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

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 receives 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 1995.
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 will provide 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 will not be 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 will not be included in reserve calculations for this report year.
The following is a schedule of royalty income for the fiscal year ended October 31, 1995 by geographic area and operating company:
By Geographic Area: ------------------- Area Royalty Income ---- -------------- Western Oldenburg $ 10,382,980 Eastern Oldenburg $ 1,978,153 Non-Oldenburg Areas $ 116,655
By Operating Company: --------------------- Company Royalty Income ------- -------------- Mobil Oil A.G. $ 9,075,834 OEG $ 3,399,839 Bayerische Mineral Industries A.G. $ 2,115
Exhibit 99 to this Report is a report dated December 21, 1995 which summarizes certain production data and the estimated net proved producing reserves as of October 1, 1995, based on the limited information available, for the Oldenburg area in which the Trust now holds overriding royalty rights. That report (the "Davis 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, the information has been prepared for the 12-month period ending September 30, 1995, which is a date prior to the end of the fiscal year of the Trust. The use of this earlier date is consistent with the periods covered in prior Annual Reports.
In connection with the information in the Davis 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 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.
The Trust has the authority to audit 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). Given the limited nature of the information available, the statistical information reflected in the Davis Report is based upon extrapolations and projections. While these are deemed appropriate and suitable by Davis Associates and by the Trustees themselves, they may vary from statistical projections which could be made if reservoir production information normally available for domestic producing companies were published or made available. In the opinion of the Trustees, the nature of the 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 Davis Report.
Table I of the Davis Report is comprised of a schedule of estimated net proved producing reserves of the Trust's royalty properties, computed as of October 1, 1995 and a five year schedule of gas, sulfur and oil sales for the 12 months ended September 30, 1995, 1994, 1993, 1992 and 1991 computed from quarterly sales reports of operating companies received by the Trust during such periods.
Item 3.

Item 3. Legal Proceedings. ------------------
Management of the Trust has been advised of certain claims or proceedings relating to disputed ownership of units of beneficial interest where replacement certificates had previously been issued for allegedly lost predecessor corporate certificates. While the Trust or its transfer agent may be named in some of these proceedings, coverage under unlimited, open penalty indemnity bonds previously issued is in effect for these disputed units. For that reason and upon advice of counsel, management of the Trust believes that these pending litigations will not have any material effect on the operation of the Trust or the funds available for distribution to unit owners.
As previously reported, on November 20, 1986, the Escheator for the State of Delaware commenced an action in the Delaware Court of Chancery. The proceeding, brought under the escheat laws of Delaware, sought issuance to the Escheator of certificates for units of beneficial interest which are issuable in exchange for certain unexchanged shares of predecessor corporate entities, as well as unpaid dividends and distributions attributable thereto and interest thereon. On October 25, 1988, the Court entered an Order granting the Trust's motion to dismiss the Escheator's complaint to the extent that it asserted a claim to a present entitlement under Delaware law to such property. The Court permitted the Escheator to seek modification of the Court's prior orders concerning the Trust to make the property subject to escheat after the statutory period of dormancy. On February 15, 1990, the Delaware Escheator made such a motion, but no further proceedings had since taken place pursuant to that motion. In July, 1991, the Delaware General Assembly adopted amendments to the Delaware escheat laws which, if controlling, would have resulted in the period of dormancy, with respect to the property in issue, having already expired. While other provisions of the law might have provided a basis for the Court to again conclude that the period of dormancy had not commenced, there could be no assurance that such an interpretation would have prevailed, and the property might have been immediately subject to escheat. Even if the Court concluded that the period of dormancy had not yet begun, the Escheator could seek modification of the Court's prior orders. In either case, funds otherwise available for distribution to unit owners would have been required for payments to the Escheator in amounts which would have resulted in reduced or no funds being available for some period of time for regular distribution payments. In response to suggestions from counsel for the Escheator and in order to avoid the attendant costs and uncertainty of further litigation, the Trustees discussed the feasibility of settling the pending litigation. On December 7, 1995, as a result of these settlement discussions, attorneys for the Trust and the Delaware Attorney General representing the Escheator filed a joint petition in the Delaware Chancery Court seeking approval for a settlement of the litigation on negotiated terms. The settlement requires approval of the Court after opportunity for public hearing. The Court has appointed a Solicitor ad litem to represent the interests of the unlocated shareholders and set a hearing date for February 26, 1996. See Exhibit 99.2 contained in this report for the complete text of the Notice of Joint Petition for Approval of Settlement of Pending Litigation.
As of December 7, 1995 there were a total of 875,946 authorized but unissued units reflecting the unexchanged shares of the Trust's predecessor corporations. If the proposed settlement is approved, 760,560 units out of this total will be issued to the Escheator in three installments. Within thirty (30) days after the Court's order approving the settlement
becomes final and non-appealable, one-half of these units (380,280) will be issued to the Escheator. Subject to reductions for intervening claims, an additional 50% of the remaining units will be issued in the year 2000 and the remainder in the year 2005. These units reflect the unexchanged shares of the predecessor corporations to the Trust which are registered in the names of unknown owners, unlocated owners with a Delaware or non- U.S. address of record and brokerage firms or other nominees with insufficient records to establish beneficial ownership. As these units are issued, they will be entitled to regular quarterly payment of distributions by the Trust.
Under the terms of the settlement, the Trust would not be required to make payments of arrearages of Company dividends or Trust distributions to the Escheator with respect to the units issued. Claims received prior to the year 2005 from previously unlocated owners would be paid jointly by the Escheator and the Trust under a formula provided in the settlement, with claimant owners entitled to receive both units and arrears payments. Following the initial issuance and continuing until the second issuance in the year 2000, the Trust and the Escheator would each be responsible for 50% of any claim submitted. Following the second issuance and continuing until the final issuance in the year 2005, the Trust would be responsible for 25% of any claim submitted and the Escheator would be responsible for 75%. At all stages of this settlement following the initial issuance and continuing until the final issuance in 2005, the Escheator's liability will be limited to the total value of units and distributions it has received. Any claims in excess of this amount will be paid by the Trust. After the final issuance in the year 2005, no further payments of arrearages of Company dividends or Trust distributions would be required to be paid to shareholders subject to this settlement and the contingent liability for such possibility, described in Note 3 to Financial Statements contained herein, would no longer be applicable.
