SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 1999 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2084119
----------------------- --------------------------
(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
-------------------------------------------------------------
(Address of principal executive offices)
(732) 741-4008
----------------------------------------------------
(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
Class Outstanding at July 31, 1999
- ----- -------------------------------
Units of Beneficial Interest 8,696,616
ARTHUR ANDERSEN LLP
ACCOUNTANT'S REVIEW REPORT
----------------------------
To North European Oil Royalty Trust:
We have reviewed the accompanying statements of assets, liabilities and trust
corpus of North European Oil Royalty Trust (the "Trust") as of July 31, 1999
and the related statements of income and expenses on a cash basis for the
three months and nine months ended July 31, 1999 and 1998, and the related
statements of changes in cash and cash equivalents and undistributed earnings
for the three and nine months ended July 31, 1999 and 1998. These financial
statements are the responsibility of the Trust's management.
The statement of assets, liabilities and trust corpus as of October 31, 1998
of the Trust was maintained on the cash basis rather than the accrual basis of
accounting and was audited by us. Our report dated November 9, 1998 indicates
the statement did not purport to present, and in our opinion did not present,
financial position and results of operations in conformity with generally
accepted accounting principles which require the use of the accrual basis of
accounting. We have not performed any auditing procedures since that date.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
The accounts of the Trust are maintained on a cash basis of accounting under
which income is not recorded until collected instead of when earned, and
expenses are recorded when paid instead of when incurred. Thus, the
accompanying financial statements are not intended to present financial
position and results of operations in conformity with generally accepted
accounting principles which require the use of the accrual basis of accounting
(see Note 1).
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with the cash basis of accounting.
As discussed in Note 3, the Trust has a contingent liability relating to
unclaimed units and distributions. No reserves are established or reflected
in the financial statements for the possibility that funds would be required
to satisfy such claims.
/s/ Arthur Andersen LLP
-------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
August 11, 1999
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
----------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 1998
-------------------------------------------------
1999 1998
----------------- -----------------
(unaudited)
German gas, oil and sulfur
royalties received $ 2,318,688 $ 3,750,200
----------- -----------
Interest income 17,719 26,471
----------- -----------
Trust expenses ( 115,018) ( 118,540)
----------- -----------
Net income on a cash basis $ 2,221,389 $ 3,658,131
=========== ===========
Net income per unit on a cash basis $ .25 $ .42
====== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .00
Distributions per unit to be paid to
unit owners $ .25 $ .42
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
JULY 31, 1999 AND OCTOBER 31, 1998
----------------------------------
1999 1998
----------------- -----------------
(unaudited) (audited)
Current assets - - Cash and
cash equivalents (Note 1) $ 2,259,216 $ 2,765,901
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
$ 2,259,217 $ 2,765,902
Current liabilities - - Cash distributions
payable to unit owners $ 2,174,154 $ 2,695,903
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 85,062 69,998
----------- -----------
$ 2,259,217 $ 2,765,902
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
------------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
--------------------------------------------------
1999 1998
----------------- -----------------
(unaudited)
German gas, oil and sulfur
royalties received $ 8,324,058 $11,043,226
----------- -----------
Interest income 55,214 73,698
----------- -----------
Trust expenses ( 445,995) ( 433,944)
----------- -----------
Net income on a cash basis $ 7,933,277 $10,682,980
=========== ===========
Net income per unit on a cash basis $0.91 $1.23
===== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .00
Distributions per unit to be paid
to unit owners $0.91 $1.23
===== ======
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
------------------------------------------------
1999 1998
----------------- -----------------
(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur
royalties $ 8,324,058 $11,043,226
Interest income 55,214 73,698
Reimbursement for prior payment
of past dividends and distributions 1,017 0
----------- -----------
8,380,289 11,116,924
----------- -----------
Uses of cash and cash equivalents:
Payment of Trust expenses 445,995 433,944
Distributions and dividends paid
(Note 3) 8,440,979 10,000,894
----------- -----------
8,886,974 10,434,838
----------- -----------
Net increase(decrease) in cash and
cash equivalents during the period ( 506,685) 682,086
Cash and cash equivalents,
beginning of period 2,765,901 3,024,317
----------- -----------
Cash and cash equivalents,
end of period $ 2,259,216 $ 3,706,403
=========== ===========
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
------------------------------------------------
1999 1998
----------------- -----------------
(unaudited)
Balance, beginning of period $ 69,998 $ 67,531
Reimbursement for prior payment
of past dividends and distributions 1,017 0
Net income on a cash basis 7,933,277 10,682,980
----------- -----------
8,004,292 10,750,511
----------- -----------
Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 5,309 0
Current year distributions paid or
to be paid to unit owners (Note 3) 7,913,921 10,696,609
----------- -----------
7,919,230 10,696,609
----------- -----------
Balance, end of period $ 85,062 $ 53,902
=========== ===========
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
(1) Summary of significant
accounting policies:
----------------------
Basis of accounting -
-------------------
The accounts of North European Oil Royalty Trust (the "Trust") are
maintained on a cash basis of accounting except for 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
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 and state income taxes -
------------------------------
The Trust, as a grantor trust, is exempt from Federal and state income
taxes under a private letter ruling issued by the Internal Revenue
Service.
