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 January 31, 2002 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
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Class Outstanding at January 31, 2002
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Units of Beneficial Interest 8,931,414
-2-
ARTHUR ANDERSEN
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
January 31, 2002 and the related statements of income and expenses on a
cash basis for the three months ended January 31, 2002 and 2001, and the
related statements of changes in cash and cash equivalents and undistributed
earnings for the three months ended January 31, 2002 and 2001. These
financial statements are the responsibility of the Trust's management.
The statement of assets, liabilities and trust corpus as of October 31, 2001
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 8, 2001, except
with respect to Note 4 as to which the date is December 4, 2001, 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
February 7, 2002
-3-
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 JANUARY 31, 2002 AND 2001
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2002 2001
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(unaudited)
German gas, oil and sulfur
royalties received $ 4,765,084 $ 6,441,960
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Interest income 24,302 30,310
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Trust expenses ( 246,541) ( 149,409)
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Net income on a cash basis $ 4,542,845 $ 6,322,861
=========== ===========
Net income per unit on a cash basis $ .51 $ .71
====== ======
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 $ .51 $ .71
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JANUARY 31, 2002 AND OCTOBER 31, 2001
-------------------------------------
2002 2001
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(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 4,602,082 $ 5,391,320
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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Total Assets $ 4,602,083 $ 5,391,321
=========== ===========
Current liabilities - - Cash distributions
payable to unit owners $ 4,555,021 $ 5,332,083
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 47,061 59,237
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Total Liabilities and Trust Corpus $ 4,602,083 $ 5,391,321
=========== ===========
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
-4-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
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2002 2001
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(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $ 4,765,084 $ 6,441,960
Interest income 24,302 30,310
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$ 4,789,386 $ 6,472,270
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Uses of cash and cash equivalents:
Payment of Trust expenses 246,541 149,409
Distributions and dividends paid (Note 3) 5,332,083 2,932,645
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5,578,624 3,082,054
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Net increase(decrease) in cash and
cash equivalents during the period ( 789,238) 3,390,216
Cash and cash equivalents,
beginning of period 5,391,320 2,946,596
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Cash and cash equivalents,
end of period $ 4,602,082 $ 6,336,812
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
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2002 2001
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(unaudited)
Balance, beginning of period $ 59,237 $ 13,951
Net income on a cash basis 4,542,845 6,322,861
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4,602,082 6,336,812
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Less:
Dividends and distributions paid to
former unlocated shareholders (Note 3) 0 0
Current year distributions paid or
to be paid to unit owners (Note 3) 4,555,021 6,309,631
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4,555,021 6,309,631
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Balance, end of period $ 47,061 $ 27,181
=========== ===========
The accompanying accountants' review report and the notes to financial
statements should be read in conjunction with these statements.
-5-
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 -
-------------------
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 incomes represent 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.
-6-
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
January 31, 2002 and 2001, there were 8,931,414 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. The Trust on behalf of the owners of
beneficial interest in the Trust holds overriding royalty rights
covering gas and oil production in certain concessions or leases in
the Federal Republic of Germany. These rights are held under contracts
with local German exploration and development subsidiaries of Exxon
Mobil Corp. and the Royal Dutch Group. Under these contracts, the
Trust receives various percentage royalties on the proceeds of the
sales of certain products from the areas involved. At the present
time, royalties are received for sales of gas well gas, oil well gas,
crude oil, distillate and sulfur.
(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, 2001, 721,364 Trust
units were issued in exchange for Corporate 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 three-
month period ended January 31, 2002, 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 ("Delaware Escheator") was approved by
the Delaware Court of Chancery. As of that date, there were a total of
875,748 authorized but unissued units, of which 760,560 were subject to
the settlement, representing the unexchanged shares of the Trust's
predecessor corporations. Under the settlement, 380,280 units were
issued to the Delaware Escheator on April 17, 1996. Of the Trust units
remaining to be issued to the Delaware Escheator, approximately 50%
(190,128 units) have been issued to the Delaware 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 Delaware
Escheator and the Trust on a 50:50 basis. From July 1, 2000 to
June 30, 2005, subsequent claims will be paid by the Delaware Escheator
and the Trust on a 75:25 basis. Any subsequent claims will reduce
the number of units to be issued to the Delaware Escheator in 2005.
