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, 2005 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, 2005
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Units of Beneficial Interest 9,168,192
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements.
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED JULY 31, 2005 AND 2004
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2005 2004
----------------- ----------------
(unaudited)
German gas, oil and sulfur
royalties received $ 5,419,524 $ 3,506,720
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Interest income 20,056 5,250
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Trust expenses ( 219,905) ( 160,069)
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Net income on a cash basis $ 5,219,675 $ 3,351,901
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Net income per unit on a cash basis $ .57 $ .38
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Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to formerly unlocated shareholders .00 .01
Distributions per unit to be paid to
unit owners $ .57 $ .37
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JULY 31, 2005 AND OCTOBER 31, 2004
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2005 2004
----------------- ----------------
(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 5,262,281 $ 3,014,386
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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Total Assets $ 5,262,282 $ 3,014,387
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Current liabilities - - Cash distributions
payable to unit owners $ 5,225,869 $ 2,947,992
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 36,412 66,394
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Total Liabilities and Trust Corpus $ 5,262,282 $ 3,014,387
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The notes to financial statements should be read
in conjunction with these statements.
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2005 AND 2004
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2005 2004
----------------- -----------------
(unaudited)
German gas, oil and sulfur
royalties received $16,906,627 $11,942,458
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Interest income 35,874 16,597
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Trust expenses ( 750,317) ( 614,352)
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Net income on a cash basis $16,192,184 $11,344,703
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Net income per unit on a cash basis $1.77 $1.27
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Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .01
Distributions per unit to be paid
to unit owners $1.80 $1.26
===== =====
The notes to financial statements should be read
in conjunction with these statements.
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STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2005 AND 2004
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2005 2004
----------------- ---------------
(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $16,906,627 $11,942,458
Interest income 35,874 16,597
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16,942,501 11,959,055
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Uses of cash and cash equivalents:
Payment of Trust expenses 750,317 614,352
Distributions and dividends paid (Note 3) 13,944,289 12,051,719
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14,694,606 12,666,071
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Net increase(decrease) in cash and
cash equivalents during the period 2,247,895 ( 707,016)
Cash and cash equivalents,
beginning of period 3,014,386 4,063,766
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Cash and cash equivalents,
end of period $ 5,262,281 $ 3,356,750
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2005 AND 2004
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2005 2004
----------------- ----------------
(unaudited)
Balance, beginning of period $ 66,394 $ 44,630
Net income on a cash basis 16,192,184 11,344,703
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16,258,578 11,389,333
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Less:
Dividends and distributions paid to
formerly unlocated shareholders (Note 3) 8,116 83,605
Current year distributions paid or
to be paid to unit owners (Note 3) 16,214,050 11,254,303
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16,222,166 11,337,908
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Balance, end of period $ 36,412 $ 51,425
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The notes to financial statements should be read
in conjunction with these statements.
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NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO FINANCIAL STATEMENTS
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(1) Summary of significant
accounting policies:
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Basis of Accounting -
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The accompanying financial statements of North European Oil Royalty
Trust (the "Trust") present financial statement balances and financial
results on a cash basis of accounting, which is a comprehensive basis
of accounting other than accounting principles generally accepted in
the United States ("GAAP basis"). Cash basis financial statements
report income when cash is received and expenses when cash is paid.
GAAP basis financial statements report income as earned and expenses
as incurred, without regard to receipts or payments. The sole
exception to the use of the cash basis of accounting is the accrual
for distributions to be paid to unit owners (those distributions
approved by the Trustees for the Trust). The Trust's distributable
income represents royalty income received by the Trust during the
period plus interest income less any expenses incurred by the Trust,
all on a cash basis. In the opinion of the Trustees, the use of the
cash basis provides a more meaningful presentation to unit owners of
the results of operations of the Trust.
Producing gas and oil
royalty rights -
---------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at 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 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.
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.
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Net income per unit
on the cash basis -
-------------------
Net income per unit on the cash basis is based upon the number of units
outstanding at the end of the period (see Note 3). As of July 31,
2005 and 2004, there were 9,168,192 and 8,933,310 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:
---------------------
Since its inception in 1975, the Trust has served 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. Pursuant to an order of the
Delaware Court of Chancery dated February 26, 1996 (the "Chancery
Court Order"), from and after July 1, 2005, the Trust has no further
obligation to make payments of dividends or distributions
attributable to any unexchanged Corporate and Company shares.
From the liquidation of the Company to October 31, 2004, 723,260 Trust
units were issued in exchange for Corporate and Company shares and
dividends of $354,101 and distributions of $4,236,544 were paid to
formerly unlocated Corporation and Company shareholders. For the
nine-month period ended July 31, 2005, 201 units of beneficial
interest were issued in exchanges and $100 in dividends and $8,281 in
distributions were paid to formerly unlocated Corporation and Company
shareholders. There is one claim pending and in process that was
instituted prior to the June 30, 2005 expiration date specified in
the Chancery Court Order, which, if satisfactorily documented, would
require the issuance of an additional 6,300 Trust units and the
payment of approximately $293,500 in dividend and distribution
arrearages when resolved at a future date.