Cash and cash equivalents -
-------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with maturities of three months or less.
Net income per unit
on the cash basis -
-------------------
Net income per unit on the cash basis is based upon the number of units
outstanding at the end of the period (see Note 3). As of July 31, 1999
and 1998, there were 8,696,616 and 8,696,430 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.
(3) Contingent liability:
---------------------
The Trust serves as fiduciary for certain unlocated or unknown
shareholders of North European Oil Corporation (the "Corporation") or of
North European Oil Company, corporate predecessors of the Trust. From the
liquidation of the Company to October 31, 1998, 721,148 units were issued
in exchange for Corporate and Company shares and dividends of $354,028
and distributions of $4,229,149 were paid to former unlocated Corporation
and Company shareholders. For the nine-month period ended July 31, 1999,
there were 156 units issued in exchanges and $73 dividends and $5,320 in
distributions were paid to former unlocated Corporation and Company
shareholders.
On February 26, 1996 the settlement of litigation between the Trust and
the Delaware State Escheator was approved by the Delaware Court of
Chancery. As of that date, there were a total of 875,748 authorized but
unissued units representing the unexchanged shares of the Trust's
predecessor corporations. Out of this total, 760,560 units were subject
to the settlement. Under the settlement, 380,280 units were issued to the
Escheator on April 17, 1996. Of the units remaining to be issued to the
Escheator, 50% would be issued to the Escheator by June 30, 2000 and the
balance by June 30, 2005. Until June 30, 2000, claims by unlocated or
unknown shareholders of the Trust's corporate predecessors for units and
past dividends and distributions thereon ("subsequent claims") will be
paid by the Escheator and the Trust on a 50:50 basis. From July 1, 2000
to June 30, 2005, subsequent claims will be paid by the Escheator and the
Trust on a 75:25 basis. Any subsequent claims will reduce the number of
units to be issued to the Escheator in 2000 or 2005. Following the final
issuance of units to the Escheator in 2005, the Trust's contingent
liability for past dividends and distributions attributable to all
unexchanged Corporation and Company shares subject to the settlement will
be completely eliminated. Under the terms of the settlement, the maximum
liability of the Escheator for subsequent claims is limited to the value
of the units received, plus current distributions on units retained, less
the Escheator's share of subsequent claims. As of the receipt of the
August, 1999 distribution, the maximum liability of the Escheator will be
$6,576,330.
Under the Trust Agreement as deemed amended by the February 26, 1996
Delaware Court Order, the Trust is not required to make payments of
arrearages of Company dividends or Trust distributions with respect to
units issued or to be issued to the Escheator. As of July 31, 1999,
there remained a total of 493,974 units that could be issued to unlocated
or unknown Corporation and Company shareholders. Of this total, 380,250
units are subject to the settlement and remain to be issued to the
Escheator. If all shares, represented by the units already issued as
well as the units remaining to be issued, were presented for exchange,
$487,023 in dividends and $28,390,041 in distributions would be payable.
In the opinion of the Trustees, based in part on the history of exchanges
during the last ten fiscal years, the maximum liability of the Escheator
would be adequate to cover the Escheator's share of any subsequent
claims. In any event, the Trust's contingent liability for such claims
will be eliminated in 2005.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
The Trust is a passive investment trust which holds overriding royalty
rights and receives monthly royalties from the operating companies,
subsidiaries of Mobil, Exxon and the Royal Dutch Group, based on their sales
of gas, sulfur and oil. These royalties are paid in Deutsche marks and are
converted into U.S. dollars at the time of their receipt. The Trust does not
engage in any business activities and has no need of funds beyond the funds
available from monthly royalties to cover operating expenses. Accordingly,
neither liquidity nor capital resources are pertinent factors in its
activities or operations. All percentage comparisons, except where otherwise
noted, in the following discussion and analysis refer to the prior year's
comparable period.
