SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 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 July 31, 2001
- ----- -------------------------------
Units of Beneficial Interest 8,886,804
ARTHUR ANDERSEN LLP
ACCOUNTANTS' REVIEW REPORT
----------------------------
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
July 31, 2001 and the related statements of income and expenses on a cash
basis for the three and nine months ended July 31, 2001 and 2000, and the
related statements of changes in cash and cash equivalents and undistributed
earnings for the nine months ended July 31, 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
August 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 JULY 31, 2001 AND 2000
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2001 2000
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(unaudited)
German gas, oil and sulfur
royalties received $ 4,983,996 $ 3,966,769
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Interest income 35,447 30,304
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Trust expenses ( 148,872) ( 131,000)
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Net income on a cash basis $ 4,870,571 $ 3,866,073
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Net income per unit on a cash basis $ .55 $ .43
====== ======
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 $ .54 $ .43
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JULY 31, 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) $ 4,871,956 $ 2,946,596
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
$ 4,871,957 $ 2,946,597
=========== ===========
Current liabilities - - Cash distributions
payable to unit owners $ 4,798,874 $ 2,932,645
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 73,082 13,951
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$ 4,871,957 $ 2,946,597
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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 NINE MONTHS ENDED JULY 31, 2001 AND 2000
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2001 2000
----------------- -----------------
(unaudited)
German gas, oil and sulfur
royalties received $17,000,330 $11,149,422
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Interest income 112,366 66,699
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Trust expenses ( 524,110) ( 442,630)
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Net income on a cash basis $16,588,586 $10,773,491
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Net income per unit on a cash basis $1.87 $1.21
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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 $1.86 $1.23
===== =====
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 NINE MONTHS ENDED JULY 31, 2001 AND 2000
------------------------------------------------
2001 2000
----------------- -----------------
(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $17,000,330 $11,149,422
Interest income 112,366 66,699
Reimbursement for prior payment
of past dividends and distributions 0 0
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17,112,696 11,216,121
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Uses of cash and cash equivalents:
Payment of Trust expenses 524,110 442,630
Distributions and dividends paid (Note 3) 14,663,226 9,219,512
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15,187,336 9,662,142
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Net increase(decrease) in cash and
cash equivalents during the period 1,925,360 1,553,979
Cash and cash equivalents,
beginning of period 2,946,596 2,319,172
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Cash and cash equivalents,
end of period $ 4,871,956 $ 3,873,151
=========== ===========
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000
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2001 2000
----------------- -----------------
(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 16,588,586 10,773,491
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16,602,537 10,831,535
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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) 16,529,455 10,778,667
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16,529,455 10,779,710
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Balance, end of period $ 73,082 $ 51,825
=========== ===========
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 except 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 (see Note 3). As of July 31, 2001
and 2000, there were 8,886,804 and 8,886,804 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 Company shares and dividends of
$354,101 and distributions of $4,236,544 were paid to former unlocated
Corporation and Company shareholders. For the nine-month period ended
July 31, 2001, there were no units 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 August, 2001 distribution, the maximum liability of the
Escheator will be $11,327,475.
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 July 31, 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 $29,707,438 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
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. Within the Oldenburg
concession there are two overriding royalty rates in effect on sales of
natural gas. The Trust receives a 4% royalty from the western portion of
the concession. The Trust also receives a 0.6667% royalty, adjusted to
account for a partial representative portion of costs, which covers the
entire concession. The royalties are initially paid in Euros and are
converted into U.S. dollars just prior to their transfer from Germany at the
agreed upon Euro/dollar exchange rate.
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 income of the Trust for the third quarter of fiscal 2001, ended
July 31, 2001, was $4,870,571, 26% higher than the prior year's period.
This income was primarily derived from royalties paid on sales of gas,
sulfur and oil from the Trust's overriding royalty areas in Germany during
the second calendar quarter of 2001. For the nine month fiscal period ended
July 31, 2001, net income of the Trust increased 54% from $10,773,491 to
$16,588,586.
Once again the increase in gas prices in Germany was the primary factor
behind the improvement in royalty income and the resulting Trust distribution
to its unit owners. The substantial nature of the price increase easily
offset both the decline in gas sales and the weaker Euro. The shift in
timing by the operating companies of their normally scheduled summer
maintenance at the Grossenkneten desulfurization plant to the month of May
resulted in the decline in production capacity and resulting gas sales from
the Oldenburg concession. While we have seen some slight recovery in the
value of the Euro recently, on average for the quarter the Euro posted its
lowest level in comparison to the dollar at a dollar equivalent value of
$0.8626.
