<PAGE>
As filed with the Securities and Exchange Commission on January 25, 1999.
Registration No. 333-68441
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
on
Form S-1 -------------- Form S-3
HUGOTON ROYALTY TRUST CROSS TIMBERS OIL COMPANY
(Exact name of co-registrant as
(Exact name of co-registrant as specified in its charter)
specified in its charter) Delaware
Texas
(State or other jurisdiction of
(State or other jurisdiction of incorporation or organization)
incorporation or organization)
58-6379215 75-2347769
(I.R.S. Employer Identification No.)
(I.R.S. Employer Identification No.)
901 Main St., 17th Floor 810 Houston Street, Suite 2000
Dallas, Texas 75202 Fort Worth, Texas 76102
(214) 508-2440 (817) 870-2800
(Address, including zip code, and (Address, including zip code, and
telephone telephone
number, including area code, of number, including area code, of
registrant's principal executive registrant's principal executive
offices) offices)
Frank G. McDonald, Esq. Bob R. Simpson
901 Main St., 17th Floor 810 Houston Street, Suite 2000
Dallas, Texas 75202 Fort Worth, Texas 76102
(214) 508-2400 (817) 870-2800
(Name, address, including zip code, (Name, address, including zip code, and
and telephone number, including area code,
telephone number, including area code, of
of agent for service)
agent for service)
--------------
Copies to:
F. Richard Bernasek, Esq. James M. Prince, Esq.
Kelly, Hart & Hallman, P.C. Andrews & Kurth L.L.P.
201 Main Street, Suite 2500 600 Travis, Suite 4200
Fort Worth, Texas 76102 Houston, Texas 77002
(817) 332-2500 (713) 220-4300
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to Be Registered Aggregate Offering Price(1) Registration Fee(2)
- ------------------------------------------------------------------------------
<S> <C> <C>
Units of Beneficial
Interest.................... $172,500,000 $47,955
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) $24,936.60 was paid previously.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated January 25, 1999.
Hugoton Royalty Trust
15,000,000 Trust Units
-----------
This is an initial public offering of units of beneficial interest in the
Hugoton Royalty Trust. Cross Timbers Oil Company has formed the trust and is
offering all of the trust units to be sold in this offering, and Cross Timbers
will receive all proceeds from the offering. The trust will not receive any
proceeds from the offering.
There is currently no public market for the trust units. Cross Timbers
expects that the public offering price will be between $8.00 and $10.00 per
trust unit. The trust units have been approved for listing on the New York
Stock Exchange under the symbol "HGT".
The Trust Units. Trust units are units of beneficial ownership of the trust
and represent undivided interests in the trust. They do not represent any
interest in Cross Timbers.
The Trust. The trust owns net profits interests in principally natural gas
producing properties located in the Hugoton area of Kansas and Oklahoma, the
Anadarko Basin of Oklahoma and the Green River Basin of Wyoming. The net
profits interests entitle the trust to receive 80% of the net proceeds from
the sale of production from these oil and natural gas properties owned by
Cross Timbers.
The Trust Unitholders. As a trust unitholder, you will receive monthly
distributions of cash that the trust receives for its net profits interests
from the sale of oil and natural gas produced from the underlying
properties.
See "Risk Factors" beginning on page 10 to read about certain information you
should consider before purchasing trust units.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Trust
Unit Total
----- -----
<S> <C> <C>
Initial public offering price....................................... $ $
Underwriting discounts.............................................. $ $
Proceeds, before expenses, to Cross Timbers......................... $ $
</TABLE>
The underwriters may, under certain circumstances, purchase from Cross
Timbers up to an additional 2,250,000 trust units at the initial public
offering price less the underwriting discount.
-----------
The underwriters expect to deliver the trust units against payment in New
York, New York on , 1999.
Goldman, Sachs & Co.
Lehman Brothers
Bear, Stearns & Co. Inc.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Donaldson, Lufkin & Jenrette
A.G. Edwards & Sons, Inc.
-----------
Prospectus dated , 1999.
<PAGE>
[MAP OF UNDERLYING PROPERTIES APPEARS HERE]
2
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you. To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and the financial statements and notes to
those statements. You will find definitions for terms relating to the oil and
natural gas business in "Glossary of Certain Oil and Natural Gas Terms." Miller
& Lents, Ltd., an independent engineering firm ("Miller & Lents"), provided the
estimates of proved oil and natural gas reserves at December 31, 1998 included
in this prospectus. These estimates are contained in summaries by Miller &
Lents of the reserve reports as of December 31, 1998, for the underlying
properties described below and for the net profits interests in the underlying
properties held by the trust. These summaries are located at the back of this
prospectus as Exhibits A and B and are referred to in the prospectus as the
"Reserve Report."
Hugoton Royalty Trust
Hugoton Royalty Trust was formed in December 1998 by Cross Timbers Oil
Company. Cross Timbers conveyed to the trust net profits interests in certain
oil and natural gas producing properties, referred to in this prospectus as the
"underlying properties." The net profits interests entitle the trust to receive
80% of net proceeds from the sale of oil and natural gas from these properties.
The underlying properties are located in the Hugoton area of Kansas and
Oklahoma, the Anadarko Basin of Oklahoma and the Green River Basin of Wyoming.
The trust will make monthly distributions of substantially all of its
income to holders of its trust units. On your federal income tax returns, you
will be required to include your proportionate share of trust net income. In
addition, you will be entitled to claim a depletion deduction and a small tax
credit relating to production from the underlying properties. The deductions
and credits will permit you to defer or reduce taxes on a significant portion
of the income you receive from the trust.
Cross Timbers will determine net proceeds monthly on a state-by-state basis.
It will collect cash received from the sale of production and deduct property
and production taxes, development and production costs and overhead. Cross
Timbers will pay to the trust 80% of the net profits remaining after deducting
those costs.
Net proceeds payable to the trust depend upon production quantities, sales
prices of oil and natural gas and costs to develop and produce the oil and
natural gas. If at any time development and production costs should exceed
gross proceeds, neither the trust nor the trust unitholders would be liable for
the excess costs. However, the trust would not receive any net proceeds until
future net proceeds exceed the total of those excess costs, plus interest at
the prime rate. Cross Timbers does not expect future production costs for the
underlying properties to change significantly as compared to recent historical
costs. It expects the level of development costs to decline significantly as
compared to recent historical amounts.
3
<PAGE>
Cross Timbers' Ownership Interest
The underlying properties include Cross Timbers' undivided interests in oil
and natural gas leases and the production from existing and future wells on
those leases. Accordingly, if Cross Timbers successfully drills additional
wells on acreage covered by these leases or successfully conducts other
development activities, those activities will enhance production from the
underlying properties. The trust will benefit from increased production, net of
related development costs. Cross Timbers' interests in the underlying
properties are predominantly "working interests," which require it to bear the
costs of exploration, production and development.
Cross Timbers' retained interest in the underlying properties entitles it to
20% of the net proceeds from production. Cross Timbers believes that a 20%
ownership interest will provide incentive to operate and develop the underlying
properties in an efficient and cost effective manner. Cross Timbers is under no
obligation to continue to own the underlying properties, but currently intends
to do so.
The following chart shows the relationship of Cross Timbers, the trust and
the public trust unitholders, assuming no exercise of the underwriters' over-
allotment option.
[CHART SHOWING RELATIONSHIP OF TRUST TO CROSS TIMBERS APPEARS HERE]
The Underlying Properties
The underlying properties are located in three of the best known and most
prolific natural gas producing areas in the United States. As of December 31,
1998, proved reserves of the underlying properties were estimated at 539 Bcfe
in the Reserve Report. Approximately 30% of the proved reserves were located in
the Hugoton area of Kansas and Oklahoma, 37% were located in the Anadarko Basin
of Oklahoma and 33% were located in the Green River Basin of Wyoming. These
areas are characterized by wells with low rates of annual decline in production
and low production costs. Wells in these areas have been producing for many
years, in some cases since the 1920s. Reserve estimates for properties with
long production histories are generally more reliable than estimates for
properties with short histories.
4
<PAGE>
Long Life of Properties
The productive lives of producing oil and natural gas properties are often
compared using their reserve-to-production index. This index is calculated by
dividing total estimated proved reserves of the property by annual production
for the prior 12 months. The reserve-to-production index for the underlying
properties at December 31, 1998 was 13.0 years. An index of 13.0 years shows a
long producing life for an oil and natural gas property. This compares
favorably to an average index of 9.2 years for U.S. oil and natural gas
properties of publicly reporting companies at year-end 1997. Because production
rates naturally decline over time, the reserve-to-production index is not a
useful estimate of how long properties should economically produce. Based on
the Reserve Report, economic production from the underlying properties is
expected for at least 40 more years.
High Percentage of Proved Developed Reserves
Proved developed reserves are the most valuable and lowest risk category of
reserves because their production requires no significant future development
costs. Proved developed reserves represent approximately 93% of the discounted
present value of estimated future net revenues from the underlying properties.
Control of Operations
The right to operate an oil and natural gas lease is important because the
operator controls the timing and amount of discretionary expenditures for
operational and development activities. Cross Timbers operates approximately
90% of the underlying properties, based on the discounted present value of
estimated future net revenues.
History of Low Cost Reserve Additions
Cross Timbers has a record of successfully adding reserves to the underlying
properties through development at costs substantially below the industry
average. Over the last three years Cross Timbers added 187 Bcfe of proved
reserves, or 156% of production, at a cost of $0.47 per Mcfe. For publicly
reporting companies in the United States, the average industry cost of adding
oil and natural gas reserves from 1995 through 1997 was $0.96 per Mcfe.
Over the last three years proved reserve additions on existing wells on the
underlying properties included upward revisions of 23 Bcfe. These upward
revisions were due to better than projected production performance and
development results, reduced production costs, increased oil and natural gas
prices in some years, gathering system improvements and improved technology.
Cross Timbers believes that the underlying properties will experience reserve
additions in the future, but cannot assure you that this will occur.
Effect of Planned Development Program
Without development projects, the underlying properties would typically
experience a 6% to 10% annual decline in production. Cross Timbers plans
development expenditures on the underlying properties of $12 million per year
for the next four years. The Reserve Report projects that these development
expenditures will reduce the natural rate of decline in production to
approximately 4% per year.
Additional Development Opportunities
Cross Timbers believes that the underlying properties will offer economic
development projects that are not included in the Reserve Report. These
additional development opportunities could significantly increase production
and proved reserves above those projected in the Reserve Report. Additional
development opportunities could include:
. adding pipeline compression and pumps to improve production flow;
. opening new producing zones in existing wells;
5
<PAGE>
. deepening existing wells to new producing zones;
. performing mechanical and chemical treatments to stimulate production
rates; and
. drilling additional wells.
Cross Timbers may face conflicts of interest in allocating its resources
between additional development of the underlying properties and development of
other oil and natural gas properties that it now owns or may own in the future.
Cross Timbers allocates resources for development based on expected rates of
return. The underlying properties have historically provided attractive rates
of return on development projects compared to Cross Timbers' other properties,
and are expected to continue to do so in the future.
Substantial Operating Margins
The underlying properties have historically generated substantial operating
margins. Production expenses, production and property taxes, transportation
costs and overhead on the underlying properties averaged $0.68 per Mcfe during
1998. During the same period, the sales price for oil and natural gas produced
from the underlying properties averaged $2.03 per Mcfe, providing an operating
margin of $1.35 per Mcfe.
Control of Natural Gas Gathering Systems
Cross Timbers and its affiliates operate natural gas gathering systems for
approximately 70% of the production from the underlying properties. This allows
Cross Timbers to manage gathering operations to maintain optimum natural gas
production.
Proved Reserves
Estimated proved reserves of the underlying properties are approximately 95%
natural gas and 5% oil, based on the Reserve Report. The following table
provides, as of December 31, 1998, estimated proved oil and natural gas
reserves, and undiscounted and discounted estimated future net revenues, for
the underlying properties and the net profits interests. Proved reserves in the
table are based on oil and natural gas prices realized by Cross Timbers as of
December 31, 1998, which were $11.24 per Bbl of oil and $2.01 per Mcf of
natural gas. The amounts of estimated future net revenues from proved reserves
shown in the table are before income taxes. Discounted future net revenues are
based on a discount rate of 10%, which is the rate required by the Securities
and Exchange Commission. Reserve estimates are subject to revision.
<TABLE>
<CAPTION>
Proved Reserves
---------------------------
Estimated Future
Net Revenues from
Gas Proved Reserves
Gas Oil Equivalents ------------------------
(MMcf) (MBbls) (MMcfe) Undiscounted Discounted
------- ------- ----------- ------------ -----------
(in thousands, except
per Unit data)
<S> <C> <C> <C> <C> <C>
Underlying properties
(100%):
Anadarko Basin......... 174,433 3,621 196,159 $258,416 $150,711
Green River Basin...... 178,970 270 180,590 242,897 104,193
Hugoton Area........... 161,670 139 162,504 173,205 92,273
------- ----- ------- -------- --------
Total................ 515,073 4,030 539,253 $674,518 $347,177
======= ===== ======= ======== ========
Underlying properties
(80%)................... 412,058 3,224 431,402 $539,615 $277,742
Net profits interests
(a)..................... 282,297 2,193 295,455 $539,615 $277,742
Per trust unit........... -- -- -- $ 13.49 $ 6.94
</TABLE>
- --------
(a) Proved reserves for the net profits interests are calculated by subtracting
from 80% of proved reserves of the underlying properties, reserve
quantities of a sufficient value to pay 80% of the
6
<PAGE>
future estimated costs, before overhead and trust administrative expenses,
that are deducted in calculating net proceeds. Accordingly, proved reserves
for the net profits interests reflect quantities that are calculated after
reductions for future costs and expenses based on price and cost
assumptions used in the reserve estimates.
Producing Areas
The underlying properties consist of predominantly natural gas producing
leases located in the States of Kansas, Oklahoma and Wyoming. These productive
areas include:
. Hugoton Area. The largest natural gas producing region in North America,
the Hugoton area covers an estimated five million acres in parts of
Oklahoma, Kansas and Texas. The area has produced more than 64 trillion
cubic feet of natural gas since 1922. Wells in this area produce
primarily from formations less than 3,000 feet in depth. Wells also
produce from deeper formations at depths ranging from 3,000 to 7,000
feet. The average 1999 net daily production for the underlying
properties in this area estimated in the Reserve Report is approximately
36,700 Mcf of natural gas and 40 Bbls of oil per day.
. Anadarko Basin. Cross Timbers properties in this area are concentrated
in Major County, Oklahoma as well as the Elk City Field and other areas
in western Oklahoma. Oil and natural gas were first discovered in Major
County and the Elk City Field in the 1940s. Natural gas wells in this
region produce from a variety of productive zones and geological
structures. Principal productive zones range in depth from 6,500 to
9,400 feet. The average 1999 net daily production for the underlying
properties in this area estimated in the Reserve Report is approximately
45,000 Mcf of natural gas and 1,100 Bbls of oil per day.
. Green River Basin. Located in southwestern Wyoming, this area includes
Cross Timbers properties in the Fontenelle area. Wells in this area have
produced since the early 1970s from formations ranging in depth from
7,500 to 10,000 feet. The average 1999 net daily production for the
underlying properties in this area estimated in the Reserve Report is
approximately 30,500 Mcf of natural gas and 50 Bbls of oil per day.
7
<PAGE>
Pro Forma Trust Distributions and Related Data
The following table contains oil and natural gas sales volumes and average
sales prices for production from the underlying properties and the calculation
of trust distributable income:
. for 1996, 1997 and 1998, based on historical net proceeds from the
underlying properties. See the audited statements of revenues and direct
operating expenses for the years ended December 31, 1996, 1997 and 1998
and the pro forma statement of distributable income for the year ended
December 31, 1998 included in this prospectus.
. for 1998, on an adjusted basis using the reduced development costs
budgeted for 1999. Cross Timbers aggressively developed the underlying
properties during 1996, 1997 and 1998, but intends to reduce development
costs to approximately $12 million per year for the next four years. The
"Adjusted 1998" data in the table are the same as the actual 1998 data,
except for the effects of reducing development costs to $12 million. The
"Adjusted 1998" data allow a comparison between the "Hypothetical 1999"
data and the 1998 data, adjusted to show the effect of the expected
reduced development expenditures during 1999.
. for 1999, on a hypothetical basis using the assumptions and methods of
calculation described under "Hypothetical Annual Cash Distributions."
These calculations were made using hypothetical realized prices of $2.00
for natural gas and $11.75 for oil, which equates to a $10.00 posted oil
price. The "Hypothetical 1999" data in the table are not a projection or
forecast of the actual or estimated results from an investment in the
trust units. They are intended only to demonstrate the calculation of
distributable income based on assumed production levels, prices and
costs. See "Hypothetical Annual Cash Distributions."
"Trust distributable income per trust unit" for each year is a pro forma
amount, assuming the net profits interests were conveyed to the trust prior
to January 1, 1996 and that trust administrative expense was $300,000
annually.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------- Adjusted Hypothetical
1996 1997 1998 1998 1999
------- ------- ------- -------- ------------
(in thousands, except per unit data)
<S> <C> <C> <C> <C> <C>
Underlying Properties
Sales Volumes:
Natural gas (Mcf).......... 36,143 37,172 38,535 38,535 41,027
Oil (Bbls)................. 455 470 479 479 434
Average Price:
Natural gas (per Mcf)...... $ 1.67 $ 2.21 $ 2.00 $ 2.00 $ 2.00
Oil (per Bbl).............. $ 19.95 $ 20.63 $ 14.78 $ 14.78 $ 11.75
Calculation of Distributable
Income
Revenues:
Natural gas sales.......... $60,502 $82,192 $77,124 $77,124 $82,054
Oil sales.................. 9,075 9,704 7,083 7,083 5,100
------- ------- ------- ------- -------
Total.................... 69,577 91,896 84,207 84,207 87,154
------- ------- ------- ------- -------
Costs:
Production and property
taxes and transportation.. 5,919 9,173 9,170 9,170 9,310
Production expenses........ 11,359 12,837 13,031 13,031 11,937
Development costs.......... 14,392 40,027 33,019 12,000 12,000
Overhead................... 4,557 5,354 6,198 6,198 6,200
------- ------- ------- ------- -------
Total................... 36,227 67,391 61,418 40,399 39,447
------- ------- ------- ------- -------
Net proceeds................. 33,350 24,505 22,789 43,808 47,707
Net profits percentage....... 80% 80% 80% 80% 80%
------- ------- ------- ------- -------
Trust royalty income......... 26,680 19,604 18,231 35,046 38,166
Trust administrative
expense..................... 300 300 300 300 300
------- ------- ------- ------- -------
Trust distributable income... $26,380 $19,304 $17,931 $34,746 $37,866
======= ======= ======= ======= =======
Trust distributable income
per trust unit.............. $ 0.66 $ 0.48 $ 0.45 $ 0.87 $ 0.95
======= ======= ======= ======= =======
</TABLE>
8
<PAGE>
The Offering
Trust units offered by Cross
Timbers................... 15,000,000
Trust units outstanding... 40,000,000
Use of proceeds........... Cross Timbers will receive all net proceeds
from this offering, which will be used to
repay indebtedness under its revolving credit
facility.
NYSE symbol............... HGT
Investing in Trust Units
Investing in these trust units differs from investing in corporate stock in
the following ways:
. trust unitholders have limited voting rights;
. trust unitholders are taxed directly on their proportionate share of
trust net income;
. trust unitholders are entitled to federal income tax depletion
deductions and tax credits;
. substantially all trust income must be distributed to trust unitholders;
and
. trust assets are limited to the net profits interests which have a
finite economic life.
9
<PAGE>
RISK FACTORS
Trust Distributions Will Be Sensitive to Changing Oil and Natural Gas Prices
The trust's monthly cash distributions are highly dependent upon the prices
realized from the sale of oil and, in particular, natural gas. Oil and natural
gas prices can fluctuate widely on a month-to-month basis in response to a
variety of factors that are beyond the control of the trust and Cross Timbers.
These factors include, among others:
. weather conditions;
. the supply and price of foreign oil and natural gas;
. the level of consumer product demand;
. worldwide economic conditions;
. political conditions in the Middle East;
. government regulations;
. the price and availability of alternative fuels;
. the proximity to, and capacity of, transportation facilities; and
. worldwide energy conservation measures.
Lower oil and natural gas prices may reduce the amount of oil and natural
gas that is economic to produce and reduce net profits available to the trust.
The volatility of energy prices reduces the accuracy of estimates of future
cash distributions to trust unitholders.
Trust Distributions Are Affected by Production and Development Costs
Production and development costs on the underlying properties are deducted
in the calculation of the trust's share of net proceeds. Accordingly, higher or
lower production and development costs will directly decrease or increase the
amount received by the trust for its net profits interests. For a summary of
these costs for the last three years, see "The Net Profits Interests and the
Underlying Properties--Pro Forma Distributable Income and Oil and Natural Gas
Sales Volumes."
If development and production costs of underlying properties located in a
particular state exceed the proceeds of production from the properties, the
trust will not receive net proceeds for those properties until future proceeds
from production in that state exceed the total of the excess costs plus accrued
interest during the deficit period. Development activities may not generate
sufficient additional revenue to repay the costs.
Trust Reserve Estimates Are Uncertain
The value of the trust units will depend upon, among other things, the
reserves attributable to the trust's net profits interests. Estimating reserves
is inherently uncertain. Ultimately, actual production, revenues and
expenditures for the underlying properties will vary from estimates and those
variations could be material. Petroleum engineers consider many factors and
make assumptions in estimating reserves. Those factors and assumptions include:
. historical production from the area compared with production rates from
other producing areas;
. the assumed effect of governmental regulation; and
. assumptions about future commodity prices, production and development
costs, severance and excise taxes, and capital expenditures.
10
<PAGE>
Changes in these assumptions can materially change reserve estimates.
The trust's reserve quantities and revenues are based on estimates of
reserves and revenues for the underlying properties. The method of allocating a
portion of those reserves to the trust is complicated because the trust holds
an interest in net profits and does not own a specific percentage of the oil
and natural gas reserves. See "The Net Profits Interests and the Underlying
Properties--Oil and Natural Gas Reserves--Proved Reserves" for a discussion of
the method of allocating proved reserves to the trust.
Production Risks Can Adversely Affect Trust Distributions
The occurrence of drilling, production or transportation accidents at any of
the underlying properties will reduce trust distributions by the amount of
uninsured costs. These accidents may result in personal injuries, property
damage, damage to productive formations or equipment and environmental damages.
The Trust Does Not Control Operations and Development
Neither the trustee nor the trust unitholders can influence or control the
operation or future development of the underlying properties. Cross Timbers is
unable to significantly influence the operations or future development of the
underlying properties that it does not operate, which contain about 10% of the
proved reserve value of all underlying properties.
The current operators of the underlying properties, including Cross Timbers,
are under no obligation to continue operating the properties. Cross Timbers can
sell any of the underlying properties that it operates and relinquish the
ability to control or influence operations. Neither the trustee nor trust
unitholders have the right to replace an operator.
Cross Timbers May Transfer or Abandon Underlying Properties
Although it has no current intention of selling any of the underlying
properties, Cross Timbers may at any time transfer all or part of the
underlying properties. You will not be entitled to vote on any transfer, and
the trust will not receive any proceeds of the transfer. Following any material
transfer, the underlying properties will continue to be subject to the net
profits interests of the trust, but the net proceeds from the transferred
property would be calculated separately and paid by the transferee. The
transferee would be responsible for all of Cross Timbers' obligations relating
to the net profits interests on the portion of the underlying properties
transferred, and Cross Timbers would have no continuing obligation to the trust
for those properties.
Cross Timbers and any transferee may abandon any well or property if it
believes that the well or property can no longer produce in commercially
economic quantities. This could result in termination of the net profits
interest relating to the abandoned well.
Net Profits Interest Can Be Sold or the Trust May Be Terminated
The trustee must sell the net profits interests if the holders of 80% or
more of the trust units approve the sale or vote to terminate the trust. The
trustee must also sell the net profits interests if the annual gross proceeds
from the underlying properties are less than $1 million for each of two
consecutive years after 1999. Sale of all the net profits interests will
terminate the trust. The net proceeds of any sale will be distributed to the
trust unitholders.
11
<PAGE>
Cross Timbers May Dispose of Remaining Trust Units
Cross Timbers currently owns 100% of the trust units and will sell 37.5% of
the trust units in this offering, or 43% if the underwriters' over-allotment
option is exercised in full. Cross Timbers has granted options to its executive
officers to purchase $12 million of its retained trust units at the initial
public offering price. It may use some or all of the remaining trust units it
owns for a number of corporate purposes, including:
. selling them for cash; and
. exchanging them for interests in oil and natural gas properties or
securities of oil and natural gas companies.
If Cross Timbers sells additional trust units or exchanges trust units in
connection with acquisitions or if Cross Timbers executives acquire trust units
upon exercise of options, then additional trust units will be available for
sale in the market. Cross Timbers expects these additional trust units to
increase market liquidity, but cannot presently determine whether they will
impact the market price for trust units. The release of these additional trust
units into the public market may cause the market price to decrease. See
"Selling Trust Unitholder."
Cross Timbers Will Receive Payments Deducted from Net Proceeds
Cross Timbers and some of its affiliates receive payments under existing
contracts for services relating to the underlying properties. Payments to Cross
Timbers and its affiliates will be deducted in determining net proceeds payable
to the trust. This will reduce the amounts available for distribution to the
trust unitholders. These payments will include:
. payments to Cross Timbers for production and development costs to
operate wells;
. payments to Cross Timbers affiliates for marketing, gathering,
processing and transportation services; and
. overhead fees to operate the underlying properties, which include
accounting and other administrative functions.
In addition to providing services, Cross Timbers affiliates purchase
production from the underlying properties. Approximately two-thirds of 1998 oil
and natural gas sales from the underlying properties were made to Cross Timbers
affiliates.
Cross Timbers believes that the terms of these contracts are competitive
with those that could be obtained from unrelated third parties. Cross Timbers
is permitted under the conveyance agreements creating the net profits interests
to enter into new contracts without any negotiations or other involvement by
independent third parties. Provisions in the conveyance agreements, however,
require that
. future contracts with affiliates relating to transportation, processing
or marketing of oil and natural gas cannot materially exceed charges
prevailing in the area for similar services; and
. future oil and natural gas sales contracts with affiliates must provide
that the affiliates retain not more than 2% of the proceeds from the
sale of production by the affiliates.
Cross Timbers Will Have Potential Conflicts of Interest
Because Cross Timbers has interests in oil and natural gas properties not
included in the trust, the interests of Cross Timbers and the trust unitholders
may not always be in common. For example,
. in setting budgets for development and production expenditures for Cross
Timbers' properties, including the underlying properties, Cross Timbers
may make decisions that could adversely affect future production from
the underlying properties;
12
<PAGE>
. Cross Timbers could continue to operate an underlying property and earn
an overhead fee even though abandonment of the property might be more
beneficial to trust unitholders; and
. Cross Timbers could decide to sell or abandon some or all of the
underlying properties, and that decision may not be in the best
interests of the trust unitholders.
Except for specified matters that require approval of the trust unitholders
described in "Description of the Trust Indenture," the documents governing the
trust do not provide a mechanism for resolving these conflicting interests.
Trust Unitholders Will Have Limited Voting Rights
Your voting rights as a trust unitholder are more limited than those of
stockholders of most public corporations. For example, there is no requirement
for annual meetings of trust unitholders or for an annual or other periodic
re-election of the trustee.
Additionally, trust unitholders have no voting rights in Cross Timbers and
therefore will have no ability to influence its operations of the underlying
properties.
Trust Unitholders Will Have Limited Ability to Enforce Rights
The trust indenture does not provide you with any right to compel the
trustee to take action against Cross Timbers or any other future owner of the
underlying properties to honor the net profits interests. Rather, the trust
indenture and related trust law permit the trustee and the trust to bring
those claims. If the trustee does not take appropriate action to enforce
provisions of the net profits interests, your recourse as a trust unitholder
would likely be limited to bringing a lawsuit against the trustee to compel
the trustee to take specified actions.
Limited Liability of Trust Unitholders Is Uncertain
Texas law is not clear whether a trust unitholder could be held personally
liable for the trust's liabilities if those liabilities exceeded the value of
the trust's assets. Cross Timbers believes it is highly unlikely the trust
could incur such excess liabilities.
As a royalty interest, the trust's net profit interest is generally not
subject to operational and environmental liabilities and obligations. The
trust conducts no active business that would give rise to other business
liabilities.
The trustee has limited ability to incur obligations on behalf of the
trust. The trustee must ensure that all contractual liabilities of the trust
are limited to claims against the assets of the trust. The trustee will be
liable for its failure to do so.
Cross Timbers' Liability to the Trust Is Limited
The net profits interest conveyance provides that Cross Timbers will not be
liable to the trust for performing its duties in operating the underlying
properties as long as it acts in good faith. Cross Timbers has no fiduciary
duty to protect the interests of the trust.
Amendment of the Trust Indenture Requires Supermajority Vote
Trust unitholders may amend the trust indenture by a vote of the holders of
80% or more of the outstanding trust units. Any amendment will be binding on
you, regardless of whether you voted for or against the amendment. Some
provisions of the trust indenture cannot be amended without the consent of all
trust unitholders. See "Description of the Trust Indenture--Creation and
Organization of the Trust; Amendments."
13
<PAGE>
Trust Assets Are Depleting Assets
The net proceeds payable to the trust are derived from the sale of depleting
assets. Accordingly, the portion of the distributions to trust unitholders
attributable to depletion may be considered a return of capital. The reduction
in proved reserve quantities is a common measure of the depletion. Future
maintenance and development projects on the underlying properties will affect
the quantity of proved reserves. The timing and size of these projects will
depend on the market prices of oil and natural gas. If operators of the
properties do not implement additional maintenance and development projects,
the future rate of production decline of proved reserves may be higher than the
rate currently expected by Cross Timbers. For federal income tax purposes,
depletion is reflected as a deduction, which is anticipated to be $0.73 per
trust unit in 1999, based on a trust unit purchase price of $9.00. See "Federal
Income Tax Consequences--Royalty Income and Depletion."
Tax Considerations
The trust has received an opinion of tax counsel that the trust is a
"grantor trust" for federal income tax purposes. This means that:
. you will be taxed directly on your pro rata share of the net income of
the trust, regardless of whether all of that net income is distributed
to you;
. you will be allowed (1) depletion deductions equal to the greater of
percentage depletion or cost depletion, computed on the tax basis of
your trust units and (2) your pro rata share of other deductions of the
trust; and
. you will be allowed the tax credit for your share of qualifying natural
gas production from tight sands provided under Section 29 of the
Internal Revenue Code, subject to limitations described in this
prospectus.
See "Federal Income Tax Consequences."
Tax counsel believes that its opinion is in accordance with the present
position of the Internal Revenue Service (the "IRS") regarding grantor trusts.
Neither Cross Timbers nor the trustee has requested a ruling from the IRS
regarding these tax questions. Neither Cross Timbers nor the trust can assure
you that they would be granted such a ruling if requested or that the IRS will
continue this position in the future.
Trust unitholders should be aware of possible state tax implications of
owning trust units. See "State Tax Considerations."
14
<PAGE>
FORWARD-LOOKING STATEMENTS
Some statements made by Cross Timbers in this prospectus under "Hypothetical
Annual Cash Distributions," statements pertaining to future development
activities and costs, and other statements contained in this prospectus are
prospective and constitute forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by the forward-looking statements. The most significant
risks, uncertainties and other factors are discussed under "Risk Factors"
above.
USE OF PROCEEDS
The trust will not receive any proceeds from the sale of the trust units.
Cross Timbers will receive all proceeds from the sale of trust units after
deducting underwriting discounts and costs of the offering paid by Cross
Timbers. The estimated net proceeds will be approximately $ , and will
increase to $ if the underwriters exercise their over-allotment option in
full. Cross Timbers intends to apply the net proceeds from the offering to
repay outstanding indebtedness under its bank revolving credit facility. The
facility bears interest at a floating rate based on LIBOR, currently 6.5%, and
matures on June 30, 2003. Cross Timbers incurred its bank debt to finance
recent acquisitions of oil and natural gas producing properties, purchases of
equity securities of other energy companies, repurchases of Cross Timbers
common stock, and development expenditures.
CROSS TIMBERS
Cross Timbers Oil Company is a leading United States independent energy
company. It engages in the acquisition, development and exploration of oil and
natural gas properties, and in the production, processing, marketing and
transportation of oil and natural gas in the United States. Cross Timbers
organized the trust in December 1998 and conveyed the net profits interests to
the trust in exchange for all of the trust units. Cross Timbers continues to
own the underlying properties from which the net profits interests were
conveyed.
Cross Timbers has granted to its executive officers options to purchase up
to $12 million of its retained trust units at the initial public offering
price. The executive officers will not receive any trust distributions until
their options are exercised.
Cross Timbers may form additional royalty trusts with other properties. It
may in the future dispose of some or all of the trust units of the Hugoton
Royalty Trust or any of the other royalty trusts. See "Risk Factors--Cross
Timbers May Dispose of Remaining Trust Units."
THE TRUST
The trust was formed in December 1998 by execution of the trust indenture
between NationsBank, N.A., as trustee, and Cross Timbers. In connection with
the formation of the trust, Cross Timbers carved the net profits interests from
the underlying properties and conveyed the net profits interests to the trust
in exchange for all 40,000,000 of the trust units.
The trustee can authorize the trust to borrow money to pay trust
administrative or incidental expenses that exceed cash held by the trust. The
trustee may authorize the trust to borrow from the trustee as a lender. Because
the trustee is a fiduciary, the terms of the loan must be fair to the trust
unitholders. The trustee may also deposit funds awaiting distribution in an
account with itself, if the interest paid to the trust at least equals amounts
paid by the trustee on similar deposits.
15
<PAGE>
The trust will pay the trustee a fee of $35,000 per year and a fee of
$15,000 for services to terminate the trust. The trust will also incur legal,
accounting and engineering fees, printing costs and other expenses that are
deducted from the 80% of net proceeds received by the trust before
distributions are made to trust unitholders.
HYPOTHETICAL ANNUAL CASH DISTRIBUTIONS
The amount of trust revenues and cash distributions to trust unitholders
will depend on (1) natural gas prices, (2) oil prices to a lesser extent, (3)
the volume of oil and natural gas produced and sold and (4) production,
development and other costs. Cross Timbers prepared the following unaudited
tables, which demonstrate the hypothetical effect that changes in the prices
for oil and natural gas could have on trust distributions. The following tables
show:
. the hypothetical cash distributions per trust unit for calendar year
1999 on the accrual or production basis;
. the resulting hypothetical cash distributions per trust unit as a
percentage of the purchase price of the trust unit ("Hypothetical Pre-
Tax Cash Returns"); and
. the resulting hypothetical cash return following payment of all federal
income tax, net of available deductions and credits, at the highest
individual tax rate of 39.6% ("Hypothetical After-Tax Cash Returns").
The tables are based on:
. an assumed purchase price of $9.00 per trust unit;
. various hypothetical oil and natural gas sales prices, which were chosen
solely for illustrative purposes and without reference to any historical
prices;
. 1999 production, as estimated in the Reserve Report; and
. the other assumptions described below under "How the Hypothetical Tables
Were Prepared."
The tables are not a projection or forecast of the actual or estimated
results from an investment in the trust units. The purpose of the tables is to
illustrate the sensitivity of cash distributions and hypothetical cash returns
to changes in the prices of oil and natural gas. There is no assurance that the
assumptions described below will actually occur or that the prices of oil or
natural gas will not decline or increase by amounts different from those shown
in the tables.
