SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 2003 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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Commission file number 1-8245
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NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (IRS Employer Identification Number)
Suite 19A, 43 West Front Street, Red Bank, N.J. 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 732-741-4008
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Units of Beneficial Interest New York Stock Exchange
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes No X .
--- ---
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As of December 31, 2003, there were 8,931,414 units of beneficial interest
("units") of the Registrant outstanding, and the aggregate market value
of outstanding units of beneficial interest of the Registrant held by non-
affiliates of the Registrant was approximately $223,669,235 on such date.
(The Trustees and the Managing Director are the only persons deemed to be
affiliates of the Registrant.)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No .
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Documents Incorporated by Reference
-----------------------------------
Items 10, 11, 12 and 13 of Part III have been partially or wholly omitted
from this report and the information required to be contained therein is
incorporated by reference from the Registrant's definitive proxy statement
dated January 12, 2004 for the annual meeting to be held on
February 11, 2004.
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PART I
Item 1. Business.
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(a) General Development of Business.
--------------------------------
Registrant (the "Trust") is a grantor trust which, on behalf of
the owners of beneficial interest in the Trust (the "unit owners"), holds
overriding royalty rights covering gas and oil production in certain
concessions or leases in the Federal Republic of Germany. The 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. See Item 2 of this Report for descriptions of
certain of these contracts.
The royalty rights were received by the Trust from North European
Oil Company (the "Company") upon dissolution of the Company in September,
1975. The Company was organized in 1957 as the successor to North European
Oil Corporation (the "Corporation"). The Trust is administered by trustees
(the "Trustees") under an Agreement of Trust dated September 10, 1975,
amended May 13, 1976 and February 10, 1981 and as deemed amended pursuant
to the Delaware Court of Chancery order dated February 26, 1996 (the "Trust
Agreement").
Neither the Trust nor the Trustees on behalf of the Trust conduct
any active business activities or operations. The sole permitted function
of the Trustees is to monitor, verify, collect, hold, invest, and distribute
the royalty payments made to the Trust. Under the Trust Agreement the
Trustees make quarterly distributions of the net funds received by the Trust
on behalf of the unit owners. Funds temporarily held by the Trust are
invested in interest bearing bank deposits, certificates of deposit, U.S.
Treasury Bills or other government obligations.
There has been no significant change in the principal operation
or purpose of the Trust during the past fiscal year.
During the year, the Securities and Exchange Commission (the
"Commission") finalized rules implementing legislation concerning governance
matters for publically held entities that was passed as part of the
Sarbanes-Oxley Act of 2002 ("SOX"). In addition, the New York Stock
Exchange (the "Exchange"), where units of beneficial interest of the Trust
are listed for trading, has adopted additional corporate governance rules.
Not all of the governance requirements are applicable to the Trust
which is a passive entity acting as a royalty trust and holds only
overriding royalty rights. The Trust does not engage in any operating or
active business. While it is also possible that the Trust could at some
time in the future request the Commission to grant the Trust relief from
other requirements of SOX based on the passive nature of the Trust, the
Trustees have directed that at this time no such requests for relief be
made. In that connection, the Trustees have directed that the additional
statements and disclosures set forth in Item 10 of this Report, which the
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Commission requires of corporations, be made even though some of such
statements and disclosures might not now or in the future be required to be
made by the Trust.
(b) Financial Information about Industry Segments.
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Since the Trust conducts no active business operations, and
analysis by industry segments is accordingly not applicable to the Trust.
To the extent that royalty income received by the Trust is attributable to
sales of different products, to sales from different geographic areas or to
sales by different operating companies, this information is set forth in
Item 2 of this Report and the Exhibit described in that Item 2.
(c) Narrative Description of Business.
----------------------------------
Under the Trust Agreement the Trust conducts no active business
operations and is restricted to collection of income from royalty rights
and distribution to unit owners of the net income after payment of
administrative and related expenses.
The overriding royalty rights held by the Trust are derived from
contracts and agreements originally entered into by German subsidiaries of
the predecessor Corporation during the early 1930's. Some of these royalty
rights are based on leases which have passed their original expiration
dates. However, the leases remain in effect as long as there is continued
production or the lessor does not cancel the lease. Individual lessors will
normally not seek termination of the rights originally granted because the
leases provide for royalty payments to the lessors if sales of oil or gas
result from discoveries made on the leased land. Additionally, termination
by individual lessors would result in the escheat of mineral rights to the
State. The remainder of the Trust's royalty rights are based on government
granted concessions which remain in effect as long as there are continued
production activities and/or exploration efforts by the operating companies.
It is generally anticipated that the operating companies will continue
production where it remains economically profitable for them to do so.
Royalties are paid to the Trust on sales from production under
these leases and concessions by the operating companies on a regular monthly
or quarterly basis pursuant to the royalty agreements. Beginning in January
2001, the operating companies began making royalty payments to the Trust
exclusively in Euros. Once deposited in the Trust's bank account in
Germany, the Euros are converted into U.S. dollars at the rate in effect on
the date of transfer. The Trust does not engage in hedge or similar
transactions and the fluctuations in the conversion rate impact its
financial results. The Trust has not experienced any difficulty in
effecting the conversion into U.S. dollars.
As the holder of overriding royalty rights, the Trust has no legal
ability, whether by contract or operation of law, to compel production.
Moreover, if an operator should determine to terminate production in any
concession or lease area and to surrender the concession or lease, the
royalty rights for that area would thereby be terminated. Under certain
royalty agreements, the operators are required to advise the Trust of any
intention to surrender lease or concession rights. In recent years no such
notices have been received and management of the Trust has not been informed
of any such intention. The Trust itself is precluded from undertaking any
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production activities and only if it could locate an alternate operator for
the same areas would there be any possibility of continued royalty payments
for such an area following any such termination. The likelihood of
locating such an alternate operator is small because the current operating
companies would be unlikely to surrender their rights for areas if
continued economic return from production can be reasonably anticipated.
