SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to ___________ .
Commission file number 1-8245
NORTH EUROPEAN OIL ROYALTY TRUST
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(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
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(Address of principal executive offices)
(732) 741-4008
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Class Outstanding at April 30, 2001
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Units of Beneficial Interest 8,886,804
ARTHUR ANDERSEN LLP
ACCOUNTANTS' REVIEW REPORT
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To the Unit Owners and Trustees of
North European Oil Royalty Trust:
We have reviewed the accompanying statements of assets, liabilities and
trust corpus of North European Oil Royalty Trust (the "Trust") as of
April 30, 2001 and the related statements of income and expenses on a cash
basis for the three and six months ended April 30, 2001 and 2000, and the
related statements of changes in cash and cash equivalents and undistributed
earnings for the six months ended April 30, 2001 and 2000. These financial
statements are the responsibility of the Trust's management.
The statement of assets, liabilities and trust corpus as of October 31, 2000
of the Trust was maintained on a cash basis rather than the accrual basis
of accounting and was audited by us. Our report dated November 9, 2000
indicates the statement did not purport to present, and in our opinion did
not present, financial position and results of operations in conformity with
accounting principles generally accepted in the United States which require
the use of the accrual basis of accounting. We have not performed any
auditing procedures since that date.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
The accounts of the Trust are maintained on a cash basis of accounting under
which income is not recorded until collected instead of when earned, and
expenses are recorded when paid instead of when incurred. Thus, the
accompanying financial statements are not intended to present financial
position and results of operations in conformity with accounting principles
generally accepted in the United States which require the use of the accrual
basis of accounting (see Note 1).
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with the cash basis of accounting.
As discussed in Note 3, the Trust has a contingent liability relating to
unclaimed units and distributions. No reserves are established or reflected
in the financial statements for the possibility that funds would be required
to satisfy such claims.
/s/ Arthur Andersen LLP
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ARTHUR ANDERSEN LLP
Roseland, New Jersey
May 8, 2001
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
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FOR THE THREE MONTHS ENDED APRIL 30, 2001 AND 2000
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2001 2000
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(unaudited)
German gas, oil and sulfur
royalties received $ 5,574,374 $ 3,682,978
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Interest income 46,609 21,323
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Trust expenses ( 225,829) ( 162,889)
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Net income on a cash basis $ 5,395,154 $ 3,541,412
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Net income per unit on a cash basis $ .61 $ .41
====== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .00
Distributions per unit to be paid to
unit owners $ .61 $ .41
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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APRIL 30, 2001 AND OCTOBER 31, 2000
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2001 2000
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(unaudited) (audited)
Current assets - - Cash and
cash equivalents (Note 1) $ 5,422,380 $ 2,946,596
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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$ 5,422,381 $ 2,946,597
Current liabilities - - Cash distributions
payable to unit owners $ 5,420,950 $ 2,932,645
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 1,430 13,951
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$ 5,422,381 $ 2,946,597
The accompanying accountants' review report and the notes to
financial statements should be read in conjunction with these statements.
STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2001 AND 2000
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2001 2000
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(unaudited)
German gas, oil and sulfur
royalties received $12,016,334 $ 7,182,653
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Interest income 76,919 36,395
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Trust expenses ( 375,238) ( 311,630)
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Net income on a cash basis $11,718,015 $ 6,907,418
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Net income per unit on a cash basis $1.32 $.79
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Cash distributions paid or to be paid:
Dividends and distributions per unit
paid to former unlocated shareholders .00 .00
Distributions per unit to be paid
to unit owners $1.32 $.80
===== ====
The accompanying accountants' review report and the notes to
financial statements should be read in conjunction with these statements.
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2001 AND 2000
----------------------------------------------------
2001 2000
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(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $12,016,334 $ 7,182,653
Interest income 76,919 36,395
Reimbursement for prior payment of
past dividends and distributions 0 0
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12,093,253 7,219,048
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Uses of cash and cash equivalents:
Payment of Trust expenses 375,238 311,630
Distributions and dividends paid (Note 3) 9,242,230 5,653,875
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9,617,468 5,965,505
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Net increase(decrease)in cash and
cash equivalents during the period 2,475,785 1,253,543
Cash and cash equivalents,
beginning of period 2,946,596 2,319,172
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Cash and cash equivalents,
end of period $ 5,422,381 $ 3,572,715
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2001 AND 2000
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2001 2000
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(unaudited)
Balance, beginning of period $ 13,951 $ 58,044
Reimbursement for prior payment of
past dividends and distributions 0 0
Net income on a cash basis 11,718,015 6,907,418
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11,731,966 6,965,462
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Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 0 1,043
Current year distributions paid or
to be paid to unit owners (Note 3) 11,730,536 6,957,341
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11,730,536 6,958,384
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Balance, end of period $ 1,430 $ 7,078
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The accompanying accountants' review report and the notes to
financial statements should be read in conjunction with these statements.
NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO FINANCIAL STATEMENTS
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(Unaudited)
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(1) Summary of significant
accounting policies:
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Basis of accounting -
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The accounts of North European Oil Royalty Trust (the "Trust") are
maintained on a cash basis of accounting with the exception of the
accrual for distributions to be paid to Unit Owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust
during the period plus interest income less any expenses incurred by
the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the cash basis provides a more meaningful presentation to unit
owners of the results of operations of the Trust.
Use of Estimates -
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements. Actual results may differ from
those estimates.
Producing gas and oil
royalty rights -
---------------------
The rights to certain gas and oil royalties in Germany were
transferred to the Trust at their net book value by North European
Oil Company (the "Company") (see Note 2). The net book value of the
royalty rights has been reduced to one dollar ($1) in view of the
fact that the remaining value of royalty rights is de minimis
relative to annual royalties received and distributed by the Trust
and does not bear any meaningful relationship to the fair value of
such rights or the actual amount of proved producing reserves.
Federal and state income taxes -
------------------------------
The Trust, as a grantor trust, is exempt from Federal and state income
taxes under a private letter ruling issued by the Internal Revenue
Service.
Cash and cash equivalents -
-------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with maturities of three months or less.
Net income per unit
on the cash basis -
-------------------
Net income per unit on the cash basis is based upon the number of
units outstanding at the end of the period. As of April 30, 2001 and
2000, there were 8,886,804 and 8,696,676 units of beneficial interest
outstanding respectively.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities
of the Company, including its royalty rights, were transferred to the
Trust.
(3) Contingent liability:
---------------------
The Trust serves as fiduciary for certain unlocated or unknown
shareholders of North European Oil Corporation (the "Corporation")
and North European Oil Company, corporate predecessors of the Trust.
From the liquidation of the Company to October 31, 2000, 721,364
units were issued in exchange for Corporate and/or Company shares and
dividends of $354,101 and distributions of $4,236,544 were paid to
former unlocated Corporation and Company shareholders. For the
six-month period ended April 30, 2001 no units were issued in
exchanges and no dividends and no distributions were paid to former
unlocated Corporation and Company shareholders.
On February 26, 1996 the settlement of litigation between the Trust
and the Delaware State Escheator was approved by the Delaware Court
of Chancery. As of that date, there were a total of 875,748
authorized but unissued units representing the unexchanged shares of
the Trust's predecessor corporations. Out of this total, 760,560
units were subject to the settlement. Under the settlement, 380,280
units were issued to the Escheator on April 17, 1996. Of the Trust
units remaining to be issued to the Escheator, approximately 50%
(190,128 units) have been issued to the Escheator as of June 30, 2000
and the remaining balance will be issued by June 30, 2005. Through
June 30, 2000, claims by unlocated or unknown shareholders of the
Trust's corporate predecessors for units and past dividends and
distributions thereon ("subsequent claims") were paid by the
Escheator and the Trust on a 50:50 basis. From July 1, 2000 to
June 30, 2005, subsequent claims will be paid by the Escheator and
the Trust on a 75:25 basis. Any subsequent claims will reduce the
number of units to be issued to the Escheator in 2005. Following
the final issuance of units to the Escheator in 2005, the Trust's
contingent liability for past dividends and distributions
attributable to all unexchanged Corporation and Company shares
subject to the settlement will be completely eliminated. Under the
terms of the settlement, the maximum liability of the Escheator for
subsequent claims is limited to the value of the units received, plus
current distributions on units retained, less the Escheator's share
of subsequent claims. As of the receipt of the May, 2001
distribution, the maximum liability of the Escheator will be
$11,047,780.
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
April 30, 2001, there remained a total of 303,786 units that could be
issued to unlocated or unknown Corporation and Company shareholders.
Of this total, 190,122 units are subject to the settlement and remain
to be issued to the Escheator. If all shares, represented by the
units already issued as well as the units remaining to be issued,
were presented for exchange, $487,023 in dividends and $29,543,394 in
distributions would be payable. In the opinion of the Trustees, based
in part on the history of exchanges during the last ten fiscal years,
the maximum liability of the Escheator would be adequate to cover the
Escheator's share of any subsequent claims. In any event, the
Trust's contingent liability for such claims will be eliminated in
2005.
Item 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations.