Due to the seasonal demand for natural gas, the amount of monthly cash
distributions from the trust is expected to vary during the year. Month-to-
month distributions will also vary based on the timing of development
expenditures and the net proceeds, if any, generated by development projects.
As a result of typical production declines for oil and natural gas
properties, production estimates generally decrease from year to year.
Accordingly, the hypothetical cash distributions for 1999 production do not
indicate the amount of distributions for future years. Because payments to the
trust will be generated by depleting assets, a portion of each distribution may
represent a return of your original investment.
16
<PAGE>
Hypothetical Cash Distributions Per Trust Unit
For Estimated 1999 Production
<TABLE>
<CAPTION>
Hypothetical Wellhead
Hypothetical Posted Gas
Oil Price per Bbl Price per Mcf
------------------- --------------------------
$1.50 $2.00 $2.50 $3.00
----- ----- ----- -----
<S> <C> <C> <C> <C>
$10.00........................................... $0.57 $0.95 $1.32 $1.70
15.00........................................... 0.61 0.99 1.36 1.74
20.00........................................... 0.65 1.03 1.40 1.78
25.00........................................... 0.69 1.07 1.44 1.82
Hypothetical Pre-Tax Cash Returns at a Trust Unit Price of $9.00
For Estimated 1999 Production
<CAPTION>
Hypothetical Wellhead
Hypothetical Posted Gas
Oil Price per Bbl Price per Mcf
------------------- --------------------------
$1.50 $2.00 $2.50 $3.00
----- ----- ----- -----
<S> <C> <C> <C> <C>
$10.00........................................... 6.3% 10.6% 14.7% 18.9%
15.00........................................... 6.8 11.0 15.1 19.3
20.00........................................... 7.2 11.4 15.6 19.8
25.00........................................... 7.7 11.9 16.0 20.2
Hypothetical After-Tax Cash Returns at a Trust Unit Price of $9.00
For Estimated 1999 Production
<CAPTION>
Hypothetical Wellhead
Hypothetical Posted Gas
Oil Price per Bbl Price per Mcf
------------------- --------------------------
$1.50 $2.00 $2.50 $3.00
----- ----- ----- -----
<S> <C> <C> <C> <C>
$10.00........................................... 7.2% 9.8% 12.3% 14.9%
15.00........................................... 7.6 10.1 12.6 15.1
20.00........................................... 7.8 10.3 12.8 15.3
25.00........................................... 8.1 10.7 13.1 15.7
</TABLE>
17
<PAGE>
The following table shows the calculation of hypothetical 1999 cash
distributions per trust unit, pre-tax and after-tax cash returns, based on the
assumptions described below under "How the Hypothetical Tables Were Prepared"
and assuming a $10.00 per Bbl posted West Texas Intermediate crude oil price
($11.75 realized), a $2.00 per Mcf wellhead natural gas price and a $9.00 trust
unit purchase price:
Hypothetical 1999 Cash Distributions
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Trust Distributable Income:
Natural gas (41,027 MMcf).................................. $82,054
Oil (434 MBbls)............................................ 5,100
-------
Total revenues........................................... 87,154
-------
Production and property taxes and transportation........... 9,310
Production expenses........................................ 11,937
Development costs.......................................... 12,000
Overhead................................................... 6,200
-------
Total expenses........................................... 39,447
-------
Net Proceeds............................................... 47,707
Net profits percentage..................................... 80%
-------
Trust royalty income....................................... 38,166
Trust administrative expense............................... 300
-------
Trust distributable income................................. $37,866
=======
</TABLE>
<TABLE>
<CAPTION>
Annual
Cash
Amount Return
------ ------
<S> <C> <C>
Per Trust Unit (40,000,000 Trust Units):
Total cash distributions....................................... $0.95 10.6%
Cost depletion tax deduction................................... (0.73)
-----
Taxable income................................................. 0.22
Income tax rate................................................ 39.6%
-----
Income tax expense............................................. 0.09
Section 29 tax credit.......................................... (0.02)
-----
Net tax........................................................ 0.07
-----
Total cash distributions after tax............................. $0.88 9.8%
=====
</TABLE>
How the Hypothetical Tables Were Prepared
Timing of Actual Distributions. In preparing the tables above, the revenues
and expenses of the trust were calculated based on the terms of the conveyances
creating the trust's net profits interests. These calculations are described
under "Computation of Net Proceeds," except that amounts for the tables were
calculated on an accrual or production basis rather than the cash basis
prescribed by the conveyances. As a result, the proceeds for production for the
final one or two months of 1999, and reflected in the tables above, will
actually enter into the calculation of net proceeds to be received by the trust
in 2000. Net proceeds from production during December 1998 will in fact be
distributed from the trust in 1999. Accordingly, the hypothetical cash
distributions attributable to 1999 production represent hypothetical cash
distributions from the trust from February or March 1999 through January or
February 2000.
18
<PAGE>
Production Estimates. Production estimates for 1999 are based on the Reserve
Report. The Reserve Report assumed constant prices at December 31, 1998, based
on a West Texas Intermediate crude oil price of $9.50 ($11.24 realized) per Bbl
and the weighted average wellhead natural gas price at December 31, 1998 of
$2.01 per Mcf. Production from the underlying properties for 1999 is estimated
to be 434,000 Bbls of oil and 41,027,000 Mcf of natural gas. See "--Oil and
Natural Gas Prices" below for a description of changes in production due to
price variations. Sales for 1998 were 479,000 Bbls of oil and 38,535,000 Mcf of
natural gas. For purposes of computing the amount of Section 29 tax credit,
natural gas production from the underlying properties that qualify for the
tight sands natural gas credit is estimated to be 2,752,000 Mcf during 1999
(1,376,000 Mcf net to the trust). Differing levels of production will result in
different levels of distributions and cash returns.
Oil and Natural Gas Prices. Oil prices shown in the above tables are
hypothetical posted oil prices. Posted price is the price paid for oil at a
specific point, unadjusted for gravity, quality and transportation and
marketing costs. Published benchmark prices are typically based upon West Texas
Intermediate crude, a light, sweet oil of a particular gravity. These prices
differ from the average or actual price received for production from the
underlying properties, which takes into account those factors. Differentials
between posted oil prices and the prices actually received for the oil
production may vary significantly due to market conditions. In the above
tables, $1.75 per barrel is added to the hypothetical posted oil price to
reflect these adjustments. This addition is based on the average difference
between the posted price of West Texas Intermediate crude and the price
received for production from the underlying properties during 1998. Pro forma
average oil prices appearing in this prospectus have been adjusted for these
differentials.
Natural gas prices shown in the above tables are hypothetical wellhead
prices for natural gas. Wellhead price is the net price received for natural
gas and natural gas liquids after all deductions for transportation, marketing
and gathering. The weighted average price of natural gas production from the
underlying properties during 1998 was $2.00 per Mcf. This was approximately
$0.25 below the average of the monthly closing NYMEX natural gas futures
contract prices for the same period. However, if previously occurring location,
quality and other differentials continue in the future, there may be more
significant differences between the natural gas price received and the NYMEX
price.
The adjustments to posted oil prices and wellhead natural gas prices applied
in the hypothetical distribution and cash return tables are based upon an
analysis by Cross Timbers of the historic price differentials for production
from the underlying properties with consideration given to gravity, quality and
transportation and marketing costs that may affect these differentials in 1999.
There is no assurance that these assumed differentials will recur in 1999.
When oil and natural gas prices decline, the operators of the underlying
properties may elect to reduce or completely suspend production. No adjustments
have been made to estimated 1999 production to reflect potential reductions or
suspensions of production.
Production Expenses, Development Costs and Overhead. For 1999, Cross Timbers
estimates production expenses to be $11.9 million, development costs to be $12
million and overhead to be $6.2 million. Overhead is the estimated fee for all
properties operated by Cross Timbers that is deducted by Cross Timbers in
calculating net proceeds. For a description of production expenses and
development costs, see "Computation of Net Proceeds."
Administrative Expense. Trust administrative expense for 1999 is assumed to
be $300,000 ($0.0075 per trust unit). See "The Trust."
Hypothetical After-Tax Cash Return. Because the net profits interests are a
depleting asset, a portion of this return may be considered a return of your
original investment. The portion that would
19
<PAGE>
be considered a return of original investment is not currently determinable.
For a discussion of alternative ways of measuring the depletion of oil and
natural gas assets, see "Risk Factors--Trust Assets Are Depleting Assets."
The Hypothetical After-Tax Cash Returns on annual hypothetical cash
distributions were computed by:
. determining the amount of federal income tax that would be paid on the
cash distributions at the highest individual marginal tax rate for 1999
of 39.6%, taking into account:
-- a cost depletion tax deduction of $0.73 per trust unit; and
-- a Section 29 tax credit of $0.02 per trust unit;
. subtracting this income tax amount from the annual cash distributions;
and
. dividing the result by $9.00 per trust unit.
Cost depletion is calculated by multiplying the assumed trust unit purchase
price of $9.00 by the cost depletion rate of 8.1%. This rate was estimated by
dividing estimated 1999 production by December 31, 1998 proved reserves
estimated in the Reserve Report. Cost depletion is recaptured upon sale of the
trust units, which results in the taxation of any gain on sale as ordinary
income, as opposed to capital gain, up to the amount of cost depletion
previously deducted.
The Section 29 tax credit was based on estimated tight sands natural gas
production of 1,376,000 Mcf for the net profits interests at $0.52 per MMBtu.
The Section 29 tax credit will expire January 1, 2003.
When the hypothetical distributions are less than $0.77 per trust unit, the
Hypothetical After-Tax Cash Return would be the same or greater than the
Hypothetical Pre-Tax Cash Return because of cost depletion and the Section 29
tax credit. In all instances, each trust unitholder is assumed to have a
regular federal income tax liability sufficient to utilize the depletion
deduction and the Section 29 tax credit. Alternative minimum tax implications
have not been considered. The Section 29 tax credit cannot be used to reduce a
trust unitholder's regular tax below his tentative minimum tax, calculated as
provided in the alternative minimum tax computation rules. See "Federal Income
Tax Consequences--Section 29 Tight Sands Natural Gas Tax Credit." The effect
of state income taxes has not been taken into account in computing the
Hypothetical After-Tax Cash Return. See "State Tax Considerations."
THE NET PROFITS INTERESTS AND THE UNDERLYING PROPERTIES
General
Cross Timbers created the net profits interests through three conveyances
to the trust of 80% net profits interests carved from Cross Timbers' interests
in properties in Kansas, Oklahoma and Wyoming. The net profits interests
entitle the trust to receive 80% of the net proceeds from the sale of oil and
natural gas attributable to the underlying properties. Net proceeds equal the
gross proceeds received by Cross Timbers from the sale of production less
property and production taxes, overhead fees and production and development
costs. The small number of interests in underlying properties that are royalty
and overriding royalty interests are not subject to production and development
costs or overhead fees. For a more detailed description of net proceeds, see
"Computation of Net Proceeds."
Cross Timbers owns the underlying properties, subject to the net profits
interests conveyed to the trust. Cross Timbers may, at any time, sell all or
any portion of the underlying properties, subject to the net profits
interests. It has no present intention to do so.
20
<PAGE>
Cross Timbers' interests in the underlying properties include its undivided
interests in oil and natural gas leases and the production from existing and
future wells on those leases. Cross Timbers' interests cover the leased acreage
and wells drilled on that acreage. When Cross Timbers drills additional wells
on the leased acreage covered by its interests, or when it deepens or opens new
producing zones in existing wells, any production from those activities is
attributable to the underlying properties. Accordingly, those activities, if
successful, will increase or replace production from the underlying properties
and increase revenues subject to the trust's net profits interest.
Cross Timbers' interest in substantially all of the underlying properties is
referred to in the oil and natural gas industry as a "working interest." A
working interest is an interest of an oil and natural gas lease entitling its
owner to receive a specified percentage of production, but requiring the owner
to bear the cost of exploring for, developing and producing oil and natural gas
from the property.
Where the working interest is held by a number of persons on a single lease,
a working interest owner is designated the lease operator by agreement. Cross
Timbers operates approximately 90% of the underlying properties based on
relative value, and major oil companies and established independent producers
operate the rest. A lease operator controls operations on the lease, including
the timing and amount of discretionary expenditures for operational and
development activities. For that reason it is desirable to operate properties,
and it is important that the operator be qualified and experienced.
21
<PAGE>
Pro Forma Distributable Income and Oil and Natural Gas Sales Volumes
The following table provides oil and natural gas sales volumes and average
sales prices for production from the underlying properties and the calculation
of distributable income (1) for the years ended December 31, 1996, 1997 and
1998, based on historical net proceeds from the underlying properties, (2) for
the year ended December 31, 1998, adjusting development costs to $12 million
as is budgeted for 1999, and (3) for the year ended December 31, 1999, on a
hypothetical basis, as described under "Hypothetical Annual Cash
Distributions."
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------- Adjusted Hypothetical
1996 1997 1998 1998(a) 1999(b)
------- ------- ------- -------- ------------
(in thousands, except per unit data)
<S> <C> <C> <C> <C> <C>
Underlying Properties
Sales Volumes:
Natural gas (Mcf).......... 36,143 37,172 38,535 38,535 41,027
Oil (Bbls)................. 455 470 479 479 434
Average Price:
Natural gas (per Mcf)...... $ 1.67 $ 2.21 $ 2.00 $ 2.00 $ 2.00
Oil (per Bbl).............. $ 19.95 $ 20.63 $ 14.78 $ 14.78 $ 11.75
Calculation of Distributable
Income
Revenues:
Natural gas sales.......... $60,502 $82,192 $77,124 $77,124 $82,054
Oil sales.................. 9,075 9,704 7,083 7,083 5,100
------- ------- ------- ------- -------
Total.................... 69,577 91,896 84,207 84,207 87,154
------- ------- ------- ------- -------
Costs:
Production and property
taxes and transportation.. 5,919 9,173 9,170 9,170 9,310
Production expenses........ 11,359 12,837 13,031 13,031 11,937
Development costs.......... 14,392 40,027 33,019 12,000 12,000
Overhead................... 4,557 5,354 6,198 6,198 6,200
------- ------- ------- ------- -------
Total.................... 36,227 67,391 61,418 40,399 39,447
------- ------- ------- ------- -------
Net proceeds................. 33,350 24,505 22,789 43,808 47,707
Net profits percentage....... 80% 80% 80% 80% 80%
------- ------- ------- ------- -------
Trust royalty income......... 26,680 19,604 18,231 35,046 38,166
Trust administrative
expense..................... 300 300 300 300 300
------- ------- ------- ------- -------
Trust distributable
income(c)................... $26,380 $19,304 $17,931 $34,746 $37,866
======= ======= ======= ======= =======
Trust distributable income
per trust unit(c)........... $ 0.66 $ 0.48 $ 0.45 $ 0.87 $ 0.95
======= ======= ======= ======= =======
</TABLE>
- --------
(a) Based on the statement of revenues and direct operating expenses for the
underlying properties for the year ended December 31, 1998, with the
exception that development costs are assumed to be $12 million, as is
budgeted for 1999.
(b) Based on the assumptions and methods of calculation described under
"Hypothetical Annual Cash Distributions" and using hypothetical prices of
$2.00 for natural gas and $10.00 ($11.75 realized) for oil. The
hypothetical amounts are not a projection or forecast of the actual or
estimated results from an investment in the trust units. They are intended
only to demonstrate distributable income based on assumed prices and
costs.
(c) On a pro forma basis, assuming the net profits interests were conveyed to
the trust prior to January 1, 1996 and that trust administration expenses
were $300,000 annually.
Discussion and Analysis of Pro Forma Distributable Income
Trust royalty income from the net profits interests was $26,680,000 for
1996, $19,604,000 for 1997 and $18,231,000 for 1998. The changes in royalty
income were primarily related to changes in volumes, prices and development
costs. Natural gas sales were 89% of total revenues for the three-year period
ended December 31, 1998. Trust royalty income is recorded when received by the
trust, which is the month following receipt by Cross Timbers, and generally
two months after the related oil and natural gas production.
22
<PAGE>
Volumes. Natural gas sales volumes from the underlying properties increased
3% from 1996 to 1997, and 4% from 1997 to 1998. Oil sales volumes from the
underlying properties increased 4% from 1996 to 1997, and 2% from 1997 to 1998.
The increases were primarily attributable to development projects.
Prices. The average natural gas price increased 32% from $1.67 per Mcf in
1996 to $2.21 in 1997, and decreased 10% from 1997 to $2.00 in 1998. The 1996
prices were at the beginning of an upturn in natural gas prices that lasted
through the summer of 1998. The average oil price increased 3% from $19.95 per
Bbl in 1996 to $20.63 in 1997, and decreased 28% from 1997 to $14.78 in 1998.
The lower 1998 oil prices were caused by increased global production without a
corresponding increase in consumption.
Costs. Total costs deducted in the calculation of royalty income increased
86% from $36,227,000 in 1996 to $67,391,000 in 1997, followed by a 9% decrease
to $61,418,000 in 1998. The primary reason for the fluctuation among the three
years was the timing of development projects. Many of the underlying properties
were purchased by Cross Timbers in 1995 and 1996, leading to large development
expenditures in 1997 and 1998. Development costs rose 178% from $14,392,000 in
1996 to $40,027,000 in 1997, and decreased 18% to $33,019,000 in 1998 as
development projects were completed. Cross Timbers expects development costs to
be $12,000,000 per year for the next four years.
Production expense rose 13% from $11,359,000 in 1996 to $12,837,000 in 1997,
and increased 2% to $13,031,000 from 1997 to 1998. Most of the increase was
related to the timing of major remedial projects such as workovers and
subsurface maintenance and to increases in production volumes. On a per Mcfe
basis, production costs declined from $0.32 in 1997 to $0.31 in 1998.
Production and property taxes and transportation costs have generally
fluctuated in relation to revenue levels.
Overhead expenses charged to the underlying properties by Cross Timbers were
$4,557,000 for 1996, $5,354,000 for 1997 and $6,198,000 for 1998. Fluctuations
resulted from changes in the number of active operated wells and the increase
in overhead rates per well.
Producing Acreage and Well Counts
For the following data, "gross" refers to the total wells or acres in which
Cross Timbers owns a working interest and "net" refers to gross wells or acres
multiplied by the percentage working interest owned by Cross Timbers. Although
many of Cross Timbers' wells produce both oil and natural gas, a well is
categorized as an oil well or a natural gas well based upon the ratio of oil to
natural gas production.
The underlying properties are interests in developed properties located
primarily in natural gas producing regions of Kansas, Oklahoma and Wyoming. The
following is a summary of the approximate producing acreage of the underlying
properties at December 31, 1998. Undeveloped acreage is not significant.
<TABLE>
<CAPTION>
Gross Net
------- -------
<S> <C> <C>
Hugoton Area.................................................... 217,590 200,390
Anadarko Basin.................................................. 152,042 113,946
Green River Basin............................................... 42,654 28,841
------- -------
Total........................................................... 412,286 343,177
======= =======
</TABLE>
23
<PAGE>
The following is a summary of the producing wells on the underlying
properties as of December 31, 1998:
<TABLE>
<CAPTION>
Operated Non-Operated
Wells Wells Total
------------- ------------- -------------
Gross Net Gross Net Gross Net
----- ------- ------------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Natural gas........................... 1,005 913.5 253 59.8 1,258 973.3
Oil................................... 140 124.1 7 1.5 147 125.6
----- ------- ----- ------ ----- -------
Total................................. 1,145 1,037.6 260 61.3 1,405 1,098.9
===== ======= ===== ====== ===== =======
</TABLE>
The following is a summary of the number of development wells drilled by
Cross Timbers on the underlying properties during the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1996 1997 1998
---------- ---------- ----------
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Completed:
Natural gas wells (a)......................... 39 30.9 79 68.8 64 43.7
Oil wells..................................... 2 2.0 1 1.0 -- --
Non-productive................................. -- -- 2 1.5 1 1.0
--- ---- --- ---- --- ----
Total (b)...................................... 41 32.9 82 71.3 65 44.7
=== ==== === ==== === ====
</TABLE>
- --------
(a) One gross (0.5 net) natural gas well drilled in 1997 was an exploratory
well.
(b) Included in totals are 9 gross (3.2 net) in 1996, 8 gross (1.5 net) in 1997
and 25 gross (8.8 net) in 1998 wells drilled on non-operated interests.
Oil and Natural Gas Sales Prices and Production Costs
The following table shows the average sales prices per Bbl of oil and Mcf of
natural gas produced and the production costs, production and property taxes
and transportation costs per Mcfe for the underlying properties:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Sales prices:
Natural gas (per Mcf)................................ $ 1.67 $ 2.21 $ 2.00
Oil (per Bbl)........................................ 19.95 20.63 14.78
Production costs per Mcfe............................. 0.29 0.32 0.31
Production and property taxes and transportation costs
per Mcfe............................................. 0.15 0.23 0.22
</TABLE>
Major Producing Areas
Hugoton Area
Natural gas was discovered in 1922 in the Hugoton area, the largest natural
gas producing area in North America, covering parts of Texas, Oklahoma and
Kansas with an estimated five million productive acres. The Permian-aged Chase
formation is the major productive formation in the Hugoton area, ranging in
depth from 2,700 to 2,900 feet. There are more than 7,200 Chase wells currently
producing. More than 64 trillion cubic feet of natural gas have been produced
from the Hugoton area.
24
<PAGE>
Additional productive formations in the Hugoton area include the Council
Grove between 2,950 and 3,400 feet, the Chester between 6,350 and 6,700 feet
and the Morrow between 6,000 and 6,300 feet. Cross Timbers is actively
exploring and developing these additional formations on the underlying
properties.
Cross Timbers' projected 1999 net production from the underlying properties
in the Hugoton area averages approximately 36,700 Mcf of natural gas per day
and 40 Bbls of oil per day.
Cross Timbers delivers approximately 70% of its Hugoton natural gas
production to a gathering and processing system operated by a subsidiary. This
system collects 71% of its throughput from underlying properties, which, in
recent months, has been approximately 26,000 Mcf per day net to Cross Timbers'
interest from 243 wells. The subsidiary purchases the natural gas from Cross
Timbers at the wellhead, gathers and transports the natural gas to its plant,
treats and processes the natural gas at the plant, and then transports it to
the marketing pipelines. Cross Timbers sells the natural gas to the subsidiary
under long-term contracts at a price equal to 80% to 85% of the price received
by the subsidiary for the natural gas. The price is adjusted based upon the Btu
content of the natural gas. The subsidiary sells the natural gas to a marketing
affiliate of Cross Timbers based upon the average price of several published
indices, but does not pay a marketing fee. The price paid by the marketing
affiliate includes a deduction for any pipeline access fees incurred by the
marketing subsidiary. Pipeline access fees currently are approximately $0.02
per Mcf.
Other Hugoton natural gas production is delivered under a third party
contract. Under the contract, Cross Timbers receives 74.5% of the net proceeds
received from the sale of the residue natural gas and liquids.
In the Hugoton area, Cross Timbers' development plans include:
. additional compression to lower line pressures;
. pumping unit installations;
. opening new producing zones of existing wells;
. drilling additional wells; and
. deeper drilling of existing wells to new producing zones.
Cross Timbers plans to develop the Chase formation primarily through infill
drilling of up to 40 wells in Kansas. If new legislation is enacted in Oklahoma
allowing for reduced spacing and Cross Timbers receives regulatory approval, it
will have approximately 200 potential infill well locations in Oklahoma. Cross
Timbers also plans to develop the other formations, including the Council
Grove, Chester, Morrow and St Louis formations that underlie the 79,500 net
acres held by production by the Chase formation wells. Cross Timbers has
participated in 3-D seismic shoots covering 30,000 acres of Cross Timbers' net
acreage position beneath the Chase formation.
Cross Timbers drilled 12 gross (10.9 net) wells in 1997, and 17 gross (10.5
net) wells in 1998, to the Chester, Council Grove and Chase formations, all of
which were successfully completed.
Anadarko Basin
Cross Timbers' projected average 1999 daily production from the underlying
properties in the Anadarko Basin is 45,000 Mcf of natural gas and 1,100 Bbls of
oil. Two of the principal areas within this basin are the Major County area and
the Elk City Field.
25
<PAGE>
Major County Area. Cross Timbers is one of the largest producers in the
Ringwood, Northwest Okeene and Cheyenne Valley fields in Major County,
Oklahoma. Projected average 1999 net daily natural gas production from the
underlying properties is approximately 33,800 Mcf and oil production is
approximately 920 Bbls.
Oil and natural gas were first discovered in the Major County area in 1945.
The fields in the Major County area are characterized by oil and natural gas
production from a variety of structural and stratigraphic traps. Productive
zones range from 6,500 to 9,400 feet and include the Oswego, Red Fork, Chester,
Manning, Mississippian, Hunton and Arbuckle formations.
A gathering subsidiary of the Company operates a 300-mile gathering system
and pipeline in the Major County area. The gathering subsidiary and a third-
party processor purchase natural gas produced at the wellhead from Cross
Timbers and other producers in the area under life of production contracts. The
gathering subsidiary gathers and transports the natural gas to a third-party
processor, which processes the natural gas and pays Cross Timbers and other
producers for at least 50% of the liquids processed. After the natural gas is
processed, the gathering subsidiary transports the natural gas via a 26-mile
pipeline to a connection with other pipelines. The gathering subsidiary sells
the residue natural gas to the marketing subsidiary of Cross Timbers based upon
the average price of several published indices. The gathering subsidiary pays
this price to Cross Timbers less a gathering fee of $.313 per Mcf of residue
natural gas. This gathering fee was previously approved by the Federal Energy
Regulatory Commission when the gathering subsidiary was regulated. In recent
months, the gathering system has been collecting approximately 25,500 Mcf per
day from over 400 wells, 70% of which Cross Timbers operates. Estimated
capacity of the gathering system is 40,000 Mcf per day. The gathering
subsidiary also provides contract operating services to properties in Woodward
County, collecting approximately 80,000 Mcf per month from 25 wells, for a
historical average fee of approximately $.125 per Mcf.
Cross Timbers also sells natural gas to its marketing subsidiary, which then
sells the natural gas to third parties. The price paid to Cross Timbers is
based upon the average price of several published indices, but does not include
a deduction for any marketing fees. The price paid by the marketing affiliate
includes a deduction for any transportation fees charged by the third party.
Cross Timbers plans to develop the Major County area primarily through:
. mechanical treatments to stimulate production rates;
. opening new producing zones in existing wells;
. deepening existing wells to new producing zones; and
. drilling additional wells.
Cross Timbers drilled 25 gross (20.3 net) wells in 1997, and 23 gross (16.3
net) wells in 1998, in the western portion of Major County, targeted at the
Mississippian and Chester formations. All of these wells were successfully
completed.
Elk City Field. The Elk City Field is located in Beckham and Washita
counties of Western Oklahoma. Projected average 1999 net production of
underlying properties in the Elk City Field is approximately 4,200 Mcf of
natural gas and 130 Bbls of oil per day.
The Elk City Field was discovered in 1947 and has been extensively
developed. Production is from the Hoxbar (9,500 feet), Atoka (13,100 feet) and
Morrow (15,500 feet) zones. Cross Timbers has increased production primarily by
adding mechanical treatments to stimulate production rates and opening new
producing zones in existing wells. Opportunities remain for additional
development in the field. Cross Timbers added significant additional reserves
through recent recompletions to the Atoka Formation.
26
<PAGE>
A third party processes natural gas from the Elk City Field and pays Cross
Timbers 80% of the proceeds received from the sale of the liquids. Cross
Timbers sells the residue natural gas to its marketing subsidiary, which pays
Cross Timbers the average price of several published indices.
Green River Basin
The Green River Basin is located in southwestern Wyoming. Cross Timbers'
projected 1999 average net daily production from the underlying properties in
the Fontenelle field is approximately 30,500 Mcf of natural gas and 50 Bbls of
oil. Natural gas was discovered in the Fontenelle area in the early 1970s. The
producing reservoirs are the Cretaceous-aged Frontier and Dakota sandstones at
depths ranging from 7,500 to 10,000 feet.
Cross Timbers markets the natural gas produced from the Fontenelle Unit and
nearby properties, under three different marketing arrangements. Under the
agreement covering 70% of the natural gas sold, Cross Timbers compresses the
natural gas on the lease, transports it off the lease and compresses the
natural gas again prior to entry into the natural gas plant pipeline. The
pipeline transports the natural gas 35 miles to the natural gas plant, where
the natural gas is processed, then redelivered to Cross Timbers and sold to
Cross Timbers' marketing subsidiary. The owner of the natural gas plant and
related pipeline charges Cross Timbers for operational fuel and processing. In
1998 the fuel charge was about 4% per MMBtu delivered and the processing fee
was $0.0792 per MMBtu. In 1999 Cross Timbers anticipates the fuel charge to be
2.5% to 3% and the processing fee to be $0.05 per MMBtu. The marketing
subsidiary then sells the residue natural gas based upon a spot sales price,
and pays Cross Timbers the net proceeds that the marketing subsidiary receives.
The marketing subsidiary does not receive a marketing fee. Condensate is sold
at the lease to an independent third party at market rates. The natural gas not
sold under the above arrangement is sold either under a similar arrangement
where the fee is $.145 per MMBtu, or under a contract where Cross Timbers
directly sells the natural gas to a third party on the lease at an adjusted
index price.
Cross Timbers drilled 35 gross (34 net) wells in 1997 and 16 gross (16 net)
wells in 1998 in the Fontenelle Unit, all of which were successfully completed.
During 1997, Cross Timbers installed additional pipeline compression to lower
overall field operating pressures and improve overall field performance. Cross
Timbers also completed an interconnect to another pipeline in the southeastern
part of the Fontenelle field that added an additional market for natural gas.
Potential development activities for the fields in this area include:
. additional compression to lower line pressures;
. opening new producing zones of existing wells;
. deepening existing wells to new producing zones; and
. drilling additional wells.
Oil and Natural Gas Reserves
Miller & Lents estimated oil and natural gas reserves attributable to the
net profits interests as of December 31, 1998. Numerous uncertainties are
inherent in estimating reserve volumes and values, and the estimates are
subject to change as additional information becomes available. The reserves
actually recovered and the timing of production of the reserves may vary
significantly from the original estimates.
Miller & Lents calculated reserve quantities and revenues for the net
profits interests from projections of reserves and revenues attributable to the
combined interests of the trust and Cross Timbers in the underlying properties.
Because the trust owns net profits interests and not a specific
27
<PAGE>
ownership percentage of the oil and natural gas reserve quantities, proved
reserves for the trust's net profits interests are calculated by subtracting
from 80% of proved reserves of the underlying properties, reserve quantities of
a sufficient value to pay 80% of the future estimated production and
development costs, excluding overhead. Accordingly, proved reserves for the net
profits interests reflect quantities that are calculated after reductions for
future costs and expenses based on the price and cost assumptions used in the
reserve estimates.
The standardized measure of discounted future net cash flows and changes in
discounted cash flows presented below were prepared using assumptions required
by the Financial Accounting Standards Board. These assumptions include the use
of year-end prices for oil and natural gas and year-end costs for estimated
future development and production expenditures to produce the proved reserves.
Because natural gas prices are influenced by seasonal demand, use of year-
end prices, as required by the Financial Accounting Standards Board, may not be
the most accurate basis for estimating future revenues or reserve data. Future
net cash flows are discounted at an annual rate of 10%. There is no provision
for federal income taxes because future net revenues are not subject to
taxation at the trust level.
Oil prices used to determine the standardized measure at December 31, 1998
were based on West Texas Intermediate crude prices of $9.50 ($11.24 realized)
per Bbl. The weighted average December 31, 1998 wellhead natural gas price used
to determine the standardized measure was $2.01 per Mcf.
Proved Reserves
The following table shows proved reserves, proved developed reserves, future
net revenues and discounted present value of future net revenues at December
31, 1998 for the underlying properties, 80% of the underlying properties and
the net profits interests.
<TABLE>
<CAPTION>
80% of Net
Underlying Underlying Profits
Properties Properties Interests
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Proved reserves
Natural gas (Mcf)............................ 515,073 412,058 282,297
Oil (Bbls)................................... 4,030 3,224 2,193
Natural gas Equivalents (Mcfe)............... 539,253 431,402 295,455
Proved developed reserves
Natural gas (Mcf)............................ 435,328 348,262 249,215
Oil (Bbls)................................... 3,368 2,694 1,934
Natural gas Equivalents (Mcfe)............... 455,536 364,429 260,819
Future net revenues............................ $674,518 $539,615 $539,615
Present value discounted at 10% per annum...... $347,177 $277,742 $277,742
</TABLE>
The following table summarizes the changes in estimated pro forma proved
reserves attributable to the net profits interests and the changes in estimated
proved reserves of the underlying properties for the periods indicated. The
data is presented assuming the underlying properties were acquired and the net
profits interests were created prior to December 31, 1995 and the trust was
formed at that date. Reserve estimates for underlying properties that Cross
Timbers acquired between 1996 and 1998 are not available prior to the date
acquired. For purposes of calculating quantities of estimated proved reserves
of these properties as of December 31, 1995, 1996 and 1997, proved
28
<PAGE>
reserves are assumed to equal reserves at the acquisition date plus production
between December 31, 1995, 1996 or 1997 and the acquisition date.
<TABLE>
<CAPTION>
Net Profits Interests
Underlying Properties (Pro Forma)
---------------------------- ----------------------------
Gas Gas
Gas Oil Equivalents Gas Oil Equivalents
(Mcf) (Bbls) (Mcfe) (Mcf) (Bbls) (Mcfe)
------- ------ ----------- ------- ------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 445,836 4,442 472,488 251,306 2,481 266,192
Revisions, extensions,
discoveries and
additions............ 47,432 577 50,894 53,978 608 57,626
Production............ (36,143) (455) (38,873) (15,148) (191) (16,294)
------- ----- ------- ------- ----- -------
Balance, December 31,
1996................... 457,125 4,564 484,509 290,136 2,898 307,524
Revisions, extensions,
discoveries and
additions............ 68,837 180 69,917 (2,303) (356) (4,439)
Production............ (37,172) (470) (39,992) (8,809) (111) (9,475)
------- ----- ------- ------- ----- -------
Balance, December 31,
1997................... 488,790 4,274 514,434 279,024 2,431 293,610
Revisions, extensions,
discoveries and
additions............ 64,818 235 66,228 12,636 (122) 11,904
Production............ (38,535) (479) (41,409) (9,363) (116) (10,059)
------- ----- ------- ------- ----- -------
Balance, December 31,
1998................... 515,073 4,030 539,253 282,297 2,193 295,455
======= ===== ======= ======= ===== =======
Proved Developed Reserves
Balance, December 31,
1995................... 384,588 3,633 406,386 222,155 2,096 234,731
Balance, December 31,
1996................... 401,784 3,966 425,580 259,281 2,564 274,665
Balance, December 31,
1997................... 417,912 3,574 439,356 249,148 2,136 261,964
Balance, December 31,
1998................... 435,328 3,368 455,536 249,215 1,934 260,819
</TABLE>
Cross Timbers expects to spend $12 million per year for the next four years
to develop the underlying properties and expects that development activities
will moderate the rate of decline of proved reserves.
Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
The following table provides the summary calculation of the standardized
measure of discounted future net cash flows of the underlying properties and
net profits interests as of December 31, 1998:
<TABLE>
<CAPTION>
Net
Underlying Profits
Properties Interests
---------- ---------
(in thousands)
<S> <C> <C>
Future cash flows.......................................... $1,087,660 $595,301
Future costs:
Production............................................... 364,930 55,686
Development.............................................. 48,212 --
---------- --------
Future net cash flows...................................... 674,518 539,615
10% discount factor........................................ 327,341 261,873
---------- --------
Standardized measure....................................... $ 347,177 $277,742
========== ========
</TABLE>
29
<PAGE>
Regulation
Natural Gas Regulation. The availability, terms and cost of transportation
significantly affect sales of natural gas. The interstate transportation and
sale for resale of natural gas is subject to federal regulation, including
transportation rates, storage tariffs and various other matters, primarily by
the Federal Energy Regulatory Commission ("FERC"). Federal and state
regulations govern the price and terms for access to natural gas pipeline
transportation. The FERC's regulations for interstate natural gas transmission
in some circumstances may also affect the intrastate transportation of natural
gas.
While natural gas prices are currently unregulated, Congress historically
has been active in the area of natural gas regulation. Cross Timbers cannot
predict whether new legislation to regulate natural gas might be proposed, what
proposals, if any, might actually be enacted by Congress or the various state
legislatures, and what effect, if any, the proposals might have on the
operations of the underlying properties.
Sales of crude oil, condensate and natural gas liquids are not currently
regulated and are made at market prices. The FERC implemented regulations on
January 1, 1995, to establish an indexing system for transportation rates for
oil that could increase the cost of transporting oil to the purchaser. Cross
Timbers is not able to predict what effect, if any, these regulations might
have.
Environmental Regulation. Companies that are engaged in the oil and gas
industry are affected by federal, state and local laws regulating the discharge
of materials into the environment. Those laws may impact operations of the
underlying properties. Cross Timbers believes that it is in substantial
compliance with the environmental laws and regulations that apply to the
operations of the underlying properties. Cross Timbers has not previously
incurred material expenses in complying with environmental laws and regulations
that affect its operations of the underlying properties. It does not currently
expect that future compliance will have a material adverse effect on the trust
or the monthly distributions.
State Regulation. The various states regulate the production and sale of oil
and natural gas, including imposing requirements for obtaining drilling
permits, the method of developing new fields, the spacing and operation of
wells and the prevention of waste of oil and gas resources. States may regulate
rates of production and may establish maximum daily production allowables from
both oil and gas wells based on market demand or resource conservation, or
both.
Other Regulation. The Mineral Management Service of the United States
Department of Interior is evaluating existing methods of settling royalties on
federal and Native American oil and gas leases. A portion of the underlying
properties, primarily those located in Wyoming, involve federal leases.
Although the final rules could cause an increase in the federal royalties to be
paid on these properties and, correspondingly, decrease the revenue to Cross
Timbers and the trust from these properties, Cross Timbers does not believe
that the proposed rule changes will have a significant detrimental effect on
the distributions from the trust.
The petroleum industry is also subject to compliance with various other
federal, state and local regulations and laws. Some of those laws relate to
occupational safety, resource conservation and equal employment opportunity.
Cross Timbers does not believe that compliance with these laws will have a
material adverse effect upon the trust unitholders.
30
<PAGE>
Title to Properties
Cross Timbers believes that its title to the underlying properties is, and
the trust's title to the net profits interest will be, good and defensible in
accordance with standards generally accepted in the oil and gas industry.
The underlying properties are typically subject, in one degree or another,
to one or more of the following:
. royalties, overriding royalties and other burdens, under oil and gas
leases;
. contractual obligations (including, in some cases, development
obligations) arising under operating agreements, farmout agreements,
production sales contracts and other agreements that may affect the
properties or their titles;
. liens that arise in the normal course of operations, such as those for
unpaid taxes, statutory liens securing unpaid suppliers and contractors
and contractual liens under operating agreements;
. pooling, unitization and commutation agreements, declarations and
orders; and
. easements, restrictions, rights-of-way and other matters that commonly
affect property.
To the extent that these burdens and obligations affect Cross Timbers'
rights to production and the value of production from the underlying
properties, they have been taken into account in calculating the trust's
interests and in estimating the size and the value of the reserves attributable
to the net profits interests. Cross Timbers believes that the burdens and
obligations affecting the underlying properties and the net profits interests
are conventional in the industry for similar properties. Cross Timbers also
believes that the burdens and obligations do not in the aggregate materially
interfere with the use of the underlying properties and will not materially
adversely affect the value of the net profits interests.
Although the matter is not entirely free from doubt, Cross Timbers believes
that the net profits interests should constitute real property interests under
Oklahoma and Wyoming law, but not under Kansas law. Cross Timbers will record
the conveyances in the appropriate real property records of Kansas, Oklahoma
and Wyoming, the states in which the underlying properties are located. If
during the term of the trust Cross Timbers should become a debtor in a
bankruptcy proceeding, it is not entirely clear that the net profits interests
would be treated as real property interests under the laws of Oklahoma and
Wyoming, and they would not be so treated under Kansas law. If a determination
were made in a bankruptcy proceeding that a net profits interest did not
constitute a real property interest under applicable state law, it could be
designated an executory contract. An executory contract is a term used, but not
defined, in the federal bankruptcy code to refer to a contract under which the
obligations of both the debtor and the other party are so unsatisfied that the
failure of either to complete performance would constitute a material breach
excusing performance by the other. If a net profits interest were designated an
executory contract and rejected in the bankruptcy proceeding, Cross Timbers
would not be required to perform its obligations under the net profits interest
and the trust would seek damages as one of Cross Timbers' unsecured creditors.
Although no assurance can be given, Cross Timbers does not believe that the net
profits interests should be subject to rejection in a bankruptcy proceeding as
executory contracts.
Marketing
A subsidiary of Cross Timbers markets Cross Timbers' natural gas production
and the natural gas output of the gathering and processing systems operated by
other Cross Timbers subsidiaries. The natural gas is sold on a monthly basis to
third parties for the best available price, although Cross Timbers occasionally
enters into forward contracts for future deliveries. Oil production is
generally marketed at the
31
<PAGE>
wellhead to third parties at the best available price. The marketing subsidiary
may arrange to accumulate oil from a number of different locations and
transport it to a central point where the greater volume will provide a higher
price, net of the transportation costs. Cross Timbers arranges for some of its
natural gas to be processed by unaffiliated third parties and markets the
natural gas liquids from that processing in a similar manner as it markets its
oil. The natural gas attributable to the underlying properties will be marketed
under the existing sales contracts. Contracts covering production from the
Major County area are for the life of the lease, and the contract for the
majority of production from the Hugoton area expires in 2004. If new contracts
are entered into with unaffiliated third parties, the proceeds from sales under
those new contracts will be included in gross proceeds from the underlying
properties. If new contracts are entered into with the marketing subsidiary, it
may charge Cross Timbers a fee that may not exceed 2% of the sales price of the
oil and natural gas received from unaffiliated third parties. The sales price
is net of any deductions for transportation from the wellhead to the
unaffiliated third parties and any gravity or quality adjustments.
Year 2000
"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations. Computer systems
that are not Year 2000 compliant by January 1, 2000 may cause material adverse
effects to companies and organizations that rely upon those systems. The
trust's timely receipt of royalty income and disbursement of distributable
income to trust unitholders will largely depend upon performance of computer
systems of Cross Timbers, the trust's transfer agent and other third parties.
These third parties include oil and natural gas purchasers and significant
service providers such as natural gas plant and gathering system operators.
Because the trust will not use the trustee's computer systems to any
significant degree, the trustee's Year 2000 compliance should not significantly
affect the trust.
Cross Timbers is in the process of reviewing its computer systems and
computer-controlled field equipment and making the necessary modifications for
Year 2000 compliance. Cross Timbers has completed most of the modifications of
its primary accounting and land computer programs and is currently testing
these modifications. Some of Cross Timbers' critical field equipment, such as
natural gas compressors, are partially controlled or regulated by embedded
computer chips. Cross Timbers is in the process of reviewing this equipment.
Remediation and testing of all Cross Timbers' computer systems and equipment is
expected to be completed by June 1999. Based on its review, remediation efforts
and the results of testing to date, Cross Timbers does not believe that timely
modification of its computer systems for Year 2000 compliance represents a
material risk to the trust. Cross Timbers' costs related to Year 2000
compliance efforts to date have not been material, and it expects that future
costs will not be material. The trust will not incur any of Cross Timbers' Year
2000 costs.
Cross Timbers has identified significant third parties whose Year 2000
compliance could affect Cross Timbers, and is in the process of formally
inquiring about their Year 2000 status. Despite its efforts to assure that such
third parties are Year 2000 compliant, Cross Timbers cannot provide assurance
that all significant third parties will achieve compliance in a timely manner.
A third party's failure to achieve Year 2000 compliance could have a material
adverse effect on Cross Timbers' operations and cash flow, and therefore have a
material adverse impact on timely trust distributions to trust unitholders. For
example a third party might fail to deliver revenue related to the trust's net
profits interest to Cross Timbers, or Cross Timbers might fail to deliver the
income of the net profits interest to the trust. In these situations, the
trustee would be unable to make distributions of those amounts to trust
unitholders on a timely basis.The potential effect of Year 2000 non-compliance
by third parties is currently unknown.
Cross Timbers is currently developing contingency plans in the event of
potential problems resulting from failure of Cross Timbers' or significant
third parties' computer systems on January 1,
32
<PAGE>
2000. No contingency plans have been completed to date. Cross Timbers expects
these contingency plans to be completed by September 1999.
Litigation
Cross Timbers is a defendant in two lawsuits that could, if adversely
determined, decrease the net proceeds from certain of the underlying
properties.
A class action lawsuit, Booth, et al. v. Cross Timbers Oil Company, was
filed on April 3, 1998 in the District Court of Dewey County, Oklahoma by
royalty owners of natural gas wells in Oklahoma. The plaintiffs allege that
since 1991 Cross Timbers has underpaid royalty owners as a result of
(1) reducing royalties for improper charges for production, marketing,
gathering, processing and transportation costs and (2) selling natural gas
through affiliated companies at prices less favorable than those paid by third
parties. Cross Timbers believes that it has strong defenses to this lawsuit and
intends to vigorously defend its position. However, if a judgment or settlement
increased the amount of future royalty payments, the trust would bear its
proportionate share of the increased royalties through reduced net proceeds.
The amount of any reduction in net proceeds is not presently determinable, but
is not expected to be material.
A second lawsuit, United States of America ex rel. Grynberg v. Cross Timbers
Oil Company, et al., was filed in the United States District Court for the
Western District of Oklahoma. This action alleges that in computing royalties
payable for natural gas produced from federal leases and lands owned by Native
Americans, Cross Timbers has mismeasured the volume of natural gas and
wrongfully analyzed its heating content. The suit, which was brought under the
qui tam provisions of the U.S. False Claims Act, seeks treble damages for the
unpaid royalties, with interest, civil penalties and an order for Cross Timbers
to cease the allegedly improper measuring practices. This lawsuit is one of
more than 75 suits filed nationwide by the same plaintiff alleging similar
claims against over 300 producers and pipeline companies. Royalties paid by
Cross Timbers for production from underlying properties on federal and Native
American lands during 1998 totalled approximately $2.8 million. Cross Timbers
believes that the allegations of this lawsuit are without merit. However, an
order to change measuring practices or a related settlement could adversely
affect the trust by reducing net proceeds in the future by an indeterminable
amount.
Damages relating to production prior to the formation of the trust will be
borne by Cross Timbers.
COMPUTATION OF NET PROCEEDS
The provisions governing the computation of the net proceeds are detailed
and extensive. The following description of the net profits interests and the
computation of net proceeds is subject to and qualified by the more detailed
provisions of the conveyances of the net profits interests that are filed as
exhibits to the registration statement. See "Available Information."
Net Profits Interests
The net profits interests are defined net profits interests carved from the
underlying properties. Each net profits interest entitles the trust to receive
80% of the net proceeds from the sale of oil and natural gas produced from the
underlying properties.
The amounts paid to the trust for the net profits interests are based on the
definitions of "gross proceeds" and "net proceeds" set forth in the conveyances
and described below. Under the conveyances, net proceeds are computed monthly
(a "Computation Period"). Cross Timbers pays 80% of the aggregate net proceeds
attributable to a Computation Period to the trust on or before the
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last business day of the month following the Computation Period. Cross Timbers
will not pay to the trust interest on the net proceeds held by Cross Timbers
prior to payment to the trust. The trustee makes distributions to trust
unitholders monthly. See "Description of the Trust Units--Distributions and
Income Computations."
Net proceeds equal the excess of gross proceeds over production costs and
excess production costs attributable to a prior Computation Period. For
royalty and overriding royalty interests, production costs are zero.
Gross proceeds means the amounts received by Cross Timbers from sales of
oil and natural gas produced from the underlying properties, after deducting:
. all general property (ad valorem), production, severance, sales,
gathering, excise and other taxes and gathering costs if they are
deducted or excluded from the proceeds of sales; and
. any payment made to the owner of an underlying property for
-- natural gas not taken, but to the extent payments are allocated to
natural gas taken in the future, payments are included, without
interest, in gross proceeds when such natural gas is taken;
-- damages, other than drainage or reservoir injury;
-- rental for reservoir use; and
-- payments in connection with the drilling of any well.
Gross proceeds does not include (1) consideration for the transfer or sale
of any underlying property by Cross Timbers or any subsequent owner to any new
owner or (2) any amount for oil and natural gas lost in production or
marketing or used by the owner of the underlying properties in drilling,
production and plant operations. Gross proceeds includes payments for future
production if they are not subject to repayment in the event of insufficient
subsequent production.
Production costs means, on a cash basis, generally the sum of:
. all payments to mineral or landowners, such as royalties or other
burdens against production, delay rentals, shut-in natural gas payments,
minimum royalty or other payments for drilling or deferring drilling;
. any taxes paid by the owner of an underlying property to the extent not
deducted in calculating gross proceeds, including estimated and accrued
ad valorem and other property taxes;
. costs paid by the owner of an underlying property under any joint
operating agreement;
. all other costs, expenses and liabilities of exploring for, drilling,
operating and producing oil and natural gas, including allocated
expenses such as labor, vehicle and travel costs and materials;
. costs or charges associated with gathering, treating and processing
natural gas;
. certain interest costs;
. any overhead charge;
. amounts previously included in gross proceeds but subsequently paid as a
refund, interest or penalty;
. costs and expenses for renewals or extensions of leases; and
. at the option of the owner of an underlying property, accruals for costs
approved under authorizations for expenditure.
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As is customary in the oil and natural gas industry, Cross Timbers charges
an overhead fee to operate the underlying properties. The operating activities
include various engineering, accounting and administrative functions. The fee
is based on a monthly charge per active operated well, and it totalled $6.2
million in 1998 for all underlying properties operated by Cross Timbers. The
fee is adjusted annually and will increase or decrease each year based on
changes in the year-end index of average weekly earnings of crude petroleum and
natural gas workers.
Excess production costs are the excess of production costs over gross
proceeds, plus interest accrued at the prime rate. Therefore, if production
costs exceed gross proceeds for a Computation Period, the trust will receive no
payment for that period, and excess production costs will be carried over to
the following month as a production cost in determining the excess of gross
proceeds over production costs for that following month.
Gross proceeds and production costs are calculated on a cash basis, except
that certain costs, primarily ad valorem taxes and expenditures of a material
amount, may be determined on an accrual basis. For convenience in complying
with state tax laws, the net profits interests were created by three separate
conveyances, one for each of Kansas, Oklahoma and Wyoming, the three states in
which the underlying properties are located. Net proceeds are calculated
separately for the underlying properties covered by each conveyance, so excess
production costs in one state do not reduce net proceeds from the others.
Cash distributions generally will include one month's net proceeds less
related trustee expenses and administrative charges. However, the first
distribution, which will be made in April 1999 to record holders as of March
31, 1999, will include net proceeds received, less trustee's expenses, during
the period December 1, 1998 through February 28, 1999. This initial
distribution will also be adjusted to exclude any development charges on the
underlying properties incurred through December 31, 1998, which Cross Timbers
will bear.
Additional Provisions
If a controversy arises as to the sales price of any oil or natural gas,
then for purposes of determining gross proceeds:
. amounts withheld or placed in escrow by a purchaser are not considered
to be received by the owner of the underlying property until actually
collected;
. amounts received by the owner of the underlying property and promptly
deposited with a nonaffiliated escrow agent will not be considered to
have been received until disbursed to it by the escrow agent; and
. amounts received by the owner of the underlying property and not
deposited with an escrow agent will be considered to have been received.
The trust is not liable to the owner of the underlying properties or the
operators for any operating, capital or other costs or liabilities attributable
to the underlying properties. The trustee is not obligated to return any income
received from the net profits interests. Any overpayments made to the trust due
to adjustments to prior calculations of net proceeds or otherwise will reduce
future amounts payable to the trust until Cross Timbers recovers the
overpayments plus interest at the prime rate.
The conveyances permit Cross Timbers to assign without the consent or
approval of the trust unitholders all or any part of the underlying properties,
subject to the net profits interests. The trust unitholders are not entitled to
any proceeds of a transfer. Following a transfer, the underlying properties
will continue to be subject to the net profits interests, and the net proceeds
attributable to the transferred property will be calculated separately and paid
by the transferee. The conveyances
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have been recorded in the appropriate real property records to give notice of
the net profits interests to Cross Timbers' creditors and transferees.
Upon notice from Cross Timbers, the trust is required to sell for cash net
profits interests that relate to underlying properties which Cross Timbers is
selling to an unaffiliated party. These types of sales may not exceed in any
calendar year 1% of the discounted present value of estimated future net
revenues for the proved reserves of the underlying properties allocated to the
trust's net profits interests, as set forth in the most recent reserve report.
The trust will receive 80% of the net proceeds from a sale.
As an operator of an underlying property, Cross Timbers may enter into
farmout, operating, participation, joint venture and other similar agreements
covering the property if Cross Timbers believes it to be advantageous to the
working interests owners of the property. The net profits interest held by the
trust would then be calculated on the interest retained by Cross Timbers under
the agreement and not on Cross Timbers' original interest before modification
by the agreement. Cross Timbers may enter into any of these agreements without
the consent or approval of the trustee or any trust unitholder. However, Cross
Timbers' interest in entering into any of these types of agreements should be
parallel with that of trust unitholders because of Cross Timbers' retained 20%
net profits interest in the underlying properties.
Cross Timbers and any transferee will have the right to abandon any well or
property if it believes the well or property ceases to produce or is not
capable of producing in commercially paying quantities. Upon termination of the
lease, that portion of the net profits interests relating to the abandoned
property will be extinguished.
Cross Timbers must maintain books and records sufficient to determine the
amounts payable for the net profits interests. Quarterly and annually, Cross
Timbers must deliver to the trustee a statement of the computation of the net
proceeds for each Computation Period. Cross Timbers will cause the annual
computation of net proceeds to be audited. The audit cost will be borne by the
trust.
FEDERAL INCOME TAX CONSEQUENCES
This section summarizes the material federal income tax consequences of the
ownership and sale of trust units. Many aspects of federal income taxation that
may be relevant to a particular taxpayer or to certain types of taxpayers
subject to specific tax treatment are not addressed. In addition, the tax laws
can and do change regularly and any future changes could have an adverse effect
on the ownership or sale of trust units. The trust will not request advance
rulings from the IRS dealing with the tax consequences of ownership of trust
units but will rely on the opinion of Butler & Binion, L.L.P. ("Tax Counsel")
regarding the classification of the trust and certain federal income tax
consequences described below, which will be confirmed at the time of the
closing. Tax Counsel believes that its opinion is in accordance with the
present position of the IRS regarding grantor trusts. The tax opinion is not
binding on the IRS or the courts, however, and no assurance can be given that
the IRS or the courts will agree with the opinion.
Summary of Legal Opinions
Tax Counsel is of the opinion that, for federal income tax purposes,
. the trust will be treated as a grantor trust and not a business entity
taxable as a partnership or a corporation,
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. the income from the net profits interests will be royalty income subject
to an allowance for depletion, and
. subject to the limitations described below, a trust unitholder will be
allowed a Section 29 tax credit with respect to his share of qualifying
natural gas production from tight sands attributable to the net profits
interests.
Tax Counsel advises that, unless noted otherwise, legal conclusions stated in
this section constitute the opinion of Tax Counsel.
No ruling is being requested from the IRS with respect to the trust or trust
unitholders. Therefore, the IRS could challenge the opinions and statements set
forth herein (which do not bind the IRS or the courts), and the IRS could win
in court if it did challenge these matters.
Classification and Taxation of the Trust
In the opinion of Tax Counsel, under current law, the trust will be taxable
as a grantor trust and not as a business entity. As a grantor trust, the trust
will not be subject to tax at the trust level. For tax purposes, the grantors,
who in this case are the trust unitholders, will be considered to own the
trust's income and principal as though no trust were in existence. A grantor
trust simply files an information return, reporting all items of income, credit
or deductions which must be included in the tax returns of the trust
unitholders based on their respective accounting methods and taxable years
without regard to the accounting method and tax year of the trust. If, contrary
to the opinion of Tax Counsel, the trust was determined to be an unincorporated
business entity, it would be taxable as a partnership unless it elected to be
taxed as a corporation. The principal tax consequence of the trust's being
treated as a partnership for tax purposes would be that all trust unitholders
would report their share of income from the trust on the accrual method of
accounting regardless of their own method of accounting.
Direct Taxation of Trust Unitholders
Since the trust will be treated as a grantor trust for federal income tax
purposes, each trust unitholder will be taxed directly on his share of trust
income and will be entitled to claim his share of trust deductions. Each trust
unitholder will recognize taxable income when the trust receives or accrues it,
even if it is not distributed until later. Trust unitholders will report their
trust income and expenses consistent with their method of accounting and their
tax year.
Reporting of Trust Income and Expenses
The trustee intends to treat each royalty payment it receives as the taxable
income of the trust unitholders who own trust units on the day of receipt
(i.e., the last business day of each calendar month). Similarly, the trustee
intends to pay expenses only on the day it receives a royalty payment and to
treat all expenses paid on a royalty receipt day as the expenses of the trust
unitholder to whom the royalty income received on that date is distributed. In
most cases, therefore, the income and expenses of the trust for a period will
be reported as belonging to the trust unitholder to whom the distribution for
that period is made and the amount of the distribution for a trust unit will
generally equal the net income allocated to that trust unit, determined without
regard to depletion. This correlation may not exist if, for example, the
trustee were to establish a cash reserve to pay estimated future expenses or
pay an expense with borrowed funds. Moreover, it is possible that the IRS would
attempt to impute income to persons who are trust unitholders when a royalty
payment on the net profits interests accrued, to disallow the deduction of
administrative expenses to persons who were not trust unitholders when the
expenses were incurred, or both. If the IRS were successful, trust income might
be taxed to trust unitholders other than those who received the distribution
relating to that income. Also, an accrual basis trust unitholder might realize
royalty income in a tax year earlier than that reported by the trustee.
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Royalty Income and Depletion
In the opinion of Tax Counsel, the income from the net profits interests
will be royalty income qualifying for an allowance for depletion. The depletion
allowance must be computed separately by each trust unitholder for each oil or
gas property (within the meaning of Section 614 of the Internal Revenue Code of
1986, as amended (the "Code")). Tax Counsel understands that the IRS is
presently taking the position that a net profits interest carved from multiple
properties is a single property for depletion purposes. Accordingly, the trust
intends to take the position that each net profits interest transferred to the
trust by a conveyance is a single property for depletion purposes. It would
change this position if a different method were established by the IRS or the
courts.
The deduction for depletion is determined annually and is the greater of
cost depletion or, if allowable, percentage depletion. Royalty income from
production attributable to trust units owned by "independent producers" will
qualify for percentage depletion. An individual or entity with production of
the equivalent of 1,000 barrels of oil per day or less is an "independent
producer." Percentage depletion is a statutory allowance equal to 15% of the
gross income from production from a property, subject to a net income
limitation of 100% of the taxable income from the property, computed without
regard to depletion deductions and certain loss carrybacks. The depletion
deduction attributable to percentage depletion for a taxable year is limited to
65% of the taxpayer's taxable income for the year before allowance of
"independent producers" percentage depletion. Unlike cost depletion, percentage
depletion is not limited to the adjusted tax basis of the property, although it
reduces the adjusted tax basis (but not below zero).
Cross Timbers believes that trust unitholders who purchase trust units in
this offering will derive a substantially greater benefit from cost depletion
than from percentage depletion.
In computing cost depletion for each property for any year, the adjusted tax
basis of the property at the beginning of the year is divided by the estimated
total units (e.g., Bbls of oil or Mcf of gas) recoverable from the property to
determine the per-unit allowance for the property. The per-unit allowance is
then multiplied by the number of units produced and sold from the property
during the year. Cost depletion for a property cannot exceed the adjusted tax
basis of the property. Since the trust will be taxed as a grantor trust, each
trust unitholder will be deemed to own an undivided interest in the net profits
interests and other assets, if any, of the trust and will compute cost
depletion using his basis in his trust units. Information will be provided to
each trust unitholder reflecting how his basis should be allocated among each
property represented by his trust units. To the extent the depletion tax
deduction exceeds cash distributions per trust unit, that excess can be
deducted from the taxpayer's other sources of taxable income.
Other Income and Expenses
It is anticipated that the only other income of the trust will be interest
income earned on funds held as a reserve. Other expenses of the trust will
include any state and local taxes imposed on the trust and administrative
expenses of the trustee. Although the issue has not been finally resolved, Tax
Counsel believes that all or substantially all of those expenses are deductible
in computing adjusted gross income and, therefore, are not the type of
miscellaneous itemized deductions that are allowable only to the extent that
they aggregate more than 2% of adjusted gross income.
Alternative Minimum Tax
All taxpayers are subject to an alternative minimum tax. Alternative minimum
taxable income ("AMTI") is the taxpayer's taxable income recomputed with
various "adjustments" plus "items of tax preference." In the case of persons
other than "independent producers," tax preferences include the excess of the
aggregate percentage depletion deductions for an oil or gas property over the
adjusted
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tax basis of the property. The alternative minimum tax rate for noncorporate
taxpayers (other than married persons filing separately) is 26% up to $175,000
and 28% over $175,000 of AMTI exceeding an exemption amount, which varies
between $45,000 and zero. Alternative minimum tax ("AMT") is the excess of a
taxpayer's "tentative minimum tax" for a tax year over his "regular" tax for
that year. The tentative minimum tax is determined by multiplying the excess of
AMTI over the applicable exemption amount by 26% up to $175,000 and 28% over
$175,000 and subtracting the AMT foreign tax credit. Reduced maximum AMT tax
rates apply to net capital gains and certain other gains.
Since the effect of the AMT varies depending upon each trust unitholder's
personal tax and financial position, each prospective investor is advised to
consult with his own tax advisor concerning the effect of the AMT on him.
Section 29 Tight Sands Natural Gas Tax Credit
Some of the natural gas production attributable to the net profits interests
is produced from tight sands formations. Subject to certain statutory
requirements, taxpayers are entitled to the Section 29 tax credit for
production and sale of certain natural gas produced from tight formations
("tight sands"). The Section 29 tax credit applies to tight sands natural gas
produced and sold to an unrelated party prior to January 1, 2003 from wells
drilled prior to January 1, 1993 and after November 5, 1990 or after December
31, 1979 if the formation was dedicated to interstate commerce, within the
meaning of the Natural Gas Policy Act of 1978, prior to April 20, 1977. The
Section 29 tax credit for qualifying tight sands natural gas is equal to $3.00
per barrel of oil equivalent (i.e., 5.8 MMBtu), or approximately $.52 per
MMBtu. The credit is reduced by a formula computation as the price of oil
("reference price") rises above an inflation adjusted amount. Because the
calendar year 1998 reference price did not exceed the inflation adjusted
amount, the credit was not reduced in 1998 and is not expected to be reduced in
1999. In the opinion of Tax Counsel, if the requisite statutory requirements
are met, the trust unitholders will be eligible to claim the Section 29 tax
credit for sales of qualified tight sands natural gas production included in
the calculation of the net profits interests. Cross Timbers believes that all
of the statutory requirements have been or will be met on substantially all of
the tight sands wells.
The Section 29 tax credit allowable for any taxable year cannot exceed the
excess, if any, of the taxpayer's regular tax liability for that taxable year,
as reduced by the taxpayer's foreign tax credits and certain nonrefundable
credits, over the taxpayer's tentative minimum tax liability for that year. Any
amount of Section 29 tax credit disallowed for the tax year solely because of
this limitation will increase the taxpayer's credit for prior year minimum tax
liability. This credit may be carried forward indefinitely as a credit against
the taxpayer's regular tax liability, subject, however, to the limitation
described in the preceding sentence. There is no provision for the carryback or
carryforward of the Section 29 tax credit in any other circumstances. Hence, a
trust unitholder may not receive the full benefit of the tax credit depending
on his particular circumstances.
Non-Passive Activity Income and Loss
The income and expenses of the trust and the Section 29 tax credit will not
be taken into account in computing the passive activity losses and income under
Code Section 469 for a trust unitholder who acquires and holds trust units as
an investment. Section 29 tax credits generated by an investment in the trust
units, therefore, can be utilized to offset regular tax liability on income
from any source, subject to the limitations discussed in "Section 29 Tight
Sands Natural Gas Tax Credit" above.
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Unrelated Business Taxable Income
Certain organizations that are generally exempt from tax under Code Section
501 are subject to tax on certain types of business income defined in Code
Section 512 as unrelated business income. In the opinion of Tax Counsel, the
income of the trust will not be unrelated business taxable income so long as
the trust units are not "debt-financed property" within the meaning of Code
Section 514(b). In general, a trust unit would be debt-financed if the trust
unitholder incurs debt to acquire a trust unit or otherwise incurs or maintains
a debt that would not have been incurred or maintained if the trust unit had
not been acquired.
Sale of Trust Units; Depletable Basis
Generally, a trust unitholder will realize gain or loss on the sale or
exchange of his trust units measured by the difference between the amount
realized on the sale or exchange and his adjusted basis for such trust units.
Gain or loss on the sale of trust units by a trust unitholder who is not a
dealer of the trust units will be a long-term capital gain, taxable at a
maximum rate of 20%, if the trust units have been held for more than 12 months.
A portion of the long-term gain will be treated as ordinary income to the
extent of the depletion recapture amount explained below. A trust unitholder's
basis in his trust units will be equal to the amount he paid for the trust
units, reduced by deductions for depletion claimed by the trust unitholder, but
not below zero. Upon the sale of the trust units, a trust unitholder must treat
as ordinary income his depletion recapture amount, which is an amount equal to
the lesser of (1) the gain on such sale or (2) the sum of the prior depletion
deductions taken on the trust units, but not in excess of the initial basis of
the trust units. It is possible that the IRS would take the position that a
portion of the sales proceeds is ordinary income to the extent of any accrued
income at the time of sale allocable to the trust units sold, but which has not
been distributed to the selling trust unitholder.
Taxation of Foreign Holders
Unless the election described below is made, a nonresident alien individual,
foreign corporation, or foreign estate or trust (a "Foreign holder") will be
subject to federal income withholding tax on his share of gross royalty income
from the net profits interests at a 30% rate, or lower treaty rate if
applicable and proper evidence is supplied to the withholding agent, without
any deductions. Gain realized on a sale of a trust unit by a Foreign holder
will be subject to federal income tax only if:
. the gain is otherwise effectively connected with business conducted by
the Foreign holder in the United States;
. the Foreign holder is an individual who is present in the United States
for at least 183 days in the year of the sale;
. the Foreign holder owns more than a 5% interest in the trust; or
. the trust units cease to be regularly traded on an established
securities exchange.
Gain realized by a Foreign holder upon the sale by the trust of all or any
part of the net profits interests would be subject to federal income tax.
The trust unitholders who are Foreign holders may elect under Code Section
871 or Section 882 or similar provisions of applicable treaties to treat income
attributable to the net profits interests as effectively connected with the
conduct of a trade or business in the United States. The Foreign holder will
then be taxed at regular federal income tax rates on the net income
attributable to the net profits interests, including gain recognized on the
disposition of trust units. Absent a treaty exception, the net income of a
corporate Foreign holder which has made such an election will also be subject
to the "branch profits tax" imposed under Code Section 884. To claim the
deductions allowable in computing net income, including cost depletion, an
electing Foreign holder will have to file a United
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States income tax return. To avoid withholding, an electing Foreign holder will
have to provide proper certificates or other evidence to the withholding agent.
Once made, the election is irrevocable unless an applicable treaty allows the
election to be made annually. The election is applicable to all income and gain
realized by the Foreign holder on any real property interests located in the
United States, including those interests held through partnerships, fixed
investment trusts, and other pass-through entities.
Backup Withholding
In general, distributions of trust income will not be subject to "backup
withholding" unless: (1) the trust unitholder is an individual or other
noncorporate taxpayer and (2) the trust unitholder fails to comply with certain
reporting procedures.
Tax Shelter Registration
The Company does not believe that the trust will meet the requirements to
register as a "tax shelter" under Code Section 6111. However, it is possible
that those requirements may be met for any trust unitholders whose investment
base is reduced by borrowing. To avoid any potential difficulty, the trust will
be registered as a tax shelter with the IRS. The trustee will furnish the tax
shelter registration number to each transferee of trust units and to each trust
unitholder. Each trust unitholder must disclose this number by attaching Form
8271 to his tax return.
Issuance of a tax shelter registration number does not indicate this
investment or the claimed tax benefits have been reviewed, examined or approved
by the IRS.
Reports
The trustee will furnish to trust unitholders of record quarterly and annual
reports in order to permit computation of their tax liability. See "Description
of the Trust Units--Periodic Reports."
STATE TAX CONSIDERATIONS
The following is a brief summary of information regarding state income taxes
and other state tax matters affecting the trust and the trust unitholders.
Trust unitholders are urged to consult their own legal and tax advisors on
these matters.
Income Tax Considerations
Wyoming presently does not have a state income tax on resident or
nonresident individuals. Kansas and Oklahoma impose income taxes on residents
and, for certain types of income, nonresidents. Trust unitholders may also be
subject to taxation by their state of residence on income derived from the
trust.
Kansas tax counsel, Morris, Laing, Evans, Brock & Kennedy, Chartered, is of
the opinion that, although there is no determinative precedent and Kansas
taxing authorities may adopt a different view:
. the activities of the trust and the trustee, as permitted under the
Indenture and the conveyance, will not subject either the trust or the
trustee to income taxation by the State of Kansas; and
. a trust unitholder who is not a Kansas resident will not be subject to
Kansas income tax and will not be required to file a Kansas income tax
return, if
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-- the trust unitholder does not use his trust units or his indirect
interest in the net profits interest in conducting a trade,
business, profession or occupation in Kansas, and
-- the trust unitholder is not subject to Kansas income tax for some
other reason.
In providing this opinion, Kansas tax counsel has assumed, among other things,
that the trust:
. will not own any property in Kansas other than the net profits
interests;
. will not conduct any activities in Kansas other than ownership of the
net profits interests for the benefit of trust unitholders; and
. is a grantor trust for federal income tax purposes.
The income tax law of Oklahoma is based on federal income tax laws. Assuming
the trust is taxed as a grantor trust for federal income tax purposes, the
trust unitholders will be subject to Oklahoma income tax on their share of
income from the Oklahoma net profits interests. It is uncertain whether trust
unitholders who are nonresidents of Oklahoma will be taxed in that state on
gains from sales of trust units.
