SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2084119
----------------------- --------------------------
(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
-------------------------------------------------------------
(Address of principal executive offices)
(732) 741-4008
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Class Outstanding at July 31, 2000
----- -------------------------------
Units of Beneficial Interest 8,886,804
ARTHUR ANDERSEN LLP
ACCOUNTANT'S REVIEW REPORT
----------------------------
To North European Oil Royalty Trust:
We have reviewed the accompanying statements of assets, liabilities and
trust corpus of North European Oil Royalty Trust (the "Trust") as of
July 31, 2000 and the related statements of income and expenses on a cash
basis for the three and nine months ended July 31, 2000 and 1999, and the
related statements of changes in cash and cash equivalents and undistributed
earnings for the three and nine months ended July 31, 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 a 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
generally accepted accounting principles which require the use of the accrual
basis of accounting. We have not performed any auditing procedures since
that date.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
The accounts of the Trust are maintained on a cash basis of accounting under
which income is not recorded until collected instead of when earned, and
expenses are recorded when paid instead of when incurred. Thus, the
accompanying financial statements are not intended to present financial
position and results of operations in conformity with generally accepted
accounting principles which require the use of the accrual basis of
accounting (see Note 1).
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with the cash basis of accounting.
As discussed in Note 3, the Trust has a contingent liability relating to
unclaimed units and distributions. No reserves are established or reflected
in the financial statements for the possibility that funds would be required
to satisfy such claims.
/s/ Arthur Andersen LLP
-------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
August 7, 2000
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
----------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999
-------------------------------------------------
2000 1999
--------------- ---------------
(unaudited)
German gas, oil and sulfur
royalties received $ 3,966,769 $ 2,318,688
----------- -----------
Interest income 30,304 17,719
----------- -----------
Trust expenses ( 131,000) ( 115,018)
----------- -----------
Net income on a cash basis $ 3,866,073 $ 2,221,389
=========== ===========
Net income per unit on a cash basis $ .43 $ .25
====== ======
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 $ .43 $ .25
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
JULY 31, 2000 AND OCTOBER 31, 1999
----------------------------------
2000 1999
----------------- -----------------
(unaudited) (audited)
Current assets - - Cash and
cash equivalents (Note 1) $ 3,873,151 $ 2,319,172
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
$ 3,873,152 $ 2,319,173
Current liabilities - - Cash distributions
payable to unit owners $ 3,821,326 $ 2,261,128
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 51,825 58,044
----------- -----------
$ 3,873,152 $ 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)
------------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
--------------------------------------------------
2000 1999
----------------- -----------------
(unaudited)
German gas, oil and sulfur
royalties received $11,149,422 $ 8,324,058
----------- -----------
Interest income 66,699 55,214
----------- -----------
Trust expenses ( 442,630) ( 445,995)
----------- -----------
Net income on a cash basis $10,773,491 $ 7,933,277
=========== ===========
Net income per unit on a cash basis $1.21 $0.91
===== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .00
Distributions per unit to be paid
to unit owners $1.23 $0.91
===== ======
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
------------------------------------------------
2000 1999
----------------- -----------------
(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $11,149,422 $ 8,324,058
Interest income 66,699 55,214
Reimbursement for prior payment
of past dividends and distributions 0 1,017
----------- -----------
11,216,121 8,380,289
----------- -----------
Uses of cash and cash equivalents:
Payment of Trust expenses 442,630 445,995
Distributions and dividends paid (Note 3) 9,219,512 8,440,979
----------- -----------
9,662,142 8,886,974
----------- -----------
Net increase(decrease) in cash and
cash equivalents during the period 1,553,979 ( 506,685)
Cash and cash equivalents,
beginning of period 2,319,172 2,765,901
----------- -----------
Cash and cash equivalents,
end of period $ 3,873,151 $ 2,259,216
=========== ===========
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
------------------------------------------------
2000 1999
----------------- -----------------
(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 10,773,491 7,933,277
----------- -----------
10,831,535 8,004,292
----------- -----------
Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 1,043 5,309
Current year distributions paid or
to be paid to unit owners (Note 3) 10,778,667 7,913,921
----------- -----------
10,779,710 7,919,230
----------- -----------
Balance, end of period $ 51,825 $ 85,062
=========== ===========
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
(1) Summary of significant
accounting policies:
----------------------
Basis of accounting -
-------------------
The accounts of North European Oil Royalty Trust (the "Trust") are
maintained on a cash basis of accounting with the exception of the
accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust
during the period plus interest income less any expenses incurred by
the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the cash basis provides a more meaningful presentation to unit
owners of the results of operations of the Trust.
Producing gas and oil
royalty rights -
---------------------
The rights to certain gas and oil royalties in Germany were
transferred to the Trust at their net book value by North European Oil
Company (the "Company") (see Note 2). The net book value of the
royalty rights has been reduced to one dollar ($1) in view of the fact
that the remaining value of royalty rights is de minimis relative to
annual royalties received and distributed by the Trust and does not
bear any meaningful relationship to the fair value of such rights or
the actual amount of proved producing reserves.
Federal and state income taxes -
------------------------------
The Trust, as a grantor trust, is exempt from Federal and state income
taxes under a private letter ruling issued by the Internal Revenue
Service.