The exploration for and the production of gas and oil is a
speculative business. The Trust has no means of ensuring continued income
from its royalty rights at either their present levels or otherwise. In
addition, fluctuations in prices and supplies of gas and oil and the effect
these fluctuations might have on royalty income to the Trust and on
reserves net to the Trust cannot be accurately projected. The Trustees
have no information with which to make any projections beyond information
on economic conditions which is generally available to the public and thus
are unwilling to make any such projections.
While Germany has laws relating to environmental protection, the
Trustees have no detailed information concerning the present or possible
effect of such laws on operations in areas where the Trust holds royalty
rights on production and sale of products from those areas.
Seasonal demand factors affect the income from royalty rights
insofar as they relate to energy demands and increases or decreases in
prices, but on average they are not material to the regular annual income
received under the royalty rights.
The Trust, either itself or in cooperation with holders of
parallel royalty rights, arranges for periodic audits of the books and
records of the operating companies to verify compliance with the computation
provisions of the applicable agreements. From time to time these
examinations disclose computational errors or errors from inappropriate
application of existing agreements and appropriate adjustments are requested
and made.
(d) Financial Information about Foreign and Domestic Operations and
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Export Sales.
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The Trust does not engage in any active business operations, and
its sources of income are the overriding royalty rights covering gas, sulfur
and oil production in certain areas in Germany and interest on the funds
temporarily invested by the Trustees. In Item 2 of this Report there is a
schedule (by product, geographic area and operating company) showing the
royalty income received by the Trust during the fiscal year ended
October 31, 2003.
(e) Executive Officers of the Trust.
--------------------------------
As specified in the Trust Agreement the affairs of the Trust are
managed by not more than five individual Trustees who receive compensation
determined under that same agreement. One of the Trustees is designated as
Managing Trustee and receives additional compensation in such capacity. The
Managing Trustee, John H. Van Kirk, is responsible for managerial oversight,
while day-to-day matters are handled by the Managing Director, John R. Van
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Kirk. John H. Van Kirk, who is 79 years old, has been Managing Trustee
since the Trust's inception in 1975. John R. Van Kirk, who is 51 years old,
has held the position of Managing Director of the Trust since November 1990.
John R. Van Kirk is the son of John H. Van Kirk, the Managing Trustee.
The Managing Director provides office space and services at cost
to the Trust. In addition to the Managing Trustee and the Managing
Director, the Trust has one secretarial employee in the United States. It
also retains a part-time consultant in Germany on a fixed yearly basis plus
associated expenses. Employee relations or labor contracts are not directly
material to the business or income of the Trust. The Trustees have no
specific information concerning employee relations of the operating
companies.
Item 2. Properties.
-----------
The properties of the Trust, which the Trust and Trustees hold
pursuant to the Trust Agreement on behalf of the unit owners, are
overriding royalty rights on sales of gas, sulfur and oil under certain
concessions or leases in the Federal Republic of Germany. The actual
leases or concessions are held either by Mobil Erdgas-Erdol GmbH ("Mobil
Erdgas"), a German operating subsidiary of the ExxonMobil Corp., or by
Oldenburgische Erdolgesellschaft ("OEG"). As a result of direct and
indirect ownership, Exxon Mobil Corp. owns two-thirds of OEG and the Royal
Dutch Group owns one-third of OEG. The Oldenburg concession
(1,398,000 acres), covering virtually the entire former State of Oldenburg
and located in the federal state of Lower Saxony, is the major source of
royalty income for the Trust. In 2002 Mobil Erdgas and BEB Erdgas und
Erdol GmbH ("BEB"), a joint venture of ExxonMobil Corp. and the Royal Dutch
Group, formed a company ExxonMobil Production Deutschland GmbH ("EMPG") to
carry out all exploration, drilling and production activities. All sales
activities are still handled by either Mobil Erdgas or BEB.
Under one series of rights covering the western part of the
Oldenburg concession (approximately 662,000 acres), the Trust receives a
royalty payment of 4% on gross receipts from sales by Mobil Erdgas of gas
well gas, oil well gas, crude oil and condensate. Under the royalty
agreement with Mobil Erdgas there is no deduction of costs prior to the
calculation of royalties from gas well gas and oil well gas, which together
account for approximately 99% of all the royalties under said agreement.
The Trust is also entitled to receive from Mobil Erdgas a 2% royalty on
gross receipts of sales of sulfur obtained as a by-product of sour gas
produced from the western part of Oldenburg. The payment of the sulfur
royalty is conditioned upon sales by Mobil Erdgas of sulfur at a selling
price above an agreed upon base price. This base price is adjusted annually
by an inflation index. When the average selling price falls below the
adjusted base price, no royalties are payable. No payments were received
from the sale of sulfur under this agreement during fiscal 2003.
Under another series of rights covering the entire Oldenburg
concession and pursuant to an agreement with OEG (the "OEG Agreement"), the
Trust receives royalties at the rate of 0.6667% on gross receipts from
sales of gas well gas, oil well gas, crude oil, condensate and sulfur
(removed during the processing of sour gas) less a certain allowed
deduction of costs. Under the agreement previously reached with OEG, 50%
of the field handling, treatment and transportation costs as reported for
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state royalty purposes are deducted from the gross sales receipts prior to
the calculation of the royalty to be paid to the Trust. Based on the
limited audit access available to the Trust and the financial information
provided by the operating companies, the Trust's management has not seen a
material change in the amount of the Trust's royalty receipts as a result
of the application of this computation system. receipts as a result of the
application of this computation system.
