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, 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
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act.
Yes X No
Class Outstanding at April 30, 2004
- ---------------------------- -------------------------------
Units of Beneficial Interest 8,931,414
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 APRIL 30, 2004 AND 2003
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2004 2003
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(Unaudited)
German gas, oil and sulfur
royalties received $ 4,075,008 $ 4,699,755
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Interest income 4,954 7,520
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Trust expenses ( 221,273) ( 178,732)
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Net income on a cash basis $ 3,858,689 $ 4,528,543
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Net income per unit on a cash basis $ .43 $ .51
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Cash distributions paid or to be paid:
Distributions per unit to be paid to
unit owners $ .43 $ .50
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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APRIL 30, 2004 AND OCTOBER 31, 2003
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2004 2003
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(Unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 3,928,962 $ 4,063,766
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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$ 3,928,963 $ 4,063,767
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Current liabilities - - Cash distributions
payable to unit owners $ 3,840,508 $ 4,019,136
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 88,454 44,630
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Total Liabilities and Trust Corpus $ 3,928,963 $ 4,063,767
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The accompanying notes to financial statements
should be read in conjunction with these statements.
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2004 AND 2003
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2004 2003
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(Unaudited)
German gas, oil and sulfur
royalties received $ 8,435,738 $ 9,466,319
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Interest income 11,347 16,040
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Trust expenses ( 454,283) ( 433,449)
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Net income on a cash basis $ 7,992,802 $ 9,048,910
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Net income per unit on a cash basis $0.89 $1.01
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Cash distributions paid or to be paid:
Distributions per unit to be paid
to unit owners $0.89 $1.01
===== =====
The accompanying 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, 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 $ 8,435,738 $ 9,466,319
Interest income 11,347 16,040
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8,447,085 9,482,359
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Uses of cash and cash equivalents:
Payment of Trust expenses 454,283 433,449
Distributions and dividends paid (Note 3) 8,127,606 7,951,090
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8,581,889 8,384,539
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Net increase(decrease)in cash and
cash equivalents during the period ( 134,804) 1,097,820
Cash and cash equivalents,
beginning of period 4,063,766 3,458,577
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Cash and cash equivalents,
end of period $ 3,928,962 $ 4,556,397
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 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 7,992,802 9,048,910
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8,037,432 9,113,550
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Less:
Current year distributions paid or
to be paid to unit owners (Note 3) 7,948,978 9,022,860
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7,948,978 9,022,860
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Balance, end of period $ 88,454 $ 90,690
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The accompanying 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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(1) Summary of significant
accounting policies:
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Basis of accounting -
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The accompanying financial statements of North European Oil Royalty
Trust (the "Trust") 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.
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, 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 ExxonMobil Corp. and the
Royal Dutch/Shell Group of Companies. 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:
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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, 2003, 721,364
units were issued in exchange for Corporate and Company shares and
dividends of $354,101 and distributions of $4,236,544 were paid to
former unlocated Corporation and Company shareholders. For the
six-month period ended April 30, 2004 no units were 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 predecessor corporations. 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) have 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 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 May, 2004 distribution, the maximum liability of the Delaware
Escheator will be $13,712,971. As of the record date for the May
distribution, the Delaware Escheator continues to own 303,937 units
of the 570,408 units previously issued to it.
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 New York state addresses were shown in
predecessor corporation records. The New York 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 of any costs relating to any claims which are allowed. As of
the receipt of the May, 2004 distribution, the maximum liability
of the New York Administrator will be $1,049,227.
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 April 30, 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 $31,115,612 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 be adequate
to cover 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.
(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 second
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
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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/Shell Group of Companies, 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 these three products, natural gas provides approximately 98% of the
total royalties.
The gas is sold to various distributors under long term contracts
which delineate, among other provisions, the timing, manner, volume and
price of the gas sold. The pricing mechanisms contained in these
contracts include a delay factor of three to six months and use the
price of light heating oil in Germany as one of the primary pricing
components. Since Germany must import a large percentage of its energy
requirements, the U.S. dollar price of oil on the international market
has a significant impact on the price of light heating oil and a
delayed impact on the price of gas. Although the Trust itself does not
have access to the specific sales contracts under which the Oldenburg
gas is sold, these contracts are examined periodically by the German
branch of Ernst & Young LLP.
For unit owners changes in value of the Euro have both an
immediate and a long term impact. The immediate impact relates to the
determination of the number of dollars the Trust receives when Euros
are converted into dollars at the time of the transfer of the royalties
from Germany to the U.S. At the time of the exchange, a higher exchange
rate would yield more dollars and a lower exchange rate fewer. The
long term impact comes into play through the mechanism of gas pricing.
With the price of light heating oil used as a component in the
calculation of gas prices in the various contracts under which the gas
is sold, changes in world crude oil prices are eventually reflected in
gas prices. Since oil on the international market is priced in
dollars, a lower exchange rate for the Euro means that oil imported
into Germany is more expensive which results in higher local oil
prices. A higher exchange rate for the Euro means that oil imported
into Germany is less expensive which results in lower local oil prices.
These higher or lower local oil prices are in turn reflected in higher
or lower gas prices.
For the second quarter of fiscal 2004 ended April 30, 2004, the
Trust's net income was $3,858,689, showing a 14.8% decline over net
income for the prior year's period. This income was derived from sales
of gas, sulfur and oil from the Trust's overriding royalty areas in
Germany during the first calendar quarter of 2004. This level of
income allowed a distribution of 43 cents per unit payable on May 26,
2004 to owners of record as of May 14, 2004. For the six month period,
the Trust's net royalty income was $7,992,802, a decline of 11.7% from
the net income for last year's equivalent period. For the six month
period ended April 30, 2004 total distributions were equal to $0.89 per
unit.
