-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KG3cby1QR0FGdOfzRuIpOhpgvf2RJFqktM5yTYYq0+PILnvSEiOfosv37SPWHQAm ktpXkhVlBH/RVFveNJUj3w== 0000072633-02-000007.txt : 20020415 0000072633-02-000007.hdr.sgml : 20020415 ACCESSION NUMBER: 0000072633-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020131 FILED AS OF DATE: 20020315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH EUROPEAN OIL ROYALTY TRUST CENTRAL INDEX KEY: 0000072633 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 222084119 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08245 FILM NUMBER: 02575830 BUSINESS ADDRESS: STREET 1: P O BOX 456 STREET 2: 43 WEST FRONT STREET SUITE 19-A CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 9087414008 MAIL ADDRESS: STREET 1: P O BOX 456 STREET 2: 43 WEST FRONT STREET SUITE 19-A CITY: RED BANK STATE: NJ ZIP: 07701 10-Q 1 tenq1q02.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended January 31, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ . Commission file number 1-8245 NORTH EUROPEAN OIL ROYALTY TRUST ------------------------------------------------------ (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 January 31, 2002 - ----- ------------------------------- Units of Beneficial Interest 8,931,414 -2- ARTHUR ANDERSEN ACCOUNTANTS' REVIEW REPORT ---------------------------- To the Unit Owners and Trustees of North European Oil Royalty Trust: We have reviewed the accompanying statements of assets, liabilities and trust corpus of North European Oil Royalty Trust (the "Trust") as of January 31, 2002 and the related statements of income and expenses on a cash basis for the three months ended January 31, 2002 and 2001, and the related statements of changes in cash and cash equivalents and undistributed earnings for the three months ended January 31, 2002 and 2001. These financial statements are the responsibility of the Trust's management. The statement of assets, liabilities and trust corpus as of October 31, 2001 of the Trust was maintained on a cash basis rather than the accrual basis of accounting and was audited by us. Our report dated November 8, 2001, except with respect to Note 4 as to which the date is December 4, 2001, indicates the statement did not purport to present, and in our opinion did not present, financial position and results of operations in conformity with accounting principles generally accepted in the United States which require the use of the accrual basis of accounting. We have not performed any auditing procedures since that date. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. The accounts of the Trust are maintained on a cash basis of accounting under which income is not recorded until collected instead of when earned, and expenses are recorded when paid instead of when incurred. Thus, the accompanying financial statements are not intended to present financial position and results of operations in conformity with accounting principles generally accepted in the United States which require the use of the accrual basis of accounting (see Note 1). Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the cash basis of accounting. As discussed in Note 3, the Trust has a contingent liability relating to unclaimed units and distributions. No reserves are established or reflected in the financial statements for the possibility that funds would be required to satisfy such claims. /s/ Arthur Andersen LLP ------------------------- ARTHUR ANDERSEN LLP Roseland, New Jersey February 7, 2002 -3- PART I -- FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements -------------------- STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ----------------------------------------------------------- FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 ----------------------------------------------------- 2002 2001 -------------- ------------- (unaudited) German gas, oil and sulfur royalties received $ 4,765,084 $ 6,441,960 ----------- ----------- Interest income 24,302 30,310 ----------- ----------- Trust expenses ( 246,541) ( 149,409) ----------- ----------- Net income on a cash basis $ 4,542,845 $ 6,322,861 =========== =========== Net income per unit on a cash basis $ .51 $ .71 ====== ====== Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders .00 .00 Distributions per unit to be paid to unit owners $ .51 $ .71 ====== ====== STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- JANUARY 31, 2002 AND OCTOBER 31, 2001 ------------------------------------- 2002 2001 -------------- ------------- (unaudited) Current assets - - Cash and cash equivalents (Note 1) $ 4,602,082 $ 5,391,320 Producing gas and oil royalty rights, net of amortization (Notes 1 and 2) 1 1 ----------- ----------- Total Assets $ 4,602,083 $ 5,391,321 =========== =========== Current liabilities - - Cash distributions payable to