The Trust also holds through Mobil Erdgas a 2% royalty interest
in oil and gas sales from acreage in Bavaria, and a 0.2117% royalty under
the net interest of the Bayerische Mineral Industries A.G. ("BMI"), a
subsidiary of Mobil Erdgas, in concessions in Bavaria. The net interest of
BMI ranges from 16-1/2 to 100% of the sales, depending on the geographic
region or area. Due to the absence of royalty income under this agreement,
reserves from this area in Bavaria are not included in reserve calculations
for this report year. While both Mobil Erdgas and BMI have suspended
production in their concessions in Bavaria, the concessions remain.
In addition to the areas of Oldenburg and Bavaria, the Trust also
holds overriding royalties on 21 leases in other areas of northwest Germany
ranging in size from 185 to 25,000 acres and totaling 73,214 acres. The
rates of overriding royalties vary from 1.83% to 6.75%. At the present time
all but one of these 21 leases are in the non-producing category. Due to
the low level of income and the intermittent gas production from the single
producing lease, reserves from this lease are not included in reserve
calculations for this report year.
The following is a schedule of royalty income for the fiscal year
ended October 31, 2003 by product, geographic area and operating company:
BY PRODUCT:
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Product Royalty Income
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Gas Well and Oil Well Gas $ 17,814,717
Sulfur $ 190,099
Oil $ 164,219
BY GEOGRAPHIC AREA:
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Area Royalty Income
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Western Oldenburg $ 15,374,591
Eastern Oldenburg $ 2,753,607
Non-Oldenburg Areas $ 40,837
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BY OPERATING COMPANY:
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Company Royalty Income
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Mobil Erdgas-Erdol GmbH $ 13,590,299
BEB $ 4,578,736
Exhibit 99.1 to this Report is a report dated December 16, 2003
which summarizes certain production data and the estimated net proved
producing reserves as of October 1, 2003, based on the limited information
available, for the Oldenburg area in which the Trust now holds overriding
royalty rights. That report, the Estimate of Remaining Proved Producing
Reserves in the Northwest Basin of the Federal Republic of Germany as of
October 1, 2003 and Calculation of Cost Depletion Percentage for the 2003
Calendar Year, (the "Reserve and Depletion Report") was prepared by Ralph
E. Davis Associates, Inc., 1717 St. James Place, Suite 460, Houston, Texas
77056 ("Davis Associates"). Davis Associates is an independent petroleum
and natural gas consulting organization specialized in analyzing hydrocarbon
reserves. In order to permit timely filing of this Report and consistent
with the practice of the Trust in prior years, the information has been
prepared for the 12-month period ending September 30, 2003, which is one
month prior to the end of the fiscal year of the Trust. Unit owners are
referred to the full text of the Reserve and Depletion Report contained
herein for further details.
In connection with the information in the Reserve and Depletion
Report, note should be taken of the limited nature of the information
available to the Trust. Pursuant to the arrangements under which the Trust
holds royalty rights and due to the fact that the Trust is not considered
an operating company within Germany, it has no access to the operating
companies' proprietary information concerning producing field reservoir
data. The Trustees have been advised that publication of such information
is not required under applicable law in Germany and that the royalty rights
do not grant the Trust the right to require or compel the release of such
information. Past efforts to obtain such information have not been
successful. The information made available to the Trust by the operating
companies does not include any of the following: reserve estimates,
capitalized costs, production cost estimates, revenue projections, producing
field reservoir data (including pressure data, permeability, porosity and
thickness of producing zone) or other similar information. The limited
nature of the information available to the Trust makes many calculations
impossible including, among others, the following: proved undeveloped or
probable future net recoverable oil and gas by appropriate geographic areas,
total gross and net productive wells, availability of oil and gas from the
present reserve, contract supply for one year or acreage concentration.
The Trust has the authority to audit, for certain limited
purposes, the operating companies' sales and production from the royalty
areas. The Trust also has access to published materials in Germany from
W.E.G. (a German organization equivalent to the American Petroleum Institute
or the American Gas Association). The use of such statistical information
relating to production and sales necessarily involves extrapolations and
projections. Both Davis Associates and the Trustees believe the use of the
material available is appropriate and suitable for preparation of the
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estimates described in the Reserve and Depletion Report. Both the Trustees
and Davis Associates believe this report and these estimates to be
reasonable and appropriate but they would possibly vary from statistical
projections which could be made if reservoir production information (of the
kind normally available to domestic producing companies) were available.
The limited information available makes it inappropriate to make projections
or estimates of proved or probable reserves of any category or class other
than the estimated net proved producing reserves described in the Reserve
and Depletion Report.
Attachment A of the Reserve and Depletion Report is comprised of a
schedule of estimated net proved producing reserves of the Trust's royalty
properties, computed as of October 1, 2003 and a five year schedule of gas,
sulfur and oil sales for the twelve months ended September 30, 2003, 2002,
2001, 2000 and 1999 computed from quarterly sales reports of operating
companies received by the Trust during such periods.
Item 3. Legal Proceedings.
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See Note 3 to the Financial Statements contained in Item 8 of this
Report for further information.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Inapplicable.
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PART II
Item 5. Market for the Registrant Trust's Units of Beneficial Interest
--------------------------------------------------------------
and Related Unit Owner Matters.
-------------------------------
The Trust's units of beneficial interest are traded on the New
York Stock Exchange (the "NYSE") under the symbol NRT. In addition, the
Midwest Stock Exchange and the Boston Exchange have granted unlisted
trading privileges in the Trust units.
Under the Trust Agreement the Trustees distribute to unit owners,
on a quarterly basis, the net royalty income after deducting expenses and
reserving limited funds for anticipated administrative expenses.
The following table presents the high and low closing prices for
the quarterly periods ended in fiscal 2003 and 2002 as reported by the NYSE
as well as the cash distributions paid to unit owners by quarter for the
past two fiscal years.
