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, 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 July 31, 2004
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Units of Beneficial Interest 8,933,310
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 JULY 31, 2004 AND 2003
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2004 2003
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(unaudited)
German gas, oil and sulfur
royalties received $ 3,506,720 $ 4,536,318
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Interest income 5,250 8,241
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Trust expenses ( 160,069) ( 192,422)
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Net income on a cash basis $ 3,351,901 $ 4,352,137
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Net income per unit on a cash basis $ .38 $ .49
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Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .01 .00
Distributions per unit to be paid to
unit owners $ .37 $ .49
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JULY 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) $ 3,356,750 $ 4,063,766
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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Total Assets $ 3,356,751 $ 4,063,767
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Current liabilities - - Cash distributions
payable to unit owners $ 3,305,325 $ 4,019,136
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 51,425 44,630
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Total Liabilities and Trust Corpus $ 3,356,751 $ 4,063,767
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The 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 NINE MONTHS ENDED JULY 31, 2004 AND 2003
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2004 2003
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(unaudited)
German gas, oil and sulfur
royalties received $11,942,458 $14,002,637
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Interest income 16,597 24,281
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Trust expenses ( 614,352) ( 625,871)
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Net income on a cash basis $11,344,703 $13,401,047
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Net income per unit on a cash basis $1.27 $1.50
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Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .01 .00
Distributions per unit to be paid
to unit owners $1.26 $1.50
===== =====
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 NINE MONTHS ENDED JULY 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 $11,942,458 $14,002,637
Interest income 16,597 24,281
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11,959,055 14,026,918
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Uses of cash and cash equivalents:
Payment of Trust expenses 614,352 625,871
Distributions and dividends paid (Note 3) 12,051,719 12,416,797
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12,666,071 13,042,668
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Net increase(decrease) in cash and
cash equivalents during the period ( 707,016) 984,250
Cash and cash equivalents,
beginning of period 4,063,766 3,458,577
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Cash and cash equivalents,
end of period $ 3,356,750 $ 4,442,827
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 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 11,344,703 13,401,047
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11,389,333 13,465,687
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Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 83,605 0
Current year distributions paid or
to be paid to unit owners (Note 3) 11,254,303 13,399,253
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11,337,908 13,399,253
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Balance, end of period $ 51,425 $ 66,434
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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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(1) Summary of significant
accounting policies:
----------------------
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 -
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The rights to certain gas and oil royalties in Germany were transferred
to the Trust at its inception by North European Oil Company (the
"Company") (see Note 2). At that time the net book value of the
royalty rights was $1,640,060. By 1992, as a result of the
intervening amortization, the net book value of the royalty rights had
been reduced to such a level that the net book value bore no
meaningful relationship to the fair market value of such rights or the
actual amount of proved producing reserves. At that time it was
determined that the remaining net book value of royalty rights was
de minimis and after a final amortization would henceforth be carried
on the books of the Trust at a nominal value of $1.
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 -
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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,
2004 and 2003, there were 8,933,310 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:
---------------------
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 nine-month period ended
July 31, 2004, 1,896 units of beneficial interest were issued in
exchanges and $1,065.30 in dividends and $82,539.19 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, respectively. 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, 2004
distribution, the maximum liability of the Escheator will be
$13,720,930. As of the record date for the August distribution, the
Delaware Escheator continues to own 125,309 units of the 570,408 units
previously issued to it as part of the settlement.
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
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 August, 2004 distribution, the maximum liability
of the New York Administrator will be $1,065,733. As of the record
date for the August distribution, the New York Administrator
continues to own all of the 44,610 units previously issued to it as
part of the settlement.
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 July 31, 2004, there remained a total
of 253,206 units that could be issued to unlocated or unknown
Corporation and Company shareholders. Of this total, 236,952 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, $485,958 in
dividends and $30,949,405 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.
(4) Related party transactions:
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John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. During the third
quarter of fiscal 2004 the Trust reimbursed him a total of $5,683.20
for such office space and office services.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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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 Exxon Mobil 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. Natural gas provides
approximately 98% of the total royalties. Within the Oldenburg concession
there are two overriding royalty rates in effect on sales of natural gas.
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 an agreed
portion of costs), which covers the entire concession. The royalties are
initially paid in Euros and are converted into U.S. dollars at the then
current Euro/dollar exchange rate just prior to their transfer from Germany.
Although the Trust itself does not have access to the specific sales
contracts under which the Oldenburg gas is sold, a third party contractor,
retained by the Trust, examines these contracts periodically. The contractor
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 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 expressed in
dollars 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 third quarter of fiscal 2004, net Trust income declined by 24.4%
to $3,351,901, which permitted a distribution of 37 cents per unit compared
to the distribution of 49 cents for the prior year's period. The current
distribution is being paid on August 25, 2004 to holders of record as of
August 13, 2004. Due to an error on the part of the operating companies to
properly adjust the royalty payment in the final month of the quarter, this
quarter's royalty payment was larger than it should have been. When the
higher royalty payment was included in the calculation of net income the
resulting distribution to unit owners was three cents higher than it
otherwise would have been. The first royalty payment by the operating
companies in the next quarter will be reduced by the amount of the earlier
overpayment thus reducing funds available for the fourth quarter's
distribution.
