10-Q 1 tenq2q02.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 April 30, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ . Commission file number 1-8245 NORTH EUROPEAN OIL ROYALTY TRUST ------------------------------------------------------ (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 April 30, 2002 ---------------------------- ------------------------------- Units of Beneficial Interest 8,931,414 ANDERSEN ACCOUNTANTS' REVIEW REPORT ---------------------------- To the Unit Owners and Trustees of North European Oil Royalty Trust: We have reviewed the accompanying statements of assets, liabilities and trust corpus of North European Oil Royalty Trust (the "Trust") as of April 30, 2002 and the related statements of income and expenses on a cash basis for the three and six months ended April 30, 2002 and 2001, and the related statements of changes in cash and cash equivalents and undistributed earnings for the six months ended April 30, 2002 and 2001. These financial statements are the responsibility of the Trust's management. The statement of assets, liabilities and trust corpus as of October 31, 2001 of the Trust was maintained on a cash basis rather than the accrual basis of accounting and was audited by us. Our report dated November 8, 2001 indicates the statement did not purport to present, and in our opinion did not present, financial position and results of operations in conformity with accounting principles generally accepted in the United States which require the use of the accrual basis of accounting. We have not performed any auditing procedures since that date. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. The accounts of the Trust are maintained on a cash basis of accounting under which income is not recorded until collected instead of when earned, and expenses are recorded when paid instead of when incurred. Thus, the accompanying financial statements are not intended to present financial position and results of operations in conformity with accounting principles generally accepted in the United States which require the use of the accrual basis of accounting (see Note 1). Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the cash basis of accounting. As discussed in Note 3, the Trust has a contingent liability relating to unclaimed units and distributions. No reserves are established or reflected in the financial statements for the possibility that funds would be required to satisfy such claims. /s/ Arthur Andersen LLP ------------------------ ARTHUR ANDERSEN LLP Roseland, New Jersey May 8, 2002 PART I -- FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements ---------------------------- STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ----------------------------------------------------------- FOR THE THREE MONTHS ENDED APRIL 30, 2002 AND 2001 ----------------------------------------------------- 2002 2001 ------------ ------------ German gas, oil and sulfur royalties received $ 4,504,767 $ 5,574,374 ----------- ----------- Interest income 12,551 46,609 ----------- ----------- Trust expenses ( 25,020) ( 225,829) ----------- ----------- Net income on a cash basis $ 4,492,298 $ 5,395,154 =========== =========== Net income per unit on a cash basis $ .50 $ .61 ====== ====== Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders .00 .00 Distributions per unit to be paid to unit owners $ .50 $ .61 ====== ====== STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- APRIL 30, 2002 AND OCTOBER 31, 2001 ------------------------------------- 2002 2001 ------------ ------------ Current assets - - Cash and cash equivalents (Note 1) $ 4,539,359 $ 5,391,320 Producing gas and oil royalty rights, net of amortization (Notes 1 and 2) 1 1 ----------- ----------- $ 4,539,360 $ 5,391,321 Current liabilities - - Cash distributions payable to unit owners $ 4,465,707 $ 5,332,083 Contingent liability (Note 3) Trust corpus (Notes 1 and 2) 1 1 Undistributed earnings 73,652 59,237 ----------- ----------- $ 4,539,360 $ 5,391,321 The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. STATEMENTS OF INCOME AND EXPENSES ON A CASH BASIS (NOTE 1) ------------------------------------------------------------ FOR THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001 -------------------------------------------------- 2002 2001 ------------ ------------ German gas, oil and sulfur royalties received $ 9,269,851 $12,016,334 ----------- ----------- Interest income 36,853 76,919 ----------- ----------- Trust expenses ( 271,561) ( 375,238) ----------- ----------- Net income on a cash basis $ 9,035,143 $11,718,015 =========== =========== Net income per unit on a cash basis $1.01 $1.32 ===== ===== Cash distributions paid or to be paid: Dividends and distributions per unit paid to former unlocated shareholders .00 .00 Distributions per unit to be paid to unit owners $1.01 $1.32 ===== ===== The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001 ---------------------------------------------------- 2002 2001 ------------ ------------ Sources of cash and cash equivalents: German gas, oil and sulfur royalties $ 9,269,851 $12,016,334 Interest income 36,853 76,919 ----------- ----------- 