg concession increased by 4.59% from 191.2 billion cubic feet ("Bcf")
to 199.9 Bcf. Gas sales from western Oldenburg increased 12.2% from 85.3 Bcf
to 95.7 Bcf. In the last three years, gas sales from western Oldenburg as a
percentage of total Oldenburg gas sales have increased from 35.87% in 1996 to
44.61% in 1997 and 47.84% in 1998. Excluding the effects of differences in
- 15 -
prices and applicable exchange rates, the impact of the higher royalty rate
from western Oldenburg is shown in the table on page 7 which details royalty
income by geographic area. While accounting for approximately 48% of overall
gas sales, dollar royalties from the sale of gas from the higher royalty area
of western Oldenburg are nearly seven times higher than royalties from
eastern Oldenburg.
The average yearly price for gas under both the higher and lower
royalty agreements declined by 3.6% and 2.6% respectively to 1.6773 and
1.7486 Pfennigs per Kwh. Reflecting the continued pressure of lower oil
prices on the international market, gas prices were lower or unchanged in all
but the first quarter of fiscal 1998. When converted into more familiar
terms using the year's average exchange rate, gas prices were $2.71 and $2.75
per Mcf under the higher and lower royalty agreements.
With Oldenburg gas sales accounting for nearly 98% of the Trust's
1998 royalties, non-gas or non-Oldenburg royalties have a very minor and
declining impact on the Trust's revenues. Royalties from sulfur, reflecting
the continued exclusion of Mobil's 2% sulfur royalty obligation and the low
worldwide sulfur prices, amounted to only $148,689. Royalties from oil
amounted to $86,271 and continued to decline, reflecting the increasingly
uneconomical nature of oil production in Germany and the continuing capping
of these oil wells. Non-Oldenburg royalties amounted to only $60,634. The
operating companies, responding to acknowledging the declining income from
these areas, have suspended production in all non-Oldenburg areas other than
Grosses Meer. These areas will be further evaluated by the operating
companies to determine whether they warrant further investment and
exploration.
Trust expenses for fiscal 1998 of $586,830 declined 12.95% from the
prior year reflecting reduced general Trust expenses. Interest income
increased 10% to a total of $101,973 from the prior year reflecting larger
sums available for investment from royalty revenues.
During fiscal 1998 and 1997 respectively, an additional 30 and 18
Trust units were issued and $2,034 and $558 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. Management
continues to believe that the number of such presentations will continue to
be minimal in the coming years. In all events, after the year 2005, pursuant
to the provisions of the order of the Delaware Court of Chancery of
April 17, 1996, no further liability for payment of dividends or
distributions arrears will be required. See Note 3 to Financial Statements
contained herein for further information.
Fiscal 1997 versus Fiscal 1996
- ------------------------------
For fiscal 1997 the Trust's royalty income of $13,651,678
increased 40.58% from the prior year. A combination of higher gas prices,
relatively uninterrupted gas production permitting increased overall gas
sales, and increased gas sales from the higher royalty area of western
Oldenburg resulted in the higher royalty revenue. This higher level of
royalties occurred despite the 12.24% decline in the average yearly value of
the Deutsche mark from $0.6707 to $0.5886.
- 16 -
The average yearly price for gas under both the higher and lower
royalty agreements increased by 22.09% and 28.34% respectively to 1.7398 and
1.7960 Pfennigs per Kwh. Compared to the prior year's quarterly averages,
higher average gas prices occurred in each of the four quarters. When
converted into more familiar terms using the year's average exchange rate,
gas prices were $2.93 and $2.97 per Mcf under the higher and lower royalty
agreements.
Following the repairs to the gas pipeline and renovations of the
Grossenkneten desulfurization plant in the late summer of 1996, gas
production increased to its full capacity of 750,000 cubic meters per hour.