FISCAL YEAR 2003
Low High Distribution
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- ------------
January 31, 2003 $19.15 $23.55 $0.51
April 30, 2003 $20.30 $24.50 $0.50
July 31, 2003 $22.25 $24.55 $0.49
October 31, 2003 $22.03 $24.50 $0.45
FISCAL YEAR 2002
Low High Distribution
Closing Closing Per
Quarter Ended Price Price Unit
- ------------- --------- --------- ------------
January 31, 2002 $18.00 $20.57 $0.51
April 30, 2002 $19.03 $23.25 $0.50
July 31, 2002 $21.00 $25.40 $0.50
October 31, 2002 $21.60 $24.59 $0.38
The quarterly distributions to unit owners represent their
undivided interest in royalty payments from sales of gas, sulfur and oil
during the previous quarter. Each unit owner is entitled to recover a
portion of his or her investment in these royalty rights through a cost
depletion percentage. The calculation of this cost depletion percentage is
set forth in detail in Attachment B to the Reserve and Depletion Report
attached as Exhibit 99.1. This report has been prepared by Davis Associates
using the limited information described in Item 2 of this Report to which
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reference is made. The Trustees believe that the calculations and
assumptions used in this report are reasonable according to the facts and
circumstances of available information. The cost depletion percentage
recommended by the Trust's independent petroleum and natural gas
consultants for calendar 2003 is 9.4652%. Specific details relative to the
Trust's income and expenses and cost depletion percentage as they apply to
the calculation of taxable income for the 2003 calendar year are included
on a special removable page in the 2003 Annual Report under "Note to Unit
Owners." A separate letter containing the same information has been sent
to all unit owners who were registered at any time during calendar 2003 and
who are no longer registered owners as of the end of the calendar year.
The Trust maintains no reserve to cover any payments which might
be required if the holders of shares of stock of the predecessor Corporation
or Company, who have not yet exchanged those shares for units, should
surrender them for exchange. See Note 3 to the Financial Statements in
Item 8 of this Report for further information.
As of November 30, 2003, there were 1,347 unit owners of record,
which figure does not include the owners of unexchanged shares of stock in
the Corporation or the Company (a total of 604 record holders). The owners
of shares of stock in the Corporation are entitled under Section 3.10 of
the Trust Agreement to receive units upon presentation of those shares or
other evidences of ownership thereof. The owners of unexchanged shares of
stock in the Company, for whom a nominee of The Bank of New York acts as
agent under a shareholder agency agreement, are entitled to receive units
upon presentation of those shares or other evidences of ownership thereof.
Management believes that the number of such presentations will continue to
be immaterial in the coming years. In all events, after the year 2005,
pursuant to the provisions of the order of the Delaware Court of Chancery
of April 17, 1996, further liability for payment of dividends or
distributions arrears will be eliminated. See Note 3 to the Financial
Statements in Item 8 of this Report for further information.
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ITEM 6. Selected Financial Data
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North European Oil Royalty Trust
--------------------------------
Selected Financial Data (Cash Basis)
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For Five Fiscal Years Ended October 31, 2003
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2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
German gas,
sulfur, and
oil
royalties
received $18,169,035 $17,435,504 $22,453,630 $14,155,028 $10,667,478
=========== =========== =========== =========== ===========
Net Income on a
cash basis $17,398,359 $16,885,776 $21,906,824 $13,668,262 $10,168,423
=========== =========== =========== =========== ===========
Net Income per unit
on a cash
basis (a) $1.95 $1.89 $2.47 $1.54 $1.17
===== ===== ===== ===== =====
Units of beneficial
interest
outstanding
at end
of year (a) 8,931,414 8,931,414 8,886,804 8,886,804 8,696,646
Cash distributions
paid or to be
paid:
Distributions per
unit paid or to
be paid to
unit owners $1.95 $1.89 $2.46 $1.56 $1.17
===== ===== ===== ===== =====
Total assets
at year
end $ 4,063,767 $ 3,458,578 $ 5,391,321 $ 2,946,597 $ 2,319,173
=========== =========== =========== =========== ===========
(a) Net income per unit on a cash basis was calculated based on the number
of units outstanding at the end of the fiscal year.
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Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
--------------------------
General
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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 is not involved 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 ExxonMobil 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. The gas is sold to
various distributors under long term contracts which delineate, among other
provisions, the timing, manner, volume and price of the gas sold. The
pricing mechanisms contained in these contracts include a delay factor of
three to six months and use the price of light heating oil in Germany as one
of the primary pricing components. Since Germany must import a large
percentage of its energy requirements, the U.S. dollar price of oil on the
international market has a significant, although delayed, impact on the
price of gas.
The Trust does not conduct any active business operations and has
only limited need of funds for its own administrative services. These funds
are used to pay Trustees' fees (computed under the Trust Agreement and based
upon a percentage of royalties and interest income received), the
remuneration fixed by the Trustees for the Managing Trustee, the Managing
Director and the Audit Committee Chairman, expenses associated with the
Trustees' meetings, professional fees paid to consultants, legal advisors
and auditors, transfer agent fees, and secretarial and other general office
expenses.
Another requirement for funds by the Trust relates to the
occasional necessity of making lump sum payments of arrearages of dividends
of a corporate predecessor and distributions previously declared by the
Trust. The payment of such arrearages would require a reduction in the
amount of distributions which otherwise would be made on presently
outstanding units. For further information on this contingent liability and
the impact of the Delaware Court order see Note 3 to Financial Statements in
Item 8 of this Report.
The Trust has no means of ensuring continued income from
overriding royalty rights at their present level or otherwise. Economic and
political factors which are not foreseeable may have an impact on Trust
income. The effect of changing economic conditions on the demand for energy
throughout the world and future prices of oil and gas cannot be accurately
projected.
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The relatively small amounts required for administrative expenses of
the Trust limit the possible effect of inflation on its financial prospects.