The amount of royalties paid to the Trust is based on four primary
factors: the amount of gas sold, the price of that gas, the area from
which the gas is sold and the exchange rate. For the quarter just
ended the impact of the exchange rate was the only positive factor on
Trust royalties and the resulting distribution of all these factors.
Under the lower percentage royalty rate agreement with BEB, the
joint venture between the German subsidiaries of ExxonMobil and the
Royal Dutch/Shell Group, covering the entire Oldenburg concession gas
sales declined by 14.3% compared to the gas sales during the second
quarter of fiscal 2003. Gas sales dropped from 52.9 to 45.3 billion
cubic feet ("Bcf"). The average gas price for gas sold under this
agreement declined as well although not as substantially, falling 3.1%
from 1.3051 Euro cents per Kilowatt hour ("Ecents/Kwh") for the second
quarter of fiscal 2003 to 1.2646 Ecents/Kwh for the quarter just ended.
The situation under the higher percentage royalty rate agreement
with the German subsidiary of ExxonMobil covering western Oldenburg was
similar, with both gas sales and gas prices falling. Under this
agreement gas sales declined 15.1% from 20.3 Bcf for the second quarter
of fiscal 2003 to 17.3 Bcf for the quarter just ended. The average
price for gas sold under this agreement was 1.2583 Ecents/Kwh, down
8.6% from the average price for the second quarter of fiscal 2003 of
1.3761 Ecents/Kwh.
Under the lower percentage royalty rate agreement, the average
value of the Euro based on the monthly transfer of royalties to the
United States during the quarter just ended was $1.2105 an increase of
11.2% from $1.0882, the average value for the second quarter of fiscal
2003. Under the higher percentage royalty rate agreement, the average
value of the Euro based on the monthly transfer of royalties to the
United States for the quarter just ended was $1.2106 an increase of
12.3% from $1.0778, the average value for the second quarter of fiscal
2003. Converting the average gas prices using the average exchange
rates for the quarter into more familiar terms yields an average gas
price under both the lower and higher percentage royalty rate
agreements of $4.27 and $4.34 per thousand cubic feet, respectively.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2004, compared to that at fiscal year end
(October 31, 2003), shows a decline in assets due to the reduction in
royalty receipts during the quarter.
Interest income was lower reflecting the continuing low interest
rates applicable during the period on the reduced funds available for
investment. Trust expenses for the second quarter were somewhat higher
in comparison to the expenses recorded for the second quarter of fiscal
2003 but the bulk of the increase was related to the timing of a
sizeable expense payment along with higher legal expenses related to
compliance with the Sarbanes-Oxley Act of 2002.
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.
REPORT ON DRILLING AND GEOPHYSICAL WORK
The Trust's new German consultant, Mr. Alfred Stachel, had met
with representatives of the operating companies to inquire about the
reasons behind the decline in gas production and sales during the two
most recent years. The following paragraph is a summary of Mr.
Stachel's account of the operating companies' response to his inquiries.
The Trust is not able to confirm the accuracy of any of these findings
or responses. In addition, the operating companies are not obligated to
take any of the actions outlined below and, if they change their plans
with respect to any such actions, they are not obligated to inform the
Trust.
The operating companies explained that the decline was the result
of the continuing drop in reservoir pressure for a number of wells and
the resulting reduction in the flowrate of gas from those wells into the
pipeline. They indicated that their intended response to this decline
was three-fold. On an immediate basis, a program of workovers was
started in 2003 and would be continuing in 2004 to address productivity
problems and failures of subsurface installations in an effort to
re-stimulate the wells and increase the flowrate. They indicated that
while these actions are expected to help over time with production
levels, in the short term this program would result in a reduction of
current production due to the required well shutdown during this
procedure. In the short term, the operating companies reported that two
new compressor units were being installed to permit a step by step
reduction in reservoir pressure while improving the gas flowrate. With
the pipeline pressure at a level of 75-80 bars, wellhead pressure must
exceed that level for gas to force its way into the pipeline. As
wellhead pressure declines over time, less and less gas enters the
pipeline. The compressors provide the needed pressure to force the gas
from the well into the pipeline at higher rates than the remaining
residual wellhead pressure would permit. They indicated that the
eventual establishment of four different pressure levels within the
pipeline system will permit the achievement of a final suction pressure
of 7 bars. In the long term, 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. The
first well, Kneheim Z-5, was begun in January and has now reached its
final depth and is nearing completion. This drilling rig will then move
on to Sage Z-4. A second drilling rig is presently moving into place to
begin drilling the horizontal deviation Hemmelte Z-8a, which after
completion will be followed by the horizontal deviation Goldenstedt
Z-18a. 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 will hopefully result in an infill drilling program to
reach reserves not currently accessible by existing wells.
------------------------------------------
This report on Form 10-Q contains forward looking statements
concerning business, financial performance and financial condition of
the Trust, which are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated
in any forward looking statement. The statements contained herein are
based on the Trustees' current beliefs, expectations and assumptions
and are subject to a number of risks and uncertainties. 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
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 second 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 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
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
(b) Reports on Form 8-K.
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.
A Report on Form 8-K, dated April 29, 2004, was furnished
on May 3, 2004 announcing the amount of the distribution
for the second quarter of fiscal 2004.
A Report on Form 8-K, dated February 13, 2004, was furnished
on February 14, 2004 announcing the Trust's earnings
for the second 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
--------------------------------
(Registrant)
By: /S/ John R. Van Kirk
----------------------------
John R. Van Kirk
Managing Director
Dated: May 27, 2004