SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 2000 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
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(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
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(Address of principal executive offices)
(732) 741-4008
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Class Outstanding at April 30, 2000
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Units of Beneficial Interest 8,696,676
ARTHUR ANDERSEN LLP
ACCOUNTANTS' REVIEW REPORT
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To North European Oil Royalty Trust:
We have reviewed the accompanying statements of assets, liabilities and
trust corpus of North European Oil Royalty Trust (the "Trust") as of
April 30, 2000 and the related statements of income and expenses on a cash
basis for the three and six months ended April 30, 2000 and 1999, and the
related statements of changes in cash and cash equivalents and undistributed
earnings for the six months ended April 30, 2000 and 1999. These financial
statements are the responsibility of the Trust's management.
The statement of assets, liabilities and trust corpus as of October 31, 1999
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, 1999
indicates the statement did not purport to present, and in our opinion did
not present, financial position and results of operations in conformity with
accounting principles generally accepted in the United States 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 auditing standards generally accepted in the
United States, 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 accounting principles
generally accepted in the United States 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
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ARTHUR ANDERSEN LLP
Roseland, New Jersey
May 9, 2000
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
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FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999
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2000 1999
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(unaudited)
German gas, oil and sulfur
royalties received $ 3,682,978 $ 2,751,008
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Interest income 21,323 17,237
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Trust expenses ( 162,889) ( 163,991)
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Net income on a cash basis $ 3,541,412 $ 2,604,254
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Net income per unit on a cash basis $ .41 $ .30
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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 $ .41 $ .30
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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APRIL 30, 2000 AND OCTOBER 31, 1999
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2000 1999
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(unaudited) (audited)
Current assets - - Cash and
cash equivalents (Note 1) $ 3,572,715 $ 2,319,172
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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$ 3,572,716 $ 2,319,173
Current liabilities - - Cash distributions
payable to unit owners $ 3,565,637 $ 2,261,128
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 7,078 58,044
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$ 3,572,716 $ 2,319,173
The accompanying accountants' review report and the notes to
financial statements should be read in conjunction with these statements.
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
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2000 1999
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(unaudited)
German gas, oil and sulfur
royalties received $ 7,182,653 $ 6,005,370
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Interest income 36,395 37,495
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Trust expenses ( 311,630) ( 330,977)
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Net income on a cash basis $ 6,907,418 $ 5,711,888
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Net income per unit on a cash basis $.79 $.66
==== ====
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 $.80 $.66
==== ====
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)
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FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
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2000 1999
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(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur
royalties $ 7,182,653 $ 6,005,370
Interest income 36,395 37,495
Reimbursement for prior payment of
past dividends and distributions 0 1,017
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7,219,048 6,043,882
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Uses of cash and cash equivalents:
Payment of Trust expenses 311,630 330,977
Distributions and dividends paid
(Note 3) 5,653,875 5,827,844
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5,965,505 6,158,821
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Net increase(decrease)in cash and
cash equivalents during the period 1,253,543 ( 114,939)
Cash and cash equivalents,
beginning of period 2,319,172 2,765,901
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Cash and cash equivalents,
end of period $ 3,572,715 $ 2,650,962
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
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2000 1999
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(unaudited)
Balance, beginning of period $ 58,044 $ 69,998
Reimbursement for prior payment of
past dividends and distributions 0 1,017
Net income on a cash basis 6,907,418 5,711,888
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6,965,462 5,782,903
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Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 1,043 1,203
Current year distributions paid or
to be paid to unit owners (Note 3) 6,957,341 5,739,687
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6,958,384 5,740,890
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Balance, end of period $ 7,078 $ 42,013
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The accompanying accountants' review report and the notes to
financial statements should be read in conjunction with these statements.
NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO FINANCIAL STATEMENTS
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(Unaudited)
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(1) Summary of significant
accounting policies:
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Basis of accounting -
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The accounts of North European Oil Royalty Trust (the "Trust") are
maintained on a cash basis of accounting with the exception of the
accrual for distributions to be paid to Unit Owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust
during the period plus interest income less any expenses incurred by
the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the cash basis provides a more meaningful presentation to unit
owners of the results of operations of the Trust.