9,306,704 12,093,253 =========== =========== Uses of cash and cash equivalents: Payment of Trust expenses 271,561 375,238 Distributions and dividends paid (Note 3) 9,887,104 9,242,230 ----------- ----------- 10,158,665 9,617,468 ----------- ----------- Net increase(decrease)in cash and cash equivalents during the period (851,961) 2,475,785 Cash and cash equivalents, beginning of period 5,391,320 2,946,596 ----------- ----------- Cash and cash equivalents, end of period $ 4,539,359 $ 5,422,381 =========== =========== STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001 ---------------------------------------------------- 2002 2001 ------------ ------------ Balance, beginning of period $ 59,237 $ 13,951 Net income on a cash basis 9,035,143 11,718,015 ----------- ----------- 9,094,380 11,731,966 ----------- ----------- Less: Dividends and distributions paid to former unlocated shareholders (Note 3) 0 0 Current year distributions paid or to be paid to unit owners (Note 3) 9,020,728 11,730,536 ----------- ----------- 9,020,728 11,730,536 ----------- ----------- Balance, end of period $ 73,652 $ 1,430 =========== =========== The accompanying accountants' review report and the notes to financial statements should be read in conjunction with these statements. NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (1) Summary of significant accounting policies: ---------------------- Basis of accounting - ------------------- The accounts of North European Oil Royalty Trust (the "Trust") are maintained on a cash basis except for distributions to be paid to unit owners (those distributions approved by the Trustees for the Trust). The Trust's distributable income represents royalty income received by the Trust during the period plus interest income less any expenses incurred by the Trust, all on a cash basis. In the opinion of the Trustees, the use of the cash basis provides a more meaningful presentation to unit owners of the results of operations of the Trust. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates. Producing gas and oil royalty rights - --------------------- The rights to certain gas and oil royalties in Germany were transferred to the Trust at their net book value by North European Oil Company (the "Company") (see Note 2). The net book value of the royalty rights has been reduced to one dollar ($1) in view of the fact that the remaining value of royalty rights is de minimis relative to annual royalties received and distributed by the Trust and does not bear any meaningful relationship to the fair value of such rights or the actual amount of proved producing reserves. Federal and state income taxes - ------------------------------ The Trust, as a grantor trust, is exempt from Federal and state income taxes under a private letter ruling issued by the Internal Revenue Service. Cash and cash equivalents - ------------------------- Included in cash and cash equivalents are amounts deposited in bank accounts and amounts invested in certificates of deposit and U. S. Treasury bills with maturities of three months or less. Net income per unit on the cash basis - ------------------- Net income per unit on the cash basis is based upon the number of units outstanding at the end of the period. As of April 30, 2002 and 2001, there were 8,931,414 and 8,886,804 units of beneficial interest outstanding respectively. (2) Formation of the Trust: ----------------------- The Trust was formed on September 10, 1975. As of September 30, 1975, the Company was liquidated and the remaining assets and liabilities of the Company, including its royalty rights, were transferred to the Trust. The Trust on behalf of the owners of beneficial interest in the Trust holds overriding royalty rights covering gas and oil production in certain concessions or leases in the Federal Republic of Germany. These rights are held under contracts with local German exploration and development subsidiaries of Exxon Mobil Corp. and the Royal Dutch Group. Under these contracts, the Trust receives various percentage royalties on the proceeds of the sales of certain products from the areas involved. At the present time, royalties are received for sales of gas well gas, oil well gas, crude oil, distillate and sulfur. (3) Contingent liability: --------------------- The Trust serves as fiduciary for certain unlocated or unknown shareholders of North European Oil Corporation (the "Corporation") and North European Oil Company, corporate predecessors of the Trust. From the liquidation of the Company to October 31, 2001, 721,364 units were issued in exchange for Corporate and Company shares and dividends of $354,101 and distributions of $4,236,544 were paid to former unlocated Corporation and Company shareholders. For the six-month period ended April 30, 2002 no units were issued in exchanges and no dividends and no distributions were paid to former unlocated Corporation and Company shareholders. On February 26, 1996 the settlement of litigation between the Trust and the Delaware State Escheator ("Delaware Escheator") was approved by the Delaware Court of Chancery. As of that date, there were a total of 875,748 authorized but unissued units representing