------------------------------------
The Trust is a passive fixed investment trust which holds
overriding royalty rights, receives income under those rights from
certain operating companies, pays its expenses and distributes the
remaining net funds to its unit owners. The Trust does not engage in
any business or extractive operations of any kind in the areas over
which it holds royalty rights and is precluded from any such
involvement by the Trust Agreement. There are no requirements,
therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of
royalty revenues by the Trust.
The operating companies, subsidiaries of Exxon Mobil Corp. and the
Royal Dutch Group, pay monthly royalties to the Trust based on their
sales of natural gas, sulfur and oil. The Oldenburg concession is the
primary area from which these products are extracted and provides
nearly 100% of all the royalties received by the Trust. Of these
three products, natural gas provides approximately 98% of the total
royalties.
Although the Trust itself does not have access to the specific
sales contracts under which the Oldenburg gas is sold, these contracts
are reviewed periodically by our auditors. They have informed the
Trust that these contracts contain pricing mechanisms which use a
number of factors with varying time delays to price the gas being sold.
For the Trust there are two elements of these contracts that are very
significant. The first element is the utilization of the price of
light heating oil in Germany as the primary pricing factor in many of
these contracts. The price of light heating oil is in turn affected by
the price of oil on the international market. The second element is a
three to six month delay before changes in pricing factors are
translated into changes in the price of gas.
Net royalty income of the Trust for the second quarter of fiscal
2001, ended April 30, 2001, was $5,395,154, 52% higher than the prior
year's period. This royalty income was based on sales of gas, sulfur
and oil from the Trust's overriding royalty areas in Germany during
the first calendar quarter of 2001. This level of income allowed a
distribution of 61 cents per unit payable on May 23, 2001 to holders
of record as of May 11, 2001. For the six month period, net royalty
income was $11,718,015, which represented an increase of 69.6% from
the prior year's period and permitted total distributions of $1.32
per unit.
The increase in royalties received by the Trust for the quarter
just ended was caused primarily by the rise in gas prices, which
continue to reflect the sustained increase in oil prices during prior
quarters and the reduced purchasing power of the weaker Euro. The
decline in overall gas sales was concentrated entirely in the lower
royalty rate area of eastern Oldenburg and reflects the lower sweet
gas volumes being extracted. The Euro continued to languish below
parity with the Dollar reducing the number of dollars received when
the royalties are transferred to the U.S.
Under the higher royalty rate agreement with the German subsidiary
of Exxon Mobil covering western Oldenburg and from which the Trust
derives the bulk of its royalties, average gas prices for the quarter
increased 74.1%. Gas prices rose from 0.9198 Euro cents per Kilowatt
hour ("Ecents/Kwh") for the prior year's period to 1.6016 Ecents/Kwh
for the quarter just ended. Converting this gas price using the
average exchange rate for the quarter, the average price for gas sold
under this agreement was $4.11 per Mcf. While gas sales from western
Oldenburg increased, the increase was less than 0.5%. In the
corresponding quarter for the prior year, gas sales were equal to
25.65 billion cubic feet ("Bcf") compared to 25.76 Bcf for the quarter
just ended.
Under the lower royalty rate agreement with BEB, a joint venture
between Exxon Mobil and the Royal Dutch Group, covering gas sales from
the entire Oldenburg concession, gas prices increased 82.1% from
0.9125 Ecents/Kwh to 1.6620 Ecents/Kwh. Converting this quarter's
price using the average exchange rate for the quarter, the average
price for gas sold under this agreement was $4.21 per Mcf. Total gas
sales from the Oldenburg concession decreased 12.7% from 72.39 Bcf to
63.19 Bcf.
Following the completion of the Hengstlage field compressor
system in 1999, the operating companies encountered repeated reductions
in flow rates from the various reservoir sections. Initially caused by
the precipitation and crystallization of salt which plugged reservoir
sections, the remedy which required fresh water to dissolve the crystal
formations stirred up sand which clogged the well-heads. In 1999, 20
such clean-up jobs were required, in 2000 approximately 100 clean-ups
were required. The operating companies have completed the installation
of continuous well monitoring systems that can immediately react to
indications of worsening well performance. Fast fresh water pumps
address the salt precipitation while larger sand and water separators
deal with the additional water and sand generated by the automatic
clean-up. Additional perforations of the reservoirs were also
undertaken to improve the flow rate. While these steps will address
the current difficulties, the Hengstlage field is in its later stage of
production. Despite efforts that should maintain current production
levels for the next ten years, sweet gas production from Hengstlage
will continue to be limited to the high demand periods. The current
quarter's decline in gas sales is directly related to the shutdown of
the Hengstlage field to conserve sweet gas reserves. The operating
companies have scheduled a four-week shutdown of the Grossenkneten
desulfurization plant for May which will reduce production capacity to
two thirds of normal.
