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, 2005 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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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 29, 2005, the aggregate market value of outstanding units of
beneficial interest of the Registrant held by non-affiliates of the
Registrant was approximately $234,760,721 on such date. (The Trustees and
the Managing Director are the only persons deemed to be affiliates of the
Registrant.)
As of December 30, 2005, there were 9,180,876 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 9, 2006 for the annual meeting to be held on February 9, 2006.
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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 three 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 and the fact that it conducts no active business. 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.
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 as set forth in Section
303A.12(a) of the NYSE Listed Company Manual. These rules provide, however,
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that passive business organizations in the form of trusts, such as the Trust,
are exempt from most of the governance requirements promulgated by the NYSE.
The Trustees have, however, 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.
(c) 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. Since January 2001,
the operating companies have been 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.
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. While the Trust itself is
precluded from undertaking any production activities, possible residual
rights might permit the Trust to take up a surrendered concession or lease
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and attempt to retain a third party operator to develop such concession or
lease.
During the 2004 fiscal year, the Trust received notification that
the operating companies intended to surrender their rights to three minor
non-productive leases. Early in fiscal 2006 an additional two leases were
added to the list of non-productive leases that the operating companies
intended to surrender. The Trust continues to review its options with regard
to all these leases. However, due to the size of the areas covered by the
leases and the lack of any current production or probable hydrocarbon
potential, the surrendering of these rights is not expected to have a
significant impact on the Trust or its royalty receipts.
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
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,
2005.
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(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 81 years old, has been Managing Trustee since
the Trust's inception in 1975. John R. Van Kirk, who is 53 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 other employee in the United States, an administrative
assistant. The Trust also maintains a part-time consultancy relationship
with an expert in Germany from whom it receives reports on a regular basis.
Because the Trust has only three employees, 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,
the Trustees' Regulations and the Trust's Audit Committee Charter are 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 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 called
ExxonMobil Production Deutschland GmbH ("EMPG") to carry out all exploration,
drilling and production activities. All sales activities are still handled
separately by either Mobil Erdgas or BEB.
- 7 -
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 2005.
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 by OEG 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 open.
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
producing lease, reserves from this lease are not included in reserve
calculations for this report year. As described above, the Trust received
notification that the operating companies intend to surrender their rights
to some minor non-productive leases.
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The following is a schedule of royalty income for the fiscal year
ended October 31, 2005 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 $ 20,644,553
Sulfur $ 220,430
Oil $ 220,056
BY GEOGRAPHIC AREA:
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Area Royalty Income
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Western Oldenburg $ 17,808,759
Eastern Oldenburg $ 3,201,336
Non-Oldenburg Areas $ 74,944
BY OPERATING COMPANY:
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Company Royalty Income
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Mobil Erdgas-Erdol GmbH $ 15,509,142
BEB Erdgas und Erdol GmbH $ 5,575,897
Exhibit 99.1 to this Report is a report dated December 16, 2005
which summarizes certain production data and the estimated net proved
producing reserves as of October 1, 2005, 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, 2005
and Calculation of Cost Depletion Percentage for the 2005 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 with the practice
of the Trust in prior years, the information has been prepared for the
12-month period ended September 30, 2005, 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
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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, but only 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 assume that these estimates
may 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, 2005 and a five year schedule of gas,
sulfur and oil sales for the twelve months ended September 30, 2005, 2004,
2003, 2002 and 2001 computed from quarterly sales reports of operating
companies received by the Trust during such periods.
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 2005 and 2004 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 2005
----------------
Low High Distribution
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- ------------
January 31, 2005 $21.80 $23.90 $0.54
April 30, 2005 $23.55 $27.05 $0.69
July 31, 2005 $26.25 $31.10 $0.57
October 31, 2005 $27.20 $34.25 $0.42
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
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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 in the light of the limited
nature of the available information. The cost depletion percentage
recommended by the Trust's independent petroleum and natural gas consultants
for calendar 2005 is 8.6660%. 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 2005 calendar year are included on a
special removable page in the 2005 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 2005 and who are no
longer registered owners as of the end of the calendar year. Additionally,
the tax reporting information for 2005 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. Except as reflected in Note 3 to the Financial Statements
in Item 8 of this Report, such payments are no longer required.
