10-Q 1 0001.txt 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, 2000 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, 2000 ----- ------------------------------- Units of Beneficial Interest 8,886,804 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, 2000 and the related statements of income and expenses on a cash basis for the three and nine months ended July 31, 2000 and 1999, and the related statements of changes in cash and cash equivalents and undistributed earnings for the three and nine months ended July 31, 2000 and 1999. These financial statements are the responsibility of the Trust's management. The statement of assets, liabilities and trust corpus as of October 31, 1999 of the Trust was maintained on a cash basis rather than the accrual basis of accounting and was audited by us. Our report dated November 9, 1999 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 7, 2000 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, 2000 AND 1999 ------------------------------------------------- 2000 1999 --------------- --------------- (unaudited) German gas, oil and sulfur royalties received $ 3,966,769 $ 2,318,688 ----------- ----------- Interest income 30,304 17,719 ----------- ----------- Trust expenses ( 131,000) ( 115,018) ----------- ----------- Net income on a cash basis $ 3,866,073 $ 2,221,389 =========== =========== Net income per unit on a cash basis $ .43 $ .25 ====== ====== 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 $ .43 $ .25 ====== ====== STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- JULY 31, 2000 AND OCTOBER 31, 1999 ---------------------------------- 2000 1999 ----------------- ----------------- (unaudited) (audited) Current assets - - Cash and cash equivalents (Note 1) $ 3,873,151 $ 2,319,172 Producing gas and oil royalty rights, net of amortization (Notes 1 and 2) 1 1 ----------- ----------- $ 3,873,152 $ 2,319,173 Current liabilities - - Cash distributions payable to unit owners $ 3,821,326 $ 2,261,128 Contingent liability (Note 3) Trust corpus (Notes 1 and 2) 1 1 Undistributed earnings 51,825 58,044 ----------- ----------- $ 3,873,152 $ 2,319,173 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, 2000 AND 1999 -------------------------------------------------- 2000 1999 ----------------- ----------------- (unaudited) German gas, oil and sulfur royalties received $11,149,422 $ 8,324,058 ----------- ----------- Interest income 66,699 55,214 ----------- ----------- Trust expenses ( 442,630) ( 445,995) ----------- ----------- Net income on a cash basis $10,773,491 $ 7,933,277 =========== =========== Net income per unit on a cash basis $1.21 $0.91 ===== ====== 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 $1.23 $0.91 ===== ====== 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, 2000 AND 1999 ------------------------------------------------ 2000 1999 ----------------- ----------------- (unaudited) Sources of cash and cash equivalents: German gas, oil and sulfur royalties $11,149,422 $ 8,324,058 Interest income 66,699 55,214 Reimbursement for prior payment of past dividends and distributions 0 1,017 ----------- ----------- 11,216,121 8,380,289 ----------- ----------- Uses of cash and cash equivalents: Payment of Trust expenses 442,630 445,995 Distributions and dividends paid (Note 3) 9,219,512 8,440,979 ----------- ----------- 9,662,142 8,886,974 ----------- ----------- Net increase(decrease) in cash and cash equivalents during the period 1,553,979 ( 506,685) Cash and cash equivalents, beginning of period 2,319,172 2,765,901 ----------- ----------- Cash and cash equivalents, end of period $ 3,873,151 $ 2,259,216 =========== =========== STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999 ------------------------------------------------ 2000 1999 ----------------- ----------------- (unaudited) Balance, beginning of period $ 58,044 $ 69,998 Reimbursement for prior payment of past dividends and distributions 0 1,017 Net income on a cash basis 10,773,491 7,933,277 ----------- ----------- 10,831,535 8,004,292 ----------- ----------- Less: Dividends and distributions paid to former unlocated shareholders (Note 3) 1,043 5,309 Current year distributions paid or to be paid to unit owners (Note 3) 10,778,667 7,913,921 ----------- ----------- 10,779,710 7,919,230 ----------- ----------- Balance, end of period $ 51,825 $ 85,062 =========== =========== 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 with the exception of 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, 2000 and 1999, there were 8,886,804 and 8,696,616 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") and North European Oil Company, corporate predecessors of the Trust. From the liquidation of the Company to October 31, 1999, 721,334 units were issued in exchange for Corporate and Company shares and dividends of $354,101 and distributions of $4,235,501 were paid to former unlocated Corporation and Company shareholders. For the nine-month period ended July 31, 2000, there were 30 units issued in exchanges and $0 in dividends and $1,043 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 Trust units remaining to be issued to the Escheator, approximately 50% (190,128 units) have been issued to the Escheator as of June 30, 2000 and the remaining balance will be issued by June 30, 2005. Through June 30, 2000, claims by unlocated or unknown shareholders of the Trust's corporate predecessors for units and past dividends and distributions thereon ("subsequent claims") were paid by the 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 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, 2000 distribution, the maximum liability of the Escheator will be $10,193,154. 