The trustee will provide information concerning the trust sufficient to
identify the income of the trust allocable to each state. Trust unitholders
should consult their own tax advisors to determine their income tax filing
requirements for their share of income of the trust allocable to states
imposing an income tax on that income.
Probate and Property Considerations
Kansas tax counsel is also of the opinion that under Kansas law, except as
noted below, the trust units will be treated the same as other securities. They
will be treated as interests in intangible personal property located where the
trust unitholder resides rather than as interests in tangible property in
Kansas.
However, if the certificate representing a trust unit is physically located
in Kansas at the time of the death of the owner who is not a Kansas resident,
the Kansas courts by statute have jurisdiction to probate and administer the
trust unit. In that event, unless Kansas courts determine otherwise, the estate
tax and devolution of title laws of Kansas would apply to the trust unit. This
could make inheritance and related matters pertaining to trust units held by
Kansas non-residents more onerous than if the trust units were treated as
interests in intangible personal property located in the state of the owner's
residence.
The trust units may constitute real property or an interest in real property
under the inheritance, estate and probate laws of Oklahoma and Wyoming. If the
trust units are held to be real property or an interest in real property under
the laws of those states, the trust units may be subject to devolution, probate
and administration and estate taxes under the laws of those states.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
regulates pension, profit-sharing and other employee benefit plans to which it
applies. ERISA also contains standards for persons who are fiduciaries of those
plans. In addition, the Code provides similar requirements and standards which
are applicable to these types of plans and to individual retirement accounts,
whether or not subject to ERISA (collectively, "Qualified Plans").
A fiduciary of a Qualified Plan should carefully consider fiduciary
standards under ERISA regarding the Qualified Plan's particular circumstances
before authorizing an investment in trust units. A fiduciary should consider
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<PAGE>
.whether the investment satisfies the prudence requirements of Section
404(a)(1)(B) of ERISA,
. whether the investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA, and
. whether the investment is in accordance with the documents and
instruments governing the Qualified Plan as required by Section
404(a)(1)(D) of ERISA.
A fiduciary should also consider whether an investment in trust units might
result in direct or indirect nonexempt prohibited transactions under Section
406 of ERISA and Code Section 4975. In deciding whether an investment involves
a prohibited transaction, a fiduciary must determine whether there are "plan
assets" in the transaction. On November 13, 1986, the Department of Labor
published final regulations concerning whether or not a Qualified Plan's
assets would be deemed to include an interest in the underlying assets of an
entity for purposes of the reporting, disclosure and fiduciary responsibility
provisions of ERISA and analogous provisions of the Code. These regulations
provide that the underlying assets of an entity will not be considered "plan
assets" if the equity interests in the entity are a publicly offered security.
Cross Timbers expects that at the time of the sale of the trust units in this
offering, they will be publicly offered securities. Fiduciaries, however, will
need to determine whether the acquisition of trust units is a nonexempt
prohibited transaction under the general requirements of ERISA Section 406 and
Code Section 4975.
The prohibited transaction rules are complex, and persons involved in
prohibited transactions are subject to penalties. For that reason, potential
Qualified Plan investors should consult with their counsel to determine the
consequences under ERISA and the Code of their acquisition and ownership of
trust units.
DESCRIPTION OF THE TRUST INDENTURE
The following information and the information included under "Description
of the Trust Units" summarize information contained in the trust indenture.
This summary may not contain all the information that is important to you. For
more detailed provisions concerning the Trust, you should read the trust
indenture. A copy of the trust indenture was filed as an exhibit to the
Registration Statement. See "Available Information."
Creation and Organization of the Trust; Amendments
Cross Timbers created the net profits interests and conveyed them to the
trust in exchange for 40,000,000 trust units.
Cross Timbers organized the trust under Texas law to acquire and hold the
net profits interests for the benefit of the trust unitholders. Neither the
trust nor the trustee has any control over or responsibility for costs
relating to the operation of the underlying properties. Neither Cross Timbers
nor other operators of the underlying properties have any contractual
commitments to the trust to conduct further drilling on or to maintain their
ownership interest in any of these properties. For a description of the
underlying properties and other information relating to them, see "The Net
Profits Interests and the Underlying Properties."
The beneficial interest in the trust is divided into 40,000,000 trust
units. Each of the trust units represents an equal undivided portion of the
trust. You will find additional information concerning the trust units in
"Description of the Trust Units."
Amendment of the trust indenture requires a vote of holders of 80% or more
of the outstanding trust units. However, no amendment may--
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<PAGE>
. increase the power of the trustee to engage in business or investment
activities;
. alter the rights of the trust unitholders as among themselves; and
. permit the trustee to distribute the net profits interests in kind.
Assets of the Trust
The assets of the trust consist of net profits interests and cash and
temporary investments being held for the payment of expenses and liabilities
and for distribution to the trust unitholders. You will find information
relating to the assets of the trust in "The Net Profits Interests and the
Underlying Properties."
Duties and Limited Powers of the Trustee
The duties of the trustee are specified in the trust indenture and by the
laws of the State of Texas. The trustee's principal duties consist of:
. collecting income attributable to the net profits interests;
. paying expenses, charges and obligations of the trust from the trust's
income and assets;
. distributing distributable income to the trust unitholders; and
. taking any action it deems necessary and advisable to best achieve the
purposes of the trust.
If a trust liability is contingent or uncertain in amount or not yet
currently due and payable, the trustee may create a cash reserve to pay for the
liability. If the trustee determines that the cash on hand and the cash to be
received is insufficient to cover the trust's liability, the trustee may borrow
funds required to pay the liabilities. The trustee may borrow the funds from
any person, including itself. The trustee may also mortgage the assets of the
trust to secure payment of the indebtedness. If the trustee borrows funds, the
trust unitholders will not receive distributions until the borrowed funds are
repaid.
Each month, the trustee will pay trust obligations and expenses and
distribute to the trust unitholders the remaining proceeds received from the
net profits interests. The cash held by the trustee as a reserve against future
liabilities or for distribution at the next distribution date must be invested
in:
. interest bearing obligations of the United States government;
. repurchase agreements secured by interest-bearing obligations of the
United States government; or
. bank certificates of deposit.
The trust may not acquire any asset except the net profits interests and
cash, and it may not engage in any investment activity except investing cash on
hand.
At the request of Cross Timbers, the trustee must sell net profits interests
relating to the underlying properties sold by Cross Timbers to an unaffiliated
third party if in any calendar year the net profits interests sold do not
exceed 1% of the discounted present value of estimated future net revenues for
the proved reserves of the trust's net profits interests, as set forth in the
most recent reserve report.
The trustee may sell the net profits interests in any of the following
circumstances:
. the sale does not involve a material part of the trust's assets and is
in the best interests of the trust unitholders. A majority of the trust
units represented at a meeting of the trust unitholders where a quorum
is present must approve the sale; or
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<PAGE>
. the sale is in the best interests of the trust unitholders, constitutes
a material part of the trust's assets and holders representing 80% of
the outstanding trust units approve the sale;
Upon termination of the trust the trustee must sell the net profits
interests. No trust unitholder approval is required.
The trustee will distribute the net proceeds from any sale of the net
profits interests to the trust unitholders.
The trustee may require any trust unitholder to dispose of his trust units
if an administrative or judicial proceeding seeks to cancel or forfeit any of
the property in which the trust holds an interest because of the nationality or
any other status of that trust unitholder. If a trust unitholder fails to
dispose of his trust units, the trustee has the right to purchase them and to
borrow funds to make that purchase.
The trustee may agree to modifications of the terms of the Conveyances or to
settle disputes involving the Conveyances. The trustee may not agree to
modifications or settle disputes involving the royalty part of the conveyances
if these actions would change the character of the net profits interests in
such a way that (1) the net profits interests become working interests, or (2)
the trust becomes an operating business.
Liabilities of the Trust
Because the trust does not conduct an active business and the trustee has
little power to incur obligations, Cross Timbers expects that the trust will
only incur liabilities for routine administrative expenses. These might include
the trustee's fees and accounting, engineering, legal and other professional
fees.
Fiduciary Responsibility and Liability of the Trustee
The trustee is a fiduciary for the trust unitholders and is required to act
in the best interests of the trust unitholders at all times. The trustee must
exercise the same judgment and care in supervising and managing the trust's
assets as persons of ordinary prudence, discretion and intelligence would
exercise. Under Texas law, the trustee's duties to the trust unitholders are
similar to the duty of care owed by a corporate director to the corporation and
its shareholders. The primary difference between the trustee's duties and a
corporate director's duties is the absence of the legal presumption protecting
the trustee's decisions from challenge.
The trustee will not make business decisions affecting the assets of the
trust. Therefore, substantially all of the trustee's functions under the trust
indenture are expected to be ministerial in nature. See "--Duties and Limited
Powers of the Trustee," above. Under Texas law, the trustee may not profit from
any transaction with the trust. The trust indenture, however, provides that the
trustee may:
. charge for its services as trustee;
. retain funds to pay for future expenses and deposit them in its own
account;
. lend funds at commercial rates to the trust to pay the trust's expenses;
and
. seek reimbursement from the trust for its out-of-pocket expenses.
In discharging its fiduciary duty to trust unitholders, the trustee may act
in its discretion and will be liable to the trust unitholders only for fraud,
gross negligence or acts or omissions constituting bad faith. The trustee will
not be liable for any act or omission of its agents or employees unless the
trustee acted in bad faith or with gross negligence in their selection and
retention. The trustee will be
45
<PAGE>
indemnified for any liability or cost that it incurs in the administration of
the trust, except in cases of fraud, gross negligence or bad faith. The trustee
will have a lien on the assets of the trust as security for this
indemnification and its compensation earned as trustee. The trustee is entitled
to indemnification from trust assets or, to the extent that trust assets are
insufficient, from Cross Timbers. Trust unitholders will not be liable to the
trustee for any indemnification. See "Description of the Trust Units--Liability
of Trust Unitholders." The trustee must ensure that all contractual liabilities
of the trust are limited to the assets of the trust and will be liable for its
failure to do so.
Under Texas law, if the trustee acts in bad faith or with gross negligence,
the trustee will be liable to the trust unitholders for damages. Texas law also
permits the trust unitholders to file actions seeking other remedies,
including:
. removal of the trustee;
. specific performance;
. appointment of a receiver;
. an accounting by the trustee to trust unitholders; and
. punitive damages.
Duration of the Trust; Sale of Net Profits Interests
The trust will terminate if:
. the trust sells all of the net profits interests;
. annual gross proceeds attributable to the underlying properties are less
than $1 million for each of two consecutive years after 1999;
. the holders of 80% or more of the outstanding trust units vote in favor
of termination; or
. the trust violates the "rule against perpetuities."
The trustee would then sell all of the trust's assets, either by private
sale or public auction, and distribute the net proceeds of the sale to the
trust unitholders.
Dispute Resolution
Any dispute, controversy or claim that may arise between Cross Timbers and
the trustee relating to the trust will be submitted to binding arbitration
before a tribunal of three arbitrators.
Compensation of the Trustee
The trustee's compensation will be paid out of the trust's assets. See "The
Trust."
Miscellaneous
The trustee may consult with counsel, accountants, geologists and engineers
and other parties the trustee believes to be qualified as experts on the
matters for which advice is sought. The trustee will be protected for any
action it takes in good faith reliance upon the opinion of the expert.
DESCRIPTION OF THE TRUST UNITS
Each trust unit is an undivided share of the beneficial interest in the
trust. Each trust unitholder has the same rights with respect to each of his
trust units as every other trust unitholder has with respect to his units. The
trust has 40,000,000 trust units outstanding.
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<PAGE>
Distributions and Income Computations
Each month, the trustee will determine the amount of funds available for
distribution to the trust unitholders. Available funds are the excess cash
received by the trust from the net profits interests and other sources that
month, over the trust's liabilities for that month. Available funds will be
reduced by any cash the trustee decides to hold as a reserve against future
liabilities. Trust unitholders that own their trust units at the end of the
last business day of the month (the "monthly record date") will receive a pro-
rata distribution no later than 10 business days after the monthly record date.
The first distribution will be made around April 10, 1999 to trust unitholders
owning trust units on March 31, 1999.
Unless otherwise advised by counsel or the IRS, the trustee will treat the
income and expenses of the trust for each month as belonging to the trust
unitholders of record on the monthly record date. Trust unitholders will
recognize income and expenses for tax purposes in the month the trust receives
or pays those amounts, rather than in the month the trust distributes them.
Minor variances may occur. For example, the trustee could establish a reserve
in one month that would not result in a tax deduction until a later month. The
trustee could also make a payment in one month that would be amortized for tax
purposes over several months. See "Federal Income Tax Consequences."
Transfer of Trust Units
Trust unitholders may transfer their trust units by sending their trust unit
certificate to the trustee along with a transfer form that is properly
completed. The trustee will not require either the transferor or transferee to
pay a service charge for any transfer of a trust unit. The trustee may require
payment of any tax or other governmental charge imposed for a transfer. The
trustee may treat the owner of any trust unit as shown by its records as the
owner of the trust unit. The trustee will not be considered to know about any
claim or demand on a trust unit by any party except the record owner. A person
who acquires a trust unit after any monthly record date will not be entitled to
the distribution relating to that monthly record date. Texas law will govern
all matters affecting the title, ownership, warranty or transfer of trust
units.
Periodic Reports
The trustee will mail to trust unitholders quarterly reports showing the
assets, liabilities, receipts and disbursements of the trust for each quarter
except the fourth quarter. No later than 120 days following the end of each
year, the trustee will mail to the trust unitholders an annual report
containing audited financial statements of the trust.
The trustee will file all required trust federal and state income tax and
information returns. The trustee will prepare and mail to trust unitholders
quarterly and annually reports that trust unitholders need to correctly report
their share of the income and deductions of the trust.
Each trust unitholder and his representatives may examine, for any proper
purpose, during reasonable business hours the records of the trust and the
trustee.
Liability of Trust Unitholders
The trustee must ensure that all contractual liabilities of the trust are
limited to the assets of the trust. The trustee will be liable for its failure
to do so. Texas law is unclear whether a trust unitholder would be responsible
for a liability that exceeds the net assets of the trust and the trustee.
Because of the value and passive nature of the trust assets and the
restrictions in the Indenture on the power of the trustee to incur liabilities,
Cross Timbers believes it is unlikely that a trust unitholder would incur any
liability from the trust based on its ownership of trust units.
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<PAGE>
Voting Rights of Trust Unitholders
Trust unitholders have more limited voting rights than those of stockholders
of most public corporations. For example, there is no requirement for annual
meetings of trust unitholders or for annual or other periodic re-election of
the trustee.
The trustee or trust unitholders owning at least 15% of the outstanding
trust units may call meetings of trust unitholders. Meetings must be held in
Fort Worth, Texas. The trustee must send written notice of the time and place
of the meeting and the matters to be acted upon to all of the trust unitholders
at least 20 days and not more than 60 days before the meeting. Trust
unitholders representing a majority of trust units outstanding must be present
or represented to have a quorum. Each trust unitholder is entitled to one vote
for each trust unit owned.
Unless otherwise required by the Trust Indenture, when a majority of the
trust units held by the trust unitholders at a meeting where there is a quorum
approve a matter, it is approved. This is true, even if a majority of the total
trust units did not approve it. The affirmative vote of the holders of 80% of
the outstanding trust units is required to
. terminate the trust,
. amend the Trust Indenture, or
. approve the sale of all or any material part of the assets of the trust.
The trustee must consent before all or any part of the trust assets can be
sold except in connection with the termination of the trust or limited sales
directed by Cross Timbers in conjunction with its sale of underlying
properties. The trustee may be removed, with or without cause, by the vote of
the holders of a majority of the outstanding trust units.
Comparison of Trust Units and Common Stock
You should be aware of the following ways in which an investment in trust
units is different from an investment in common stock of a corporation.
Trust Units Common Stock
Voting
Limited voting rights. Corporate statutes provide
specific voting rights to
stockholders on electing
directors and major corporate
transactions.
Income Tax
The trust is not subject to Corporations are taxed on
income tax; trust unitholders their income, and their
are directly subject to stockholders are taxed on
income tax on their dividends.
proportionate shares of trust
net income, adjusted for tax
deductions and credits.
Distributions
Substantially all trust Stockholders receive
income is distributed to dividends at the discretion
trust unitholders. of the board of directors.
Business Interest is limited to A corporation conducts an
and Assets specific assets with a finite active business for an
economic life. unlimited term and can
reinvest its earnings and
raise additional capital to
expand.
Limited Texas law and the laws of Corporate laws provide that a
Liability other states do not stockholder is not liable for
specifically provide for the obligations and
limited liability of trust liabilities of the
unitholders. However, due to corporation, subject to
the size and nature of the limited exceptions.
trust assets, liability in
excess of the trust
unitholders' investment is
extremely unlikely.
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<PAGE>
SELLING TRUST UNITHOLDER
Cross Timbers currently owns 100% of the 40,000,000 outstanding trust units.
It is offering 15,000,000 trust units in this offering, or 17,250,000 trust
units if the underwriters exercise their over-allotment option in full.
Cross Timbers has reserved $12 million of trust units for issuance in Cross
Timbers' 1998 Royalty Trust Option Plan. It has granted options covering all
trust units in the plan to its executive officers at an exercise price equal to
the public offering price in this offering. The options are exercisable for a
period of three years, beginning at the date of grant. Assuming the sale of all
trust units offered in this offering and the exercise in full of the
underwriters' over-allotment option, after taking into account the trust units
reserved for the plan, Cross Timbers will have trust units, or % of the
outstanding trust units available for future sale or distribution.
Cross Timbers has announced that it may form additional royalty trusts with
other properties. It may exchange trust units for oil and natural gas
properties or use them for other corporate purposes.
Prior to this offering there has been no public market for the trust units.
Cross Timbers cannot predict the effect on future market prices, if any, of
market sales of trust units or the availability of trust units for sale if it
disposes of its remaining trust units. Nevertheless, sales of substantial
amounts of trust units in the public market could adversely affect prevailing
market prices.
LEGAL MATTERS
Counsel for Cross Timbers, Kelly, Hart & Hallman, P.C., Fort Worth, Texas,
will give a legal opinion that the trust units are valid and fully paid without
further consideration. Counsel for the underwriters, Andrews & Kurth L.L.P.,
Houston, Texas, will give a legal opinion to the underwriters regarding other
matters related to this offering. Butler & Binion, L.L.P., Houston, Texas, will
give the tax opinion set forth in the section of this prospectus captioned
"Federal Income Tax Consequences." Morris, Laing, Evans, Brock & Kennedy,
Chartered, Wichita, Kansas, will give the Kansas tax opinion set forth in the
section of this prospectus captioned "State Tax Considerations." Certain
members of Kelly, Hart & Hallman, P.C. currently own approximately 23,200
shares of common stock of Cross Timbers, and certain partners of Butler &
Binion, L.L.P. own 95,985 shares of common stock of Cross Timbers.
EXPERTS
Certain information appearing in this prospectus regarding the December 31,
1998 estimated quantities of reserves of the underlying properties and net
profits interests owned by the trust, the future net revenues from those
reserves and their present value is based on estimates of the reserves and
present values prepared by or derived from estimates prepared by Miller and
Lents, Ltd. independent petroleum engineers.
The financial statements of Cross Timbers incorporated by reference in this
prospectus, and statements of revenues and direct operating expenses of the
underlying properties and the statement of assets and trust corpus of Hugoton
Royalty Trust included in this Prospectus and elsewhere in the registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
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<PAGE>
AVAILABLE INFORMATION
Cross Timbers files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any of these reports,
statements or other information at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC at the
address in the previous sentence. To obtain information on the operation of the
public reference rooms you may call the SEC at (800) SEC-0330. Cross Timbers'
filings are also available to the public on the SEC Internet Web site at
http://www.sec.gov.
The SEC allows Cross Timbers to "incorporate by reference" information Cross
Timbers files with it, which means that Cross Timbers can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Cross Timbers incorporates by reference in this prospectus the following
documents:
. Its Annual Report on Form 10-K for the year ended December 31, 1997;
. Its Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 30, 1998, and September 30, 1998, and on Form 10 Q/A dated
September 30, 1998;
. Its Current Reports on Form 8-K dated February 12, 1998, February 16,
1998 (Amendment No. 1 to Report dated December 1, 1997), February 18,
1998, February 25, 1998, April 13, 1998, April 17, 1998, April 21, 1998,
April 24, 1998, May 19,1998, July 2, 1998 (Amendment No. 1 to Report
dated April 24, 1998), August 26, 1998, and December 21, 1998; and
. all other documents filed by it pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 after the date of this prospectus
and prior to termination of the offering of the trust units.
Information that Cross Timbers files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information over different information included or incorporated by
reference in this prospectus.
As a recipient of this prospectus, you may request a copy of any document
Cross Timbers incorporates by reference, except exhibits to the documents that
are not specifically incorporated by reference, at no cost to you by writing or
calling Cross Timbers at 810 Houston Street, Suite 2000, Fort Worth, Texas
76102, Attention: Investor Relations, telephone (817) 870-2800.
NationsBank, N.A. is trustee of the trust. The trustee's address is 901 Main
Street, 17th Floor, Dallas, Texas 75202, and its telephone number is (214) 508-
2400.
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GLOSSARY OF CERTAIN OIL AND NATURAL GAS TERMS
In this prospectus the following terms have the meanings specified below.
Bbl -- One stock tank barrel, or 42 US gallons liquid volume, of crude oil or
other liquid hydrocarbons.
Bcf -- One billion cubic feet of natural gas.
Bcfe -- One billion cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.
Btu -- A British Thermal Unit, a common unit of energy measurement.
Estimated Future Net Revenues -- Also referred to as "estimated future net cash
flows." The result of applying current prices of oil and natural gas to
estimated future production from oil and natural gas proved reserves, reduced
by estimated future expenditures, based on current costs to be incurred, in
developing and producing the proved reserves, excluding overhead. Estimated
future net revenues do not include the effects of the tight sands natural gas
tax credit, since the trust is not a taxable entity and the credit goes
directly to the trust unitholders.
MBbl -- One thousand Bbl.
Mcf -- One thousand cubic feet of natural gas.
Mcfe -- One thousand cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.
MMBtu -- One million British Thermal Units (Btus).
MMcf -- One million cubic feet of natural gas.
MMcfe -- One million cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.
Natural Gas Revenue -- Includes revenue related to the sale of natural gas,
natural gas liquids and plant products.
Net Oil and Natural Gas Wells or Acres -- Determined by multiplying "gross" oil
and natural gas wells or acres by the interest in such wells or acres
represented by the underlying properties.
NYMEX -- New York Mercantile Exchange, where futures and options contracts for
the oil and natural gas industry and some precious metals are traded.
Oil Revenue -- Includes revenue related to the sale of oil and condensate
production.
Proved Developed Reserves -- Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Proved Reserves -- The estimated quantities of crude oil, natural gas and
natural gas liquids which, upon analysis of geological and engineering data,
appear with reasonable certainty to be recoverable in the future from known oil
and natural gas reservoirs under existing economic and operating conditions.
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<PAGE>
Proved Undeveloped Reserves -- Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required.
Reserve-to-Production Index -- An estimate, expressed in years, of the total
estimated proved reserves attributable to a producing property divided by
production from the property for the 12 months preceding the date as of which
the proved reserves were estimated.
Royalty or Overriding Royalty Interest -- A real property interest entitling
the owner to receive a specified portion of the gross proceeds of the sale of
oil and natural gas production or, if the conveyance creating the interest
provides, a specific portion of oil and natural gas produced, without any
deduction for the costs to explore for, develop or produce the oil and natural
gas. A royalty or overriding royalty interest owner has no right to consent to
or approve the operation and development of the property, while the owners of
the working interest have the exclusive right to exploit the mineral on the
land.
Standardized Measure of Discounted Future Net Cash Flows -- Also referred to
herein as "standardized measure." It is the present value of estimated future
net revenues computed by discounting estimated future net revenues at a rate of
10% annually.
Working Interest -- A real property interest entitling the owner to receive a
specified percentage of the proceeds of the sale of oil and natural gas
production or a percentage of the production, but requiring the owner of the
working interest to bear the cost to explore for, develop and produce such oil
and natural gas. A working interest owner who owns a portion of the working
interest may participate either as operator or by voting his percentage
interest to approve or disapprove the appointment of an operator and certain
activities in connection with the development and operation of a property.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Underlying Properties
Report of Independent Public Accountants................................ F-2
Statements of Revenues and Direct Operating Expenses for the Years Ended
December 31, 1996, 1997 and 1998....................................... F-3
Notes to Financial Statements........................................... F-4
Hugoton Royalty Trust
Report of Independent Public Accountants................................ F-8
Statement of Assets and Trust Corpus as of December 31, 1998............ F-9
Note to Statement of Assets and Trust Corpus............................ F-10
Pro Forma Statement of Distributable Income for the Year Ended
December 31, 1998 (Unaudited).......................................... F-11
Notes to Pro Forma Statement of Distributable Income (Unaudited)........ F-12
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have audited the accompanying statements of revenues and direct operating
expenses of the Underlying Properties of Cross Timbers Oil Company ("the
Company") for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 statement. 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.
The accompanying statements of revenue and direct operating expenses have
been prepared on the cash basis of accounting, as described in Note 2, and are
not intended to be a presentation in conformity with generally accepted
accounting principles.
In our opinion, the statements referred to above present fairly, in all
material respects, the revenues and direct operating expenses of the Underlying
Properties for each of the three years in the period ended December 31, 1998,
in conformity with the basis of accounting described above and in Note 2.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
January 22, 1999
F-2
<PAGE>
UNDERLYING PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues
Gas sales............................................. $60,502 $82,192 $77,124
Oil sales............................................. 9,075 9,704 7,083
------- ------- -------
Total............................................... 69,577 91,896 84,207
------- ------- -------
Direct Operating Expenses
Production and property taxes and transportation...... 5,919 9,173 9,170
Production expenses................................... 11,359 12,837 13,031
------- ------- -------
Total............................................... 17,278 22,010 22,201
------- ------- -------
Excess of Revenues over Direct Operating Expenses....... $52,299 $69,886 $62,006
======= ======= =======
</TABLE>
See Accompanying Notes to Financial Statements.
F-3
<PAGE>
UNDERLYING PROPERTIES
NOTES TO FINANCIAL STATEMENTS
1. UNDERLYING PROPERTIES
The Underlying Properties are predominantly working interests in producing
properties currently owned by Cross Timbers Oil Company ("Company") in the
Hugoton Area of Oklahoma and Kansas, the Anadarko Basin of Oklahoma and the
Green River Basin of Wyoming. The Company conveyed 80% defined net profits
interests ("Net Profits Interests") in the Underlying Properties to the Hugoton
Royalty Trust ("Trust") as of December 1998. Estimated proved reserves
attributable to the Underlying Properties are approximately 5% oil and 95%
natural gas, based on discounted present value of estimated future net revenues
as of December 31, 1998. See Note 5.
All of the Underlying Properties were acquired by the Company from 1986
through 1998. Significant property acquisitions were made by the Company during
the three-year period presented in the accompanying financial statements. The
statements include the historical revenues and direct operating expenses from
these acquired properties for all years presented.
2. BASIS OF PRESENTATION
The statements of revenues and direct operating expenses of the Underlying
Properties were derived from the historical accounting records of the Company
(and prior owners for acquisitions occurring during the three-year period
presented), and are presented on the cash basis of accounting before the
effects of conveyance of the Net Profits Interests. The statements do not
include depreciation, depletion and amortization, general and administrative or
interest expenses.
Amounts are included in the accompanying financial statements in the period
Net Proceeds are distributed by the Company to the Trust, which is the month
subsequent to the month received by the Company. Accordingly, the financial
statements for the year ended December 31 include amounts received by the
Company from December through the following November.
Royalty income of the Trust is determined based on the defined 80% net
profits interest percentage of Net Proceeds of the Underlying Properties. The
computation also includes deductions for capital development expenditures on
the properties of $14,392,000 in 1996, $40,027,000 in 1997 and $33,019,000 in
1998, as well as an overhead charge totalling $4,557,000 in 1996, $5,354,000 in
1997, and $6,198,000 in 1998. Accordingly, royalty income of the Trust is
materially different from the excess of revenues over direct operating expenses
from the Underlying Properties.
3. RELATED PARTY TRANSACTIONS
The Company sells a significant portion of natural gas production from the
Underlying Properties to certain of the Company's wholly owned subsidiaries,
generally at amounts approximating monthly spot market prices. Most of the
production from the Hugoton area is sold under a contract to Timberland
Gathering & Processing Company, Inc. ("TGPC"). Much of the natural gas
production in Major County, Oklahoma is sold to Ringwood Gathering Company
("RGC") which retains a $0.313 per Mcf gathering fee. TGPC and RGC sell natural
gas to Cross Timbers Energy Services, Inc. ("CTES") which markets natural gas
to third parties. The Company sells directly to CTES most natural gas
production not sold directly to TGPC or RGC.
F-4
<PAGE>
UNDERLYING PROPERTIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Sales from the Underlying Properties to the Company's wholly owned
subsidiaries are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
TGPC................................................. $12,348 $16,429 $14,519
RGC.................................................. 6,768 8,436 6,421
CTES................................................. 12,167 32,294 33,878
</TABLE>
4. CONTINGENCIES
The Company is a defendant in two separate lawsuits that could, if adversely
determined, decrease future revenues from certain of the Underlying Properties.
Damages relating to production prior to the formation of the Trust will be
borne by the Company.
A class action lawsuit, Booth, et al. v. Cross Timbers Oil Company, was filed
on April 3, 1998 in the District Court of Dewey County, Oklahoma by royalty
owners of natural gas wells in Oklahoma. The plaintiffs allege that since 1991
the Company has underpaid royalty owners as a result of (1) reducing royalties
for improper charges for production, marketing, gathering, processing and
transportation costs and (2) selling natural gas through affiliated companies
at prices less favorable from those paid by third parties. The Company believes
that it has strong defenses to this lawsuit and intends to vigorously defend
its position. However, if a judgment or settlement increased the amount of
future royalty payments, revenues from the Underlying Properties will be
reduced. The amount of any reduction in such revenues is not presently
determinable, but is not expected to be material to the Trust's distributable
income, financial position or liquidity.
A second lawsuit, United States of America ex rel. Grynberg v. Cross Timbers
Oil Company, et al., was filed in the United States District Court for the
Western District of Oklahoma. This action alleges that in computing royalties
payable for natural gas produced from federal leases and lands owned by Native
Americans, the Company has mismeasured the volume of natural gas and wrongfully
analyzed its heating content. The suit, which was brought under the qui tam
provisions of the U.S. False Claims Act, seeks treble damages for the unpaid
royalties (with interest), civil penalties and an order for the Company to
cease the allegedly improper measuring practices. This lawsuit is one of more
that 75 suits filed nationwide by the same plaintiff alleging similar claims
against over 300 producers and pipeline companies. Royalties paid by the
Company for production from Underlying Properties on federal and Native
American lands for 1998 totalled approximately $2.8 million. The Company
believes that the allegations of this lawsuit are without merit. However, an
order to change measuring practices or a related settlement could adversely
affect future revenues from the Underlying Properties by an amount that is not
presently determinable, but is not expected to be material to the Trust's
distributable income, financial position or liquidity.
5. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited)
Proved oil and natural gas reserves of the Underlying Properties have been
estimated as of December 31, 1998 by independent petroleum engineers. The
reserve estimates provided for the Underlying Properties are before the effects
of conveying the defined net profits interests to the Trust. In accordance with
Statement of Financial Accounting Standards No. 69, estimates of future net
revenues from proved reserves have been prepared using year-end oil and natural
gas prices and current costs to produce and develop the proved reserves,
excluding overhead. The standardized measure of future net cash flows from oil
and natural gas reserves is calculated based on discounting such future net
cash flows at an annual rate of 10%.
F-5
<PAGE>
UNDERLYING PROPERTIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year-end posted West Texas Intermediate crude oil prices were $18.00 per barrel
for 1995, $24.25 per barrel for 1996, $15.50 per barrel for 1997, and $9.50 per
barrel for 1998. Year-end weighted average spot natural gas prices were $1.76
per Mcf for 1995, $2.84 per Mcf for 1996, $2.01 per Mcf for 1997, and $2.01 per
Mcf for 1998.
The standardized measure of future net cash flows is not intended to
represent the fair value of the Underlying Properties. Numerous uncertainties
are inherent in estimating volumes and values of proved reserves and in
projecting future production rates and timing of development expenditures. Such
reserve estimates are subject to change as additional information becomes
available. The reserves actually recovered and the timing of production may be
substantially different from the original estimates. Also, because natural gas
prices are influenced by seasonal demand, use of year-end prices, as required
by the Financial Accounting Standards Board, may not be representative in
estimating future revenues or reserve data.
Reserve estimates for Underlying Properties that were acquired between 1996
and 1998 are not available for periods prior to the date they were acquired by
the Company. Estimated proved reserves and the related standardized measure of
these properties were calculated as of December 31, 1995, 1996 and 1997, by
adding production prior to the date acquired to estimates as of the acquisition
dates.
<TABLE>
<CAPTION>
Gas (Mcf) Oil (Bbls)
Proved Reserves --------- ----------
(in thousands)
<S> <C> <C>
Balance, December 31, 1995.............................. 445,836 4,442
Revisions............................................. 20,301 432
Extensions, discoveries and other additions........... 27,131 145
Production............................................ (36,143) (455)
------- -----
Balance, December 31, 1996.............................. 457,125 4,564
Revisions............................................. (15,557) (305)
Extensions, discoveries and other additions........... 84,394 485
Production............................................ (37,172) (470)
------- -----
Balance, December 31, 1997.............................. 488,790 4,274
Revisions............................................. 17,798 (24)
Extensions, discoveries and other additions........... 47,020 259
Production............................................ (38,535) (479)
------- -----
Balance, December 31, 1998.............................. 515,073 4,030
======= =====
</TABLE>
Proved Developed Reserves
<TABLE>
<CAPTION>
Gas (Mcf) Oil (Bbls)
--------- ----------
(in thousands)
<S> <C> <C>
December 31, 1995....................................... 384,588 3,633
======= =====
December 31, 1996....................................... 401,784 3,966
======= =====
December 31, 1997....................................... 417,912 3,574
======= =====
December 31, 1998....................................... 435,328 3,368
======= =====
</TABLE>
F-6
<PAGE>
UNDERLYING PROPERTIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Standardized Measure of Discounted
Future Net Cash Flows Relating to
Proved Reserves
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Future cash inflows.................... $1,414,852 $1,057,023 $1,087,660
Future costs:
Production........................... 357,049 326,325 364,930
Development.......................... 30,894 42,460 48,212
---------- ---------- ----------
Future net cash flows.................. 1,026,909 688,238 674,518
10% discount factor.................... 467,687 322,301 327,341
---------- ---------- ----------
Standardized measure of discounted
future net cash flows................. $ 559,222 $ 365,937 $ 347,177
========== ========== ==========
Changes in Standardized Measure of
Discounted Future Net Cash Flows from
Proved Reserves
<CAPTION>
December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Standardized measure, beginning of
year.................................. $ 273,032 $ 559,222 $ 365,937
---------- ---------- ----------
Revisions:
Prices and costs..................... 241,743 (212,920) (27,206)
Quantity estimates................... 47,520 5,585 11,161
Accretion of discount................ 24,457 50,574 33,464
Future development costs............. (18,620) (48,471) (33,542)
Production rates and other........... (544) (1,076) (827)
---------- ---------- ----------
Net revisions...................... 294,556 (206,308) (16,950)
Extensions, discoveries and other
additions............................. 29,541 42,882 27,177
Production............................. (52,299) (69,886) (62,006)
Development costs...................... 14,392 40,027 33,019
---------- ---------- ----------
Net change........................... 286,190 (193,285) (18,760)
---------- ---------- ----------
Standardized measure, end of year...... $ 559,222 $ 365,937 $ 347,177
========== ========== ==========
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Hugoton Royalty Trust:
We have audited the accompanying statement of assets and trust corpus of
Hugoton Royalty Trust as of December 31, 1998. This financial statement is the
responsibility of the management of Cross Timbers Oil Company. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the statement referred to above presents fairly, in all
material respects, the assets and trust corpus of Hugoton Royalty Trust as of
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
January 25, 1999
F-8
<PAGE>
HUGOTON ROYALTY TRUST
STATEMENT OF ASSETS AND TRUST CORPUS
December 31, 1998
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash........................................................... $ 1
Net overriding royalty interests in oil and gas properties..... 247,067
--------
Total Assets................................................. $247,068
========
Trust Corpus (40,000,000 units of beneficial interest
authorized and outstanding)................................... $247,068
========
</TABLE>
See Accompanying Note to Statement of Assets and Trust Corpus.