The resumption of full production allowed the operating companies to sell
more than 191 billion cubic feet (Bcf) of gas from the entire Oldenburg
concession, an increase of 9.07% from the prior year's sales. The expansion
of the desulfurization plant's capacity also permitted an increase in the
relative volumes of gas drawn from the higher royalty area of western
Oldenburg. Gas sales from western Oldenburg increased 35.63% to more than 85
Bcf. In addition, the percentage of western gas production to overall gas
production increased from 35.9% in 1996 to 44.6% in 1997. Without
considering differences in prices, the impact of the higher royalty rate from
western Oldenburg is shown in the table on page 7 detailing royalty income by
geographic area. Despite accounting for less than 45% of overall gas
production, royalties from the sale of gas from western Oldenburg are more
than six times higher than royalties from eastern Oldenburg.
With Oldenburg gas sales accounting for over 97% of the Trust's
1997 royalties, non-gas or non-Oldenburg royalties have a very minor impact
on the Trust. Royalties from sulfur, reflecting the continued exclusion of
Mobil's 2% sulfur royalty obligation, amounted to only $137,555. Royalties
from oil amounted to $108,725 and continued to decline, reflecting the
increasingly uneconomical nature of oil production in Germany and the
continuing capping of these uneconomical oil wells. Non-Oldenburg royalties
amounted to only $123,054.
Trust expenses for fiscal 1997 of $674,131 declined by 3.1% from
the prior year. Slightly higher interest rates along with larger sums
available for investment resulted in a 29% increase in interest income to
$92,660.
During fiscal 1997 and 1996 respectively, an additional 18 and
2,148 Trust units were issued and $558 and $64,932 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, pursuant to the settlement approved by the
order of the Delaware Court of Chancery, 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
order 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 order of the Delaware Court of Chancery is expected to
benefit the Trust's financial condition. See Note 3 to Financial Statements
contained herein.
- 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, 1998 and 1997 F-2
Statements of Income and Expenses on a Cash Basis
for the Years Ended October 31, 1998, 1997 and 1996 F-3
Statements of Undistributed Earnings
for the Years Ended October 31, 1998, 1997 and 1996 F-4
Statements of Changes in Cash and Cash Equivalents
for the Years Ended October 31, 1998, 1997 and 1996 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, 1998 and 1997
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, 1998. 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 require 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, 1998 and 1997, 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, 1998, 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 financial statements for the possibility that funds would be required
to satisfy such claims.
/s/ Arthur Andersen LLP
Roseland, New Jersey
November 9, 1998
F-1
- 19 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
OCTOBER 31, 1998 AND 1997
-------------------------
ASSETS 1998 1997
------ ------------ ------------
Current Assets --
Cash and cash equivalents (Note 1) $2,765,901 $3,024,317
Producing gas and oil
royalty rights (Note 1) 1 1
------------ ------------
$2,765,902 $3,024,318
============ ============
LIABILITIES AND TRUST CORPUS
----------------------------
Current liabilities --
Cash distributions payable
to unit owners, paid
November 1998 and 1997 $2,695,903 $2,956,786
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 69,998 67,531
------------ ------------
$2,765,902 $3,024,318
============ ============
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, 1998, 1997 AND 1996
---------------------------------------------------
1998 1997 1996
------------ ------------ ------------
German gas, sulfur and
oil royalties
received $13,881,870 $13,651,678 $ 9,710,487
Interest income 101,973 92,660 71,834
Trust expenses ( 586,830) ( 674,131) ( 696,005)
------------ ------------ ------------
Net income on
a cash basis $13,397,013 $13,070,207 $ 9,086,316
============ ============ ============
Net income per unit
on a cash basis $1.54 $1.50 $1.05
======= ======= =======
Cash distributions paid
or to be paid:
Dividends and
distributions per
unit paid or to be
paid to former unlocated
shareholders (Note 3) $0.00 $0.00 $0.01
Distributions per unit
paid or to be paid to
unit owners (Note 4) 1.54 1.51 1.04
------- ------- -------
$1.54 $1.51 $1.05
======= ======= =======
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, 1998, 1997 AND 1996
---------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Balance,
beginning of year $ 67,531 $ 129,484 $ 41,333
Net income on
a cash basis 13,397,013 13,070,207 9,086,316
------------ ------------ ------------
13,464,544 13,199,691 9,127,649
------------ ------------ ------------
Less:
Dividends and
distributions paid
to former unlocated
shareholders (Note 3) 1,961 558 64,178
Current year
distributions paid
or to be paid to unit
owners (Note 4) 13,392,585 13,131,602 8,933,987
------------ ------------ ------------
13,394,546 13,132,160 8,998,165
------------ ------------ ------------
Balance, end of year $ 69,998 $ 67,531 $ 129,484
============ ============ ============
