SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 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
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NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (IRS Employer Identification Number)
Suite 19A, 43 West Front Street, Red Bank, N.J. 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 732-741-4008
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Units of Beneficial Interest New York Stock Exchange
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X .
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No .
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As of April 30, 2004, the aggregate market value of outstanding units of
beneficial interest of the Registrant held by non-affiliates of the
Registrant was approximately $212,247,118 on such date. (The Trustees and
the Managing Director are the only persons deemed to be affiliates of the
Registrant.)
As of December 31, 2004, there were 8,933,316 units of beneficial interest
("units") of the Registrant outstanding.
Documents Incorporated by Reference
-----------------------------------
Items 10, 11, 12, 13 and 14 of Part III have been partially or wholly omitted
from this report and the information required to be contained therein is
incorporated by reference from the Registrant's definitive proxy statement
dated January 10, 2005 for the annual meeting to be held on
February 9, 2005.
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PART I
Item 1. Business.
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(a) General Development of Business.
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Registrant (the "Trust") is a grantor trust which, on behalf of the
owners of beneficial interest in the Trust (the "unit owners"), holds
overriding royalty rights covering gas and oil production in certain
concessions or leases in the Federal Republic of Germany. The rights are
held under contracts with local German exploration and development
subsidiaries of ExxonMobil Corp. and the Royal Dutch/Shell Group of
Companies ("Royal Dutch/Shell 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.
See Item 2 of this Report for descriptions of certain of these contracts.
The royalty rights were received by the Trust from North European
Oil Company (the "Company") upon dissolution of the Company in September,
1975. The Company was organized in 1957 as the successor to North European
Oil Corporation (the "Corporation"). The Trust is administered by trustees
(the "Trustees") under an Agreement of Trust dated September 10, 1975,
amended May 13, 1976 and February 10, 1981 and as deemed amended pursuant
to the Delaware Court of Chancery Order dated February 26, 1996 (the "Trust
Agreement").
Neither the Trust nor the Trustees on behalf of the Trust conduct
any active business activities or operations. The sole permitted function
of the Trustees is to monitor, verify, collect, hold, invest and distribute
the royalty payments made to the Trust. Under the Trust Agreement the
Trustees make quarterly distributions of the net funds received by the Trust
on behalf of the unit owners. Funds temporarily held by the Trust are
invested in interest bearing bank deposits, certificates of deposit, U.S.
Treasury Bills or other government obligations.
There has been no significant change in the principal operation
or purpose of the Trust during the past fiscal year.
During the past two years, the Securities and Exchange Commission
(the "SEC" or "Commission") finalized rules implementing legislation
concerning governance matters for publicly held entities that was passed as
part of the Sarbanes-Oxley Act of 2002 ("SOX"). The Trust is complying with
the requirements of the SEC and SOX and at this time the Trustees have
chosen not to request any relief from those provisions based on the passive
nature of the Trust. In that connection, the Trustees have directed that
the additional statements and disclosures set forth or incorporated by
reference in this Report, which the Commission requires of corporations, be
made even though some of such statements and disclosures might not now or
in the future be required to be made by the Trust.
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In addition, the New York Stock Exchange (the "NYSE" or
"Exchange"), where units of beneficial interest of the Trust are listed for
trading, has adopted additional corporate governance rules. Most of the
governance requirements promulgated by the NYSE are not applicable to the
Trust which is a passive entity acting as a royalty trust and holds only
overriding royalty rights. The Trust does not engage in any operating or
active business. The Trustees have chosen to constitute an Audit and a
Compensation Committee.
(b) Financial Information about Industry Segments.
---------------------------------------------
Since the Trust conducts no active business operations, an
analysis by industry segments is accordingly not applicable to the Trust.
To the extent that royalty income received by the Trust is attributable to
sales of different products, to sales from different geographic areas or to
sales by different operating companies, this information is set forth in
Item 2 of this Report and the Exhibit described in that Item 2.
) Narrative Description of Business.
---------------------------------
Under the Trust Agreement the Trust conducts no active business
operations and is restricted to collection of income from royalty rights
and distribution to unit owners of the net income after payment of
administrative and related expenses.
The overriding royalty rights held by the Trust are derived from
contracts and agreements originally entered into by German subsidiaries of
the predecessor Corporation during the early 1930's. Some of these royalty
rights are based on leases which have passed their original expiration
dates. However, the leases remain in effect as long as there is continued
production or the lessor does not cancel the lease. Individual lessors will
normally not seek termination of the rights originally granted because the
leases provide for royalty payments to the lessors if sales of oil or gas
result from discoveries made on the leased land. Additionally, termination
by individual lessors would result in the escheat of mineral rights to the
State. The remainder of the Trust's royalty rights are based on government
granted concessions which remain in effect as long as there are continued
production activities and/or exploration efforts by the operating companies.
It is generally anticipated that the operating companies will continue
production where it remains economically profitable for them to do so.
Royalties are paid to the Trust on sales from production under
these leases and concessions by the operating companies on a regular monthly
or quarterly basis pursuant to the royalty agreements. Beginning in January
2001, the operating companies began making royalty payments to the Trust
exclusively in Euros. Once deposited in the Trust's bank account in Germany,
the Euros are converted into U.S. dollars at the rate in effect on the date
of transfer. The Trust does not engage in activities to hedge against
currency risk or similar transactions and the fluctuations in the
conversion rate impact its financial results. The Trust has not experienced
any difficulty in effecting the conversion into U.S. dollars.
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As the holder of overriding royalty rights, the Trust has no legal
ability, whether by contract or operation of law, to compel production.
Moreover, if an operator should determine to terminate production in any
concession or lease area and to surrender the concession or lease, the
royalty rights for that area would thereby be terminated. Under certain
royalty agreements, the operators are required to advise the Trust of any
intention to surrender lease or concession rights. During the 2004 fiscal
year, the Trust received notification that the operating companies intend to
surrender their rights to three minor non-productive leases. The Trust is
reviewing its options with regard to these three leases. The Trust itself
is precluded from undertaking any production activities and only if it could
locate an alternate operator for the same areas would there be any
possibility of continued royalty payments for such an area following any
such termination. The likelihood of locating such an alternate operator is
small because the current operating companies would be unlikely to surrender
their rights for areas if continued economic return from production can be
reasonably anticipated.