As of November 30, 2005, there were 1,249 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 28 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. If the remaining
unclaimed units have not been claimed prior to April 30, 2006, they will be
escheated to the states of last known address. 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, as a matter of practice, does
not make any repurchases of Trust units and did not make any repurchases of
Trust units during fiscal 2005, 2004 or 2003.
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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, 2005
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2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
German gas,
sulfur, and
oil
royalties
received $21,085,039 $15,061,209 $18,169,035 $17,435,504 $22,453,630
=========== =========== =========== =========== ===========
Net Income on a
cash basis $20,222,814 $14,307,658 $17,398,359 $16,885,776 $21,906,824
=========== =========== =========== =========== ===========
Net Income per unit
on a cash
basis (a) $2.20 $1.60 $1.95 $1.89 $2.47
===== ===== ===== ===== =====
Units of beneficial
interest
outstanding
at end
of year (a) 9,180,876 8,933,310 8,931,414 8,931,414 8,886,804
Cash distributions
paid or to be
paid:
Dividends and
distributions
per unit paid
to formerly
unlocated
unit owners .02 .01 .00 .00 .00
Distributions per
unit paid or to
be paid to
unit owners $2.22 $1.59 $1.95 $1.89 $2.46
===== ===== ===== ===== =====
Total assets
at year
end $3,920,268 $ 3,014,387 $ 4,063,767 $ 3,458,578 $5,391,321
========== =========== =========== =========== ==========
(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 set forth, 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
price 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.
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.
However, except for one claim begun before the cut-off date of 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
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arrears has been eliminated. 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 Trust's current consultant in Germany provides general information to the
Trust on the German and European economies and energy markets. This
information provides a context in which to evaluate the actions of the
operating companies. In his position as consultant he receives reports from
the operating companies with respect to current and planned drilling and
exploration efforts. However, the unified exploration and production venture,
EMPG, which provides the reports to the Trust's consultant, continues to
limit the information flow to that which is required by German law.
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 2005 versus Fiscal 2004
- ----------------------------------------
For fiscal 2005 the Trust's gross royalty income increased 40% from
$15,061,209 to $21,085,069. Increases in gas prices under both the higher
and lower royalty rate agreements, higher gas sales from the higher royalty
rate area of western Oldenburg and a higher average value for the Euro
resulted in the higher royalty income and, as a result, higher distributions.
The only negative factor impacting royalty income was lower gas sales from
eastern Oldenburg.
Under the higher royalty rate agreement with Mobil Erdgas covering
western Oldenburg, gas sales increased 7% from 63.55 Billion cubic feet
("Bcf") in fiscal 2004 to 68.02 Bcf in fiscal 2005. Gas sales strengthened
each quarter throughout fiscal 2005 until the final quarter when maintenance
work at the desulfurization plant slowed production. A comparison to the
prior year gas sales for the first through fourth quarters of fiscal 2005
showed changes of -4.6%, -1.3%, +20.9% and +13.7%, respectively. The Trust's
management believes that this turnaround is at least partially the result of
the new compressors that came on line in late 2004 and the new western wells
completed in 2004. Average gas prices for gas sold from this royalty area
increased 21.1% from 1.2038 Euro cents per kilowatt hour ("Ecents/Kwh") in
fiscal 2004 to 1.4577 Ecents/Kwh in fiscal 2005. For fiscal 2005 the average
gas price for each quarter posted an increase over the prior year's
corresponding quarter.