Cash and cash equivalents -
-------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with maturities of three months or less.
Net income per unit
on the cash basis -
-------------------
Net income per unit on the cash basis is based upon the number of units
outstanding at the end of the period (see Note 3). As of July 31, 2000
and 1999, there were 8,886,804 and 8,696,616 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 Company shares and dividends of
$354,101 and distributions of $4,235,501 were paid to former unlocated
Corporation and Company shareholders. For the nine-month period ended
July 31, 2000, there were 30 units 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 Trust units remaining to be
issued to the Escheator, approximately 50% (190,128 units) have been
issued to the Escheator as of June 30, 2000 and the remaining balance
will be issued by June 30, 2005. Through 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") were 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 2005.
Following the final issuance of units to the Escheator in 2005, the
Trust's contingent liability for past dividends and distributions
attributable to all unexchanged Corporation and Company shares subject
to the settlement will be completely eliminated. Under the terms of the
settlement, the maximum liability of the Escheator for subsequent claims
is limited to the value of the units received, plus current
distributions on units retained, less the Escheator's share of
subsequent claims. As of the receipt of the August, 2000 distribution,
the maximum liability of the Escheator will be $10,193,154.
Under the Trust Agreement as deemed amended by the February 26, 1996
Delaware Court Order, the Trust is not required to make payments of
arrearages of Company dividends or Trust distributions with respect to
units issued or to be issued to the Escheator. As of July 31, 2000,
there remained a total of 303,786 units that could be issued to
unlocated or unknown Corporation and Company shareholders. Of this
total, 190,122 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, $487,023 in dividends and $29,042,147 in
distributions would be payable. In the opinion of the Trustees, based
in part on the history of exchanges during the last ten fiscal years,
the maximum liability of the Escheator would be adequate to cover the
Escheator's share of any subsequent claims. In any event, the Trust's
contingent liability for such claims will be eliminated in 2005.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
The Trust is a passive investment trust which holds overriding royalty
rights and receives monthly royalties from the operating companies,
subsidiaries of 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.
For the nine month fiscal period ended July 31, 2000, net income of the
Trust increased 35.8% from $7,933,277 to $10,773,491. Net income of the
Trust for the third fiscal quarter ended July 31, 2000 increased by 74% from
$2,221,389 to $3,866,073. A combination of higher gas prices under both
royalty agreements and higher gas sales from the higher royalty rate area
of western Oldenburg resulted in the increased royalties paid to the Trust
and the subsequent higher distribution.
Of these two positive factors the most significant was higher gas
prices. Under the lower royalty rate covering the entire Oldenburg
concession, average gas prices increased 100.9% from 0.6447 Euros per
hundred kilowatt hours ("Euros/CKwh") to 1.2949 Euros/CKwh. Under the
higher royalty rate covering western Oldenburg, average gas prices increased
67.7% from 0.6762 Euros/CKwh to 1.1340 Euros/CKwh. Converting these prices
into more familiar terms based on the applicable exchange rates yields
average prices of $3.40 and $2.99 per Mcf for the lower and higher royalty
rate areas respectively.
While overall gas sales declined by 6% to 45.9 Billion cubic feet
("Bcf"), gas sales from western Oldenburg increased 8.9% to 24.7 Bcf.
Western Oldenburg gas sales accounted for 53.8% of total sales as compared
to 46.4% in the prior year. This increase in sales is significant because
the combined royalty in effect in western Oldenburg yields a royalty payment
approximately seven times higher on an equivalent amount of gas sold in
eastern Oldenburg.
The Euro continued to remain under pressure throughout the quarter
hovering in the low $0.90's, slightly above its historic low. The continued
strength of the U.S. economy, recent interest rate increases by the Federal
Reserve and low interest rates in Europe helped to sustain the Euro's low
value. The average value for the Euro for the quarter just ended was
$0.9304, a decline of 11% from last year's equivalent exchange rate.
Interest income was higher due to both greater funds available for
investment and higher interest rates. Trust expenses increased slightly
from the prior year's period primarily due to higher Trustees' fees
reflecting the higher level of royalty income.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 2000, compared to that at fiscal year end (October 31,
1999), shows an increase in assets due to higher royalty receipts during the
quarter.
The Trust distribution for the third quarter of fiscal 2000 is $0.43,
an increase of 72% from last year's distribution of $0.25. Cumulative
distributions for the nine month fiscal period are $1.23 compared to $0.91
for 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.
As mandated by the Trust Agreement, distributions of income are made on a
quarterly basis. These distributions, as determined by the Trustees,
constitute substantially all the funds on hand after provision is made for
Trust expenses then anticipated. As permitted by the Trust Agreement, no
provision is made for the retention of reserve funds of any kind. If funds
were to be required for payments to owners for shares of the Trust's
predecessor corporations not previously presented for exchange into Trust
units, quarterly distributions would be reduced to the extent required to
provide funds for such payments.
Part II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
A report on Form 8-K dated June 30, 2000 was filed with
Securities and Exchange Commission reporting the
completion of the second issuance of Trust units as
specified by the terms of the February 1996 settlement
between North European Oil Royalty Trust and the
Delaware State Escheator. The Form 8-K included as its
exhibit the press release dated June 30, 2000.
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: August 30, 2000