the unexchanged shares of the Trust's predecessor corporations. Out of this total, 760,560 units were subject to the settlement. Under the settlement, 380,280 units were issued to the Delaware Escheator on April 17, 1996. Of the Trust units remaining to be issued to the Delaware Escheator, approximately 50%(190,128 units) have been issued to the Delaware Escheator as of June 30, 2000 and the remaining balance will be issued by June 30, 2005. Through June 30, 2000, claims by unlocated or unknown shareholders of the Trust's corporate predecessors for units and past dividends and distributions thereon ("subsequent claims") were paid by the Delaware Escheator and the Trust on a 50:50 basis. From July 1, 2000 to June 30, 2005, subsequent claims will be paid by the Delaware Escheator and the Trust on a 75:25 basis. Any subsequent claims will reduce the number of units to be issued to the Delaware Escheator in 2005. Following the final issuance of units to the Delaware Escheator in 2005, the Trust's contingent liability for past dividends and distributions attributable to all unexchanged Corporation and Company shares subject to the settlement will be completely eliminated. Under the terms of the settlement, the maximum liability of the Delaware Escheator for subsequent claims is limited to the value of the units received, plus current distributions on units retained, less the Delaware Escheator's share of subsequent claims. As of the receipt of the May, 2002 distribution, the maximum liability of the Delaware Escheator will be $12,161,383. In addition to the agreement reached with the Delaware Escheator, on December 4, 2001 the Trust reached a parallel agreement with the Administrator of Unclaimed Property, Office of the New York State Comptroller (the "New York Administrator") covering units for which owners were unlocated but New York state addresses were shown in predecessor corporation records. The New York Settlement Agreement covers 89,220 units attributable to stock ownership by unlocated shareholders of predecessor corporate entities. Of the units covered by the Settlement Agreement, 44,610 were issued to the New York Administrator on December 21, 2001 and the balance of 44,610 will be issued on or before June 30, 2005. The Settlement Agreement provides for processing of claims in the period until June 30, 2005 and the sharing of any costs relating to any claims which are allowed. As of the receipt of the May, 2002 distribution, the maximum liability of the New York Administrator will be $883,278. Under the Trust Agreement as deemed amended by the February 26, 1996 Delaware Court Order, the Trust is not required to make payments of arrearages of Company dividends or Trust distributions with respect to units issued or to be issued to the Delaware Escheator or the New York Administrator. As of April 30, 2002, there remained a total of 259,176 units that could be issued to unlocated or unknown Corporation and Company shareholders. Of this total, 234,732 units are subject to the settlements and remain to be issued to the Delaware Escheator or the New York Administrator. If all shares, represented by the units already issued as well as the units remaining to be issued, were presented for exchange, $487,023 in dividends and $30,151,477 in distributions would be payable. In the opinion of the Trustees, based in part on the history of exchanges during the last ten fiscal years, the maximum liability of the Delaware Escheator and the New York Administrator would be adequate to cover their respective share of any subsequent claims. In any event, the Trust's contingent liability for all claims for arrearages will be eliminated in 2005. Item 2. Management's Discussion and Analysis of Financial ------------------------------------------------- Condition and Results of Operations. ------------------------------------ The Trust is a passive fixed investment trust which holds overriding royalty rights, receives income under those rights from certain operating companies, pays its expenses and distributes the remaining net funds to its unit owners. The Trust does not engage in any business or extractive operations of any kind in the areas over which it holds royalty rights and is precluded from any such involvement by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust. The operating companies, subsidiaries of Exxon Mobil Corp. and the Royal Dutch Group, pay monthly royalties to the Trust based on their sales of natural gas, sulfur and oil. The Oldenburg concession is the primary area from which these products are extracted and provides nearly 100% of all the royalties received by the Trust. Of these three products, natural gas provides approximately 98% of the total royalties. Although the Trust itself does not have access to the specific sales contracts under which the Oldenburg gas is sold, these contracts are reviewed periodically by our auditors. They have informed the Trust that these contracts contain pricing mechanisms which use a number of factors with varying time delays to price the gas being sold. For the Trust there are two elements of these contracts that are very significant. The first element is the