-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RNT1GqqUuEfNiE8ZOkz/45+7pZS30o0Gbwb/OHs74LgSlbzWHFfxvz6tkIYtOYWY Ljq3FD/HwG1ef1i/E3n82w== 0000072633-97-000002.txt : 19970116 0000072633-97-000002.hdr.sgml : 19970116 ACCESSION NUMBER: 0000072633-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970115 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH EUROPEAN OIL ROYALTY TRUST CENTRAL INDEX KEY: 0000072633 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 222084119 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08245 FILM NUMBER: 97505962 BUSINESS ADDRESS: STREET 1: P O BOX 456 STREET 2: 43 WEST FRONT STREET SUITE 19-A CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 9087414008 MAIL ADDRESS: STREET 1: P O BOX 456 STREET 2: 43 WEST FRONT STREET SUITE 19-A CITY: RED BANK STATE: NJ ZIP: 07701 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended October 31, 1996 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) (IRS Employer Identification Number) Suite 19A, 43 West Front Street, Red Bank, N.J. 07701 - ---------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: 908-741-4008 - --------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ---------------------------- ----------------------------------------- Units of Beneficial Interest New York Stock Exchange Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 31, 1996, 8,696,412 units of beneficial interest of the Registrant were outstanding, and the aggregate market value of outstanding units of beneficial interest of the Registrant, which may be voted, held by non-affiliates of the Registrant was approximately $111,177,846 on such date. (The Trustees and the Managing Director are the only persons deemed to be affiliates of the Registrant.) - 2 - Documents Incorporated by Reference ----------------------------------- Items 10, 11, 12 and 13 of Part III have been partially or wholly omitted from this report and the information required to be contained therein is incorporated by reference from the Registrant's definitive proxy statement, dated January 9, 1997, for the annual meeting to be held on February 12, 1997. - 3 - PART I Item 1. Business. --------- (a) General Development of Business. -------------------------------- Registrant (the "Trust") is a trust which, on behalf of the owners of beneficial interest in the Trust (called the "certificate holders" or "unit owners"), holds overriding royalty rights covering gas and oil production in certain concessions or leases in the Federal Republic of Germany. The rights are held under contracts with local German exploration and development subsidiaries of Mobil Corp., Exxon Corp., and Royal Dutch Group. Under these contracts, the Trust receives various percentage royalties on the proceeds of the sales of certain products from the areas involved. At the present time, royalties are received for sales of natural gas, casinghead gas, crude oil, distillate and sulfur. See Item 2 for descriptions of certain of these contracts. The royalty rights were received by the Trust from North European Oil Company (the "Company") upon dissolution of the Company in September, 1975. The Company was organized in 1957 as the successor to North European Oil Corporation (the "Corporation"). The Trust is administered by trustees (the "Trustees") under an Agreement of Trust dated September 10, 1975, amended May 13, 1976 and February 10, 1981 and as deemed amended pursuant to the Delaware Court of Chancery order dated February 26, 1996 (the "Trust Agreement"). Neither the Trust nor the Trustees on behalf of the Trust conduct any active business activities or operations. The sole permitted function of the Trustees is to monitor, verify, collect, hold, invest, and distribute the royalty payments made to the Trust. Under the Trust Agreement, the Trustees make quarterly distributions of the net funds received by the Trust on behalf of the unit owners. Funds temporarily held by the Trust are invested in interest bearing bank deposits, certificates of deposit, U.S. Treasury Bills or other government obligations. There has been no significant change in the principal operation or purpose of the Trust during the past fiscal year. (b) Financial Information about Industry Segments. ---------------------------------------------- The Trust conducts no active business operations, and analysis by industry segments is therefore not applicable to the Trust. To the extent that royalty income received by the Trust is attributable to sales of different products, to sales from different geographic areas or to sales by different operating companies the information is set forth in Item 2 of this Report and the Exhibit described in that Item 2. - 4 - (c) Narrative Description of Business. ---------------------------------- Under the Trust Agreement, the Trust conducts no active business operations and is restricted to collection of income from royalty rights and distribution to unit owners of the net income after payment of administrative and related expenses. The overriding royalty rights held by the Trust are derived from contracts and agreements originally entered into by German subsidiaries of the predecessor Corporation during the early 1930's. Some of these royalty rights are based on leases which have expired. However, the leases remain in effect as long as there is continued production or the lessor does not cancel the lease. Individual lessors will normally not seek termination of the rights originally granted because the leases provide for royalty payments to the lessors if sales of oil or gas result from discoveries made on the leased land. Additionally, termination by individual lessors would result in the escheat of mineral rights to the State. The remainder of the Trust's royalty rights are based on government granted concessions which remain in effect as long as there are continued production activities and/or exploration efforts by the operating companies. It is generally anticipated that the operating companies will continue production where it remains economically profitable for them to do so. Royalties are paid to the Trust on sales from production under these leases and concessions by the operating companies on a regular monthly or quarterly basis pursuant to the royalty agreements. These royalties are paid in Deutsche marks and are converted into U.S. dollars. The Trust has experienced no difficulties converting marks to dollars, although its financial results are impacted by varying currency exchange rates. As the holder of overriding royalty rights, the Trust has no legal ability, whether by contract or operation of law, to compel production. Moreover, if an operator should determine to terminate production in any concession or lease area and to surrender the concession or lease, the royalty rights for that area would thereby be terminated. Under certain royalty agreements, the operators are required to advise the Trust of any intention to surrender lease or concession rights. In recent years, no such notices have been received and management of the Trust has not been informed of any such intention. The Trust itself is precluded from undertaking any production activities and only if it could locate an alternate operator for the same areas would there be any possibility of continued royalty payments for such an area following any such termination. The likelihood of locating such an alternate operator is small because the current operating companies would be unlikely to surrender their rights for areas where continued economic return from production is reasonably anticipated. - 5 - The exploration for and the production of gas and oil is a speculative business. The Trust has no means of insuring continued income from its royalty rights at either their present levels or otherwise. In addition, fluctuations in prices and supplies of gas and oil and what effect these fluctuations might have on royalty income to the Trust and on reserves net to the Trust cannot be accurately projected. The Trustees have no information with which to make any projections beyond information on economic conditions which is generally available to the public and thus are unwilling to make any such projections. While Germany has laws relating to environmental protection, the Trustees have no detailed information concerning the present or possible effect of such laws on operations in areas where the Trust holds royalty rights on production and sale of product from those areas. Seasonal demand factors affect the income from royalty rights insofar as they relate to energy demands and increases or decreases in prices, but, in the average they are not material to the regular annual income received under the royalty rights. The Trust, either itself or in cooperation with holders of parallel royalty rights, arranges for periodic audits of the books and records of the operating companies to verify compliance with the computation provisions of the applicable agreements. From time to time, these examinations disclose computational errors or errors from inappropriate application of existing agreements and appropriate adjustments are requested and made. (d) Financial Information about Foreign and Domestic Operations and --------------------------------------------------------------- Export Sales. - ------------- The Trust does not engage in any active business operations, and its sources of income are the overriding royalty rights covering