-7-
Following the final issuance of units to the Delaware 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 Delaware
Escheator for subsequent claims is limited to the value of the units
received, plus current distributions on units retained, less the
Delaware Escheator's share of subsequent claims. As of the receipt of
the February, 2002 distribution, the maximum liability of the Delaware
Escheator will be $11,902,405.
In addition to the agreement reached with the Delaware Escheator, on
December 4, 2001 the Trust reached a parallel agreement with the
Administrator of Unclaimed Property, Office of the New York State
Comptroller (the "New York Administrator") covering Units for which
owners were unlocated but New York state addresses were shown in
predecessor corporation records. The New York Settlement Agreement
covers 89,220 Units attributable to stock ownership by unlocated
shareholders of predecessor corporate entities. Of the Units covered by
the Settlement Agreement, 44,610 were issued to the New York
Administrator on December 21, 2001 and the balance of 44,610 will be
issued on or before June 30, 2005. The Settlement Agreement provides
for processing of claims in the period until June 30, 2005 and the
sharing of any costs relating to any claims which are allowed. As of
the receipt of the February, 2002 distribution, the maximum liability
of the New York Administrator will be $860,973.
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 Delaware Escheator or the New York
Administrator. As of January 31, 2002, there remained a total of
259,176 units that could be issued to unlocated or unknown Corporation
and Company shareholders. Of this total, 234,732 units are subject to
the settlements and remain to be issued to the Delaware Escheator or
the New York Administrator. 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 $30,021,890 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 Delaware Escheator and the New York
Administrator would be adequate to cover their respective share of any
subsequent claims. In any event, the Trust's contingent liability for
all claims for arrearages will be eliminated in 2005.
-8-
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.
Net income on a cash basis for the first quarter of fiscal 2002 was
$4,542,845. This level of income permitted a distribution of 51 cents per
unit which was paid on February 27, 2002 to owners of record as of February
15, 2002. Gross royalty income of $4,765,084 for the quarter ended January
31, 2002 was 26% lower than royalty income for the same period last year.
This royalty income was based on sales of gas, oil and sulfur from the
Trust's overriding royalty areas in Germany during the fourth calendar
quarter of 2001.
While all factors affecting the level of royalty income showed declines
during the first quarter of fiscal 2002 when compared to the prior year's
corresponding quarter, the most significant factor was the decline in gas
sales for the higher royalty area of western Oldenburg. Overall gas sales
from Oldenburg fell by 12.7% to 57.98 Billion cubic feet ("Bcf"). Gas sales
from western Oldenburg, which account for approximately 75% of the Trust's
royalty income, declined by 12.9% to 23.29 Bcf. Average prices for gas sold
under the higher royalty rate agreement covering western Oldenburg dropped
3.9% to 1.5001 Euro cents per Kwh ("Ecents/Kwh"). Average prices for gas
sold under the lower royalty rate agreement covering the entire Oldenburg
area dropped 12.3% to 1.3999 Ecents/Kwh. Finally, the average value for the
Euro declined by 3.2% compared to the prior year's equivalent quarter from a
dollar equivalent of .9020 to .8728. Using this average value for the Euro
and converting gas prices into more familiar terms, gas prices under the
higher and lower royalty rate agreements averaged $3.78 per Mcf and $3.42
per Mcf, respectively. The decline in gas sales can most likely be traced
to a combination of reduced demand engendered by the economic slowdown in
Germany and the warmer weather experienced during the period. The decline
in gas prices can be traced to the impact of lower world oil prices on the
pricing mechanisms in the various contracts under which the gas is sold.
The worldwide economic slowdown, significantly warmer weather in many areas,
OPEC's slow reaction in cutting output and non-OPEC producers continuing
high production have all contributed to an excess of oil on the world market
and the resulting drop in prices.
-9-
The Annual Meeting of Unit Owners was held on February 13, 2002 at the
University Club in New York City. Approximately 30 unit owners attended and
over 80% of all units outstanding were represented in person or by proxy.
The five serving Trustees were elected and the appointment of Arthur
Andersen LLP as Trust auditor for the 2002 fiscal year was ratified. In the
discussion period the topics of discussion ranged from the Trustees' choice
of Arthur Andersen LLP as auditor to the impact of horizontal drilling on
gas reserves.
