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, 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
Class Outstanding at April 30, 2002
- ---------------------------- -------------------------------
Units of Beneficial Interest 8,931,414
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
April 30, 2002 and the related statements of income and expenses on a cash
basis for the three and six months ended April 30, 2002 and 2001, and the
related statements of changes in cash and cash equivalents and undistributed
earnings for the six months ended April 30, 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
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
------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
May 8, 2002
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, 2002 AND 2001
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2002 2001
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German gas, oil and sulfur
royalties received $ 4,504,767 $ 5,574,374
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Interest income 12,551 46,609
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Trust expenses ( 25,020) ( 225,829)
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Net income on a cash basis $ 4,492,298 $ 5,395,154
=========== ===========
Net income per unit on a cash basis $ .50 $ .61
====== ======
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 $ .50 $ .61
====== ======
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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APRIL 30, 2002 AND OCTOBER 31, 2001
-------------------------------------
2002 2001
------------ ------------
Current assets - - Cash and
cash equivalents (Note 1) $ 4,539,359 $ 5,391,320
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
----------- -----------
$ 4,539,360 $ 5,391,321
Current liabilities - - Cash distributions
payable to unit owners $ 4,465,707 $ 5,332,083
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 73,652 59,237
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$ 4,539,360 $ 5,391,321
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, 2002 AND 2001
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2002 2001
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German gas, oil and sulfur
royalties received $ 9,269,851 $12,016,334
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Interest income 36,853 76,919
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Trust expenses ( 271,561) ( 375,238)
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Net income on a cash basis $ 9,035,143 $11,718,015
=========== ===========
Net income per unit on a cash basis $1.01 $1.32
===== =====
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 $1.01 $1.32
===== =====
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, 2002 AND 2001
----------------------------------------------------
2002 2001
------------ ------------
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $ 9,269,851 $12,016,334
Interest income 36,853 76,919
----------- -----------
9,306,704 12,093,253
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Uses of cash and cash equivalents:
Payment of Trust expenses 271,561 375,238
Distributions and dividends paid (Note 3) 9,887,104 9,242,230
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10,158,665 9,617,468
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Net increase(decrease)in cash and
cash equivalents during the period (851,961) 2,475,785
Cash and cash equivalents,
beginning of period 5,391,320 2,946,596
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Cash and cash equivalents,
end of period $ 4,539,359 $ 5,422,381
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001
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2002 2001
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Balance, beginning of period $ 59,237 $ 13,951
Net income on a cash basis 9,035,143 11,718,015
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9,094,380 11,731,966
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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) 9,020,728 11,730,536
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9,020,728 11,730,536
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Balance, end of period $ 73,652 $ 1,430
=========== ===========
The accompanying accountants' review report and the notes to
financial statements should be read in conjunction with these statements.
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
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(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). 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, 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 North European Oil Company, corporate predecessors of the Trust.
From the liquidation of the Company to October 31, 2001, 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
six-month period ended April 30, 2002 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 ("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 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 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. 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 May, 2002 distribution, the maximum liability of the Delaware
Escheator will be $12,161,383.
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 May, 2002 distribution, the maximum liability
of the New York Administrator will be $883,278.
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 April 30, 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 $30,151,477 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.
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.
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.
For unit owners changes in value of the Euro have both an
immediate and a long term impact. The immediate impact relates to the
determination of the number of dollars the Trust receives when Euros
are converted into dollars at the time of the transfer of the royalties
from Germany to the U.S. At the time of the exchange a higher exchange
rate would yield more dollars and a lower exchange rate fewer. The
long term impact comes into play through the mechanism of 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 exchange rate for the Euro means that oil imported
into Germany is more expensive which results in higher local oil
prices. A higher exchange rate for the Euro means that oil imported
into Germany is less expensive which results in lower local oil prices.
These higher or lower local oil prices are in turn reflected in higher
or lower gas prices.
For the second quarter of fiscal 2002 ended April 30, 2002, the
Trust's net royalty income was $4,492,298, 16.7% lower than the prior
year's period. This royalty income was derived from sales of gas,
sulfur and oil from the Trust's overriding royalty areas in Germany
during the first calendar quarter of 2002. This level of income
allowed a distribution of 50 cents per unit payable on May 29, 2002 to
owners of record as of May 10, 2002. For the six month period, the
Trust's net royalty income was $9,035,143. This is a decrease of 22.7%
from the prior year's period and permitted total distributions of
$1.01 per unit.
The amount of royalties paid to the Trust is based on four primary
factors: the amount of gas sold, the price of that gas, the area from
which the gas is sold and the exchange rate. In the quarter just ended
all of these factors had a negative impact on Trust royalties.
Under the lower royalty rate agreement with BEB, the joint venture
between the German subsidiaries of Exxon Mobil and the Royal Dutch
Group, covering the entire Oldenburg concession, gas sales were
52.7 billion cubic feet ("Bcf"), down 7.3% from 56.9 Bcf for the second
quarter of fiscal 2001. Under the higher royalty rate agreement with
the German subsidiary of Exxon Mobil covering western Oldenburg, gas
sales were 23.0 Bcf, down 10.7% from 25.8 Bcf for the second quarter of
fiscal 2001. The average price for gas sold under the lower royalty
rate agreement was 1.5107 Euro cents per Kilowatt hour ("Ecents/Kwh"),
down 9.1% from 1.6620 Ecents/Kwh the average for the second quarter of
fiscal 2001. The average price for gas sold under the higher royalty
rate agreement was 1.3878 Ecents/Kwh, down 13.4% from 1.6016 Ecents/Kwh
the average for the second quarter of fiscal 2001. Under the lower
royalty rate agreement the average value of the Euro based on the
monthly transfer of royalties to the U.S. was $0.8783, down 2.7% from
$0.9025 the average value for the second quarter of fiscal 2001. Under
the lower royalty rate agreement the average value of the Euro was
$0.8767, down 2.6% from $0.9004 the average value for the second
quarter of fiscal 2001. Converting the average gas prices using the
average exchange rates for the quarter into more familiar terms yields
an average gas price under both the lower and higher royalty rate
agreements of $3.50 per thousand cubic feet.