The exploration for and the production of gas and oil is a
speculative business. The Trust has no means of ensuring continued income
from its royalty rights at either their present levels or otherwise. In
addition, fluctuations in prices and supplies of gas and oil and the effect
these fluctuations might have on royalty income to the Trust and on
reserves net to the Trust cannot be accurately projected. The Trustees
have no information with which to make any projections beyond information
on economic conditions which is generally available to the public and thus
are unwilling to make any such projections.
While Germany has laws relating to environmental protection, the
Trustees have no detailed information concerning the present or possible
effect of such laws on operations in areas where the Trust holds royalty
rights on production and sale of products from those areas.
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 Trust, either itself or in cooperation with holders of
parallel royalty rights, arranges for periodic reviews of the books and
records of the operating companies to verify compliance with the computation
provisions of the applicable agreements. From time to time these
examinations disclose computational errors or errors from inappropriate
application of existing agreements and appropriate adjustments are requested
and made.
(d) Financial Information about Foreign and Domestic Operations and
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Export Sales.
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The Trust does not engage in any active business operations, and
its sources of income are the overriding royalty rights covering gas, sulfur
and oil production in certain areas in Germany and interest on the funds
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temporarily invested by the Trustees. In Item 2 of this Report there is a
schedule (by product, geographic area and operating company) showing the
royalty income received by the Trust during the fiscal year ended
October 31, 2004.
(e) Executive Officers of the Trust.
-------------------------------
As specified in the Trust Agreement the affairs of the Trust are
managed by not more than five individual Trustees who receive compensation
determined under that same agreement. One of the Trustees is designated as
Managing Trustee and receives additional compensation in such capacity. The
Managing Trustee, John H. Van Kirk, is responsible for managerial oversight,
while day-to-day matters are handled by the Managing Director, John R. Van
Kirk. John H. Van Kirk, who is 80 years old, has been Managing Trustee
since the Trust's inception in 1975. John R. Van Kirk, who is 52 years old,
has held the position of Managing Director of the Trust since November 1990.
John R. Van Kirk is the son of John H. Van Kirk, the Managing Trustee.
The Managing Director provides office space and services at cost
to the Trust. In addition to the Managing Trustee and the Managing Director,
the Trust has one secretarial employee in the United States. It also
maintains a part-time consultancy relationship with an expert in Germany
from whom it receives reports on a regular basis. Employee relations or
labor contracts are not directly material to the business or income of the
Trust. The Trustees have no specific information concerning employee
relations of the operating companies.
(f) Available Information.
---------------------
The Trust maintains a website at www.NEORT.com. The Trust's annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and related amendments are available free of charge through the
Trust's website as soon as reasonably practicable after such reports are
filed with or furnished to the SEC. The Trust's Code of Conduct and
Business Ethics is also available on the Trust's website. The Trust's
website and the information contained in it and connected to it shall not
be deemed incorporated by reference into this Form 10-K.
Item 2. Properties.
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The properties of the Trust, which the Trust and Trustees hold
pursuant to the Trust Agreement on behalf of the unit owners, are
overriding royalty rights on sales of gas, sulfur and oil under certain
concessions or leases in the Federal Republic of Germany. The actual
leases or concessions are held either by Mobil Erdgas-Erdol GmbH ("Mobil
Erdgas"), a German operating subsidiary of the ExxonMobil Corp., or by
Oldenburgische Erdolgesellschaft ("OEG"). As a result of direct and
indirect ownership, ExxonMobil Corp. owns two-thirds of OEG and the Royal
Dutch/Shell Group owns one-third of OEG. The Oldenburg concession
(1,398,000 acres), covering virtually the entire former State of Oldenburg
- 7 -
and located in the federal state of Lower Saxony, is the major source of
royalty income for the Trust. In 2002 Mobil Erdgas and BEB Erdgas und
Erdol GmbH ("BEB"), a joint venture of ExxonMobil Corp. and the Royal
Dutch/Shell Group, formed a company ExxonMobil Production Deutschland GmbH
("EMPG") to carry out all exploration, drilling and production activities.
All sales activities are still handled by either Mobil Erdgas or BEB.
Under one series of rights covering the western part of the
Oldenburg concession (approximately 662,000 acres), the Trust receives a
royalty payment of 4% on gross receipts from sales by Mobil Erdgas of gas
well gas, oil well gas, crude oil and condensate. Under the royalty
agreement with Mobil Erdgas there is no deduction of costs prior to the
calculation of royalties from gas well gas and oil well gas, which together
account for approximately 99% of all the royalties under said agreement.
The Trust is also entitled to receive from Mobil Erdgas a 2% royalty on
gross receipts of sales of sulfur obtained as a by-product of sour gas
produced from the western part of Oldenburg. The payment of the sulfur
royalty is conditioned upon sales of sulfur by Mobil Erdgas at a selling
price above an agreed upon base price. This base price is adjusted annually
by an inflation index. When the average selling price falls below the
adjusted base price, no royalties are payable. No payments were received
from the sale of sulfur under this agreement during fiscal 2004.
Under another series of rights covering the entire Oldenburg
concession and pursuant to an agreement with OEG (the "OEG Agreement"), the
Trust receives royalties at the rate of 0.6667% on gross receipts from
sales of gas well gas, oil well gas, crude oil, condensate and sulfur
(removed during the processing of sour gas) less a certain allowed
deduction of costs. Under the agreement previously reached with OEG, 50%
of the field handling, treatment and transportation costs as reported for
state royalty purposes are deducted from the gross sales receipts prior to
the calculation of the royalty to be paid to the Trust. Based on the
limited audit access available to the Trust and the financial information
provided by the operating companies, the Trust's management has not seen a
material change in the amount of the Trust's royalty receipts as a result
of the application of this computation system.
The Trust also holds through Mobil Erdgas a 2% royalty interest
in oil and gas sales from acreage in Bavaria, and a 0.2117% royalty under
the net interest of the Bayerische Mineral Industries A.G. ("BMI"), a
subsidiary of Mobil Erdgas, in concessions in Bavaria. The net interest of
BMI ranges from 16-1/2 to 100% of the sales, depending on the geographic
region or area. Due to the absence of royalty income under this agreement,
reserves from this area in Bavaria are not included in reserve calculations
for this report year. While both Mobil Erdgas and BMI have suspended
production in their concessions in Bavaria, the concessions remain.
