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 January 31, 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 January 31, 1999
- ----- -------------------------------
Units of Beneficial Interest 8,696,484
ARTHUR ANDERSEN LLP
ACCOUNTANT'S REVIEW REPORT
----------------------------
To North European Oil Royalty Trust:
We have reviewed the accompanying statements of assets, liabilities and
trust corpus of North European Oil Royalty Trust (the "Trust") as of
January 31, 1999 and the related statements of income and expenses on a
cash basis for the three months ended January 31, 1999 and 1998, and the
related statements of changes in cash and cash equivalents and
undistributed earnings for the three months January 31, 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
February 9, 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 JANUARY 31, 1999 AND 1998
-----------------------------------------------------
1999 1998
-------------- -------------
(unaudited)
German gas, oil and sulfur
royalties received $ 3,254,362 $ 3,788,273
----------- -----------
Interest income 20,258 22,047
----------- -----------
Trust expenses ( 166,986) ( 144,990)
----------- -----------
Net income on a cash basis $ 3,107,634 $ 3,665,330
=========== ===========
Net income per unit on a cash basis $ .36 $ .42
====== ======
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 $ .36 $ .42
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
JANUARY 31, 1999 AND OCTOBER 31, 1998
-------------------------------------
1999 1998
-------------- -------------
(unaudited) (audited)
Current assets - - Cash and
cash equivalents (Note 1) $ 3,178,649 $ 2,765,901
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
Total Assets $ 3,178,650 $ 2,765,902
=========== ===========
Current liabilities - - Cash distributions
payable to unit owners $ 3,130,734 $ 2,695,903
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 47,915 69,998
----------- -----------
Total Liabilities and Trust Corpus $ 3,178,650 $ 2,765,902
=========== ===========
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 THREE MONTHS ENDED JANUARY 31, 1999 AND 1998
----------------------------------------------------
1999 1998
-------------- -------------
(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $ 3,254,362 $ 3,788,273
Interest income 20,258 22,047
Reimbursement for prior payment
of past dividends and distributions 1,017 0
----------- -----------
$ 3,275,637 $ 3,810,320
=========== ===========
Uses of cash and cash equivalents:
Payment of Trust expenses 166,986 144,990
Distributions and dividends paid (Note 3) 2,695,903 2,956,786
----------- -----------
2,862,889 3,101,776
----------- -----------
Net increase(decrease) in cash and
cash equivalents during the period 412,748 708,544
Cash and cash equivalents,
beginning of period 2,765,901 3,024,317
----------- -----------
Cash and cash equivalents,
end of period $ 3,178,649 $ 3,732,861
=========== ===========
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE THREE MONTHS ENDED JANUARY 31, 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 3,107,634 3,665,330
----------- -----------
3,178,649 3,732,861
----------- -----------
Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 0 0
Current year distributions paid or
to be paid to unit owners (Note 3) 3,130,734 3,652,501
----------- -----------
3,130,734 3,652,501
----------- -----------
Balance, end of period $ 47,915 $ 80,360
=========== ===========
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 except for distributions to be paid to
unit owners (those distributions approved by the Trustees for the
Trust). The Trust's distributable incomes represent royalty income
received by the Trust during the period plus interest income less
any expenses incurred by the Trust, all on a cash basis. In the
opinion of the Trustees, the use of the cash basis provides a more
meaningful presentation to unit owners of the results of operations
of the Trust.
Producing gas and oil
royalty rights -
---------------------
The rights to certain gas and oil royalties in Germany were
transferred to the Trust at their net book value by North European
Oil Company (the "Company") (see Note 2). The net book value of the
royalty rights has been reduced to one dollar ($1) in view of the
fact that the remaining value of royalty rights is de minimis
relative to annual royalties received and distributed by the Trust
and does not bear any meaningful relationship to the fair value of
such rights or the actual amount of proved producing reserves.
Federal and state income taxes -
------------------------------
The Trust, as a grantor trust, is exempt from Federal and state
income taxes under a private letter ruling issued by the Internal
Revenue Service.
Cash and cash equivalents -
-------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with maturities of three months or less.
Net income per unit
on the cash basis -
-------------------
Net income per unit on the cash basis is based upon the number of
units outstanding at the end of the period (see Note 3). As of
January 31, 1999 and 1998, there were 8,696,484 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
of North European Oil Company, corporate predecessors of the Trust.