To make it possible to address within this settlement all unlocated shareholders, the Trust is seeking Court approval to permit the Trust to enter into similar settlement procedures with other states covering the authorized but unissued units that were not subject to the litigation (115,386 units as of December 7, 1995). See the Current Reports on Form 8-K filed on November 26, 1986, November 1, 1988 and December 11, 1995 (including Exhibits describing petition terms) and Note 3 to Financial Statements contained herein.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders. ----------------------------------------------------
Inapplicable.
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 "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 closing sales prices for the quarterly periods ended in fiscal 1995 and 1994 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 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
Fiscal Year 1994
Low High Distributions Quarter Ended Sales Sales Per Unit - ---------------- -------- -------- ------------- January 31, 1994 15 17 1/4 .27 April 30, 1994 15 1/4 16 7/8 .36 July 31, 1994 15 1/2 16 7/8 .16 October 31, 1994 12 7/8 16 .22
The quarterly distributions to unit owners represent their undivided interest in royalty payments from sales of gas, oil and sulfur during the previous quarter. Each unit owner is entitled to recover a portion of their investment in these royalty rights through a cost depletion allowance. The percentage of cost depletion allowance recommended by the Trust's independent petroleum and natural gas consultants for calendar 1995 is 9.343%. Specific details relative to your interest in the Trust's income and expenses are included on page 3 of the 1995 Annual Report under "Note to Unit Owners" and have been sent in a separate letter to all unit owners registered at any time during 1995.
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 January 2, 1996, there were 2,124 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 613 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.
ITEM 6.

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 received), the remuneration fixed by the Trustees for the Managing Trustee and the Managing Director, 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. As indicated in Note 3 to the Financial Statements, if presentation were made with respect to all predecessor corporate shares which have not been previously presented, a total of $26,368,222 would be required for arrearage payments. Depending on the number of such shares presented or claims filed, payment of such arrearages would likely require a reduction or deferral of distributions which otherwise would be made on presently outstanding units.
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 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 1995 versus Fiscal 1994 - ------------------------------
For fiscal 1995 the Trust's royalty income of $12,477,788 was 31.6% 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 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.
Fiscal 1994 versus Fiscal 1993 - ------------------------------
For fiscal 1994 the Trust's total royalty income of $9,476,252 was 11.6% lowerthan the previous year. There are four primary factors that affect the level of royalties: the amount of gas sales, the gas prices, the geographic source of sales and the exchange rates. This year, as in last year, a fifth factor of business interruption was added. The year commenced on a strong note with both the first and second quarters showing increases in all factors except for exchange rates when compared to the prior year's quarter. During the third and fourth quarters all the factors affecting royalties reversed themselves. Where previously the amount of gas sales, gas prices and geographic source of sales showed increases, they now showed declines. The previous declines in exchange rates now showed increases. The basis for this reversal was the fifth factor of business interruption, which involved an extended shutdown at the Grossenkneten desulfurization plant from April 25 to July 25, 1994. During this shutdown, production was reduced to between one third and two thirds of normal levels. The rationale behind the shutdown was three fold: conduct normal annual maintenance, install additional tail gas clean up units to address lingering environmental concerns and overhaul and update control system for the entire plant. The effects of this shutdown on the Trust's royalty stream and subsequent distributions were significant. The first six months of fiscal 1994 showed distributions of 63 cents per unit compared to 57 cents per unit for fiscal 1993, an increase of 10.5%. The final six months of fiscal 1994 showed distributions of 38 cents per unit compared to 65 cents per unit for fiscal 1993, a decrease of 41.5%. In average for the year the four factors affecting royalties showed decreases or were unchanged. Under the higher royalty agreement with Mobil covering sales of gas from western Oldenburg, sales declined by 11.85%, prices and exchange rates were unchanged. Because the combined royalty rate in effect on these sales is seven times greater than the royalty in effect on sales from eastern Oldenburg, any decline in sales from the west has an exaggerated effect on Trust royalties. Under the lower royalty agreement covering the entire Oldenburg
area, sales declined by 3.6%, gas prices by 3.1% and the exchange rate by 1.5%.
Despite the improvement in sulfur prices from $24.00 in the first quarter to $63.00 per metric ton in the fourth quarter, the threshold level for the resumption of royalties under the agreement with Mobil has not been reached. Until the overabundance of sulfur on the world market is reduced, the Trust will receive only minor amounts of royalties from sulfur.
Trust expenses showed an increase of nearly 45% reflecting increased legal expenses relating to escheat matters. Interest income increased slightly, despite the reduced amount of funds available, because of the gradually increasing interest rates in effect.
During fiscal 1994 and 1993, respectively, an additional 14,682 and 3,687 Trust Units were issued and $412,306 and $97,121 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.
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, 1995 and 1994
Statements of Income and Expenses on a Cash Basis for the Years Ended October 31, 1995, 1994 and 1993
Statements of Undistributed Earnings for the Years Ended October 31, 1995, 1994 and 1993
Statements of Changes in Cash and Cash Equivalents for the Years Ended October 31, 1995, 1994 and 1993
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.
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, 1995 and 1994 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, 1995. 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, 1995 and 1994, 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, 1995, 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 8, 1995
NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- OCTOBER 31, 1995 AND 1994 -------------------------
ASSETS 1995 1994 ------ ------------ ------------
Current Assets -- Cash and cash equivalents (Note 1) $2,951,227 $1,848,273
Producing gas and oil royalty rights (Note 1) 1 1 ------------ ------------ $2,951,228 $1,848,274 ============ ============
LIABILITIES AND TRUST CORPUS ----------------------------
Current liabilities -- Cash distributions payable to unit owners, paid November 1995 and 1994 $2,909,894 $1.828,838
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 41,333 19,435 ------------ ------------ $2,951,228 $1,848,274 ============ ============
The accompanying notes to financial statements are an integral part of these statements.
NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ---------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 ---------------------------------------------------
1995 1994 1993 ------------ ------------ ------------ German gas, oil and sulfur royalties received $12,477,788 $ 9,476,252 $10,718,289
Interest income 76,569 45,798 44,768
Trust expenses ( 612,682) ( 744,628) ( 514,075) ------------ ------------ ------------ Net income on a cash basis $11,941,675 $ 8,777,422 $10,248,982 ============ ============ ============
Net income per unit on a cash basis $1.43 $1.06 $1.24 ======= ======= =======
Cash distributions paid or to be paid: Dividends and distributions per unit paid or to be paid to former unlocated shareholders (Note 3) $ .00 $ .05 $ .01
Distributions per unit paid or to be paid to unit owners (Note 4) 1.43 1.01 1.22 ------- ------- ------- $1.43 $1.06 $1.23 ======= ======= =======
The accompanying notes to financial statements are an integral part of these statements.
NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 ---------------------------------------------------
1995 1994 1993 ------------ ------------ ------------ Balance, beginning of year $ 19,435 $ 43,897 $ 14,589
Net income on a cash basis 11,941,675 8,777,422 10,248,982 ------------ ------------ ------------ 11,961,110 8,821,319 10,263,571 ------------ ------------ ------------ Less: Dividends and distributions paid to former unlocated shareholders (Note 3) 30,781 412,306 97,847
Current year distributions paid or to be paid to unit owners (Note 4) 11,888,996 8,389,578 10,121,827 ------------ ------------ ------------ 11,919,777 8,801,884 10,219,674 ------------ ------------ ------------ Balance, end of year $ 41,333 $ 19,435 $ 43,897 ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements.
NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 ---------------------------------------------------
1995 1994 1993 ------------ ------------ ------------ Sources of cash and cash equivalents: German gas, oil and sulfur royalties received $12,477,788 $ 9,476,252 $10,718,289
Interest income 76,569 45,798 44,768 ------------ ------------ ------------ 12,554,357 9,522,050 10,763,057 Uses of cash and cash equivalents: Payment of Trust expenses 612,682 744,628 514,075 Distributions and dividends paid (Note 3) 10,838,721 9,662,197 10,516,557 ------------ ------------ ------------ 11,451,403 10,406,825 11,030,632 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents during the year 1,102,954 ( 884,775) ( 267,575)
Cash and cash equivalents, beginning of year 1,848,273 2,733,048 3,000,623 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 2,951,227 $ 1,848,273 $ 2,733,048 ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements.
NORTH EUROPEAN OIL ROYALTY TRUST --------------------------------
NOTES TO FINANCIAL STATEMENTS ----------------------------- OCTOBER 31, 1995, 1994 AND 1993 -------------------------------
(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 except for distributions to be paid to unit owners (those distributions approved by the Trustees for the Trust). 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.
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, 1995, 1994 and 1993, there were 8,313,984, 8,312,898 and 8,298,216 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, 1994, 717,836 Trust units were issued in exchange for Corporate or Company shares and dividends of $352,959 and distributions of $4,130,993 were paid to former unlocated Corporation and Company shareholders. For the year ended October 31, 1995, 1,086 units were issued in exchanges and dividends of $271 and distributions of $31,430 were paid to former unlocated Corporation and Company shareholders.
As of October 31, 1995, 876,606 units remain that could be issued to unlocated or unknown Corporation and Company shareholders and $487,894 in dividends and $25,880,328 in distributions would be payable if all such shares were exchanged. The amount of attributable distributions will increase as further distributions of the Trust are made and it is possible that claims by such unlocated shareholders would require substantial payments to a level where reduced or no funds would be available for some period of time for regular distribution payments. On the basis of their experience with such claims, the Trustees believe that it is unlikely that payments for such claimants would be required in substantial amounts in any one period of time.
On November 20, 1986, the Escheator for the State of Delaware commenced an action in the Delaware Court of Chancery seeking issuance, under Delaware escheat statutes, of
certificates for units of beneficial interest which are issuable in exchange for certain unexchanged Corporate or Company shares as well as unpaid dividends and distributions. Following partial resolution of the suit in 1988, discussions for possible settlement of the proceeding were suggested by representatives for the Escheator. On December 7, 1995, as a result of these discussions, attorneys for the Trust and the Delaware Attorney General representing the Escheator filed a joint petition in the Delaware Chancery Court seeking approval for a settlement of the litigation on negotiated terms. The settlement requires approval of the Court after opportunity for public hearing. The Court has appointed a Solicitor ad litem to represent the interests of the unlocated shareholders.
As of December 7, 1995 there were a total of 875,946 authorized but unissued units reflecting the unexchanged shares of the Trust's predecessor corporations. If the proposed settlement is approved, 760,560 units will be issued to the Escheator in three installments as follows: within thirty (30) days after the Court's order approving the settlement becomes final and non-appealable, one-half of these units (380,280) will be issued to the Escheator; subject to reductions for subsequent exchanges, an additional 50% of the remaining units will be issued in the year 2000; and the remainder in the year 2005. As these units are issued and become outstanding, they will be entitled to receive the ordinary distributions of the Trust.
Under the terms of the settlement, the Trust would not be required to make payments of arrearages of Company dividends or Trust distributions to the Escheator with respect to the units issued. Claims for the issuance of units and the payment of prior dividends and distributions received before the year 2005 from previously unlocated shareholders would be paid jointly by the Escheator and the Trust under a formula provided in the settlement, with claimant owners entitled to receive both units and arrears payments. Until the final issuance of units in 2005, the Escheator's liability will be limited to the total value of units and distributions it has received. Any claims in excess of this amount will be paid by the Trust. After the final issuance of units in the year 2005, no further payments of arrearages of Company dividends or Trust distributions would be required to be paid to shareholders subject to this settlement and the contingent liability for such possibility described above would no longer be applicable.
This settlement also permits the Trust to seek to apply the same or similar settlement procedures to the authorized but unissued units that were not subject to the litigation (115,386 units as of December 7, 1995). Any additional issuances that occur as in the course of subsequent settlements with respect to these units would involve some additional dilution.
(4) Quarterly results (unaudited): ------------------------------
The table below summarizes the quarterly results and distributions of the Trust for the years ended October 31, 1995 and 1994.