In addition to the areas of Oldenburg and Bavaria, the Trust also
holds overriding royalties on a number of leases in other areas of northwest
Germany ranging in size from 185 to 25,000 acres and totaling 73,214 acres.
The rates of overriding royalties vary from 1.83% to 6.75%. At the present
time all but one of these leases are in the non-producing category. Due to
the low level of income and the intermittent gas production from the single
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producing lease, reserves from this lease are not included in reserve
calculations for this report year. During the 2004 fiscal year, the Trust
received notification that the operating companies intend to surrender
their rights to three minor non-productive leases. The Trust is reviewing
its options with regard to these three leases.
The following is a schedule of royalty income for the fiscal year
ended October 31, 2004 by product, geographic area and operating company:
BY PRODUCT:
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Product Royalty Income
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Gas Well and Oil Well Gas $ 14,681,866
Sulfur $ 245,965
Oil $ 133,378
BY GEOGRAPHIC AREA:
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Area Royalty Income
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Western Oldenburg $ 12,188,014
Eastern Oldenburg $ 2,804,868
Non-Oldenburg Areas $ 68,327
BY OPERATING COMPANY:
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Company Royalty Income
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Mobil Erdgas-Erdol GmbH $ 10,521,770
BEB Erdgas und Erdol GmbH $ 4,539,439
Exhibit 99.1 to this Report is a report dated December 16, 2004
which summarizes certain production data and the estimated net proved
producing reserves as of October 1, 2004, based on the limited information
available, for the Oldenburg area in which the Trust holds overriding
royalty rights. That report, the Estimate of Remaining Proved Producing
Reserves in the Northwest Basin of the Federal Republic of Germany as of
October 1, 2004 and Calculation of Cost Depletion Percentage for the 2004
Calendar Year (the "Reserve and Depletion Report"), was prepared by Ralph
E. Davis Associates, Inc., 1717 St. James Place, Suite 460, Houston, Texas
77056 ("Davis Associates"). Davis Associates is an independent petroleum
and natural gas consulting organization specialized in analyzing hydrocarbon
reserves. In order to permit timely filing of this Report and consistent
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with the practice of the Trust in prior years, the information has been
prepared for the 12-month period ended September 30, 2004, which is one
month prior to the end of the fiscal year of the Trust. Unit owners are
referred to the full text of the Reserve and Depletion Report contained
herein for further details.
In connection with the information in the Reserve and Depletion
Report, note should be taken of the limited nature of the information
available to the Trust. Pursuant to the arrangements under which the Trust
holds royalty rights and due to the fact that the Trust is not considered
an operating company within Germany, it has no access to the operating
companies' proprietary information concerning producing field reservoir
data. The Trustees have been advised that publication of such information
is not required under applicable law in Germany and that the royalty rights
do not grant the Trust the right to require or compel the release of such
information. Past efforts to obtain such information have not been
successful. The information made available to the Trust by the operating
companies does not include any of the following: reserve estimates,
capitalized costs, production cost estimates, revenue projections, producing
field reservoir data (including pressure data, permeability, porosity and
thickness of producing zone) or other similar information. The limited
nature of the information available to the Trust makes many calculations
impossible including, among others, the following: proved undeveloped or
probable future net recoverable oil and gas by appropriate geographic areas,
total gross and net productive wells, availability of oil and gas from the
present reserves, contract supply for one year or acreage concentration.
The Trust has the authority to examine, for certain limited
purposes, the operating companies' sales and production from the royalty
areas. The Trust also has access to published materials in Germany from
W.E.G. (a German organization equivalent to the American Petroleum Institute
or the American Gas Association). The use of such statistical information
relating to production and sales necessarily involves extrapolations and
projections. Both Davis Associates and the Trustees believe the use of the
material available is appropriate and suitable for preparation of the
estimates described in the Reserve and Depletion Report. Both the Trustees
and Davis Associates believe this report and these estimates to be
reasonable and appropriate but they would possibly vary from statistical
projections which could be made if reservoir production information (of the
kind normally available to domestic producing companies) were available.
The limited information available makes it inappropriate to make projections
or estimates of proved or probable reserves of any category or class other
than the estimated net proved producing reserves described in the Reserve
and Depletion Report.
Attachment A of the Reserve and Depletion Report is comprised of a
schedule of estimated net proved producing reserves of the Trust's royalty
properties, computed as of October 1, 2004 and a five year schedule of gas,
sulfur and oil sales for the twelve months ended September 30, 2004, 2003,
2002, 2001 and 2000 computed from quarterly sales reports of operating
companies received by the Trust during such periods.
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Item 3. Legal Proceedings.
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See Note 3 to the Financial Statements contained in Item 8 of this
Report for further information.
Item 4. Submission of Matters to a Vote of Security Holders.
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Inapplicable.
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PART II
Item 5. Market for the Registrant Trust's Units of Beneficial Interest,
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Related Unit Owner Matters and Trust Purchases of Units of
----------------------------------------------------------
Beneficial Interest.
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The Trust's units of beneficial interest are traded on the New
York Stock Exchange under the symbol NRT. In addition, the Midwest Stock
Exchange and the Boston Exchange have granted unlisted trading privileges
in the Trust units.
Under the Trust Agreement the Trustees distribute to unit owners,
on a quarterly basis, the net royalty income after deducting expenses and
reserving limited funds for anticipated administrative expenses.
The following table presents the high and low closing prices for
the quarterly periods ended in fiscal 2004 and 2003 as reported by the NYSE
as well as the cash distributions paid to unit owners by quarter for the
past two fiscal years.