gas, sulfur and oil production in certain areas in Germany and interest on the funds temporarily invested by the Trustees. In Item 2 there is a schedule (by product, geographic area and operating company) showing the royalty income received by the Trust during the fiscal year ended October 31, 1996. (e) Executive Officers of the Trust. -------------------------------- The affairs of the Trust are managed by not more than five individual Trustees who receive compensation determined under the Trust Agreement. One of the Trustees is designated as Managing Trustee and receives additional compensation in such capacity. The Managing Trustee, John H. Van Kirk, is responsible for managerial oversight, while day to day matters are handled by the Managing Director, John R. Van Kirk. John H. Van Kirk, who is 72 years old, has been Managing Trustee since the Trust's inception in 1975. John R. Van Kirk, who is 44 years old, has held the position of Managing Director of the Trust since November 1990. John R. Van Kirk is the son of John H. Van Kirk, the Managing Trustee. - 6 - The Managing Director provides office space and services to the Trust. In addition to the Managing Trustee and the Managing Director, the Trust has one secretarial employee in the United States. It also retains a part-time consultant in Germany on a fixed yearly basis plus associated expenses. Employee relations or labor contracts are not directly material to the business or income of the Trust. The Trustees have no specific information concerning employee relations of the operating companies. Item 2. Properties. ----------- The properties of Trust, which the Trust and Trustees hold pursuant to the Trust Agreement on behalf of the unit owners, are overriding royalty rights on sales of gas, sulfur and oil under certain concessions or leases in the Federal Republic of Germany. The actual leases or concessions are held either by Mobil Oil A.G. ("Mobil"), the German operating subsidiary of Mobil Corp., or by Oldenburgische Erdol Gesellschaft ("OEG"). The Oldenburg concession (1,398,000 acres), covering virtually the entire former State of Oldenburg, is the major source of royalty income for the Trust. Within this concession Mobil and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture of Exxon Corp. and the Royal Dutch Group, carry out all exploration, drilling, production and sales activities. Under one series of rights covering the western part of the Oldenburg concession (approximately 662,000 acres), the Trust receives a royalty payment of 4% on gross receipts from sales by Mobil of natural gas, casinghead gas, crude oil and condensate. The Trust also is entitled to receive from Mobil a 2% royalty on gross receipts of sales of sulfur obtained as a by-product of sour gas produced from the western part of Oldenburg. The payment of the sulfur royalty is conditioned upon sales by Mobil of sulfur at a selling price above an agreed upon base price. This base price is adjusted annually by an inflation index. When the average selling price falls below the adjusted base price, no royalties are payable. No payments were received under this sulfur royalty during fiscal 1996. Under another series of rights covering the entire Oldenburg concession and pursuant to an agreement with OEG (the "OEG Agreement"), the Trust receives royalties at the rate of 0.6667% on gross receipts from sales of natural gas, casinghead gas, crude oil, condensate and sulfur (removed during the processing of sour gas) less 50% of an escalating cost base. This cost base is recomputed annually based on indexes reflecting changes in certain prices within Germany. This system will be revised in 2002 unless the escalating cost base diverges significantly from the actual production costs, in which case the OEG Agreement provides for the system to be revised in 1999. In either case, the revised system will provide that 50% of field handling, - 7 - treatment and transport costs, as reported for state governmental royalty purposes, will be deducted from gross sales receipts prior to the royalty calculation. The Trust also holds through Mobil a 2% royalty interest in oil and gas sales from acreage in Bavaria, and a 0.2117% royalty under the net interest of the Bayerische Mineral Industries A.G. ("BMI"), a subsidiary of Mobil, in concessions in Bavaria. The net interest of BMI ranges from 16-1/2 to 100% of the sales, depending on geographic region or area. Due to the low level of royalty income under this agreement, reserves from this area in Bavaria are not included in reserve calculations for this report year. In addition to the areas of Oldenburg and Bavaria, the Trust also holds overriding royalties on 21 leases in other areas of northwest Germany ranging in size from 185 to 25,000 acres and totalling 73,214 acres. The rates of overriding royalties vary from 1.83% to 6.75%. At the present time all but one of these 21 leases are in the non-producing category. Due to the low level of income and the intermittent gas production from the single producing lease, reserves from this lease are not included in reserve calculations for this report year. The following is a schedule of royalty income for the fiscal year ended October 31, 1996 by product, geographic area and operating company: BY PRODUCT: ----------- Product Royalty Income - ------- -------------- Natural Gas $ 9,366,239 Sulfur $ 186,827 Oil $ 157,421 BY GEOGRAPHIC AREA: ------------------- Area Royalty Income - ---- -------------- Western Oldenburg $ 7,929,612 Eastern Oldenburg $ 1,720,396 Non-Oldenburg Areas $ 60,479 - 8 - BY OPERATING COMPANY: --------------------- Company Royalty Income - ------- -------------- Mobil Oil A.G. $ 7,058,128 OEG $ 2,652,047 Bayerische Mineral Industries A.G. $ 312 Exhibit 99.1 to this Report is a report dated December 18, 1996 which summarizes certain production data and the estimated net proved producing reserves as of October 1, 1996, based on the limited information available, for the Oldenburg area in which the Trust now holds overriding royalty rights. That report, the Estimate of Remaining Proved Producing Reserves in the Northwest Basin of the Federal Republic of Germany as of October 1, 1996, (the "Reserve Report") was prepared by Ralph E. Davis Associates, Inc., 3555 Timmons Lane, Suite 1105, Houston, Texas 77027 ("Davis Associates"). Davis Associates is an independent petroleum and natural gas consulting organization specialized in analyzing hydrocarbon reserves. In order to permit timely filing of this Report and consistent with prior years, the information has been prepared for the 12-month period ending September 30, 1996, which is one month prior to the end of the fiscal year of the Trust. In connection with the information in the Reserve Report, note should be taken of the limited nature of the information available to the Trust. Pursuant to the arrangements under which the Trust holds royalty rights and due to the fact that the Trust is not considered an operating company within Germany, it has no access to the operating companies' proprietary information concerning producing field reservoir data. The Trustees have been advised that publication of such information is not required under applicable law in Germany and that the royalty rights do not give rise to the right to require or compel production of such information. Past efforts to obtain such information voluntarily have not been successful. The information made available to the Trust by the operating companies does not include any of the following: reserve estimates, capitalized costs, production cost estimates, revenue projections, producing field reservoir data (including pressure data, permeability, porosity and thickness of producing zone) or other similar information. The limited nature of the information available to the Trust makes impossible the calculation of the following: proved undeveloped or probable future net recoverable oil and gas by appropriate geographic areas, total gross and net productive wells, availability of oil and gas from the present reserve, contract supply for one year or acreage concentration. - 9 - The Trust has the authority to audit for certain limited purposes the operating companies' sales and production from the royalty areas. The Trust also has access to published materials in Germany from W.E.G. (a German organization equivalent to the American Petroleum Institute or the American Gas Association). The use of such statistical information relating to production and sales necessarily involves extrapolations and projections. Both Davis Associates and the Trustees believe the use of the material available is appropriate and suitable for preparation of the reports and estimates described in the Reserve Report and in the Cost Depletion Report (described below), which is based on the Reserve Report. Both the Trustees and Davis Associates believe these reports and estimates to be reasonable and appropriate but they would possibly vary from statistical projections which could be made if reservoir production information (of the kind normally available to domestic producing companies) were available. However, the limited information available makes it inappropriate to make projections or estimates of proved or probable reserves of any category or class other than the estimated net proved producing reserves described in the Reserve Report. Table I of the Reserve Report is comprised of a schedule of estimated net proved producing reserves of the Trust's royalty properties, computed as of October 1, 1996 and a five year schedule of gas, sulfur and oil sales for the 12 months ended September 30, 1996, 1995, 1994, 1993 and 1992 computed from quarterly sales reports of operating companies received by the Trust during such periods. Item 3. Legal Proceedings. ------------------ As previously reported, on February 26, 1996 the settlement of litigation commenced by the Delaware State Escheator relating to claims concerning unexchanged shares of predecessor corporate entities was approved by the Delaware Court of Chancery. The first stage of the settlement, encompassing the issuance of Trust units without the attributable past dividends and distributions, was completed on April 17, 1996 with the second and third stages scheduled for late June of the years 2000 and 2005 respectively. For a complete description of the terms of this settlement see Note 3 to Financial Statements contained herein or the Current Reports on Form 8-K filed on November 26, 1986, November 1, 1988, December 11, 1995 and February 28, 1996 (including Exhibits). Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- Inapplicable. - 10 - PART II Item 5. Market for the Registrant Trust's Units of Beneficial Interest -------------------------------------------------------------- and Related Certificate Holder Matters. --------------------------------------- The Trust's units of beneficial interest ("Units") are traded on the New York Stock Exchange (the "Exchange") under the symbol NET. In addition, the Midwest Stock Exchange and the Boston Exchange have granted unlisted trading privileges in the Trust Units. Under the Trust Agreement, the Trustees distribute to unit owners, on a quarterly basis, the net royalty income after deducting expenses. The following table presents the high and low sales prices for the quarterly periods ended in fiscal 1996 and 1995 as reported by the Exchange as well as the cash distributions paid to unit owners by quarter for the past two fiscal years. FISCAL YEAR 1996 Low High Distributions Quarter Ended Sales Sales Per Unit - ------------- --------- --------- ------------- January 31, 1996 12-1/8 14-3/8 .29 April 30, 1996 12-3/4 14-3/8 .29 July 31, 1996 13 14-1/8 .19 October 31, 1996 12-3/8 13-3/4 .27 FISCAL YEAR 1995 Low High Distributions Quarter Ended Sales Sales Per Unit - ------------- --------- --------- ------------- January 31, 1995 12-1/2 14-7/8 .31 April 30, 1995 12-3/8 14-5/8 .42 July 31, 1995 13 14-3/4 .35 October 31, 1995 12-5/8 13-5/8 .35 - 11 - The quarterly distributions to unit owners represent their undivided interest in royalty payments from sales of gas, sulfur and oil during the previous quarter. Each unit owner is entitled to recover a portion of his or her investment in these royalty rights through a cost depletion percentage. The calculation of this cost depletion percentage is set forth in detail in a report titled Calculation of Cost Depletion Percentage for 1996 Calendar Year (the "Cost Depletion Report") attached as Exhibit 99.2. The Cost Depletion Report has been prepared by Davis Associates using the same limited information, as described under Item 2, Properties, to which reference is made. The Trustees and Davis Associates believe that the calculations and assumptions used in the Cost Depletion Report are reasonable under the facts and circumstances of available information. The cost depletion percentage recommended by the Trust's independent petroleum and natural gas consultants for calendar 1996 is 7.891%. Specific details relative to the Trust's income and expenses and cost depletion percentage as they apply to the calculation of taxable income for the 1996 calendar year are included on page 3 of the 1996 Annual Report under "Note to Unit Owners" and have been sent in a separate letter to all unit owners registered at any time during 1996. (See attached Exhibit 99.3.) The Trust maintains no reserve to cover any payments which might be required if the holders of shares of stock of the predecessor Corporation or Company, who have not yet exchanged those shares for Units, should surrender them for exchange. See Item 7 and Note 3 to the Financial Statements in Item 8 of this Report. As of December 31, 1996, there were 1,969 Unit owners of record, which figure does not include the owners of unexchanged shares of stock in the Corporation or the Company (a total of 610 record holders). The owners of shares of stock in the Corporation are entitled under Section 3.10 of the Trust Agreement to receive Units upon presentation of those shares or other evidences of ownership thereof. The owners of unexchanged shares of stock in the Company, for whom a nominee of the Bank of New York acts as agent under a shareholder agency agreement, are entitled to receive Units upon presentation of those shares or other evidences of ownership thereof. See Item 3, Legal Proceedings, and Note 3 to Financial Statements contained herein. - 12 - ITEM 6. Selected Financial Data ----------------------- North European Oil Royalty Trust -------------------------------- Selected Financial Data (Cash Basis) ------------------------------------ For Five Years Ended October 31, 1996 ------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- German gas, oil and sulfur royalties received $ 9,710,487 $12,477,788 $ 9,476,252 $10,718,289 $13,458,150 =========== =========== =========== =========== =========== Net Income on a cash basis $ 9,086,316 $11,941,675 $ 8,777,422 $10,248,982 $12,870,740 =========== =========== =========== =========== =========== Net Income per unit on a cash basis (a) $1.05 $1.43 $1.06 $1.24 $1.55 ===== ===== ===== ===== ===== Units of beneficial interest outstanding at end of year (a) 8,696,412 8,313,984 8,312,898 8,298,216 8,294,538 Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders $ .01 $ .00 $ .05 $ .01 $ .01 Distributions per unit paid or to be paid to certificate holders 1.04 1.43 1.01 1.22 1.55 ----- ----- ----- ----- ----- $1.05 $1.43 $1.06 $1.23 $1.56 ===== ===== ===== ===== ===== Total assets at end of year $ 2,477,516 $ 2,951,228 $ 1,848,274 $ 2,733,049 $3,000,624 =========== =========== =========== ========== =========== (a) Net income per unit on a cash basis was calculated based on the number of units of beneficial interest outstanding at the end of the year. - 13 - Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations. -------------------------- General - ------- The Trust is a passive fixed investment trust which holds overriding royalty rights, receives income under those rights from certain operating companies, pays its expenses and distributes the remaining net funds to its unit owners. The Trust is not involved in any business or extractive operations of any kind in the areas over which it holds royalty rights and is precluded from any such involvement by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust. The 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 and the Managing Director, expenses associated with the Trustees' meetings, professional fees paid to consultants, legal advisors and auditors, transfer agent fees, and secretarial and other general office expenses. Another requirement for funds by the Trust relates to the occasional necessity of making lump sum payments of arrearages of dividends of a corporate predecessor and distributions previously declared by the Trust. Such payments are required when owners of shares of stock in predecessor corporate entities, who have not previously presented their shares for conversion to units of beneficial interest in the Trust, make such a presentation or furnish properly documented affidavits of loss and obtain an unlimited, open penalty bond. The procedures for administering such claims are described in Section 3.10 of the Trust Agreement as deemed amended by the February 26, 1996 order of the Delaware Court of Chancery. The payment of such arrearages would require a reduction in the amount of distributions which otherwise would be made on presently outstanding units. For further information on this contingent liability and the impact of the Delaware Court order see Item 3, Legal Proceedings, and Note 3 to Financial Statements contained herein. The Trust has no means of assuring continued income from overriding royalty rights at their present level or otherwise. Economic and political factors which are not foreseeable may have an impact on Trust income. The effect of changing economic conditions on the demand for energy throughout the world and future prices of oil and gas cannot be accurately projected. - 14 - The relatively small amounts required for administrative expenses of the Trust limit the possible effect of inflation on its financial prospects. Continued price inflation would be reflected in sales prices, which, with sales volumes, form the basis on which the royalties paid to the Trust are computed. In addition, fluctuations in the mark/dollar exchange rate have an impact on domestic energy prices within Germany and on the amount of dollars received upon conversion. The impact of inflation or deflation on energy prices in Germany is delayed by the use in certain long-term gas sales contracts of a deferred "trailing average" related to light fuel oil prices. Fiscal 1996 versus Fiscal 1995 - ------------------------------ For fiscal 1996 the Trust's royalty income of $9,710,487 was 22% lower than the