-----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, D4PEGUEAHZKuus7kV4vm5gTD7fUJCnGtNwDc3TxLG1ON+CMX9jPF8qRKs2OLDOfX MLbnAospWoWHpI5+/HRqfA== 0000072633-04-000002.txt : 20040107 0000072633-04-000002.hdr.sgml : 20040107 20040107151651 ACCESSION NUMBER: 0000072633-04-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031031 FILED AS OF DATE: 20040107 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08245 FILM NUMBER: 04512992 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: 7327414008 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-K 1 tenk1219.txt 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 ---------------- [ ] 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) (IRS Employer Identification Number) Suite 19A, 43 West Front Street, Red Bank, N.J. 07701 ---------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: 732-741-4008 --------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ---------------------------- ----------------------------------------- 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 . --- --- 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 . --- --- - 2 - 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 . --- --- 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. - 3 - PART I Item 1. Business. --------- (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 - 4 - 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. ---------------------------------------------- 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 - 5 - 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 --------------------------------------------------------------- Export Sales. - ------------- 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 - 6 - 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 - 7 - 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: ----------- Product Royalty Income - ------- -------------- Gas Well and Oil Well Gas $ 17,814,717 Sulfur $ 190,099 Oil $ 164,219 BY GEOGRAPHIC AREA: ------------------- Area Royalty Income - ---- -------------- Western Oldenburg $ 15,374,591 Eastern Oldenburg $ 2,753,607 Non-Oldenburg Areas $ 40,837 - 8 - BY OPERATING COMPANY: --------------------- Company Royalty Income - ------- -------------- 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 - 9 - 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. ------------------ 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. - 10 - 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 - 11 - 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. - 12 - ITEM 6. Selected Financial Data ----------------------- North European Oil Royalty Trust -------------------------------- Selected Financial Data (Cash Basis) ------------------------------------ For Five Fiscal Years Ended October 31, 2003 ---------------------------------------------- 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. - 13 - Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations. -------------------------- General - ------- 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. - 14 - 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 - 32 - Exhibit Index ------------- Exhibit Page - ------- ---- (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). EX-31 3 ex311219.txt - 33 - Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, John H. Van Kirk, certify that: 1. I have reviewed this Annual Report on Form 10-K of North European Oil Royalty Trust; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; and b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and to the audit committee of the board of directors (or persons performing the equivalent function): - 34 - a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: December 19, 2003 /s/ John H. Van Kirk ---------------------- John H. Van Kirk Managing Trustee (Chief Executive Officer) - 35 - Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, John R. Van Kirk, certify that: 1. I have reviewed this Annual Report on Form 10-K of North European Oil Royalty Trust; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; and b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and to the audit committee of the board of directors (or persons performing the equivalent function): - 36 - a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: December 19, 2003 /s/ John R. Van Kirk ---------------------- John R. Van Kirk Managing Director (Chief Financial Officer) EX-32 4 ex321219.txt - 37 - Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. section 1350(a) and (b)), the undersigned hereby certify that the Annual Report on Form 10-K for the period ended October 31, 2003 of North European Oil Royalty Trust ("Trust") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: December 19, 2003 /s/ John H. Van Kirk ---------------------- John H. Van Kirk Managing Trustee (Chief Executive Officer) /s/ John R. Van Kirk ---------------------- John R. Van Kirk Managing Director (Chief Financial Officer) EX-99 5 ex991219.txt Exhibit 99.1 NORTH EUROPEAN OIL ROYALTY TRUST 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 2003 CALENDAR YEAR RALPH E. DAVIS ASSOCIATES, INC. HOUSTON, TEXAS DECEMBER, 2003 T A B L E O F C O N T E N T S Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Description of Holdings . . . . . . . . . . . . . . . . . . . . . . . . . 