Robert P. Adelman, chairperson of the Trust's Audit Committee, briefly
addressed the meeting and explained the Trust's position with respect to the
recent adverse publicity surrounding Arthur Andersen. The Trustees and
management have always found the representatives of Arthur Andersen providing
services for the Trust to be intelligent, knowledgeable and responsive and
consider them to be persons of professional and personal integrity and
ability. Arthur Andersen has served as auditor for the Trust and its
predecessor North European Oil Company since 1966. The Trust reports on a
cash basis, carries no debt and has no requirements for off balance sheet
reporting of items. The simplicity of the required audit work done
domestically by Arthur Andersen has allowed the Trust to limit audit expenses
to their low level. In Germany the relationship goes back even further with
Arthur Andersen examining the books of the operating companies to ensure the
accuracy of reported royalty payments and, where applicable, reviewing the
reporting of deductible costs under the lower royalty rate agreement. The
individuals assigned by Arthur Andersen in Germany have worked in that
capacity for more than a decade and the experience gained over this extensive
period by these individuals has benefitted the Trust with a more
comprehensive understanding of the operating companies. The representatives
of Arthur Andersen, both in the U.S. and in Germany, directly responsible for
the work with the Trust have had no involvement with the audit or consulting
work for any of the public companies which prompted the ongoing inquiries.
The Trustees and management will continue to monitor the situation.
While there was no drilling activity during 2001, the operating
companies commenced drilling their first well of 2002 in the early days of
January. This well, Doetlingen Z-13a, is a production well located in the
eastern portion of Oldenburg and is a horizontal deviation from the existing
well site. The operating companies have exploited the advantages of
horizontal drilling by using this technology almost exclusively for more
than a decade. This technology has allowed the operating companies to
maintain a very stable level of gas sales and reserves for an extended period
of time with relatively minor investments in exploration and drilling. By
working off existing well sites with current permits and safety measures in
place, delays and expenses associated with the establishment of a new well
site are avoided. The level of recoverable reserves possible through
horizontal drilling and the associated acidizing or fracturing processes far
exceed the level of recoverable reserves of a corresponding number of
vertical wells. Due to the dense and non-porous nature of the Zechstein
geological strata in which the bulk of Oldenburg gas is found, the use of
the horizontal drilling has proven to be extremely effective. Furthermore,
the experience gained by the operating companies in their use of this
technology will serve them very well when they attempt to exploit the
Carboniferous strata which is found at a greater depth than the Zechstein.
-10-
At the request of the New York Stock Exchange, effective with the
opening of business on January 29, 2002 the ticker symbol under which Trust
units are traded on the NYSE was changed from "NET" to "NRT".
Trust expenses of $246,541 were substantially higher than the prior
year due primarily to increased legal expenses relating to the settlement
reached between the Trust and the Administrator of Unclaimed Property for
the State of New York. Biannual work performed by personnel from Arthur
Andersen Germany in examining the royalty payments and costs of the operating
companies added to the level of Trust expenses. Trustees fees were higher
because one of the positions of Trustee was vacant last year whereas now it
has been filled. Interest income declined reflecting the reduced funds
available for investment and the lower interest rates on those funds.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at January 31, 2002, compared to that at fiscal year end (October 31,
2001), shows a decrease in assets due to lower royalty receipts during the
quarter.
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
are 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.
-----------------------------------
This report on Form 10-Q 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.
-11-
Part II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The Annual Meeting of Unit Owners was held February 13, 2002.
(b) The following persons were elected as Trustees of the Trust to
serve until the 2003 Annual Meeting of Unit Owners:
Robert P. Adelman (7,098,850 votes for; 74,386 withheld)
Samuel M. Eisenstat (7,094,720 votes for; 78,516 withheld)
Willard B. Taylor (7,097,219 votes for; 76,017 withheld)
John H. Van Kirk (7,003,605 votes for; 169,631 withheld)
Rosalie J. Wolf (7,091,484 votes for; 81,752 withheld)
(c) The designation of the firm of Arthur Andersen LLP as auditor for
the Trust for 2002 fiscal year was ratified with the following vote totals:
6,089,265 votes for; 979,983 votes against and 103,988 abstained.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
-12-
SIGNATURE
---------
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: March 14, 2002