previous year. A combination of production interruptions, lower sales from the higher royalty area of western Oldenburg, moderately weaker gas prices and less favorable currency exchange rates contributed to the decline in royalties. The interruptions in production resulted from two events: planned improvements to the Grossenkneten desulfurization plant and a pipeline accident isolating the Visbek and Cappeln gas fields in western Oldenburg. The plant improvements occurred at two separate times from late April to early June and during the month of August and increased the plant capacity to 750,000 cubic meters of gas per hour. During this combined 10 week period, the plant was shut down completely for 2 weeks and partially for 8 weeks. The pipeline accident occurred shortly after the resumption of production in early June. Production from these fields was totally shut down for 4 weeks and partially shut down for 2 weeks. The net effect of these interruptions helped to reduce overall Oldenburg gas sales by only 4.7% to 175.3 billion cubic feet. However, gas sales from western Oldenburg, with an effective royalty seven times greater than eastern Oldenburg, were reduced by 18.2% to 62.8 billion cubic feet. Gas prices for both eastern and western Oldenburg declined by 3.9% and 2.5% respectively. From their lowest level experienced during the second quarter, gas prices have steadily climbed through the remainder of the year. In addition, the average exchange rate for eastern and western Oldenburg also declined by 5.3% and 3.3% respectively. For the year the average value of the Deutsche mark was 67.1 cents down from last year's average of 69.2 cents. In prior years, we made note of the steps taken by the operating companies to maintain current sales levels despite the increasing ratio of sour gas to sweet gas in the total product mix. These steps included improvements to the Grossenkneten plant as well as the construction of a pipeline to the NEAG desulfurization plant to utilize excess capacity at that plant. With the discovery of additional reserves outside Oldenburg, the owners of the NEAG desulfurization plant are currently utilizing that plant's entire capacity for non-Oldenburg gas. Therefore the recent increases to the - 15 - capacity at Grossenkneten do not increase the total production capacity but instead permit that capacity to be maintained at the previous level of 750,000 cu. meters per hour. Over 95% of the Trust's current year royalties came from Oldenburg gas sales; royalties from oil sales were $157,000 and from sulfur sales were $187,000. During fiscal 1996 the Trust did not receive any royalties under the Mobil 2% sulfur royalty because prices remained below the threshold level specified in the agreement. Despite reaching over $62 per metric ton recorded in the third quarter, sulfur prices ended the year below $40 per metric ton. Trust expenses of $696,005 increased 10.9% from the prior year reflecting increased legal expenses in connection with the settlement of the suit previously commenced by the Delaware State Escheator and with costs associated with investigations into the status of certain leases in Germany. Despite higher average interest rates in effect, interest income declined by 6.2% due to the decrease in funds available for investment. During fiscal 1996 and 1995 respectively, an additional 2,148 and 1,086 Trust units were issued and $64,932 and $31,701 were paid to former unlocated shareholders of North European Oil Corporation and North European Oil Company who presented shares for exchange or filed properly documented affidavits of loss and obtained an unlimited, open penalty indemnity bond. In addition on April 17, 1996, in compliance with the terms of the settlement with Delaware, the Trust issued 380,280 units to the Delaware State Escheator. The increase in the number of issued units resulted in a 4.57% dilution reducing subsequent per unit income by that percentage. Beyond the dilution from this and future issuances of units, the settlement will have no impact on the Trust's financial condition, result of operations or long or short term liquidity. The termination of liability for payment of arrears of dividends or distributions after the year 2005 as specified in the settlement approval order of the Delaware Court of Chancery is expected to benefit the Trust's financial condition. See Note 3 to Financial Statements contained herein. Fiscal 1995 versus Fiscal 1994 - ------------------------------ For fiscal 1995 the Trust's royalty income of $12,477,788 was 31.7% higher than the previous year. A combination of increased sales from the higher royalty area of western Oldenburg and a strong Deutsche mark yielded the increased royalties. In contrast to the prior year, when the partial shutdown of the Grossenkneten desulfurization plant significantly affected the amount of royalties received in the third and fourth quarters, no such unusual or extended interruption of production occurred during fiscal 1995. Since last year's partial shutdown affected production of saleable gas from the higher royalty western portion of Oldenburg to a greater degree, in 1995 the - 16 - increase in production and sales was slanted toward gas from the west. Total gas sales of 76.8 billion cubic feet from the higher royalty western area increased by 15.45% while gas sales of 183.8 billion cubic feet for all of Oldenburg only increased by 2.4%. In addition, the continued strength of the Deutsche mark throughout the year contributed to the amount of dollars received by the Trust upon the transfer of funds from Germany. For the year, the average value of the Deutsche mark increased from 60.3 cents to 69.2 cents, an improvement of 14.6%. While gas prices, which averaged 1.46 Pfennigs per Kwh, declined somewhat from the prior year (1.65% and 3.9% for western and overall Oldenburg respectively), the negative effect of that decline was easily offset by the increases in sales and exchange rates. There have been no payments under the Mobil sulfur royalty, since the most recent sulfur price of DM 91 per metric ton is well below the threshold for the resumption of royalty payments. The world sulfur situation looks to deteriorate further as a result of world wide over supply and continued increases in the removal of sulfur from petroleum products for environmental compliance. Trust expenses of $612,682 showed a decrease of nearly 18%, reflecting a reduction in legal expenses as well as the absence of audit expenses in the off year of the biennial audit cycle of the operating companies in Germany. The increase in interest income to $76,569 reflects both the increase of funds available for investment as well as somewhat higher rates available through the exclusive use of Treasury bills for short term investments. During fiscal 1995 and 1994 respectively, an additional 1,086 and 14,682 Trust units were issued and $31,701 and $412,306 were paid to former unlocated shareholders of North European Oil Corporation and North European Oil Company who presented shares for exchange or filed properly documented affidavits of loss and obtained an unlimited, open penalty indemnity bond. - 17 - Item 8. Financial Statements and Supplementary Data -------------------------------------------- NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- INDEX TO FINANCIAL STATEMENTS AND SCHEDULE ------------------------------------------ Page Number ----------- Report of Independent Public Accountants F-1 Financial Statements: Statements of Assets, Liabilities and Trust Corpus as of October 31, 1996 and 1995 F-2 Statements of Income and Expenses on a Cash Basis for the Years Ended October 31, 1996, 1995 and 1994 F-3 Statements of Undistributed Earnings for the Years Ended October 31, 1996, 1995 and 1994 F-4 Statements of Changes in Cash and Cash Equivalents for the Years Ended October 31, 1996, 1995 and 1994 F-5 Notes to Financial Statements F-6 - F-9 Schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. - 18 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To North European Oil Royalty Trust: We have audited the accompanying statements of assets, liabilities and trust corpus of North European Oil Royalty Trust as of October 31, 1996 and 1995 and the related statements of income and expenses on a cash basis, undistributed earnings and changes in cash and cash equivalents for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accounts of the Trust are maintained on the 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 requires the use of the accrual basis of accounting (see Note 1). In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities and trust corpus of North European Oil Royalty Trust as of October 31, 1996 and 1995, and its income and expenses, undistributed earnings and changes in cash and cash equivalents for each of the three years in the period ended October 31, 1996, all on 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 fanancial statements for the possibility that funds would be required to satisfy such claims. /s/ Arthur Andersen LLP Roseland, New Jersey November 1, 1996 F-1 - 19 - NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- OCTOBER 31, 1996 AND 1995 ------------------------- ASSETS 1996 1995 ------ ------------ ------------ Current Assets -- Cash and cash equivalents (Note 1) $2,477,515 $2,951,227 Producing gas and oil royalty rights (Note 1) 1 1 ------------ ------------ $2,477,516 $2,951,228 ============ ============ LIABILITIES AND TRUST CORPUS ---------------------------- Current liabilities -- Cash distributions payable to unit owners, paid November 1996 and 1995 $2,348,031 $2,909,894 Contingent liability (Note 3) Trust corpus (Notes 1 and 2) 1 1 Undistributed earnings (Note 1) 129,484 41,333 ------------ ------------ $2,477,516 $2,951,228 ============ ============ The accompanying notes to financial statements are an integral part of these statements. F-2 - 20 - NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ---------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 --------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ German gas, oil and sulfur royalties received $ 9,710,487 $12,477,788 $ 9,476,252 Interest income 71,834 76,569 45,798 Trust expenses ( 696,005) ( 612,682) ( 744,628) ------------ ------------ ------------ Net income on a cash basis $ 9,086,316 $11,941,675 $ 8,777,422 ============ ============ ============ Net income per unit on a cash basis $1.05 $1.43 $1.06 ======= ======= ======= Cash distributions paid or to be paid: Dividends and distributions per unit paid or to be paid to former unlocated shareholders (Note 3) $ .01 $ .00 $ .05 Distributions per unit paid or to be paid to unit owners (Note 4) 1.04 1.43 1.01 ------- ------- ------- $1.05 $1.43 $1.06 ======= ======= ======= The accompanying notes to financial statements are an integral part of these statements. F-3 - 21 - NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 --------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Balance, beginning of year $ 41,333 $ 19,435 $ 43,897 Net income on a cash basis 9,086,316 11,941,675 8,777,422 ------------ ------------ ------------ 9,127,649 11,961,110 8,821,319 ------------ ------------ ------------ Less: Dividends and distributions paid to former unlocated shareholders (Note 3) 64,178 30,781 412,306 Current year distributions paid or to be paid to unit owners (Note 4) 8,933,987 11,888,996 8,389,578 ------------ ------------ ------------ 8,998,165 11,919,777 8,801,884 ------------ ------------ ------------ Balance, end of year $ 129,484 $ 41,333 $ 19,435 ============ ============ ============ The accompanying notes to financial statements are an integral part of these statements. F-4 - 22 - NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 --------------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Sources of cash and cash equivalents: German gas, oil and sulfur royalties received $ 9,710,487 $12,477,788 $ 9,476,252 Interest income 71,834 76,569 45,798 ------------ ------------ ------------ 9,782,321 12,554,357 9,522,050 Uses of cash and cash equivalents: Payment of Trust expenses 696,005 612,682 744,628 Distributions and dividends paid (Note 3) 9,560,028 10,838,721 9,662,197 ------------ ------------ ------------ 10,256,033 11,451,403 10,406,825 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents during the year ( 473,712) 1,102,954 ( 884,775) Cash and cash equivalents, beginning of year 2,951,227 1,848,273 2,733,048 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 2,477,515 $ 2,951,227 $ 1,848,273 ============ ============ ============ The accompanying notes to financial statements are an integral part of these statements. F-5 - 23 - NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- OCTOBER 31, 1996, 1995 AND 1994 ------------------------------- (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 certificate owners (those distributions approved by the Trustees for the Trust). The Trust's distributable incomes represents royalty income received by the Trust during the period plus interest income less any expenses incured 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 any 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 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. F-6 - 24 - Net income per unit on the cash basis- -------------------------------------- Net income per unit on the cash basis is based upon the number of units outstanding at the end of the period (see Note 3). As of October 31, 1996, 1995 and 1994, there were 8,696,412, 8,313,984 and 8,312,898 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 of North European Oil Company, corporate predecessors of the Trust. From the liquidation of the Company to October 31, 1995, 718,992 Trust units were issued in exchange for Corporate or Company shares and dividends of $353,230 and distributions of $4,162,423 were paid to former unlocated Corporation and Company shareholders. For the year ended October 31, 1996, 2,148 units were issued in exchanges and dividends of $762 and distributions of $64,170 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, of which 760,560 were subject to the settlement, representing the unexchanged shares of the Trust's predecessor corporations. 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 F-7 - 25 - 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 October 31, 1996, the maximum liability of the Escheator is $5,110,136. 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 October 31, 1996, there remained a total of 494,178 units that could be issued to unlocated or unknown Corporation and Company shareholders. Of this total, 380,280 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, $487,132 in dividends and $26,543,814 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 all claims for arrearages will be eliminated in 2005. F-8 - 26 - (4) Quarterly results (unaudited): ------------------------------ The table below summarizes the quarterly results and distributions of the Trust for the years ended October 31, 1996 and 1995. Fiscal 1996 by Quarter and Year ------------------------------------------------------------- 1st 2nd 3rd 4th Year ---------- ---------- ---------- ---------- ------------- Royalties received $2,688,592 $2,671,845 $1,796,511 $2,553,539 $ 9,710,487 Net income on a cash basis 2,466,261 2,507,064 1,674,327 2,438,664 9,086,316 Net income per unit on a cash basis .30 .29 .19 .28 1.05 Current year cash distributions paid or to be paid 2,411,304 2,522,316 1,652,336 2,348,031 8,933,987 Current year cash distributions per unit .29 .29 .19 .27 1.04 Fiscal 1995 by Quarter and Year ------------------------------------------------------------- 1st 2nd 3rd 4th Year ---------- ---------- ---------- ---------- ------------- Royalties received $2,760,129 $3,633,648 $3,056,999 $3,027,012 $12,477,788 Net income on a cash basis 2,590,726 3,476,434 2,952,057 2,922,458 11,941,675 Net income per unit on a cash basis .31 .42 .35 .35 1.43 Current year cash distributions paid or to be paid 2,576,998 3,491,943 2,910,161 2,909,894 11,888,996 Current year cash distributions per unit .31 .42 .35 .35 1.43 F-9 - 27 - Item 9. Changes in and Disagreements with Accountants on Accounting ----------------------------------------------------------- and Financial Disclosure. ------------------------- Inapplicable. PART III Item 10. Directors and Executive Officers of the Registrant. --------------------------------------------------- The identity, business experience, relationships, and other information about the Trustees as set forth under the caption "Election of Trustees" in Registrant's definitive Proxy Statement, dated January 9, 1997, as filed with the Commission, are incorporated herein by reference in accordance with Instruction G(3) to Form 10-K. See "Executive Officers of the Trust" under Item 1 for information concerning the executive officers of the Trust. Item 11. Executive Compensation. ----------------------- The information about remuneration of the Trustees and Management as set forth under the caption "Management Compensation" in Registrant's definitive Proxy Statement, dated January 9, 1997, as filed with the Commission, is incorporated herein by reference in accordance with Instruction G(3) to Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------- The information about security ownership of certain beneficial owners and Management as set forth in the introduction to and under the caption "Election of Trustees" in Registrant's definitive Proxy Statement dated January 9, 1997, as filed with the Commission, is incorporated herein by reference in accordance with Instruction G(3) to Form 10-K. Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- The information about certain relationships and related transactions as set forth under the captions "Election of Trustees" and "Management Compensation" in Registrant's definitive Proxy Statement, dated January 9, 1997 as filed with the Commission, is incorporated herein by reference in accordance with Instruction G(3) to Form 10-K. - 28 - PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. ----------------------------------------------------------------- (a) The following is a list of the documents filed as part of this report: 1. Financial Statements Index to Financial Statements and Schedule for the Years Ended October 31, 1996, 1995 and 1994 Report of Independent Public Accountants Statements of Assets, Liabilities and Trust Corpus as of October 31, 1996 and 1995 Statements of Income and Expenses on a Cash Basis for the Years Ended October 31, 1996, 1995 and 1994 Statements of Undistributed Earnings for the Years Ended October 31, 1996, 1995 and 1994 Statements of Changes in Cash and Cash Equivalents for the Years Ended October 31, 1996, 1995 and 1994 Notes to Financial Statements 2. Exhibits The Exhibit Index following the signature page lists all exhibits filed with this report or incorporated by reference. (b) No Current Report on Form 8-K was filed during the last quarter of the period covered by this Report. - 29 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Trust has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTH EUROPEAN OIL ROYALTY TRUST Dated: January 7, 1997 By: /s/ John H. Van Kirk --------------------- John H. Van Kirk, Managing Trustee Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: January 7, 1997 /s/ John H. Van Kirk ----------------------------- John H. Van Kirk, Trustee Dated: January 7, 1997 /s/ Robert P. Adelman ------------------------------ Robert P. Adelman, Trustee Dated: January 7, 1997 /s/ Robert J. Castle ------------------------------ Robert J. Castle, Trustee Dated: January 7, 1997 /s/ Samuel M Eisenstat ------------------------------- Samuel M Eisenstat, Trustee Dated: January 7, 1997 /s/ Willard B. Taylor -------------------------------- Willard B. Taylor, Trustee - 30 - Exhibit Index ------------- Exhibit Page - ------- ---- (3) Trust Agreement, dated September 10, 1975, amended May 13, 1976, and February 10, 1981, (incorporated by reference to Exhibit 4(i) to Form 10-Q for the quarter ended April 30, 1981 (File No. 0-8378)). (10.1) Agreement with OEG, dated April 2, 1979, exhibit to Current Report on Form 8-K, filed May 11, 1979 (incorporated by reference as Exhibit 1 to Current Report on Form 8-K, filed May 11, 1979 (File No. 0-8378)). (10.2) Agreement with Mobil Oil, A.G. concerning sulfur royalty payment, dated March 30, 1979, (incorporated by reference to Exhibit 3 to Current Report on Form 8-K, filed May 11, 1979 (File No. 0-8378)). (22) There are no parents and no subsidiaries of the Trust. (99.1) Estimate of Remaining Proved Producing Reserves 32 in the Northwest Basin of the Federal Republic of Germany as of October 1, 1996 prepared by Ralph E. Davis Associates, Inc. (99.2) Calculation of Cost Depletion Percentage 42 for 1996 Tax Year by Ralph E. Davis Associates, Inc. (99.3) 1996 Tax Letter mailed to Unit Owners registered 47 during the 1996 calendar year and included in the 1996 Annual Report. - 31 - (99.4) Notice to Unit Owners of hearing date and terms of the Joint Petition for Approval of Settlement of Pending Litigation on Form 8-K, filed December 11, 1995. (99.5) Order Approving Settlement signed by Vice Chancellor Jack Jacobs of the Delaware Court of Chancery on Form 8-K, filed February 26, 1996. EX-99 2 Exhibit 99.1 - 32 - NORTH EUROPEAN OIL ROYALTY TRUST ESTIMATE OF REMAINING PROVED PRODUCING RESERVES IN THE NORTHWEST BASIN OF THE FEDERAL REPUBLIC OF GERMANY AS OF OCTOBER 1, 1996 RALPH E. DAVIS ASSOCIATES, INC. HOUSTON, TEXAS DECEMBER, 1996 - 33 - T A B L E O F C O N T E N T S -------------------------------- Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Description of Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Limitations of Available Data . . . . . . . . . . . . . . . . . . . . . . . .3 Oldenburg Area - Sales and Reserves . . . . . . . . . . . . . . . . . . . . .4 Net Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Table 1 . . . . .Reserve Summary and Five Year Net Sales History . . . . . . . . . . . . . . . . . . . . . 7 Certificate of Qualification . . . . . . . . . . . . . . . . . . . . . . . . 8 - 34 - Ralph E. Davis Associates, Inc. Consultants - Petroleum and Natural Gas 3555 Timmons Lane - Suite 1105 Houston, Texas 77027 (713) 622-8955 December 18, 1996 The Trustees of North European Oil Royalty Trust P. O. Box 456 Red Bank, New Jersey 07701 Gentlemen: In accordance with your request, we have prepared a report of the estimated remaining proved producing reserves attributable to the overriding royalty interest of North European Oil Royalty Trust (the "Trust" or "NEORT") in the Northwest German Basin of the Federal Republic of Germany as of October 1, 1996 (the "Reserve Report"). The proved producing reserves are as of October 1, 1996 and the reported sales are for the twelve month period ending September 30, 1996. The use of the period ending September 30, 1996 is consistent with prior years and allows the timely calculation of the royalty reserves and the cost depletion percentage. In annual reserve reports prepared for the Trust prior to 1992, reserve estimates were presented for the Trust's interests in fields located in the Alpine Foreland Area of Bavaria and other non-Oldenburg areas. Reports from 1992 forward omit such estimates. The Trust continues to receive royalty payments from these interests. However, these royalties represent less than two (2) percent of the Trust's total royalties and the expenses involved in the determination of reserve estimates for these interests are not warranted by the royalties received. We will continue to monitor the quarterly statements and if increases are noted that could add reserves to the Trust, we will resume estimating future reserves. - 35 - The Trust normally receives from Mobil Oil A.G. ("Mobil"), the German subsidiary of Mobil Corp., a 2% royalty on gross receipts from sales of sulfur obtained as a by-product of sour gas produced from the western portion of Oldenburg. This agreement is subject to an escalation clause which provides that if Mobil's selling price is below the escalated base price, payment of royalties is deferred until such time as the selling price again exceeds the escalated base price. Throughout fiscal 1996, Mobil's selling price was below the escalated base price. We will continue to monitor this situation, but until the point that Mobil's selling price again exceeds the escalated base price, reserves subject to this royalty will not be included in overall reserve calculations. DESCRIPTION OF HOLDINGS ----------------------- The Trust holds various overriding royalty rights on sales of gas, sulfur and oil from certain concessions and leases in the Federal Republic of Germany. The Oldenburg concession (1,398,000 acres), covering virtually the entire former State of Oldenburg and located in the State of Lower Saxony, is the major source of royalty income for the Trust. Although the Trust holds overriding royalty rights on other areas outside the Oldenburg concession, the reserve calculations for this year do not include reserves from these areas due to the low level of royalty income and intermittent production. 1. The Oldenburg concession is held by Oldenburgische Erdol Gesellschaft ("OEG"). Within this concession Mobil and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture of Exxon Corp. and Royal Dutch Group, carry out all exploration, drilling, production and sales activities. (a) Under one series of rights covering the western part of the Oldenburg concession (approximately 662,000 acres), the Trust receives a royalty payment of 4% on gross receipts from sales by Mobil of natural gas, casinghead gas, crude oil and condensate. The Trust also receives from Mobil a 2% royalty payment on gross receipts of sales of sulfur obtained as a by-product of sour gas produced - 2 - - 36 - from the western part of Oldenburg. The payment of the sulfur royalty is conditioned upon sales by Mobil of sulfur at a selling price above an agreed upon base price, which base price is adjusted by an inflation index. Where the average selling price falls below the adjusted base price, no royalties are payable. (b) Under another series of rights covering the entire Oldenburg concession and pursuant to an agreement with OEG (the "OEG Agreement"), the Trust receives royalties at the rate of 0.6667% on gross receipts from sales of natural gas, casinghead gas, crude oil, condensate and sulfur (removed during the processing of sour gas) less 50% of an escalating cost base. This cost base is recomputed annually based on indexes reflecting changes in certain prices within Germany. This system will be revised in 2002 unless the escalating cost base diverges significantly from the actual production costs, in which case the system will be revised in 1999. In either case, the revised system provides that 50% of field handling, treatment and transport costs, as reported for state governmental royalty purposes, will be deducted from gross sales receipts prior to the royalty calculation. LIMITATIONS OF AVAILABLE DATA ----------------------------- The reserves considered in this report are defined as proved producing reserves. Proved producing reserves are limited to those quantities which can be expected to be recoverable commercially from known reservoirs at current prices and costs, under existing regulatory practices and with existing conventional equipment and operating methods. Proved producing reserves do not include either proved developed non-producing reserves or any class of probable reserves. The reserve estimates were prepared using engineering methods generally accepted by the petroleum industry. The reliability of any reserve estimate - 3 - - 37 - is a function of the quality of available information and of engineering interpretation and judgment. The Trust, as an overriding royalty interest owner, is not entitled to receive proprietary data from the various operators on producing wells. Data (such as logs, core analysis, reservoir tests, pressure tests, gas analyses, geologic maps, and individual well production histories, which are used in volummetric and material balance type reserve estimates) are not available to the Trust. The Trust receives various monthly and quarterly