1 Oldenburg Area - Sales and Reserves . . . . . . . . . . . . . . . . . . . 3 Total Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Gross Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Net Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-4 Limitations of Available Data . . . . . . . . . . . . . . . . . . . . . . 4 Calculation of Cost Depletion Percentage . . . . . . . . . . . . . . . . 5 Certificate of Qualification . . . . . . . . . . . . . . . . . . . . . . 7 Attachment A: Reserve Summary and Five Year Net Sales History . . . . . . . . . . 8 Attachment B: Calculation of Cost Depletion Percentage . . . . . . . . . . . . . . 9 Ralph E. Davis Associates, Inc. Consultants - Petroleum and Natural Gas 1717 St. James Place, Suite 460 Houston, Texas 77056 (713) 622-8955 December 16, 2003 The Trustees of North European Oil Royalty Trust P. O. Box 456 Red Bank, New Jersey 07701 Gentlemen: In accordance with your request, we have prepared a report of the estimated remaining proved producing reserves attributable to the overriding royalty interest of North European Oil Royalty Trust (the "Trust" or "NEORT") in the Northwest German Basin of the Federal Republic of Germany as of October 1, 2003. The proved producing reserves are as of October 1, 2003 and the reported sales are for the twelve month period ending September 30, 2003. The use of the period ending September 30, 2003 is consistent with prior years and allows the timely calculation of the royalty reserves and the cost depletion percentage for the calendar year. In addition, based on the information contained in the first part of this report, we have performed the calculations necessary to derive the cost depletion percentage for the 2003 calendar year. As detailed in Attachment B, the cost depletion percentage for the 2003 calendar year for Trust unit owners is equal to 9.4652% of their cost base as of January 1, 2003. DESCRIPTION OF HOLDINGS ----------------------- The Trust holds various overriding royalty rights on sales of gas, sulfur and oil from certain concessions and leases in the Federal Republic of Germany. The Oldenburg concession (1,398,000 acres), covering virtually the entire former State of Oldenburg and located in the State of Lower Saxony, is held by Oldenburgische Erdolgesellschaft ("OEG"). OEG in turn is owned by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), the German subsidiary of ExxonMobil Corp. and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture of ExxonMobil Corp. and the Royal Dutch Group. As a result by direct and indirect ownership, ExxonMobil Corp. owns two-thirds of OEG and the Royal Dutch Group owns one-third of OEG. North European Oil Royalty Trust December 16, 2003 Page 2 The Oldenburg concession is the major source of royalty income for the Trust. Although the Trust has interests in other producing areas, reserves and net sales for these areas are no longer used in the calculation of the annual cost depletion percentage. While the Trust continues to receive royalty payments from some of these interests, these royalties represent less than one (1) percent of the Trust's total royalties and the expenses involved in the determination of reserve estimates for these interests are not warranted by the royalties received. The exclusion of these reserves does not have a material effect on the calculation of the cost depletion percentage. We will continue to monitor the quarterly statements and if increases are noted that could materially add reserves to the Trust, we will resume estimating future reserves. 