1995 Quarter --------------------------------------- 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
1994 Quarter --------------------------------------- 1st 2nd 3rd 4th Year ---------- ---------- ---------- ---------- ------------- Royalties received $2,579,218 $3,114,996 $1,843,579 $1,938,459 $ 9,476,252 Net income on a cash basis 2,380,956 2,963,754 1,661,147 1,771,565 8,777,422 Net income per unit on a cash basis .29 .36 .20 .21 1.06 Current year cash distributions paid or to be paid 2,241,709 2,988,967 1,330,064 1,828,838 8,389,578 Current year cash distributions per unit .27 .36 .16 .22 1.01
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 11, 1996, 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 11, 1996, 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 11, 1996, 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 11, 1996 as filed with the Commission, is incorporated herein by reference in accordance with Instruction G(3) to Form 10-K.
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, 1995, 1994 and 1993
Report of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus as of October 31, 1995 and 1994
Statements of Income and Expenses on a Cash Basis for the Years Ended October 31, 1995, 1994 and 1993
Statements of Undistributed Earnings for the Years Ended October 31, 1995, 1994 and 1993
Statements of Changes in Cash and Cash Equivalents for the Years Ended October 31, 1995, 1994 and 1993
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 but one was filed on December 11, 1995 to reflect information concerning the joint petition to settle pending litigation brought by Delaware State Escheator.
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 11, 1996 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 11, 1996 /s/ John H. Van Kirk ------------------------------- John H. Van Kirk, Trustee
Dated: January 11, 1996 /s/ Robert P. Adelman ------------------------------- Robert P. Adelman, Trustee
Dated: January 11, 1996 /s/ Robert J. Castle ------------------------------- Robert J. Castle, Trustee
Dated: January 11, 1996 /s/ Willard B. Taylor ------------------------------- Willard B. Taylor, Trustee
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) Report and Production Summary Information 35 for Twelve Months Ended September 30, 1995, by Ralph E. Davis Associates, Inc.
(99.2) Notice to Unit Owners of hearing date and terms 45 of the Joint Petition for Approval of Settlement of Pending Litigation on Form 8-K, filed December 11, 1995.


ITEM 1 - BUSINESS
Frontier Financial Corporation (FFC) is a Washington corporation which was incorporated in 1983 and is registered as a bank holding company under the Bank Holding Company Act of 1956. As part of a plan of reorganization consummated following the close of business September 30, 1983, FFC acquired all of the stock of Frontier Bank (the Bank), issuing its common stock in an exchange for the Bank's common stock on a share-for-share basis. FFC has two subsidiaries; the Bank, which is engaged in a general banking business and in businesses related to banking, and FFP, Inc., a nonbank corporation which leases property and equipment to the Bank.
The Bank
The Bank is a state-chartered banking association with its principal office located in Everett, Snohomish County, Washington. It was founded in September, 1978 by Robert J. Dickson and local business persons. The Bank is an "insured bank" as defined in the Federal Deposit Insurance Act.
The Bank engages in general banking business, including the acceptance of demand, time and savings deposits and the making of loans. As of December 31, 1995, the Bank conducted its business operations out of 16 offices located in Snohomish and King Counties, of which four offices are located in Everett, one office each is located in Arlington, Snohomish, Smokey Point, Lake Stevens, Marysville, Lynnwood, Mill Creek, Edmonds, Stanwood, Bothell, Woodinville and Monroe.
Banking Services
The Bank provides a full range of consumer banking services including savings accounts, checking accounts, installment and commercial lending, safe deposit facilities, time deposits and other consumer and business related financial services. In addition to consumer oriented activities, the Bank maintains a strong commercial lending program, servicing businesses headquartered in the Bank's principal market area. At the end of 1983, the Bank began to offer a discount brokerage service to its customers. In September of 1984, the Bank opened its Real Estate Division, offering a broad range of home, construction and commercial long-term financing. The Trust Department opened for business in March of 1985. This department offers a full array of trust services to its customers. In May 1988, the Bank opened a Private Banking Office to give personal service to upscale customers. In August 1989, the Bank acquired, through a merger, three banking offices of Citizens Bank of Snohomish County, and a real estate origination department. In January 1991, the Bank opened an office in Mill Creek, providing a full range of consumer banking services.
In March 1991, the Bank opened an Insurance and Investment Center which markets annuities, life insurance products, and mutual funds to Bank customers and the general public. In July 1992, the Bank opened its Stanwood office. In November 1992, the Bank acquired through merger, Edmonds National Bank, which had one office. In July 1993, the Bank acquired through merger, The Bank of Northshore, which had two offices located in Bothell and Woodinville, King County, Washington. This merger marked the first time the Bank branched outside of Snohomish County. In June 1995, the Bank opened an office in Monroe, providing a full range of consumer banking services.
Employees
At December 31, 1995, the Bank had 281 full and part time employees. The Bank considers its relations with employees to be very good.
Competition
All phases of the Bank's activities are highly competitive. The Bank competes actively with national and state banks, mutual savings banks, savings and loan associations, finance companies, credit unions, brokerage houses, and other financial institutions operating in its service area. Some of these financial institutions have greater resources than those of the Bank. On December 31, 1995, the Bank had total assets of $735.2 million and deposits of $641.2 million.
Supervision and Regulation
FFC, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956 (the Act), as amended, and is registered with the Board of Governors of the Federal Reserve System. FFC is required to file quarterly reports with the Federal Reserve, and is subject to their examination.
The Act requires prior approval of the Board of Governors before acquiring substantially all the assets of, or direct or indirect ownership or control of, more than 5% of the voting shares of any bank.
The Act also prohibits the acquisition by a bank holding company of the assets or shares of a bank located outside the state in which the principal operations of the banking subsidiaries are conducted unless such acquisition is specifically authorized by the laws of the state in which the Bank to be acquired is located. The Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies.