For the nine month fiscal period, net Trust income was $11,344,703, a
decline of 15.3% from the prior year's period. Cumulative distributions for
the nine month period are $1.26 per unit compared to $1.50 paid during the
same period last year. This income was primarily derived from royalties paid
on sales of gas, sulfur and oil from the Trust's overriding royalty areas in
Germany during the fourth calendar quarter of 2003 through the second
calendar quarter of 2004.
The primary factors affecting royalty revenue for the quarter just ended
were the decline in gas sales and prices under both the higher royalty rate
agreement covering western Oldenburg and the lower royalty rate agreement
covering the entire Oldenburg concession. The increase in the average dollar
value of the Euro over the prior year was minor in comparison to the more
substantial declines in gas prices and sales and only partially offset their
impact.
The higher royalty rate agreement between the Trust and the German
subsidiary of ExxonMobil covers western Oldenburg and provides the Trust with
the bulk of its royalties. Under this agreement average gas prices for the
quarter decreased 24.6% from the equivalent quarter for the prior year. Gas
prices dropped from 1.4963 Euro cents per Kilowatt hour ("Ecents/Kwh") to
1.1276 Ecents/Kwh. When we convert this quarter's price into more familiar
terms using the average exchange rate for the quarter, the average price for
gas sold under this agreement was $3.90 per Mcf. This represents a 21.3%
decrease from the prior year's equivalent quarter.
The lower royalty rate agreement between the Trust and BEB, a joint
venture between ExxonMobil and the Royal Dutch/Shell Group of Companies,
covers gas sales from the entire Oldenburg concession. Under this agreement
average gas prices for the quarter decreased 15.3% from the equivalent
quarter for the prior year. Gas prices dropped from 1.3995 Ecents/Kwh to
1.1858 Ecents/Kwh compared to the prior year's equivalent quarter. When we
convert this quarter's price into more familiar terms using the average
exchange rate for the quarter, the average price for gas sold under this
agreement was $4.03 per Mcf. This represents an 11.1% decrease from the
prior year's equivalent quarter.
During the quarter just ended, overall Oldenburg gas sales decreased by
10.5% from 43.06 billion cubic feet ("Bcf") to 38.56 Bcf. Gas sales from the
higher royalty rate area of western Oldenburg decreased 10.3% from 16.91 Bcf
to 15.16 Bcf. At this level, gas sales from western Oldenburg accounted for
39.31% of total Oldenburg gas sales.
Throughout fiscal 2004 the Euro has held its value within a fairly
narrow range. For the quarter just ended the average value for the Euro
based on all royalties transferred to the United States was $1.2128. This
average value was 4.7% higher than the average value of $1.1586 posted in the
third quarter of fiscal 2003. The higher value of the Euro has the immediate
impact of increasing the amount of dollars received at the time of the
transfer of royalties from Germany. However, because of the use of light
heating oil as a pricing factor in the gas sales contracts, the higher Euro
also works to reduce the price of gas within Germany by making imported oil
prices in dollars less expensive.
If we discount the effects of differences in prices and average exchange
rates, the combination of royalty rates on gas sold from western Oldenburg
results in an effective royalty rate approximately seven times higher than
the royalty rate on gas sold from eastern Oldenburg. This is of particular
significance to the Trust since gas sold from western Oldenburg provides the
bulk of royalties paid to the Trust. For the quarter just ended gas sales
from western Oldenburg accounted for only 39.31% of all gas sales. However,
royalties on these gas sales provided 78.4% or $2,747,844 out of a total of
$3,506,720 in Oldenburg royalties.
In an effort to keep the unit owners informed about the operating
companies' efforts to increase production, the Trust's German consultant
Alfred Stachel spoke with personnel at the operating companies to get an
update on their progress. The operating companies indicated that the
expansion of the Visbek compressor station is on time and will commence full
operations at the beginning of October. Kneheim Z-5, a new well located in
western Oldenburg, has been completed and will enter its active production
phase in October. Drilling operations for Hemmelte Z-8a, a horizontal
deviation off an existing wellhead in western Oldenburg, began on June 24th.
Drilling operations for Sage Z-4, a new well located in eastern Oldenburg,
began on June 30th. The operating companies have indicated that they
believe the first impact of their efforts to increase production and sales
will not be apparent until the Trust's first quarter of fiscal 2005. The
Trust has no independent information with respect to these matters and must
rely on the operating companies to keep it advised of any changes in the
status of the matters described.
Interest income for the third quarter and the nine month period was
lower due to both reduced funds available for investment and continuing low
interest rates. Trust expenses for the third quarter were lower due to the
absence of the biannual audit related work completed in Germany and reduced
legal fees. For the nine month period Trust expenses were only slightly
lower in comparison.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 2004, compared to that at fiscal year end (October 31,
2003), shows a decrease in assets due to the reduced royalty receipts during
the quarter.
The Trust distribution for the third quarter of fiscal 2004 is $0.37,
a decline of 24.5% from last year's distribution of $0.49. Cumulative
distributions for the nine month fiscal period are $1.26 compared to $1.50
for the prior year's period, a decline of 16%.
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.
-----------------------------------
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 sale 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 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 third 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 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 May 13, 2004, was furnished
on May 14, 2004 announcing the Trust's earnings
for the second quarter of fiscal 2004.
A Report on Form 8-K, dated July 28, 2004, was furnished
on August 9, 2004 announcing the amount of the distribution
for the third 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 thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: August 26, 2004