1. In 2002 Mobil Erdgas and BEB formed a new company ExxonMobil Production Deutschland GmbH ("EMPG") to carry out all exploration, drilling and production within the Oldenburg concession. All sales activities are still handled by either Mobil Erdgas or BEB. (a) 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 or oil well gas, which together account for approximately 99% of all the royalties under said agreement. The Trust also receives from Mobil Erdgas a 2% royalty payment 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 subject to an agreement which provides that if Mobil Erdgas' selling price is below the escalated base price, payment of royalties is deferred until such time as the selling price again exceeds the escalated base price. Throughout fiscal 2003, Mobil Erdgas' selling price was below the escalated base price. We will continue to monitor this situation, but until the point that Mobil Erdgas' selling price again exceeds the escalated base price, reserves subject to this royalty will not be included in overall reserve calculations. (b) 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 state royalty purposes is deducted from gross sales receipts prior to the calculation of the royalty to be paid to the Trust. North European Oil Royalty Trust December 16, 2003 Page 3 OLDENBURG AREA - SALES AND RESERVES ------------------------------------ The Trust's royalty income comes primarily from the Oldenburg area. Gas production accounts for the majority of the income; however, the hydrogen sulfide in much of the gas produced necessitates its removal before the gas can be sold. At the Grossenkneten desulfurization plant, the hydrogen sulfide in sour gas is removed. Following renovations and improvements to the plant in 1994 and again in 1996, the plant's input capacity has been increased from 536.4 million cubic feet ("MMcf") per day to its present capacity of 679.4 MMcf per day. A second desulfurization plant NEAG remains connected by pipeline with the transportation system of the Oldenburg concession but is currently being utilized only to a limited degree for the processing of gas from Oldenburg. TOTAL SALES ----------- During the twelve months ending September 30, 2003 total sales for the Oldenburg area were as follows: WEST EAST TOTAL ---- ---- ----- Gas Well Gas-MMcf 75,880 113,400 189,280 Oil Well Gas-MMcf 82 54 136 Oil & Condensate-Barrels 126,133 82,980 209,113 Sulfur-Short Tons 255,674 558,857 814,531 GROSS RESERVES -------------- Estimated gross remaining proved producing reserves attributable to the total Oldenburg area are as follows: WEST EAST TOTAL ---- ---- ----- Gas Well Gas-MMcf 629,908 1,725,918 2,355,826 Oil Well Gas-MMcf 267 329 596 Oil & Condensate-Barrels 1,835,979 899,000 2,734,979 Sulfur-Short Tons 2,120,548 8,366,026 10,486,574 NET RESERVES ------------ To present an accurate picture of estimated proved producing reserves net to the Trust, the gross reserve figures outlined above must be modified by the impact of the different royalty rates in effect in the Oldenburg concession. A comparison of the Trust's overriding royalty rates in both the western and eastern areas of Oldenburg is as follows: North European Oil Royalty Trust December 16, 2003 Page 4 Mobil Erdgas West East --------------- ---------- ---------- Gas & Oil 4% 0% Sulfur 2%* 0% BEB --------------- Gas & Oil 0.6667%** 0.6667%** Sulfur 0.6667%** 0.6667%** *Temporarily suspended. (See prior explanation.) **Prior to the calculation of royalties, 50% of costs as reported for state royalty purposes are deducted. The application of these royalty rates to the estimated gross remaining proved producing reserves attributable to the western and eastern Oldenburg areas yields the combined estimated proved producing reserves net to the Trust. The Trust's estimated remaining net proved producing reserves as of October 1, 2003 and net sales for the twelve month period ending September 30, 2003 are as follows: Reserves Sales -------- ----- Gas Well Gas-MMcf 39,141 4,141 Oil Well Gas-MMcf 11 3 Oil & Condensate-Barrels 90,541 5,597 Sulfur-Short Tons 54,728*** 4,265*** *** Note: At current price levels no royalties are being paid under the Mobil Erdgas sulfur royalty. A summary of net proved producing reserves by product and a five year history of net sales attributable to the royalty interests of the Trust are presented in Attachment A. LIMITATIONS OF AVAILABLE DATA ----------------------------- The reserves considered in this report are defined as proved producing reserves. Proved producing reserves are limited to those quantities which can be expected to be recoverable commercially from known reservoirs at current prices and costs, under existing regulatory practices and with existing conventional equipment and operating methods. Proved producing reserves do not include either proved developed non-producing reserves or any class of probable reserves. The reserve estimates were prepared using engineering methods generally accepted by the petroleum industry. The reliability of any reserve estimate is a function of the quality of available information and of engineering interpretation and judgment. North European Oil Royalty Trust December 16, 2003 Page 5 The Trust, as an overriding royalty interest owner, does not