10-Q 1 tenq3q01.txt 10-Q THIRD QTR. 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 31, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ . Commission file number 1-8245 NORTH EUROPEAN OIL ROYALTY TRUST ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 22-2084119 ----------------------- -------------------------- (State of organization) (I.R.S. Employer I.D. No.) Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701 ------------------------------------------------------------- (Address of principal executive offices) (732) 741-4008 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Class Outstanding at July 31, 2001 ----- ------------------------------- Units of Beneficial Interest 8,886,804 ARTHUR ANDERSEN LLP ACCOUNTANTS' REVIEW REPORT ---------------------------- To the Unit Owners and Trustees of North European Oil Royalty Trust: We have reviewed the accompanying statements of assets, liabilities and trust corpus of North European Oil Royalty Trust (the "Trust") as of July 31, 2001 and the related statements of income and expenses on a cash basis for the three and nine months ended July 31, 2001 and 2000, and the related statements of changes in cash and cash equivalents and undistributed earnings for the nine months ended July 31, 2001 and 2000. These financial statements are the responsibility of the Trust's management. The statement of assets, liabilities and trust corpus as of October 31, 2000 of the Trust was maintained on a cash basis rather than the accrual basis of accounting and was audited by us. Our report dated November 9, 2000 indicates the statement did not purport to present, and in our opinion did not present, financial position and results of operations in conformity with accounting principles generally accepted in the United States which require the use of the accrual basis of accounting. We have not performed any auditing procedures since that date. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. The accounts of the Trust are maintained on a cash basis of accounting under which income is not recorded until collected instead of when earned, and expenses are recorded when paid instead of when incurred. Thus, the accompanying financial statements are not intended to present financial position and results of operations in conformity with accounting principles generally accepted in the United States which require the use of the accrual basis of accounting (see Note 1). Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the cash basis of accounting. As discussed in Note 3, the Trust has a contingent liability relating to unclaimed units and distributions. No reserves are established or reflected in the financial statements for the possibility that funds would be required to satisfy such claims. /s/ Arthur Andersen LLP ------------------------- ARTHUR ANDERSEN LLP Roseland, New Jersey August 8, 2001 PART I -- FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements ---------------------------- STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ----------------------------------------------------------- FOR THE THREE MONTHS ENDED JULY 31, 2001 AND 2000 ------------------------------------------------- 2001 2000 ----------------- ----------------- (unaudited) German gas, oil and sulfur royalties received $ 4,983,996 $ 3,966,769 ----------- ----------- Interest income 35,447 30,304 ----------- ----------- Trust expenses ( 148,872) ( 131,000) ----------- ----------- Net income on a cash basis $ 4,870,571 $ 3,866,073 =========== =========== Net income per unit on a cash basis $ .55 $ .43 ====== ====== Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders .00 .00 Distributions per unit to be paid to unit owners $ .54 $ .43 ====== ====== STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- JULY 31, 2001 AND OCTOBER 31, 2000 ---------------------------------- 2001 2000 ----------------- ----------------- (unaudited) (audited) Current assets - - Cash and cash equivalents (Note 1) $ 4,871,956 $ 2,946,596 Producing gas and oil royalty rights, net of amortization (Notes 1 and 2) 1 1 ----------- ----------- $ 4,871,957 $ 2,946,597 =========== =========== Current liabilities - - Cash distributions payable to unit owners $ 4,798,874 $ 2,932,645 Contingent liability (Note 3) Trust corpus (Notes 1 and 2) 1 1 Undistributed earnings 73,082 13,951 ----------- ----------- $ 4,871,957 $ 2,946,597 =========== =========== The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ------------------------------------------------------------ FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000 -------------------------------------------------- 2001 2000 ----------------- ----------------- (unaudited) German gas, oil and sulfur royalties received $17,000,330 $11,149,422 ----------- ----------- Interest income 112,366 66,699 ----------- ----------- Trust expenses ( 524,110) ( 442,630) ----------- ----------- Net income on a cash basis $16,588,586 $10,773,491 =========== =========== Net income per unit on a cash basis $1.87 $1.21 ===== ===== Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders .00 .00 Distributions per unit to be paid to unit owners $1.86 $1.23 ===== ===== The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000 ------------------------------------------------ 2001 2000 ----------------- ----------------- (unaudited) Sources of cash and cash equivalents: German gas, oil and sulfur royalties $17,000,330 $11,149,422 Interest income 112,366 66,699 Reimbursement for prior payment of past dividends and distributions 0 0 ----------- ----------- 