Continued price inflation would be reflected in sales prices, which with
sales volumes form the basis on which the royalties paid to the Trust are
computed. In addition, fluctuations in the euro/dollar exchange rate have
an impact on domestic energy prices within Germany and on the amount of
dollars received by the Trust upon conversion. The impact of inflation or
deflation on energy prices in Germany is delayed by the use in certain
long-term gas sales contracts of a deferred "trailing average" related to
light fuel oil prices.
Fiscal 2003 versus Fiscal 2002
- ------------------------------
For fiscal 2003 the Trust's gross royalty income increased 4.2%
from $17,435,504 to $18,169,035. The strengthening of world oil prices
along with the gradual, albeit minor, improvement in the European economy
combined to increase the amount of royalties paid to the Trust.
Additionally the Euro continued its climb through the first three quarters
before falling back slightly in the final quarter of fiscal 2003.
Under the higher royalty rate agreement with ExxonMobil the
average quarterly gas price for the last two fiscal years fell to its low
point of 1.3517 Euro cents per kilowatt hour ("Ecents/Kwh") during the first
quarter of fiscal 2003. From that point, the average quarterly price
increased on a quarter over quarter basis for the next two quarters before
falling back slightly in the final quarter. For the entire fiscal year the
average gas price fell by 1.5% from 1.4394 Ecents/Kwh for fiscal 2002 to
1.4180 Ecents/Kwh for fiscal 2003.
Under the lower royalty rate agreement with BEB the average
quarterly gas price for the last two fiscal years fell to its low point of
1.1864 Ecents/Kwh during the fourth quarter of fiscal 2003. With the
exception of the third quarter the average quarterly gas price posted a
decline over the gas prices for the prior year's equivalent period. For
the entire fiscal year the average gas price fell by 6.35% from 1.3917
Ecents/Kwh for fiscal 2002 to 1.3033 Ecents/Kwh for fiscal 2003.
Except for a minor drop-off during the fourth quarter of fiscal
2003, the value of the Euro has increased steadily during the last two
years. Using the transfer of royalties from Germany to the U.S. to provide
an average value for the Euro, the value of the Euro during fiscal 2002
increased from $0.8728 in the first quarter to $0.9745 in the fourth
quarter. During fiscal 2003 the value of the Euro continued its almost
uninterrupted rise posting average values of $1.0385, $1.0806 and $1.1586 in
the first through third quarters before falling back slightly to $1.1239 in
the fourth quarter. When we use the average exchange rates and convert
prices measured in Ecents/Kwh into more familiar terms of dollars/Mcf, we
see average yearly gas prices under the higher and lower royalty rate
agreements of $4.46/ Mcf and $4.02/Mcf, increases of 17.8% and 14.9%,
respectively for fiscal 2003.
Following the sudden death of the Trust's German consultant Dr.
Wolfgang Sohn in March of 2003, the Trust began discussions with Mr. Alfred
Stachel, the Senior Vice President of Domestic Gas/Oil Exploration and
Production with RWE-Dea AG a German energy corporation, about his assuming
Dr. Sohn's duties. Mr. Stachel's service with RWE-Dea AG concluded at the
- 15 -
end of August and as of October 1, 2003 he assumed the position of the
Trust's German consultant.
For fiscal 2003 the decline in gas production and sales was
concentrated in the western half of the Oldenburg concession. In each
quarter western gas sales posted a year over year decline. In total for the
year western Oldenburg gas sales declined 13.7% from 87.50 billion cubic
feet ("BCF") in fiscal 2002 to 75.54 BCF in fiscal 2003. Eastern gas sales
increased 8.7% from 104.85 BCF in fiscal 2002 to 113.92 BCF in fiscal 2003.
Overall gas sales declined 1.5% from 192.35 BCF in fiscal 2002 to 189.46 BCF
in fiscal 2003.
Interest income for fiscal 2003 was lower due to the historically
low interest rates in effect. Trust expenses increased 31.35% from $610,689
in fiscal 2002 to $802,153 in fiscal 2003. The combination of a reduction
in Trust expenses in fiscal 2002 resulting from the reimbursement by the
New York Stock Exchange for expenses associated with the Trust's symbol
change from "NET" to "NRT" and higher legal and audit expenses in fiscal
2003 that were associated with the additional requirements imposed by the
Sarbanes-Oxley Act of 2002 resulted in the substantial increase in fiscal
2003.
Fiscal 2002 versus Fiscal 2001
- ------------------------------
For fiscal 2002 the Trust's gross royalty income decreased 22.35%
from $22,453,630 to 17,435,504. The decline in world oil prices that began
in the latter half of fiscal 2001 continued into fiscal 2002 resulting in a
fairly steady decline in gas prices from the high point experienced in the
third quarter of fiscal 2001. The general economic slowdown in Europe
contributed to the reduction in royalties paid to the Trust by reducing the
demand for natural gas thus resulting in lower sales. After lingering in
the range of $0.87 for the first half of fiscal 2002, the Euro staged a rally
climbing to an average of over $0.97 for the second half of fiscal 2002.
Under the higher royalty rate agreement with ExxonMobil the
average gas price for each quarter of fiscal 2002 showed a decline when
compared to the prior fiscal year's equivalent quarter. For fiscal 2002 gas
sold under this agreement averaged 1.4394 Euro cents per kilowatt hour
("Ecents/Kwh") compared to the average sales price of 1.6415 Ecents/Kwh for
fiscal 2001, a decline of 12.3%. Under the lower royalty rate agreement
with BEB the average gas price for each quarter of fiscal 2002 showed a
decline when compared to the prior fiscal year's equivalent quarter. For
fiscal 2002 gas sold under this agreement averaged 1.3917 Ecents/Kwh
compared to the average sales price of 1.6664 Ecents/Kwh for fiscal 2001, a
decline of 16.5%. When we use the average exchange rates and convert prices
measured in Ecents/Kwh into more familiar terms of dollars/Mcf, we see
average gas prices under the higher and lower royalty rate agreements of
$3.79/ Mcf and $3.54/Mcf, declines of 9.6% and 15.4%, respectively.