receive proprietary data from the various operators on producing wells. Data, such as logs, core analysis, reservoir tests, pressure tests, gas analyses, geologic maps, and individual well production histories, which are used in volumetric and material balance type reserve estimates, are not available to the Trust. The Trust receives various monthly and quarterly statements from the operators that report production, sales and revenue data. Utilizing the same procedures as in prior years, this information plus published information received from W.E.G. (a German organization comparable to the American Petroleum Institute or the American Gas Association) has been used to prepare this annual report. In addition, the Trust retains a part-time consultant in Germany who is familiar with the German petroleum industry in general and the operating companies in particular. His periodic reports and communications are considered in the preparation of this report. We believe that reserve estimates prepared using all the available data represent realistic values. However, due to the limitations of available data, this estimate of reserves cannot have the same degree of accuracy that an estimate of reserves prepared using all pertinent data would have. Our experience in the evaluation of reserves using such limited data, including ten (10) years of experience working for the Trust, compensates somewhat for the limitations of available data. The data in the reports received by the Trust is in metric tons and cubic meters. The following Metric to English Unit conversion factors were used: Gas: 37.25 cubic feet per cubic meter at 14.7 psia and 60 degrees Fahrenheit Oil: 7.23 barrels per metric ton Sulfur: 1.1 short tons per metric ton CALCULATION OF COST DEPLETION PERCENTAGE ---------------------------------------- The categories of proved producing reserves considered in the calculation of the cost depletion percentage are oil, oil well gas, and gas well gas. Sulphur is a by-product of gas production and is not considered in the computation of total cost depletion percentage. For each category of reserves, a product base was established for the Trust as of January 1, 1976. Through the use of these product bases, we can account for the relative size of each of these categories of reserves and the corresponding impact on the calculation of the cost depletion percentage. The product base for each category of proved producing reserves is reduced annually by an adjustment that is calculated by multiplying the product base at the beginning of the current year by the depletion factor for that category of reserves. The depletion factor for each category of reserves is the ratio of the relevant net sales during the current year to the corresponding adjusted net proved producing reserves at the beginning of the current year. North European Oil Royalty Trust December 16, 2003 Page 6 Significant items in the cost depletion percentage calculation that appear on Attachment B as specific item numbers, shown in parentheses, and their sources are as follows: The adjusted estimated net proved producing reserves as of 10/1/02 Line (3) is obtained by adding the estimated remaining net proved producing reserves as of 10/1/02 Line (1) and the adjustments to reserves during the period Line (2). Therefore Line (3) = Line (1) + Line (2). The depletion factor Line (6) for each category of proved producing reserves is obtained by dividing the relevant net sales Line (4) by the corresponding adjusted estimated net proved producing reserves as of 10/1/02 Line (3). Therefore Line (6) = Line (4) / Line (3). The product base for each category of proved producing reserves as of 1/1/02 Line (7) and the adjustment taken during 2002 Line (8) were obtained from the previous year's report. The product base as of 1/1/03 Line (9) forms the initial starting point for the calculation of the cost depletion percentage for the 2003 tax year. The product base for 1/1/02 Line (9) then is Line (7) - Line (8). The adjustment to the product base for each category of proved producing reserves Line (10) is used to reduce the product base as of the beginning of each year. This adjustment is the product of the depletion factor for each category of proved producing reserves Line (6) multiplied by the corresponding product base as of 1/1/03 Line (9). Therefore Line (10) = Line (6) x Line (9). The cost depletion percentage Line (11) then is the sum of the adjustment to the product base of each category of proved producing reserves [Sum Line (10)] divided by the sum of the product base for each category as of 1/1/03 [Sum Line (9)]. Therefore Line (11) = [Sum Line (10)] / [Sum Line (9)]. The cost depletion percentage represents the total allowable cost depletion for the 2003 calendar year for the Trust's unit owners, expressed as a percentage of their cost base as of January 1, 2003. Sincerely yours, RALPH E. DAVIS ASSOCIATES, INC. /s/ Larry A. Barnett ---------------------------- Larry A. Barnett, P.E. Senior Vice-President LAB:sw North European Oil Royalty Trust December 16, 2003 Page 7 CERTIFICATE OF QUALIFICATION ---------------------------- I, Larry A. Barnett, Registered Professional Engineer, do hereby certify: 1. That I am senior vice-president of the consulting firm of Ralph E. Davis Associates, Inc. with offices at 1717 St. James Place, Suite 460, Houston, Texas 77056. 