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 (the "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 the 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
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 1997.
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 indices 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 earlier years, in which case the OEG Agreement provides for the computation system to be revised in 1999. In either case, the revised system will provide
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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.
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. While both Mobil and BMI have suspended production in their concessions in Bavaria, the concessions remain open. They are considering possible wildcat drilling or other methods to increase production.
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 totaling 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, 1997 by product, geographic area and operating company:
BY PRODUCT: -----------
Product Royalty Income - ------- --------------
Natural Gas $ 13,405,398 Sulfur $ 137,555 Oil $ 108,725
BY GEOGRAPHIC AREA: -------------------
Area Royalty Income - ---- --------------
Western Oldenburg $ 11,604,347 Eastern Oldenburg $ 1,924,277 Non-Oldenburg Areas $ 123,054
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BY OPERATING COMPANY: ---------------------
Company Royalty Income - ------- --------------
Mobil Oil A.G. $ 10,188,043 OEG $ 3,463,510 Bayerische Mineral Industries A.G. $ 125
Exhibit 99.1 to this Report is a report dated December 18, 1997 which summarizes certain production data and the estimated net proved producing reserves as of October 1, 1997, 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, 1997 and Calculation of Cost Depletion Percentage for the 1997 Calendar Year, (the "Reserve and Depletion 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 the practice of the Trust in prior years, the information has been prepared for the 12-month period ending September 30, 1997, which is one month prior to the end of the fiscal year of the Trust.
In connection with the information in the Reserve and Depletion 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.
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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 estimates described in the Reserve and Depletion Report. Both the Trustees and Davis Associates believe this report and these 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.
Attachment A of the Reserve and Depletion Report is comprised of a schedule of estimated net proved producing reserves of the Trust's royalty properties, computed as of October 1, 1997 and a five year schedule of gas, sulfur and oil sales for the 12 months ended September 30, 1997, 1996, 1995, 1994 and 1993 computed from quarterly sales reports of operating companies received by the Trust during such periods.
Item 3.
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 more 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.
Item 4. Submission of Matters to a Vote of Security Holders. ----------------------------------------------------
Inapplicable.
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PART II
Item 5.
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 "NYSE") 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 and reserving limited funds for anticipated administrative expenses.
The following table presents the high and low closing prices for the quarterly periods ended in fiscal 1997 and 1996 as reported by the NYSE as well as the cash distributions paid to unit owners by quarter for the past two fiscal years.
FISCAL YEAR 1997
Low High Distributions Closing Closing Per Quarter Ended Price Price Unit - ------------- --------- --------- -------------
January 31, 1997 12.5000 14.2500 .42 April 30, 1997 13.1250 14.3750 .39 July 31, 1997 13.3750 14.7500 .36 October 31, 1997 14.8125 17.5000 .34
FISCAL YEAR 1996
Low High Distributions Closing Closing Per Quarter Ended Price Price Unit - ------------- --------- --------- -------------
January 31, 1996 12.1250 14.3750 .29 April 30, 1996 12.7500 14.3750 .29 July 31, 1996 13.0000 14.1250 .19 October 31, 1996 12.3750 13.7500 .27
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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 Attachment B to the Reserve and Depletion Report attached as Exhibit 99.1. This report has been prepared by Davis Associates using the limited information described under Item 2, Properties, to which reference is made. The Trustees and Davis Associates believe that the calculations and assumptions used in this 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 1997 is 9.056%. 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 a special removable page in the 1997 Annual Report under "Note to Unit Owners" and have been sent in a separate letter to all unit owners registered at any time during 1997 and who are no longer registered owners as of year end.
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, 1997, there were 1,825 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 609 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.
ITEM 6. Selected Financial Data -----------------------
North European Oil Royalty Trust -------------------------------- Selected Financial Data (Cash Basis) ------------------------------------ For Five Years Ended October 31, 1997 -------------------------------------
1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- -----------
German gas, oil and sulfur royalties received $13,651,678 $ 9,710,487 $12,477,788 $ 9,476,252 $10,718,289 =========== =========== =========== =========== =========== Net Income on a cash basis$13,070,207 $ 9,086,316 $11,941,675 $ 8,777,422 $10,248,982 =========== =========== =========== =========== =========== Net Income per unit on a cash basis (a) $1.50 $1.05 $1.43 $1.06 $1.24 ===== ===== ===== ===== ===== Units of beneficial interest outstanding at end of year (a) 8,696,430 8,696,412 8,313,984 8,312,898 8,298,216 Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders $0.00 $0.01 $0.00 $0.05 $0.01 Distributions per unit paid or to be paid to unit owners $1.51 $1.04 $1.43 $1.01 $1.22 ----- ----- ----- ----- ----- $1.51 $1.05 $1.43 $1.06 $1.23 ===== ===== ===== ===== ===== Total assets at end of year$ 3,024,318 $ 2,477,516 $ 2,951,228 $ 1,848,274 $ 2,733,049 =========== =========== =========== ========== ===========
(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.