- 15 -
Under the lower royalty rate agreement with BEB covering the entire
Oldenburg concession, gas sales declined 3.4% from 166.41 Bcf in fiscal 2004
to 160.76 Bcf in fiscal 2005. A comparison to the prior year gas sales for
the first through fourth quarters of fiscal 2005 showed changes of -5.1%,
- -5.1%, +8.7% and -12.0%, respectively. Average gas prices for gas sold from
this royalty area increased 25.2% from 1.2201 Ecents/Kwh in fiscal 2004 to
1.5272 Ecents/Kwh in fiscal 2005. For fiscal 2005 the average gas price for
each quarter posted an increase over the prior year's corresponding quarter.
From its high point in November 2004, the Euro steadily declined
throughout fiscal 2005 in relation to the U.S. dollar. Using the cumulative
transfer of royalties from Germany to the U.S. to generate an average value
for the Euro, there was a 3.6% increase in the average value from $1.2234 for
fiscal 2004 to $1.2673 for fiscal 2005.
Interest income for fiscal 2005 was higher due to the combination
of rising interest rates and increased funds available for investment. Trust
expenses increased 18.8% from $775,521 in fiscal 2004 to $921,578 in fiscal
2005. A number of expense items not part of the normal yearly Trust expenses
were incurred this year. The expenses associated with the biennial
examination of the operating companies in Germany to confirm the accuracy of
the royalty payments added $25,874 to the expense total. Payment of a
portion of the fees of the Trust's German consultant was made early in fiscal
2005, which added $50,664 to the expense total. The resolution of the
Trust's contingent liability for arrearage payments to previously unlocated
shareholders resulted in additional legal expenses compared to fiscal 2004.
The operating companies provide reports to the Trust's German
consultant detailing their plans for exploration and drilling for the
upcoming calendar year and the results of that program for the current
calendar year. The Trust's consultant has extracted the following
information from those reports. The operating companies' expanded drilling
program continued throughout 2005. Goldenstedt Z-12a was successfully
completed in March 2005 with a horizontal deviation of 3,117 feet. After
construction of production facilities was completed, production began in
September 2005. Hemmelte Z-5a, this year's one western well, was completed
in mid June 2005 but due to geological constraints did not fully penetrate
the total reservoir section as originally planned. This would appear to have
had an impact of the well's productivity. However, following the completion
of the production facilities, production began in October 2005. Doetlingen
Ost Z-2, an exploratory well, began drilling in June 2005. Intended to
penetrate to a total depth of 16,000 feet with a horizontal deviation of
1,310 feet, the drilling encountered massive technical problems which delayed
completion of the well until mid November 2005. While no production tests
were carried out, numerous gas "shows" occurred during the drilling and well
logging confirmed a gas discovery. Once production facilities are completed,
production is expected to begin in the middle of 2006. Oythe Z-3 was a new
vertical well planned to replace Oythe Z-2, which suffered a casing collapse.
Drilling began in September 2005 but significant technical difficulties
forced the operators to plug the initial drilling with cement and redrill.
Now designated Oythe Z-3a, the well is scheduled for completion in March 2006.
A new well, Doetlingen Z-8a, originally scheduled for 2006 has been pushed
forward to December 2005 with an expected completion of March 2006. This
well is planned as a horizontal deviation of approximately 980 feet. For
2006, two new wells, Goldenstedt Z-7a and Varnhorn Z-7a, are planned. Both
are horizontal deviations from existing wells located in eastern Oldenburg.
- 16 -
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 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 addressed until the month of October
when the new compressors came on line and was not be fully addressed until
the completion of some remaining minor construction work. Average gas prices
for gas sold from this royalty area declined 15.1% from 1.4175 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 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 2004 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.
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 provide reports to the Trust's German
consultant detailing their plans for exploration and drilling for the
upcoming calendar year and the results of that program for the current
calendar year. The Trust's consultant has extracted the following
information from those reports. The operating companies were 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. Initially some remaining construction work limited production
levels to a rate of 54 million cubic feet per day ("ft/d"). When all
construction was completed, this production figure rose to the expected
levels of 71 million ft/d.