Under the Act, FFC is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank, and from engaging in any business other than banking, except that FFC may engage in, and may own shares of companies engaged in certain businesses determined by the Board of Governors to be so closely related to banking so "as to be a proper incident thereto". Such related businesses include, by determination of the Board of Governors, the making or acquiring of loans or extensions of credit such as would be made by a mortgage, finance, credit card or factoring company; leasing of personal property where the leasing arrangements are functionally equivalent to extensions of credit; and acting as an insurance agent or broker of insurance directly related to extensions of credit of the Bank or other closely related businesses. The Act, however, prohibits tie-in arrangements in connection with the extension of credit or provision of services.
The Bank, as a state chartered bank, is subject to supervision, examination and regulation by the State Supervisor of Banking and the Federal Deposit Insurance Corporation (the FDIC). The deposits of the Bank are insured by the FDIC to the extent provided by law.
Various requirements and restrictions under the laws of the United States and the State of Washington affect the operations of the Bank. Federal regulations include requirements to maintain reserves against deposits, restrictions on interest which may be paid on business demand deposits, limitations on the nature and the amount of loans which may be made and the interest that may be charged thereon, restrictions relating to investments or other activities, limitations based on capital and surplus, and limitations on payments of dividends. The approval of the Supervisor is required to pay dividends which exceed the Bank's net profits for that year plus its retained net profits for the preceding two years. Federal law also restricts the amount which can be loaned to the Corporation or any of its nonbank subsidiaries to 10% of the Bank's capital stock and surplus, and restricts the total of such loans to 20% of the Bank's capital stock and surplus.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) became effective on August 9, 1989. Among other things, this far reaching legislation: 1) phased in significant increases in the FDIC insurance premiums by 1993; 2) created two deposit insurance pools within the FDIC, one to insure commercial and savings bank deposits and the other to insure savings associations deposits; 3) permitted bank holding companies to acquire healthy savings associations; 4) permitted commercial banks that meet certain housing related asset requirements to secure advances and other financial services from their local Federal Home Loan Bank; 5) created the Resolution Trust Corporation to pay the cost of resolving insolvent savings associations financed by the taxpayers and the savings associations; 6) restructured the federal regulatory agencies for savings associations; 7) required higher minimum capital levels for savings associations; and 8) has greatly enhanced the regulator's enforcement powers by removing procedural barriers, sharply increasing the civil and criminal penalties for violating statutes and regulations, and providing increased appropriations to the Justice Department to finance prosecutions for crimes against depository institutions.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was enacted. FDICIA substantially revises the depository institution regulatory and funding provisions in the Federal Deposit Insurance Act and makes revisions to several other federal banking statutes. Among other things, FDICIA requires the Federal Banking Regulators to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. The FDICIA created regulations establishing five capital tiers: "Well Capitalized"; "Adequately Capitalized"; "Under-Capitalized"; "Significantly Under-Capitalized"; and "Critically Under-Capitalized". Under the regulations, a depository institution would be considered Well Capitalized if it maintains a leverage ratio of at least five percent and a risk-based Tier I capital ratio of at least six percent and a risk-based total capital ratio of at least ten percent, and is not otherwise designated to be in troubled condition. Also, a depository institution will be deemed Under-Capitalized if it fails to meet any applicable minimum capital measure; Significantly Under-Capitalized if it is significantly below such measure; and Critically Under-Capitalized if it fails to meet a level of tangible equity of two percent of total assets. If a depository institution is neither Well Capitalized nor Under-Capitalized, it will be considered Adequately Capitalized. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.
The FDICIA generally prohibits a depository institution from making any capital distribution, including the payment of dividends or payment of any management fee to its holding company, if the depository institution would thereafter be Under-Capitalized. Under-Capitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, Under-Capitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution holding company must guarantee the capital plan up to the amount equal to the lesser of five percent of the depository institution's assets at the time it becomes Under-Capitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The Federal Banking Agencies may not accept a capital plan without determining, among other things, if the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is Significantly Under-Capitalized.
Significantly Under-Capitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become Adequately Capitalized, requirements to reduce total assets, and the cessation of receipt of deposits from correspondent banks. Critically Under-Capitalized depository institutions are subject to employment of a receiver or a conservator.
The FDICIA also required the FDIC to revise its risk-based capital guidelines by June 19, 1993 to take into account interest rate risk, concentration of credit risk, and risk associated with nontraditional activities. It also required the guidelines to reflect the actual performance and expected risk of loss of multi-family mortgages. These provisions affect the capital standing of all institutions, and may result in a need for increased capital.
As of December 31, 1995, the Bank was Well Capitalized, and maintained a leverage ratio of 8.81%, a risk-based Tier I capital ratio of 11.07%, and a risk-based total capital ratio of 12.33%.
The Corporation's common stock is registered under Section 12(g) of the Securities Exchange Act of 1934 and the Corporation is subject to the periodic reporting and proxy solicitation requirements, as well as other requirements of federal and state securities law.
Effect of Governmental Policies
The Bank is affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States Government and various agencies, particularly the Federal Reserve System. In its role of implementing its monetary policy, the Federal Reserve Board has the power to regulate the national supply of bank credit through such methods as open market operations in the United States Government securities markets, control of the discount rate on member bank borrowings, and establishment of reserve requirements against bank deposits. These means are used in varying combinations and have an influence over the growth of bank loans, investments, and deposits. They may also affect interest rates charged on loans or paid on deposits.
The nature and timing of future changes in monetary policies and their impact on the Bank are not predictable. As a consequence of extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by Federal legislation and regulations which may have the effect of increasing the cost of doing business or limiting permissible activities.
FFP, Inc.
On April 4, 1988, the Corporation formed a new subsidiary corporation called FFP, Inc. The purpose of this corporation is to purchase and lease property and equipment to the Bank. The reason for this approach was to preclude placing nonearning assets on the books of the Bank or the Corporation.
It is intended that future purchases of fixed assets will be made by FFP, Inc. The assets of FFP, Inc. as of December 31, 1995 are the premises and equipment of the Bank's Lynnwood, Stanwood, Administrative, Monroe, Smokey Point and Snohomish offices. At this time, it is not anticipated that FFP, Inc. will engage in any other type of business.
STATISTICAL DISCLOSURE INDEX
The schedules listed below set forth the statistical information relating to Frontier Financial Corporation and subsidiaries (unless otherwise stated) in accordance with Guide 3. This information should be read in conjunction with the consolidated financial statements.