unit owners $ 4,555,021 $ 5,332,083 Contingent liability (Note 3) Trust corpus (Notes 1 and 2) 1 1 Undistributed earnings 47,061 59,237 ----------- ----------- Total Liabilities and Trust Corpus $ 4,602,083 $ 5,391,321 =========== =========== The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. -4- STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 ---------------------------------------------------- 2002 2001 -------------- ------------- (unaudited) Sources of cash and cash equivalents: German gas, oil and sulfur royalties $ 4,765,084 $ 6,441,960 Interest income 24,302 30,310 ----------- ----------- $ 4,789,386 $ 6,472,270 =========== =========== Uses of cash and cash equivalents: Payment of Trust expenses 246,541 149,409 Distributions and dividends paid (Note 3) 5,332,083 2,932,645 ----------- ----------- 5,578,624 3,082,054 ----------- ----------- Net increase(decrease) in cash and cash equivalents during the period ( 789,238) 3,390,216 Cash and cash equivalents, beginning of period 5,391,320 2,946,596 ----------- ----------- Cash and cash equivalents, end of period $ 4,602,082 $ 6,336,812 =========== =========== STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 ---------------------------------------------------- 2002 2001 ------------- ------------- (unaudited) Balance, beginning of period $ 59,237 $ 13,951 Net income on a cash basis 4,542,845 6,322,861 ----------- ----------- 4,602,082 6,336,812 ----------- ----------- Less: Dividends and distributions paid to former unlocated shareholders (Note 3) 0 0 Current year distributions paid or to be paid to unit owners (Note 3) 4,555,021 6,309,631 ----------- ----------- 4,555,021 6,309,631 ----------- ----------- Balance, end of period $ 47,061 $ 27,181 =========== =========== The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. -5- NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- 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 incomes represent royalty income received by the Trust during the period plus interest income less any expenses incurred by the Trust, all on a cash basis. In the opinion of the Trustees, the use of the cash basis provides a more meaningful presentation to unit owners of the results of operations of the Trust. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates. Producing gas and oil royalty rights - --------------------- The rights to certain gas and oil royalties in Germany were transferred to the Trust at their net book value by North European Oil Company (the "Company") (see Note 2). The net book value of the royalty rights has been reduced to one dollar ($1) in view of the fact that the remaining value of royalty rights is de minimis relative to annual royalties received and distributed by the Trust and does not bear any meaningful relationship to the fair value of such rights or the actual amount of proved producing reserves. Federal and state income taxes - ------------------------------ The Trust, as a grantor trust, is exempt from Federal and state income taxes under a private letter ruling issued by the Internal Revenue Service. Cash and cash equivalents - ------------------------- Included in cash and cash equivalents are amounts deposited in bank accounts and amounts invested in certificates of deposit and U. S. Treasury bills with maturities of three months or less. -6- Net income per unit on the cash basis - ------------------- Net income per unit on the cash basis is based upon the number of units outstanding at the end of the period (see Note 3). As of January 31, 2002 and 2001, there were 8,931,414 and 8,886,804 units of beneficial interest outstanding, respectively. (2) Formation of the Trust: ----------------------- The Trust was formed on September 10, 1975. As of September 30, 1975, the Company was liquidated and the remaining assets and liabilities of the Company, including its royalty rights, were transferred to the Trust. The Trust on behalf of the owners of beneficial interest in the Trust holds overriding royalty rights covering gas and oil production in certain concessions or leases in the Federal Republic of Germany. These rights are held under contracts with local German exploration and development subsidiaries of Exxon Mobil Corp. and the Royal Dutch Group. Under these contracts, the Trust receives various percentage royalties on the proceeds of the sales of certain products from the areas involved. At the present time, royalties are received for sales of gas well gas, oil well gas, crude oil, distillate and sulfur. (3) Contingent liability: --------------------- The Trust serves as fiduciary for certain unlocated or unknown shareholders of North European Oil Corporation (the "Corporation") and of North European Oil Company, corporate predecessors of the Trust. From the liquidation of the Company to October 31, 2001, 