2. That I have prepared a reserve report on the interests of the North European Oil Royalty Trust in the Northwest Basin of the Federal Republic of Germany as of October 1, 2003. 3. That I have no direct or indirect interest, nor do I expect to receive any direct or indirect interest, in the properties or in any securities of the North European Oil Royalty Trust. 4. That I attended The University of Texas and that I graduated with a Bachelor of Science Degree in Petroleum Engineering in 1958. 5. That I am a Registered Professional Engineer in the State of Texas Registration Number 23399, and that I am a member in good standing of the Society of Petroleum Engineers, the Society of Petroleum Evaluation Engineers and the Society of Professional Well Log Analysts. 6. That I have in excess of forty years experience in the evaluation of oil and gas properties in the United States, Canada, Mexico, South America and Germany, and that I have been practicing as a consultant in petroleum engineering and geology since 1985. RALPH E. DAVIS ASSOCIATES, INC. /S/ Larry A. Barnett ---------------------------- Larry A. Barnett, P.E. Senior Vice-President Page 8 ATTACHMENT A NORTH EUROPEAN OIL ROYALTY TRUST RESERVE SUMMARY AND FIVE YEAR NET SALES HISTORY ESTIMATED NET PROVED PRODUCING RESERVES - --------------------------------------- AS OF OCTOBER 1, 2003 - --------------------- OLDENBURG - --------------------------------------------------------------------------- Gas Well Oil Well Oil/Cond. Sulfur Gas Gas MMcf MMcf Barrels Short Tons --------- ---------- ---------- ---------- 39,141 11 90,541 54,728*** ***Note: At current prices, no royalties are presently being paid under the Mobil Erdgas sulfur royalty. FIVE YEAR NET SALES SUMMARY - --------------------------- 12 MONTHS ENDING SEPTEMBER 30 - ----------------------------- OLDENBURG - --------------------------------------------------------------------------- Gas Well Oil Well Oil/Cond. Sulfur Gas Gas MMcf MMcf Barrels Short Tons ---------- ---------- ---------- ------------ 2003 4,141 3 5,597 4,265*** 2002 4,652 3 6,412 3,600*** 2001 5,159 7 7,205 4,667*** 2000 4,953 7 6,996 4,373*** 1999 5,047 8 7,415 3,744*** ***Note: At current prices, no royalties are presently being paid under the Mobil Erdgas sulfur royalty. Page 9 ATTACHMENT B NORTH EUROPEAN OIL ROYALTY TRUST CALCULATION OF TOTAL COST DEPLETION PERCENTAGE For the Year Ending December 31, 2003 OLDENBURG ------------------------------------- Gas Well Oil Well Gas Gas Oil MMcf MMCF Barrels ------- ---------- ---------- NEORT NET RESERVES (Million Cubic Feet of Gas and Barrels of Oil ) - ------------------------------------------------------------------ 1. Estimated remaining net proved producing reserves as of 10-1-02 44,463 20 73,499 2. Adjustments to reserves during period -1,181 -6 22,639 3. Adjusted est. net proved producing reserves as of 10-1-02 43,282 14 96,138 4. Net sales from 10-1-02 to 9-30-03 4,141 3 5,597 5. Estimated remaining net proved producing reserves as of 10-1-03 39,141 11 90,541 RESERVE DEPLETION FACTOR - ----------------------------- 6. Depletion factor 0.09567 0.21429 0.05822 NEORT WEIGHTED PRODUCT BASE ALLOCATION - ------------------------------------------- 7. Product base as of 1-1-02 9.66194 0.02161 0.33405 8. Less adjustments taken during 2002 0.91514 0.00282 0.02680 9. Product base as of 1-1-03 8.74680 0.01879 0.30725 10. 2003 Adjustment to product base 0.83685 0.00403 0.01789 11. Cost depletion percentage for 2003 calendar year for Trust unit owners is equal to 9.4652 percent of their 1-1-03 cost base. Page 10 Footnotes: Line (1) from reserves review as of 10-1-02 Line (2) from reserves review as of 10-1-03 Line (3) = Line (1) + Line (2) Line (4) from BEB and Mobil Erdgas statements Line (5) from reserves review as of 10-1-03 Line (6) = Line (4) / Line (3) Line (7) from 2002 Depletion Calculations Line (8) from 2002 Depletion Calculations Line (9) = Line (7) - Line (8) Line (10) = Line (9) x Line (6) Line (11) = [Sum Line (10)] / [Sum Line (9)] -----END PRIVACY-ENHANCED MESSAGE-----