Analysis of Investment Securities
The Aggregate amortized recorded values of investment securities at December 31 are as follows:
Maturity Distribution of Investment Securities
The following table sets forth the maturities of investment securities at December 31, 1995. Taxable equivalent values are used in calculating yields assuming a tax rate of 34%.
Types of Loans
Major classifications of loans, net of deferred loan fees, at December 31 are as follows:
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table shows the amounts and maturity analysis of loans outstanding as of December 31, 1995. Also, the amounts are classified as to fixed and variable rate sensitivity for amounts due after one year.
Loans maturing after one year with:
It is not uncommon to rollover loans at the maturity period, provided that the rate and terms of the loan conform to the current policy.
Loan Administration
The Bank provides revolving lines of credit to many of its borrowers. Such lines are approved by the Director's Loan Committee ("Loan Committee") or other administrative level committee or person if the amount exceeds the lending units authorized loan limit.
Credit Review personnel, under the direction of the Credit Administrator, examine the loan portfolio regularly. Reports are made by the Senior Vice-President/Credit Administrator to senior management and the Loan Committee, and follow-up corrective action is monitored. Problem loan reports are prepared for management review on a regular basis.
Certain problem loans are placed on a nonaccrual basis in conformance with defined policy. The Loan Committee regularly reviews information reports on classified and delinquent loans. Comparative summaries of delinquent loans are also provided on a regular basis to senior management and to the Board of Directors.
Management closely monitors the adequacy of the loan loss reserve and an analysis is performed four times a year. The allowance is maintained at a level deemed sufficient to meet potential losses.
The reviews, examinations and actions described above are in addition to the periodic examinations by federal and state regulatory agencies, as well as the Bank's internal audit department and the Bank's outside public accounting firm.
Impaired Assets (Previously referred to as Nonperforming Assets)
Loans are placed in a nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful, or when the loan becomes ninety (90) days past due in principal or interest. When a loan is placed on a nonaccrual status, all interest previously accrued but not collected is reversed and charged against interest income. Income on nonaccrual loans is then recognized only to the extent cash is received and where the future collection of principal is probable. Accruals are resumed only when the loan is brought current, or when, in the opinion of management, the borrower has demonstrated the ability to resume payments of principal and interest on a regular basis.
The dollar amount of loans placed in nonaccrual or past due 90 days or more as a percentage of total loans was .87%, .57% and .44% for year-end 1995, 1994 and 1993 respectively. These loans have a variety of situations, some of which may lead to foreclosure or involve a bankruptcy case. Others may continue payment as the borrower's financial situation improves. A very small amount represents federally insured loans. The rise at year end 1995 occurred primarily as a result of two particular borrowers which, together, constituted $4.0 million, or 91% of total nonaccruing loans. While these loans appear adequately secured by real estate, it was nonetheless felt prudent to place them in nonaccrual.
Management monitors these loans on a frequent basis and conducts aggressive collection efforts, unless constraints are placed on the Bank by the bankruptcy courts. These efforts are directed toward the best long-term results for the Bank, and to the extent reasonable, to the borrower as well.
Loans past due 90 days or more and nonaccruing loans on which the accrual of interest has been discontinued as of December 31st are as follows:
(In thousands)
There are certain amounts of interest collected on the above loans and included in income, and amounts that have not been accrued which are indicated in the table below:
Restructured loans are those loans that had problems in the past, and a concession was made in the interest rate, principal amount, and/or the repayment schedule has been modified to the extent that there has been tangible impairment of value. These loans are monitored on a regular basis for performance.
The recorded value of restructured loans at year-end for the last five years was insignificant, and therefore not shown.
The Bank originates commercial, commercial real estate, mortgage and installment loans primarily in Snohomish and north King Counties. Loan growth in 1995 was at a somewhat slower pace than previous years. Total loans as of December 31, 1995 and 1994 were $505.0 and $470.5 million, respectively. The percent of the growth in net loans for year-end 1995 was 7.2%, or an addition of $34.0 million in net loans during 1995.
The area's economy is diversified with trade, high-tech, military and service industries. Military personnel assigned to the new Everett Naval facility began arriving in the later part of 1995, and it is expected that continuing increases in personnel will serve to further diversify and stabilize the local economy. While management estimates that the loan portfolio is reasonably diversified, the quality of the portfolio is related to the strength and stability of real estate values which are controlled by the local economy.
The Boeing Company continues to be one of the major employers in Snohomish County. The labor strike in the fourth quarter of 1995 slowed retail sales growth during the time, but it would appear that this slowing and concerns over the past downsizing at Boeing were somewhat mitigated by the increased diversification of the local economy. However, concern still persists regarding the employment stability of Boeing, and, accordingly, management will continue to exercise caution in the execution of the Bank's lending activities.
A concern on the national level is the continued negotiations on balancing the federal budget. The government shut downs in the last quarter 1995 combined with the uncertainty of reaching a compromise over the federal deficit may have adverse effects on the credit and equity markets, which could affect consumer and business confidence locally.
Other Real Estate Owned
As of December 31, 1995, the Bank had four parcels of other real estate owned (OREO) on its books, which totaled $.6 million. One parcel is under a contingent earnest money agreement to purchase, and one other parcel is sold under the equivalent of the instalment sale method. The remaining two parcels are pending sale. No losses are expected on sales of OREO which are recorded at the lower of cost or fair value, less estimated costs to sell. No particular trends are noted at this time.
The table below shows the book value of OREO at December 31st:
Summary of Loan Loss Experience
The following table provides an analysis of net losses by loan type for the last five years:
It is the policy of Frontier Financial Corporation and its subsidiary to charge-off any loan or portion of a loan that is deemed uncollectible in the ordinary course of business. The entire allowance for possible loan losses is available to absorb such charge-offs.
In the opinion of management, if a loan represents a long-term liquidation project, particularly when the liquidation is under the control of the bankruptcy courts, a decision may be made to write off the asset. Many charge-offs will ultimately have recoveries in full or significant part, and some are currently under repayment programs.