FISCAL YEAR 2004
----------------
Low High Distribution
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- ------------
January 31, 2004 $22.51 $25.99 $0.46
April 30, 2004 $23.15 $25.40 $0.43
July 31, 2004 $20.71 $25.20 $0.37
October 31, 2004 $21.51 $24.63 $0.33
FISCAL YEAR 2003
----------------
Low High Distribution
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- ------------
January 31, 2003 $19.15 $23.55 $0.51
April 30, 2003 $20.30 $24.50 $0.50
July 31, 2003 $22.25 $24.55 $0.49
October 31, 2003 $22.03 $24.50 $0.45
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The quarterly distributions to unit owners represent their
undivided interest in royalty payments from sales of gas, sulfur and oil
during the previous quarter. Each unit owner is entitled to recover a
portion of his or her investment in these royalty rights through a cost
depletion percentage. The calculation of this cost depletion percentage is
set forth in detail in Attachment B to the Reserve and Depletion Report
attached as Exhibit 99.1. This report has been prepared by Davis Associates
using the limited information described in Item 2 of this Report to which
reference is made. The Trustees believe that the calculations and
assumptions used in this report are reasonable according to the facts and
circumstances of available information. The cost depletion percentage
recommended by the Trust's independent petroleum and natural gas
consultants for calendar 2004 is 8.7247%. Specific details relative to the
Trust's income and expenses and cost depletion percentage as they apply to
the calculation of taxable income for the 2004 calendar year are included
on a special removable page in the 2004 Annual Report under "Note to Unit
Owners." A separate letter containing the same information has been sent
to all unit owners who were registered at any time during calendar 2004 and
who are no longer registered owners as of the end of the calendar year.
Additionally, the tax reporting information for 2004 is available on the
Trust's website, www.NEORT.com.
The Trust maintains no reserve to cover any payments which might
be required if the holders of shares of stock of the predecessor Corporation
or Company, who have not yet exchanged those shares for units, should
surrender them for exchange. See Note 3 to the Financial Statements in
Item 8 of this Report for further information.
As of November 30, 2004, there were 1,290 unit owners of record,
which figure does not include the owners of unexchanged shares of stock in
the Corporation or the Company (a total of 604 record holders). The owners
of shares of stock in the Corporation are entitled under Section 3.10 of
the Trust Agreement to receive units upon presentation of those shares or
other evidences of ownership thereof. The owners of unexchanged shares of
stock in the Company, for whom a nominee of The Bank of New York acts as
agent under a shareholder agency agreement, are entitled to receive units
upon presentation of those shares or other evidences of ownership thereof.
Management believes that the number of such presentations will continue to
be immaterial in the coming years. In all events, after June 30, 2005,
pursuant to the provisions of the order of the Delaware Court of Chancery
of April 17, 1996, further liability for payment of dividends or
distributions arrears will be eliminated. See Note 3 to the Financial
Statements in Item 8 of this Report for further information.
The Trust does not maintain any compensation plans under which
units are authorized for issuance. The Trust does not make any purchases
of Trust units.
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Item 6. Selected Financial Data.
-----------------------
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
SELECTED FINANCIAL DATA (CASH BASIS)
------------------------------------
FOR FIVE FISCAL YEARS ENDED OCTOBER 31, 2004
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2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
German gas,
sulfur, and
oil
royalties
received $15,061,209 $18,169,035 $17,435,504 $22,453,630 $14,155,028
=========== =========== =========== =========== ===========
Net Income on a
cash basis $14,307,658 $17,398,359 $16,885,776 $21,906,824 $13,668,262
=========== =========== =========== =========== ===========
Net Income per unit
on a cash
basis (a) $1.60 $1.95 $1.89 $2.47 $1.54
===== ===== ===== ===== =====
Units of beneficial
interest
outstanding
at end
of year (a) 8,933,310 8,931,414 8,931,414 8,886,804 8,886,804
Cash distributions
paid or to be
paid:
Dividends and
distributions
per unit paid
to formerly
unlocated
unit owners .01 .00 .00 .00 .00
Distributions per
unit paid or to
be paid to
unit owners $1.59 $1.95 $1.89 $2.46 $1.56
===== ===== ===== ===== =====
Total assets
at year
end $ 3,014,386 $ 4,063,767 $ 3,458,578 $ 5,391,321 $ 2,946,597
=========== =========== =========== =========== ===========
(a) Net income per unit on a cash basis was calculated based on the number
of units outstanding at the end of the fiscal year.
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Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
-------------------------
Executive Summary
- -----------------
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 is not involved 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.
The operating companies, subsidiaries of ExxonMobil Corp. and the
Royal Dutch/Shell 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 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, although delayed, impact on
the price of gas. A strong Euro would tend to reduce the cost of oil being
imported into Germany and likely result in a lower price for light heating
oil and a reduction in the amount of royalties paid to the Trust in Germany.
However, a strong Euro would also result in an increase in the amount of
royalties received when the royalties, originally received in Euros, are
converted into dollars and transferred to the Trust's bank account in the
U.S. A weak Euro would have the opposite effect. However, it is important
to note that the prices of imported oil and the Euro/dollar relationship
are only two of the numerous factors that can affect the price of light
heating oil.
The Trust does not conduct any active business operations and has
only limited need of funds for its own administrative services. These
funds are used to pay Trustees' fees (computed under the Trust Agreement
and based upon a percentage of royalties and interest income received), the
remuneration fixed by the Trustees for the Managing Trustee, the Managing
Director and the Audit Committee Chairman, expenses associated with the
Trustees' meetings, professional fees paid to consultants, legal advisors
and auditors, transfer agent fees, and secretarial and other general office
expenses.
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Another requirement for funds by the Trust relates to the
occasional necessity of making lump sum payments of arrearages of dividends
of a corporate predecessor and distributions previously declared by the
Trust. The payment of such arrearages would require a reduction in the
amount of distributions which otherwise would be made on presently
outstanding units. For further information on this contingent liability
and the impact of the Delaware Court Order see Note 3 to Financial Statements
in Item 8 of this Report.
The Trust has no means of ensuring continued income from
overriding royalty rights at their present level or otherwise. Economic
and political factors which are not foreseeable may have an impact on Trust
income. The effect of changing economic conditions on the demand for
energy throughout the world and future prices of oil and gas cannot be
accurately projected.
The relatively small amounts required for administrative expenses
of the Trust limit the possible effect of inflation on its financial
prospects. Continued price inflation would be reflected in sales prices,
which with sales volumes form the basis on which the royalties paid to the
Trust are computed. In addition, fluctuations in the Euro/dollar exchange
rate have an impact on domestic energy prices within Germany and on the
amount of dollars received by the Trust upon conversion. The impact of
inflation or deflation on energy prices in Germany is delayed by the use in
certain long-term gas sales contracts of a deferred "trailing average"
related to light fuel oil prices.