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, 1998, 1997 AND 1996
---------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Sources of cash and
cash equivalents:
German gas, sulfur
and oil
royalties received $13,881,870 $13,651,678 $ 9,710,487
Interest income 101,973 92,660 71,834
------------ ------------ ------------
13,983,843 13,744,338 9,782,321
Uses of cash and
cash equivalents:
Payment of Trust
expenses 586,830 674,131 696,005
Distributions and
dividends paid
(Note 3) 13,655,429 12,523,405 9,560,028
------------ ------------ ------------
14,242,259 13,197,536 10,256,033
------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents
during the year ( 258,416) 546,802 ( 473,712)
Cash and cash
equivalents,
beginning of year 3,024,317 2,477,515 2,951,227
------------ ------------ ------------
Cash and cash
equivalents,
end of year $ 2,765,901 $ 3,024,317 $ 2,477,515
============ ============ ============
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, 1998, 1997 AND 1996
-------------------------------
(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 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,
1998, 1997 and 1996, there were 8,696,460, 8,696,430 and 8,696,412
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 the Trust's corporate predecessors, North European
Oil Corporation (the "Corporation") and North European Oil
Company. From the liquidation of the Company to October 31, 1997,
721,088 Trust units were issued in exchange for Corporate or Company
shares and dividends of $353,992 and distributions of $4,227,151 were
paid to former unlocated Corporation and Company shareholders. For
the year ended October 31, 1998, 30 units were issued in exchanges
and $36 in dividends and $1,998 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
corporate predecessors. Out of this total, 760,560 units were
subject to the settlement. Pursuant to the Court approved
settlement, 380,280 units were issued to the Escheator on April 17,
1996. Of the units remaining to be issued to the Escheator, 50% will
be issued to the Escheator by June 30, 2000 and the balance by June
30, 2005. Under the terms of the settlement, any claims by unlocated
or unknown shareholders of the Trust's corporate predecessors for
units subject to the settlement and past dividends and distributions
thereon ("subsequent claims") will be paid by the Escheator and the
Trust on a proportionate basis. For the period until June 30, 2000,
subsequent claims will be paid by the Escheator and the Trust on a
50:50 basis. For the period 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
F-7
- 25 -
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 November, 1998
distribution, the maximum liability of the Escheator will be
$6,260,708.
Under the Trust Agreement as deemed amended by the February 26, 1996
Order of the Delaware Court of Chancery, 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, 1998, there remained a total of 494,130
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, $487,096 in
dividends and $27,945,769 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, 1998 and 1997.
Fiscal 1998 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $3,788,273 $3,504,753 $3,750,200 $2,838,644 $13,881,870
Net income on
a cash basis 3,665,330 3,359,519 3,658,131 2,714,033 13,397,013
Net income
per unit on
a cash basis .42 .39 .42 .31 1.54
Current year cash
distributions
paid or
to be paid 3,652,501 3,391,608 3,652,501 2,695,975 13,392,585
Current year cash
distributions
per unit .42 .39 .42 .31 1.54
Fiscal 1997 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $3,832,201 $3,510,987 $3,170,930 $3,137,560 $13,651,678
Net income on
a cash basis 3,578,007 3,400,600 3,070,926 3,020,674 13,070,207
Net income
per unit on
a cash basis .41 .39 .35 .35 1.50
Current year cash
distributions
paid or
to be paid 3,652,493 3,391,608 3,130,715 2,956,786 13,131,602
Current year cash
distributions
per unit .42 .39 .36 .34 1.51
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 7, 1999,
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 7, 1999, 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 7, 1999, 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 7, 1999 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, 1998, 1997 and 1996
Report of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus as of
October 31, 1998 and 1997
Statements of Income and Expenses on a Cash Basis for the
Years Ended October 31, 1998, 1997 and 1996
Statements of Undistributed Earnings for the Years Ended
October 31, 1998, 1997 and 1996
Statements of Changes in Cash and Cash Equivalents for the
Years Ended October 31, 1998, 1997 and 1996
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, 1999 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, 1999 /s/ John H. Van Kirk
-----------------------------
John H. Van Kirk, Trustee
Dated: January 7, 1999 /s/ Robert P. Adelman
-----------------------------
Robert P. Adelman, Trustee
Dated: January 7, 1999 /s/ Robert J. Castle
-----------------------------
Robert J. Castle, Trustee
Dated: January 7, 1999 /s/ Samuel M. Eisenstat
------------------------------
Samuel M. Eisenstat, Trustee
Dated: January 7, 1999 /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 31
in the Northwest Basin of the Federal Republic of
Germany as of October 1, 1998 and Calculation
Of Cost Depletion Percentage for the 1998
Calendar Year prepared by
Ralph E. Davis Associates, Inc.