The ongoing success on the part of OPEC in matching oil supply to demand
continues to be reflected in the world price of oil. In turn, through the
specifications in gas sales contracts under which Oldenburg gas is sold,
these higher oil prices are reflected in higher prices for natural gas in
Germany. For the first three quarters of fiscal 2001, there has been
consecutive quarter over quarter gas price increases. Indeed, except for a
minor drop in the fourth quarter of fiscal 2000, average gas prices for
Oldenburg gas have increased for eight consecutive quarters. Under the
higher royalty rate agreement with the German subsidiary of Exxon Mobil
covering western Oldenburg (from which the Trust derives the bulk of its
royalties), average gas prices for the quarter increased 54.8% from the
equivalent quarter for the prior year. Gas prices rose from 1.1340 Euro
cents per Kilowatt hour ("Ecents/Kwh") to 1.7552 Ecents/Kwh. Converting
this gas price using the average exchange rate for the quarter, the average
price for gas sold under the higher royalty rate agreement was $4.32 per Mcf.
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 44.6% from 1.2949 Ecents/Kwh to
1.8718 Ecents/Kwh. Converting this quarter's price using the average
exchange rate for the quarter, the average price for gas sold under the lower
royalty rate agreement was $4.50 per Mcf.
With the four-week shutdown of the Grossenkneten desulfurization plant
occurring in May, the reduction in gas sales reported by the operating
companies was in line with expectations. Overall Oldenburg gas sales
declined by 9.1% from 45.9 Billion cubic feet ("Bcf") to 41.7 Bcf. Gas sales
from the higher royalty rate area of western Oldenburg declined 11% from
24.7 Bcf to 22.9 Bcf. At this level gas sales from western Oldenburg
accounted for 52.6% of total Oldenburg gas sales as compared to 53.7% for
the prior year's quarter. Discounting the effects of differences in prices
and effective exchange rates, the combination of royalty rates on gas sold
from western Oldenburg results in a royalty approximately seven times higher
on a cubic foot of gas than a cubic foot originating from the eastern half
of Oldenburg. The impact of the combined royalty rate is demonstrated by
the fact that out of a total of $4,966,663 in Oldenburg gas royalties for
the quarter just ended, 89.6% or $4,451,951 is attributable to the combined
royalty rate in effect in the western area.
The Euro showed some slow improvement during the quarter just ended
increasing from a dollar equivalent of $0.8534 to $0.8765 from the first to
the third month of the quarter. However, this increase only raised the Euro
to its lowest quarterly average, at least as far as its impact on the Trust
is concerned, since its inception. The low exchange rate has an immediate
impact on Trust royalties when the royalties, originally paid in Euros, are
converted into dollars for their transfer to the United States. A weak Euro
means the Trust receives fewer dollars on exchange. However, over the range
of three to six months, the time delay factor contained in many of the
Oldenburg gas sales contracts, the weaker Euro means that oil imported into
Germany is more expensive since oil on the world market is priced in dollars.
This more expensive oil eventually has an impact on the price of light
heating oil which is one of the major gas pricing factors contained in the
provisions of these same contracts.
With the completion in May of scheduled maintenance for Grossenkneten,
we can reasonably expect to look forward to uninterrupted production during
the upcoming fourth quarter. Barring unforeseen circumstances the
convergence of the possibly uninterrupted fourth quarter production and last
year's fourth quarter maintenance downtime for Grossenkneten would seem
likely to result in an increase in fourth quarter gas sales when compared to
the fourth quarter of fiscal 2000.
Interest income was higher due to both greater funds available for
investment and higher interest rates. Trust expenses increased slightly
from the prior year's period primarily due to higher legal fees and higher
Trustees' fees reflecting the higher level of royalty income.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 2001, compared to that at fiscal year end
(October 31, 2000), shows an increase in assets due to higher royalty
receipts during the quarter.
The Trust distribution for the third quarter of fiscal 2001 is $0.54,
an increase of 26% from last year's distribution of $0.43. Cumulative
distributions for the nine month fiscal period are $1.86 compared to $1.23
for the prior year's period.
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 for shares of the Trust's
predecessor corporations not previously presented for exchange into Trust
units, quarterly distributions would be reduced to the extent required to
provide funds for such payments.
-----------------------------------
This report on Form 10-K contains forward looking statements
concerning business, financial performance and financial condition of the
Trust, which are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in any forward
looking statement. The statements contained herein are based on the
Trustees' current beliefs, expectations and assumptions and are subject to a
number of risks and uncertainties. Actual results and events may vary
significantly from those discussed in the forward looking statements.
Part II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
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
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: August 28, 2001