Results: Fiscal 2004 versus Fiscal 2003
- ----------------------------------------
For fiscal 2004 the Trust's gross royalty income decreased 17.1%
from $18,169,035 to $15,061,209. The decline in gas sales and the drop in
gas prices combined to push royalty income lower. The increase in the
average value of the Euro contributed to the drop in gas prices but helped
offset the decline in royalties by increasing the amount of dollars received
when the royalties were transferred to the U.S.
Under the higher royalty rate agreement with Mobil Erdgas covering
western Oldenburg, gas sales declined 15.9% from 75.54 Billion cubic feet
("Bcf") in fiscal 2003 to 63.55 Bcf in fiscal 2004. In comparison to the
prior year's equivalent quarter, each quarter showed a decline. With the
exception of the first quarter of fiscal 2004, gas sales for each quarter
showed a drop from those of the immediately preceding quarter. The drop in
reservoir pressure that continued throughout the year was not fully addressed
until the month of October when the new compressors came fully on line and
even now there remains some minor construction work before the full
production rate is reached. Average gas prices for gas sold from this
royalty area declined 15.1% from 1.4175 Euro cents per kilowatt hour
("Ecents/Kwh") in fiscal 2003 to 1.2038 Ecents/Kwh in fiscal 2004.
Under the lower royalty rate agreement with BEB covering the
entire Oldenburg concession, gas sales declined 12.2% from 189.46 Bcf in
fiscal 2003 to 166.41 Bcf in fiscal 2004. The overall gas sales showed the
- 16 -
same pattern as gas sales from western Oldenburg in comparison to the prior
year and the immediately preceding quarter. Average gas prices for gas sold
from this royalty area declined 6.4% from 1.3033 Ecents/Kwh in fiscal 2003
to 1.2201 Ecents/Kwh in fiscal 2004.
The Euro continued its strong performance against the dollar
throughout fiscal 2004 and in late November reached its highest point yet at
a dollar equivalent value of $1.3294. Using the cumulative transfer of
royalties from Germany to the U.S. to generate an average value for the Euro,
there was an 11.5% increase in the average value from $1.0971 for
fiscal 2003 to $1.2234 for fiscal 2004.
The consultant with whom the Trust has recently established a
relationship continues to work diligently to develop the contacts with the
personnel from the two operating companies to provide the best information
possible to the Trust and its unit owners. However, the formation by the
operating companies of the unified exploration and production venture, EMPG,
has resulted in an information flow that is much more restricted than that
experienced in prior years.
Interest income for fiscal 2004 was lower due to the low interest
rates that remained in effect and the reduced funds available for investment.
Trust expenses decreased 3.3% from $802,153 in fiscal 2003 to $775,521 in
fiscal 2004. The absence of expenses associated with the biennial
examination of the operating companies in Germany to confirm the accuracy of
the royalty payments resulted in the lower level of expenses.
The operating companies have been involved in a construction and
drilling program throughout 2004 in an effort to increase gas production and
sales. The two new compressor units completed a four week testing period at
the end of September, 2004 and since then have been in full operation.
While some construction work involving some dehydration plants remains to be
completed, as of the beginning of October, 2004 the compressor units have
produced at a rate of 54 million cubic feet per day ("ft/d"). When all
construction is completed, this production figure is expected to rise to
71 million ft/d.
The operating companies have pursued an expanded drilling program
during 2004. Kneheim Z-5, a production well located in western Oldenburg,
began production in mid September. Hemmelte Z-8a, a horizontal deviation
off an existing western production well, began production in mid October.
The deviation presented particular difficulties that were successfully
addressed. Goldenstedt Z-18a, a horizontal deviation off an existing
production well in eastern Oldenburg, has been completed. Using a high tech
geo-steering procedure the operators were able to extend the horizontal
deviation approximately 2,140 feet in length. The start of production is
scheduled for March 2005. Sage Z-4, an exploratory well located in eastern
Oldenburg, has been completed. Preliminary indications are that this well
may have tapped a separate geological block but final confirmation will not
be possible until the second half of 2006. Construction of a new gas
treatment plant and a field pipeline will be necessary before production can
begin. This additional construction will delay the start of production
until at least September of 2005.
- 17-
The operating companies have indicated that they will continue
their expanded drilling program into 2005 with four additional wells planned.
Two horizontal deviations off existing wells are planned. The eastern well,
Goldenstedt Z-12a, will begin drilling in mid December 2004 and the western
well, Hemmelte Z-5a, will begin drilling in April 2005. A new production
well in eastern Oldenburg, Oythe Z-3, to replace an existing well that
suffered a casing collapse, is scheduled for a drilling start in September
2005. A new exploratory well in eastern Oldenburg, Doetlingen Ost Z-2, is
scheduled for a drilling start in June 2005. This well is targeted to test
a new geological reservoir.
Results: Fiscal 2003 versus Fiscal 2002
- ----------------------------------------
For fiscal 2003 the Trust's gross royalty income increased 4.2%
from $17,435,504 to $18,169,035. The strengthening of world oil prices along
with the gradual, albeit minor, improvement in the European economy combined
to increase the amount of royalties paid to the Trust. Additionally, the
Euro continued its climb throughout the first three quarters before falling
back slightly in the final quarter of fiscal 2003.
Under the higher royalty rate agreement with Mobil Erdgas, the
average quarterly gas price for the 2003 and 2002 fiscal years fell to its
low point of 1.3517 cents/Kwh during the first quarter of fiscal 2003.
From that point, the average quarterly price increased on a quarter over
quarter basis for the next two quarters before falling back slightly in the
final quarter. For the entire fiscal year the average gas price fell by 1.5%
from 1.4394 Ecents/Kwh for fiscal 2002 to 1.4180 Ecents/Kwh for fiscal 2003.
Under the lower royalty rate agreement with BEB, the average
quarterly gas price for the 2003 and 2002 fiscal years fell to its low point
of 1.1864 Ecents/Kwh during the fourth quarter of fiscal 2003. With the
exception of the third quarter the average quarterly gas price posted a
decline over the gas prices for the prior year's equivalent period. For the
entire fiscal year the average gas price fell by 6.35% from 1.3917 Ecents/Kwh
for fiscal 2002 to 1.3033 Ecents/Kwh for fiscal 2003.
