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, 2003 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 August 31, 2003
- ---------------------------- ------------------------------
Units of Beneficial Interest 8,931,414
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, 2003 AND 2002
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2003 2002
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German gas, oil and sulfur
royalties received $ 4,536,318 $ 4,580,463
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Interest income 8,241 11,874
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Trust expenses ( 192,422) ( 148,634)
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Net income on a cash basis $ 4,352,137 $ 4,443,703
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Net income per unit on a cash basis $ .49 $ .50
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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 $ .49 $ .50
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JULY 31, 2003 AND OCTOBER 31, 2002
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2003 2002
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Current assets - - Cash and
cash equivalents (Note 1) $ 4,442,827 $ 3,458,577
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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$ 4,442,828 $ 3,458,578
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Current liabilities - - Cash distributions
payable to unit owners $ 4,376,393 $ 3,393,937
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 66,434 64,640
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$ 4,442,828 $ 3,458,578
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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, 2003 AND 2002
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2003 2002
----------------- -----------------
German gas, oil and sulfur
royalties received $14,002,637 $13,850,314
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Interest income 24,281 48,727
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Trust expenses ( 625,871) ( 420,195)
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Net income on a cash basis $13,401,047 $13,478,846
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Net income per unit on a cash basis $1.50 $1.51
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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 $1.50 $1.51
===== =====
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, 2003 AND 2002
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2003 2002
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Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $14,002,637 $13,850,314
Interest income 24,281 48,727
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14,026,918 13,899,041
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Uses of cash and cash equivalents:
Payment of Trust expenses 625,871 420,195
Distributions and dividends paid (Note 3) 12,416,797 14,352,811
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13,042,668 14,773,006
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Net increase(decrease) in cash and
cash equivalents during the period 984,250 ( 873,965)
Cash and cash equivalents,
beginning of period 3,458,577 5,391,320
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Cash and cash equivalents,
end of period $ 4,442,827 $ 4,517,355
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2003 AND 2002
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2003 2002
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Balance, beginning of period $ 64,640 $ 59,237
Net income on a cash basis 13,401,047 13,478,846
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13,465,687 13,538,083
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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) 13,399,253 13,486,435
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13,399,253 13,486,435
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Balance, end of period $ 66,434 $ 51,648
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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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(1) Summary of significant
accounting policies:
----------------------
The accompanying financial statements of North European Oil Royalty
Trust (the "Trust") present financial statement balances and financial
results on a cash basis of accounting, which is a comprehensive basis
of accounting other than accounting principles generally accepted in
the United States ("GAAP basis"). Cash basis financial statements
report income when cash is received and expenses when cash is paid.
GAAP basis financial statements report income as earned and expenses
as incurred, without regard to receipts or payments. The sole
exception to the use of the cash basis of accounting is 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.
Producing gas and oil
royalty rights -
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The rights to certain gas and oil royalties in Germany were transferred
to the Trust at its inception by North European Oil Company (the
"Company") (see Note 2). At that time the net book value of the
royalty rights was $1,640,060. By 1992, as a result of the
intervening amortization, the net book value of the royalty rights had
been reduced to such a level that the net book value bore no
meaningful relationship to the fair market value of such rights or the
actual amount of proved producing reserves. At that time it was
determined that the remaining net book value of royalty rights was
de minimis and after a final amortization would henceforth be carried
on the books of the Trust at a nominal value of $1.
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 -
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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,
2003 and 2002, there were 8,931,414 and 8,931,414 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 ExxonMobil 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, 2002, 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, 2003, 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, respectively. 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, 2003
distribution, the maximum liability of the Escheator will be
$13,277,814.
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 for whom 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 August, 2003 distribution, the maximum liability
of the New York Administrator will be $989,450.
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 July 31, 2003, 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 $30,768,316 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 not be less
than 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.
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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. 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 an agreed portion of costs), which
covers the entire concession. The royalties are initially paid in Euros and
are converted into U.S. dollars at the then current Euro/dollar exchange rate
just prior to their transfer from Germany.
Although the Trust itself does not have access to the specific sales
contracts under which the Oldenburg gas is sold, a third party contractor,
retained by the Trust, examines these contracts periodically. 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 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 expressed in
dollars 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 the third quarter of fiscal 2003, net Trust income declined by 2.1%
to $4,352,137, which permitted a distribution of 49 cents per unit compared
to the distribution of 50 cents for the prior year's period. The current
distribution is being paid on August 27, 2003 to holders of record as of
August 15, 2003. For the nine month fiscal period, net Trust income was
$13,401,047, a decline of 0.6% from the prior year's period. Cumulative
distributions for the nine month period are $1.50 per unit compared to $1.51
paid during the same period last year. 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 fourth calendar quarter of
2002 through the second calendar quarter of 2003.
The primary factors affecting royalty revenue for the quarter just
ended were the decline in gas sales from the higher royalty rate area of
western Oldenburg and the increase in the average dollar value of the Euro
over the prior year. While the increase in the exchange rate was
substantial, it could not fully offset the impact on royalties caused by the
decline in gas sales.
The higher royalty rate agreement between the Trust and the German
subsidiary of ExxonMobil covers western Oldenburg and provides the Trust
with the bulk of its royalties. Under this agreement average gas prices for
the quarter increased 1.6% from the equivalent quarter for the prior year.