(99.2) Order Approving Settlement signed by
Vice Chancellor Jack Jacobs of the
Delaware Court of Chancery on
Form 8-K, filed December 11, 1995.
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, 1998
AND
CALCULATION OF
COST DEPLETION PERCENTAGE
FOR 1998 CALENDAR YEAR
RALPH E. DAVIS ASSOCIATES, INC.
HOUSTON, TEXAS
DECEMBER, 1998
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
Calculation of Cost Depletion Percentage . . . . . . . . . . . . . . . . .6
Certificate of Qualification . . . . . . . . . . . . . . . . . . . . . . .8
Attachment A . . . . .
Reserve Summary and Five Year
Net Sales History . . . . . . . . . . . . . . . . . . . . . .9
Attachment B. . . . .
Calculation of
Cost Depletion Percentage. . . . . . . . . . . . . . . . . . 10
Ralph E. Davis Associates, Inc.
Consultants - Petroleum and Natural Gas
3555 Timmons Lane - Suite 1105
Houston, Texas 77027
(713) 622-8955
December 18, 1998
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, 1998. The proved producing reserves are as of October 1, 1998
and the reported sales are for the twelve month period ending
September 30, 1998. The use of the period ending September 30, 1998 is
consistent with prior years and allows the timely calculation of the royalty
reserves and the cost depletion percentage for the calendar year.
In addition, based on the information contained in the first
portion of this report, we have performed the calculations necessary to
derive the cost depletion percentage for the 1998 calendar year. As detailed
in Attachment B, the cost depletion percentage for the 1998 calendar year for
Trust unit owners is equal to 9.309 percent of their cost base as of
January 1, 1998.
North European Oil Royalty Trust December 18, 1998
Page 2
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 has
interests in other producing areas, reserves and net sales for these areas
are no longer used in the calculation of annual cost depletion percentage.
While the Trust continues to receive royalty payments from some of these
interests, these royalties represent less than one (1) 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 effect on the
calculation of the cost depletion percentage. We will continue to monitor
the quarterly statements and if increases are noted that could materially add
reserves to the Trust, we will resume estimating future reserves.
1. The Oldenburg concession is held by Oldenburgische Erdol
Gesellschaft ("OEG"). Within this concession Mobil Oil A.G.
("Mobil"), the German subsidiary of Mobil Corp. 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.
(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 from the western part of Oldenburg. The
payment of the sulfur royalty is subject to an agreement
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 1998, 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.
North European Oil Royalty Trust December 18, 1998
Page 3
(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 recalculated
annually based on indices 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 earlier
years, in which case the computation system will be
revised in 1999. In either case, the revised system will
provide 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 is a function of the quality of available information and
of engineering interpretation and judgment.
The Trust, as an overriding royalty interest owner, does not
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 volumetric and material balance type reserve estimates) are not
available to the Trust.
