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, 2004 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
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 126-2 of the Exchange Act).
Yes X No
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Class Outstanding at February 27, 2004
- ----- --------------------------------
Units of Beneficial Interest 8,931,414
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
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2004 2003
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(unaudited)
German gas, oil and sulfur
royalties received $ 4,360,730 $ 4,766,564
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Interest income 6,393 8,520
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Trust expenses ( 233,010) ( 254,717)
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Net income on a cash basis $ 4,134,113 $ 4,520,367
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Net income per unit on a cash basis $ .46 $ .51
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Cash distributions paid or to be paid:
Distributions per unit to be paid to
unit owners $ .46 $ .51
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JANUARY 31, 2004 AND OCTOBER 31, 2003
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2004 2003
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(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 4,178,723 $ 4,063,766
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
Total Assets $ 4,178,724 $ 4,063,767
=========== ===========
Current liabilities - - Cash distributions
payable to unit owners $ 4,108,450 $ 4,019,136
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 70,273 44,630
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Total Liabilities and Trust Corpus $ 4,178,724 $ 4,063,767
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The accompanying notes to financial statements
should be read in conjunction with these statements.
-3-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
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2004 2003
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(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $ 4,360,730 $ 4,766,564
Interest income 6,393 8,520
----------- -----------
$ 4,367,123 $ 4,775,084
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Uses of cash and cash equivalents:
Payment of Trust expenses 233,010 254,717
Distributions and dividends paid (Note 3) 4,019,156 3,393,937
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4,252,166 3,648,654
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Net increase in cash and
cash equivalents during the period 114,957 1,126,430
Cash and cash equivalents,
beginning of period 4,063,766 3,458,577
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Cash and cash equivalents,
end of period $ 4,178,723 $ 4,585,007
=========== ===========
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
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2004 2003
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(unaudited)
Balance, beginning of period $ 44,630 $ 64,640
Net income on a cash basis 4,134,113 4,520,367
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4,178,743 4,585,007
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Less:
Current year distributions paid or
to be paid to unit owners (Note 3) 4,108,470 4,555,021
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4,108,470 4,555,021
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Balance, end of period $ 70,273 $ 29,986
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The accompanying notes to financial statements
should be read in conjunction with these statements.
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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 accompanying financial statements present financial statement
balances and financial results on a cash basis of accounting, which is
a comprehensive basis of accounting other than accounting principles
generally accepted in the United States ("GAAP basis"). Cash basis
financial statements report income when cash is received and expenses
when cash is paid. GAAP basis financial statements report income as
earned and expenses as incurred, without regard to receipts or
payments. The sole exception to the use of the cash basis of
accounting is 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 from the date
of purchase.
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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, 2004 and 2003, there were 8,931,414 and 8,931,414 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. The Trust on behalf of the owners of
beneficial interest in the Trust holds overriding royalty rights
covering gas and oil production in certain concessions or leases in
the Federal Republic of Germany. These rights are held under contracts
with local German exploration and development subsidiaries of Exxon
Mobil 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 gas well gas, oil well gas,
crude oil, distillate and sulfur.
(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, 2003, 721,364 Trust
units were issued in exchange for Corporate or Company shares and
dividends of $354,101 and distributions of $4,236,544 were paid to
former unlocated Corporation and Company shareholders. For the three
month period ended January 31, 2004, there were no units issued in
exchanges and no dividends and no 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 ("Delaware 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. Under the
settlement 380,280 units were issued to the Delaware Escheator on
April 17, 1996. Of the Trust units remaining to be issued to the
Delaware Escheator, approximately 50% (190,128 units) had been issued
to the Delaware 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 Delaware Escheator and the
Trust on a 50:50 basis. From July 1, 2000 to June 30, 2005
subsequent claims will be paid by the Delaware Escheator and the Trust
on a 75:25 basis. Any subsequent claims will reduce the number of
units to be issued to the Delaware Escheator in 2005. Following the
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final issuance of units to the Delaware 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 Delaware Escheator for
subsequent claims is limited to the value of the units received, plus
current distributions on units retained, less the Delaware Escheator's
share of subsequent claims. As of the receipt of the February 2004
distribution, the maximum liability of the Delaware Escheator will be
$13,582,277.