17,112,696 11,216,121 ----------- ----------- Uses of cash and cash equivalents: Payment of Trust expenses 524,110 442,630 Distributions and dividends paid (Note 3) 14,663,226 9,219,512 ----------- ----------- 15,187,336 9,662,142 ----------- ----------- Net increase(decrease) in cash and cash equivalents during the period 1,925,360 1,553,979 Cash and cash equivalents, beginning of period 2,946,596 2,319,172 ----------- ----------- Cash and cash equivalents, end of period $ 4,871,956 $ 3,873,151 =========== =========== STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE NINE MONTHS ENDED JULY 31, 2001 AND 2000 ------------------------------------------------ 2001 2000 ----------------- ----------------- (unaudited) Balance, beginning of period $ 13,951 $ 58,044 Reimbursement for prior payment of past dividends and distributions 0 0 Net income on a cash basis 16,588,586 10,773,491 ----------- ----------- 16,602,537 10,831,535 ----------- ----------- Less: Dividends and distributions paid to former unlocated shareholders (Note 3) 0 1,043 Current year distributions paid or to be paid to unit owners (Note 3) 16,529,455 10,778,667 ----------- ----------- 16,529,455 10,779,710 ----------- ----------- Balance, end of period $ 73,082 $ 51,825 =========== =========== The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Unaudited) ----------- (1) Summary of significant accounting policies: ---------------------- Basis of accounting - ------------------- The accounts of North European Oil Royalty Trust (the "Trust") are maintained on a cash basis except for distributions to be paid to unit owners (those distributions approved by the Trustees for the Trust). The Trust's distributable income represents royalty income received by the Trust during the period plus interest income less any expenses incurred by the Trust, all on a cash basis. In the opinion of the Trustees, the use of the cash basis provides a more meaningful presentation to unit owners of the results of operations of the Trust. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates. Producing gas and oil royalty rights - --------------------- The rights to certain gas and oil royalties in Germany were transferred to the Trust at their net book value by North European Oil Company (the "Company") (see Note 2). The net book value of the royalty rights has been reduced to one dollar ($1) in view of the fact that the remaining value of royalty rights is de minimis relative to annual royalties received and distributed by the Trust and does not bear any meaningful relationship to the fair value of such rights or the actual amount of proved producing reserves. Federal and state income taxes - ------------------------------ The Trust, as a grantor trust, is exempt from Federal and state income taxes under a private letter ruling issued by the Internal Revenue Service. Cash and cash equivalents - ------------------------- Included in cash and cash equivalents are amounts deposited in bank accounts and amounts invested in certificates of deposit and U. S. Treasury bills with maturities of three months or less. Net income per unit on the cash basis - ------------------- Net income per unit on the cash basis is based upon the number of units outstanding at the end of the period (see Note 3). As of July 31, 2001 and 2000, there were 8,886,804 and 8,886,804 units of beneficial interest outstanding respectively. (2) Formation of the Trust: ----------------------- The Trust was formed on September 10, 1975. As of September 30, 1975, the Company was liquidated and the remaining assets and liabilities of the Company, including its royalty rights, were transferred to the Trust. (3) Contingent liability: --------------------- The Trust serves as fiduciary for certain unlocated or unknown shareholders of North European Oil Corporation (the "Corporation") and North European Oil Company, corporate predecessors of the Trust. From the liquidation of the Company to October 31, 2000, 721,364 units were issued in exchange for Corporate and Company shares and dividends of $354,101 and distributions of $4,236,544 were paid to former unlocated Corporation and Company shareholders. For the nine-month period ended July 31, 2001, there were no units issued in exchanges and no dividends and no distributions were paid to former unlocated Corporation and Company shareholders. On February 26, 1996 the settlement of litigation between the Trust and the Delaware State Escheator was approved by the Delaware Court of Chancery. As of that date, there were a total of 875,748 authorized but unissued units representing the unexchanged shares of the Trust's predecessor corporations. Out of this total, 760,560 units were subject to the settlement. Under the settlement, 380,280 units were issued to the Escheator on April 17, 1996. Of the Trust units remaining to be issued to the Escheator, approximately 50% (190,128 units) have been issued to the Escheator as of June 30, 2000 and the remaining balance will be issued by June 30, 2005. Through June 30, 2000, claims by unlocated or unknown shareholders of the Trust's corporate predecessors for units and past dividends and distributions thereon ("subsequent claims") were paid by the Escheator and the Trust on a 50:50 basis. From July 1, 2000 to June 30, 2005, subsequent claims will be paid by the Escheator and the Trust on a 75:25 basis. Any subsequent claims will reduce the number of units to be issued to the Escheator in 2005. Following the final issuance of units to the Escheator in 2005, the Trust's contingent liability for past dividends