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Item 7.
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. 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.
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 Deutsche 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.
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Fiscal 1997 versus Fiscal 1996 - ------------------------------
For fiscal 1997 the Trust's royalty income of $13,651,678 increased 40.58% from the prior year. A combination of higher gas prices, relatively uninterrupted gas production permitting increased overall gas sales, and increased gas sales from the higher royalty area of western Oldenburg resulted in the higher royalty revenue. This higher level of royalties occurred despite the 12.24% decline in the average yearly value of the Deutsche mark from $0.6707 to $0.5886.
The average yearly price for gas under both the higher and lower royalty agreements increased by 22.09% and 28.34% respectively to 1.7398 and 1.7960 Pfennigs per Kwh. Compared to the prior year's quarterly averages, higher average gas prices occurred in each of the four quarters. When converted into more familiar terms using the year's average exchange rate, gas prices were $2.93 and $2.97 per Mcf under the higher and lower royalty agreements.
Following the repairs to the gas pipeline and renovations of the Grossenkneten desulfurization plant in the late summer of 1996, gas production increased to its full capacity of 750,000 cubic meters per hour. The resumption of full production allowed the operating companies to sell more than 191 billion cubic feet (Bcf) of gas from the entire Oldenburg concession, an increase of 9.07% from the prior year's sales. The expansion of the desulfurization plant's capacity also permitted an increase in the relative volumes of gas drawn from the higher royalty area of western Oldenburg. Gas sales from western Oldenburg increased 35.63% to more than 85 Bcf. In addition, the percentage of western gas production to overall gas production increased from 35.9% in 1996 to 44.6% in 1997. Without considering differences in prices, the impact of the higher royalty rate from western Oldenburg is shown in the table on page 7 detailing royalty income by geographic area. Despite accounting for less than 45% of overall gas production, royalties from the sale of gas from western Oldenburg are more than six times higher than royalties from eastern Oldenburg.
With Oldenburg gas sales accounting for over 97% of the Trust's 1997 royalties, non-gas or non-Oldenburg royalties have a very minor impact on the Trust. Royalties from sulfur, reflecting the continued exclusion of Mobil's 2% sulfur royalty obligation, amounted to only $137,555. Royalties from oil amounted to $108,725 and continued to decline, reflecting the increasingly uneconomical nature of oil production in Germany and the continuing capping of these uneconomical oil wells. Non-Oldenburg royalties amounted to only $123,054.
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Trust expenses for fiscal 1997 of $674,131 declined by 3.1% from the prior year. Slightly higher interest rates along with larger sums available for investment resulted in a 29% increase in interest income to $92,660.
During fiscal 1997 and 1996 respectively, an additional 18 and 2,148 Trust units were issued and $558 and $64,932 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, pursuant to the settlement approved by the order of the Delaware Court of Chancery, 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 order 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 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 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.
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In prior years, note was made 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 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 obligation 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, pursuant to the settlement approved by the order of the Delaware Court of Chancery, 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 order 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 order of the Delaware Court of Chancery is expected to benefit the Trust's financial condition. See Note 3 to Financial Statements contained herein.
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Item 8.
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
Financial Statements:
Statements of Assets, Liabilities and Trust Corpus as of October 31, 1997 and 1996
Statements of Income and Expenses on a Cash Basis for the Years Ended October 31, 1997, 1996 and 1995
Statements of Undistributed Earnings for the Years Ended October 31, 1997, 1996 and 1995
Statements of Changes in Cash and Cash Equivalents for the Years Ended October 31, 1997, 1996 and 1995
Notes to Financial Statements -
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.
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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, 1997 and 1996 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, 1997. 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 require 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, 1997 and 1996, 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, 1997, 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 financial statements for the possibility that funds would be required to satisfy such claims.