Producing gas and oil
royalty rights -
---------------------
The rights to certain gas and oil royalties in Germany were
transferred to the Trust at their net book value by North European
Oil Company (the "Company") (see Note 2). The net book value of the
royalty rights has been reduced to one dollar ($1) in view of the
fact that the remaining value of royalty rights is de minimis
relative to annual royalties received and distributed by the Trust
and does not bear any meaningful relationship to the fair value of
such rights or the actual amount of proved producing reserves.
Federal and state income taxes -
------------------------------
The Trust, as a grantor trust, is exempt from Federal and state income
taxes under a private letter ruling issued by the Internal Revenue
Service.
Cash and cash equivalents -
-------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with maturities of three months or less.
Net income per unit
on the cash basis -
-------------------
Net income per unit on the cash basis is based upon the number of
units outstanding at the end of the period. As of April 30, 2000 and
1999, there were 8,696,676 and 8,696,496 units of beneficial interest
outstanding respectively.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities
of the Company, including its royalty rights, were transferred to the
Trust.
(3) Contingent liability:
---------------------
The Trust serves as fiduciary for certain unlocated or unknown
shareholders of North European Oil Corporation (the "Corporation")
and North European Oil Company, corporate predecessors of the Trust.
From the liquidation of the Company to October 31, 1999, 721,334
units were issued in exchange for Corporate and/or Company shares and
dividends of $354,101 and distributions of $4,235,501 were paid to
former unlocated Corporation and Company shareholders. For the
six-month period ended April 30, 2000 30 units were issued in
exchanges and $0 in dividends and $1,043 in distributions were paid
to former unlocated Corporation and Company shareholders.
On February 26, 1996 the settlement of litigation between the Trust
and the Delaware State Escheator was approved by the Delaware Court
of Chancery. As of that date, there were a total of 875,748
authorized but unissued units representing the unexchanged shares of
the Trust's predecessor corporations. Out of this total, 760,560
units were subject to the settlement. Under the settlement, 380,280
units were issued to the Escheator on April 17, 1996. Of the units
remaining to be issued to the Escheator, 50% would be issued to the
Escheator by June 30, 2000 and the balance by June 30, 2005. Until
June 30, 2000, claims by unlocated or unknown shareholders of the
Trust's corporate predecessors for units and past dividends and
distributions thereon ("subsequent claims") will be paid by the
Escheator and the Trust on a 50:50 basis. From July 1, 2000 to
June 30, 2005, subsequent claims will be paid by the Escheator and
the Trust on a 75:25 basis. Any subsequent claims will reduce the
number of units to be issued to the Escheator in 2000 or 2005.
Following the final issuance of units to the Escheator in 2005, the
Trust's contingent liability for past dividends and distributions
attributable to all unexchanged Corporation and Company shares
subject to the settlement will be completely eliminated. Under the
terms of the settlement, the maximum liability of the Escheator for
subsequent claims is limited to the value of the units received, plus
current distributions on units retained, less the Escheator's share
of subsequent claims. As of the receipt of the May, 2000
distribution, the maximum liability of the Escheator will be
$6,943,977.
Under the Trust Agreement as deemed amended by the February 26, 1996
Delaware Court Order, the Trust is not required to make payments of
arrearages of Company dividends or Trust distributions with respect
to units issued or to be issued to the Escheator. As of
April 30, 2000, there remained a total of 493,914 units that could be
issued to unlocated or unknown Corporation and Company shareholders.
Of this total, 380,250 units are subject to the settlement and remain
to be issued to the Escheator. If all shares, represented by the
units already issued as well as the units remaining to be issued,
were presented for exchange, $487,096 in dividends and $28,911,519 in
distributions would be payable. In the opinion of the Trustees, based
in part on the history of exchanges during the last ten fiscal years,
the maximum liability of the Escheator would be adequate to cover the
Escheator's share of any subsequent claims. In any event, the
Trust's contingent liability for such claims will be eliminated in
2005.
Item 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations.
------------------------------------
The Trust is a passive investment trust which holds overriding royalty
rights and receives monthly royalties from the operating companies,
subsidiaries of Exxon Mobil Corp. and the Royal Dutch Group, based on their
sales of natural gas, sulfur and oil. Of these three products, natural gas
provides approximately 98% of the total royalties. There are two overriding
royalty rates in effect on sales of natural gas within the Oldenburg
concession, from which the Trust derives nearly all of its royalty income.