While the annual maintenance at the Grossenkneten desulfurization
plant was conducted during a different quarter than the prior fiscal year,
the scope and duration of the work was similar. This fact is significant in
that the ratio in the sales of sour gas and sweet gas was similar to the
prior fiscal year. Since the majority of gas sold from the higher royalty
rate area of western Oldenburg is sour gas and must be processed through
Grossenkneten, any change in the plant's production capacity can have
- 16 -
significant consequences to the amount of royalties the Trust receives.
In fiscal 2001 western gas sales accounted for 45.68% of overall Oldenburg
gas sales. In fiscal 2002 western gas sales accounted for 45.49% of overall
Oldenburg gas sales. For fiscal 2002 the decline in gas production and
sales was fairly evenly divided between the western and eastern halves of
the Oldenburg concession. Western gas sales declined 11.1% from 98.47
billion cubic feet ("BCF") in fiscal 2001 to 87.50 BCF in fiscal 2002.
Overall gas sales declined 10.77% from 215.56 BCF in fiscal 2001 to
192.35 BCF in fiscal 2002.
Interest income for 2002 was lower for both the fourth quarter and
the fiscal year as a whole due to reduced funds available for investment and
lower interest rates in effect. Trust expenses declined by 10.7% from
$684,111 in fiscal 2001 to $610,689 in fiscal 2002. Trust expenses were
reduced 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. However, the amount of the reduction was substantially offset by
additional legal and audit expenses associated with the change in the
Trust's auditors and additional requirements imposed by the Sarbanes-Oxley
Act of 2002.
-----------------------------------
This report on Form 10-K 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 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
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.
- 17-
Item 8. Financial Statements and Supplementary Data
--------------------------------------------
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
INDEX TO FINANCIAL STATEMENTS
------------------------------
Page Number
-----------
Report of Independent Public Auditors F-1
Financial Statements:
Statements of Assets, Liabilities and
Trust Corpus as of October 31, 2003 and 2002 F-2
Statements of Revenue Collected and Expenses Paid
for the Years Ended October 31, 2003,
2002 and 2001 F-3
Statements of Undistributed Earnings for the
Years Ended October 31, 2003, 2002 and 2001 F-4
Statements of Changes in Cash and Cash Equivalents for
the Years Ended October 31, 2003, 2002 and 2001 F-5
Notes to Financial Statements F-6 - F-10
Schedules are omitted because they are not applicable or not required or
because the required information is included in the financial statements or
notes thereto.
- 18 -
REPORT OF INDEPENDENT PUBLIC AUDITORS
-------------------------------------
To the Board of Trustees and Unit Owners of
North European Oil Royalty Trust
We have audited the accompanying statement of assets, liabilities and trust
corpus arising from cash transactions of North European Oil Royalty Trust
as of October 31, 2003 and 2002, and the related statements of revenue
collected and expenses paid, undistributed earnings and changes in cash and
cash equivalents for the years then ended. These financial statements are
the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
statements of revenue collected and expenses paid, undistributed earnings
and changes in cash and cash equivalents for the year ended October 31, 2001
were audited by other auditors who have ceased operations, whose opinion,
dated November 8, 2001 (except with respect to Note 4, as to which the date
was December 4, 2001) expressed an unqualified opinion thereon.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements have been prepared on the
cash basis of accounting, which is a comprehensive basis of accounting other
than accounting principles generally accepted in the United States.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and trust corpus arising
from cash transactions of North European Oil Royalty Trust at October 31,
2003 and 2002, its revenue collected and expenses paid, its undistributed
earnings and changes in its cash and cash equivalents for each of the years
then ended, on the basis of accounting described in Note 1.
/s/ Ernst & Young LLP
------------------------
New York, New York
December 18, 2003
F-1
- 19 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
OCTOBER 31, 2003 AND 2002
-------------------------
ASSETS 2003 2002
------ ------------ ------------
Current Assets --
Cash and cash equivalents (Note 1) $4,063,766 $3,458,577
Producing gas and oil
royalty rights (Note 1) 1 1
------------ ------------
$4,063,767 $3,458,578
============ ============
LIABILITIES AND TRUST CORPUS
----------------------------
Current liabilities --
Cash distributions payable
to unit owners, paid
November 2003 and 2002 $4,019,136 $3,393,937
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings (Note 1) 44,630 64,640
------------ ------------
$4,063,767 $3,458,578
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-2
- 20 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
----------------------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
----------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
German gas, sulfur and
oil royalties
received $18,169,035 $17,435,504 $22,453,630
Interest income 31,477 60,961 137,305
Trust expenses (802,153) (610,689) ( 684,111)
------------ ------------ ------------
Net income on
a cash basis $17,398,359 $16,885,776 $21,906,824
============ ============ ============
Net income per unit
on a cash basis $1.95 $1.89 $2.47
======= ======= =======
Cash distributions paid
or to be paid:
Distributions per unit
paid or to be paid to
unit owners (Note 5) 1.95 $1.89 $2.46
======= ======= =======
The accompanying notes to financial statements
are an integral part of these statements.