721,364 Trust units were issued in exchange for Corporate or Company shares and dividends of $354,101 and distributions of $4,236,544 were paid to former unlocated Corporation and Company shareholders. For the three- month period ended January 31, 2002, there were no units issued in exchanges and no dividends and no distributions were paid to former unlocated Corporation and Company shareholders. On February 26, 1996 the settlement of litigation between the Trust and the Delaware State Escheator ("Delaware Escheator") was approved by the Delaware Court of Chancery. As of that date, there were a total of 875,748 authorized but unissued units, of which 760,560 were subject to the settlement, representing the unexchanged shares of the Trust's predecessor corporations. Under the settlement, 380,280 units were issued to the Delaware Escheator on April 17, 1996. Of the Trust units remaining to be issued to the Delaware Escheator, approximately 50% (190,128 units) have been issued to the Delaware Escheator as of June 30, 2000 and the remaining balance will be issued by June 30, 2005. Through June 30, 2000, claims by unlocated or unknown shareholders of the Trust's corporate predecessors for units and past dividends and distributions thereon ("subsequent claims") were paid by the Delaware Escheator and the Trust on a 50:50 basis. From July 1, 2000 to June 30, 2005, subsequent claims will be paid by the Delaware Escheator and the Trust on a 75:25 basis. Any subsequent claims will reduce the number of units to be issued to the Delaware Escheator in 2005. -7- Following the final issuance of units to the Delaware Escheator in 2005, the Trust's contingent liability for past dividends and distributions attributable to all unexchanged Corporation and Company shares subject to the settlement will be completely eliminated. Under the terms of the settlement, the maximum liability of the Delaware Escheator for subsequent claims is limited to the value of the units received, plus current distributions on units retained, less the Delaware Escheator's share of subsequent claims. As of the receipt of the February, 2002 distribution, the maximum liability of the Delaware Escheator will be $11,902,405. In addition to the agreement reached with the Delaware Escheator, on December 4, 2001 the Trust reached a parallel agreement with the Administrator of Unclaimed Property, Office of the New York State Comptroller (the "New York Administrator") covering Units for which owners were unlocated but New York state addresses were shown in predecessor corporation records. The New York Settlement Agreement covers 89,220 Units attributable to stock ownership by unlocated shareholders of predecessor corporate entities. Of the Units covered by the Settlement Agreement, 44,610 were issued to the New York Administrator on December 21, 2001 and the balance of 44,610 will be issued on or before June 30, 2005. The Settlement Agreement provides for processing of claims in the period until June 30, 2005 and the sharing of any costs relating to any claims which are allowed. As of the receipt of the February, 2002 distribution, the maximum liability of the New York Administrator will be $860,973. Under the Trust Agreement as deemed amended by the February 26, 1996 Delaware Court Order, the Trust is not required to make payments of arrearages of Company dividends or Trust distributions with respect to units issued or to be issued to the Delaware Escheator or the New York Administrator. As of January 31, 2002, there remained a total of 259,176 units that could be issued to unlocated or unknown Corporation and Company shareholders. Of this total, 234,732 units are subject to the settlements and remain to be issued to the Delaware Escheator or the New York Administrator. If all shares, represented by the units already issued as well as the units remaining to be issued, were presented for exchange, $487,023 in dividends and $30,021,890 in distributions would be payable. In the opinion of the Trustees, based in part on the history of exchanges during the last ten fiscal years, the maximum liability of the Delaware Escheator and the New York Administrator would be adequate to cover their respective share of any subsequent claims. In any event, the Trust's contingent liability for all claims for arrearages will be eliminated in 2005. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ------------------------------------------------- The Trust is a passive fixed investment trust which holds overriding royalty rights, receives income under those rights from certain operating companies, pays its expenses and distributes the remaining net funds to its unit owners. The Trust does not engage in any business or extractive operations of any kind in the areas over which it holds royalty rights and is precluded from any such involvement by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust. The operating companies, subsidiaries of Exxon Mobil Corp. and the Royal Dutch Group, pay monthly royalties to the Trust based on their sales of natural gas, sulfur and oil. The Oldenburg concession is the primary area from which these products are extracted and provides nearly 100% of all the royalties received by the Trust. Of these three products, natural gas provides approximately 98% of the total royalties. Net income on a cash basis for the first quarter of fiscal 2002 was $4,542,845. This level of income permitted a distribution of 51 cents per unit which was paid on February 27, 2002 to owners of record as of February 15, 2002. Gross royalty income of $4,765,084 for the quarter ended January 31, 2002 was 26% lower than royalty income for the same period last year. This royalty income was based on sales of gas, oil and sulfur from the Trust's overriding royalty areas in Germany during the fourth calendar quarter of 2001. While all factors affecting the level of royalty income showed declines during the first quarter of fiscal 2002 when compared to the prior year's corresponding quarter, the most significant factor was the decline in gas sales for the higher royalty area of western Oldenburg. Overall gas sales from Oldenburg fell by 12.7% to 57.98 Billion cubic feet ("Bcf"). Gas sales from western Oldenburg, which account for approximately 75% of the Trust's royalty income, declined by 12.9% to 23.29 Bcf. Average prices for gas sold under the higher royalty rate agreement covering western Oldenburg dropped 3.9% to 1.5001 Euro cents per Kwh ("Ecents/Kwh"). Average prices for gas sold under the lower royalty rate agreement covering the entire Oldenburg area dropped 12.3% to 1.3999 Ecents/Kwh. Finally, the average value for the Euro declined by 3.2% compared to the prior year's equivalent quarter from a dollar equivalent of .9020 to .8728. Using this average value for the Euro and converting gas prices into more familiar terms, gas prices under the higher and lower royalty rate agreements averaged $3.78 per Mcf and $3.42 per Mcf, respectively. The decline in gas sales can most likely be traced to a combination of reduced demand engendered by the economic slowdown in Germany and the warmer weather experienced during the period. The decline in gas prices can be traced to the impact of lower world oil prices on the pricing mechanisms in the various contracts under which the gas is sold. The worldwide economic slowdown, significantly warmer weather in many areas, OPEC's slow reaction in cutting output and non-OPEC producers continuing high production have all contributed to an excess of oil on the world market and the resulting drop in prices. -9- The Annual Meeting of Unit Owners was held on February 13, 2002 at the University Club in New York City. Approximately 30 unit owners attended and over 80% of all units outstanding were represented in person or by proxy. The five serving Trustees were elected and the appointment of Arthur Andersen LLP as Trust auditor for the 2002 fiscal year was ratified. In the discussion period the topics of discussion ranged from the Trustees' choice of Arthur Andersen LLP as auditor to the impact of horizontal drilling on gas reserves. Robert P. Adelman, chairperson of the Trust's Audit Committee, briefly addressed the meeting and explained the Trust's position with respect to the recent adverse publicity surrounding Arthur Andersen. The Trustees and management have always found the representatives of Arthur Andersen providing services for the Trust to be intelligent, knowledgeable and responsive and consider them to be persons of professional and personal integrity and ability. Arthur Andersen has served as auditor for the Trust and its predecessor North European Oil Company since 1966. The Trust reports on a cash basis, carries no debt and has no requirements for off balance sheet reporting of items. The simplicity of the required audit work done domestically by Arthur Andersen has allowed the Trust to limit audit expenses to their low level. In Germany the relationship goes back even further with Arthur Andersen examining the books of the operating companies to ensure the accuracy of reported royalty payments and, where applicable, reviewing the reporting of deductible costs under the lower royalty rate agreement. The individuals assigned by Arthur Andersen in Germany have worked in that capacity for more than a decade and the experience gained over this extensive period by these individuals has benefitted the Trust with a more comprehensive understanding of the operating companies. The representatives of Arthur Andersen, both in the U.S. and in Germany, directly responsible for the work with the Trust have had no involvement with the audit or consulting work