10-Q 1 tenq3q05.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, 2005 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ . Commission file number 1-8245 NORTH EUROPEAN OIL ROYALTY TRUST ------------------------------------------------------ (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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No Class Outstanding at July 31, 2005 ---------------------------- ------------------------------ Units of Beneficial Interest 9,168,192 -2- PART I -- FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements. -------------------- STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1) ----------------------------------------------------------- FOR THE THREE MONTHS ENDED JULY 31, 2005 AND 2004 ------------------------------------------------- 2005 2004 ----------------- ---------------- (unaudited) German gas, oil and sulfur royalties received $ 5,419,524 $ 3,506,720 ----------- ----------- Interest income 20,056 5,250 ----------- ----------- Trust expenses ( 219,905) ( 160,069) ----------- ----------- Net income on a cash basis $ 5,219,675 $ 3,351,901 =========== =========== Net income per unit on a cash basis $ .57 $ .38 ====== ====== Cash distributions paid or to be paid: Dividends and distributions per unit paid to formerly unlocated shareholders .00 .01 Distributions per unit to be paid to unit owners $ .57 $ .37 ====== ====== STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- JULY 31, 2005 AND OCTOBER 31, 2004 ---------------------------------- 2005 2004 ----------------- ---------------- (unaudited) Current assets - - Cash and cash equivalents (Note 1) $ 5,262,281 $ 3,014,386 Producing gas and oil royalty rights, net of amortization (Notes 1 and 2) 1 1 ----------- ----------- Total Assets $ 5,262,282 $ 3,014,387 =========== =========== Current liabilities - - Cash distributions payable to unit owners $ 5,225,869 $ 2,947,992 Contingent liability (Note 3) Trust corpus (Notes 1 and 2) 1 1 Undistributed earnings 36,412 66,394 ----------- ----------- Total Liabilities and Trust Corpus $ 5,262,282 $ 3,014,387 =========== =========== The notes to financial statements should be read in conjunction with these statements. -3- STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1) ------------------------------------------------------------ FOR THE NINE MONTHS ENDED JULY 31, 2005 AND 2004 -------------------------------------------------- 2005 2004 ----------------- ----------------- (unaudited) German gas, oil and sulfur royalties received $16,906,627 $11,942,458 ----------- ----------- Interest income 35,874 16,597 ----------- ----------- Trust expenses ( 750,317) ( 614,352) ----------- ----------- Net income on a cash basis $16,192,184 $11,344,703 =========== =========== Net income per unit on a cash basis $1.77 $1.27 ===== ===== Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders .00 .01 Distributions per unit to be paid to unit owners $1.80 $1.26 ===== ===== The notes to financial statements should be read in conjunction with these statements. -4- STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE NINE MONTHS ENDED JULY 31, 2005 AND 2004 ------------------------------------------------ 2005 2004 ----------------- --------------- (unaudited) Sources of cash and cash equivalents: German gas, oil and sulfur royalties $16,906,627 $11,942,458 Interest income 35,874 16,597 ----------- ----------- 16,942,501 11,959,055 ----------- ----------- Uses of cash and cash equivalents: Payment of Trust expenses 750,317 614,352 Distributions and dividends paid (Note 3) 13,944,289 12,051,719 ----------- ----------- 14,694,606 12,666,071 ----------- ----------- Net increase(decrease) in cash and cash equivalents during the period 2,247,895 ( 707,016) Cash and cash equivalents, beginning of period 3,014,386 4,063,766 ----------- ----------- Cash and cash equivalents, end of period $ 5,262,281 $ 3,356,750 =========== =========== STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE NINE MONTHS ENDED JULY 31, 2005 AND 2004 ------------------------------------------------ 2005 2004 ----------------- ---------------- (unaudited) Balance, beginning of period $ 66,394 $ 44,630 Net income on a cash basis 16,192,184 11,344,703 ----------- ----------- 16,258,578 11,389,333 ----------- ----------- Less: Dividends and distributions paid to formerly unlocated shareholders (Note 3) 8,116 83,605 Current year distributions paid or to be paid to unit owners (Note 3) 16,214,050 11,254,303 ----------- ----------- 16,222,166 11,337,908 ----------- ----------- Balance, end of period $ 36,412 $ 51,425 =========== =========== The notes to financial statements should be read in conjunction with these statements. -5- NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (1) Summary of significant accounting policies: ---------------------- Basis of Accounting - ------------------- The accompanying financial statements of North European Oil Royalty Trust (the "Trust") present financial statement balances and financial results on a cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States ("GAAP basis"). Cash basis financial statements report income when cash is received and expenses when cash is paid. GAAP basis financial statements report income as earned and expenses as incurred, without regard to receipts or payments. The sole exception to the use of the cash basis of accounting is the accrual for distributions to be paid to unit owners (those distributions approved by the Trustees for the Trust). The Trust's distributable income represents royalty income received by the Trust during the period plus interest income less any expenses incurred