The Euro continued to follow the disappointing trend begun shortly
after its introduction in January, 1999. It still languishes well
below parity with the Dollar and despite recent interest rate
reductions in the U.S. has shown no significant improvement. For the
quarter based on the transfer of royalties from Germany, the Euro had
an average value of $0.9024, a decline of 5.1% from its average value
in the equivalent quarter for the prior year of $0.9511. Except for a
brief hiatus in its drop in the third quarter of 1999 and a sharp drop
in the third quarter of 2000, from which it partially recovered, the
Euro has declined steadily quarter over quarter since its inauguration.
For the unit owners the fall in value of the Euro has both an immediate
and a long term impact. The immediate impact relates to the reduction
in the number of dollars the Trust received when the Euros, at the
lower value, were converted to dollars at the time of the transfer of
the royalties from Germany to the U.S. Consequently, the lower value
of the Euro resulted in a reduction in the funds available for
distribution to the unit owners. The long term impact relates to gas
pricing. With the price of light heating oil used as a component in
the calculation of gas prices in the various contracts under which the
gas is sold, changes in world crude oil prices are eventually reflected
in gas prices. Since oil on the international market is priced in
dollars, a lower value for the Euro means that oil imported into
Germany costs more resulting in higher local oil prices. These higher
prices are later reflected in higher gas prices through the pricing
mechanisms in the various contracts under which Oldenburg gas is sold.
The fall in value of the Euro has further accentuated the increase in
gas prices within Germany beyond the impact attributable to higher
world oil prices.
We have received a report from the Trust's consultant in Germany
outlining the drilling and seismic activity completed in 2000 and
planned for 2001 as reported by the operating companies. As in 2000,
there is no seismic field work planned for 2001. The operating
companies have planned a continuing evaluation of previous seismic work
and an examination of possible Carboniferous projects. It is expected
that this work will lead to further development drilling in both the
eastern and western portions of Oldenburg. While drilling in 2000 was
limited to a single horizontal deviation from the Visbek Z-17 well,
there were other significant efforts undertaken to maintain production
levels. Major acidizing projects were completed for 8 wells to
increase flow rates to the well-heads. Acidizing works to increase gas
flow by increasing the porosity of the rock strata where the gas is
located. Drilling activity for 2001 within Oldenburg is limited to two
possible horizontal deviations from existing production wells,
Goldenstedt Z-12 and Doetlingen Z-13. The commencement of this
drilling is dependent on the results of the seismic evaluations for
these reservoirs. While nearly all the royalties paid to the Trust are
derived from sales of products originating from within the Oldenburg
concession, there has been one active well outside Oldenburg in the
Bedekaspel area, Grosses Meer Z-1. For the first time a new wildcat
well is being drilled in this area that will explore the Rotliegend
formation, which has traditionally been a source of sweet gas.
With the increase in gas prices and the operating companies'
resulting profit margins, the government of Lower Saxony raised the
state royalty from 17% to 24%, effective January 1, 2001. While this
in no way directly affects the Trust's royalty, the payment of
additional funds to the state government reduces funds that would
otherwise be available for exploration and makes exploration for gas
within Germany less attractive to the international oil companies.
Despite the imposition of this higher royalty rate by Lower Saxony,
the previous cost cutting efforts by the operating companies and the
current high gas prices have significantly improved the economic
position of these companies. Finally, OPEC has proven to be fairly
successful in matching supply to demand and maintaining oil prices at
substantially higher levels than those experienced just two years ago.
It is these prices that have sustained the increase in distributions by
the Trust.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2001, compared to that at fiscal year end
(October 31, 2000), shows an increase in assets due to higher royalty
receipts during the quarter.
Interest income was higher reflecting the increased funds
available for investment. Trust expenses were 38.6% higher reflecting
higher Trustees' fees determined by provisions contained in the Trust
Agreement and higher general Trust expenses reflecting the significant
increase in NYSE fees.
As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all the funds on hand after
provision is made for Trust expenses then anticipated. As permitted
by the Trust Agreement, no provision is made for the retention of
reserve funds of any kind. If funds were to be required for payments
to owners of units not previously presented for issuance, quarterly
distributions would be reduced to the extent required to provide funds
for such payments.
PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
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None.
(b) Reports on Form 8-K
-------------------
None.
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
(Registrant)
By: /S/ John R. Van Kirk
----------------------------
John R. Van Kirk
Managing Director
Dated: May 23, 2001