F-3
- 21 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
----------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Balance,
beginning of year $ 64,640 $ 59,237 $ 13,951
Net income on
a cash basis 17,398,359 16,885,776 21,906,824
------------ ------------ ------------
17,462,999 16,945,013 21,920,775
------------ ------------ ------------
Less:
Current year
distributions paid
or to be paid to unit
owners (Note 5) 17,418,369 16,880,373 21,861,538
------------ ------------ ------------
Balance, end of year $ 44,630 $ 64,640 $ 59,237
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-4
- 22 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2003 2002 AND 2001
----------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Sources of cash and
cash equivalents:
German gas, sulfur and
oil royalties received $18,169,035 $17,435,504 $22,453,630
Interest income 31,477 60,961 137,305
------------ ------------ ------------
18,200,512 17,496,465 22,590,935
Uses of cash and
cash equivalents:
Payment of Trust
expenses 802,153 610,689 684,111
Distributions and
dividends paid
(Note 3) 16,793,170 18,818,519 19,462,100
------------ ------------ ------------
17,595,323 19,429,208 20,146,211
------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents
during the year 605,189 (1,932,743) 2,444,724
Cash and cash
equivalents,
beginning of year 3,458,577 5,391,320 2,946,596
------------ ------------ ------------
Cash and cash
equivalents,
end of year $ 4,063,766 $3,458,577 $ 5,391,320
============ ============ ============
The accompanying notes to financial statements
are an integral part of these statements.
F-5
- 23 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 2003, 2002 AND 2001
-------------------------------
(1) Summary of significant
accounting policies:
----------------------
Basis of accounting -
---------------------
The accompanying financial statements 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 disclose income when cash is received
and expenses when cash is paid. GAAP basis financial statements
disclose 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 -
--------------------------------------
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 net book 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.
F-6
- 24 -
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 from the
date of purchase.
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
October 31, 2003, 2002 and 2001, there were 8,931,414, 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 the Trust's corporate predecessors, North European
Oil Corporation (the "Corporation") and North European Oil Company.
From the liquidation of the Company to October 31, 2002, 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
year ended October 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
F-7
- 25 -
the Trust's corporate predecessors. 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) had 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 November 2003 distribution, the maximum liability of the
Delaware Escheator will be $13,414,581.
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 ("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 on a 50:50 basis of any
costs relating to any claims which are allowed. Any subsequent
claims will reduce the number of units to be issued to the New York
Administrator in 2005. Following the final issuance of units to the
New York Administrator in 2005, the Trust's contingent liability for
past dividends and distributions attributable to all unexchanged
Corporation and Company shares subject to the Settlement Agreement
will be completely eliminated. Under the terms of the Settlement
Agreement, the maximum liability of the New York Administrator for
subsequent claims is limited to the value of the units received,
plus current distributions on units retained, less the New York
Administrator's share of subsequent claims. As of the receipt of
the November, 2003 distribution, the maximum liability of the New
York Administrator will be $1,009,524.
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
F-8
- 26 -
to units issued or to be issued to the Delaware Escheator or the
New York Administrator. As of October 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 $30,884,946 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.
(4) Related Party Transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. During fiscal 2003,
the Trust reimbursed him a total of $19,151.75 for such office space
and office services.
F-9
- 27 -
(5) Quarterly results (unaudited):
------------------------------
The table below summarizes the quarterly results and distributions of
the Trust for the fiscal years ended October 31, 2003 and 2002.
Fiscal 2003 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $4,766,564 $4,699,755 $4,536,318 $4,166,398 $18,169,035
Net income on
a cash basis 4,520,367 4,528,543 4,352,137 3,997,312 17,398,359
Net income
per unit on
a cash basis .51 .51 .49 .45 1.95
Current year
cash
distributions
paid or
to be paid 4,555,689 4,467,170 4,376,504 4,019,006 17,418,369
Current year
cash
distributions
per unit .51 .50 .49 .45 1.95
Fiscal 2002 by Quarter and Year
-------------------------------------------------------------
First Second Third Fourth Year
---------- ---------- ---------- ---------- -------------
Royalties
received $4,765,084 $4,504,767 $4,580,463 $3,585,190 $17,435,504
Net income on
a cash basis 4,542,845 4,492,298 4,443,703 3,406,930 16,885,776
Net income
per unit on
a cash basis .51 .50 .50 .38 1.89
Current year
cash
distributions
paid or
to be paid 4,555,021 4,465,707 4,465,707 3,393,937 16,880,372
Current year
cash
distributions
per unit .51 .50 .50 .38 1.89
F-10
- 28 -
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosure.
-------------------------
As of June 15, 2002 Arthur Andersen LLP ceased to serve as auditor
for North European Oil Royalty Trust because of its inability to perform
future audit services. The Trust was advised that neither the engagement
partner nor the manager of the audit work performed by Arthur Andersen LLP
for the Trust remained in the employ of Arthur Andersen LLP.
Arthur Andersen LLP's report on the financial statements for the
Trust's fiscal year 2001 contained no adverse opinion or disclaimer of
opinion. The report was unqualified except for the fact that the financial
statements did not present financial position and results of operations in
conformity with generally accepted accounting principles, which require the
use of the accrual basis of accounting. The Trust uses the cash basis of
accounting, which is a comprehensive basis of accounting other than
accounting principles generally accepted in the United States.
In fiscal 2001 and the first two quarters of fiscal 2002 prior to
the termination of Arthur Andersen LLP's services to the Trust, there were
no disagreements between the Trust and Arthur Andersen LLP on any matter of
accounting principles or practice, financial statement disclosure or
auditing scope or procedure which would have caused Arthur Andersen LLP to
make reference to the subject matter of such disagreement in connection
with its report. During the same period, there were no "reportable events"
as defined in Item 304 of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
The identity, business experience, relationships, and other
information about the Trustees as set forth under the caption "Election of
Trustees" in Registrant's definitive Proxy Statement, dated January 12,
2004, as filed with the Commission, are incorporated herein by reference in
accordance with Instruction G(3) to Form 10-K. See "Executive Officers of
the Trust" under Item 1 of this Report for information concerning the
executive officers of the Trust.
Code of Ethics.
- ---------------
The Trustees have adopted a Code of Ethics for its officers, which
at this time only include the Managing Trustee and the Managing Director.