by the Trust, all on a cash basis. In the opinion of the Trustees, the use of the cash basis provides a more meaningful presentation to unit owners of the results of operations of the Trust. Producing gas and oil royalty rights - --------------------- The rights to certain gas and oil royalties in Germany were transferred to the Trust at its inception by North European Oil Company (the "Company") (see Note 2). At that time the net book value of the royalty rights was $1,640,060. By 1992, as a result of the intervening amortization, the net book value of the royalty rights had been reduced to such a level that the net book value bore no meaningful relationship to the fair market value of such rights or the actual amount of proved producing reserves. At that time it was determined that the remaining net book value of royalty rights was de minimis and after a final amortization would henceforth be carried on the books of the Trust at a nominal value of $1. Federal income taxes - -------------------- The Trust, as a grantor trust, is exempt from Federal income taxes under a private letter ruling issued by the Internal Revenue Service. Cash and cash equivalents - ------------------------- Included in cash and cash equivalents are amounts deposited in bank accounts and amounts invested in certificates of deposit and U. S. Treasury bills with maturities of three months or less. -6- Net income per unit on the cash basis - ------------------- Net income per unit on the cash basis is based upon the number of units outstanding at the end of the period (see Note 3). As of July 31, 2005 and 2004, there were 9,168,192 and 8,933,310 units of beneficial interest outstanding respectively. (2) Formation of the Trust: ----------------------- The Trust was formed on September 10, 1975. As of September 30, 1975, the Company was liquidated and the remaining assets and liabilities of the Company, including its royalty rights, were transferred to the Trust. The Trust on behalf of the owners of beneficial interest in the Trust holds overriding royalty rights covering gas and oil production in certain concessions or leases in the Federal Republic of Germany. These rights are held under contracts with local German exploration and development subsidiaries of ExxonMobil Corp. and the Royal Dutch/Shell Group of Companies. Under these contracts, the Trust receives various percentage royalties on the proceeds of the sales of certain products from the areas involved. At the present time, royalties are received for sales of gas well gas, oil well gas, crude oil, distillate and sulfur. (3) Contingent liability: --------------------- Since its inception in 1975, the Trust has served as fiduciary for certain unlocated or unknown shareholders of North European Oil Corporation (the "Corporation") and North European Oil Company, corporate predecessors of the Trust. Pursuant to an order of the Delaware Court of Chancery dated February 26, 1996 (the "Chancery Court Order"), from and after July 1, 2005, the Trust has no further obligation to make payments of dividends or distributions attributable to any unexchanged Corporate and Company shares. From the liquidation of the Company to October 31, 2004, 723,260 Trust units were issued in exchange for Corporate and Company shares and dividends of $354,101 and distributions of $4,236,544 were paid to formerly unlocated Corporation and Company shareholders. For the nine-month period ended July 31, 2005, 201 units of beneficial interest were issued in exchanges and $100 in dividends and $8,281 in distributions were paid to formerly unlocated Corporation and Company shareholders. There is one claim pending and in process that was instituted prior to the June 30, 2005 expiration date specified in the Chancery Court Order, which, if satisfactorily documented, would require the issuance of an additional 6,300 Trust units and the payment of approximately $293,500 in dividend and distribution arrearages when resolved at a future date. Pursuant to the Chancery Court Order, the Trust had previously entered into agreements with the Delaware State Escheator and with the New York Administrator of Unclaimed Property. Pursuant to this Order and prior to June 30, 2005, the Trust made a final issuance of 190,116 and 44,565 Trust units to the states of Delaware and New York, respectively. As of July 31, 2005, there remained a total of 22,398 units (including the 6,300 units for the application in process) that remain unclaimed and will be subject to escheat to various states -7- prior to April 30, 2006. Under the Chancery Court Order, no payment of arrearages will be made for such units. (4) Related party transactions: --------------------------- John R. Van Kirk, the Managing Director of the Trust, provides office space and office services to the Trust at cost. During the third quarter of fiscal 2005 the Trust reimbursed him a total of $6,860 for such office space and office services. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ------------------------------------------------- The Trust is a passive fixed investment trust which holds overriding royalty rights, receives income under those rights from certain operating companies, pays its expenses and distributes the remaining net funds to its unit owners. The Trust does not engage in any business or extractive operations of any kind in the areas over which it holds royalty rights and is precluded from any such involvement by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust. Seasonal demand factors affect the income from royalty rights insofar as they relate to energy demands and increases or decreases in prices, but on average they are not material to the regular annual income received under the royalty rights. The operating companies, subsidiaries of Exxon Mobil Corp. and the Royal Dutch/Shell Group of Companies, pay monthly royalties to the Trust based on their sales of natural gas, sulfur and oil. The Oldenburg concession is the primary area from which these products are extracted and provides nearly 100% of all the royalties received by the Trust. Natural gas provides approximately 98% of the total royalties. Within the Oldenburg concession there are two overriding royalty rates in effect on sales of natural gas. The Trust receives a 4% royalty from the western portion of the concession. The Trust also receives a 0.6667% royalty (adjusted to account for an agreed portion of costs), which covers the entire concession. The royalties are initially paid in Euros and are converted into U.S. dollars at the then current Euro/dollar exchange rate just prior to their transfer from Germany. Although the Trust itself does not have access to the specific sales contracts under which the Oldenburg gas is sold, a third party contractor, retained by the Trust, examines these contracts periodically. The contractor informed the Trust that these contracts contain pricing mechanisms which use a number of factors with varying time delays to price the gas being sold. For the Trust there are two elements of these contracts that are significant. The first element is the utilization of the price of light heating oil in Germany as the primary pricing factor in many of these contracts. The price of light heating oil is in turn affected by the price of oil expressed in dollars on the international market. The second element is a three to six month delay before changes in pricing factors are translated into changes in the price of gas. For the third quarter of fiscal 2005, net Trust income increased by 55.7% to $5,219,675, which permitted a distribution of 57 cents per unit compared to the distribution of 37 cents for the prior year's period. The current distribution is being paid on August 31, 2005 to holders of record as of August 12, 2005. The amount of the distribution per unit was affected by an increase in the number of units outstanding. This increase in units outstanding, a 2.6% dilution, resulted from the final distribution of 234,681 Trust units to the States of Delaware and New York prior to June 30, 2005. This distribution continued the implementation of the February 26, 1996 Chancery Court Order concerning previously unlocated holders of shares of the Trust's predecessor corporations. Pursuant to the Chancery Court Order and as of June 30, 2005, the Trust has no further responsibility to make payments of dividends or distributions attributable to unexchanged Corporation or Company shares. There is one claim, instituted prior to the June 30, 2005 -9- expiration date, that continues to be processed. If successfully concluded, this claim would require the issuance of 6,300 Trust units and the payment of approximately $293,500 in dividend and distribution arrearages. Including these 6,300 units, there remain 22,398 units that could be issued to unlocated or unknown Corporation and Company shareholders. If these units remain unclaimed, the final units will be escheated in April 2006 as part of the Trust's ongoing escheat efforts. For the nine month fiscal period, net Trust income was $16,192,184, an increase of 42.7% from the prior year's period. Cumulative distributions for the nine month period are $1.80 per unit compared to $1.26 paid during the same period last year. Due to the effect caused by the dilution, net income per unit increased from $1.27 to $1.77. This income was primarily derived from royalties paid on sales of gas, sulfur and oil from the Trust's overriding royalty areas in Germany during the fourth calendar quarter of 2004 through the second calendar quarter of 2005. The primary factors affecting royalty revenue for the quarter just ended were the increase in gas sales and prices under both the higher royalty rate agreement covering western Oldenburg and the lower royalty rate agreement covering the entire Oldenburg concession. The increase in the average dollar value of the Euro based on total royalty transfers over the prior year was minor. All comparisons, unless otherwise noted, are to the prior year's equivalent period. The higher royalty rate agreement between the Trust and the German subsidiary of ExxonMobil covers western Oldenburg and provides the Trust with the bulk of its royalties. Under this agreement average gas prices for the quarter increased 30.7% from the equivalent quarter for the prior year. Gas prices increased from 1.1276 Euro cents per Kilowatt hour ("Ecents/Kwh") to 1.4738 Ecents/Kwh. When we convert this quarter's price into more familiar terms using the average exchange rate for the quarter, the average price for gas sold under this agreement was $5.18 per Mcf compared to $3.90 per Mcf. This represents a 32.7% increase from the prior year. The lower royalty rate agreement between the Trust and BEB, a joint venture between ExxonMobil and the Royal Dutch/Shell Group of Companies, covers gas sales from the entire Oldenburg concession. Under this agreement average gas prices for the quarter increased 28.3% from the equivalent quarter for the prior year. Gas prices rose from 1.1858 Ecents/Kwh to 1.5216 Ecents/Kwh compared to the prior year. When we convert this quarter's price into more familiar terms using the average exchange rate for the quarter, the average price for gas sold under this agreement was $5.25 per Mcf. This represents a 30.2% increase from the prior year. During the