The significance of changes in the exchange rate and the amount
and price of gas sold from the Oldenburg concession is shown through
the impact on Trust income that results from the application of the
particular royalty rate. Under the lower royalty rate agreement the
lower gas sales, prices and exchange rate resulted in a 15.2% decline
in royalties from gas sales to $1,542,484 from $1,819,655 for the
second quarter of fiscal 2001. This 15.2% decline represented a drop
of $ 277,171 in royalties. Under the higher royalty rate agreement
from which the Trust derives the bulk of its royalties, the
concentration of reduction in gas sales in the western area of
Oldenburg along with lower gas prices and a lower average exchange
rate resulted in a 24% decline in royalties from gas sales to
$3,218,343 from $4,234,465 for the second quarter of fiscal 2001. This
24% decline represented a drop of $1,016,122 in royalties. Because of
the higher royalty rate, the impact of changes in factors affecting the
royalty calculation, whether positive or in this case negative, are
magnified.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2002, compared to that at fiscal year end
(October 31, 2001), shows a decline in assets due to lower royalty
receipts during the quarter.
Interest income was lower reflecting the reduced funds available
for investment. Compared to the prior year, Trust expenses for the
second quarter were significantly lower due to the reimbursement by
the New York Stock Exchange for expenses associated with the Trust's
symbol change from "NET" to "NRT" on January 29, 2002.
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
----------------------------
Item 5. Other Information.
-----------------
REPORT ON DRILLING AND GEOPHYSICAL WORK
The Trust's consultant in Germany has provided a translation and
analysis of a report supplied by the operating companies outlining the
drilling and seismic activity completed in 2001 and planned for 2002.
As in 2001, there is no seismic field work planned for 2002. The
operating companies have planned a continuing evaluation of previous
seismic work including the application of newly developed filter
techniques as part of this evaluation process. This laboratory work
is necessary as it forms the basis for all decisions with respect to
drilling as well as further seismic field work. It also contributes
directly to the operating companies' high success rate in their
drilling program as well as to the success in their efforts to maintain
and extend the life of the reserves. As a result of the analysis of
earlier 2-D seismic data, the operating companies have begun the
process of obtaining permits to conduct 3-D seismic work in the
Zwischenahn area. The 3-D seismic studies provide a much clearer
picture of possible gas bearing zones for future development. The
previous work on evaluating the development prospects of the very deep
Carboniferous zone, which falls into the category of long term
projects, continues with further seismic study required. However, in
current drilling projects located outside the boundaries of the
Oldenburg concession the operating companies hope to gain experience
in multi-lateral and multi-reservoir horizontal wells at the extreme
depths that will be required to eventually exploit the gas reserves
present in the Carboniferous zone within the Oldenburg concession.
The two wells that had been planned for 2001 were postponed until
2002 partially due to complex drilling problems that had to be resolved
before drilling commenced. Drilling on the horizontal production well
Doetlingen Z-13a commenced in January, 2002 and will be completed some
time in May or June with production scheduled to start in July. This
well is scheduled to be followed by a second horizontal production
well Hemmelte Z-8a that is planned to enter production before the end
of 2002. Current plans continue with the scheduled start and
completion of horizontal production well Goldenstedt Z-12a in 2003.
In addition to the ongoing drilling operations, the operating
companies are continuing with various plans and operations to ensure a
steady production of gas from the Oldenburg concession. Preparation
work on three future drilling projects, Kneheim Z-5, Sage Z-4 and
Doetlingen-Ost Z-2, has been scheduled. Production wells Brinkholz Z-2
and Z-4 are scheduled to be equipped with a joint dehydration unit in
July that will address continuing water problems and permit an
increase in their production capacity. A short maintenance program
for the Grossenkneten desulfurization plant is scheduled for the
May-June period during which production will be reduced by one-third.
------------------------------------------
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.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
Exhibit 99.1. A letter dated May 8, 2002 from Arthur
Andersen LLP representing that their
review in accordance with Statement on
Auditing Standards No. 71 was subject to
their quality control system for the
U.S. accounting and auditing practice
to provide reasonable assurance that the
engagement was conducted in compliance
with professional standards and other
applicable requirements.
(b) Reports on Form 8-K.
A report on Form 8-K dated February 14, 2002 was filed with the
Securities and Exchange Commission reporting the announcement
of a change in the ticker symbol used on the New York Stock
Exchange for units of beneficial interest in North European Oil
Royalty Trust from "NET" to "NRT" and the subsequent
commencement of trading under that new symbol.
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
--------------------------------
(Registrant)
By: /S/ John R. Van Kirk
----------------------------
John R. Van Kirk
Managing Director
Dated: May 23, 2002