/s/ Arthur Andersen LLP
Roseland, New Jersey November 1, 1997
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NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- OCTOBER 31, 1997 AND 1996 -------------------------
ASSETS 1997 1996 ------ ------------ ------------
Current Assets -- Cash and cash equivalents (Note 1) $3,024,317 $2,477,515
Producing gas and oil royalty rights (Note 1) 1 1 ------------ ------------ $3,024,318 $2,477,516 ============ ============
LIABILITIES AND TRUST CORPUS ----------------------------
Current liabilities -- Cash distributions payable to unit owners, paid November 1997 and 1996 $2,956,786 $2,348,031
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 67,531 129,484 ------------ ------------ $3,024,318 $2,477,516 ============ ============
The accompanying notes to financial statements are an integral part of these statements.
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NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ---------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 ---------------------------------------------------
1997 1996 1995 ------------ ------------ ------------ German gas, sulfur and oil royalties received $13,651,678 $ 9,710,487 $12,477,788
Interest income 92,660 71,834 76,569
Trust expenses ( 674,131) ( 696,005) ( 612,682) ------------ ------------ ------------ Net income on a cash basis $13,070,207 $ 9,086,316 $11,941,675 ============ ============ ============
Net income per unit on a cash basis $1.50 $1.05 $1.43 ======= ======= =======
Cash distributions paid or to be paid: Dividends and distributions per unit paid or to be paid to former unlocated shareholders (Note 3) $0.00 $0.01 $0.00
Distributions per unit paid or to be paid to unit owners (Note 4) 1.51 1.04 1.43 ------- ------- ------- $1.51 $1.05 $1.43 ======= ======= =======
The accompanying notes to financial statements are an integral part of these statements.
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NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 ---------------------------------------------------
1997 1996 1995 ------------ ------------ ------------ Balance, beginning of year $ 129,484 $ 41,333 $ 19,435
Net income on a cash basis 13,070,207 9,086,316 11,941,675 ------------ ------------ ------------ 13,199,691 9,127,649 11,961,110 ------------ ------------ ------------ Less: Dividends and distributions paid to former unlocated shareholders (Note 3) 558 64,178 30,781
Current year distributions paid or to be paid to unit owners (Note 4) 13,131,602 8,933,987 11,888,996 ------------ ------------ ------------ 13,132,160 8,998,165 11,919,777 ------------ ------------ ------------ Balance, end of year $ 67,531 $ 129,484 $ 41,333 ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements.
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NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 ---------------------------------------------------
1997 1996 1995 ------------ ------------ ------------ Sources of cash and cash equivalents: German gas, sulfur and oil royalties received $13,651,678 $ 9,710,487 $12,477,788
Interest income 92,660 71,834 76,569 ------------ ------------ ------------ 13,744,338 9,782,321 12,554,357 Uses of cash and cash equivalents: Payment of Trust expenses 674,131 696,005 612,682 Distributions and dividends paid (Note 3) 12,523,405 9,560,028 10,838,721 ------------ ------------ ------------ 13,197,536 10,256,033 11,451,403 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents during the year 546,802 ( 473,712) 1,102,954
Cash and cash equivalents, beginning of year 2,477,515 2,951,227 1,848,273 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 3,024,317 $ 2,477,515 $ 2,951,227 ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements.
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NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
NOTES TO FINANCIAL STATEMENTS ----------------------------- OCTOBER 31, 1997, 1996 AND 1995 -------------------------------
(1) Summary of significant accounting policies: ----------------------
Basis of accounting - ---------------------
The accounts of North European Oil Royalty Trust (the "Trust") are maintained on a cash basis of accounting with the exception of the accrual for distributions to be paid to unit owners (those distributions approved by the Trustees for the Trust). The Trust's distributable income represents royalty income received by the Trust during the period plus interest income less any expenses incurred the Trust, all on a cash basis. In the opinion of the Trustees, the use of the cash basis provides a more meaningful presentation to unit owners of the results of operations of the Trust.
Producing gas and oil royalty rights - --------------------------------------
The rights to certain gas and oil royalties in Germany were transferred to the Trust at their net book value by North European Oil Company (the "Company") (see Note 2). The net book value of the royalty rights has been reduced to one dollar ($1) in view of the fact that the remaining 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.
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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, 1997, 1996 and 1995, there were 8,696,430, 8,696,412 and 8,313,984 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 the Trust's corporate predecessors, North European Oil Corporation (the "Corporation") and North European Oil Company. From the liquidation of the Company to October 31, 1996, 721,070 Trust units were issued in exchange for Corporate or Company shares and dividends of $353,992 and distributions of $4,226,593 were paid to former unlocated Corporation and Company shareholders. For the year ended October 31, 1997, 18 units were issued in exchanges and $0 in dividends and $558 in distributions were paid to former unlocated Corporation and Company shareholders.