and distributions attributable to all unexchanged Corporation and Company shares subject to the settlement will be completely eliminated. Under the terms of the settlement, the maximum liability of the Escheator for subsequent claims is limited to the value of the units received, plus current distributions on units retained, less the Escheator's share of subsequent claims. As of the receipt of the August, 2001 distribution, the maximum liability of the Escheator will be $11,327,475. Under the Trust Agreement as deemed amended by the February 26, 1996 Delaware Court Order, the Trust is not required to make payments of arrearages of Company dividends or Trust distributions with respect to units issued or to be issued to the Escheator. As of July 31, 2001, there remained a total of 303,786 units that could be issued to unlocated or unknown Corporation and Company shareholders. Of this total, 190,122 units are subject to the settlement and remain to be issued to the Escheator. If all shares, represented by the units already issued as well as the units remaining to be issued, were presented for exchange, $487,023 in dividends and $29,707,438 in distributions would be payable. In the opinion of the Trustees, based in part on the history of exchanges during the last ten fiscal years, the maximum liability of the Escheator would be adequate to cover the Escheator's share of any subsequent claims. In any event, the Trust's contingent liability for such claims will be eliminated in 2005. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ------------------------------------------------- The Trust is a passive fixed investment trust which holds overriding royalty rights, receives income under those rights from certain operating companies, pays its expenses and distributes the remaining net funds to its unit owners. The Trust does not engage in any business or extractive operations of any kind in the areas over which it holds royalty rights and is precluded from any such involvement by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust. The operating companies, subsidiaries of Exxon Mobil Corp. and the Royal Dutch Group, pay monthly royalties to the Trust based on their sales of natural gas, sulfur and oil. The Oldenburg concession is the primary area from which these products are extracted and provides nearly 100% of all the royalties received by the Trust. Of these three products, natural gas provides approximately 98% of the total royalties. Within the Oldenburg concession there are two overriding royalty rates in effect on sales of natural gas. The Trust receives a 4% royalty from the western portion of the concession. The Trust also receives a 0.6667% royalty, adjusted to account for a partial representative portion of costs, which covers the entire concession. The royalties are initially paid in Euros and are converted into U.S. dollars just prior to their transfer from Germany at the agreed upon Euro/dollar exchange rate. Although the Trust itself does not have access to the specific sales contracts under which the Oldenburg gas is sold, these contracts are reviewed periodically by our auditors. They have informed the Trust that these contracts contain pricing mechanisms which use a number of factors with varying time delays to price the gas being sold. For the Trust there are two elements of these contracts that are very significant. The first element is the utilization of the price of light heating oil in Germany as the primary pricing factor in many of these contracts. The price of light heating oil is in turn affected by the price of oil on the international market. The second element is a three to six month delay before changes in pricing factors are translated into changes in the price of gas. Net income of the Trust for the third quarter of fiscal 2001, ended July 31, 2001, was $4,870,571, 26% higher than the prior year's period. This income was primarily derived from royalties paid on sales of gas, sulfur and oil from the Trust's overriding royalty areas in Germany during the second calendar quarter of 2001. For the nine month fiscal period ended July 31, 2001, net income of the Trust increased 54% from $10,773,491 to $16,588,586. Once again the increase in gas prices in Germany was the primary factor behind the improvement in royalty income and the resulting Trust distribution to its unit owners. The substantial nature of the price increase easily offset both the decline in gas sales and the weaker Euro. The shift in timing by the operating companies of their normally scheduled summer maintenance at the Grossenkneten desulfurization plant to the month of May resulted in the decline in production capacity and resulting gas sales from the Oldenburg concession. While we have seen some slight recovery in the value of the Euro recently, on average for the quarter the Euro posted its lowest level in comparison to the dollar at a dollar equivalent value of $0.8626. The ongoing success on the part of OPEC in matching oil supply to demand continues to be reflected in the world price of oil. In turn, through the specifications in gas sales contracts under which Oldenburg gas is sold, these higher oil prices are reflected in higher prices for natural gas in Germany. For the first three quarters of fiscal 2001, there has been consecutive quarter over quarter gas price increases. Indeed, except for a minor drop in the fourth quarter of fiscal 2000, average gas prices for Oldenburg gas have increased for eight consecutive quarters. Under the higher royalty rate agreement with the German subsidiary of