The operating companies pursued an expanded drilling program during
2004. Kneheim Z-5, a production well located in western Oldenburg, began
- 17 -
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, had been completed with production beginning in March 2005.
Using a high tech geo-steering procedure the operators were able to extend
the horizontal deviation approximately 2,140 feet in length. 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
was necessary but production finally began in May 2005.
The operating companies indicated that they will continue their
expanded drilling program into 2005 with four additional wells planned. Two
horizontal deviations off existing wells were planned. The eastern well,
Goldenstedt Z-12a, began drilling in mid December 2004 and was successfully
completed in March 2005. The western well, Hemmelte Z-5a, began drilling in
April 2005 and was successfully completed in June 2005. A new production
well in eastern Oldenburg, Oythe Z-3, to replace an existing well that
suffered a casing collapse, was scheduled for a drilling start in September
2005. Technical difficulties have delayed its completion until March 2006.
A new exploratory well in eastern Oldenburg, Doetlingen Ost Z-2, was
scheduled for a drilling start in June 2005 and was successfully completed in
mid November 2005. This well was targeted to test a new geological reservoir.
- 18-
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.
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. The Trust does not engage in any
trading activities with respect to possible commodity price fluctuations.
- 19 -
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, 2005 and 2004 F-2
Statements of Revenue Collected and Expenses Paid
for the Years Ended October 31, 2005,
2004 and 2003 F-3
Statements of Undistributed Earnings for the
Years Ended October 31, 2005, 2004 and 2003 F-4
Statements of Changes in Cash and Cash Equivalents for
the Years Ended October 31, 2005, 2004 and 2003 F-5
Notes to Financial Statements F-6 - F-9
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.
- 20 -
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 statements of assets, liabilities and trust
corpus arising from cash transactions of North European Oil Royalty Trust as
of October 31, 2005 and 2004, 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, 2005.
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, 2005 and
2004, 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, 2005, on the basis of accounting described in Note 1.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of North
European Oil Royalty Trust's internal control over financial reporting as of
October 31, 2005, based on criteria established in Internal Control--
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated December 7, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
------------------------
New York, NY
December 7, 2005
F-1
- 21 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
OCTOBER 31, 2005 AND 2004
-------------------------
ASSETS 2005 2004
------ ------------ ------------
Current Assets
Cash and cash equivalents (Note 1) $3,920,267 $3,014,386
Producing gas and oil
royalty rights (Note 1) 1 1
------------ ------------
$3,920,268 $3,014,387
============ ============
LIABILITIES AND TRUST CORPUS
----------------------------
Current liabilities
Cash distributions payable
to unit owners, paid
November 2005 and 2004 $3,855,968 $2,947,992
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 64,299 66,394
------------ ------------
$3,920,268 $3,014,387
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-2
- 22 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 2005, 2004 AND 2003
---------------------------------------------------
2005 2004 2003
------------ ------------ ------------
German gas, sulfur and
oil royalties
received $21,085,039 $15,061,209 $18,169,035
Interest income 59,353 21,970 31,477
Trust expenses (921,578) (775,521) (802,153)
------------ ------------ ------------
Net income on
a cash basis $20,222,814 $14,307,658 $17,398,359
============ ============ ============
Net income per unit
on a cash basis $2.20 $1.60 $1.95
======= ======= =======
Cash distributions paid
or to be paid:
Dividends and distributions
per unit paid to formerly
unlocated unit owners .02 .01 .00
Distributions per unit
paid or to be paid to
unit owners (Note 5) $2.22 $1.59 $1.95
======= ======= =======
The accompanying notes to financial statements
are an integral part of these statements.