For fiscal year-end 1995, the Bank experienced the lowest level of net losses to average total loans in the last five years. This low level is attributed to the Bank's recoveries during 1995 of several significant charge-offs. All of the major dollar recoveries were from charge-offs that occurred in prior years.
As indicated by the chart showing the "Summary of Loan Loss Experience", the Bank has recovered a significant portion of its charged-off loans for fiscal years 1995 and 1994. The chart also indicates that the Bank's net charge-offs for fiscal years 1992 and 1993 were substantially higher. The higher level for those fiscal years is primarily attributed to loans acquired through acquisition.
Charged-off loans that continue to be actively pursued for collection as of fiscal year-end 1995, total $3.4 million. While additional recoveries are expected, the amounts and timing cannot be determined with certainty.
Based on certain characteristics of the portfolio, potential losses can be anticipated for major loan categories. In the following table, the allowance for possible loan losses at year-end, for the last five years, has been allocated among major loan categories based primarily on their historical net charge-off experience, along with consideration of factors such as quality, volume, anticipated economic conditions, and other business considerations.
Historical net charge-offs are not necessarily accurate indicators of future losses since net charge-offs vary from period to period due to economic conditions and other factors that cannot be accurately predicted. Thus, an evaluation based on historical loss experience of individual loan categories is only one of many factors considered by management in evaluating the adequacy of the overall allocation, and in determining the amount of the provision for possible loan losses. Other factors are the continuing level of nonperforming loans, credit concentrations, and uncertain economic conditions. At December 31, 1995, based on current economic conditions, the total of the allocation for possible loan losses is, in management's opinion, adequate to provide for future losses. However, a worsening of the economy in the Bank's market area could negatively affect loan performance and underlying collateral values. The full impact of such a trend on the condition of the Bank cannot be estimated.
Credit Concentrations
At year-end 1995, 16.8% of the Bank's loan portfolio was in residential and commercial construction and land development projects centered in Snohomish and King Counties. Management has established a Real Estate Review Committee which meets periodically to monitor local economic conditions, and the performance of borrowers in this industry. The chart below indicates the amount of those loans, and as a percent of total loans for the period:
Deposits
For the average amount of deposits and rates paid on such deposits for years ended December 31, 1995, 1994, and 1993 please refer to page 32 of Annual Report to Shareholders.
Maturities of time certificates of deposit over $100,000 at year end 1995, are shown below:
Significant Financial Ratios
Ratios for the years ended December 31, 1995, 1994 and 1993 are as follows:
Borrowings
For information regarding average balances and yields, please refer to page 32 of 1995 Annual Report to Shareholders.
Long-Term Debt
For detailed information relating to long term debt, please refer to Note 9, page 15, of 1995 Annual Report to Shareholders.
ITEM 2

ITEM 2 - PROPERTIES
The Bank's Evergreen Way Office (previously the Main Office) is a two story building constructed in 1979, and owned by the Bank. This building has approximately 13,000 square feet, and is fully utilized by the Bank.
The Bank's first branch, the Downtown Everett Office, opened in 1980 in rented facilities at 2831 Wetmore Ave, was relocated in 1994 one block from its previous location. FFP, Inc. has entered into a long term lease with a director of the Bank who owns the property located at 2831 Colby Ave. The Bank utilizes 12,000 square feet, all of the main floor of the building.
The Bank owns the Arlington Office premises which consists of a single story building with approximately 3,000 square feet. Contiguous to the Arlington Office is a parcel of land on which five apartments are located. The Bank owns these apartments. The Arlington Office was acquired through merger with The Bank of Arlington in August, 1982. The Bank of Arlington had one office.
FFC owned the property previously occupied by the Trust Department, Private Banking, and the Insurance & Investment Center, located at 2612 Wetmore Avenue, Everett, Washington. In 1994, these departments combined operations in the new facility located at 2831 Colby with the Downtown Everett Office. The property at 2612 Wetmore has been disposed of. In September 1985, a drive-up facility was constructed on this site to serve the Downtown Everett community, and will remain in operation at the same location.
FFP owns property in Snohomish, which is rented by the Bank for its Snohomish Office. There are also eight apartments on the property. Currently a mobile banking facility is being utilized by the Bank. In the second quarter of 1996, the construction of a permanent building will begin which will occupy most all of the property. Completion is expected by September 1996. All of the new facility will be occupied by the Bank.
FFP, Inc. owns the property in Lynnwood, which is rented by the Bank for its Lynnwood Office. The office opened for business in June 1988, and has approximately 3,200 square feet. The office is located on Highway 99, which is heavily traveled.
The South Point Office of the Bank has been relocated approximately 100 yards from its previous location, and renamed the Main Office of the Bank. This office is now located on the ground floor of the financial center constructed in 1993 (please see next page).
The Bank acquired the Marysville Office by merger with Citizens Bank of Snohomish County in August 1989. This building has approximately 5,000 square feet, and is fully utilized by the Bank. On the same property are two buildings, which are presently rented to other business concerns. The Bank owns the land and the buildings.
The Smokey Point Office was also added to the branch network by the same merger in August 1989. This office was relocated within a few blocks of the original site in June 1995. FFP owns the land and building and leases it to the Bank. The office has 3,500 square feet and is fully utilized by the Bank.
The Bank also acquired its Lake Stevens Office by the same merger. The Bank owns the building, but leases the land from nonaffiliates. The building is a mobile facility type construction, and has 1,800 square feet, which is fully utilized by the Bank.
The Bank's Mill Creek Office is located approximately five miles east of Lynnwood, Washington. The office was opened in January 1991, and has 2,600 square feet, all being utilized by the Bank. The property and building are leased from nonaffiliates.
In July 1992, the Bank opened its Stanwood Office in leased quarters. In 1994, FFP constructed a new facility in the immediate area, on land purchased. The building has 3,500 square feet, and is fully utilized by the Bank.
In November 1992, the Bank acquired its Edmonds Office by merger with Edmonds National Bank. This building has approximately 11,300 square feet and is fully utilized by the Bank. The land is being leased by the Bank from nonaffiliates, but the Bank owns the building.