F-9
<PAGE>
HUGOTON ROYALTY TRUST
NOTE TO STATEMENT OF ASSETS AND TRUST CORPUS
1. TRUST ORGANIZATION
Hugoton Royalty Trust ("Trust") is a grantor trust that was created as of
December 1, 1998 by Cross Timbers Oil Company ("Company"). The Trust was formed
to hold net overriding royalty interests equivalent to 80% defined net profits
interests in certain producing oil and gas properties in Kansas, Oklahoma and
Wyoming that were conveyed by the Company effective December 1, 1998 in
exchange for 40 million units of beneficial interest in the Trust ("Units").
The net overriding royalty interests are reflected in the accompanying
statement of assets and trust corpus at the Company's historical net book value
at the date of conveyance. The Company uses the successful efforts method of
accounting.
The Trust will terminate upon the first occurrence of: (a) disposition of all
net overriding royalty interests pursuant to terms of the Trust Indenture, (b)
when gross proceeds attributable to the Underlying Properties are less than $1
million per year for each of two successive years after 1999, or (c) a vote of
at least 80% of the Trust Unitholders to terminate the Trust in accordance with
provisions of the Trust Indenture.
F-10
<PAGE>
HUGOTON ROYALTY TRUST
PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (Unaudited)
For the Year Ended December 31, 1998
(in thousands, except for per Unit amounts)
<TABLE>
<S> <C>
Gross Proceeds
Gas revenues......................................................... $77,124
Oil revenues......................................................... 7,083
-------
Total Revenues...................................................... 84,207
Production and property taxes and transportation..................... 9,170
-------
Total.............................................................. 75,037
-------
Production and Development Costs
Production........................................................... 13,031
Development (Note 2)................................................. 33,019
-------
Total.............................................................. 46,050
-------
Net proceeds before overhead........................................... 28,987
Overhead (Note 2)...................................................... 6,198
-------
Net proceeds........................................................... 22,789
Net profits percentage................................................. 80%
-------
Trust royalty income................................................... 18,231
Administrative expense................................................. 300
-------
Distributable income................................................... $17,931
=======
Distributable income per Unit (40,000,000 Trust Units issued and
outstanding--Note 1)................................................. $ 0.45
=======
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Statement of Distributable
Income.
F-11
<PAGE>
HUGOTON ROYALTY TRUST
NOTES TO PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (Unaudited)
1. BASIS OF PRESENTATION
The pro forma statement of distributable income of the Trust for the year
ended December 31, 1998 has been prepared on a cash basis of accounting from
the historical results (successful efforts method of accounting) of operations
of the properties out of which the Net Profits Interests were carved and the
following assumptions made:
a. The Trust was formed and the Net Profits Interests were conveyed to
the Trust effective December 1, 1997.
A significant property acquisition was made by the Company during the
year ended December 31, 1998. The pro forma statement of distributable
income includes the historical revenues and expenses of this acquisition.
b. Net proceeds related to the Net Profits Interests are received and
recorded as royalty income by the Trust in the month following their
receipt by the Company from the Underlying Properties.
Generally the Trust will receive and record royalty income two months
after the month of production. This basis for recognizing royalty income
differs from generally accepted accounting principles which requires that
revenues be accrued in the month of production.
c. Royalty income is calculated based on 80% of the Net Proceeds from the
Underlying Properties. Net Proceeds is a defined term in the Net Profits
Interests conveyance to the Trust.
d. Administrative expense is estimated to be $300,000 annually. Such
expense generally would include Trustee fees and costs incurred by the
Trustee to administer the Trust and report Trust results to Unitholders,
including the expense of attorneys, independent auditors, reservoir
engineers, printing and mailing.
2. PRO FORMA ADJUSTMENTS
The following pro forma adjustments were made to the historical direct
operating expenses of the Underlying Properties to present pro forma
distributable income for the year ended December 31, 1998:
a. Historical development costs of $33,019,000 were deducted.
b. An overhead charge by the Company totalling $6,198,000 was deducted.
This charge, based on a monthly count of active wells operated by the
Company, is specified by the terms of the Net Profits Interest conveyance
to the Trust. Such charge is deducted in the computation of Net Proceeds
and represents reimbursement to the Company for costs associated with
monitoring the Underlying Properties.
3. FEDERAL INCOME TAXES
As a grantor trust, the Trust will not be required to pay federal income
taxes. Accordingly, the accompanying pro forma statement of distributable
income does not include a provision for federal income taxes.
F-12
<PAGE>
HUGOTON ROYALTY TRUST
NOTES TO PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (Unaudited)--(Continued)
4. CONTINGENCIES
The Company is a defendant in two separate lawsuits that could, if adversely
determined, decrease future Trust distributable income. Damages relating to
production prior to the formation of the Trust will be borne by the Company.
A class action lawsuit, Booth, et al. v. Cross Timbers Oil Company, was
filed on April 3, 1998 in the District Court of Dewey County, Oklahoma by
royalty owners of natural gas wells in Oklahoma. The plaintiffs allege that
since 1991 the Company has underpaid royalty owners as a result of (1) reducing
royalties for improper charges for production, marketing, gathering, processing
and transportation costs and (2) selling natural gas through affiliated
companies at prices less favorable from those paid by third parties. The
Company believes that it has strong defenses to this lawsuit and intends to
vigorously defend its position. However, if a judgment or settlement increased
the amount of future royalty payments, the Trust would bear its proportionate
share of the increased royalties through reduced Net Proceeds. The amount of
any reduction in Net Proceeds is not presently determinable, but is not
expected to be material to the Trust's distributable income, financial position
or liquidity.
A second lawsuit, United States of America ex rel. Grynberg v. Cross Timbers
Oil Company, et al., was filed in the United States District Court for the
Western District of Oklahoma. This action alleges that in computing royalties
payable for natural gas produced from federal leases and lands owned by Native
Americans, the Company has mismeasured the volume of natural gas and wrongfully
analyzed its heating content. The suit, which was brought under the qui tam
provisions of the U.S. False Claims Act, seeks treble damages for the unpaid
royalties (with interest), civil penalties and an order for the Company to
cease the allegedly improper measuring practices. This lawsuit is one of more
than 75 suits filed nationwide by the same plaintiff alleging similar claims
against over 300 producers and pipeline companies. Royalties paid by the
Company for production from Underlying Properties on federal and Native
American lands during 1998 totalled approximately $2.8 million. The Company
believes that the allegations of this lawsuit are without merit. However, an
order to change measuring practices or a related settlement could adversely
affect the Trust by reducing Net Proceeds in the future by an amount that is
presently not determinable, but is not expected to be material to the Trust's
distributable income, financial position or liquidity.
5. PRO FORMA SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
Proved oil and natural gas reserves of the Trust have been estimated as of
December 31, 1998 by independent petroleum engineers. In accordance with
Statement of Financial Accounting Standards No. 69, estimates of future net
revenues from proved reserves have been prepared using year-end oil and natural
gas prices and current costs to produce and develop the proved reserves. The
standardized measure of future net cash flows from oil and natural gas reserves
is calculated based on discounting such future net cash flows at an annual rate
of 10%. Year-end posted West Texas Intermediate crude oil prices were $15.50
and $9.50 per barrel for 1997 and 1998, respectively. Year-end weighted average
spot gas prices were $2.01 per Mcf for each of 1997 and 1998. As the Trust is
not subject to taxation at the trust level, no provision is included for
federal income taxes.
Reserve quantities and revenues for the Net Profits Interests were estimated
from projections of reserves and revenues attributable to the Underlying
Properties. Since the Trust has a defined net profits interests, the Trust does
not own a specific ownership percentage of the oil and natural gas reserve or
production quantities. Accordingly, reserves and production allocated to the
Trust pertaining to its 80%
F-13
<PAGE>
HUGOTON ROYALTY TRUST
NOTES TO PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (Unaudited)--(Continued)
net profits interest in the working interest properties have effectively been
reduced to reflect recovery of the Trust's 80% portion of applicable production
and development costs, excluding overhead and trust administrative expenses.
Because Trust reserve quantities are determined using an allocation formula,
any fluctuations in actual or assumed prices or costs will result in revisions
to the estimated reserve quantities allocated to the Net Profits Interests.
The standardized measure of future net cash flows is not intended to
represent the fair value of the Trust. Numerous uncertainties are inherent in
estimating volumes and values of proved reserves and in projecting future
production rates and timing of development expenditures. Such reserve estimates
are subject to change as additional information becomes available. The reserves
actually recovered and the timing of production may be substantially different
from the original estimates. Also, because natural gas prices are influenced by
seasonal demand, use of year-end prices, as required by the Financial
Accounting Standards Board, may not be representative in estimating future
revenues or reserve data.
<TABLE>
<CAPTION>
Gas (Mcf) Oil (Bbls)
--------- ----------
(in thousands)
<S> <C> <C>
Proved Reserves
Balance, January 1, 1998................................ 279,024 2,431
Revisions ............................................ (11,541) (255)
Extensions, discoveries and other additions........... 24,177 133
Production............................................ (9,363) (116)
------- -----
Balance, December 31, 1998.............................. 282,297 2,193
======= =====
Proved Developed Reserves
January 1, 1998......................................... 249,148 2,136
======= =====
December 31, 1998....................................... 249,215 1,934
======= =====
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Reserves at December 31, 1998
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Future cash inflows.......................................... $595,301
Future production taxes and transportation................... 55,686
--------
Future net cash flows........................................ 539,615
10% discount factor.......................................... 261,873
--------
Standardized measure of discounted future net cash flows..... $277,742
========
Changes in Standardized Measure of Discounted Future Net Cash
Flows from Proved Reserves
<CAPTION>
(in thousands)
<S> <C>
Standardized measure, January 1, 1998........................ $292,749
--------
Extensions, discoveries and other additions.................. 21,742
Trust royalty income ........................................ (18,231)
Changes in prices and other.................................. (45,289)
Accretion of discount........................................ 26,771
--------
(15,007)
--------
Standardized measure, December 31, 1998...................... $277,742
========
</TABLE>
F-14
<PAGE>
UNDERWRITING
Cross Timbers and the underwriters named below (the "Underwriters") have
entered into an underwriting agreement with respect to the trust units being
offered. Subject to certain conditions, each Underwriter has severally agreed
to purchase the number of trust units indicated in the following table.
Goldman, Sachs & Co., Lehman Brothers Inc., Bear, Stearns & Co., Inc., Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation and A. G. Edwards & Sons, Inc. are
representatives of the Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriter Trust Units
----------- -----------
<S> <C>
Goldman, Sachs & Co ...........................................
Lehman Brothers Inc. ..........................................
Bear, Stearns & Co. Inc........................................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated............................................
Donaldson, Lufkin & Jenrette Securities Corporation............
A.G. Edwards & Sons, Inc.......................................
----------
Total........................................................ 15,000,000
==========
</TABLE>
If the Underwriters sell more trust units than the total number shown in the
table above, the Underwriters have an option to buy up to an additional
2,250,000 trust units from Cross Timbers to cover such sales. They may exercise
that option for 30 days. If any trust units are purchased pursuant to this
option, the Underwriters will severally purchase trust units in approximately
the same proportion shown in the table above.
The following table shows the per trust unit and total underwriting
discounts and commissions to be paid to the Underwriters by Cross Timbers.
These amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase 2,250,000 additional trust units.
<TABLE>
<CAPTION>
Paid by Cross Timbers
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per trust unit....................................... $ $
Total................................................ $ $
</TABLE>
Trust units sold by the Underwriters to the public will initially be offered
at the initial public offering price shown on the cover of this prospectus. Any
trust units sold by the Underwriters to securities dealers may be sold at a
discount of up to $ per trust unit from the initial public offering price. Any
such securities dealers may resell any trust units purchased from the
Underwriters to certain other brokers or dealers at a discount of up to $ per
trust unit from the initial public offering price. If all the trust units are
not sold at the initial offering price, the representatives may change the
offering price and the other selling terms.
Cross Timbers and its executive officers have agreed with the Underwriters
not to dispose of or hedge any of their trust units or securities convertible
into or exchangeable for trust units during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans.
Prior to the Offering, there has been no public market for the trust units.
The initial public offering price has been negotiated among Cross Timbers and
the representatives. Among the factors to be considered in determining the
initial public offering price of the trust units, in addition to prevailing
market conditions, will be estimates of distributions to trust unitholders and
overall quality of the underlying properties.
U-1
<PAGE>
The trust units have been approved for listing on the New York Stock
Exchange under the symbol "HGT." In order to meet one of the requirements for
listing the trust units on the New York Stock Exchange, the Underwriters have
undertaken to sell lots of 100 or more trust units to a minimum of 2,000
beneficial holders.
In connection with the Offering, the Underwriters may purchase and sell
trust units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the Underwriters of a greater number of
trust units than they are required to purchase in the Offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the trust units while
the Offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount it received because the representatives repurchased trust units sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the marketprice of the trust units. As a result, the price of the trust
units may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.
The Underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of trust units offered.
Cross Timbers estimates that total expenses of the Offering, other than
underwriting discounts and commissions, will be approximately $650,000.
Cross Timbers and the trust have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. The trust's indemnity obligations are limited to the
assets of the trust, and neither the trustee nor any unitholder will have any
obligation to indemnify the Underwriters.
U-2
<PAGE>
EXHIBIT A
[LETTERHEAD OF MILLER & LENTS, LTD. APPEARS HERE]
January 20, 1999
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, TX 76102
Re: Underlying Properties (100%)
Relating to the Hugoton Royalty Trust
As of January 1, 1999
SEC Pricing Case
Gentlemen:
At your request, we estimated the proved reserves and future net revenue as of
January 1, 1999, attributable to the Cross Timbers Oil Company interest in
certain oil and gas properties prior to inclusion in the Hugoton Royalty Trust,
i.e., Underlying Properties (100%). The properties consist of approximately
1,679 wells and are located primarily in Kansas, Oklahoma, and Wyoming. The
aggregate results of our evaluations are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Net Reserves as of 1/1/99 Future Net Revenue
-----------------------------------------------------------------------
Oil and
Condensate, Gas, Undiscounted, Discounted at
Reserves Category MBbls. MMcf M$ 10% Per Year, M$
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kansas
- -----------------------------------------------------------------------------------------------------------
Proved Developed Producing 50.6 46,123.6 45,306.6 24,767.3
- -----------------------------------------------------------------------------------------------------------
Proved Nonproducing 0.0 499.1 344.5 176.3
- -----------------------------------------------------------------------------------------------------------
Proved Undeveloped 0.0 3,996.2 1,698.7 510.6
- -----------------------------------------------------------------------------------------------------------
Subtotal 50.6 50,618.9 47,349.7 25,454.1
- -----------------------------------------------------------------------------------------------------------
Oklahoma
- -----------------------------------------------------------------------------------------------------------
Proved Developed Producing 2,901.2 235,076.2 328,413.8 192,126.8
- -----------------------------------------------------------------------------------------------------------
Proved Nonproducing 206.9 14,281.9 20,685.8 12,219.8
- -----------------------------------------------------------------------------------------------------------
Proved Undeveloped 601.3 36,125.9 35,171.7 13,182.5
- -----------------------------------------------------------------------------------------------------------
Subtotal 3,709.3 285,484.0 384,271.3 217,529.1
- -----------------------------------------------------------------------------------------------------------
Wyoming
- -----------------------------------------------------------------------------------------------------------
Proved Developed Producing 189.2 132,662.1 186,849.2 88,540.8
- -----------------------------------------------------------------------------------------------------------
Proved Nonproducing 20.6 6,685.6 10,812.6 5,173.7
- -----------------------------------------------------------------------------------------------------------
Proved Undeveloped 60.3 39,622.6 45,235.3 10,479.0
- -----------------------------------------------------------------------------------------------------------
Subtotal 270.1 178,970.3 242,897.1 104,193.5
- -----------------------------------------------------------------------------------------------------------
Total Underlying Properties (100%)
- -----------------------------------------------------------------------------------------------------------
Proved Developed Producing 3,140.9 413,861.8 560,569.6 305,434.9
- -----------------------------------------------------------------------------------------------------------
Proved Nonproducing 227.5 21,466.6 31,842.8 17,569.7
- -----------------------------------------------------------------------------------------------------------
Proved Undeveloped 661.5 79,744.7 82,105.7 24,172.1
- -----------------------------------------------------------------------------------------------------------
TOTAL 4,029.9 515,073.1 674,518.1 347,176.7
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MILLER AND LENTS, LTD.
Cross Timbers Oil Company January 20, 1999
Page 2
We performed evaluations, which are designated as the SEC Pricing Case,
using price, expense, and gas production curtailment premises specified by you
and described in detail on Attachment 1.
Proved reserves and future net revenue were estimated in accordance with
the provisions contained in Securities and Exchange Commission Regulation S-X,
Rule 4-10. The Securities and Exchange Commission definition of proved reserves
is shown on Attachment 2. Estimates of future net revenue and discounted future
net revenue are not intended and should not be interpreted to represent fair
market values for the estimated reserves. Future costs of abandoning facilities
and wells and of the restoration of producing properties to satisfy
environmental standards were not deducted from total revenues as such estimates
are beyond the scope of this assignment.
Following Attachment 2 is a list of exhibits which include annual
projections of future production and net revenue for each state and reserve
category. Also included in the exhibits are one-line summaries for the total
royalty trust and for each state showing the proved reserves and future net
revenue for the individual properties. Projections of individual property
future production and net revenue are included in separate volumes to this
report. These exhibits and volumes should not be relied upon independently of
this narrative.
The proved developed producing reserves and production forecasts were
estimated by production decline extrapolations, water-oil ratio trends, P/Z
declines, or in a few cases, by volumetric calculations. For some properties
with insufficient performance history to establish trends, we estimated future
production by analogy with other properties with similar characteristics. The
past performance trends of many properties were influenced by production
curtailments, workovers, waterfloods, and/or infill drilling. Actual future
production may require that our estimated trends be significantly altered.
The estimated proved undeveloped reserves require significant capital
expenditures such as drilling and completion costs. The proved undeveloped
reserve estimates for infill wells are based on analogies to similar infill
wells in the same field and/or the production histories of offset wells in the
same field.
Reserve estimates from volumetric calculations and from analogies are often
less certain than reserve estimates based on well performance obtained over a
period during which a substantial portion of the reserves was produced.
With the exception of a few properties, the data employed in our
determinations of proved reserves and future net income were provided by Cross
Timbers Oil Company. We obtained pressure and production information from
independent sources for some properties that had insufficient data from Cross
Timbers Oil Company to employ as bases for reserve estimates. The current
expenses for each lease were obtained from operating statements provided by
Cross Timbers Oil Company except for certain leases where Cross Timbers Oil
Company deducted items considered by Cross Timbers Oil Company to be
nonrecurring expenditures. No overhead was included for those properties
operated by Cross Timbers Oil Company. For some properties, such as large
waterfloods, Cross Timbers Oil Company assumed a decline in variable operating
costs due to depleting production which was derived by forecasting a decrease in
the property well count. None of the data provided to us by Cross Timbers Oil
Company,
<PAGE>
MILLER AND LENTS, LTD.
Cross Timbers Oil Company January 20, 1999
Page 3
including, but not limited to, graphical representations and tabulations of past
production performance, well tests and pressures, ownership interests, prices,
and operating costs, were verified by us as such was not within the scope of our
assignment.
The evaluations presented in this report, with the exceptions of those
parameters specified by others, reflect our informed judgments based on accepted
standards of professional investigation but are subject to those generally
recognized uncertainties associated with interpretation of geological,
geophysical, and engineering information. Government policies and market
conditions different from those employed in this study may cause the total
quantity of oil or gas to be recovered, actual production rates, prices
received, or operating and capital costs to vary from those presented in this
report.
Our workpapers and data are in our files and available for review upon
request. If you have any questions regarding the above, or if we can be of
further assistance, please call.
Very truly yours,
MILLER AND LENTS, LTD.
By /s/ Karen F. Loving
-------------------------------
Karen F. Loving
Vice President
KFL/hsd
<PAGE>
Attachment 1
1-1-99
Underlying Properties (100%)
Relating to the
Hugoton Royalty Trust
SEC PRICING CASE
A. Oil Price All oil/condensate prices held constant at $9.50 per
barrel through the life of the property. (Adjust for
gravity, transportation charges, and crude marketing
arrangements.)
B. Gas Price Estimated 1/1/99 price held constant through the life
of the property.
C. Operating Costs Current expenses held constant through the life of the
property.
D. Curtailment For curtailed gas wells, curtailed rates were based on
the first six months of 1998 rate as a percent of 1998
capacity, then relieved over a two-year period, i.e.,
100% at 1/1/01.
E. Discount Rate 10% per year.
<PAGE>
Attachment 2
PROVED RESERVES DEFINITIONS
IN ACCORDANCE WITH
SECURITIES AND EXCHANGE COMMISSION REGULATION S-X
PROVED OIL AND GAS RESERVES
- ---------------------------
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and
costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements but not on
escalations based upon future conditions.
1. Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a
reservoir considered proved includes (a) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any, and (b)
the immediately adjoining portions not yet drilled but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
2. Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the proved
classification when successful testing by a pilot project or the operation
of an installed program in the reservoirs provides support for the
engineering analysis on which the project or program was based.
3. Estimates of proved reserves do not include the following:
a. Oil that may become available from known reservoirs but is classified
separately as indicated additional reserves.
b. Crude oil, natural gas, and natural gas liquids, the recovery of which
is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors.
c. Crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects.
d. Crude oil, natural gas, and natural gas liquids, that may be recovered
from oil shales, coal, gilsonite, and other such sources.
Depending upon their status of development, proved reserves are subdivided
into proved developed reserves and proved undeveloped reserves.
PROVED DEVELOPED OIL AND GAS RESERVES
- -------------------------------------
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as proved developed
reserves only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
PROVED UNDEVELOPED OIL AND GAS RESERVES
- ---------------------------------------
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
<PAGE>
EXHIBIT B
[LETTERHEAD OF MILLER & LENTS, LTD. APPEARS HERE]
January 20, 1999
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, TX 76102
Re: Hugoton Royalty Trust
80% Net Profits Interests
As of January 1, 1999
SEC Pricing Case
Gentlemen:
At your request, we estimated the proved reserves and future net revenue as of
January 1, 1999, attributable to the Hugoton Royalty Trust interest in certain
oil and gas properties that consist of approximately 1,679 wells located
primarily in Kansas, Oklahoma, and Wyoming. The aggregate results of our
evaluations are as follows:
<TABLE>
<CAPTION>
Net Reserves as of 1/1/99 Future Net Revenue
------------------------------------------------------------------------
Oil and
Condensate, Gas, Undiscounted, Discounted at
Reserves Category MBbls. MMcf M$ 10% Per Year, M$
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kansas
- -------------------------------------------------------------------------------------------------------
Proved Developed Producing 28.4 25,987.1 36,245.2 19,813.8
- -------------------------------------------------------------------------------------------------------
Proved Nonproducing 0.0 240.4 275.6 141.0
- -------------------------------------------------------------------------------------------------------
Proved Undeveloped 0.0 1,141.6 1,359.0 408.5
- -------------------------------------------------------------------------------------------------------
Subtotal 28.4 27,369.1 37,879.8 20,363.3
- -------------------------------------------------------------------------------------------------------
Oklahoma
- -------------------------------------------------------------------------------------------------------
Proved Developed Producing 1,667.2 135,345.9 262,731.0 153,701.5
- -------------------------------------------------------------------------------------------------------
Proved Nonproducing 117.9 8,140.8 16,548.6 9,775.8
- -------------------------------------------------------------------------------------------------------
Proved Undeveloped 231.7 13,898.2 28,137.4 10,546.0
- -------------------------------------------------------------------------------------------------------
Subtotal 2,016.8 157,384.9 307,417.0 174,023.3
- -------------------------------------------------------------------------------------------------------
Wyoming
- -------------------------------------------------------------------------------------------------------
Proved Developed Producing 107.4 75,219.7 149,479.4 70,832.7
- -------------------------------------------------------------------------------------------------------
Proved Nonproducing 13.2 4,280.7 8,650.1 4,139.0
- -------------------------------------------------------------------------------------------------------
Proved Undeveloped 27.5 18,042.9 36,188.2 8,383.2
- -------------------------------------------------------------------------------------------------------
Subtotal 148.1 97,543.3 194,317.7 83,354.9
- -------------------------------------------------------------------------------------------------------
Total Hugoton Royalty Trust
- -------------------------------------------------------------------------------------------------------
Proved Developed Producing 1,803.0 236,552.7 448,455.6 244,348.0
- -------------------------------------------------------------------------------------------------------
Proved Nonproducing 131.1 12,661.9 25,474.3 14,055.8
- -------------------------------------------------------------------------------------------------------
Proved Undeveloped 259.2 33,082.7 65,684.6 19,337.7
- -------------------------------------------------------------------------------------------------------
TOTAL 2,193.3 282,297.3 539,614.5 277,741.5
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MILLER AND LENTS, LTD.
Cross Timbers Oil Company January 20, 1999
Page 2
We performed evaluations, which are designated as the SEC Pricing Case,
using price, expense, and gas production curtailment premises specified by you
and described in detail on Attachment 1.
The Hugoton Royalty Trust interests evaluated herein are comprised of an 80
percent net overriding royalty interest of certain Cross Timbers Oil Company
properties. At your instruction, the net oil and condensate reserves and the
net natural gas reserves attributable to the Hugoton Royalty Trust interests
were computed from 80 percent of the Cross Timbers Oil Company interests in
those properties after adjustment for the estimated reserves attributable to the
future operating expenses and capital costs. As a result of this procedure, a
change in the future costs, or prices, or capital expenditures different from
those projected herein may result in a change in the computed reserves to the
net interests even if there are no revisions or additions to the gross reserves
attributed to the property.
Proved reserves and future net revenue were estimated in accordance with
the provisions contained in Securities and Exchange Commission Regulation S-X,
Rule 4-10. The Securities and Exchange Commission definition of proved reserves
is shown on Attachment 2. Estimates of future net revenue and discounted future
net revenue are not intended and should not be interpreted to represent fair
market values for the estimated reserves. Future costs of abandoning facilities
and wells and of the restoration of producing properties to satisfy
environmental standards were not deducted from total revenues as such estimates
are beyond the scope of this assignment.
Following Attachment 2 is a list of exhibits which include annual
projections of future production and net revenue for each state and reserve
category. Also included in the exhibits are one-line summaries for the total
royalty trust and for each state showing the proved reserves and future net
revenue for the individual properties. Projections of individual property
future production and net revenue are included in separate volumes to this
report. These exhibits and volumes should not be relied upon independently of
this narrative.
The proved developed producing reserves and production forecasts were
estimated by production decline extrapolations, water-oil ratio trends, P/Z
declines, or in a few cases, by volumetric calculations. For some properties
with insufficient performance history to establish trends, we estimated future
production by analogy with other properties with similar characteristics. The
past performance trends of many properties were influenced by production
curtailments, workovers, waterfloods, and/or infill drilling. Actual future
production may require that our estimated trends be significantly altered.
The estimated proved undeveloped reserves require significant capital
expenditures such as drilling and completion costs. The proved undeveloped
reserve estimates for infill wells are based on analogies to similar infill
wells in the same field and/or the production histories of offset wells in the
same field.
Reserve estimates from volumetric calculations and from analogies are often
less certain than reserve estimates based on well performance obtained over a
period during which a substantial portion of the reserves was produced.
<PAGE>
MILLER AND LENTS, LTD.
Cross Timbers Oil Company January 20, 1999
Page 3
With the exception of a few properties, the data employed in our
determinations of proved reserves and future net income were provided by Cross
Timbers Oil Company. We obtained pressure and production information from
independent sources for some properties that had insufficient data from Cross
Timbers Oil Company to employ as bases for reserve estimates. The current
expenses for each lease were obtained from operating statements provided by
Cross Timbers Oil Company except for certain leases where Cross Timbers Oil
Company deducted items considered by Cross Timbers Oil Company to be
nonrecurring expenditures. No overhead was included for those properties
operated by Cross Timbers Oil Company. For some properties, such as large
waterfloods, Cross Timbers Oil Company assumed a decline in variable operating
costs due to depleting production which was derived by forecasting a decrease in
the property well count. None of the data provided to us by Cross Timbers Oil
Company, including, but not limited to, graphical representations and
tabulations of past production performance, well tests and pressures, ownership
interests, prices, and operating costs, were verified by us as such was not
within the scope of our assignment.
The evaluations presented in this report, with the exceptions of those
parameters specified by others, reflect our informed judgments based on accepted
standards of professional investigation but are subject to those generally
recognized uncertainties associated with interpretation of geological,
geophysical, and engineering information. Government policies and market
conditions different from those employed in this study may cause the total
quantity of oil or gas to be recovered, actual production rates, prices
received, or operating and capital costs to vary from those presented in this
report.
Our workpapers and data are in our files and available for review upon
request. If you have any questions regarding the above, or if we can be of
further assistance, please call.
Very truly yours,
MILLER AND LENTS, LTD.
By /s/ Karen F. Loving
----------------------------
Karen F. Loving
Vice President
KFL/hsd
<PAGE>
Attachment 1
1-1-99
Hugoton Royalty Trust
80% Net Profits Interests
SEC PRICING CASE
A. Oil Price All oil/condensate prices held constant at $9.50 per
barrel through the life of the property. (Adjust for
gravity, transportation charges, and crude marketing
arrangements.)
B. Gas Price Estimated 1/1/99 price held constant through the life
of the property.
C. Operating Costs Current expenses held constant through the life of the
property.
D. Curtailment For curtailed gas wells, curtailed rates were based on
the first six months of 1998 rate as a percent of 1998
capacity, then relieved over a two-year period, i.e.,
100% at 1/1/01.
E. Discount Rate 10% per year.
<PAGE>
Attachment 2
PROVED RESERVES DEFINITIONS
IN ACCORDANCE WITH
SECURITIES AND EXCHANGE COMMISSION REGULATION S-X
PROVED OIL AND GAS RESERVES
- ---------------------------
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and
costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements but not on
escalations based upon future conditions.
1. Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a
reservoir considered proved includes (a) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any, and (b)
the immediately adjoining portions not yet drilled but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
2. Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the proved
classification when successful testing by a pilot project or the operation
of an installed program in the reservoirs provides support for the
engineering analysis on which the project or program was based.
3. Estimates of proved reserves do not include the following:
a. Oil that may become available from known reservoirs but is classified
separately as indicated additional reserves.
b. Crude oil, natural gas, and natural gas liquids, the recovery of which
is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors.
c. Crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects.
d. Crude oil, natural gas, and natural gas liquids, that may be recovered
from oil shales, coal, gilsonite, and other such sources.
Depending upon their status of development, proved reserves are subdivided
into proved developed reserves and proved undeveloped reserves.
PROVED DEVELOPED OIL AND GAS RESERVES
- -------------------------------------
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as proved developed
reserves only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
PROVED UNDEVELOPED OIL AND GAS RESERVES
- ---------------------------------------
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell the Trust Units offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 10
Forward Looking Statements................................................. 15
Use of Proceeds............................................................ 15
Cross Timbers.............................................................. 15
The Trust.................................................................. 15
Hypothetical Annual Cash Distributions..................................... 16
The Net Profits Interests and the Underlying Properties.................... 20
Computation of Net Proceeds................................................ 33
Federal Income Tax Consequences............................................ 36
State Tax Considerations................................................... 41
ERISA Considerations....................................................... 42
Description of the Trust Indenture......................................... 43
Description of the Trust Units............................................. 46
Selling Trust Unitholder................................................... 49
Legal Matters.............................................................. 49
Experts.................................................................... 49
Available Information...................................................... 50
Glossary of Certain Oil and Natural Gas Terms.............................. 51
Index to Financial Statements.............................................. F-1
Underwriting............................................................... U-1
</TABLE>
---------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15,000,000 Trust Units
Hugoton Royalty Trust
---------------
PROSPECTUS
---------------
Goldman, Sachs & Co.
Lehman Brothers
Bear, Stearns & Co. Inc.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Donaldson, Lufkin & Jenrette
A.G. Edwards & Sons, Inc.
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meanings assigned to them in the Prospectus forming a
part of this Registration Statement.
Item 14. Other Expenses of Issuance and Distribution.
Except for the Registration Fee and the NASD Filing Fee, the following
itemized table sets forth estimates of those expenses payable by the Company in
connection with the offer and sale of the securities offered hereby:
<TABLE>
<S> <C>
Registration Fee................................................... $ 47,955
NASD Filing Fee.................................................... 17,750
Printing and Engraving Expenses.................................... 200,000
Legal Fees and Expenses............................................ 175,000
Accountants' Fees and Expenses..................................... 60,000
Miscellaneous Fees and Expenses.................................... 149,295
--------
Total.............................................................. $650,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Section 6.02 of the Trust Indenture provides that the trustee will be
indemnified by the trust estate or, if Trust assets are insufficient, by Cross
Timbers Oil Company, a Delaware corporation (the "Company"), against any and
all liability and expenses incurred by it individually or as Trustee in the
administration of the trust and the trust estate, except for any liability or
expense resulting from fraud or gross negligence or acts or omissions in bad
faith.
The Company is incorporated in Delaware. Under Section 145 of the Delaware
General Corporation Law (the "DGCL"), a Delaware corporation has the power,
under specified circumstances, to indemnify its directors, officers, employees
and agents in connection with actions, suits or proceedings brought against
them by a third party or in the right of the corporation, by reason that they
were or are such directors, officers, employees or agents, against expenses and
liabilities incurred in any such action, suit or proceeding so long as they
acted in good faith and in a manner that they reasonably believed to be in, or
not opposed to, the best interests of such corporation, and with respect to any
criminal action, that they had no reasonable cause to believe their conduct was
unlawful. With respect to suits by or in the right of such corporation,
however, indemnification is generally limited to attorneys' fees and other
expenses and is not available if such person is adjudged to be liable to such
corporation unless the court determines that indemnification is appropriate. A
Delaware corporation also has the power to purchase and maintain insurance for
such persons. Article Nine of the Certificate of Incorporation of the Company
permits indemnification of directors and officers to the fullest extent
permitted by Section 145 of the DGCL. Reference is made to the Certificate of
Incorporation of the Company.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provisions may not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock) of
the DGCL or (iv) for any transaction from which the director derived an
improper personal benefit. Article Ten of the Company's Certificate of
Incorporation contains such a provision.