quarter just ended, overall Oldenburg gas sales increased by 8.7% from 38.56 billion cubic feet ("Bcf") to 41.91 Bcf. Gas sales from the higher royalty rate area of western Oldenburg increased 20.9% from 15.16 Bcf to 18.33 Bcf. At this level, gas sales from western Oldenburg accounted for 43.7% of total Oldenburg gas sales. So far during fiscal 2005 the Euro has shown a steady decline from its high during the first quarter with the most significant fall-off occurring in the third quarter. For the quarter just ended the average value for the Euro based on all royalties transferred to the United States was $1.2259. This average value was 7.2% lower than the average value of $1.3213 posted in the first quarter of fiscal 2005. The lower value of the Euro has the immediate impact of decreasing the amount of dollars received at the time of the transfer of royalties from Germany. However, because of the use of -10- light heating oil as a pricing factor in the gas sales contracts, the lower value of the Euro also works to increase the price of gas within Germany by making imported oil prices in dollars more expensive. If we exclude the effects of differences in prices and average exchange rates, the combination of royalty rates on gas sold from western Oldenburg results in an effective royalty rate approximately seven times higher than the royalty rate on gas sold from eastern Oldenburg. This is of particular significance to the Trust since gas sold from western Oldenburg provides the bulk of royalties paid to the Trust. For the quarter just ended gas sales from western Oldenburg accounted for only 43.7% of all gas sales. However, royalties on these gas sales provided 84.8% or $3,745,146 out of a total of $4,414,543 in Oldenburg royalties. Interest income for the third quarter and the nine month period was higher due to both increased funds available for investment and slowly rising interest rates. Trust expenses for the third quarter increased by 37.4% from the prior year. The increased expenses were due to the addition of expenses incurred in the biannual examination of the operating companies in Germany, higher legal fees and higher Trustees' fees (calculated under the formula specified in the Trust Agreement). For the nine month period Trust expenses increased by 22.1% from the prior year. The current Statement of Assets, Liabilities and Trust Corpus of the Trust at July 31, 2005, compared to that at fiscal year end (October 31, 2004), shows an increase in assets due to the higher royalty receipts during the quarter. As mandated by the Trust Agreement, distributions of income are made on a quarterly basis. These distributions, as determined by the Trustees, constitute substantially all the funds on hand after provision is made for Trust expenses then anticipated. Under the Trust Agreement, no provision is made for the retention of reserve funds of any kind. With respect to the one claim still being processed, if funds are subsequently required for payment to that claimant based upon the dividends and distributions attributable to their unexchanged shares of the Trust's predecessor corporation, quarterly distributions would be reduced to the extent required to provide funds for such payment. ----------------------------------- This report on Form 10-Q contains forward looking statements concerning business, financial performance and financial condition of the Trust. Many of these statements are based on information provided to the Trust by the operating companies or by consultants using public information sources. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward looking statements. These include uncertainties concerning levels of gas production and gas sale prices, general economic conditions and currency exchange rates. Actual results and events may vary significantly from those discussed in the forward looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. ---------------------------------------------------------- The Trust does not engage in any trading activities with respect to possible foreign exchange fluctuations. The Trust does not use any financial -11- instruments to hedge against possible risks related to foreign exchange fluctuations. The market risk is negligible because standing instructions at its German bank require the bank to process transfers of royalty payments as soon as possible following their receipt. Item 4. Controls and Procedures. ----------------------- As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Trust's management, which consists of the Managing Trustee and the Managing Director, of the effectiveness of the design and operation of the Trust's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Managing Trustee and the Managing Director concluded that the Trust's disclosure controls and procedures were effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission's rules and forms, of information required to be disclosed by the Trust's management in the reports that are filed or submitted under the Exchange Act. There have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that occurred during the third quarter of fiscal 2005 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. -12- Part II -- OTHER INFORMATION ---------------------------- Item 6. Exhibits. -------- (a) Exhibits. Exhibit 31.1. Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2. Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32. Certification of Chief Executive and Chief Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTH EUROPEAN OIL ROYALTY TRUST /s/ John R. Van Kirk --------------------------------- John R. Van Kirk Managing Director Dated: August 26, 2005