Gas prices rose from 1.4730 Euro cents per Kilowatt hour ("Ecents/Kwh") to
1.4963 Ecents/Kwh. When we convert this quarter's price into more familiar
terms using the average exchange rate for the quarter, the average price for
gas sold under this agreement was $4.96 per Mcf. This represents a 22.9%
increase from the prior year's equivalent quarter. The lower royalty rate
agreement between the Trust and BEB, a joint venture between ExxonMobil and
the Royal Dutch Group, covers gas sales from the entire Oldenburg concession.
Under this agreement average gas prices for the quarter increased 1.5% from
the equivalent quarter for the prior year. Gas prices rose from 1.3785
Ecents/Kwh to 1.3995 Ecents/Kwh compared to the prior year's equivalent
quarter. When we convert this quarter's price into more familiar terms using
the average exchange rate for the quarter, the average price for gas sold
under this agreement was $4.54 per Mcf. This represents a 23.9% increase
from the prior year's equivalent quarter.
During the quarter just ended overall Oldenburg gas sales decreased by
2.4% from 44.13 Billion cubic feet ("Bcf") to 43.06 Bcf. Gas sales from the
higher royalty rate area of western Oldenburg decreased 24.2% from 22.31 Bcf
to 16.91 Bcf. At this level, gas sales from western Oldenburg accounted for
39.26% of total Oldenburg gas sales. In prior years the Trust's German
consultant, Dr. Wolfgang Sohn, would have determined through inquiries with
the operating companies the reasons behind the decline in gas sales.
Unfortunately with Dr. Sohn's death in March and the unavailability of his
replacement until October, the Trust does not have access to the contacts
who could provide specific information with respect to the decline. It is
possible that, as in prior years, at least part of the decline occurred as a
result of the annual maintenance procedures being conducted at the
Grossenkneten desulfurization plant during the quarter just ended. At this
time, however, we cannot state this with any certainty.
During the quarter just ended the Euro continued its strong performance.
A number of factors including extremely low interest rates in the United
States and continuing uncertainty following the war in Iraq combined to push
the Euro close to the highs posted shortly after its introduction in 1999.
At a dollar equivalent of $1.1586 in average for the quarter based on all
royalties transferred to the United States, the Euro increased by 7.2% from
the immediately preceding quarter's average of $1.0806 and by 19.7% from the
average of $0.9680 for the third quarter of fiscal 2002 . This higher
exchange rate had the immediate impact of increasing the amount of dollars
received by the Trust when the royalties, paid in Euros, were transferred to
the United States.
If we discount the effects of differences in prices and average exchange
rates, the combination of royalty rates on gas sold from western Oldenburg
results in an effective royalty rate approximately seven times higher than
the royalty rate on gas sold from eastern Oldenburg. This is of particular
significance to the Trust since gas sold from western Oldenburg provides the
bulk of royalties paid to the Trust. For the quarter just ended gas sales
from western Oldenburg accounted for only 39.26% of all gas sales. However,
royalties on these gas sales provided 84.6% or $3,824,740 out of a total of
$4,519,286 in Oldenburg royalties. The impact on royalties of the decline
in gas sales is highlighted when viewed in comparison to the prior year when
gas sales from western Oldenburg accounted for 50.55% of total Oldenburg gas
sales but 90.1% of the total Oldenburg royalties.
Interest income for the third quarter and the nine month period was
lower due to both reduced funds available for investment and lower interest
rates. Trust expenses for the third quarter were higher due to the timing
of the audit fees in the U.S. and the biannual audit related work completed
in Germany. For the nine month period Trust expenses were higher in
comparison due to the reimbursement in the prior year's equivalent period by
the New York Stock Exchange for expenses associated with the Trust's symbol
change from "NET" to "NRT" on January 29, 2002.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 2003, compared to that at fiscal year end (October 31,
2002), shows an increase in assets due to higher royalty receipts during the
quarter. The Trust distribution for the third quarter of fiscal 2003 is
$0.49, a decrease of 2.0% from last year's distribution of $0.50. Cumulative
distributions for the nine month fiscal period are $1.50 compared to $1.51
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-Q contains forward looking statements concerning
business, financial performance and financial condition of the Trust. Many
of these statements are based on information provided to the Trust by the
operating companies or by consultants using public information sources.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in any
forward looking statements. These include uncertainties concerning levels
of gas production and gas sale prices, general economic conditions and
currency exchange rates. Actual results and events may vary significantly
from those discussed in the forward looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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The Trust does not engage in any trading activities with respect to
possible foreign exchange fluctuations. The Trust does not use any financial
instruments to hedge against possible risks related to foreign exchange
fluctuations. The market risk is negligible because standing instructions
at its German bank require the bank to process transfers of royalty payments
as soon as possible following their receipt.
Item 4. Controls and Procedures.
-----------------------
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the Trust's
management, which consists of the Managing Trustee and the Managing Director,
of the effectiveness of the design and operation of the Trust's disclosure
controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Managing Trustee and
the Managing Director concluded that the Trust's disclosure controls and
procedures were effective, in all material respects, with respect to the
recording, processing, summarizing and reporting, within the time periods
specified in the Securities and Exchange Commission's rules and forms, of
information required to be disclosed by the Trust's management in the
reports that are filed or submitted under the Exchange Act.
There have been no changes in the Trust's internal control over
financial reporting identified in connection with the evaluation described
above that occurred during the third quarter of fiscal 2003 that have
materially affected, or are reasonably likely to materially affect, the
Trust's internal control over financial reporting.
Part II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
Exhibit 31.1. Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2. Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32. Certification of Chief Executive and
Chief Financial Officers pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K.
None.
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 thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: September 5, 2003