In addition to the agreement reached with the Delaware Escheator, on
December 4, 2001 the Trust reached a parallel agreement with the
Administrator of Unclaimed Property, Office of the New York State
Comptroller (the "New York Administrator") covering units for which
owners were unlocated but for whom New York state addresses were shown
in predecessor corporation records. The New York Settlement Agreement
(the "Settlement Agreement") covers 89,220 units attributable to stock
ownership by unlocated shareholders of predecessor corporate
entities. Of the units covered by the Settlement Agreement, 44,610
were issued to the New York Administrator on December 21, 2001 and the
balance of 44,610 will be issued on or before June 30, 2005. The
Settlement Agreement provides for processing of claims in the period
until June 30, 2005 and the sharing on a 50:50 basis of any costs
relating to any claims which are allowed. Any subsequent claims will
reduce the number of units to be issued to the New York Administrator
in 2005. Following the final issuance of units to the New York
Administrator in 2005, the Trust's contingent liability for past
dividends and distributions attributable to all unexchanged
Corporation and Company shares subject to the Settlement Agreement
will be completely eliminated. Under the terms of the Settlement
Agreement, the maximum liability of the New York Administrator for
subsequent claims is limited to the value of the units received, plus
current distributions on units retained, less the New York
Administrator's share of subsequent claims. As of the receipt of the
February 2004 distribution, the maximum liability of the New York
Administrator will be $1,030,045
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 Delaware Escheator or the New York
Administrator. As of January 31, 2004, there remained a total of
259,176 units that could be issued to unlocated or unknown Corporation
and Company shareholders. Of this total, 234,732 units are subject to
the settlements and remain to be issued to the Delaware Escheator or
the New York Administrator. 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 $31,004,167 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 Delaware Escheator and the New York
Administrator would not be less than their respective share of any
subsequent claims. In any event, the Trust's contingent liability for
all claims for arrearages will be eliminated in 2005.
-7-
(4) Related party transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. During the first
quarter of fiscal 2004 the Trust reimbursed him a total of $3,584.64
for such office space and office services.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
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 does not engage 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.
Seasonal demand factors affect the income from royalty rights
insofar as they relate to energy demands and increases or decreases in
prices, but on average they are not material to the regular annual income
received under the royalty rights.
The operating companies, subsidiaries of ExxonMobil Corp. and the
Royal Dutch Group, pay monthly royalties to the Trust based on their sales
of natural gas, sulfur and oil. The Oldenburg concession is the primary area
from which these products are extracted and provides nearly 100% of all the
royalties received by the Trust. Of the three products, natural gas
provides approximately 98% of the total royalties.
Net Trust income for the first quarter of fiscal 2004 was
$4,134,113. This level of income permitted a distribution of 46 cents per
unit which was paid on February 25, 2004 to owners of record as of February
13, 2004. Gross royalty income of $4,360,730 for the quarter ended January
31, 2004 declined by 8.5% from gross royalty income of $4,766,564 received
during last year's equivalent period. This royalty income was based on
sales of gas, oil and sulfur from the Trust's overriding royalty areas in
Germany during the fourth calendar quarter of 2003.
With both the quarterly gas sales and gas prices posting lower
levels in comparison to the first quarter of fiscal 2003, higher exchange
rates on royalty transfers from Germany served to limit the drop in dollar
royalties and the Trust distribution for the first quarter of fiscal 2004.
The amount of gas sold under the higher royalty rate agreement covering
western Oldenburg declined by 12.9% from 20.86 billion cubic feet ("Bcf")
in the first quarter of fiscal 2003 to 18.16 Bcf in the quarter just ended.
Gas sales from the entire Oldenburg concession covered under the lower
royalty rate agreement fell by 13.1% from 53.61 Bcf to 46.59 Bcf.
The decline in gas sales was almost evenly spread through both the eastern
and western halves of the Oldenburg concession.
The average price for gas sold under the higher royalty rate
agreement declined 12.2% from 1.3487 Euro cents per Kwh ("Ecents/Kwh") to
-8-
1.1836 Ecents/Kwh. The average price for gas sold under the lower royalty
rate agreement declined 7.6% from 1.3119 Ecents/Kwh to 1.2120 Ecents/Kwh.
The impact of the decline in both gas sales and gas prices is shown clearly
in the amount of royalties in Euros paid to the Trust. Royalties paid to
the Trust under the higher royalty rate agreement declined 22.8% from
3,214,224 Euros to 2,481,980 Euros. Royalties paid to the Trust under the
lower royalty rate agreement declined 22.6% from 1,175,022 Euros to 909,007
Euros. Based upon the conversion of Euro royalties into dollar royalties
the average value of the Euro for the quarter just ended increased 18.1%
compared to the first quarter of fiscal 2003 from a dollar equivalent of
$1.0385 to $1.2269. Using this average value for the Euro and converting
gas prices into more familiar terms, gas prices under both the higher and
lower royalty rate agreements averaged $4.18 per Mcf compared to $3.97 and
$3.88 respectively for the first quarter of fiscal 2003.
From information informally provided by the operating companies,
it appears that the decline in gas sales is related to a continuing decline
in overall reservoir pressure along with interruptions in production caused
by the large number of well shutdowns for required maintenance and efforts
to address productivity problems or failures at subsurface levels. They
indicated that their response to this decline was three-fold. On an
immediate basis, the operating companies began a program of workovers in
2003 to address productivity problems and failures of subsurface
installations in an effort to re-stimulate the wells. This program is
continuing in 2004. While these actions will help over time with production
levels, this program results in a reduction of current production due to the
required well shutdowns during this procedure.
