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 January 31, 2006 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
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Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated Filer
--- --- ---
Class Outstanding at January 31, 2006
- ----- -------------------------------
Units of Beneficial Interest 9,184,026
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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 JANUARY 31, 2006 AND 2005
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2006 2005
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(unaudited)
German gas, oil and sulfur
royalties received $ 8,184,669 $ 5,154,811
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Interest income 22,033 5,320
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Trust expenses ( 262,093) ( 325,017)
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Net income on a cash basis $ 7,944,609 $ 4,835,114
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Net income per unit on a cash basis $ .87 $ .54
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Cash distributions paid or to be paid:
Dividends and distributions per unit paid
to formerly unlocated shareholders (Note 3) $ .02 $ .00
Distributions per unit to be paid to
unit owners $ .85 $ .54
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JANUARY 31, 2006 AND OCTOBER 31, 2005
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2006 2005
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(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 7,860,811 $ 3,920,267
Producing gas and oil royalty rights,
net of amortization (Note 1) 1 1
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Total Assets $ 7,860,812 $ 3,920,268
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Current liabilities - - Cash distributions
payable to unit owners $ 7,806,422 $ 3,855,968
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 54,389 64,299
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Total Liabilities and Trust Corpus $ 7,860,812 $ 3,920,268
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The accompanying 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 THREE MONTHS ENDED JANUARY 31, 2006 AND 2005
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2006 2005
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(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $ 8,184,669 $ 5,154,811
Interest income 22,033 5,320
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$ 8,206,702 $ 5,160,131
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Uses of cash and cash equivalents:
Payment of Trust expenses 262,093 325,017
Distributions and dividends paid (Note 3) 4,004,065 2,947,992
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4,266,158 3,273,009
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Net increase in cash and
cash equivalents during the period 3,940,544 1,887,122
Cash and cash equivalents,
beginning of period 3,920,267 3,014,386
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Cash and cash equivalents,
end of period $ 7,860,811 $ 4,901,508
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2006 AND 2005
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2006 2005
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(unaudited)
Balance, beginning of period $ 64,299 $ 66,394
Net income on a cash basis 7,944,609 4,835,114
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8,008,908 4,901,508
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Less:
Dividends and distributions per unit
paid to formerly unlocated
shareholders (Note 3) 148,097 0
Current year distributions paid or
to be paid to unit owners 7,806,422 4,823,991
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7,954,519 4,823,991
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Balance, end of period $ 54,389 $ 77,517
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The accompanying 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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(Unaudited)
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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 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 -
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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 -
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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 from the date
of purchase.
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Net income per unit
on the cash basis -
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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
January 31, 2006 and 2005, there were 9,184,026 and 8,933,316 units
of beneficial interest outstanding, respectively.
(2) Formation of the Trust:
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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, 2005, 726,611 Trust
units were issued in exchange for Corporate or Company shares and
dividends of $357,035 and distributions of $4,472,371 were paid to
former unlocated Corporation and Company shareholders. For the three
month period ended January 31, 2006, there were 3,150 units issued in
exchanges and $1,769 in dividends and $146,328 in distributions were
paid to formerly unlocated Corporation shareholders under a claim begun
before July 1, 2005 and conditionally approved by the Trustees subject
to the successful submission of the required documentation.
As of January 31, 2006, there are a total of 6,564 units that remain
unclaimed and will be subject to escheat to various states prior to
the end of fiscal 2006. Under the Chancery Court Order, no payment
of arrearages will be made for such units.
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(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 first
quarter of fiscal 2006 the Trust reimbursed the Managing Director a
total of $6,760 for such office space and office services.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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Executive Summary
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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 ExxonMobil Corp. and the
Royal Dutch/Shell Group of Companies, pay monthly royalties to the Trust
based on their sales of natural gas, sulfur and oil. The Oldenburg concession
is the primary area from which these products are extracted and provides
nearly 100% of all the royalties received by the Trust. 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.
The gas that is produced by the operating companies from the
Oldenburg concession is sold to various distributors under long term
contracts which delineate, among other provisions, the timing, manner, volume
and price of the gas sold. 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. 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 in Germany is 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
-7-
translated into changes in the price of gas. 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. This lower price would likely impact the price of gas after the three
to six month delay and possibly result in 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 and through it the price of gas.
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.