F-3
- 23 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2005, 2004 AND 2003
----------------------------------------------------------
2005 2004 2003
------------ ------------ ------------
Balance,
beginning of year $ 66,394 $ 44,630 $ 64,640
Net income on
a cash basis 20,222,814 14,307,658 17,398,359
------------ ----------- -----------
20,289,208 14,352,288 17,462,999
------------ ------------ ------------
Less:
Dividends and
distributions paid
to formerly unlocated
unit owners (Note 3) 155,062 83,605 0
Current year
distributions paid
or to be paid to unit
owners (Note 5) 20,069,847 14,202,289 17,418,369
------------ ------------ ------------
Balance, end of year $ 64,299 $ 66,394 $ 44,630
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-4
- 24 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 2005, 2004 AND 2003
---------------------------------------------------
2005 2004 2003
------------ ------------ ------------
Sources of cash and
cash equivalents:
German gas, sulfur and
oil royalties received $21,085,039 $15,061,209 $18,169,035
Interest income 59,353 21,970 31,477
----------- ----------- -----------
21,144,392 15,083,179 18,200,512
Uses of cash and
cash equivalents:
Payment of Trust
expenses 921,578 775,521 802,153
Distributions and
dividends paid
(Note 3) 19,316,933 15,357,038 16,793,170
----------- ----------- -----------
20,238,511 16,132,559 17,595,323
----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents
during the year 905,881 (1,049,380) 605,189
Cash and cash
equivalents,
beginning of year 3,014,386 4,063,766 3,458,577
----------- ----------- -----------
Cash and cash
equivalents,
end of year $3,920,267 $3,014,386 $4,063,766
=========== =========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
F-5
- 25 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 2005, 2004 AND 2003
-------------------------------
(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
- 26 -
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, 2005, 2004 and 2003, there were 9,180,876, 8,933,310 and
8,931,414 units of beneficial interest outstanding, respectively.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities
of the Company, including its royalty rights, were transferred to
the Trust. The Trust, on behalf of the owners of beneficial interest
in the Trust, holds overriding royalty rights covering gas and oil
production in certain concessions or leases in the Federal Republic
of Germany. These rights are held under contracts with local German
exploration and development subsidiaries of ExxonMobil Corp. and
the Royal Dutch/Shell Group. 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 $355,166 and distributions of $4,319,084 were paid to
formerly unlocated Corporation and Company shareholders. For the
year ended October 31, 2005, 3,351 units of beneficial interest were
issued in exchanges and $1,869 in dividends and $153,287 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
F-7
- 27 -
require the issuance of an additional 3,150 Trust units and the
payment of approximately $150,000 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 October 31, 2005, there are a total of 9,714
units (including the 3,150 units for the one uncompleted claim still
in process) that remain unclaimed and will be subject to escheat to
various states prior to the end of fiscal 2006. Under the Chancery
Court Order and with the exception of the one claim still in process,
no payment of arrearages will be made for such units.
(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 2005,
the Trust reimbursed him a total of $18,015 for such office space and
office services.
F-8
- 28 -
(5) Quarterly results (unaudited):
------------------------------
The table below summarizes the quarterly results and distributions of
the Trust for the years ended October 31, 2005 and 2004.
Fiscal 2005 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $5,154,811 $6,332,292 $5,419,524 $4,178,412 $21,085,039
Net income on
a cash basis 4,835,114 6,137,395 5,219,675 4,030,630 20,222,814
Net income
per unit on
a cash basis .54 .69 .57 .44 2.20
Current year
cash
distributions
paid or
to be paid 4,823,991 6,164,019 5,225,869 3,855,968 20,069,847
Dividends and
distributions
paid to formerly
unlocated
unit owners .00 .00 .00 .02 .02
Current year
cash
distributions
per unit .54 .69 .57 .42 2.22
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 3,840,508 3,305,325 2,947,986 14,202,275
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
F-9
- 29 -
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
---------
The Trust's management is responsible for establishing and
maintaining adequate internal control over financial reporting (as such term
is defined in Exchange Act Rule 13a-15(f)) for the Trust. 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 controls may vary
over time. Management has evaluated the Trust's internal control over
financial reporting as of October 31, 2005. 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 evaluation, our management concluded that our
internal control over financial reporting was effective as of October 31,
2005. Our management's assessment of the effectiveness of our internal
control over financial reporting as of October 31, 2005 has been audited by
Ernst & Young LLP, the Trust's independent auditors, as stated in their
report which appears below.