The Trust receives various monthly and quarterly statements from
the operators that report production, sales and revenue data. 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. In addition, the Trust retains a part-time
consultant in Germany who is familiar with the German petroleum industry in
general and the operating companies in particular. His periodic reports
North European Oil Royalty Trust December 18, 1998
Page 4
and communications are considered in the preparation of this report. We
believe the reserve estimates prepared using all the available data represent
realistic values. However, due to the limitation of available data, this
estimate of reserves cannot 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. 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 760,000 cu. meters per hour. A
second desulfurization plant, NEAG, remains connected by pipeline with the
transportation system of the Oldenburg concession but is not currently being
utilized.
During the 12 months ending September 30, 1998 total sales for the
Oldenburg area were 272,036 barrels of oil and condensate, 199,154 million
cubic feet (MMcf) of non-associated gas, 231 MMcf of associated gas and
892,457 short tons of sulfur. The sales from the western portion of
Oldenburg, where the Trust has a greater interest, were 167,524 barrels of
condensate and oil, 95,840 MMcf of non-associated gas, 179 MMcf of associated
gas and 363,091 short tons of sulfur.
Estimated gross remaining proved producing reserves attributable to
the total Oldenburg area are 2,923,299 barrels of condensate and oil,
2,380,300 MMcf of non-associated gas, 2,732 MMcf of associated gas and
10,915,562 short tons of sulfur.
North European Oil Royalty Trust December 18, 1998
Page 5
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:
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, 50% of an escalating cost base.
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. The Trust's estimated remaining net proved producing reserves
as of October 1, 1998 and net sales for the twelve month period ending
September 30, 1998 are as follows:
Reserves Sales
-------- -----
Oil, Barrels 87,851 8,236
Associated Gas, MMcf 66 9
Non-Associated Gas, MMcf 47,999 4,937
Sulfur, Short Tons 53,006*** 4,334***
(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.
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 Attachment A.
North European Oil Royalty Trust December 18, 1998
Page 6
CALCULATION OF COST DEPLETION PERCENTAGE
----------------------------------------
The categories of proved producing reserves considered in the
calculation of the cost depletion percentage are oil, associated gas, and
non-associated gas. Sulphur is a by-product of gas production and is not
considered in the computation of total cost depletion percentage.
For each category of reserves, a product base was established for
the Trust as of January 1, 1976. Through the use of these product bases, we
can account for the relative size of each of these categories of reserves and
the corresponding impact on the calculation the cost depletion percentage.
The product base for each category of proved producing reserves is reduced
annually by an adjustment that is calculated by multiplying the product base
at the beginning of the current year by the depletion factor for that
category of reserves. The depletion factor for each category of reserve is
the ratio of the relevant net sales during the current year to the
corresponding adjusted net proved producing reserves at the beginning of the
current year.
Significant items in the cost depletion percentage calculation that
appear on Attachment B as specific item numbers, shown in parentheses, and
their sources are as follows:
The adjusted estimated net proved producing reserves as of
10/1/97 (3) is obtained by adding the estimated remaining net
proved producing reserves as of 10/1/97 (1) and the
adjustments to reserves during the period (2).
Therefore (3) = (1) + (2).
The depletion factor (6) for each category of proved producing
reserves is obtained by dividing the relevant net sales (4) by
the corresponding adjusted estimated net proved producing
reserves as of 10/1/97 (3). Therefore (6) = (4) / (3).
The product base for each category of proved producing
reserves as of 1/1/97 (7) and the adjustment taken during 1997
(8) were obtained from the previous year's report. The
product base as of 1/1/98 (9) forms the initial starting point
for the calculation of the cost depletion percentage for the
1998 tax year. The product base for 1/1/98 (9) then is
(7) - (8).
The adjustment to the product base for each category of proved
producing reserves (10) is used to reduce the product base as
of the beginning of each year. This adjustment is the product
of the depletion factor for each category of proved producing
reserves (6) multiplied by the corresponding product base as
of 1/1/98 (9). Therefore (10) = (6) x (9).
North European Oil Royalty Trust December 18, 1998
Page 7
The cost depletion percentage (11) then is the sum of the
adjustment to the product base of each category of proved
producing reserves [Sum (10)] divided by the sum of the
product base for each category as of 1/1/98 [Sum (9)].
Therefore (11) = [Sum (10)] / [Sum (9)].