statements that report production, sales and revenue data from the operators. Utilizing the same procedures as in prior years, this information, plus published information received from W.E.G. (a German organization comparable to the American Petroleum Institute or the American Gas Association), has been used to prepare this annual report. We believe the reserve estimates prepared using this data represent realistic values. However, due to the limitation of data, this estimate of reserves can not have the same degree of accuracy that an estimate of reserves prepared using all pertinent data would have. Our experience in the evaluation of reserves using such limited data compensates somewhat for the limitations of available data. The data in the reports received by the Trust is in metric tons and cubic meters. The following Metric to English Unit conversion factors were used: Oil: 7.23 barrels per metric ton Gas: 37.25 cubic feet per cubic meter at 14.7 psia and 60 degrees Fahrenheit Sulfur: 1.1 short tons per metric ton OLDENBURG AREA - SALES AND RESERVES ------------------------------------ The Trust's royalty income comes primarily from the Oldenburg area. Gas production accounts for the majority of the income; however, the high hydrogen sulfide content of much of the gas produced necessitates its removal before the gas can be sold. - 4 - - 38 - The facilities at the Grossenkneten desulfurization plant are the primary means by which the hydrogen sulfide is removed. Following renovations and improvements to the plant in 1994 and again in 1996, the plant's input capacity has been increased from 600,000 cu. meters per hour to its present capacity of 750,000 cu. meters per hour. In 1994, a 60 Km. pipeline connecting the Oldenburg concession with the NEAG desulfurization plant was completed. Initially, this pipeline provided access to additional and excess capacity at NEAG of up to approximately 90,000 cu. meters per hour. However, following the development of additional reserves outside the Oldenburg concession this former excess capacity will not be available for the processing of Oldenburg gas for some period of time. During the 12 months ending September 30, 1996 total sales for the Oldenburg area were 333,997 barrels of oil and condensate, 174,970 million cubic feet (MMcf) of non-associated gas, 332 MMcf of associated gas and 828,804 short tons of sulfur. The sales from the western portion of Oldenburg, where the Trust has a greater interest, were 188,859 barrels of condensate and oil, 63,188 MMcf of non-associated gas, 133 MMcf of associated gas and 208,661 short tons of sulfur. Estimated gross remaining proved producing reserves attributable to the total Oldenburg area are 3,504,974 barrels of condensate and oil, 2,152,001 MMcf of non-associated gas, 3,392 MMcf of associated gas and 9,479,718 short tons of sulfur. NET RESERVES ------------ To present an accurate picture of estimated proved producing reserves net to the Trust, the gross reserve figures outlined above must be modified by the impact of the different royalty rates in effect in the Oldenburg concession. A comparison of the Trust's overriding royalty rates in both the western and eastern areas of Oldenburg is as follows: - 5 - - 39 - Mobil Oil A. G. West East --------------- ---- ---- Oil & Gas 4% 0% Sulfur 2%* 0% BEB --------------- Oil & Gas 0.6667%** 0.6667%** Sulfur 0.6667%** 0.6667%** *Temporarily suspended. (See explanation above.) **Prior to the calculation of royalties, a portion of the field handling, transport and manipulation costs for products produced and sold is deducted. The application of these royalty rates to the estimated gross remaining proved producing reserves attributable to the western and eastern Oldenburg areas yields the combined estimated proved producing reserves net to the Trust. As of October 1, 1996, these figures stand at 89,141 barrels of oil and condensate, 40,644 MMcf of gas and 48,754 short tons of sulfur. A summary of net proved producing reserves by product and a five year history of net sales attributable to the royalty interests of the Trust are presented in Table 1. Sincerely yours, RALPH E. DAVIS ASSOCIATES, INC. /s/ Larry A. Barnett ------------------------------- Larry A. Barnett, P. E. Senior Vice-President LAB:sw - 6 - - 40 - TABLE 1 NORTH EUROPEAN OIL ROYALTY TRUST RESERVE SUMMARY AND FIVE YEAR NET SALES HISTORY ESTIMATED NET PROVED PRODUCING RESERVES AS OF OCTOBER 1, 1996 OLDENBURG Oil/Cond. Associated Non-Associated Sulfur Gas Gas Barrels MMcf MMcf Short Tons -------- ---------- -------------- ---------- 89,141 62 40,644 48,754** **Note: At current prices, no royalties are presently being paid under the Mobil sulfur royalty. FIVE YEAR NET SALES SUMMARY 12 MONTHS ENDING SEPTEMBER 30 OLDENBURG Oil/Cond. Associated Non-Associated Sulfur Gas Gas Barrels MMcf MMcf Short Tons -------- ---------- -------------- ---------- 1996 9,348 8 3,450 4,268** 1995 9,226 8 4,098 4,081** 1994 8,984 11 3,681 2,391** 1993 10,550 18 4,031 3,790** 1992 10,100 10 4,056 8,102 **Note: At current prices, no royalties are presently being paid under the Mobil sulfur royalty. - 7 - - 41 - CERTIFICATE OF QUALIFICATION I, Larry A. Barnett, Registered Professional Engineer, do hereby certify: 1. That I am senior vice-president of the consulting firm of Ralph E. Davis Associates, Inc. with offices at 3555 Timmons Lane, Suite 1105, Houston, Texas 77027. 2. That I have prepared a reserve report on the interests of the North European Oil Royalty Trust in the Northwest Basin of the Federal Republic of Germany for the twelve month period ending September 30, 1996. 3. That I have no direct or indirect interest, nor do I expect to receive any direct or indirect interest, in the properties or in any securities of the North European Oil Royalty Trust. 4. That I attended The University of Texas and that I graduated with a Bachelor of Science Degree in Petroleum Engineering in 1958. 5. That I am a Registered Professional Engineer in the States of Texas and Louisiana, Registration Numbers 23399 and 9647 respectively, and that I am a member in good standing of the Society of Petroleum Engineers, the Society of Petroleum Evaluation Engineers and the Society of Professional Well Log Analysts. 6. That I have in excess of thirty-five years experience in the evaluation of oil and gas properties in the United States, Canada, Mexico, South America and Germany, and that I have been practicing as a consultant in petroleum engineering and geology since 1987. RALPH E. DAVIS ASSOCIATES, INC. /S/ Larry A. Barnett ------------------------------- Larry A. Barnett, P. E. Senior Vice-President - 8 - EX-99 3 Exhibit 99.2 - 42 - NORTH EUROPEAN OIL ROYALTY TRUST CALCULATION OF COST DEPLETION PERCENTAGE For 1996 Tax Year RALPH E. DAVIS ASSOCIATES, INC. HOUSTON, TEXAS DECEMBER, 1996 - 43 - Ralph E. Davis Associates, Inc. Consultants - Petroleum and Natural Gas 3555 Timmons Lane - Suite 1105 Houston, Texas 77027 (713) 622-8955 December 18, 1996 The Trustees of North European Oil Royalty Trust P. O. Box 456 Red Bank, New Jersey 07701 Gentlemen: In accordance with your request, we have prepared a report of the estimated remaining proved producing reserves attributable to the overriding royalty interest of North European Oil Royalty Trust (the "Trust" or "NEORT") in the Northwest German Basin of the Federal Republic of Germany as of September 30, 1996 (the "Reserve Report"). The Reserve Report forms the basis on which this report, the Calculation of the Cost Depletion Percentage for the 1996 Calendar Year (the "Cost Depletion Report"), is made. As detailed in Attachment A, the total cost depletion percentage to be taken for the twelve month period ending December 31, 1996 is 7.891 percent. In the annual reserve reports prepared for the Trust prior to 1992, reserve estimates were presented for the Trust's interests in fields located in the Alpine Foreland Area of Bavaria and other non-Oldenburg areas. Reserves and net sales for these areas were used in the calculation of cost depletion in those prior years. Reports since 1992 do not include such estimates. The Trust continues to receive royalty payments from these interests. However, these royalties represent less than two (2) percent of the Trust's total royalties and the expenses involved in the determination of reserve estimates for these interests are not warranted by the royalties received. The exclusion of these reserves does not have a material efffect on the calculation of the cost depletion percentage. - 44 - The Trust's estimated remaining net proved producing reserves as of October 1, 1996 and net sales for the twelve month period ending September 30, 1996 are as follows: Reserves Sales -------- ----- Oil, Barrels 89,141 9,348 Associated Gas, MMcf 62 8 Non-Associated Gas, MMcf 40,644 3,450 Sulfur, Short Tons 45,311** 4,268** (MMcf = million cubic feet @ 14.7 psia and 60 degrees Fahrenheit) ** Note: At current price levels no royalties are being paid under the Mobil sulfur royalty. Computation of Total Cost Depletion Percentage ---------------------------------------------- The categories of reserves considered in the computation of total cost depletion percentage are oil, associated gas and non-associated gas. Sulfur is a by-product of the gas production and is not considered in the cost depletion calculation. For each category of reserves, a cost base for the Trust was established as of January 1, 1976. This