The Trust receives a 4% royalty from the western portion of the concession.
The Trust also receives a 0.6667% royalty, adjusted to account for a partial
representative portion of costs, which covers the entire concession. The
royalties are initially paid in Deutsche marks, which are subsequently
converted into Euros at a treaty mandated rate. Just prior to their
transfer, the royalties, now denominated in Euros, are converted into U.S.
dollars at the agreed upon Euro/dollar exchange rate. The Trust does not
engage in any business activities and has no need of funds beyond the funds
available from monthly royalties to cover operating expenses. Accordingly,
neither liquidity nor capital resources are pertinent factors in its
activities or operations. All percentage comparisons, except where
otherwise noted, in the following discussion and analysis refer to the prior
year's comparable period.
Although the Trust itself does not have access to the specific sales
contracts under which the Oldenburg gas is sold, these contracts are
reviewed periodically by our auditors. They have informed the Trust that
these contracts contain pricing mechanisms which use a number of factors
with varying time delays to price the gas being sold. For the Trust there
are two elements of these contracts that are very significant. The first
element is the utilization of the price of light heating oil in Germany as
the primary pricing factor in many of these contracts. The price of light
heating oil is in turn affected by the price of oil on the international
market. The second element is a three to six month delay before changes in
pricing factors are translated into changes in the price of gas.
Net income of the Trust for the second fiscal quarter ended
April 30, 2000 increased by 36% from $2,604,254 to $3,541,412. This level
of income permitted a distribution of 41 cents per unit outstanding compared
to 30 cents last year. Significantly higher gas prices along with a slight
increase in overall and western Oldenburg gas sales combined to drive
royalties higher. The continuing decline in the average Euro/dollar
exchange rate reduced the amount of dollars that would otherwise have been
received by the Trust when the royalties were transferred to the U.S. from
Germany. For the first six months of fiscal 2000, net income increased 21%
from $5,711,888 to $6,907,418. The total distributions for the first six
months of fiscal 2000 were 80 cents compared to 66 cents for fiscal 1999.
For the second quarter of fiscal 2000, the positive impact on Trust
royalties caused by the increase in Oldenburg gas prices far outweighed the
impact of all other factors. Gas prices under the higher royalty agreement
in western Oldenburg increased by 42.8% to an average of 0.9198 Euros per
hundred Kilowatt hours ("Euros/CKwh"). Overall Oldenburg gas prices, under
the lower royalty agreement, increased 38.2% to an average of 0.9125
Euros/CKwh. When converted into more familiar terms using the average
exchange rate for the quarter, the average gas price increased 24.5% to
$2.49 per Mcf from the prior year's period.
Gas sales from western Oldenburg for the second quarter were equal to
25.7 billion cubic feet ("Bcf"), an increase of 3.2% over the prior year's
sales of 24.9 Bcf. For the six month period, gas sales from western
Oldenburg were virtually unchanged increasing only 0.4% from 49.9 Bcf to
50.1 Bcf. For the second quarter overall Oldenburg gas sales were equal to
65.2 Bcf, an increase of 2.7% over the prior year's sales of 63.4 Bcf.
For the six month period, overall Oldenburg gas sales increased 5.7% from
128.1 Bcf to 135.5 Bcf. With the lower demand period of spring and summer
quarters approaching and a scheduled four week shutdown at the
Grossenkneten desulfurization plant, the operating companies may find it
difficult to sustain the high production and sales pace set during the first
two quarters.
Interest income was higher reflecting the increased funds available for
investment. Trust expenses were virtually unchanged from the prior year's
period. With regard to the Y2K issue, there appear to have been no
difficulties experienced by either the Trust or its principal third parties.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at April 30, 2000, compared to that at fiscal year end (October 31,
1999), 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
were to be required for payments to owners of units not previously
presented for issuance, quarterly distributions would be reduced to the
extent required to provide funds for such payments.
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
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None.
(b) Reports on Form 8-K
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None.
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
(Registrant)
By: /S/ John R. Van Kirk
----------------------------
John R. Van Kirk
Managing Director
Dated: May 25, 2000