utilization of the price of light heating oil in Germany as the primary pricing factor in many of these contracts. The price of light heating oil is in turn affected by the price of oil on the international market. The second element is a three to six month delay before changes in pricing factors are translated into changes in the price of gas. For unit owners changes in value of the Euro have both an immediate and a long term impact. The immediate impact relates to the determination of the number of dollars the Trust receives when Euros are converted into dollars at the time of the transfer of the royalties from Germany to the U.S. At the time of the exchange a higher exchange rate would yield more dollars and a lower exchange rate fewer. The long term impact comes into play through the mechanism of gas pricing. With the price of light heating oil used as a component in the calculation of gas prices in the various contracts under which the gas is sold, changes in world crude oil prices are eventually reflected in gas prices. Since oil on the international market is priced in dollars, a lower exchange rate for the Euro means that oil imported into Germany is more expensive which results in higher local oil prices. A higher exchange rate for the Euro means that oil imported into Germany is less expensive which results in lower local oil prices. These higher or lower local oil prices are in turn reflected in higher or lower gas prices. For the second quarter of fiscal 2002 ended April 30, 2002, the Trust's net royalty income was $4,492,298, 16.7% lower than the prior year's period. This royalty income was derived from sales of gas, sulfur and oil from the Trust's overriding royalty areas in Germany during the first calendar quarter of 2002. This level of income allowed a distribution of 50 cents per unit payable on May 29, 2002 to owners of record as of May 10, 2002. For the six month period, the Trust's net royalty income was $9,035,143. This is a decrease of 22.7% from the prior year's period and permitted total distributions of $1.01 per unit. The amount of royalties paid to the Trust is based on four primary factors: the amount of gas sold, the price of that gas, the area from which the gas is sold and the exchange rate. In the quarter just ended all of these factors had a negative impact on Trust royalties. Under the lower royalty rate agreement with BEB, the joint venture between the German subsidiaries of Exxon Mobil and the Royal Dutch Group, covering the entire Oldenburg concession, gas sales were 52.7 billion cubic feet ("Bcf"), down 7.3% from 56.9 Bcf for the second quarter of fiscal 2001. Under the higher royalty rate agreement with the German subsidiary of Exxon Mobil covering western Oldenburg, gas sales were 23.0 Bcf, down 10.7% from 25.8 Bcf for the second quarter of fiscal 2001. The average price for gas sold under the lower royalty rate agreement was 1.5107 Euro cents per Kilowatt hour ("Ecents/Kwh"), down 9.1% from 1.6620 Ecents/Kwh the average for the second quarter of fiscal 2001. The average price for gas sold under the higher royalty rate agreement was 1.3878 Ecents/Kwh, down 13.4% from 1.6016 Ecents/Kwh the average for the second quarter of fiscal 2001. Under the lower royalty rate agreement the average value of the Euro based on the monthly transfer of royalties to the U.S. was $0.8783, down 2.7% from $0.9025 the average value for the second quarter of fiscal 2001. Under the lower royalty rate agreement the average value of the Euro was $0.8767, down 2.6% from $0.9004 the average value for the second quarter of fiscal 2001. Converting the average gas prices using the average exchange rates for the quarter into more familiar terms yields an average gas price under both the lower and higher royalty rate agreements of $3.50 per thousand cubic feet. The significance of changes in the exchange rate and the amount and price of gas sold from the Oldenburg concession is shown through the impact on Trust income that results from the application of the particular royalty rate. Under the lower royalty rate agreement the lower gas sales, prices and exchange rate resulted in a 15.2% decline in royalties from gas sales to $1,542,484 from $1,819,655 for the second quarter of fiscal 2001. This 15.2% decline represented a drop of $ 277,171 in royalties. Under the higher royalty rate agreement from which the Trust derives the bulk of its royalties, the concentration of reduction in gas sales in the western area of Oldenburg along with lower gas prices and a lower average exchange rate resulted in a 24% decline in royalties from gas sales to $3,218,343 from $4,234,465 for the second quarter of fiscal 2001. This 24% decline represented a drop of $1,016,122 in royalties. Because of the higher royalty rate, the impact of changes in factors affecting the royalty calculation, whether positive or in this case negative, are magnified. The current Statement of Assets, Liabilities and Trust Corpus of the Trust at April 30, 2002, compared to that at fiscal year end (October 31, 2001), shows a decline in assets due to lower royalty receipts during the quarter. Interest income was lower reflecting the reduced funds