From the liquidation of the Company to October 31, 1998, 721,148 Trust
units were issued in exchange for Corporate and Company shares and
dividends of $354,028 and distributions of $4,229,149 were paid to
former unlocated Corporation and Company shareholders. For the three-
month period ended January 31, 1999, there were 24 units issued in
exchanges but no dividends or 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, of which 760,560 were subject to the settlement,
representing the unexchanged shares of the Trust's predecessor
corporations. Under the settlement, 380,280 units were issued to the
Escheator on April 17, 1996. Of the units remaining to be issued to
the Escheator, 50% would be issued to the Escheator by June 30, 2000
and the balance by June 30, 2005. Until June 30, 2000, claims by
unlocated or unknown shareholders of the Trust's corporate predecessors
for units and past dividends and distributions thereon ("subsequent
claims") will be paid by the Escheator and the Trust on a 50:50 basis.
From July 1, 2000 to June 30, 2005, subsequent claims will be paid by
the Escheator and the Trust on a 75:25 basis. Any subsequent claims
will reduce the number of units to be issued to the Escheator in 2000
or 2005. Following the final issuance of units to the Escheator in
2005, the Trust's contingent liability for past dividends and
distributions attributable to all unexchanged Corporation and Company
shares subject to the settlement will be completely eliminated. Under
the terms of the settlement, the maximum liability of the Escheator for
subsequent claims 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 February, 1999
distribution, the maximum liability of the Escheator will be
$6,385,569.
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 January 31, 1999,
there remained a total of 494,106 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 $28,123,640 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.
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 income from the operating companies based on
their sales of gas, sulfur and oil. 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.
For the quarter ended January 31, 1999, gross royalty income declined
14.1% to $3,254,362 compared to the prior year's equivalent quarter. Net
income, reflecting both the lower interest income and the higher level of
Trust expenses, decreased 15.2% to $3,107,634. Of all the factors affecting
royalty income, the decline in gas prices had the most significant impact on
Trust royalties. Increases in both the average exchange rate and in gas
sales for overall and western Oldenburg could only partially offset the
impact of the drop in prices. Gas prices for Oldenburg (both overall and
western) declined by 18.8% and 19% respectively. The average exchange rate
applied to transfers of royalties from Germany increased 4.6% from an
average of $0.5642 for the first quarter of 1998 to $0.5904 for the quarter
just ended. Applying this average exchange rate we are able to convert the
German gas prices, normally calculated in pfennigs per Kwh, to more familiar
terms of dollars per Mcf. For the first quarter of fiscal 1999 the average
price for gas sold from the Oldenburg concession was $2.36 per Mcf. For the
quarter, overall Oldenburg gas sales increased by 6% from 61 Billion cubic
feet ("Bcf") to 64.6 Bcf while gas sales from the higher royalty area of
western Oldenburg increased by 7.3% from 23.3 Bcf to 25 Bcf.
Trust expenses increased by 15.2% from the prior year's period to
$166,986. This increase resulted from additional audit work performed by
the Trust's auditors in Germany. Interest income declined slightly to
$20,258 reflecting the reduced funds available for investment.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at January 31, 1999, compared to that at fiscal year end (October 31,
1998), shows an increase in assets due to higher 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
are required for payments to owners of units not previously presented for
issuance or currently in litigation, 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 and The Bank of New York and Deutsche Bank, the
Trust's principal banks. 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. Registrar and Transfer Company, the Trust's transfer agent, 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
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.
Part II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The Annual Meeting of Unit Owners was held February 11, 1999.
(b) The following persons were re-elected Trustees of the Trust to
serve until the 2000 Annual Meeting of Unit Owners:
Robert P. Adelman (7,109,551 votes for; 42,462 withheld)
Robert J. Castle (7,109,951 votes for; 42,062 withheld)
Samuel M. Eisenstat (7,109,211 votes for; 42,802 withheld)
Willard B. Taylor (7,112,361 votes for; 39,652 withheld)
John H. Van Kirk (7,112,085 votes for; 39,928 withheld)
(c) The designation of the firm of Arthur Andersen & Co. as auditor
for the Trust for 1999 fiscal year was ratified with the following vote
totals:
7,112,134 votes for; 12,695 votes against and 27,184 abstained.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: March 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statements of Assets, Liabilities and Trust Corpus at January 31, 1999 and the
Statements of Income and Expenses on a Cash Basis for the three months ended
January 31, 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> JAN-31-1999
<CASH> 3,178,649
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,178,650
<CURRENT-LIABILITIES> 3,130,734
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 47,916
<TOTAL-LIABILITY-AND-EQUITY> 3,178,650
<SALES> 0
<TOTAL-REVENUES> 3,274,620
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 166,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,107,634
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,107,634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,107,634
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