Exxon Mobil covering western Oldenburg (from which the Trust derives the bulk of its royalties), average gas prices for the quarter increased 54.8% from the equivalent quarter for the prior year. Gas prices rose from 1.1340 Euro cents per Kilowatt hour ("Ecents/Kwh") to 1.7552 Ecents/Kwh. Converting this gas price using the average exchange rate for the quarter, the average price for gas sold under the higher royalty rate agreement was $4.32 per Mcf. Under the lower royalty rate agreement with BEB, a joint venture between Exxon Mobil and the Royal Dutch Group, covering gas sales from the entire Oldenburg concession, gas prices increased 44.6% from 1.2949 Ecents/Kwh to 1.8718 Ecents/Kwh. Converting this quarter's price using the average exchange rate for the quarter, the average price for gas sold under the lower royalty rate agreement was $4.50 per Mcf. With the four-week shutdown of the Grossenkneten desulfurization plant occurring in May, the reduction in gas sales reported by the operating companies was in line with expectations. Overall Oldenburg gas sales declined by 9.1% from 45.9 Billion cubic feet ("Bcf") to 41.7 Bcf. Gas sales from the higher royalty rate area of western Oldenburg declined 11% from 24.7 Bcf to 22.9 Bcf. At this level gas sales from western Oldenburg accounted for 52.6% of total Oldenburg gas sales as compared to 53.7% for the prior year's quarter. Discounting the effects of differences in prices and effective exchange rates, the combination of royalty rates on gas sold from western Oldenburg results in a royalty approximately seven times higher on a cubic foot of gas than a cubic foot originating from the eastern half of Oldenburg. The impact of the combined royalty rate is demonstrated by the fact that out of a total of $4,966,663 in Oldenburg gas royalties for the quarter just ended, 89.6% or $4,451,951 is attributable to the combined royalty rate in effect in the western area. The Euro showed some slow improvement during the quarter just ended increasing from a dollar equivalent of $0.8534 to $0.8765 from the first to the third month of the quarter. However, this increase only raised the Euro to its lowest quarterly average, at least as far as its impact on the Trust is concerned, since its inception. The low exchange rate has an immediate impact on Trust royalties when the royalties, originally paid in Euros, are converted into dollars for their transfer to the United States. A weak Euro means the Trust receives fewer dollars on exchange. However, over the range of three to six months, the time delay factor contained in many of the Oldenburg gas sales contracts, the weaker Euro means that oil imported into Germany is more expensive since oil on the world market is priced in dollars. This more expensive oil eventually has an impact on the price of light heating oil which is one of the major gas pricing factors contained in the provisions of these same contracts. With the completion in May of scheduled maintenance for Grossenkneten, we can reasonably expect to look forward to uninterrupted production during the upcoming fourth quarter. Barring unforeseen circumstances the convergence of the possibly uninterrupted fourth quarter production and last year's fourth quarter maintenance downtime for Grossenkneten would seem likely to result in an increase in fourth quarter gas sales when compared to the fourth quarter of fiscal 2000. Interest income was higher due to both greater funds available for investment and higher interest rates. Trust expenses increased slightly from the prior year's period primarily due to higher legal fees and higher Trustees' fees reflecting the higher level of royalty income. The current Statement of Assets, Liabilities and Trust Corpus of the Trust at July 31, 2001, compared to that at fiscal year end (October 31, 2000), shows an increase in assets due to higher royalty receipts during the quarter. The Trust distribution for the third quarter of fiscal 2001 is $0.54, an increase of 26% from last year's distribution of $0.43. Cumulative distributions for the nine month fiscal period are $1.86 compared to $1.23 for the prior year's period. As mandated by the Trust Agreement, distributions of income are made on a quarterly basis. These distributions, as determined by the Trustees, constitute substantially all the funds on hand after provision is made for Trust expenses then anticipated. As permitted by the Trust Agreement, no provision is made for the retention of reserve funds of any kind. If funds were to be required for payments to owners for shares of the Trust's predecessor corporations not previously presented for exchange into Trust units, quarterly distributions would be reduced to the extent required to provide funds for such payments. ----------------------------------- This report on Form 10-K contains forward looking statements concerning business, financial performance and financial condition of the Trust, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward looking statement. The statements contained herein are based on the Trustees' current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results and events may vary significantly from those discussed in the forward looking statements. Part II -- OTHER INFORMATION ---------------------------- Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. None. (b) Reports on Form 8-K. None. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NORTH EUROPEAN OIL ROYALTY TRUST /s/ John R. Van Kirk --------------------------------- John R. Van Kirk Managing Director Dated: August 28, 2001