II-1
<PAGE>
The above discussion of the Company's Certificate of Incorporation and of
Sections 102(b)(7) and 145 of the DGCL is not intended to be exhaustive and is
qualified in its entirety by such Certificate of Incorporation and statutes.
Additionally, the Company has acquired directors' and officers' insurance in
the amount of $10 million.
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement.
4.1* --Hugoton Royalty Trust Indenture.
5.1 --Opinion of Kelly, Hart & Hallman, P.C. as to legality of the
securities registered hereby.
8.1 --Opinion of Butler & Binion, L.L.P. regarding federal income tax
matters.
8.2 --Opinion of Morris, Laing, Evans, Brock & Kennedy, Chartered as to
Kansas State tax matters.
10.1 --Form of 80% Net Overriding Royalty Conveyance--Kansas.
10.2 --Form of 80% Net Overriding Royalty Conveyance--Oklahoma.
10.3 --Form of 80% Net Overriding Royalty Conveyance--Wyoming.
15.1 --Awareness letter of Arthur Andersen LLP.
23.1 --Consent of Arthur Andersen LLP.
23.2 --Consent of Kelly, Hart & Hallman, P.C. (set forth in their opinion
filed as Exhibit 5.1).
23.3 --Consent of Butler & Binion, L.L.P. (set forth in their opinion filed
as Exhibit 8.1).
23.4 --Consent of Morris, Laing, Evans, Brock & Kennedy, Chartered (set
forth in their opinion filed as Exhibit 8.2).
23.5 --Consent of Miller & Lents.
24.1* --Powers of attorney (set forth on the signature page of the original
filing).
27.1 --Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
Item 17. Undertakings.
The Company hereby undertakes:
(a) that, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Company's annual reports pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) to provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(c) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed a part of this registration statement
as of the time it was declared effective.
II-2
<PAGE>
(d) for the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore unenforceable. In the event that claim for
indemnification against such liabilities (other than the payment by the Trust
or Company of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered the Trust or Company will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fort Worth, State of Texas, on January 25,
1999.
CROSS TIMBERS OIL COMPANY,
By /s/ J. Richard Seeds
-----------------------------------
J. Richard Seeds
Executive Vice President
HUGOTON ROYALTY TRUST
By CROSS TIMBERS OIL COMPANY, as
sponsor
By /s/ J. Richard Seeds
-------------------------------
J. Richard Seeds
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Bob R. Simpson* Director, Chairman of the January 25, 1999
______________________________________ Board and Chief Executive
Bob R. Simpson Officer (Principal
Executive Officer)
/s/ Steffen E. Palko* Director, Vice Chairman of January 25, 1999
______________________________________ the Board and President
Steffen E. Palko
/s/ J. Richard Seeds Director, Executive Vice January 25, 1999
______________________________________ President
J. Richard Seeds
/s/ J. Luther King, Jr.* Director January 25, 1999
______________________________________
J. Luther King, Jr.
/s/ Jack P. Randall* Director January 25, 1999
______________________________________
Jack P. Randall
/s/ Scott G. Sherman* Director January 25, 1999
______________________________________
Scott G. Sherman
/s/ Louis G. Baldwin Senior Vice President and January 25, 1999
______________________________________ Chief Financial Officer
Louis G. Baldwin (Principal Financial
Officer)
/s/ Bennie G. Kniffen Senior Vice President and January 25, 1999
______________________________________ Controller (Principal
Bennie G. Kniffen Accounting Officer)
</TABLE>
/s/ J. Richard Seeds
*By:
------------------------------
J. Richard Seeds
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement.
5.1 --Opinion of Kelly, Hart & Hallman, P.C. as to legality of the
securities registered hereby.
8.1 --Opinion of Butler & Binion, L.L.P. regarding federal income tax
matters.
8.2 --Opinion of Morris, Laing, Evans, Brock & Kennedy, Chartered as to
Kansas State tax matters.
10.1 --Form of 80% Net Overriding Royalty Conveyance--Kansas.
10.2 --Form of 80% Net Overriding Royalty Conveyance--Oklahoma.
10.3 --Form of 80% Net Overriding Royalty Conveyance--Wyoming.
15.1 --Awareness letter of Arthur Andersen LLP.
23.1 --Consent of Arthur Andersen LLP.
23.5 --Consent of Miller & Lents.
27.1 --Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 1.1
Hugoton Royalty Trust
Trust Units
----------
Underwriting Agreement
____________________, 1999
<PAGE>
Hugoton Royalty Trust
Trust Units
---------
Underwriting Agreement
----------------------
______________, 1999
Goldman, Sachs & Co.,
Lehman Brothers Inc.
A.G. Edwards & Sons, Inc.
Bear, Stearns & Co.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street
New York, New York 10004
Dear Sirs:
Cross Timbers Oil Company, a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
15,000,000 units of beneficial interest ("Trust Units") in Hugoton Royalty
Trust, a grantor trust formed under the laws of the State of Texas (the
"Trust"), and, at the election of the Underwriters, up to 2,250,000 additional
Trust Units. The aggregate of 15,000,000 Trust Units to be sold by the Company
is herein called the "Firm Units" and the aggregate of 2,250,000 additional
Trust Units to be sold by the Company at the election of the Underwriters is
herein called the "Optional Units." The Firm Units and the Optional Units which
the Underwriters elect to purchase pursuant to Section 2 hereof are referred to
herein collectively as the "Units."
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A joint registration statement of the Trust (on Form S-1) and the
Company (on Form S-3) (File No. 333-68441) (the "Initial Registration
Statement") in respect of the Units has been filed with the Securities and
Exchange Commission (the "Commission"); the Initial Registration Statement and
any post-effective amendment thereto, each in the form heretofore delivered to
you, and, excluding exhibits thereto but including all documents incorporated by
reference in the prospectus contained therein, to you for each of the other
Underwriters, have been declared effective by the Commission in such form; other
than a registration statement, if any,
<PAGE>
increasing the size of the offering (a "Rule 462(b) Registration Statement"),
filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Act"), which became effective upon filing, no other document with respect to
the Initial Registration Statement or document incorporated by reference therein
has heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act, is hereinafter called a
"Preliminary Prospectus;" the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including (i) the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b) under the Act
in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under
the Act to be part of the Initial Registration Statement at the time it was
declared effective and (ii) the documents incorporated by reference in the
prospectus contained in the Initial Registration Statement at the time such part
of the Initial Registration Statement became effective, each as amended at the
time such part of the Initial Registration Statement became effective or such
part of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement;" such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus;" and any reference
herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Item
12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus or
Prospectus, as the case may be; any reference to any amendment or supplement to
any Preliminary Prospectus or the Prospectus shall be deemed to refer to and
include any documents filed after the date of such Preliminary Prospectus or
Prospectus, as the case may be, under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and any reference to any amendment
to the Registration Statement shall be deemed to refer to and include any annual
report of the Company filed pursuant to Section 13(a) or 15(d) of the Exchange
Act after the effective date of the Initial Registration Statement that is
incorporated by reference in the Registration Statement);
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iii) The documents incorporated by reference in the Prospectus,
when they became effective or were filed with the Commission, as the case may
be, conformed in all material
-2-
<PAGE>
respects to the requirements of the Act or the Exchange Act, as applicable, and
the rules and regulations of the Commission thereunder, and none of such
documents contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and any further documents so filed and incorporated by
reference in the Prospectus or any further amendment or supplement thereto, when
such documents become effective or are filed with the Commission, as the case
may be, will conform in all material respects to the requirements of the Act or
the Exchange Act, as applicable, and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company by
an Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iv) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(v) The Trust has not sustained since the date of its formation any
material loss or interference with respect to the Underlying Properties (as
defined in the Prospectus) from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been (a) any change in the number of outstanding Trust Units or (b) any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the general affairs, financial position, or
results of operations of the Trust, or management of the Underlying Properties,
otherwise than as set forth or contemplated in the Prospectus;
(vi) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements incorporated by
reference in the Prospectus any material loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the Prospectus; and,
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the long-term
debt of the Company or any of its subsidiaries or any material adverse
-3-
<PAGE>
change, or any development involving a prospective material adverse change, in
or affecting the general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus;
(vii) (a) The Company has good and defensible title to the
Underlying Properties, free and clear of all liens, encumbrances and defects,
except (A) royalties, overriding royalties and other burdens under oil and gas
leases, (B) easements, restrictions, rights-of-way and other matters that
commonly affect property, (C) liens securing taxes and other governmental
charges, or claims of materialmen, mechanics and similar persons, not yet due
and payable, (D) liens and encumbrances under operating agreements, farmout
agreements, unitization, pooling and commutation agreements, declarations and
orders, and gas sales contracts, securing payment of amounts not yet due and
payable and of a scope and nature customary in the oil and gas industry and (E)
liens, encumbrances and defects that do not in the aggregate materially affect
the value of the Underlying Properties or materially interfere with the use made
or proposed to be made of such Underlying Properties by the Company; (b) the
working interests in oil, gas and mineral leases or mineral interests which
constitute a portion of the Underlying Properties held by the Company reflect in
all material respects the right of the Company to explore or receive production
from such Underlying Properties, and the care taken by the Company and its
subsidiaries with respect to acquiring or otherwise procuring such leases or
mineral interests was generally consistent with standard industry practices for
acquiring or procuring leases and interests therein to explore such for
hydrocarbons; and (c) the Trust has good and defensible title to the Net Profits
Interests (as defined in the Prospectus), free and clear of all liens,
encumbrances and defects, except liens securing taxes and other governmental
charges and liens, encumbrances and defects that do not in the aggregate
materially affect the value of the Net Profits Interests;
(viii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties and conduct
its business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction, and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(ix) (a) The Trust has been duly formed and is validly existing as a
grantor trust under the laws of the State of Texas, with full trust power and
authority to own its properties as described in the Prospectus; (b) the Royalty
Trust Indenture, dated as of December 1, 1998, between the Company, as Grantor,
and NationsBank, N.A., a banking association organized under the laws of the
United States with its principal place of business in Dallas, Texas (the
"Trustee"), as trustee, (such Royalty Trust Indenture being herein referred to
as the "Indenture"), has been authorized, executed and delivered by the Company
and the Trustee; (c) the Indenture is a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except
-4-
<PAGE>
as the enforceability thereof may be limited by (A) bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors generally, and
(B) general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law); (d) the Net Overriding Royalty
Conveyance (Oklahoma) dated as of December 1, 1998 by the Company in favor of
the Trustee, as trustee in trust, the Net Overriding Royalty Conveyance (Kansas)
dated as of December 1, 1998 by the Company in favor of the Trustee, as trustee
in trust, and the Net Overriding Royalty Conveyance (Wyoming) dated as of
December 1, 1998 by the Company in favor of the Trustee, as trustee in trust,
(collectively, the "Conveyances"), will be duly authorized, executed and
delivered by the Company and will be valid and binding obligations of the
Company enforceable against the Company, except as the enforceability of each
may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, and (B) general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law); (e) at the Closing, the Company will have made
all necessary filings in the jurisdictions referred to in the Conveyances or,
with respect to Net Profits Interests burdening Federal or Indian lands, under
Federal law, including without limitation the filing of the Conveyances for
recordation in the appropriate records pursuant to local recordation laws or,
with respect to Net Profits Interests burdening Federal and Indian lands,
pursuant to applicable Federal law; (f) the Indenture conforms and the
Conveyances will conform in all material respects to the descriptions thereof in
the Prospectus; (g) at the Closing, the Company will have assigned and
contributed to the Trust the Net Profits Interests as described in the
Prospectus and (h) holders of the certificates representing the Trust Units are
entitled to the benefits of the Indenture;
(x) There are 40,000,000 Trust Units authorized and issued under
the Indenture; the Trust Units to be sold by the Company to the Underwriters
hereunder have been duly and validly authorized and issued without the
requirement for payment of any further consideration and conform to the
description of the Trust Units contained in the Prospectus; and, except as set
forth in the Prospectus;
(xi) The Company has, and immediately prior to each Time of Delivery
(as defined in Section 4 hereof) the Company will have, good and valid title to
the Trust Units to be sold by the Company hereunder, free and clear of all
liens, encumbrances, equities or claims, and the Company has full corporate
power and authority to sell, assign, transfer and deliver such Trust Units
hereunder; and, upon the delivery of such Trust Units and payment therefor
pursuant hereto, good and valid title to such Trust Units, free and clear of
all liens, encumbrances, equities or claims, will pass to the several
Underwriters;
(xii) All consents, approvals, authorizations and orders necessary
for the transfer of the Net Profits Interests to the Trust as described in the
Prospectus have been obtained and such transfer has not had the effect of
creating any lien, claim, encumbrance or equity of any kind in favor of any
person with respect to any of the Net Profits Interests (including any
preferential right of purchase, or, with respect to any properties in which
Grantor has acted as operator, any right to remove the Grantor as operator)
except (i) to the extent such rights have been validly waived in
-5-
<PAGE>
writing or (ii) to the extent such liens, claims, encumbrances or equities,
which, if asserted or exercised, would not have a material adverse effect on the
value of the Trust Units;
(xiii) The formation of the Trust by the execution and delivery of
the Indenture and the transfer of the Net Profits Interests by the Company to
the Trust by the execution and delivery of the Conveyances, the sale of the
Trust Units to be sold by the Company hereunder, the compliance by the Company
and the Trust with all of the provisions of this Agreement, the Indenture and
the Conveyances and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, the Indenture or any other
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries or the Trust is a
party or by which the Company or any of its subsidiaries or the Trust is bound
or to which any of the property or assets of the Company or any of its
subsidiaries or the Net Profit Interests is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or Bylaws
of the Company, the Indenture, or any statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such court or
governmental agency or body is required for the sale of the Trust Units or the
consummation by the Company of the transactions contemplated by this Agreement,
except the registration under the Act of the Trust Units and such consents,
approvals, authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Trust Units by the Underwriters;
(xiv) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or Bylaws or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan agreement,
lease or any other agreement or instrument to which it is a party or by which it
or any of its properties may be bound;
(xv) The statements set forth in the Prospectus under the caption
"Description of the Trust Units," insofar as they purport to constitute a
summary of the terms of the Trust Units, and the statements under the captions
"Federal Income Tax Consequences," and "State Tax Considerations" and
"Underwriting," fairly and accurately describe the provisions of the laws and
documents referred to therein in all material respects;
(xvi) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any of its
subsidiaries or the Trust is a party or of which any property of the Company or
any of its subsidiaries or the Net Profits Interests is the subject which, if
determined adversely to the Company or any of its subsidiaries or the Trust or
the Net Profits Interests, would individually or in the aggregate have a
material adverse effect on the Net Profits Interests or the current or future
consolidated financial position, owners' equity or results of operations of the
Company and its subsidiaries or the Trust; and, to the best of the Company's
-6-
<PAGE>
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(xvii) Arthur Andersen L.L.P., who have certified certain financial
statements of the Trust and the Underlying Properties included in the Prospectus
and certain financial statements of the Company and its subsidiaries
incorporated by reference therein, are independent public accountants as
required by the Act and the rules and regulations of the Commission thereunder;
(xviii) Neither the Company nor the Trust is or, after giving effect
to the offering and sale of Trust Units, will be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xix) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
(xx) The Company has reviewed its operations and that of its
subsidiaries and is in the process of reviewing the relevant operations of third
parties with which the Company or any of its subsidiaries has a material
relationship to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries will be affected by the Year 2000 Problem.
As a result of such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a material adverse effect on the
general affairs, management, the current or future consolidated financial
position, business prospects, stockholders' equity or results of operations of
the Company and its subsidiaries or result in any material loss or interference
with the Company's business or operations. The "Year 2000 Problem" as used
herein means any significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000;
(xxi) The information supplied by the Company to its independent
petroleum engineering consultants for purposes of preparing the reserve reports
used to calculate estimates of reserves of the Trust and the Underlying
Properties included in the Registration Statement, including, without
limitation, production, costs of operation and development, current prices for
production, agreements relating to current and future operations and sales of
production, was true and correct in all material respects on the date supplied
and was prepared in accordance with customary industry practices; Miller and
Lents, Ltd., independent consulting petroleum engineers, who prepared estimates
of the extent and value of proved oil and natural gas reserves of the Underlying
Properties, are independent with respect to the Company and the Trust;
(xxii) At the First Time of Delivery (as defined in Section 4),
except for liens and encumbrances described in clauses (A), (B), (C) and (D) of
Section 1(vii)(a) hereof, (a) any and all
-7-
<PAGE>
liens or encumbrances on the Underlying Properties will be subordinated to the
Net Profits Interests, and (b) all future liens or encumbrances on the
Underlying Properties shall be subordinate and inferior to the Net Profits
Interests;
(xxiii) The Company has not taken and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of Trust Units or any security of the Company to facilitate the
sale or resale of the Trust Units; and
(xxiv) No consent, approval, authorization or filing is required
under any law, rule or regulation of the States of Texas, Kansas, Oklahoma or
Wyoming, or of the United States of America in order to permit the Trustee to
act as Trustee of the Trust.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company at a purchase price of
$______ per Trust Unit, the number of Firm Units set forth opposite the name of
such Underwriter in Schedule I hereto and (b) in the event and to the extent
that the Underwriters shall exercise the election to purchase Optional Units as
provided below, the Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at the purchase price per Trust Unit set forth in clause (a) of this
Section 2, that portion of the number of Optional Units as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional Trust Units) determined by multiplying such number of Optional Units
by a fraction the numerator of which is the maximum number of Optional Units
which such Underwriter is entitled to purchase as set forth opposite the name of
such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Optional Units which all of the Underwriters are entitled to
purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 2,250,000 Optional Units, at the purchase price per Trust
Unit set forth in the paragraph above, for the sole purpose of covering over-
allotments in the sale of the Firm Units. Any such election to purchase
Optional Units shall be made in proportion to the maximum number of Optional
Units to be sold by the Company. Any such election to purchase Optional Units
may be exercised only by written notice from you to the Company, given within a
period of 30 calendar days after the date of this Agreement and setting forth
the aggregate number of Optional Units to be purchased and the date on which
such Optional Units are to be delivered, as determined by you but in no event
earlier than the First Time of Delivery (as defined in Section 4 hereof) or,
unless you and the Company otherwise agree in writing, earlier than two or later
than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Units, the
several Underwriters propose to offer the Firm Units for sale upon the terms and
conditions set forth in the Prospectus.
-8-
<PAGE>
4. (a) The Trust Units to be purchased by each Underwriter hereunder, in
definitive form and in such denominations and registered in such names as
Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice
to the Company shall be delivered by or on behalf of the Company to Goldman,
Sachs & Co. through the facilities of The Depository Trust Company for the
account of such Underwriter, against payment on behalf of such Underwriter of
the purchase price therefor by wire transfer of federal (same-day) funds to the
account specified by the Company, to Goldman, Sachs & Co. at least forty-eight
hours in advance. The Company will cause the certificates representing the
Trust Units to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto at
the office of The Depository Trust Company or its designated custodian (the
"Designated Office"). The time and date of such delivery and payment shall be,
with respect to the Firm Units, 9:30 a.m., New York City time, on
_______________, 1999 or such other time and date as Goldman, Sachs & Co. and
the Company may agree upon in writing, and, with respect to the Optional Units,
9:30 a.m., New York City time, on the date specified by Goldman, Sachs & Co. in
the written notice given by Goldman, Sachs & Co. of the Underwriters' election
to purchase such Optional Units, or such other time and date as Goldman, Sachs &
Co. and the Company may agree upon in writing. Such time and date for delivery
of the Firm Units is herein called the "First Time of Delivery," such time and
date for delivery of the Optional Units, if not the First Time of Delivery, is
herein called the "Second Time of Delivery," and each such time and date of
delivery is herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Trust Units and any additional documents requested by the Underwriters
pursuant to Section 7 hereof, will be delivered at the offices of
[________________] (the "Closing Location"), and certificates representing the
Trust Units will be delivered at the Designated Office, all at such Time of
Delivery. A meeting will be held at the Closing Location at _____p.m., New York
City time, on the New York Business Day next preceding such Time of Delivery, at
which meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. (a) The Company agrees with each of the Underwriters:
(i) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you copies thereof; to advise you, promptly after it receives notice
thereof, of the
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issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the Trust Units for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(ii) Promptly from time to time to take such action as you may
reasonably request to qualify the Trust Units for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions in the United States for as long as may be necessary to complete
the distribution of the Trust Units, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation, to become
subject to taxation or to file a general consent to service of process in any
jurisdiction;
(iii) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to time,
to furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Trust Units and if at such time any events shall have occurred as a result
of which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus or to file under the Exchange Act any document
incorporated by reference in the Prospectus in order to comply with the Act or
the Exchange Act, to notify you and to promptly amend or supplement the
Prospectus or to file such document and to furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may from time
to time reasonably request of the amended Prospectus or the supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Trust Units at any time nine months or more
after the time of issue of the Prospectus, upon your request but at the expense
of such Underwriter, to prepare and deliver to such Underwriter as many copies
as you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(iv) During the period beginning on the date hereof and continuing to
and including the date that is 180 days after the date of the Prospectus, not to
offer, sell, contract to sell, or transfer or distribute to stockholders
(including any declaration of a distribution to stockholders of record as of
any date prior to such date), or otherwise dispose of, except as provided
hereunder, any Trust Units or other securities of the Trust, or other securities
that are derived from the
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<PAGE>
Underlying Properties that are substantially similar to the Trust Units,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Trust Units or any
such substantially similar securities (other than pursuant to the grant or
exercise under employee benefit plans and awards of the Company of options to
acquire Trust Units existing on the date of this agreement, provided that the
optionee agrees in writing to be bound by the restrictions set forth in this
clause (e)), without your prior written consent;
(v) To use the net proceeds received by it from the sale of the
Trust Units pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds;"
(vi) To use its best efforts to list the Trust Units on the New York
Stock Exchange (the "Exchange");
(vii) To file with the Commission any information on Form 10-Q or
Form 10-K as may be required by Rule 463 under the Act; and
(viii) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of
this Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
(b) The Trustee, on behalf of the Trust, agrees with each of the
Underwriters:
(i) To cause the Trust to file promptly all reports and any
definitive proxy or information statements required to be filed by the Trust
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering or sale of
the Trust Units;
(ii) To cause the Trust to make generally available to holders of
Trust Units as soon as practicable, but in any event not later than eighteen
months after the effective date of the Registration Statement (as defined in
Rule 158(c) under the Act), an earnings statement of the Trust (which need not
be audited) complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the option of the
Trustee, Rule 158);
(iii) To cause the Trust to furnish to Trust Unitholders as soon
as practicable after the end of each fiscal year an annual report (including
financial statements of the Trust certified by independent public accountants)
and, as soon as practicable after the end of each of the first three quarters
of each fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), to make available to its Trust
Unitholders summary financial information of the Trust for such quarter in
reasonable detail, all as required by the Indenture; and
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<PAGE>
(iv) During a period of five years from the effective date of the
Registration Statement, to cause the Trust to furnish to you copies of all
reports or other communications (financial or other) of the Trust furnished to
Trust Unitholders, and to deliver to you as soon as they are available, copies
of any reports and financial statements of the Trust furnished to or filed with
the Commission or any national securities exchange on which any class of
securities of the Trust is listed.
6. The Company and the Trustee covenant and agree with one another and
with the several Underwriters that (a) the Company will pay or cause to be paid
the following: (i) the fees, disbursements and expenses of the Company's counsel
and accountants and Trustee's counsel in connection with the formation of the
Trust and the registration of the Trust Units under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents and any other documents in connection with the offering,
purchase, sale and delivery of the Trust Units; (iii) all expenses in connection
with the qualification of the Trust Units for offering and sale under state
securities laws as provided in Section 5(b) hereof, including the fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey; (iv) all fees and
expenses in connection with the original listing of the Trust Units on the New
York Stock Exchange and the filing fees incident to securing any required review
by the National Association of Securities Dealers, Inc. of the terms of the sale
of the Trust Units; (v) the cost of preparing certificates representing Trust
Units; and (vi) all other costs and expenses incident to the performance of its
obligations hereunder that are not otherwise specifically provided for in this
Section and (b) the Trustee will cause the Trust to pay (i) the cost and charges
of any transfer agent or registrar and (ii) the annual listing fees of the New
York Stock Exchange. It is understood, however, that except as provided in this
Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their
own costs and expenses, including the fees of their counsel, stock transfer
taxes on resale of any of the Trust Units by them, and any advertising expenses
connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Trust Units
to be delivered at each Time of Delivery, shall be subject, in their discretion,
to the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m. Washington,
D.C. time on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have
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<PAGE>
been initiated or threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with to your
reasonable satisfaction;
(b) Andrews & Kurth L.L.P., counsel for the Underwriters, shall have
furnished to you such opinion or opinions (a draft of such opinion is attached
as Annex II(a) hereto), dated such Time of Delivery, with respect to the matters
covered in paragraphs (i), (ii), (viii), (xii), and the matters set forth in the
last paragraph of subsection (c) below, as well as other related matters as you
may reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Kelly, Hart & Hallman, a professional corporation, counsel for the
Company, shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of Delivery, in form
and substance reasonably satisfactory to you, to the effect that:
(i) The Company was incorporated, exists and is in good standing
under the laws of the State of Delaware, with corporate power and authority to
own its properties and conduct its business as described in the Prospectus;
(ii) The Company is qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of the States of
Texas, Kansas, Oklahoma and Wyoming and such other states set forth on an
exhibit to such opinion, and such counsel has no knowledge that the nature of
the properties of the Company or the conduct of its business requires
qualification in other jurisdictions, except jurisdictions in which the Company
is subject to no material liability or disability by reason of its failure to be
so qualified;
(iii) Each subsidiary of the Company was incorporated, exists and
is in good standing under the laws of its jurisdiction of incorporation; all of
the issued shares of capital stock of each such subsidiary have been validly
authorized and issued, are fully paid and non-assessable, are owned of record by
the Company directly or through subsidiaries, and such counsel has no knowledge
of any adverse claim (within the meaning of Article 8 of the Uniform Commercial
Code) thereto;
(iv) The Trust has been duly formed and is validly existing as a
grantor trust under the laws of the State of Texas; there are 40,000,000 Trust
Units authorized and issued under the Indenture; and all of the outstanding
Trust Units have been duly authorized, are fully paid without the requirement of
any further consideration, and, assuming due execution by the Trustee of the
certificates representing the Trust Units, are validly issued and entitle the
Trust Unitholder thereof to the benefits of the Indenture;
(v) Each of the Indenture and the Conveyances has been duly
authorized, executed and delivered by the Company as grantor and, assuming the
due authorization, execution and delivery thereof by the Trustee, are valid and
binding obligations of the Company, enforceable
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<PAGE>
against the Company in accordance with their terms (except as regards the
application of bankruptcy, insolvency, moratorium or other similar laws
governing creditors' rights generally and the availability of the remedy of
specific performance and the enforceability of provisions providing for
indemnification for violations of federal securities laws);
(vi) The Company is the record owner of the Trust Units to be sold
by the Company to the Underwriters hereunder, and the Company has corporate
power and authority to sell and deliver to the Underwriters certificates
representing such Trust Units; such counsel has no knowledge that immediately
prior to the Time of Delivery, the Company did not have good and valid title to
such Trust Units sold at the Time of Delivery, free and clear of all adverse
claims (within the meaning of Article 8 of the Uniform Commercial Code); and
title to such Trust Units, free and clear of such adverse claims, has been
transferred to each of the several Underwriters who purchased and took delivery
of certificates representing such Trust Units in good faith and without notice
of any adverse claim within the meaning of Article 8 of the Uniform Commercial
Code;
(vii) Such counsel has no knowledge, other than as set forth in
the Prospectus, of any pending or overtly threatened legal or governmental
proceedings to which the Company or any of its subsidiaries or the Trust is or
may be a party or of which any property of the Company or any of its
subsidiaries or the Trust is or may be subject which, if determined adversely to
the Company or any of its subsidiaries or the Trust would, individually or in
the aggregate, have a material adverse effect on (A) the consolidated financial
position, equity or results of operations of the Company and its subsidiaries,
(B) the financial condition of the trust corpus of the Trust or (C) the revenues
and direct operating expenses of the Underlying Properties;
(viii) This Agreement has been duly authorized, executed and delivered
by the Company;
(ix) The issue and sale of the Trust Units being delivered at the
Time of Delivery by the Company and the compliance by the Company with all of
its obligations under this Agreement and the Indenture will not (A) conflict
with or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, the Indenture or, except with respect to any
preferential purchase rights under applicable joint operating agreements, any
other indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its subsidiaries
or the Trust is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries or the Trust is subject, (B) violate any provisions of the
Certificate of Incorporation or Bylaws of the Company or (C) violate any
statute, rule or regulation known to such counsel or any order known to such
counsel of any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or the Trust or any of their properties;
(x) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body that is
required for the issue and sale of the Trust Units, except the registration
under the Act of the Trust Units, and such consents, approvals,
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<PAGE>
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Trust Units by the Underwriters;
(xi) Such counsel has no knowledge that the Company or any of its
subsidiaries is in violation of its Certificate of Incorporation or By-laws or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, or lease or agreement or other instrument known to such
counsel to which it is a party or by which it or any of its properties may be
bound;
(xii) The statements set forth in the Prospectus under the caption
"Description of Trust Units," insofar as they constitute matters of law,
summaries of legal matters, documents or legal conclusions, have been reviewed
by such counsel and are correct in all material respects;
(xiii) Neither the Company nor the Trust is an "investment company,"
as such term is defined in the Investment Company Act; and
(xiv) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to the Time of
Delivery (other than the financial statements, notes thereto and related
schedules therein, and the information that is extracted from the reports of
Miller and Lents, Ltd. pertaining to oil and gas reserves that is included
therein, as to which such counsel expresses no opinion) comply as to form in all
material respects with the requirements of the Act and the rules and regulations
thereunder;
In addition to the opinions set forth above, such opinion shall also
include a statement to the effect that although such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement, the Prospectus or the documents
incorporated by reference in the Prospectus or any further amendment or
supplement thereto, except for those referred to in the opinion in subsection
(xii) above, nothing has come to the attention of such counsel that has caused
them to believe that, (A) as of its effective date, the Registration Statement,
or any further amendment thereto prior to such Time of Delivery (other than the
financial statements, notes thereto and related schedules therein, and the
information that is extracted from the reports of Miller and Lents, Ltd.
pertaining to oil and gas reserves that is included therein, as to which such
counsel need express no opinion) contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (B) as of its date, the
Prospectus or any further amendment or supplement thereto prior to such Time of
Delivery (other than the financial statements, notes thereto and related
schedules therein, and the information that
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<PAGE>
is extracted from the reports of Miller and Lents, Ltd. pertaining to oil and
gas reserves that is included therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (C) as of such Time
of Delivery, either the Registration Statement or the Prospectus or any further
amendment or supplement thereto prior to such Time of Delivery (other than the
financial statements, notes thereto and related schedules therein, and the
information that is extracted from the reports of Miller and Lents, Ltd.
pertaining to oil and gas reserves that is included therein, as to which such
counsel need express no opinion) contains an untrue statement of a material fact
or omits to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
such counsel does not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement or required to
be incorporated by reference into the Prospectus or required to be described in
the Registration Statement or the Prospectus which are not filed or incorporated
by reference or described as required;
(d) Frank McDonald, general counsel to the Company, shall have furnished
to you his written opinion in substantially the form attached hereto as Annex
II(c), dated such time of Delivery, in form and substance reasonably
satisfactory to you, to the effect that:
(i) The documents incorporated by reference in the Prospectus or
any further amendment or supplement thereto made by the Company prior to the
Time of Delivery (other than the financial statements, notes thereto and related
schedules therein, and the information that is extracted from the reports of
Miller and Lents, Ltd. pertaining to oil and gas reserves that is included
therein, as to which such counsel expresses no opinion), when they were filed
with the Commission complied as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder; and
(ii) As of the time they were filed with the Commission, such
documents incorporated by reference in the Prospectus (other than the financial
statements, notes thereto and related schedules therein, and the information
that is extracted from the reports of Miller and Lents, Ltd. pertaining to oil
and gas reserves that is included therein, as to which such counsel need express
no opinion) did not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
(e) Butler and Binion L.L.P., a limited liability partnership, special tax
counsel to the Company, shall have furnished to you their written opinion, dated
such Time of Delivery, in form and substance reasonably satisfactory to you, to
the effect that the statements set forth under the caption "Federal Income Tax
Consequences" in the Prospectus, insofar as such statements set forth legal
conclusions and summaries of legal matters, are correct in all material
respects, subject to the qualifications stated therein;
(f) Morris, Laing, Evans, Brock and Kennedy, chartered, special counsel to
the Company for the State of Kansas, shall have furnished to you their written
opinion with respect to certain tax matters in substantially the form attached
hereto as Annex II(d), dated such Time of Delivery, in form and substance
reasonably satisfactory to you, to the effect that:
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(i) the activities of the Trust and the Trustee as permitted under
the Indenture and the Conveyances will not subject either the Trust or the
Trustee to income taxation by the State of Kansas;
(ii) an owner of a Trust Unit who is not a Kansas resident will not
be subject to Kansas income tax and will not be required to file a Kansas income
tax return, provided that such Trust Unit and such Trust Unit owner's indirect
interest in the Net Profits Interests (through ownership of such Trust Unit) are
not employed by the Trust Unit owner in a trade, business, profession or
occupation carried on in Kansas, and further provided that the Trust Unit owner
is not otherwise subject to Kansas income tax; and
(iii) nonresidents of Kansas will not be subject to Kansas income
tax on gains from sales of Trust Units, subject to the same provisos set forth
in opinion (ii), immediately above;
(g) Each of Monnet, Hayes, Bullis, Thompson & Edwards L.L.P., Brown, Drew,
Massey & Sullivan L.L.P. and Morris, Laing, Evans, Brock and Kennedy, chartered,
special counsel to the Company for the states of Oklahoma, Wyoming and Kansas,
respectively, shall have furnished to you their written opinions in
substantially the form attached hereto as Annex II(e), dated such Time of
Delivery, in form and substance reasonably satisfactory to you, to the effect
that:
(i) a court of competent jurisdiction of the state of such counsel
should give effect to the choice of law provisions of the Conveyance and the
Indenture;
(ii) the Conveyance (i) has been properly filed of record and
recorded in the appropriate real property records in the state of such counsel,
(ii) is adequate and sufficient to legally convey to the Trustee the Net Profits
Interests in the state of such counsel, and (iii) constitutes, in the state of
such counsel, a perfected Conveyance and effective notice of the Net Profits
Interests in the Underlying Properties located in the state of such counsel,
which is and will be valid and binding against third parties subsequently
acquiring interests in the Underlying Properties and is and will be superior to
all future liens and encumbrances on the Underlying Properties (except for such
liens and encumbrances for taxes and assessments not yet due and payable, and
liens and encumbrances under operating agreements, unitization and pooling
agreements, and gas sales contracts, securing payments of amounts not yet due
and payable);
(iii) no actions other than those described above are necessary to
convey the Net Profits Interests in the state of such counsel and to publish
notice thereof;
(iv) the Net Profits Interests constitute property interests under
the laws of the state of such counsel, and the Conveyance and the related Net
Profits Interests should not constitute executory contracts as such term is used
in the federal bankruptcy code;
(v) neither the Trust nor the Trustee is required to qualify to
transact business or appoint an agent for service of process in the state of
such counsel as a result of the ownership,
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operation or activities of the Trust or the Trustee with respect to the Trust,
and the activities of the Trustee pursuant to the Indenture will not require the
appointment of an ancillary trustee in the state of such counsel;
(vi) neither a Trust Unit, nor the interest of a holder of a Trust
Unit, constitutes an interest in real property under the laws of the state of
such counsel, and a non-resident holder of a Trust Unit will not be subject to
inheritance or gift taxation, intestate succession, elective shares of community
property or require the filing of ancillary probate proceedings in such State
solely by reason of ownership of Trust Units;
(vii) a beneficial owner of a Trust Unit will not be subject to
personal liability under state and local laws in the state of such counsel by
virtue of said ownership, including liability regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment;
(viii) the execution, delivery and performance by the Trustee of
the Indenture will not violate or conflict with any law, administrative ruling
or regulation of the state of such counsel;
(ix) no consent, approval, authorization or filing is required under
any law, rule or regulation of the state of such counsel (i) to permit the
Trustee to act as trustee with respect to the oil and gas properties located in
such state or (ii) in connection with the execution and delivery of the
Conveyance, or necessary to the validity, legality or enforceability of the
Conveyance; and
(x) the income from the Net Profits Interests received by the Trust
will not be subject to taxation at the Trust level by the state of such counsel
or any political subdivision thereof. [A Trust Unitholder will not be subject to
taxation by the state of such counsel or any political subdivision thereof with
respect to income from the Net Profits Interests or ownership of Trust Units.]