Except for a minor drop-off during the fourth quarter of fiscal
2003, the value of the Euro increased steadily during the 2003 and 2002
fiscal years. Using the transfer of royalties from Germany to the U.S. to
provide an average value for the Euro, the value of the Euro during fiscal
2002 increased from $0.8728 in the first quarter to $0.9745 in the fourth
quarter. During fiscal 2003 the value of the Euro continued its almost
uninterrupted rise posting average values of $1.0385, $1.0806 and $1.1586 in
the first through third quarters before falling back slightly to $1.1239 in
the fourth quarter.
For fiscal 2003 the decline in gas production and sales was
concentrated in the western half of the Oldenburg concession. In each
quarter western gas sales posted a year over year decline. In total for the
year western Oldenburg gas sales declined 13.7% from 87.50 Bcf in fiscal 2002
to 75.54 Bcf in fiscal 2003. Eastern gas sales increased 8.7%
- 18 -
from 104.85 Bcf in fiscal 2002 to 113.92 Bcf in fiscal 2003. Overall gas
sales declined 1.5% from 192.35 Bcf in fiscal 2002 to 189.46 Bcf in fiscal
2003.
Interest income for fiscal 2003 was lower due to the historically
low interest rates in effect. Trust expenses increased 31.35% from
$610,689 in fiscal 2002 to $802,153 in fiscal 2003. The combination of a
reduction in Trust expenses in fiscal 2002 resulting from the reimbursement
by the New York Stock Exchange for expenses associated with the Trust's
symbol change from "NET" to "NRT" and higher legal and audit expenses in
fiscal 2003 that were associated with the additional requirements imposed by
the Sarbanes-Oxley Act of 2002 resulted in the substantial increase in
fiscal 2003.
Critical Accounting Policies
- ----------------------------
The financial statements, appearing subsequently in this Report,
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 accounting is an accepted accounting method for royalty trusts
such as the Trust. Cash basis financial statements disclose revenue when
cash is received and expenses when cash is paid. GAAP basis financial
statements disclose 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 and presents to the unit owners a more
accurate calculation of income and expenses for tax reporting purposes.
-----------------------------------
This report on Form 10-K 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.
- 19 -
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
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.
- 20 -
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
INDEX TO FINANCIAL STATEMENTS
------------------------------
Page Number
-----------
Report of Independent Registered Public Accounting Firm F-1
Financial Statements:
Statements of Assets, Liabilities and
Trust Corpus as of October 31, 2004 and 2003 F-2
Statements of Revenue Collected and Expenses Paid
for the Years Ended October 31, 2004,
2003 and 2002 F-3
Statements of Undistributed Earnings for the
Years Ended October 31, 2004, 2003 and 2002 F-4
Statements of Changes in Cash and Cash Equivalents for
the Years Ended October 31, 2004, 2003 and 2002 F-5
Notes to Financial Statements F-6 - F-10
Schedules are omitted because they are not applicable or not required or
because the required information is included in the financial statements or
notes thereto.
- 21 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Trustees and Unit Owners of
North European Oil Royalty Trust
We have audited the accompanying statement of assets, liabilities and trust
corpus arising from cash transactions of North European Oil Royalty Trust as
of October 31, 2004 and 2003, and the related statements of revenue
collected and expenses paid, undistributed earnings and changes in cash and
cash equivalents for each of the three years in the period ended
October 31, 2004. These financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements have been prepared on the
cash basis of accounting, which is a comprehensive basis of accounting other
than U.S. generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and trust corpus arising
from cash transactions of North European Oil Royalty Trust at
October 31, 2004 and 2003, its revenue collected and expenses paid, its
undistributed earnings and changes in its cash and cash equivalents for each
of the three years in the period ended October 31, 2004, on the basis of
accounting described in Note 1.
We have also audited management's assessment, included in Management's Report
on Internal Control Over Financial Reporting, that North European Oil Royalty
Trust maintained effective internal control over financial reporting as of
October 31, 2004, and our report dated December 20, 2004 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
------------------------
New York, NY
December 20, 2004
F-1
- 22 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
OCTOBER 31, 2004 AND 2003
-------------------------
ASSETS 2004 2003
------ ------------ ------------
Current Assets
Cash and cash equivalents (Note 1) $3,014,386 $4,063,766
Producing gas and oil
royalty rights (Note 1) 1 1
------------ ------------
$3,014,387 $4,063,767
============ ============
LIABILITIES AND TRUST CORPUS
----------------------------
Current liabilities
Cash distributions payable
to unit owners, paid
November 2004 and 2003 $2,947,992 $4,019,136
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 66,394 44,630
------------ ------------
$3,014,387 $4,063,767
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-2
- 23 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
---------------------------------------------------
2004 2003 2002
------------ ------------ ------------
German gas, sulfur and
oil royalties
received $15,061,209 $18,169,035 $17,435,504
Interest income 21,970 31,477 60,961
Trust expenses (775,521) (802,153) (610,689)
------------ ------------ ------------
Net income on
a cash basis $14,307,658 $17,398,359 $16,885,776
============ ============ ============
Net income per unit
on a cash basis $1.60 $1.95 $1.89
======= ======= =======
Cash distributions paid
or to be paid:
Dividends and distributions
per unit paid to formerly
unlocated unit owners .01 .00 .00
Distributions per unit
paid or to be paid to
unit owners (Note 5) $1.59 $1.95 $1.89
======= ======= =======
The accompanying notes to financial statements
are an integral part of these statements.