As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all the funds on hand after provision is
made for Trust expenses then anticipated. As permitted by the Trust
Agreement, no provision is made for the retention of reserve funds of any
kind. If funds are required for payments to owners of units not previously
presented for issuance, quarterly distributions would be reduced to the
extent required to provide funds for such payments.
Results of Operations
- ---------------------
Net Trust income for the first quarter of fiscal 2006 was
$7,944,609 as compared to $4,835,114 for the first quarter of fiscal 2005.
This level of income permitted a distribution of 85 cents per unit which was
paid on February 22, 2006 to owners of record as of February 10, 2006.
Gross royalty income of $8,184,669 for the quarter ended January 31, 2006
increased by 58.7% from gross royalty income of $5,154,811 received during
last year's equivalent period. This royalty income was based on sales of
gas, oil and sulfur from the Trust's overriding royalty areas in Germany
during the fourth calendar quarter of 2005.
In comparison to the first quarter of fiscal 2005, the combination
of higher gas prices and higher volumes of gas sales more than offset the
impact of the lower average exchange rates and boosted both the level of
royalty income and the subsequent distribution. The increase in average
prices of gas sold from the Oldenburg concession was the primary factor
behind the increase in royalty income. For the quarter just ended the
average price of gas sold under the higher royalty rate agreement increased
57.2% from 1.3010 Euro cents/Kwh ("Ecents/Kwh") to 2.0456 Ecents/Kwh. For
the same period, the average price of gas sold under the lower royalty rate
agreement increased 49.9% from 1.4169 Ecents/Kwh to 2.1240 Ecents/Kwh.
-8-
Based on the conversion and transfer of all the royalties during the quarter,
the average value of the Euro was $1.1936 down 9.7% from the average value
of $1.3213 for the first quarter of fiscal 2005. If we apply this weighted
average value to the average price of gas during the quarter just ended, we
can convert the average gas prices into more familiar terms. For the first
quarter of fiscal 2006 the average gas prices for gas sold under both the
higher and lower royalty rate agreements were $7.02/Mcf and $7.23/Mcf
respectively. The corresponding prices for the first quarter of fiscal 2005
were $4.94/Mcf and $5.23/Mcf respectively.
For the quarter just ended, gas sales under the higher royalty rate
agreement covering western Oldenburg increased by 12.7% from 17.33 billion
cubic feet ("Bcf") to 19.54 Bcf compared to the first quarter of fiscal 2005.
In a corresponding comparison, overall gas sales throughout the Oldenburg
concession covered under the lower royalty rate agreement increased by 8.3%
from 44.21 Bcf to 47.88 Bcf.
Trust expenses for the first quarter of fiscal 2006 were $262,093,
a decrease of $62,924 or 19.4% from the prior year. A combination of lower
costs for legal services and reduced consulting fees from Germany accounted
for the majority of the reduction in expenses. In addition, the annual
listing fee for the New York Stock Exchange was not received and consequently
not paid until after the end of the first quarter of fiscal 2006, but had
been received and paid during the first quarter of fiscal 2005
Interest income increased, reflecting both the expanded funds
available for investment and the higher interest rates on those funds.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at January 31, 2006 compared to that at fiscal year end
(October 31, 2005) shows an increase in assets due to higher royalty receipts
during the quarter.
-----------------------------------
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 prices, general economic conditions and currency
exchange rates. Actual results and events may vary significantly from those
discussed in the forward looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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The Trust does not engage in any trading activities with respect
to possible foreign exchange fluctuations. The Trust does not use any
financial instruments to hedge against possible risks related to foreign
exchange fluctuations. The market risk is negligible because standing
instructions at its German bank require the bank to process conversions and
transfers of royalty payments as soon as possible following their receipt.
-9-
The Trust does not engage in any trading activities with respect to possible
commodity price fluctuations.
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 first quarter of fiscal 2005 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
Part II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
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(a) The Annual Meeting of Unit Owners was held on February 9, 2006.
(b) The following persons were elected as Trustees of the Trust to
serve until the 2006 Annual Meeting of Unit Owners:
Robert P. Adelman (7,858,650 votes for; 141,338 withheld)
Samuel M. Eisenstat (7,875,862 votes for; 124,126 withheld)
Willard B. Taylor (7,862,778 votes for; 137,210 withheld)
John H. Van Kirk (7,631,992 votes for; 367,996 withheld)
Rosalie J. Wolf (7,867,681 votes for; 132,307 withheld)
Item 5. Other Information.
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None.
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Item 6. Exhibits.
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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 hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: February 28, 2006