Pursuant to the Chancery Court Order, the Trust had previously entered
into agreements with the Delaware State Escheator and with the New
York Administrator of Unclaimed Property. Pursuant to this Order and
prior to June 30, 2005, the Trust made a final issuance of 190,116
and 44,565 Trust units to the states of Delaware and New York,
respectively. As of July 31, 2005, there remained a total of 22,398
units (including the 6,300 units for the application in process) that
remain unclaimed and will be subject to escheat to various states
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prior to April 30, 2006. Under the Chancery Court Order, no payment
of arrearages will be made for such units.
(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 2005 the Trust reimbursed him a total of $6,860 for
such office space and office services.
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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 2005, net Trust income increased by
55.7% to $5,219,675, which permitted a distribution of 57 cents per unit
compared to the distribution of 37 cents for the prior year's period. The
current distribution is being paid on August 31, 2005 to holders of record
as of August 12, 2005. The amount of the distribution per unit was affected
by an increase in the number of units outstanding. This increase in units
outstanding, a 2.6% dilution, resulted from the final distribution of 234,681
Trust units to the States of Delaware and New York prior to June 30, 2005.
This distribution continued the implementation of the February 26, 1996
Chancery Court Order concerning previously unlocated holders of shares of the
Trust's predecessor corporations. Pursuant to the Chancery Court Order and
as of June 30, 2005, the Trust has no further responsibility to make payments
of dividends or distributions attributable to unexchanged Corporation or
Company shares. There is one claim, instituted prior to the June 30, 2005
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expiration date, that continues to be processed. If successfully concluded,
this claim would require the issuance of 6,300 Trust units and the payment of
approximately $293,500 in dividend and distribution arrearages. Including
these 6,300 units, there remain 22,398 units that could be issued to
unlocated or unknown Corporation and Company shareholders. If these units
remain unclaimed, the final units will be escheated in April 2006 as part of
the Trust's ongoing escheat efforts.
For the nine month fiscal period, net Trust income was $16,192,184, an
increase of 42.7% from the prior year's period. Cumulative distributions
for the nine month period are $1.80 per unit compared to $1.26 paid during
the same period last year. Due to the effect caused by the dilution, net
income per unit increased from $1.27 to $1.77. 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
2004 through the second calendar quarter of 2005.
The primary factors affecting royalty revenue for the quarter just ended
were the increase 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 based on total royalty transfers over the prior year was
minor. All comparisons, unless otherwise noted, are to the prior year's
equivalent period.
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 increased 30.7% from the equivalent quarter for the prior year. Gas
prices increased from 1.1276 Euro cents per Kilowatt hour ("Ecents/Kwh") to
1.4738 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 $5.18 per Mcf compared to $3.90 per Mcf.
This represents a 32.7% increase from the prior year.
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 increased 28.3% from the equivalent
quarter for the prior year. Gas prices rose from 1.1858 Ecents/Kwh to
1.5216 Ecents/Kwh compared to the prior year. 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 $5.25 per
Mcf. This represents a 30.2% increase from the prior year.
During the quarter just ended, overall Oldenburg gas sales increased by
8.7% from 38.56 billion cubic feet ("Bcf") to 41.91 Bcf. Gas sales from the
higher royalty rate area of western Oldenburg increased 20.9% from 15.16 Bcf
to 18.33 Bcf. At this level, gas sales from western Oldenburg accounted for
43.7% of total Oldenburg gas sales.
So far during fiscal 2005 the Euro has shown a steady decline from its
high during the first quarter with the most significant fall-off occurring
in the third quarter. For the quarter just ended the average value for the
Euro based on all royalties transferred to the United States was $1.2259.
This average value was 7.2% lower than the average value of $1.3213 posted
in the first quarter of fiscal 2005. The lower value of the Euro has the
immediate impact of decreasing the amount of dollars received at the time of
the transfer of royalties from Germany. However, because of the use of
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light heating oil as a pricing factor in the gas sales contracts, the lower
value of the Euro also works to increase the price of gas within Germany by
making imported oil prices in dollars more expensive.
If we exclude 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 43.7% of all gas sales. However,
royalties on these gas sales provided 84.8% or $3,745,146 out of a total of
$4,414,543 in Oldenburg royalties.
Interest income for the third quarter and the nine month period was
higher due to both increased funds available for investment and slowly rising
interest rates. Trust expenses for the third quarter increased by 37.4%
from the prior year. The increased expenses were due to the addition of
expenses incurred in the biannual examination of the operating companies in
Germany, higher legal fees and higher Trustees' fees (calculated under the
formula specified in the Trust Agreement). For the nine month period Trust
expenses increased by 22.1% from the prior year.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 2005, compared to that at fiscal year end (October 31,
2004), shows an increase in assets due to the higher royalty receipts during
the quarter.
As mandated by the Trust Agreement, distributions of income are made on
a quarterly basis. These distributions, as determined by the Trustees,
constitute substantially all the funds on hand after provision is made for
Trust expenses then anticipated. Under the Trust Agreement, no provision is
made for the retention of reserve funds of any kind. With respect to the
one claim still being processed, if funds are subsequently required for
payment to that claimant based upon the dividends and distributions
attributable to their unexchanged shares of the Trust's predecessor
corporation, quarterly distributions would be reduced to the extent required
to provide funds for such payment.
-----------------------------------
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.
----------------------------------------------------------
The Trust does not engage in any trading activities with respect to
possible foreign exchange fluctuations. The Trust does not use any financial
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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 2005 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
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Part II -- OTHER INFORMATION
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Item 6. Exhibits.
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(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
SIGNATURE
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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, 2005