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, 2000, there remained a total of 303,786 units that could be issued to unlocated or unknown Corporation and Company shareholders. Of this total, 190,122 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 $29,042,147 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 Exxon Mobil Corp. and the Royal Dutch Group, based on their sales of natural gas, sulfur and oil. Of these three products, natural gas provides approximately 98% of the total royalties. There are two overriding royalty rates in effect on sales of natural gas within the Oldenburg concession, from which the Trust derives nearly all of its royalty income. 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 a partial representative portion of costs, which covers the entire concession. The royalties are initially paid in Deutsche marks, which are subsequently converted into Euros at a treaty mandated rate. Just prior to their transfer, the royalties, now denominated in Euros, are converted into U.S. dollars at the agreed upon Euro/dollar exchange rate. 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. Although the Trust itself does not have access to the specific sales contracts under which the Oldenburg gas is sold, these contracts are reviewed periodically by our auditors. They have informed the Trust that these contracts contain pricing mechanisms which use a number of factors with varying time delays to price the gas being sold. For the Trust there are two elements of these contracts that are very significant. The first element is the utilization of the price of light heating oil in Germany as the primary pricing factor in many of these contracts. The price of light heating oil is in turn affected by the price of oil on the international market. The second element is a three to six month delay before changes in pricing factors are translated into changes in the price of gas. For the nine month fiscal period ended July 31, 2000, net income of the Trust increased 35.8% from $7,933,277 to $10,773,491. Net income of the Trust for the third fiscal quarter ended July 31, 2000 increased by 74% from $2,221,389 to $3,866,073. A combination of higher gas prices under both royalty agreements and higher gas sales from the higher royalty rate area of western Oldenburg resulted in the increased royalties paid to the Trust and the subsequent higher distribution. Of these two positive factors the most significant was higher gas prices. Under the lower royalty rate covering the entire Oldenburg concession, average gas prices increased 100.9% from 0.6447 Euros per hundred kilowatt hours ("Euros/CKwh") to 1.2949 Euros/CKwh. Under the higher royalty rate covering western Oldenburg, average gas prices increased 67.7% from 0.6762 Euros/CKwh to 1.1340 Euros/CKwh. Converting these prices into more familiar terms based on the applicable exchange rates yields average prices of $3.40 and $2.99 per Mcf for the lower and higher royalty rate areas respectively. While overall gas sales declined by 6% to 45.9 Billion cubic feet ("Bcf"), gas sales from western Oldenburg increased 8.9% to 24.7 Bcf. Western Oldenburg gas sales accounted for 53.8% of total sales as compared to 46.4% in the prior year. This increase in sales 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. The Euro continued to remain under pressure throughout the quarter hovering in the low $0.90's, slightly above its historic low. The continued strength of the U.S. economy, recent interest rate increases by the Federal Reserve and low interest rates in Europe helped to sustain the Euro's low value. The average value for the Euro for the quarter just ended was $0.9304, a decline of 11% from last year's equivalent exchange rate. Interest income was higher due to both greater funds available for investment and higher interest rates. Trust expenses increased slightly from the prior year's period primarily due to higher Trustees' fees reflecting the higher level of royalty income. The current Statement of Assets, Liabilities and Trust Corpus of the Trust at July 31, 2000, compared to that at fiscal year end (October 31, 1999), shows an increase in assets due to higher royalty receipts during the quarter. The Trust distribution for the third quarter of fiscal 2000 is $0.43, an increase of 72% from last year's distribution of $0.25. Cumulative distributions for the nine month fiscal period are $1.23 compared to $0.91 for the prior year's period. With regard to the Y2K issue, there appear to have been no difficulties experienced by either the Trust or its principal third parties. 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. Part II -- OTHER INFORMATION ---------------------------- Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. None. (b) Reports on Form 8-K. A report on Form 8-K dated June 30, 2000 was filed with Securities and Exchange Commission reporting the completion of the second issuance of Trust units as specified by the terms of the February 1996 settlement between North European Oil Royalty Trust and the Delaware State Escheator. The Form 8-K included as its exhibit the press release dated June 30, 2000. 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: August 30, 2000