[A Trust Unitholder will be subject to taxation by the state of such counsel [or
the applicable political subdivision] with respect to income from the Net
Profits Interests or ownership of Trust Units and is required to report such
income to the state of such counsel [or the applicable political subdivision]
only if the amount of such income [during a fiscal year] exceeds
$____________________________;
(h) Thompson & Knight , A Professional Corporation, counsel for the
Trustee, shall have furnished to you their written opinion, dated such Time of
Delivery, in form and substance reasonably satisfactory to you, with respect to
the matters set forth in clauses (i), (ii) and (iii) of Section 7(i) hereof and
to the effect that this Agreement has been duly executed and delivered by the
Trustee. Such opinion may be limited for all purposes to the laws of the State
of Texas and United States federal law;
(i) The Trustee shall have furnished to you a certificate, dated such Time
of Delivery, executed by a duly authorized officer of the Trustee, representing
and warranting to each of the Underwriters that:
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(i) The Trustee is a national banking association authorized and
empowered to act as trustee of the Trust pursuant to the Indenture, and no
consent, approval, authorization or filing is required under any law, rule or
regulation of the State of Texas or of the United States of America in order to
permit the Trustee to act as trustee of the Trust;
(ii) The Indenture has been executed and delivered by the Trustee
and, assuming the due authorization, execution and delivery thereof by the
Company, is a valid and binding obligation of the Trustee, enforceable against
the Trustee in accordance with its terms, except as the enforceability thereof
may be limited (A) by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors rights generally, (B) by general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law), (C) to the extent provisions provide indemnification for
violations of federal securities laws, and (D) by considerations of public
policy; and the Conveyances have been properly executed by the Trustee; and
(iii) There are 40,000,000 Trust Units authorized and outstanding
under the Indenture, all of which have been properly issued in accordance with
the Indenture; certificates representing the Trust Units have been duly executed
by the Trustee; and holders of certificates representing the Trust Units are
entitled to the benefits of the Indenture;
(j) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any post-
effective amendment to the Registration Statement filed subsequent to the date
of this Agreement and also at each Time of Delivery, Arthur Andersen L.L.P.
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto;
(k) Neither the Company nor any of its subsidiaries, taken together, the
Trust nor the Underlying Properties shall have sustained since the date of the
last audited financial statements included or incorporated by reference in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries, taken together, or the imposition of any liabilities on the Trust,
or any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position, shareholders'
equity or results of operations of the Company and its subsidiaries, or any
change, or any development involving a prospective change, in or affecting
either (A) the general affairs or financial condition of the Trust, or (B) the
management or results of operations of the Underlying Properties otherwise than
as set forth or contemplated in the Prospectus, the effect of which, in any such
case described in clause (i) or (ii), is in the judgment of the Representatives
so material and adverse as to make it impracticable or inadvisable to proceed
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with the public offering or the delivery of the Trust Units being delivered at
such Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(l) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange; (ii) a suspension or material
limitation in trading in the Trust Units or the Company's securities on the New
York Stock Exchange; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv) the outbreak
or escalation of hostilities involving the United States or the declaration by
the United States of war or national emergency if the effect of any such event
specified in this clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Trust Units being delivered at such Time of Delivery on the terms and in
the manner contemplated in the Prospectus;
(m) The Trust Units at such Time of Delivery shall have been duly listed on
the New York Stock Exchange;
(n) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of Prospectuses on the New York Business
Day next succeeding the date of this Agreement;
(o) The Company shall have furnished or caused to be furnished to you at
such Time of Delivery certificates of officers of the Company, satisfactory to
you as to the accuracy, in all material respects, of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to the
performance, in all material respects, by the Company of all of its respective
obligations hereunder to be performed at or prior to such Time of Delivery, and
as to such other matters as you may reasonably request, and the Company shall
have furnished or caused to be furnished certificates as to the matters set
forth in subsections (a) and (k) of this Section; and
(p) The Company shall have furnished or caused to be furnished to you at
10:00 a.m., New York City time on the effective date of the Registration
Statement and the most-recently filed post-effective amendment to the
Registration Statement and also at such Time of Delivery, letters from Miller
and Lents, Ltd. dated the respective date of delivery in form and substance
satisfactory to you.
8. (a) The Company and the Trust (solely from the assets of the Trust
and without liability or obligation of the Trustee or any Trust Unitholder) will
jointly and severally indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact
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<PAGE>
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that neither the Company nor the Trust shall be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or any amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein; and provided, further,
that neither the Underwriters nor any other person or entity entitled to seek
indemnification from the Trust under this Section 8(a) shall attempt to enforce
its rights hereunder in any circumstance in which such enforcement would result
in any liability to the Trustee or any Trust Unitholder;
(b) Each Underwriter will indemnify and hold harmless the Company, the
Trust and the Trustee against any losses, claims, damages or liabilities to
which the Company, the Trust or the Trustee may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company, the Trust and the Trustee for any legal or other expenses
reasonably incurred by the Company, the Trust or the Trustee in connection with
investigating or defending any such action or claim as such expenses are
incurred;
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (which shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the
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<PAGE>
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party. No
indemnifying party shall be required to indemnify an indemnified party for any
amount paid or payable by such indemnified party in the settlement of any
action, proceeding or investigation without the written consent of such
indemnifying party, which consent shall not be unreasonably withheld;
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Trust on the one hand and the Underwriters on the other
from the offering of the Trust Units. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and the Trust
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations (including the failure of the indemnified party to give
the notice required under subsection (c) above). The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters in each case as set forth
in the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Trustee (on behalf of the Trust) and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or
-22-
<PAGE>
defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Trust Units
underwritten by it and distributed to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint; and
(e) The obligations of the Company and the Trust under this Section 8 shall
be in addition to any liability which the Company and the Trust may otherwise
have and shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section 8 shall be in addition to any
liability which the respective Underwriters may otherwise have and shall extend,
upon the same terms and conditions, to each officer and director of the Company
and the Trustee and to each person, if any, who controls the Company or the
Trustee within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Trust Units which it has agreed to purchase hereunder at a Time of Delivery,
you may in your discretion arrange for you or another party or other parties to
purchase such Trust Units on the terms contained herein. If within thirty-six
hours after such default by any Underwriter you do not arrange for the purchase
of such Trust Units, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
reasonably satisfactory to you to purchase such Trust Units on such terms. In
the event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Trust Units, or the Company,
notifies you that it has so arranged for the purchase of such Trust Units, you
or the Company shall have the right to postpone a Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
reasonable opinion may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this Agreement
with respect to such Trust Units;
(b) If, after giving effect to any arrangements for the purchase of the
Trust Units of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of Trust Units which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Trust Units to be purchased at such Time of Delivery, then the Company shall
have the right to require each non-defaulting Underwriter to purchase the number
of Trust Units which such Underwriter agreed to purchase hereunder at such Time
of Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Trust Units which such
Underwriter agreed to purchase hereunder) of the
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<PAGE>
Trust Units of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a defaulting
Underwriter from liability for its default; and
(c) If, after giving effect to any arrangements for the purchase of the
Trust Units of a defaulting Underwriter or Underwriters by you and the Company
as provided in subsection (a) above, the aggregate number of such Trust Units
which remains unpurchased exceeds one-eleventh of the aggregate number of all
the Trust Units to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require non-
defaulting Underwriters to purchase Trust Units of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Units) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company or the Trustee, except for
the expenses to be borne by the Company, the Trustee and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Trust and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, the Trust or the Trustee, or any officer or director or controlling
person of the Company or any officer or director or controlling person of the
Trustee, and shall survive delivery of any payment for the Trust Units.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Trust shall then be under any liability to any
Underwriter except as provided in Section 6 and Section 8 hereof; but, if for
any other reason any Trust Units are not delivered by or on behalf of the
Company as provided herein, the Company will reimburse the Underwriters through
you for all out-of-pocket expenses approved in writing by you, including fees
and disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Trust Units not so
delivered, but the Company shall then be under no further liability to any
Underwriter in respect of the Trust Units not so delivered except as provided in
Section 6 and Section 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the
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<PAGE>
representatives in care of Goldman, Sachs & Co., at 32 Old Slip, 9th Floor, New
York, New York 10005, Attention: Registration Department; and if to the Company
shall be delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; and if to the Trust shall be delivered or sent by mail, telex or
facsimile transmission to 901 Main Street, 17th Floor, Dallas, Texas 75202,
Attention: Ron E. Hooper; provided, however, that any notice to an Underwriter
pursuant to Section 8(d) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire or telex constituting such Questionnaire, which
address will be supplied to the Company or the Trustee by you upon request. Any
such statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Trust and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and the
Trustee and each person who controls the Company, the Trustee or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. The Trustee has executed this Agreement solely in its
capacity as trustee of the Trust and shall have no liability or obligation
hereunder other than the obligation, in such capacity, to cause the Trust to
perform its obligations hereunder. No purchaser of any of the Trust Units from
any Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us 10 (ten) counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters, the
Company and the Trust. It is understood that your acceptance of this letter on
behalf of each of the Underwriters is pursuant to the authority set forth in a
form of Agreement among Underwriters the form of which shall be submitted to the
Company and the Trustee for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
Cross Timbers Oil Company
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<PAGE>
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
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<PAGE>
Hugoton Royalty Trust
By: NationsBank, N.A., Trustee
By:
---------------------------------------
Name: Ron E. Hooper
Title: Vice President
Accepted as of the date hereof:
Goldman, Sachs & Co.
Lehman Brothers Inc.
A.G. Edwards & Sons, Inc.
Bear, Stearns & Co.
Dean Rauscher Wessels,
a division of Dean Rauscher Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
By:
---------------------------------------
(Goldman, Sachs & Co.)
By Lehman Brothers Inc.
By:
--------------------------------------
Name/Title:
--------------------------
On behalf of each of the Underwriters
-27
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional
Units to be
Total Number of Purchased if
Firm Units Maximum Option
Underwriter to be Purchased Exercised
- ------------------------------------------------------ --------------- --------------
<S> <C> <C>
Goldman, Sachs & Co...................................
Lehman Brothers Inc...................................
Bear, Stearns & Co....................................
Dain Rauscher Wessels.................................
a division of Dain Rauscher Incorporated..........
Donaldson, Lufkin & Jenrette Securities Corporation...
A.G. Edwards & Sons, Inc..............................
Total..............................................
--------------- --------------
=============== ==============
</TABLE>
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<PAGE>
ANNEX I
ACCOUNTANT'S COMFORT LETTER REQUIREMENTS
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants shall
furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and the Trust within the meaning of the Act and the applicable
published rules and regulations thereunder adopted by the SEC;
(ii) In their opinion, the consolidated financial statements of the
Company as of December 31, 1997, the statements of revenue and direct operating
expenses of the Underlying Properties for each of the three years in the period
ended November 30, 1998 and the statement of assets and trust corpus as of
December 4, 1998 audited by them and included or incorporated by reference in
the Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the related
published rules and regulations adopted by the SEC.
(iii) They have made a review in accordance with standards established by
the American Institute of Certified Public Accountants of (A) the unaudited
interim consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Company's quarterly report
on Form 10-Q incorporated by reference into the Prospectus, and on the basis of
specified procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether the
unaudited consolidated financial statements referred to in paragraph (vi)(A)(i)
below are stated on a basis substantially consistent with that of the audited
consolidated financial statements incorporated by reference in the Registration
Statement, comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the related
published rules and regulations, nothing came to their attention that caused
them to believe that the unaudited condensed consolidated financial statements
do not comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for the
five most recent fiscal years incorporated by reference in the Prospectus and
included in Item 6 of the Company's Annual Report on Form 10-K for the most
recent fiscal year agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for such five
fiscal years which were included or incorporated by reference in the Company's
Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the basis of
limited procedures specified in
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such letter nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not conform in
all material respects with the disclosure requirements of Items 301, 302, 402
and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a reading
of the unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company and
its subsidiaries, read the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in the
Prospectus, inquiries of certain officials of the Company who have
responsibility for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their attention
that caused them to believe that:
(A) (i) the unaudited consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Company's quarterly report on Form 10-Q incorporated by reference into the
Prospectus, are not stated on a basis substantially consistent with that of
the audited consolidated financial statements incorporated by reference in
the Registration Statement or (ii) any material modifications should be
made to the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Company's quarterly report on Form 10-Q incorporated by
reference into the Prospectus, for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which such data and items
were derived, and any such unaudited data and items were not determined on
a basis substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included or
incorporated by reference in the Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to in
Clause (B) were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included or
incorporated by reference in the Prospectus;
(D) as of a specified date not more than five days prior to the date
of such letter, there have been (i) any increase in the consolidated long-
term debt of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity of the Company and
its subsidiaries, or any changes in any other Company items specified by
the Representatives or (ii) any incurrence of liabilities by the Trust, or
any decreases in assets or trust corpus of the Trust or other items
specified by the Representatives, or any changes in
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<PAGE>
any other Trust items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet included or
incorporated by reference in the Prospectus, except in each case for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(E) for the period from the date of the latest financial statements
included or incorporated by reference in the Prospectus to the specified
date referred to in clause (E) there were any decreases in consolidated net
revenues or operating profit or the total or per share amounts of
consolidated net income of the Company or the excess of revenues over
direct operating expenses of the Underlying Properties, or changes in other
items specified by the Representatives relating to the results of
operations of the Company and its subsidiaries or the Underlying
Properties, in each case as compared with the comparable period of the
preceding year and with any other period of corresponding length specified
by the Representatives, except in each case for decreases or increases
which the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their reports included
or incorporated by reference in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to in
paragraphs (iii) and (vi) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally accepted
auditing standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the general
accounting records of the Company and its subsidiaries, which appear in the
Prospectus (excluding documents incorporated by reference) or in Part II of, or
in exhibits and schedules to, the Registration Statement specified by the
Representatives or in documents incorporated by reference specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
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<PAGE>
EXHIBIT 5.1
Kelly, Hart & Hallman
(a professional corporation)
201 Main Street, Suite 2500
Fort Worth, Texas 76102
January __, 1999
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, Texas 76102
Re: Hugoton Royalty Trust and Cross Timbers Oil Company
Registration Statement on Form S-1/S-3
--------------------------------------
Gentlemen:
This firm has acted as counsel to Cross Timbers Oil Company, a Delaware
corporation (the "Company"), in connection with the filing by the Hugoton
Royalty Trust (the "Trust") and the Company of a registration statement on Form
S-1/S-3, No. 333-68441 (the "Registration Statement"), with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, for the
registration of the sale of up to 17,250,000 units of beneficial interest in the
Trust (the "Trust Units"). The opinion set forth below is given pursuant to Item
601(b)(5) of Regulation S-K for inclusion as Exhibit 5.1 to the Registration
Statement and pertains to the offering of such Trust Units.
In connection with this opinion, we have made the following assumptions:
(i) all documents submitted to or reviewed by us, including all amendments and
supplements thereto, are accurate and complete and if not originals are true and
correct copies of the originals; (ii) the signatures on each of such documents
by the parties thereto are genuine; (iii) each individual who signed such
documents had the legal capacity to do so; and (iv) all persons who signed such
documents on behalf of a corporation were duly authorized to do so. We have
assumed that there are no amendments, modifications or supplements to such
documents other than those amendments, modifications and supplements that are
known to us.
Based on the foregoing, and subject to the limitations and
qualifications set forth herein, we are of the opinion that:
1. The Trust was formed and is validly existing under the laws of
the State of Texas.
2. The Trust Units have been duly authorized and are validly
issued under the laws of the State of Texas and fully paid without the
requirement of any further consideration.
<PAGE>
Cross Timbers Oil Company
January __, 1999
Page 2
This opinion is further limited and qualified in all respects as
follows:
A. The opinion is specifically limited to matters of the existing
laws of the State of Texas. We express no opinion as to the
applicability of the laws of any other particular jurisdiction to the
transactions described in this opinion.
B. This opinion is limited to the specific opinions stated herein,
and no other opinion is implied or may be inferred beyond the specific
opinions expressly stated herein.
C. This opinion is based on our knowledge of the law and facts as
of the date hereof. We assume no duty to update or supplement this
opinion to reflect any facts or circumstances that may hereafter come to
our attention or to reflect any changes in any law that may hereafter
occur or become effective.
We call your attention to the fact that certain members of the law firm
have directly or indirectly invested in the Company's common stock.
This opinion is intended solely for your benefit. It is not to be quoted
in whole or in part, disclosed, made available to or relied upon by any other
person, firm or entity without our express prior written consent.
We hereby consent to the use of this opinion in the above-referenced
Registration Statement. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Respectfully submitted,
KELLY, HART & HALLMAN
(a professional corporation)
<PAGE>
Exhibit 8.1
Butler & Binion L.L.P.
1000 Louisiana, Suite 1600
Houston, Texas 77002
January __, 1999
Board of Directors
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, Texas 76102
Gentlemen:
We have acted as special tax counsel to Cross Timbers Oil Company, a
Delaware corporation (the "Company"), in connection with the formation of the
Hugoton Royalty Trust, an express trust formed under the laws of the State of
Texas ("Trust") and the proposed sale of Units by the Company as described in
the Registration Statement on Form S-1/S-3 (Registration No. 333-68441) and the
prospectus included as part of such Registration Statement (the "Prospectus"),
filed with the Securities and Exchange Commission on December 4, 1998, as
amended by Pre-Effective Amendment No. 1 thereto filed on January __, 1999 [and
any subsequent amendments]. In connection with such representation, we have
reviewed the following documents: (i) the Hugoton Royalty Trust Indenture (the
"Trust Indenture") dated as of December 1, 1998 among the Company and
NationsBank, N.A. (the "Trustee"), (ii) the Net Overriding Royalty Conveyance
dated as of December 1, 1998, conveying net overriding royalty interests in
Kansas properties from the Company to the Trust; (iii) the Net Overriding
Royalty Conveyance dated as of December 1, 1998, conveying net overriding
royalty interests in Oklahoma properties from the Company to the Trust; (iv) the
Net Overriding Royalty Conveyance dated December 1, 1998, conveying net
overriding royalty interests in Wyoming properties from the Company to the Trust
(collectively, the "Conveyances"), and (iv) the Prospectus.
We have been requested to furnish our opinion as to the material federal
income tax consequences of the formation and operation of the Trust. Our opinion
is limited to the federal income tax matters stated herein as of the date
hereof, and no opinion is implied or may be inferred beyond the matters
expressly stated herein. We express no opinion as to the impact of the tax laws
of any state on an investment in the Trust.
In rendering the following opinion we have assumed the authenticity of
all documents reviewed by us purporting to be originals, and the conformity with
the originals of documents purporting to be copies. We have assumed that the
Trust Indenture and the Conveyances, at the time of delivery, were
<PAGE>
January __, 1999
Page 2
- ----------------------------
duly authorized, executed and delivered by the parties thereto. We have also
assumed that all representations and warranties (other than as to the subject
matter expressed herein) made by each of the parties to the Underwriting
Agreement, Trust Indenture and Conveyances were and are true, correct and
complete, and have relied upon said representations and warranties for the
purposes hereof.
Based on the foregoing, we confirm that the statements set forth under
the captions "Federal Income Tax Consequences" in the Prospectus, insofar as
such statements set forth legal conclusions and summaries of legal matters, are
accurate in all material respects, subject to the qualifications stated therein.
Our opinion is based on the Internal Revenue Code of 1986, as amended,
the presently effective regulations thereunder, reported judicial decisions and
published revenue rulings and other administrative interpretations as of the
date hereof. It may be modified as a result of subsequent legislation,
regulations or other administrative or court interpretations, any of which could
be retroactive in effect. Our opinion is not binding on the Internal Revenue
Service ("IRS") or the courts, and no assurance can be given that the IRS will
not challenge the tax treatment described in the Prospectus or that, if it does,
such challenge would not be successful.
We hereby consent to the use of our name in the Registration Statement
and under the caption "Federal Income Tax Consequences" in the Prospectus and
consent to the filing of this opinion as an Exhibit to the Registration
Statement.
Very truly yours,
BUTLER & BINION, L.L.P.
<PAGE>
Exhibit 8.2
[LOGO OF MORRIS, LAING, EVANS, BROCK & KENNEDY, CHARTERED APPEARS HERE]
January __, 1999
Cross Timbers Oil Company
810 Houston Street - Suite 2000
Fort Worth, TX 76102-6298
Gentlemen:
We have reviewed the Hugoton Royalty Trust Royalty Trust Indenture dated
as of December 1, 1998 ("the Royalty Trust Indenture"), Conveyance and the
prospectus (the "Prospectus") contained in the Registration Statement No.
333-68441 filed December 4, 1998, relating to Units of Beneficial Interest (the
"Units") in the Hugoton Royalty Trust (the "Trust"). All terms capitalized in
this letter and not defined in this letter shall have the same meanings given to
them in the Royalty Trust Indenture. In offering the opinions set out below, we
are relying upon the provisions as contained in the foregoing documents.
Although there is no clearly determinative Kansas law on the questions,
we are of the opinion that as to Units owned by an individual who is not a
resident of the state of Kansas, the Units will be treated as intangible
personal property, rather than as interests in tangible personal property having
a situs in Kansas, for purposes of death tax, probate, and devolution of title.
With one possible exception discussed below, a Unit owned by an individual who
is not a resident of the state of Kansas at the date of death would not be
subject to probate in Kansas or to Kansas estate tax. If the certificate
representing a Unit is physically located in Kansas at the time of the
nonresident owner's death, a Kansas statute declares that Kansas courts have
jurisdiction to probate the Unit. In that situation the Unit would arguably also
be subject to Kansas estate tax. Kansas has no gift tax.
It is well established under Kansas law that an oil and gas lease
covering Kansas land, and interests in such a lease, are intangible personal
property unless defined otherwise by statute for a particular purpose. In this
connection, we note that prior to July 1, 1998, for inheritance tax purposes,
Kansas Statutes Annotated (S)79-1559 defined oil and gas leases on lands in this
state and all interests created thereby, or arising therefrom, as tangible
personal property having a tax situs in this state. That statutory section was
repealed effective July 1, 1998, and the definition quoted above
<PAGE>
Cross Timbers Oil Company
Page 2
January __, 1999
was not reinserted into any other statutory section. We believe that this repeal
therefore revives the applicability of the opinion of the Kansas Supreme Court
in the Denver National Bank of Denver, Colorado v. State Commission of Revenue
and Taxation of the State of Kansas, 176 Kan. 617 (1954). In that case, the
Kansas Supreme Court held that an interest in an oil and gas lease is intangible
personal property and has a tax situs in the state of the residence of its owner
at the time of death. K.S.A. (S)79-1559, and its predecessors, all of which have
now been repealed, were adopted by the Kansas legislature in response to the
Denver National Bank opinion.
Although there is no determinative precedent, and Kansas taxing
authorities may adopt a contrary view, we are of the opinion that:
1. The activities of the Trust and the Trustee as permitted under the
Royalty Trust Indenture and the Conveyances will not subject either
the Trust or the Trustee to income taxation by the State of Kansas;
2. An owner of a Unit who is not a Kansas resident will not be subject
to Kansas income tax and will not be required to file a Kansas
income tax return, provided that such Unit and such Unit owner's
indirect interest in the Royalties (through ownership of such Unit)
are not employed by the Unit owner in a trade, business, profession
or occupation carried on in Kansas, and further provided that the
Unit owner is not otherwise subject to Kansas income tax; and
3. Nonresidents of Kansas will not be subject to Kansas income tax on
gains from sales of Units, subject to the same provisos set forth
in opinion 2, immediately above.
In rendering these opinions, we have assumed that the Trust (i) will not own any
property in Kansas other than the Royalties, (ii) will not conduct any
activities in Kansas other than ownership of the Royalties for the benefit of
the Unit holders, and (iii) is a grantor trust for federal income tax purposes.
Because no Kansas court decisions, statutory provisions, or Kansas
Department of Revenue rulings have specifically addressed the precise questions
upon which we opine herein, all opinions expressed in this letter must be
considered in light of the lack of such authority.
<PAGE>
Cross Timbers Oil Company
Page 3
January __, 1999
These opinions are based on Kansas law as of the date of this letter,
and we disclaim any responsibility to advise you of any subsequent changes in
Kansas law that might affect our opinions.
We are furnishing this opinion letter to you solely for your benefit. It
is not to be quoted in whole or in part, disclosed, made available to or relied
upon by any other person, firm or entity without our express prior written
consent.
We hereby consent to the use of this opinion in the above-referenced
Registration Statement and to the use of our name in the Section of the
Prospectus captioned "State Tax Considerations."
Very truly yours,
MORRIS, LAING, EVANS, BROCK &
KENNEDY, Chartered
Robert I. Guenthner
<PAGE>
Exhibit 10.1
NET OVERRIDING ROYALTY CONVEYANCE
Hugoton Royalty Trust
STATE OF KANSAS (S)
(S)
COUNTIES OF FINNEY, (S) KNOW ALL MEN BY THESE PRESENTS:
GRANT, HASKELL, KEARNY, (S)
MEADE, MORTON, SEWARD, (S)
AND STEVENS (S)
THAT CROSS TIMBERS OIL COMPANY, a corporation formed under the laws of the
State of Delaware ("Assignor"), for and in consideration of the sum of Ten
Dollars ($10.00) and other good and valuable consideration to Assignor paid by
NATIONSBANK, N.A., a bank organized under the laws of the United States, acting
not in its individual corporate capacity but solely as trustee under that
certain Trust Indenture establishing the Hugoton Royalty Trust dated as of
December 1, 1998 ("Assignee"), the receipt and sufficiency of which are hereby
acknowledged, has bargained, sold, granted, conveyed, transferred, assigned, set
over and delivered, and by these presents does bargain, sell, grant, convey,
transfer, assign, set over and deliver unto Assignee a net overriding royalty
interest ("the Royalty Interest") in and to the Subject Hydrocarbons in and
under, and if, as and when produced, saved and sold from, the Subject Lands
during the term of the Subject Interests equal to eighty percent (80%) of the
Net Proceeds attributable to the Subject Interests, as each of the above
capitalized words is defined in Article I hereof and all as more fully provided
herein.
TO HAVE AND TO HOLD the Royalty Interest, together with all and singular
the rights and appurtenances thereto in anywise belonging, unto Assignee, its
successors and assigns, subject, however, to the terms and provisions of this
Conveyance; and Assignor does by these presents bind and obligate itself, its
successors and assigns, to WARRANT and FOREVER defend all and singular the
Royalty Interest unto the said Assignee, its successors and assigns, against
every person whomsoever lawfully claiming or to claim the same or any part
thereof by, through or under Assignor, but not otherwise.
ARTICLE I
DEFINITIONS
As used herein, the following words, terms or phrases have the following
meanings:
SECTION 1.01. "Affiliate" means, as to the party specified, any Person
controlling, controlled by or under common control with such party, with the
concept of control in such context meaning the possession, directly or
indirectly, of the power to direct or cause the direction of the management
<PAGE>
and policies of another, whether through the ownership of voting securities, by
contract or otherwise. The Trust shall not be deemed an Affiliate of Assignor.
SECTION 1.02. "Assignor" means the Assignor named herein while Assignor
owns all or any part of or interest in the Subject Interests and any other
Person or Persons (excluding Assignee) who hereafter may acquire all or any part
of or interest in the Subject Interests.
SECTION 1.03. "Assignee" means the Assignee named herein (and any successor
Trustee under the Trust Indenture) while it owns all or any part of or interest
in the Royalty Interest and any other Person or Persons who may acquire legal
title to all or any part of or interest in the Royalty Interest.
SECTION 1.04. "Computation Period" means (i) initially, the period
commencing on the Effective Date and ending on February 28, 1999, and (ii) each
calendar month thereafter.
SECTION 1.05. "Conveyance" means this Net Overriding Royalty Conveyance.
SECTION 1.06. "Effective Date" means 7:00 o'clock A.M., local time in
effect at the location of each Subject Interest, on December 1, 1998.
SECTION 1.07. "Excess Production Costs" means, for any Computation Period,
an amount equal to the excess, if any, of Production Costs for such Computation
Period over Gross Proceeds for such Computation Period.
SECTION 1.08. "Existing Sales Contracts" means all contracts and
agreements in effect as of the Effective Date between or among Assignor and any
Affiliate of Assignor, or between or among any Affiliates of Assignor, for the
Sale, Processing, treatment, compression, gathering or transportation of Subject
Hydrocarbons.
SECTION 1.09. "Gross Proceeds" means, for any Computation Period, and
subject to Section 2.01 (i) during the term of the Existing Sales Contracts, the
proceeds received by Assignor under the Existing Sales Contracts attributable to
the Sale of Subject Hydrocarbons Sold during such Computation Period by Assignor
after the Effective Date, and (ii) as to Subject Hydrocarbons Sold by Assignor
during such Computation Period after the Effective Date other than under the
Existing Sales Contracts (A) if Sold under a Sales Contract with a Non-Affiliate
of Assignor, the proceeds received by Assignor under such Sales Contract, or (B)
if Sold under a Sales Contract with an Affiliate of Assignor, the proceeds
received by Assignor under such Sales Contract but in no event less than 98% of
the proceeds received by such Affiliate upon the resale of such Subject
Hydrocarbons to a Non-Affiliate of Assignor, and (iii) the proceeds received by
Assignor in respect of underproduced gas imbalances attributable to the Subject
Interests as of the Effective Date, but in all instances, subject to the
following:
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<PAGE>
(a) There shall be excluded from Gross Proceeds all Property Taxes
that are deducted or excluded from proceeds of Sale received by Assignor.
(b) There shall be excluded any amount for Subject Hydrocarbons
attributable to nonconsent operations conducted with respect to the Subject
Interests (or any portion thereof) as to which Assignor shall be a
nonconsenting party and which is dedicated to the recoupment or
reimbursement of costs and expenses of the consenting party or parties by
the terms of the relevant operating agreement, unit agreement, contract for
development or other instrument providing for such nonconsent operations.
Assignor agrees that its election not to participate in such operations
shall be made in conformity with the provisions of Section 6.01 of this
Conveyance, but third persons shall not be under any duty to determine that
such election so conformed.
(c) There shall be excluded any amount which Assignor shall receive
as any of the following: consideration for transfer or sale of any of the
Subject Interests (subject to the Royalty Interest) or equipment or other
personal property or fixtures on the Subject Lands; payments for gas not
taken, when such payments are made (but to the extent such payments are
allocated to gas taken in the future such payments shall be included
without interest in Gross Proceeds when such gas is taken); damages arising
from any cause other than drainage or reservoir injury; rental for
reservoir use; payments made to Assignor in connection with the drilling of
any well on any of the Subject Lands or lands in the vicinity thereof (such
exclusion including dry and bottom hole payments, provided that if such
well is drilled on the Subject Lands and Assignor incurs Production Costs
in connection therewith such payments shall reduce Production Costs) or in
connection with any adjustment of any well and leasehold equipment upon
unitization of any of the Subject Interests; provided there shall be
included in Gross Proceeds advance or prepaid payments for future
production received by Assignor to the extent not subject to repayment in
the event of insufficient subsequent production (and to the extent so
subject to repayment shall be included without interest in Gross Proceeds
when the Subject Hydrocarbons on which such payment was so advanced or
prepaid are actually produced) and payments made to Assignor in connection
with the deferring of drilling of any well on any of the Subject Lands
(including payments from an operator in the vicinity for refraining from
drilling an offset well).
(d) There shall be excluded any amount for Subject Hydrocarbons lost
in the production or marketing thereof or used by Assignor in conformity
with ordinary or prudent practices for drilling, production and plant
operations (including gas injection, secondary recovery, pressure
maintenance, repressuring, cycling operations, plant fuel or shrinkage)
conducted for the purpose of drilling for, producing or Processing Subject
Hydrocarbons or for operations on any unit or plant to which the Subject
Interests are committed, but only so long as such Subject Hydrocarbons are
so used.
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<PAGE>
(e) Amounts received as a loan by Assignor from a purchaser of
Subject Hydrocarbons, whether with or without interest, shall not be
considered to be derived from the sale of Subject Hydrocarbons.
(f) If a controversy or possible controversy exists (whether by
reason of any statute, order, decree, rule, regulation, contract or
otherwise) between Assignor and any purchaser as to the correct sales price
of any Subject Hydrocarbons or, for any other reason, as to Assignor's
right to receive or collect the proceeds of sale of any Subject
Hydrocarbons, then
(i) amounts withheld by the purchaser or deposited by it with
an escrow agent shall not be considered to be received by Assignor
until actually collected by Assignor, but the amounts received by
Assignor shall include any interest, penalty or other amount paid to
Assignor in respect thereof;
(ii) amounts received by Assignor and promptly deposited by it
with an escrow agent shall not be considered to have been received by
Assignor, but all amounts thereafter paid to Assignor by such escrow
agent shall be considered to be amounts received from the Sale of
Subject Hydrocarbons; and
(iii) amounts received by Assignor and not deposited with an
escrow agent shall be considered to be received for purposes of this
Section 1.09.
SECTION 1.10. "Hydrocarbons" means oil, gas (which term includes coal bed
gas, coal seam gas and methane) and all other minerals produced in association
with oil or gas (including, but not limited to, helium, sulphur and carbon
dioxide), but excluding all other minerals, whether similar or dissimilar.
SECTION 1.11. "Monthly Record Date" for each month means the close of
business on the last day of such month which is not a Saturday, Sunday or other
day on which national banking institutions in the City of Fort Worth, Texas, are
closed as authorized or required by law, unless Assignee determines that a
different date is required to comply with applicable law or the rules of a
securities exchange or quotation system pursuant to the terms of the Trust
Indenture, in which event it means such different date.
SECTION 1.12. "Net Proceeds" means, for any Computation Period, the excess
of Gross Proceeds for such Computation Period over Production Costs for such
Computation Period.