available for investment. Compared to the prior year, Trust expenses for the second quarter were significantly lower due to the reimbursement by the New York Stock Exchange for expenses associated with the Trust's symbol change from "NET" to "NRT" on January 29, 2002. As mandated by the Trust Agreement, distributions of income are made on a quarterly basis. These distributions, as determined by the Trustees, constitute substantially all the funds on hand after provision is made for Trust expenses then anticipated. As permitted by the Trust Agreement, no provision is made for the retention of reserve funds of any kind. If funds were to be required for payments to owners of units not previously presented for issuance, quarterly distributions would be reduced to the extent required to provide funds for such payments. Part II -- OTHER INFORMATION ---------------------------- Item 5. Other Information. ----------------- REPORT ON DRILLING AND GEOPHYSICAL WORK The Trust's consultant in Germany has provided a translation and analysis of a report supplied by the operating companies outlining the drilling and seismic activity completed in 2001 and planned for 2002. As in 2001, there is no seismic field work planned for 2002. The operating companies have planned a continuing evaluation of previous seismic work including the application of newly developed filter techniques as part of this evaluation process. This laboratory work is necessary as it forms the basis for all decisions with respect to drilling as well as further seismic field work. It also contributes directly to the operating companies' high success rate in their drilling program as well as to the success in their efforts to maintain and extend the life of the reserves. As a result of the analysis of earlier 2-D seismic data, the operating companies have begun the process of obtaining permits to conduct 3-D seismic work in the Zwischenahn area. The 3-D seismic studies provide a much clearer picture of possible gas bearing zones for future development. The previous work on evaluating the development prospects of the very deep Carboniferous zone, which falls into the category of long term projects, continues with further seismic study required. However, in current drilling projects located outside the boundaries of the Oldenburg concession the operating companies hope to gain experience in multi-lateral and multi-reservoir horizontal wells at the extreme depths that will be required to eventually exploit the gas reserves present in the Carboniferous zone within the Oldenburg concession. The two wells that had been planned for 2001 were postponed until 2002 partially due to complex drilling problems that had to be resolved before drilling commenced. Drilling on the horizontal production well Doetlingen Z-13a commenced in January, 2002 and will be completed some time in May or June with production scheduled to start in July. This well is scheduled to be followed by a second horizontal production well Hemmelte Z-8a that is planned to enter production before the end of 2002. Current plans continue with the scheduled start and completion of horizontal production well Goldenstedt Z-12a in 2003. In addition to the ongoing drilling operations, the operating companies are continuing with various plans and operations to ensure a steady production of gas from the Oldenburg concession. Preparation work on three future drilling projects, Kneheim Z-5, Sage Z-4 and Doetlingen-Ost Z-2, has been scheduled. Production wells Brinkholz Z-2 and Z-4 are scheduled to be equipped with a joint dehydration unit in July that will address continuing water problems and permit an increase in their production capacity. A short maintenance program for the Grossenkneten desulfurization plant is scheduled for the May-June period during which production will be reduced by one-third. ------------------------------------------ This report on Form 10-Q contains forward looking statements concerning business, financial performance and financial condition of the Trust, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward looking statement. The statements contained herein are based on the Trustees' current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results and events may vary significantly from those discussed in the forward looking statements. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits. Exhibit 99.1. A letter dated May 8, 2002 from Arthur Andersen LLP representing that their review in accordance with Statement on Auditing Standards No. 71 was subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and other applicable requirements. (b) Reports on Form 8-K. A report on Form 8-K dated February 14, 2002 was filed with the Securities and Exchange Commission reporting the announcement of a change in the ticker symbol used on the New York Stock Exchange for units of beneficial interest in North European Oil Royalty Trust from "NET" to "NRT" and the subsequent commencement of trading under that new symbol. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- (Registrant) By: /S/ John R. Van Kirk ---------------------------- John R. Van Kirk Managing Director Dated: May 23, 2002