In May 1993, FFP completed construction of a financial center in south Everett, to house the Main Office of the Bank and the Executive Offices of the Corporation. The three story building has approximately 42,100 square feet and is fully utilized by the Bank and Corporation. The building houses all of the operations functions of the Bank, including the data processing center and the real estate loan center.
In July 1993, the Bank acquired the Bothell Office through merger with The Bank of Northshore. This office, previously the Main Office of the Bank of Northshore, has approximately 1,800 square feet, and is fully utilized by the Bank. Both the land and building are owned by the Bank.
The Bank acquired its Woodinville Office through the same merger. This office has approximately 1,300 square feet, and is one of three suites in an office building. The Bank is renting the office from nonaffiliates.
In 1994, FFP purchased property located at 201 West Main St. in Monroe, Washington. This property is leased to the Bank for its Monroe Office which was opened in June 1995. The building has 3,500 square feet, and is fully utilized by the Bank.
As of December 31, 1995, the Bank had sixteen branch offices, including the Main Office.
ITEM 3

ITEM 3 - LEGAL PROCEEDINGS
There are no material legal proceedings.
ITEM 4

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the fourth quarter of 1995.
PART II
ITEM 5

ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Please see 1995 Annual Report to Shareholders, page 30 and 31.
ITEM 6

ITEM 6 - SELECTED FINANCIAL DATA (In thousands, except per share data)
FINANCIAL HIGHLIGHTS
NM=Not Meaningful
ITEM 7

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Please see 1995 Annual Report to Shareholders, pages 23 through 33.
ITEM 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF FRONTIER FINANCIAL CORPORATION
Please see pages 3 thru 6 of 1996 Proxy Statement.
ITEM 11

ITEM 11 - EXECUTIVE COMPENSATION
Please see pages 6 thru 8 of 1996 Proxy Statement.
ITEM 12

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Please see page 5 of 1996 proxy statement.
ITEM 13

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please see page 8 of 1996 Proxy Statement; and, Note 13, page 18 of 1995 Annual Report to Shareholders; and Page 22 of this Form 10-K report.
PART IV
ITEM 14

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the report:
1. Financial Statements.
Financial statements required by Item 8 of this report are incorporated by reference, from the Annual Report to Shareholders, attached hereto as an exhibit.
2. Financial Statement Schedules.
Additional financial statement schedules filed with this report are included in Item 14(d) and are as follows:
Schedule I - Amounts Receivable from Certain Persons
Schedules other than those listed above are omitted because of the absence of the condition under which they are required or because the information called for is included in the financial statements or notes thereto.
3. Exhibits.
(3) Articles of Incorporation and By-Laws are incorporated herein by reference to Exhibits 3(a) and 3(b) to Registration on Form S-14, File No. 2-82420.
(11) Statement Regarding Computation of Earnings Per Share.
(13) Annual Report to Shareholders for the year ended December 31, 1995. (Pages 1 to 33, inclusive)
(21) Subsidiaries of Registrant is incorporated by reference from Part I, page 1 thru 5 of this report.
(27) Financial Data Schedule (This exhibit is included only in the electronic EDGAR filing version of this Form 10-K. The Financial Data Schedule is not a separate financial statement, but a schedule that summarizes certain standard financial information extracted directly from the financial statements in this filing.)
(b) Reports on Form 8-K:
No Form 8-K's were filed, nor required to be filed for any event during the fourth quarter ended December 31, 1995.
(c) Exhibits - See list of exhibits set forth above at Item 14(a)3.
(d) Financial Statement Schedules:
Schedules required to be filed in response to this portion of Item 14 are listed above in Item 14(a)1 and 2. The report of independent public accountants covering these items is included on page 23 of this Form 10-K.
SCHEDULE I
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM CERTAIN PERSONS
MOSS ADAMS LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders Frontier Financial Corporation
We have audited the consolidated financial statements and related financial statement schedules of Frontier Financial Corporation and subsidiaries listed in item 14 (a) 1 and 2 of the Annual Report on Form 10-K of Frontier Financial Corporation for the year ended December 31, 1995. These financial statements are the responsibility of the Corporation'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 auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frontier Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly the information required to be included therein.
As discussed in Note 1 to the financial statements, in 1994 the Corporation changed its method of accounting for investment securities.
/s/ MOSS ADAMS LLP
Everett, Washington January 22, 1996
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRONTIER FINANCIAL CORPORATION
March 20, 1996 /s/ Robert J. Dickson Date ---------------------------------------- Robert J. Dickson President & Chief Executive Officer
March 20, 1996 /s/ James F. Felicetty Date ---------------------------------------- James F. Felicetty Secretary/Treasurer
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:
March 20, 1996 /s/ Robert J. Dickson ---------------------------------------- Robert J. Dickson, Director
March 20, 1996 /s/ David A. Dujardin ---------------------------------------- David A. Dujardin, Director
March 20, 1996 /s/ Edward D. Hansen ---------------------------------------- Edward D. Hansen, Director
March 20, 1996 /s/ William H. Lucas ---------------------------------------- William H. Lucas, Director
March 20, 1996 /s/ James H. Mulligan ---------------------------------------- James H. Mulligan, Director
March 20, 1996 /s/ Alwyn L. Nelson --------------------------------------- Alwyn L. Nelson, Director
March 20, 1996 /s/ Edward J. Novack ---------------------------------------- Edward J. Novack, Secretary of the Board
March 20, 1996 /s/ J. Donald Regan ---------------------------------------- J. Donald Regan, Director
March 20, 1996 /s/ Roger L. Rice ---------------------------------------- Roger L. Rice, Director
---------------------------------------- Roy A. Robinson, Director
March 20, 1996 /s/ William J. Robinson ---------------------------------------- William J. Robinson, Director
March 20, 1996 /s/ Edward C. Rubatino ---------------------------------------- Edward C. Rubatino, Chairman of the Board
March 20, 1996 /s/ Arthur W. Skotdal ---------------------------------------- Arthur W. Skotdal, Director
EXHIBIT INDEX
EXHIBIT NUMBER - ------- 11 Computation of Earnings Per Share.
13 Frontier Financial Corporation and Subsidiaries 1995 Annual Report to Shareholders