These officers serve the roles of principal executive officer and principal
financial and accounting officer. A copy of the Code is available without
charge on request by writing to the Managing Director at the office of the
Trust.
- 29 -
No waivers or exceptions to the Code have been granted since the
adoption of the Code. Any amendments or waivers to the Code will be
disclosed in a Form 8-K filing of the Trust after such amendment or waiver.
Audit Committee membership.
- ---------------------------
All of the members of the Audit Committee are "independent" as that
term is defined in the rules of the Securities and Exchange Commission and
the applicable listing standards of New York Stock Exchange . The Trustees
have determined that both Robert P. Adelman and Rosalie J. Wolf are "audit
committee financial experts," as the term is defined in the Commission rules.
Item 11. Executive Compensation.
-----------------------
The information about remuneration of the Trustees and Management
as set forth under the caption "Management Compensation" in Registrant's
definitive Proxy Statement, dated January 12, 2004, as filed with the
Commission, is incorporated herein by reference in accordance with
Instruction G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
The information about security ownership of certain beneficial
owners and Management as set forth in the introduction to and under the
caption "Election of Trustees" in Registrant's definitive Proxy Statement
dated January 12, 2004, as filed with the Commission, is incorporated herein
by reference in accordance with Instruction G(3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
The information about security ownership of certain beneficial
owners and Management as set forth in the introduction to and under the
caption "Election of Trustees" in Registrant's definitive Proxy Statement
dated January 12, 2004, as filed with the Commission, is incorporated herein
by reference in accordance with Instruction G(3) to Form 10-K.
Item 14. 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 Rule 13a-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.
- 30 -
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 fourth quarter of fiscal 2003 that have
materially affected, or are reasonably likely to materially affect, the
Trust's internal control over financial reporting.
PART IV
Item 15. Principal Accountant Fees and Services.
---------------------------------------
The information about fees billed by our independent auditors and
our pre-approval policies with respect to non-audit services are set forth
under the caption "Auditor Matters" in Registrant's definitive Proxy
Statement dated January 12, 2004, as filed with the Commission, is
incorporated herein by reference in accordance with Instruction G(3) to
Form 10-K.
Item 16. Exhibits, Financial Statements, and Reports on Form 8-K.
--------------------------------------------------------
(a) The following is a list of the documents filed as part of this
report:
1. Financial Statements
Index to Financial Statements for the Years
Ended October 31, 2003, 2002 and 2001
Report of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus as of
October 31, 2003 and 2002
Statements of Revenue Collected and Expenses Paid for the
Years Ended October 31, 2003, 2002 and 2001
Statements of Undistributed Earnings for the Years
Ended October 31, 2003, 2002 and 2001
Statements of Changes in Cash and Cash Equivalents for the
Years Ended October 31, 2003, 2002 and 2001
Notes to Financial Statements
2. Exhibits
The Exhibit Index following the signature page lists all
exhibits filed with this report or incorporated by reference.
(b) Reports on Form 8-K.
A Report on Form 8-K, dated August 12, 2003, was furnished on
August 14, 2003 announcing the Trust's earnings for the third
quarter of fiscal 2003.
- 31 -
A Report on Form 8-K, dated October 30, 2003, was furnished on
November 3, 2003 announcing the amount of the distribution for
the fourth quarter of fiscal 2003.
A Report on Form 8-K, dated November 13, 2003, was furnished
on November 17, 2003 announcing the Trust's earnings for the
fourth quarter of fiscal 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
Dated: December 19, 2003 By: /s/ John H. Van Kirk
-------------------------
John H. Van Kirk,
Managing Trustee
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Dated: December 19, 2003 /s/ John H. Van Kirk
--------------------------------
John H. Van Kirk, Trustee
Dated: December 19, 2003 /s/ Robert P. Adelman
--------------------------------
Robert P. Adelman, Trustee
Dated: December 19, 2003 /s/ Samuel M. Eisenstat
--------------------------------
Samuel M. Eisenstat, Trustee
Dated: December 19, 2003 /s/ Willard B. Taylor
--------------------------------
Willard B. Taylor, Trustee
Dated: December 19, 2003 /s/ Rosalie J. Wolf
--------------------------------
Rosalie J. Wolf, Trustee
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Exhibit Index
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Exhibit Page
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(3) Trust Agreement, dated September 10, 1975,
amended May 13, 1976, and February 10, 1981
(incorporated by reference to Exhibit 4(i) to
Form 10-Q for the quarter ended April 30, 1981
(File No. 0-8378)).
(10.1) Agreement with OEG, dated April 2, 1979,
exhibit to Current Report on Form 8-K
filed May 11, 1979 (incorporated by
reference as Exhibit 1 to Current Report
on Form 8-K, filed May 11, 1979
(File No. 0-8378)).
(10.2) Agreement with Mobil Oil, A.G. concerning
sulfur royalty payment, dated March 30, 1979,
(incorporated by reference to Exhibit 3
to Current Report on Form 8-K, filed
May 11, 1979 (File No. 0-8378)).
(22) There are no parents and no subsidiaries
of the Trust.
(31.1) Certification of Chief Executive Officer pursuant 33
to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer pursuant 35
to Section 302 of the Sarbanes-Oxley Act of 2002
(32) Certification of Chief Executive and Chief Financial 37
Officers pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(99.1) Estimate of Remaining Proved Producing Reserves 38
in the Northwest Basin of the Federal Republic of
Germany as of October 1, 2003 and Calculation of
Cost Depletion Percentage for the 2003 Calendar
Year prepared by Ralph E. Davis Associates, Inc.
(99.2) Order Approving Settlement signed by
Vice Chancellor Jack Jacobs of the
Delaware Court of Chancery
(incorporated by reference as
Exhibit 99.2 to Current Report on
Form 8-K, filed February 26, 1996).