The cost depletion percentage represents the total allowable cost
depletion for the current calendar year for the Trust's unit owners,
expressed as a percentage of their cost base at the beginning of the calendar
year.
Sincerely yours,
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Larry A. Barnett
----------------------------
Larry A. Barnett, P. E.
Senior Vice-President
LAB:sw
North European Oil Royalty Trust December 18, 1998
Page 8
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, 1998.
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-eight 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 1985.
RALPH E. DAVIS ASSOCIATES, INC.
/S/ Larry A. Barnett
----------------------------
Larry A. Barnett, P. E.
Senior Vice-President
ATTACHMENT A
NORTH EUROPEAN OIL ROYALTY TRUST
RESERVE SUMMARY AND FIVE YEAR NET SALES HISTORY
ESTIMATED NET PROVED PRODUCING RESERVES
- ---------------------------------------
AS OF OCTOBER 1, 1998
- ---------------------
OLDENBURG
- ---------------------------------------------------------------------------
Oil/Cond. Associated Non-Associated Sulfur
Gas Gas
Barrels MMcf MMcf Short Tons
--------- ---------- -------------- ----------
87,581 66 47,999 53,006***
***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
------- ---------- -------------- ----------
1998 8,236 9 4,937 4,334***
1997 8,618 7 4,479 3,993***
1996 9,348 8 3,450 4,268***
1995 9,226 8 4,098 4,081***
1994 8,984 11 3,681 2,391***
***Note: At current prices, no royalties are presently
being paid under the Mobil sulfur royalty.
ATTACHMENT B
NORTH EUROPEAN OIL ROYALTY TRUST
CALCULATION OF COST DEPLETION PERCENTAGE
For the Year Ending December 31, 1998
OLDENBURG
Associated Non-Assoc.
Oil Gas Gas
Barrels MMCF MMCF
------- ---------- ----------
NEORT NET RESERVES (Barrels of Oil and Million Cubic Feet of Gas)
- ------------------------------------------------------------------
1. Estimated remaining net proved
producing reserves as of 10-1-97 90,869 44 44,980
2. Adjustments to reserves
during period 4,948 31 7,956
3. Adjusted estimated net proved
producing reserves
as of 10-1-97 95,817 75 52,936
4. Net sales from 10-1-97
to 9-30-98 8,236 9 4,937
5. Estimated remaining net proved
producing reserves
as of 10-1-98 87,581 66 47,999
RESERVE DEPLETION FACTOR (%)
- -----------------------------
6. Depletion factor 0.08596 0.12000 0.09326
NEORT PRODUCT BASE ALLOCATION (%)
- ----------------------------------
7. Product base as of 1-1-97 0.53979 0.04470 15.62268
8. Less adjustments taken
during 1997 0.04676 0.00614 1.41479
9. Product base as of 1-1-98 0.49303 0.03856 14.20789
10. 1998 adjustment
to product base 0.04238 0.00463 1.32508
11. Cost depletion percentage for 1998 calendar year for Trust unit owners
is equal to 9.309 percent of their 1-1-98 cost base.
Footnotes:
Line (1) from reserves review as of 10-1-97
Line (2) from reserves review as of 10-1-98
Line (3) = Line (1) + Line (2)
Line (4) from OEG and MOBIL statements
Line (5)from reserves review as of 10-1-98
Line (6)= Line (4) / Line (3)
Line (7) from 1997 Depletion Computations
Line (8) from 1997 Depletion Computations
Line (9)= Line (7) - Line (8)
Line (10) = Line (6) x Line (9)
Line (11) = [Sum (10)] / [Sum (9)]
<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, 1998 and the
Statements of Income and Expenses on a Cash Basis for the year ended October 31,
1998 and is qualified in its entirety by reference to such financial statements
and the accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,765,901
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1
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<TOTAL-ASSETS> 2,765,902
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0
0
<COMMON> 0
<OTHER-SE> 69,999
<TOTAL-LIABILITY-AND-EQUITY> 2,765,902
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<TOTAL-REVENUES> 13,983,843
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<OTHER-EXPENSES> 586,830
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