On a short term basis, the operating companies report that two new
compressor units are being installed as the first part of the production
program. This program will permit a step by step reduction in reservoir
pressures allowing gas reserves previously not recoverable to be produced.
Under current arrangements reservoir pressure must exceed the pipeline
pressure of 75-80 bars in order for the gas to force its way into the
pipeline. As the pressure declines over time, less and less gas enters the
pipeline. The compressors provide the needed additional pressure to force
the gas from the well into the pipeline at higher rates than the residual
reservoir pressure would permit. The eventual establishment of four
different pressure levels within the pipeline system will permit the
achievement of a final reservoir pressure of 7 bars.
On a long term basis, the operating companies have indicated their
intent to increase the drilling program that has been limited in recent
years. Four wells are currently planned for 2004 with two each in both the
eastern and western areas of the Oldenburg concession. There is both a new
vertical well (to develop a previously untapped area) and a horizontal
deviation off an existing well (to increase production rates and recoverable
reserves) planned for both areas. For 2005 two additional horizontal
deviations are currently being planned. Finally a review of seismic data
for larger areas is planned that the operating companies hope will result
in an infill drilling program to reach reserves not currently accessible by
existing wells. While the Trust has no control over the plans of the
operating companies it is our hope that these plans will be implemented and
will result in an increase in both future production and sales levels as
well as accelerating the replacement of reserves reduced through current
production.
-9-
First fiscal quarter Trust expenses of $233,010 were slightly
lower than the prior year, due primarily to the delayed billing in the
current quarter of the listing fee for the New York Stock Exchange. All the
remaining categories of expenses showed only moderate changes either
positive or negative. Interest income declined, reflecting the reduced
funds available for investment and the continuing low interest rates on
those funds.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at January 31, 2003 compared to that at fiscal year end
(October 31, 2003) 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, quarterly distributions would be reduced to the
extent required to provide funds for such payments.
-----------------------------------
This report on Form 10-Q contains forward looking statements
concerning business, financial performance and financial condition of the
Trust. Many of these statements are based on information provided to the
Trust by the operating companies or by consultants using public information
sources. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated in any
forward looking statements. These include uncertainties concerning levels of
gas production and gas prices, general economic conditions and currency
exchange rates. Actual results and events may vary significantly from those
discussed in the forward looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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The Trust does not engage in any trading activities with respect
to possible foreign exchange fluctuations. The Trust does not use any
financial instruments to hedge against possible risks related to foreign
exchange fluctuations. The market risk is negligible because standing
instructions at its German bank require the bank to process conversions and
transfers of royalty payments as soon as possible following their receipt.
Item 4. Controls and Procedures.
-----------------------
As of the end of the period covered by this report, an evaluation
was carried out under the supervision and with the participation of the
Trust's management, which consists of the Managing Trustee and the Managing
Director, of the effectiveness of the design and operation of the Trust's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
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Exchange Act of 1934. Based upon that evaluation, the Managing Trustee and
the Managing Director concluded that the Trust's disclosure controls and
procedures were effective, in all material respects, with respect to the
recording, processing, summarizing and reporting, within the time periods
specified in the Securities and Exchange Commission's rules and forms, of
information required to be disclosed by the Trust's management in the
reports that are filed or submitted under the Exchange Act.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation described above that
occurred during the first quarter of fiscal 2004 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
Part II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
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(a) The Annual Meeting of Unit Owners was held on February 11, 2004.
(b) The following persons were elected as Trustees of the Trust to
serve until the 2005 Annual Meeting of Unit Owners:
Robert P. Adelman (7,141,638 votes for; 358,452 withheld)
Samuel M. Eisenstat (7,143,298 votes for; 356,792 withheld)
Willard B. Taylor (7,142,281 votes for; 357,809 withheld)
John H. Van Kirk (6,991,126 votes for; 508,964 withheld)
Rosalie J. Wolf (7,141,540 votes for; 358,550 withheld)
Item 5. Other Information.
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There have been no changes to the procedures by which unit owners
may recommend nominees for Trustees of the Trust since those disclosed in
our proxy statement on Schedule 14A dated January 12, 2004.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
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Exhibit 31.1. Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2. Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32. Certification of Chief Executive and
Chief Financial Officers pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-11-
(b) Reports on Form 8-K.
A Report on Form 8-K, dated November 13, 2003, was furnished
on November 17, 2003 announcing the Trust's earnings
for the fourth quarter of fiscal 2003.
A Report on Form 8-K, dated January 29, 2004, was furnished
on January 30, 2004 announcing the amount of the distribution
for the first quarter of fiscal 2004.
A Report on Form 8-K, dated February 11, 2004, was furnished
on February 13, 2004 announcing the Trust's earnings
for the first quarter of fiscal 2004.
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: February 27, 2004