for any of the public companies which prompted the ongoing inquiries. The Trustees and management will continue to monitor the situation. While there was no drilling activity during 2001, the operating companies commenced drilling their first well of 2002 in the early days of January. This well, Doetlingen Z-13a, is a production well located in the eastern portion of Oldenburg and is a horizontal deviation from the existing well site. The operating companies have exploited the advantages of horizontal drilling by using this technology almost exclusively for more than a decade. This technology has allowed the operating companies to maintain a very stable level of gas sales and reserves for an extended period of time with relatively minor investments in exploration and drilling. By working off existing well sites with current permits and safety measures in place, delays and expenses associated with the establishment of a new well site are avoided. The level of recoverable reserves possible through horizontal drilling and the associated acidizing or fracturing processes far exceed the level of recoverable reserves of a corresponding number of vertical wells. Due to the dense and non-porous nature of the Zechstein geological strata in which the bulk of Oldenburg gas is found, the use of the horizontal drilling has proven to be extremely effective. Furthermore, the experience gained by the operating companies in their use of this technology will serve them very well when they attempt to exploit the Carboniferous strata which is found at a greater depth than the Zechstein. -10- At the request of the New York Stock Exchange, effective with the opening of business on January 29, 2002 the ticker symbol under which Trust units are traded on the NYSE was changed from "NET" to "NRT". Trust expenses of $246,541 were substantially higher than the prior year due primarily to increased legal expenses relating to the settlement reached between the Trust and the Administrator of Unclaimed Property for the State of New York. Biannual work performed by personnel from Arthur Andersen Germany in examining the royalty payments and costs of the operating companies added to the level of Trust expenses. Trustees fees were higher because one of the positions of Trustee was vacant last year whereas now it has been filled. Interest income declined reflecting the reduced funds available for investment and the lower interest rates on those funds. The current Statement of Assets, Liabilities and Trust Corpus of the Trust at January 31, 2002, compared to that at fiscal year end (October 31, 2001), shows a decrease in assets due to lower royalty receipts during the quarter. As mandated by the Trust Agreement, distributions of income are made on a quarterly basis. These distributions, as determined by the Trustees, constitute substantially all the funds on hand after provision is made for Trust expenses then anticipated. As permitted by the Trust Agreement, no provision is made for the retention of reserve funds of any kind. If funds are required for payments to owners of units not previously presented for issuance, quarterly distributions would be reduced to the extent required to provide funds for such payments. ----------------------------------- This report on Form 10-Q contains forward looking statements concerning business, financial performance and financial condition of the Trust, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward looking statement. The statements contained herein are based on the Trustees' current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results and events may vary significantly from those discussed in the forward looking statements. -11- Part II -- OTHER INFORMATION ---------------------------- Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- (a) The Annual Meeting of Unit Owners was held February 13, 2002. (b) The following persons were elected as Trustees of the Trust to serve until the 2003 Annual Meeting of Unit Owners: Robert P. Adelman (7,098,850 votes for; 74,386 withheld) Samuel M. Eisenstat (7,094,720 votes for; 78,516 withheld) Willard B. Taylor (7,097,219 votes for; 76,017 withheld) John H. Van Kirk (7,003,605 votes for; 169,631 withheld) Rosalie J. Wolf (7,091,484 votes for; 81,752 withheld) (c) The designation of the firm of Arthur Andersen LLP as auditor for the Trust for 2002 fiscal year was ratified with the following vote totals: 6,089,265 votes for; 979,983 votes against and 103,988 abstained. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. None. (b) Reports on Form 8-K. None. -12- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NORTH EUROPEAN OIL ROYALTY TRUST /s/ John R. Van Kirk --------------------------------- John R. Van Kirk Managing Director Dated: March 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----