cost base is adjusted (reduced) each year by an amount of depletion that is calculated by multiplying the remaining cost base at the beginning of the current year by a unit cost depletion factor. The unit cost depletion factor is the ratio of the net sales during the current year to the adjusted net proved producing reserves at the beginning of the current year. Significant items in the cost depletion percentage calculation that appear on Attachment A as specific item numbers ( ) and their sources are as follows: The cost base as of 1-1-95 (2) and the depletion taken during 1995 (3) were obtained from the previous year's report. The cost base as of 1-1-96 (4) forms the initial starting point for the calculation of the cost depletion percentage for the 1996 tax year. The cost base for 1-1-96 (4) then is (2) - (3). - 2 - - 45 - The adjusted net proved producing reserves as of 10-1-95 (8) is obtained by adding the net sales (7) to the estimated remaining net proved producing reserves as of 10-1-96 (6). Therefore (8) = (6) + (7). The unit cost depletion factor (10) is obtained by dividing the net sales (7) by the adjusted net proved producing reserves as of 10-1-95 (8). Therefore (10) = (7) / (8). The cost depletion to be taken for each category of reserves (11) that is used to reduce the original cost base each year then is the product of the unit cost depletion factor (10) multiplied by the cost base as of 1-1-96 (4). Therefore (11) = (4) x (10). The total NEORT or Trust cost depletion percentage (12) then is the sum of the cost depletion to be taken for each category Sum (11) divided by the sum of the cost base as of 1-1-96 for each category Sum (4). Therefore (12) = Sum (11) / Sum (4). The Trust's total cost depletion percentage represents the allowable cost depletion for the current tax year, expressed as a percentage of the cost base at the beginning of the tax year. Sincerely yours, RALPH E. DAVIS ASSOCIATES, INC. /S/ Larry A. Barnett, P. E. ------------------------------- Larry A. Barnett, P. E. Senior Vice-President LAB:sw - 3 - - 46 - ATTACHMENT A NORTH EUROPEAN OIL ROYALTY TRUST COMPUTATION OF COST DEPLETION PERCENTAGE For the Year Ending December 31, 1996 OLDENBURG ----------------------------------------- 1. Product Associated Non-Assoc. Oil Gas Gas Barrels MMCF MMCF -------- ---------- ---------- NEORT COST BASE ALLOCATION (%) - ------------------------------- 2. Cost base as of 1-1-95 0.66294 0.05698 18.68911 3. Less depletion taken during 1995 0.06654 0.00651 1.74032 4. Cost base as of 1-1-96 0.59640 0.05047 16.94879 NEORT NET RESERVES (Barrels of Oil and Million Cubic Feet) - ----------------------------------------------------------- 5. Estimated remaining net proved producing reserves as of 10-1-95 82,687 62 39,910 6. Estimated remaining net proved producing reserves as of 10-1-96 89,141 62 40,644 7. Net sales from 10-1-95 to 9-30-96 9,348 8 3,450 8. Adjusted net proved producing reserves as of 10-1-95 98,489 70 44,094 9. Adjustments to reserves during period 15,802 8 4,184 COST DEPLETION CALCULATION (%) - ------------------------------- 10. Unit cost depletion factor 0.09491 0.11429 0.07824 11. 1996 cost depletion to be taken 0.05661 0.00577 1.32611 12. Total NEORT cost depletion percentage = 7.891 Percent of 1-1-96 cost base Footnotes: Line (2) from 1995 depletion computations Line (8) = Line (6) + Line (7) Line (3) from 1995 depletion computations Line (9) = Line (8) - Line (5) Line (4) = Line (2) - Line (3) Line (10) = Line (7) / Line (8) Line (5) from reserves review as of 10-1-95 Line (11) = Line (10) x Line (4) Line (6) from reserves review as of 10-1-96 Line (12) = Sum (11) / Sum (4) Line (7) from OEG and MOBIL statements EX-99 4 Exhibit 99.3 - 47 - North European Oil Royalty Trust Office of the Managing Director P.O. Box 456 Red Bank, New Jersey 07701 (908) 741-4008 IMPORTANT RETAIN THIS LETTER FOR PREPARATION OF YOUR 1996 INCOME TAX RETURNS THE TRUST DOES NOT FILE NOR FURNISH TO OWNERS FORM 1099 January 9, 1997 To the Present and Former Unit Owners of North European Oil Royalty Trust: This letter sets forth the information you will require for preparation of your personal income tax returns in connection with ownership of units of beneficial interest ("Units") in North European Oil Royalty Trust (the "Trust") during 1996. For Federal income tax reporting purposes, each owner of Units in the Trust is considered to be a grantor or substitute grantor as well as a beneficiary of the Trust. As such, you are deemed to have received your pro rata share of overriding royalties when paid to the Trust and are permitted to deduct your share of Trust expenses. Consequently, your net taxable income may not correspond exactly to the cash distributions received. TRUST DISTRIBUTIONS SHOULD NOT BE INCLUDED ON INCOME TAX RETURNS AS "DIVIDEND - ----------------------------------------------------------------------------- INCOME" AND ARE NOT ELIGIBLE FOR THE DIVIDENDS RECEIVED DEDUCTION - ----------------------------------------------------------------- FOR CORPORATIONS. - ----------------- The Internal Revenue Service has ruled that the overriding royalty rights held by the Trust represent economic interest in oil and gas deposits. Consequently, income realized from such interests is taxable to each Unit owner as ordinary income subject to cost depletion. Each Unit owner's basis for computing cost depletion is the adjusted cost basis for their Units. This adjusted cost basis is to be reduced annually by the depletion previously allowed. Ralph E. Davis Associates, Inc. of Houston, Texas, based upon computations of proven reserves estimated in accordance with accepted engineering analytical principles, has recommended that the percentage to be applied to the cost basis to determine deductions for cost depletion for the year 1996 is 7.891%. The suggested percentage for cost depletion deduction will be adjusted annually in accordance with reported production results and revised reserve estimates. Since the above percentage covers the entire year 1996, if you owned Units for only a portion of the year, you are required to pro rate the percentage depletion in the ratio that the total income per Unit shown on the schedule below for the period of your ownership bears to the total income per Unit for the entire year. If you owned Units for the period January 1, 1996 through December 31, 1996, you will be considered to have received and expended, on the cash basis, the respective totals shown below for each Unit. On the other hand, if you - 48 - owned Units during only a portion of that period, then the schedule shows the amounts of income and deductible expenses reportable by you for each Unit owned for the respective months. For your information, income is received between the 24th and the end of each month. Income per Unit Expenses per Unit January 1996 $ 0.0890 $ 0.0129 February 0.0949 0.0051 March 0.1046 0.0075 April 0.1076 0.0063 May 0.0892 0.0032 June 0.0667 0.0103 July 0.0507 0.0050 August 0.0729 0.0023 September 0.1041 0.0054 October 0.1167 0.0056 November 0.1397 0.0044 December 0.1067 0.0058 --------- --------- TOTAL 1996 $ 1.1428 $ 0.0738 ========= ========= Income and expenses should be reported on Federal Income Tax Form 1040, Schedule E. Under Part I, Income or Loss from Rentals and Royalties, line 1 enter property description as "oil and gas overriding royalty rights, Germany through North European Oil Royalty Trust." Your income and expenses are calculated by multiplying the above per Unit figures by the number of Units you owned. Your income should be entered on line 4. Expenses should be entered on line 18 as "miscellaneous Trust expenses." Your cost depletion deduction should be entered on line 20. This figure is derived by multiplying the total adjusted cost of all your Units by .07891. Your adjusted cost is your original cost minus depletion deducted in prior years. Your net reportable income or loss should be entered on lines 22 and 26 in Part I and on line 40 in Part V and is determined by subtracting the amounts entered on lines 18 and 20 from the amount on line 4. All of the above entries should be adjusted for the period of time you owned your Units, if you did not own them throughout 1996. The royalty income received by the Trust represents income from Germany. Although there are no German taxes imposed on this income, this information should be considered if you have available foreign tax credits from other sources. The Trust will submit this letter and the listing of Unit owners during - ---------------------------------------------------------------------------- 1996 to the Internal Revenue Service. This list will contain names, - ------------------------------------- addresses, tax ID or Social Security numbers; you may wish to attach a copy of this letter to your tax returns. Most sincerely, /S/ John R. Van Kirk EX-27 5
5 This schedule contains summary financial information extracted from the Statements of Assets, Liabilities and Trust Corpus at October 31, 1996 and the Satements of Income and Expenses on a Cash Basis for the Year Ended October 31, 1996 and is qualified in its entirety by reference to suchfinancial statements and the accompanying notes. YEAR OCT-31-1996 OCT-31-1996 2,477,515 0 0 0 0 2,477,515 1 0 2,477,516 2,348,031 0 0 0 0 129,485 2,477,516 0 9,782,321 0 0 696,005 0 0 9,086,316 0 0 0 0 0 9,086,316 1.05 1.05
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