F-3
- 24 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
----------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Balance,
beginning of year $ 44,630 $ 64,640 $ 59,237
Net income on
a cash basis 14,307,658 17,398,359 16,885,776
------------ ----------- -----------
14,352,288 17,462,999 16,945,013
------------ ------------ ------------
Less:
Dividends and
distributions paid
to formerly unlocated
unit owners (Note 3) 83,605 0 0
Current year
distributions paid
or to be paid to unit
owners (Note 5) 14,202,289 17,418,369 16,880,373
------------ ------------ ------------
Balance, end of year $ 66,394 $ 44,630 $ 64,640
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-4
- 25 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
---------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Sources of cash and
cash equivalents:
German gas, sulfur and
oil royalties received $15,061,209 $18,169,035 $17,435,504
Interest income 21,970 31,477 60,961
----------- ----------- -----------
15,083,179 18,200,512 17,496,465
Uses of cash and
cash equivalents:
Payment of Trust
expenses 775,521 802,153 610,689
Distributions and
dividends paid
(Note 3) 15,357,038 16,793,170 18,818,519
----------- ----------- -----------
16,132,559 17,595,323 19,429,208
----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents
during the year (1,049,380) 605,189 (1,932,743)
Cash and cash
equivalents,
beginning of year 4,063,766 3,458,577 5,391,320
----------- ----------- -----------
Cash and cash
equivalents,
end of year $3,014,386 $4,063,766 $3,458,577
=========== =========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
F-5
- 26 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 2004, 2003 AND 2002
-------------------------------
(1) Summary of significant
accounting policies:
----------------------
Basis of accounting -
---------------------
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 disclose revenue when cash is received
and expenses when cash is paid. GAAP basis financial statements
disclose 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 income taxes -
----------------------
The Trust, as a grantor trust, is exempt from federal income taxes
under a private letter ruling issued by the Internal Revenue Service.
F-6
- 27 -
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 (see Note 3). As of
October 31, 2004, 2003 and 2002, there were 8,933,310, 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. 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 year ended October 31, 2004, there were 1,896 units issued in
exchanges and $1,065 in dividends and $82,540 in distributions were
paid to formerly 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 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
F-7
- 28 -
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 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 November 2004 distribution, the maximum liability of
the Delaware Escheator will be $13,732,808.
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 ("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 November 2004 distribution, the
maximum liability of the New York Administrator will be $1,080,454.
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 October 31, 2004, there remained a
F-8
- 29 -
total of 253,206 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, $485,958 in
dividends and $31,032,963 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 Transaction:
--------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. During fiscal 2004,
the Trust reimbursed him a total of $21,253 for such office space and
office services.
F-9
- 30 -
(5) Quarterly results (unaudited):
------------------------------
The table below summarizes the quarterly results and distributions of
the Trust for the years ended October 31, 2004 and 2003.
Fiscal 2004 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $4,360,730 $4,075,008 $3,506,720 $3,118,751 $15,061,209
Net income on
a cash basis 4,134,113 3,858,689 3,351,901 2,962,955 14,307,658
Net income
per unit on
a cash basis .46 .43 .38 .33 1.60
Current year
cash
distributions
paid or
to be paid 4,108,450 3,840,528 3,388,930 2,947,986 14,285,894
Dividends and
distributions
paid to formerly
unlocated
unit owners .00 .00 .01 .00 .01
Current year
cash
distributions
per unit .46 .43 .37 .33 1.59
Fiscal 2003 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- ------------
Royalties
received $4,766,564 $4,699,755 $4,536,318 $4,166,398 $18,169,035
Net income on
a cash basis 4,520,367 4,528,543 4,352,137 3,997,312 17,398,359
Net income
per unit on
a cash basis .51 .51 .49 .45 1.95
Current year
cash
distributions
paid or
to be paid 4,555,689 4,467,170 4,376,504 4,019,006 17,418,369
Current year
cash
distributions
per unit .51 .50 .49 .45 1.95
F-10
- 31 -
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure.
------------------------
None
Item 9A. Controls and Procedures.
-----------------------
Disclosure 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.
Internal Control Over Financial Reporting
- -----------------------------------------
Part A. Management's Report on Internal Control Over Financial
------------------------------------------------------
Reporting
---------
Rules of the Securities and Exchange Commission implementing
Section 404 of the Sarbanes-Oxley Act will require our Annual Report for the
fiscal year ending October 31, 2005 to contain a management's report and an
independent accountants' report regarding the effectiveness of internal
control over financial reporting ("internal control"). However, in this
fiscal year 2004 Annual Report, we chose to include this report on internal
control voluntarily. As a basis for our report, we tested and evaluated the
design, documentation and operating effectiveness of internal control.
In early March 2004, the Public Company Accounting Oversight Board
(PCAOB) formed pursuant to SOX issued its auditing standard, which may
require changes to the processes we utilize to test and evaluate the design,
documentation and operating effectiveness of internal control and may affect
our future internal control disclosures. In addition, various proposals for
rules by the SEC may also affect internal control disclosures and require
changes in them. Based on our assessment as of October 31, 2004, however,
we make the following assertions:
- 32 -
1. Management is responsible for establishing and maintaining
effective internal control over financial reporting of the
Trust. The internal control contains monitoring mechanisms,
and actions are taken to correct deficiencies identified.
2. There are inherent limitations in the effectiveness of any
internal control, including the possibility of human error
and the circumvention or overriding of controls. Accordingly,
even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness
of internal control may vary over time.
3. Management has evaluated the Trust's internal control over
financial reporting as of October 31, 2004. This assessment
was based on criteria for effective internal control over
financial reporting described in the standards promulgated by
PCAOB and in the Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes
that the Trust maintained effective internal control over
financial reporting as of October 31, 2004.
Ernst & Young LLP, the Trust's independent auditors, have issued an
attestation report on management's assessment of the Trust's internal control
over financial reporting. It appears immediately following this report.
Part B. Attestation Report of Independent Registered Public
---------------------------------------------------
Accounting Firm
---------------
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Unit Owners of
North European Oil Royalty Trust
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that North
European Oil Royalty Trust (the "Trust") maintained effective internal
control over financial reporting as of October 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Trust's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment about the effectiveness of
internal control over financial reporting. Our responsibility is to express
an opinion on management's assessment and an opinion on the effectiveness of
the Trust's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment,
- 33 -
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with the basis of accounting described in the notes to
financial statements. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with the basis of
accounting described in the notes to financial statements, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and trustees of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Trust maintained effective
internal control over financial reporting as of October 31, 2004, is fairly
stated, in all material respects, based on criteria established in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also, in our opinion, the Trust
maintained, in all material respects, effective internal control over
financial reporting as of October 31, 2004, based on criteria established in
"Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the statements of assets,
liabilities and trust corpus arising from cash transactions of the Trust as
of October 31, 2004 and 2003 and the related statements of revenue collected
and expenses paid, undistributed earning and changes in cash and cash
equivalents for each of the three years in the period ended October 31, 2004,
and our report dated December 20, 2004 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
---------------------
New York, NY
December 20, 2004
- 34 -
Part C. Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There have been no changes in the Trust's internal control over
financial reporting that occurred during the fourth quarter of fiscal 2004
that have materially affected, or are reasonably likely to materially affect,
the Trust's internal control over financial reporting.