On February 26, 1996 the settlement of litigation between the Trust and the Delaware State Escheator was approved by the Delaware Court of Chancery. As of that date, there were a total of 875,748 authorized but unissued units representing the unexchanged shares of the Trust's corporate predecessors. Out of this total, 760,560 units were subject to the settlement. Pursuant to the Court approved settlement, 380,280 units were issued to the Escheator on April 17, 1996. Of the units remaining to be issued to the Escheator, 50% will be issued to the Escheator by June 30, 2000 and the balance by June 30, 2005. Under the terms of the Court approved settlement, any claims by unlocated or unknown shareholders of the Trust's corporate predecessors for units subject to the settlement and past dividends and distributions thereon ("subsequent claims") will be paid by the Escheator and the Trust on a proportionate basis. For the period until June 30, 2000, subsequent claims will be paid by the Escheator and the Trust on a 50:50 basis. For the period 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
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the Escheator in 2005, the Trust's contingent liability for past dividends and distributions attributable to all unexchanged Corporation and Company shares subject to the settlement will be completely eliminated. Under the terms of the settlement, the maximum liability of the Escheator for subsequent claims is limited to the value of the units received, plus current distributions on units retained, less the Escheator's share of subsequent claims. As of the receipt of the November, 1997 distribution, the maximum liability of the Escheator is $5,727,559.
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, 1997, there remained a total of 494,160 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 $27,186,770 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.
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(4) Quarterly results (unaudited): ------------------------------
The table below summarizes the quarterly results and distributions of the Trust for the years ended October 31, 1997 and 1996.
Fiscal 1997 by Quarter and Year ------------------------------------------------------------- First Second Third Fourth Year ---------- ---------- ---------- ---------- ------------- Royalties received $3,832,201 $3,510,987 $3,170,930 $3,137,560 $13,651,678 Net income on a cash basis 3,578,007 3,400,600 3,070,926 3,020,674 13,070,207 Net income per unit on a cash basis .41 .39 .35 .35 1.50 Current year cash distributions paid or to be paid 3,652,493 3,391,608 3,130,715 2,956,786 13,131,602 Current year cash distributions per unit .42 .39 .36 .34 1.51
Fiscal 1996 by Quarter and Year ------------------------------------------------------------- First Second Third Fourth 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
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Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting ----------------------------------------------------------- and Financial Disclosure. -------------------------
Inapplicable.
PART III
Item 10.
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 13, 1998, 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.
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 13, 1998, as filed with the Commission, is incorporated herein by reference in accordance with Instruction G(3) to Form 10-K.
Item 12.
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 13, 1998, as filed with the Commission, is incorporated herein by reference in accordance with Instruction G(3) to Form 10-K.
Item 13.
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 13, 1998 as filed with the Commission, is incorporated herein by reference in accordance with Instruction G(3) to Form 10-K.
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PART IV
Item 14.
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, 1997, 1996 and 1995
Report of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus as of October 31, 1997 and 1996
Statements of Income and Expenses on a Cash Basis for the Years Ended October 31, 1997, 1996 and 1995
Statements of Undistributed Earnings for the Years Ended October 31, 1997, 1996 and 1995
Statements of Changes in Cash and Cash Equivalents for the Years Ended October 31, 1997, 1996 and 1995
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.
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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 13, 1998 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 13, 1998 /s/ John H. Van Kirk ----------------------------- John H. Van Kirk, Trustee
Dated: January 13, 1998 /s/ Robert P. Adelman ------------------------------ Robert P. Adelman, Trustee
Dated: January 13, 1998 /s/ Robert J. Castle ------------------------------ Robert J. Castle, Trustee
Dated: January 13, 1998 /s/ Samuel M. Eisenstat ------------------------------- Samuel M Eisenstat, Trustee
Dated: January 13, 1998 /s/ Willard B. Taylor -------------------------------- Willard B. Taylor, Trustee
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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 31 in the Northwest Basin of the Federal Republic of Germany as of October 1, 1997 and Calculation Of Cost Depletion Percentage for the 1997 Calendar Year prepared by Ralph E. Davis Associates, Inc.
(99.2) Order Approving Settlement signed by Vice Chancellor Jack Jacobs of the Delaware Court of Chancery on Form 8-K, filed December 11, 1995.