- 30 -
Part B. Attestation Report of Independent Registered Public
---------------------------------------------------
Accounting Firm
---------------
Report of Independent Registered Public Accounting Firm
Internal Control over Financial Reporting
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, 2005, based on criteria
established in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
The Trust's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of 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, 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 generally accepted accounting principles. 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 generally accepted accounting principles, 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
- 31 -
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 North European Oil Royalty Trust
maintained effective internal control over financial reporting as of October
31, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, the Trust maintained, in all material
respects, effective internal control over financial reporting as of
October 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the statement of assets,
liabilities and trust corpus arising from cash transactions as of October 31,
2005 and 2004, 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, 2005 of North
European Oil Royalty Trust and our report dated December 7, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
---------------------
New York, NY
December 7, 2005
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 2005
that have materially affected, or are reasonably likely to materially affect,
the Trust's internal control over financial reporting.
Item 9B. Other Information.
-----------------
None
- 32 -
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 9, 2006,
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 9, 2006, 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 website, 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.
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 9, 2006, 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,
- 33 -
dated January 9, 2006, 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 9, 2006, 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 9, 2006, as filed with the Commission, is
incorporated herein by reference in accordance with Instruction G(3) to
Form 10-K.
- 34 -
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, 2005, 2004 and 2003
Report of Independent Registered Public Accounting Firm
Statements of Assets, Liabilities and Trust Corpus as of
October 31, 2005 and 2004
Statements of Revenue Collected and Expenses Paid for the
Years Ended October 31, 2005, 2004 and 2003
Statements of Undistributed Earnings for the Years
Ended October 31, 2005, 2004 and 2003
Statements of Changes in Cash and Cash Equivalents for the
Years Ended October 31, 2005, 2004 and 2003
Notes to Financial Statements
2. Exhibits
The Exhibit Index following the signature page lists all
exhibits filed with this Report or incorporated by reference.
- 35 -
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 21, 2005 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 21, 2005 /s/ John H. Van Kirk
--------------------------------
John H. Van Kirk, Trustee
Dated: December 21, 2005 /s/ Robert P. Adelman
--------------------------------
Robert P. Adelman, Trustee
Dated: December 21, 2005 /s/ Samuel M. Eisenstat
--------------------------------
Samuel M. Eisenstat, Trustee
Dated: December 21, 2005 /s/ Willard B. Taylor
--------------------------------
Willard B. Taylor, Trustee
Dated: December 21, 2005 /s/ Rosalie J. Wolf
--------------------------------
Rosalie J. Wolf, Trustee
Dated: December 21, 2005 /s/ John R. Van Kirk
--------------------------------
John R. Van Kirk,
Managing Director
- 36 -
Exhibit Index
-------------
Exhibit Page
- ------- ----
(3.1) 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)).
(3.2) Amended and Restated Trustees' Regulations,
dated September 10, 1975, and amended and
restated as of February 9, 2005 (incorporated
by reference to Exhibit 3 to Form 10-Q for the
quarter ended January 31, 2005 (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 37
to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer pursuant 39
to Section 302 of the Sarbanes-Oxley Act of 2002
(32) Certification of Chief Executive and Chief Financial 41
Officers pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(99.1) Estimate of Remaining Proved Producing Reserves 42
in the Northwest Basin of the Federal Republic of
Germany as of October 1, 2005 and Calculation
of Cost Depletion Percentage for the 2005
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).