Item 9B. Other Information.
-----------------
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The identity, business experience, relationships, and other
information about the Trustees as set forth under the caption "Election of
Trustees" in Registrant's definitive Proxy Statement, dated January 10, 2005,
as filed with the Commission, are incorporated herein by reference in
accordance with Instruction G(3) to Form 10-K. See "Executive Officers of
the Trust" under Item 1 of this Report for information concerning the
executive officers of the Trust.
The information required by this item with respect to the Trust's
audit committee, audit committee financial experts and Section 16(a)
Beneficial Ownership Reporting Compliance is also set forth in the
Registrant's definitive Proxy Statement, dated January 10, 2005, as filed
with the Commission, which is incorporated herein by reference in accordance
with Instruction G(3) to Form 10-K.
Code of Ethics
- --------------
The Trustees have adopted a Code of Conduct and Business Ethics
(the "Code") for the Trust's trustees and employees, which at this time
includes the Trustees, including the Managing Trustee, and the Managing
Director. The Managing Trustee and Managing Director serve the roles of
principal executive officer and principal financial and accounting officer.
A copy of the Code is available without charge on request by writing to the
Managing Director at the office of the Trust. The Code is also available at
the Trust's web-site, www.NEORT.com.
All trustees and employees of the Trust have signed a copy of the
Code. No waivers or exceptions to the Code have been granted since the
adoption of the Code. Any amendments or waivers to the Code will be
disclosed in a Form 8-K filing of the Trust after such amendment or waiver.
- 35 -
Item 11. Executive Compensation.
----------------------
The information about remuneration of the Trustees and Management
as set forth under the caption "Management Compensation" in Registrant's
definitive Proxy Statement, dated January 10, 2005, as filed with the
Commission, is incorporated herein by reference in accordance with
Instruction G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
and Related Stockholder Matters.
-------------------------------
The information about security ownership of certain beneficial
owners and Management as set forth in the introduction to and under the
caption "Election of Trustees" in Registrant's definitive Proxy Statement,
dated January 10, 2005, as filed with the Commission, is incorporated
herein by reference in accordance with Instruction G(3) to Form 10-K.
The Trust does not maintain any compensation plans under which
units are authorized for issuance.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The information about certain relationships and related
transactions as set forth under the captions "Election of Trustees" and
"Management Compensation" in Registrant's definitive Proxy Statement, dated
January 10, 2005, as filed with the Commission, is incorporated herein by
reference in accordance with Instruction G(3) to Form 10-K.
Item 14. Principal Accountant Fees and Services.
--------------------------------------
The information about fees billed by our independent auditors and
our pre-approval policies with respect to non-audit services are set forth
under the caption "Auditor Matters" in Registrant's definitive Proxy
Statement, dated January 10, 2005, as filed with the Commission, is
incorporated herein by reference in accordance with Instruction G(3) to
Form 10-K.
- 36 -
Item 15. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) The following is a list of the documents filed as part of this
Report:
1. Financial Statements
Index to Financial Statements for the Years
Ended October 31, 2004, 2003 and 2002
Report of Independent Registered Public Accounting Firm
Statements of Assets, Liabilities and Trust Corpus as of
October 31, 2004 and 2003
Statements of Revenue Collected and Expenses Paid for the
Years Ended October 31, 2004, 2003 and 2002
Statements of Undistributed Earnings for the Years
Ended October 31, 2004, 2003 and 2002
Statements of Changes in Cash and Cash Equivalents for the
Years Ended October 31, 2004, 2003 and 2002
Notes to Financial Statements
2. Exhibits
The Exhibit Index following the signature page lists all
exhibits filed with this Report or incorporated by reference.
- 37 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Trust has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
Dated: December 20, 2004 By: /s/ John H. Van Kirk
-------------------------
John H. Van Kirk,
Managing Trustee
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Dated: December 20, 2004 /s/ John H. Van Kirk
--------------------------------
John H. Van Kirk, Trustee
Dated: December 20, 2004 /s/ Robert P. Adelman
--------------------------------
Robert P. Adelman, Trustee
Dated: December 20, 2004 /s/ Samuel M. Eisenstat
--------------------------------
Samuel M. Eisenstat, Trustee
Dated: December 20, 2004 /s/ Willard B. Taylor
--------------------------------
Willard B. Taylor, Trustee
Dated: December 20, 2004 /s/ Rosalie J. Wolf
--------------------------------
Rosalie J. Wolf, Trustee
Dated: December 20, 2004 /s/ John R. Van Kirk
--------------------------------
John R. Van Kirk,
Managing Director
- 38 -
Exhibit Index
-------------
Exhibit Page
- ------- ----
(3) Trust Agreement, dated September 10, 1975,
amended May 13, 1976, and February 10, 1981
(incorporated by reference to Exhibit 4(i) to
Form 10-Q for the quarter ended April 30, 1981
(File No. 0-8378)).
(10.1) Agreement with OEG, dated April 2, 1979,
exhibit to Current Report on Form 8-K
filed May 11, 1979 (incorporated by
reference as Exhibit 1 to Current Report
on Form 8-K, filed May 11, 1979
(File No. 0-8378)).
(10.2) Agreement with Mobil Oil, A.G. concerning
sulfur royalty payment, dated March 30, 1979,
(incorporated by reference to Exhibit 3
to Current Report on Form 8-K, filed
May 11, 1979 (File No. 0-8378)).
(21) There are no subsidiaries of the Trust.
(31.1) Certification of Chief Executive Officer pursuant 39
to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer pursuant 41
to Section 302 of the Sarbanes-Oxley Act of 2002
(32) Certification of Chief Executive and Chief Financial 43
Officers pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(99.1) Estimate of Remaining Proved Producing Reserves 44
in the Northwest Basin of the Federal Republic of
Germany as of October 1, 2004 and Calculation
of Cost Depletion Percentage for the 2004
Calendar Year prepared by
Ralph E. Davis Associates, Inc.
(99.2) Order Approving Settlement signed by
Vice Chancellor Jack Jacobs of the
Delaware Court of Chancery
(incorporated by reference as
Exhibit 99.2 to Current Report on
Form 8-K, filed February 26, 1996).