For the nine month fiscal period ended July 31, 1999, net income of the
Trust decreased 25.7% from $10,682,980 to $7,933,277. Net income of the Trust
for the third fiscal quarter ended July 31, 1999 decreased by 39.3% from
$3,658,131 to $2,318,688. A combination of lower gas prices, a weak Euro and
lower gas sales from the higher royalty area of western Oldenburg resulted in
the reduced royalties paid to the Trust and the subsequent distribution.
Of these three negative factors the most significant was lower gas
prices. In the Oldenburg concession the Trust has an overriding royalty of
0.6667% covering gas sales throughout the concession. Under this royalty gas
prices declined 33.6% to an average of 1.2610 Pfennigs per Kwh ("Pf/Kwh"). In
the area of western Oldenburg, where the Trust has a second overriding royalty
of 4%, average gas prices for the quarter just ended declined 26.5% to 1.3227
Pf/Kwh. Converting these prices into more familiar terms based on the
applicable exchange rates yields prices of $1.88 and $2.02 for the lower and
higher royalty areas respectively.
The Euro continued to remain under pressure reaching its all time low of
$1.0148 late in the quarter. Since that point the Euro has recovered somewhat
and this recovery has continued into the Trust's fourth fiscal quarter. The
average value for the Euro for the quarter just ended was $1.0456, a decline
of 4.5% from last year's equivalent exchange rate.
While overall gas sales increased 5.1% to 48.8 Billion cubic feet
("Bcf"), gas sales from western Oldenburg declined 11% to 22.6 Bcf. Western
Oldenburg gas sales accounted for 46.4% of total sales as compared to 54.8% in
the prior year. This decline is significant because the combined royalty in
effect in western Oldenburg yields a royalty payment approximately seven times
higher on an equivalent amount of gas sold in eastern Oldenburg.
Interest income was lower due to reduced funds available for investment.
Trust expenses were down slightly from the prior year's period primarily due
to lower Trustees' fees.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 1999, compared to that at fiscal year end (October 31,
1998), shows a decrease in assets due to lower royalty receipts during the
quarter.
The Trust distribution for the third quarter of fiscal 1999 is $0.25, a
decrease of 40.5% from last year's distribution of $0.42. Cumulative
distributions for the nine month fiscal period are $0.91 compared to $1.23
for the prior year's period.
As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all the funds on hand after provision is
made for Trust expenses then anticipated. As permitted by the Trust
Agreement, no provision is made for the retention of reserve funds of any
kind. If funds were to be required for payments to owners for shares of the
Trust's predecessor corporations not previously presented for exchange into
Trust units, quarterly distributions would be reduced to the extent required
to provide funds for such payments.
The Trust has conducted an internal review of its readiness for
Year 2000 ("Y2K") computer compliance issues and has communicated with its
principal business relationships concerning their respective Y2K computer
readiness as well. Based on this review and the inquiries to third parties,
management of the Trust believes that its level of readiness will be
adequate in a timely manner and will not adversely impact on the continued
ability of the Trust to manage its affairs.
The Trust's internal technology system is limited to stand-alone
personal computers. They have been examined with respect to hardware and
software issues and are already compliant, at a direct cost to the Trust of
$3,000.
Inquiries have also been made to the principal third parties with which
the Trust's business is conducted. These include BEB and Mobil, the German
operating companies; The Bank of New York and Deutsche Bank, the Trust's
principal banks and Registrar and Transfer Co., the Trust's transfer agent.
These third party entities have confirmed that they have in place
substantial management personnel devoted to the Y2K compliance requirements
and have instituted comprehensive testing and remediation programs to
complete necessary compliance efforts in a timely manner. BEB, Mobil and
The Bank of New York have confirmed that their mission critical systems are
Y2K compliant and that they anticipate the completion of the remediation and
testing of the remaining systems in the near future. As of June 30, 1999
the Deutsche Bank has updated 100% of its IT systems with 94% confirmed
through testing. Registrar and Transfer Company has confirmed that its
systems are Y2K compliant.
The Trust has not made any direct inquiries to vendors to the operating
companies or to other parties with important relationships with the operating
companies and has relied on their compliance review programs for that
purpose. These are reported to be in place to effect timely compliance in a
manner which will avoid any disruption of the activities of the operating
companies, but the Trust has no direct information concerning such other
parties.
To the extent that the Trust relies on statistical and other information
and analysis from its consultant in Germany and its consulting organization,
Davis Associates, the Trust has been advised that computer software and
hardware review and remediation has been completed to assure Y2K compliance.
No costs to the Trust are anticipated in connection with these matters.
Part II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: September 8, 1999