SECTION 1.13. "Non-Affiliate" means, as to the party specified, any Person
who is not an Affiliate of such party.
SECTION 1.14. "Person" means any individual, corporation, partnership,
limited liability company, trust, estate or other entity, organization or
association.
4
<PAGE>
SECTION 1.15. "Prime Interest Rate" means the variable rate of interest
most recently announced by NationsBank, N.A. as its "prime rate."
SECTION 1.16. "Process" or "Processing" means to extract or otherwise
recover natural gas liquids from natural gas included in the Subject
Hydrocarbons through the processes of absorption, condensation, adsorption,
cryogenic or other methods in a manner that does not constitute Separation.
SECTION 1.17. "Processing Costs" means the costs to Assignor or any
Affiliate of Assignor to Process Subject Hydrocarbons before the Sale thereof,
which costs for purposes hereof shall consist of the sum of (a) any such
Processing charges paid to Non-Affiliates, (b) the charges by Affiliates of
Assignor under Existing Sales Contracts, and (c) the charges by Affiliates of
Assignor other than under Existing Sales Contracts so long as such charges do
not materially exceed charges prevailing in the area for similar services at the
time of contracting for such charges.
If Assignor (or its Affiliates) receives a share of the production of
others or of plant products therefrom (or proceeds of sale thereof) for
Processing such production of others, such share shall not be included in
Subject Hydrocarbons (or Gross Proceeds). If Assignor (or its Affiliates) does
not bear any Processing Costs but the owners or operators of a plant receive a
share of the Subject Hydrocarbons (or proceeds of sale thereof) for Processing
them, such share (or proceeds) shall be excluded from the Subject Hydrocarbons
(and Gross Proceeds).
SECTION 1.18. "Production Costs" means, for any Computation Period, to the
extent not excluded for purposes of calculating Gross Proceeds, whether capital
or non-capital in nature,
(a) the sum of
(i) all amounts paid by Assignor or any Affiliate of Assignor
as any of the following: royalty, overriding royalty or other
presently existing burden against production or the proceeds of Sale
of production attributable to the Subject Interests; delay rental;
shut-in gas well royalty or payment; minimum royalty; payments to
lessors or others in the area in connection with the drilling or
deferring of drilling of any well on any of the Subject Lands or lands
in the vicinity thereof (including dry and bottom hole payments and
payments made to others for refraining from drilling an offset well)
or in connection with any adjustment of any well and leasehold
equipment upon unitization of any of the Subject Interests; and rent
and other consideration paid for use of or damage to the surface;
(ii) the Property Tax Accrual;
(iii) the overhead costs paid by Assignor or any Affiliate of
Assignor under any joint operating agreement applicable to any of the
Subject Interests to which
5
<PAGE>
Assignor and one or more Non-Affiliates of Assignor are parties and
where Assignor or any Affiliate of Assignor is not the operator of
such Subject Interest;
(iv) the overhead rate provided for in any joint operating
agreement applicable to any of the Subject Interests where Assignor or
any Affiliate of Assignor is the operator of such Subject Interests,
less the portion, if any, of the overhead rate due from Non-Affiliates
of Assignor;
(v) with respect to any Subject Interests operated by Assignor
or any of its Affiliates and not subject to a joint operating
agreement, an overhead fee as shown on Schedule B attached hereto and
subject to adjustment as provided in Schedule B attached hereto;
(vi) all other costs, expenses and liabilities (including
Processing Costs) paid or incurred by Assignor or any Affiliate of
Assignor for investigating, exploring, prospecting, drilling and
mining for, operating and producing Subject Hydrocarbons and sale and
marketing thereof, including without implied limitation: costs for
equipping, plugging back, reworking, completing, recompleting and
plugging and abandoning of any well on the Subject Lands and of making
the Subject Hydrocarbons ready or available for market; costs for
construction and operation of gathering lines, tanks, transmission
lines, meters and other production and delivery facilities; costs,
whether paid in cash or by a share of Subject Hydrocarbons, of
transporting, compressing, dehydrating, separating, treating, storing
and marketing the Subject Hydrocarbons and disposing of extraneous
substances produced in association with Subject Hydrocarbons (provided
that such costs, if paid to or incurred by an Affiliate of Assignor
other than pursuant to an Existing Sales Contract, shall not
materially exceed charges prevailing in the area for similar services
at the time of contracting for such charges); costs for secondary
recovery, pressure maintenance, repressuring, cycling and other
operations conducted for the purpose of enhancing production; costs or
expenses (whether paid in cash or by delivery of gas) incurred in
resolving overproduced gas imbalances attributable to the Subject
Interests as of the Effective Date and thereafter; and costs for
litigation concerning title to or operation of the Subject Interests
and any other acts or omissions of Assignor consistent herewith or
brought by Assignor to protect the Subject Interests; and costs for
litigation or regulatory proceedings concerning title to or operation
of the Subject Interests and any other acts or omissions of Assignor
consistent herewith or brought by Assignor to protect the Subject
Interests or to protect or enforce any rights, contractual or
otherwise, of Assignor to produce or market Subject Hydrocarbons
therefrom;
(vii) Excess Production Costs for the preceding Computation
Period (including any remaining Excess Production Costs carried
forward from any preceding Computation Period);
6
<PAGE>
(viii) interest on the amount of Excess Production Costs at the
beginning of any Computation Period, calculated from the first day to
the last day of the Computation Period, at the Prime Interest Rate in
effect at the beginning of such Computation Period;
(ix) any amounts paid by Assignor or any Affiliate of Assignor
whether as refund, interest or penalty, to a purchaser or any
governmental agency or other Person because the amount initially
received by Assignor (or Affiliate of Assignor) as sales price for
Sales after the Effective Date was more or allegedly more than
permitted by the terms of any applicable contract, statute,
regulation, order, decree or other obligation; provided such amounts
(in the case of a refund), or the amounts with respect to which the
interest or penalty was paid, were previously included in Gross
Proceeds;
(x) any other amounts paid by Assignor or any Affiliate of
Assignor with respect to ownership or operation of the Subject
Interests after the Effective Date or Sales of production therefrom
after the Effective Date, whether as refund, fine, interest or
penalty, pursuant to litigation or settlement of threatened litigation
or order of governmental agency, provided that Assignor has not
breached Section 6.01 hereof;
(xi) all consideration hereafter paid and costs and expenses
hereafter incurred by Assignor or any Affiliate of Assignor for any
renewals or extensions of leases or other rights acquired after the
Effective Date which are included in the definition herein of Subject
Interests; and
(xii) any accrual or reserve which Assignor or any Affiliate of
Assignor shall have the right, at its election, to charge to
Production Costs for operations (other than day-to-day operations)
budgeted under an operating agreement or approved under an
authorization for expenditures ("AFE"), which accrual or reserve may
be based on the reasonably expected time of performing such operation
or on an estimated percentage of completion of the operation or on any
other reasonable method, and which accrual is in lieu of charging the
cost of such operation when paid for by Assignor (or Affiliate of
Assignor) but which shall be adjusted if and to the extent actual
costs differ from such accrual or reserve;
(b) but excluding
(i) costs which would otherwise be treated as Production Costs
(but which shall not be so treated for purposes hereof until the
following amounts have been fully credited against such costs) equal
to amounts reimbursed or credited to Assignor by insurance from damage
to property, by sales of property or transfers of
7
<PAGE>
property off the leases included in the Subject Interests or by
proceeds from unitization or other disposition of property; and
(ii) except for resolution of gas imbalances which are included
in Section 1.18(a)(vi) above, any amounts which would otherwise be
Production Costs but which are attributable to periods before the
Effective Date; and
(iii) costs that otherwise would be treated as Production Costs
but which have already been excluded or deducted from Gross Proceeds
under Section 1.09; and
(iv) costs incurred by any Affiliate of Assignor for which such
Affiliate has received a fee, reimbursement or other payment from
Assignor, where such payment by Assignor constitutes a Production
Cost; and
(v) costs paid or accrued by Assignor during the month of
December 1998 for the drilling, equipping, reworking, plugging back,
completing or recompleting of any well on the Subject Lands.
SECTION 1.19. "Property Taxes" means the sum of all general property (ad
valorem), production, severance, sales, gathering and excise taxes and other
taxes (whether state, federal or otherwise), except income taxes, assessed or
levied on or in connection with the Subject Interests, the Royalty Interest or
the production therefrom or equipment on the Subject Lands, or against Assignor
as owner of the Subject Interests or Assignee as owner of the Royalty Interest.
SECTION 1.20. "Property Tax Accrual" means, for any Computation Period, an
amount that may be set aside by Assignor as an accrual to be applied against
Property Taxes other than those that are deducted or excluded from Gross
Proceeds pursuant to Section 1.09(a) above, which accruals shall be adjusted to
the extent actual Property Taxes differ.
SECTION 1.21. "Sale" and "Sold" mean all forms of dispositions of Subject
Hydrocarbons for value, including exchanges and other dispositions for value.
SECTION 1.22. "Sales Contracts" means all contracts and agreements for the
sale of Subject Hydrocarbons.
SECTION 1.23. "Separation" means liquid separation operations in the
vicinity of the well using a conventional mechanical liquid gas separator but
excluding operations involving heat exchange, adiabatic cooling, absorption,
adsorption or refrigeration principles.
SECTION 1.24. "Subject Hydrocarbons" means all Hydrocarbons in and under,
and which may be produced, saved and sold from, and which shall accrue and be
attributable to, the Subject Interests, including plant products attributable
thereto from Processing gas or casinghead gas included
8
<PAGE>
in the Subject Hydrocarbons before sale thereof (but not including products
derived from processing oil).
SECTION 1.25. "Subject Interests" means, subject to the exclusions stated
below, each kind and character of right, title, claim or interest which Assignor
has on the Effective Date in or under each oil, gas or mineral lease,
unitization or pooling agreement (and the units created thereby), royalty
interests, overriding royalty interests, fee mineral interests and net profits
interests and any other agreements, conveyances, assignments or instruments
which are described or referred to in Schedule A, and all the right, title,
claim or interest which Assignor has on the Effective Date in and to the Subject
Lands, whether such right, title, claim or interest be under and by virtue of a
lease, a unitization or pooling agreement or order, an operating agreement, a
division order, a transfer order or any other type of agreement, conveyance,
assignment or instrument or under any other type of claim or title, legal or
equitable, recorded or unrecorded, even though Assignor's interests be
incorrectly or incompletely described in, or a description thereof be omitted
from, Schedule A, all as the same shall be enlarged by the discharge of any
payments out of production or by the removal of any charges or encumbrances to
which any of the same are subject and any and all renewals and extensions of any
of the same, but subject to all burdens to which Assignor's such right, title,
claim or interest is subject (while same remains so subject), limited, however,
if Assignor's interest in any Subject Interest should terminate at any time, to
the period to which Assignor's interest in such Subject Interest is limited.
There shall be excluded from the term "Subject Interests" any interest hereafter
acquired by Assignor in and to any of the Subject Lands, except any interest
acquired pursuant to existing agreements for no new consideration and renewals
or extensions of existing leases and other such agreements. For purposes of
this Conveyance "renewals or extensions" of any lease or other such agreement
shall be limited to renewals or extensions of an existing lease or other such
agreement obtained by the present owner thereof (or such owner's successors in
interest) while such lease is in force or within six months after such lease or
other such agreement terminates. Assignor shall be under no duty to seek
renewals or extensions of any lease or other such agreement.
SECTION 1.26. "Subject Lands" means the lands which are described in and
which are subject to the oil, gas or mineral leases, unitization or pooling
agreements or orders, operating agreements, division orders, transfer orders or
other type of agreement, conveyance, assignment or instrument described in
Schedule A attached hereto, provided that, where the description in Schedule A
excepts land or refers to an instrument insofar only as it covers certain land
or certain depths in certain land, no interest in such excepted land or depths
or in land other that to which such reference is limited shall be included in
the terms "Subject Lands" or "Subject Interests".
SECTION 1.27. "Trust" means the Hugoton Royalty Trust established by the
Trust Indenture.
SECTION 1.28. "Trust Indenture" means the Royalty Trust Indenture by and
between Cross Timbers Oil Company and NationsBank, N.A. dated as of December 1,
1998, establishing the Hugoton Royalty Trust, an express Texas Trust under the
Texas Trust Code.
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ARTICLE II
MARKETING OF SUBJECT HYDROCARBONS
SECTION 2.01. Sales Contracts. Assignor, to the extent it has the right to
do so, shall market or cause to be marketed the Subject Hydrocarbons and
Assignee shall have no authority to market the Subject Hydrocarbons or to take
in-kind any Subject Hydrocarbons. For such purpose, Sales of Subject
Hydrocarbons may continue to be made pursuant to Existing Sales Contracts.
Assignor may amend such Existing Sales Contracts and may enter into one or more
Sales Contracts in the future at the prices and on the terms Assignor shall deem
proper in Assignor's sole and absolute discretion, which may include sales to
Affiliates of Assignor. Further, Assignor may commit any of the Subject
Interests (including the Royalty Interest attributable thereto) to one or more
agreements for Processing pursuant to which, by way of example and not by way of
limitation, the plant owner or operator (which may be an Affiliate of Assignor)
receives a portion of the Subject Hydrocarbons or plant products derived
therefrom or proceeds of the Sale thereof as a fee for Processing. Gross
Proceeds of Subject Hydrocarbons shall be determined on the basis of amounts
actually received by Assignor (and not, except as provided in Section 1.09,
proceeds received by any of Assignor's Affiliates) from Sales under Sales
Contracts regardless of whether at the time of production or Sale market value
should be different from proceeds of Sale. In no event shall Gross Proceeds or
Production Costs include any revenues, expenses, gains or losses resulting from
option transactions or other futures or hedging transactions (other than forward
Sales of the Subject Hydrocarbons) which, if engaged in by Assignor or any of
its Affiliates in respect of Subject Hydrocarbons, shall be solely for the
account of Assignor or such Affiliate.
SECTION 2.02. Delivery of Subject Hydrocarbons. All Subject Hydrocarbons
Sold by Assignor, whether pursuant to Sales Contracts or otherwise, shall be
delivered, by Assignor to the purchasers thereof, into the pipelines to which
the wells producing such Subject Hydrocarbons may be connected or to such other
point of purchase as is reasonably required in the marketing of such Subject
Hydrocarbons.
SECTION 2.03. Reliance by Third Party. As to any party, the acts of
Assignor shall be binding on Assignee. It shall not be necessary for Assignee to
join with Assignor in any division or transfer order, lease extension or Sales
Contract, and proceeds of Sale of the Subject Hydrocarbons shall be paid by the
purchasers thereof (or others disbursing proceeds) directly to Assignor without
necessity of joinder by or consent of Assignee.
ARTICLE III
PAYMENTS
SECTION 3.01. Payment. On or before each Monthly Record Date, beginning
with the Monthly Record Date for March, 1999, Assignor shall pay to Assignee as
an overriding royalty
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hereunder an amount equal to eighty percent (80%) of the Net Proceeds for the
preceding Computation Period.
SECTION 3.02. Interest on Past Due Payments. Except as otherwise provided
in Section 9.05 hereof, any amount not paid by Assignor to Assignee when due
shall bear, and Assignor will pay, interest determined at the end of each month,
from such due date until such amount is paid, at the rate of the lesser of (a)
the Prime Interest Rate plus 4% or (b) the maximum lawful contract rate of
interest permitted by the applicable usury laws, now or hereafter enacted, which
interest rate (the "Maximum Rate") shall change when and as said laws change,
effective at the close of business on the day such change in said laws becomes
effective; but, if there shall be no Maximum Rate, then the rate shall be as
specified in the foregoing clause (a).
SECTION 3.03. Overpayment. If at any time Assignor pays Assignee more than
the amount due, Assignee shall not be obligated to return any such overpayment,
but the amount or amounts otherwise payable to Assignee for any subsequent
period or periods shall be reduced by such overpayment, plus an amount equal to
interest during the period of such overpayment at the rate of the lesser of (a)
the Prime Interest Rate or (b) the Maximum Rate; but if there shall be no
Maximum Rate, then the rate shall be as specified in the foregoing clause (a).
ARTICLE IV
RECORDS AND REPORTS
SECTION 4.01. Books and Records. Assignor shall at all times maintain true
and correct books and records sufficient to determine the amounts payable to
Assignee hereunder, including, but not limited to, a Net Proceeds account to
which Gross Proceeds and Production Costs are credited and charged.
SECTION 4.02. Inspections. The books and records referred to in Section
4.01 shall be open for inspection by Assignee and its agents and representatives
at the office of Assignor during normal business hours and after reasonable
advance notice.
SECTION 4.03. Quarterly Statements. Within thirty (30) days next following
the close of each calendar quarter, Assignor shall deliver to Assignee a
statement showing the computation of Net Proceeds attributable to such quarter.
SECTION 4.04. Assignee's Exceptions to Quarterly Statements. If Assignee
shall take exception to any item or items included in the quarterly statements
rendered by Assignor, Assignee shall notify Assignor in writing within 180 days
after the receipt of the report and annual audit furnished pursuant to Section
4.07 hereof, setting forth in such notice the specific charges complained of and
to which exception is taken or the specific credits which should have been made
and allowed; and, with respect to such complaints and exceptions as are
justified, adjustment shall be made. If Assignee shall fail to give Assignor
notice of such complaints and exceptions prior to the expiration
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of such 180 day period, then the statements for such calendar year as originally
rendered by Assignor shall be deemed to be correct as rendered.
SECTION 4.05. Geological and Other Data. Upon request by Assignee, Assignor
shall, subject to the limitations of confidentiality or nondisclosure
obligations to co-owners or other third parties, furnish to Assignee access to
all geological, well and production data which Assignor has on hand relating to
operations on the Subject Interests. Assignor will use reasonable efforts to
obtain waivers of any such confidentiality or nondisclosure obligations that
prevent it from providing to Assignee any requested information, but Assignor
shall not be obligated to incur any expense or detriment above a nominal amount
to obtain such waiver. Assignor shall also furnish to Assignee, upon request by
Assignee, reports showing the status of development, producing and other
operations conducted by Assignor on the Subject Interests. Assignor shall, upon
request by Assignee, furnish to Assignee all reserve reports or studies in the
possession of Assignor from time to time relating to the Subject Interests,
whether prepared by Assignor or by third party consulting engineers; provided,
it is agreed that Assignor makes no representations or warranties as to the
accuracy or completeness of any such reports or studies and shall have no
liability to Assignee or any other Person resulting from their use of such
reports or studies, and Assignee agrees not to attribute to Assignor or such
third-party consulting engineers any such reports or studies or the contents
thereof in any securities filings or reports to owners or holders of "Beneficial
Interests" in the Trust. All information furnished to Assignee pursuant to this
section is confidential and for the sole benefit of Assignee and shall not be
shown by Assignee to any other Person, except that this provision shall not
prohibit the disclosure by Assignee of any information that (i) at the time of
disclosure is generally available to the public (other than as a result of a
disclosure by Assignee), (ii) was available to Assignee on a nonconfidential
basis from a source other than Assignor, provided that such source is not known
by Assignee to be bound by a confidentiality obligation owed to Assignor, or
(iii) Assignee is legally required to disclose, provided that Assignee has given
to Assignor notice of such requirement and a reasonable opportunity to seek, at
Assignor's expense, a protective order and other appropriate relief from such
requirement.
SECTION 4.06. Monthly Estimates. On or before ten days (excluding
Saturdays, Sundays and other days on which national banking institutions in the
City of Fort Worth, Texas, are closed as authorized or required by law) before
each Monthly Record Date (beginning with the Monthly Record Date for March,
1999), Assignor shall deliver to Assignee a statement of Assignor's best
estimate of the amount payable to Assignee on or before such Monthly Record
Date.
SECTION 4.07. Annual Audits and Reports. Within 90 days after the end of
the calendar year, Assignor shall deliver to Assignee a statement which has been
audited by a nationally recognized firm of independent public accountants
selected by Assignor, which shall show the information provided for in Section
4.03 on an annual basis. Assignee shall bear the cost of each such audit.
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SECTION 4.08. Reserve Reports. Assignor may, but is not obligated to,
provide an annual reserve report for the Royalty Interest prepared by
independent consulting reservoir engineers. If such reserve report is provided
by Assignor, Assignee will reimburse Assignor for the cost thereof.
ARTICLE V
LIABILITY OF ASSIGNEE
In no event shall Assignee be liable or responsible in any way for any
Production Costs (including Excess Production Costs) or other costs or
liabilities incurred by Assignor or others attributable to the Subject Interests
or to the Hydrocarbons produced therefrom.
ARTICLE VI
OPERATION OF SUBJECT INTERESTS
SECTION 6.01. Prudent Operator Standard. Assignor agrees, to the extent it
has the legal right to do so under the terms of any lease, operating agreement,
contract for development or similar instrument affecting or pertaining to the
Subject Interests (or any portion thereof), that it will conduct and carry on
the maintenance and operation of the Subject Interests with reasonable and
prudent business judgment and in accordance with good oil and gas field
practices, and that it will drill such wells as a reasonably prudent operator
would drill from time to time in order to protect the Subject Interests from
drainage. However, nothing contained in this Section 6.01 shall be deemed to
prevent or restrict Assignor from electing not to participate in any operation
which is to be conducted under the terms of any operating agreement, contract
for development or similar instrument affecting or pertaining to the Subject
Interests (or any portion thereof) and allowing consenting parties to conduct
nonconsent operations thereon, if such election is made by Assignor in good
faith. Notwithstanding anything elsewhere herein to the contrary, Assignor shall
never be liable to Assignee for the manner in which Assignor performs its duties
hereunder as long as Assignor has acted in good faith.
SECTION 6.02. Abandonment of Properties. Nothing herein contained shall
obligate Assignor to continue to operate any well or to operate or maintain in
force or attempt to maintain in force any of the Subject Interests when, in
Assignor's opinion, such well or Subject Interest ceases to produce or is not
capable of producing Hydrocarbons in paying quantities. The expiration of a
Subject Interest in accordance with the terms and conditions applicable thereto
shall not be considered to be a voluntary surrender or abandonment thereof.
SECTION 6.03. Insurance. Although Assignor is permitted to carry policies
of insurance covering the property upon the Subject Interests and risks incident
to the operation thereof and to charge premiums therefor to the Net Proceeds
account, Assignor shall not be required to carry insurance on such property or
covering any of such risks unless it elects to do so. In no event shall Assignor
be liable to Assignee on account of any losses sustained which are not covered
by insurance.
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SECTION 6.04. Certain Rights to Manage the Subject Interests.
Notwithstanding anything in this Conveyance to the contrary, Assignor shall have
the right and power, acting in good faith and as a reasonably prudent oil and
gas operator, to execute, deliver, and perform operating agreements, oil and gas
leases, farmout agreements, exploration agreements, participation agreements,
drilling agreements, acreage contribution agreements, dry-hole agreements,
bottom-hole agreements, joint venture agreements, partnership agreements, and
other similar instruments and agreements that cover or affect the Subject
Interests and to make all decisions or elections required thereunder, including,
but not limited to, decisions to consent or non-consent to drilling and other
operations. The applicable Royalty Interest shall in each case be bound by such
instrument or agreement (and decisions or elections thereunder), without the
necessity of any execution, consent, joinder, or ratification by Assignee, and
the Royalty Interest shall thereafter be calculated and paid with respect to the
interests reserved, obtained, or modified by Assignor in such transaction, not
by reference to the Subject Interests that existed before such transaction. For
example, but not by way of limitation, (a) Assignor may farm out any Subject
Interest that is an oil and gas lease, and the Subject Interest therein shall
subsequently be the overriding royalty interest, reversionary working interest,
and/or other rights and interests reserved by Assignor in the farmout, not the
original leasehold interest, or (b) Assignor may execute an oil and gas lease to
cover any Subject Interest that is a mineral interest, and the Subject Interest
shall subsequently be the royalty and other lease benefits obtained or reserved
by Assignor in such lease, not the original mineral interest.
ARTICLE VII
POOLING AND UNITIZATION
SECTION 7.01. Pooled Subject Interests. To the extent any of the Subject
Interests have been heretofore pooled and unitized for the production of
Hydrocarbons, such Subject Interests are and shall be subject to the terms and
provisions of such pooling and unitization agreements, and the Royalty Interest
in each such Subject Interest shall apply to and affect only the production from
such units which accrues to such Subject Interest under and by virtue of the
applicable pooling and unitization agreements.
SECTION 7.02. Right to Pool and Unitize. Assignor shall have the exclusive
right and power (as between Assignor and Assignee), exercisable only during the
period provided in Section 7.03 hereof, to pool or unitize any of the Subject
Interests and to alter, change or amend or terminate any pooling or unitization
agreements heretofore or hereafter entered into, as to all or any part of the
Subject Lands, as to any one or more of the formations or horizons thereunder,
and as to any one or more Hydrocarbons, upon such terms and provisions as
Assignor shall in its sole and absolute discretion determine. If and whenever
through the exercise of such right and power, or pursuant to any law hereafter
enacted or any rule, regulation or order of any governmental body or official
hereafter promulgated, any of the Subject Interests are pooled or unitized in
any manner, the Royalty Interest insofar as it affects such Subject Interest
shall also be pooled and unitized, and in any such event such Royalty Interest
in such Subject Interest shall apply to and affect only the production which
accrues to such Subject Interest under and by virtue of the pooling and
unitization, and it shall
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not be necessary for Assignee to agree to, consent to, ratify, confirm or adopt
any exercise of such right and power by Assignor.
SECTION 7.03. Applicable Period. Assignor's power and rights in Section
7.02 shall be exercisable only during the period of the life of the last
survivor of the descendants of the signers of the Declaration of Independence
living on the date of execution hereof, plus twenty-one (21) years after the
death of such last survivor, or the term of this Conveyance, whichever period
shall first expire.
ARTICLE VIII
GOVERNMENT REGULATION
All obligations of Assignor hereunder shall be subject to all present and
future valid federal, state and local laws, statutes, codes and orders; and all
applicable rules, orders, regulations and decisions of every court, governmental
agency, body or authority having jurisdiction over the Hydrocarbons in and under
and that may be produced from the Subject Interests. Assignor's obligations are
specifically, but not by way of limitation, subject, to the extent in effect, to
all applicable provisions of the Emergency Petroleum Allocation Act of 1973, the
Department of Energy Organization Act, the Natural Gas Act, the Natural Gas
Policy Act of 1978, the Natural Gas Wellhead Decontrol Act of 1989 and each
other statute purporting to provide regulation of the Sale of Hydrocarbons or
establishing maximum prices at which the same may be Sold and all applicable
laws, orders, rules and regulations thereunder of the Federal Energy Regulatory
Commission, the Department of Energy and each other legislative or governmental
body, agency, board or commission having jurisdiction. If maximum rates
permitted under such statutes, rules and regulations for the Subject
Hydrocarbons are lower than prices established in Sales Contracts, then the
lower regulated prices received by Assignor shall control. Assignor shall be
entitled to use its reasonable discretion in making filings, for itself and on
behalf of Assignee, with the Federal Energy Regulatory Commission, the
Department of Energy or any other governmental body, agency, board or commission
having jurisdiction, affecting the price or prices at which Subject Hydrocarbons
may be Sold, and with purchasers of production, operators or others with respect
to any excise tax.
ARTICLE IX
ASSIGNMENTS
SECTION 9.01. Assignment by Assignor. Assignor shall have the right to
assign, sell, transfer, convey, mortgage or pledge the Subject Interests, or any
part thereof, subject to the Royalty Interest and the terms and provisions of
this Conveyance. From and after the effective date of any such assignment, sale,
transfer or conveyance by Assignor, the assignee thereunder shall succeed to all
the requirements upon and responsibilities of Assignor hereunder, as to the
interests in the Subject Interests so acquired by such assignee, and, from and
after the said effective date, Assignor shall be
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relieved of such requirements and responsibilities, excepting only those accrued
or due for performance prior to such effective date.
SECTION 9.02. Partial Assignment. If Assignor assigns its interest under
the Subject Interests as to some of such Subject Interests or as to some part
thereof, then, effective as of the date of such assignment, in determining the
Royalty Interest payable with respect to production from such assigned Subject
Interests or parts thereof, the Gross Proceeds, Production Costs and Net
Proceeds attributable to such assigned interests will be computed and determined
by the assignee of such assigned interests in the aggregate as to the assigned
interests owned by such assignee, but separate from and not aggregated with the
computation and determination made by Assignor as to Subject Interests that have
not been assigned by Assignor.
SECTION 9.03. Assignment by Assignee. Assignee has the right to assign the
Royalty Interest in whole or in part only as authorized by the Trust Indenture.
However, no such assignment will affect the method of computing Net Proceeds,
and if more than one Person becomes entitled to participate in the Royalty
Interest, Assignor may withhold from such other Person payments to which such
Person would otherwise be entitled hereunder and the furnishing of any data or
information which Assignor is required by the terms hereof to furnish Assignee
until Assignor is furnished a recordable instrument executed by or binding upon
all Persons interested in the Royalty Interest designating one Person who is to
receive such payments, data and information. In making conveyances or
assignments of any of the Subject Interests (to the extent permitted hereunder),
Assignee need not vest in its grantee or assignee all of the rights of Assignee
hereunder with respect to the interest in the Subject Interests so conveyed or
assigned.
SECTION 9.04. Certain Sales of Subject Interests. Subject to the
limitations set forth in Section 3.02(b) of the Trust Indenture, Assignor may
cause the sale of certain Subject Interests, including the appurtenant Royalty
Interest from time to time and Assignee will join in such sales as provided in
the Trust Indenture. The proceeds of any such sale shall be apportioned and
paid as provided in the Trust Indenture, but the purchasers of such Subject
Interests (inclusive of the appurtenant Royalty Interest) may pay the full
amount of the purchase price therefor to Assignor and shall have no
responsibility to see to the proper allocation thereof between Assignor and
Assignee.
SECTION 9.05. Change in Ownership. No change of ownership or right to
receive payment of the Royalty Interest, or of any part thereof, however
accomplished, shall be binding upon Assignor until notice thereof shall have
been furnished by the Person claiming the benefit thereof, and then only with
respect to payments thereafter made. Notice of sale or assignment shall consist
of a certified copy of the recorded instrument accomplishing the same; notice of
change of ownership or right to receive payment accomplished in any other manner
(for example by reason of incapacity, death or dissolution) shall consist of
certified copies of recorded documents and complete proceedings legally binding
and conclusive of the rights of all parties. Until such notice accompanied by
such documentation shall have been furnished Assignor as above provided, the
payment or tender of all sums payable on the Royalty Interest may be made in the
manner provided herein precisely as if no such change in interest or ownership
or right to receive payment had occurred, or (at Assignor's
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election) Assignor shall have the right to suspend payment of such sums without
interest in the event of such change until such documentation is furnished. The
kind of notice herein provided shall be exclusive, and no other kind, whether
actual or constructive, shall be binding on Assignor.
SECTION 9.06. Rights of Mortgagee or Trustee. If Assignee shall at any
time execute a mortgage or deed of trust covering all or part of the Royalty
Interest, the mortgagee(s) or trustee(s) therein named or the holder of any
obligation secured thereby shall be entitled, to the extent such mortgage or
deed of trust so provides, to exercise all the rights, remedies, powers and
privileges conferred upon Assignee by the terms of this Conveyance and to give
or withhold all consents required to be obtained hereunder by Assignee, but the
provisions of this Section 9.06 shall in no way be deemed or construed to impose
upon Assignor any obligation or liability undertaken by Assignee under such
mortgage or deed of trust or under the obligation secured thereby.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Proportionate Reduction. In the event of failure or
deficiency in title to any of the Subject Interests, the portion of the
production from such Subject Interest out of which the Royalty Interest
attributable to such Subject Interest shall be payable shall be reduced in the
same proportion that such Subject Interest is reduced. Notwithstanding the
foregoing, if any Person claims that this Conveyance gives rise to a
preferential right of such Person to acquire any portion of the Royalty Interest
(or any of the Subject Interests), then Assignor shall indemnify Assignee and
the trustee of the Trust against any liability, expense, damage or loss in
regard to such claim and the provisions of Section 6.05 of the Trust Indenture
shall apply with respect to such indemnity obligation. If such claim results in
the acquisition of any portion of the Royalty Interest by the Person claiming
the preferential right then, subject to the proviso below, Assignor shall pay to
Assignee the amount determined by multiplying (i) the product of 40,000,000
multiplied by the initial public offering price of the Trust's units of
beneficial interest by (ii) a fraction, the numerator of which is the value of
the portion of the Royalty Interest acquired by the Person claiming the
preferential right, as determined by reference to the most recent Reserve Report
(as defined in the Trust Indenture) of the Trust and the denominator of which is
the value of all the Royalty Interest as determined by reference to such Reserve
Report; provided, however, that if the Person claiming such preferential right
makes any payment to the Trust in connection with the acquisition of a portion
of the Royalty Interest, then the amount of such payment shall be credited
against Assignor's payment obligation set forth above, but not to create a
negative number.
SECTION 10.02. Term. This Conveyance shall remain in force as long as any
of the Subject Interests are in effect.
SECTION 10.03. Further Assurances. Should any additional instruments of
assignment and conveyance be required to describe more specifically any
interests subject hereto, Assignor agrees to execute and deliver the same. Also,
if any other or additional instruments are required in
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connection with the transfer of State, Federal or Indian lease interests in
order to comply with applicable laws, regulations or agreements, Assignor will
execute and deliver the same.
SECTION 10.04. Notices. All notices, statements, payments and
communications between the parties hereto shall be deemed to have been
sufficiently given and delivered if enclosed in a post paid wrapper and
deposited in the United States Mails directed, or if personally delivered, to
the party to whom the same is directed or to be furnished or made at the
respective addresses, as follows:
If to Assignor:
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, Texas 76102
Attention: Corporate Secretary
If to Assignee:
NationsBank, N.A.
17th Floor
901 Main Street
NationsBank Plaza
Dallas, Texas 75202
Attention: Trust Department
Either party or the successors or assignees of the interest or rights or
obligations of either party hereunder may change its address or designate a new
or different address or addresses for the purposes hereof by a similar notice
given or directed to all parties interested hereunder at the time.
SECTION 10.05. Binding Effect. This Conveyance shall bind and inure to the
benefit of the successors and assigns of Assignor and Assignee.
SECTION 10.06. Governing Law. The validity, effect and construction of
this Conveyance shall be governed by the laws of the State of Texas.
SECTION 10.07. Headings. Article and Section headings used in this
Conveyance are for convenience only and shall not affect the construction of
this Conveyance.
SECTION 10.08. Substitution of Warranty. This instrument is made with full
substitution and subrogation of Assignee in and to all covenants of warranty by
others heretofore given or made with respect to the Subject Interests or any
part thereof or interest therein.
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SECTION 10.09. Counterpart Execution. This Conveyance may be executed in
multiple counterparts, each of which shall be an original. Certain counterparts
may have descriptions relating to different recording jurisdictions omitted from
Schedule A. A counterpart with all such descriptions is being filed for record
in Seward County, Kansas. Where a description covers an interest located in more
than one county, such description may be included in counterparts recorded in
each county but such inclusion of the same description in more than one
counterpart does not have any cumulative effect as to the interests covered by
such description.
IN WITNESS WHEREOF, each of the parties hereto has caused this Conveyance
to be executed in its name and behalf and delivered as of the Effective Date.
ATTEST:
CROSS TIMBERS OIL COMPANY
/s/ VIRGINIA ANDERSON
- ----------------------------
Virginia Anderson, Secretary
of Cross Timbers Oil Company By: /s/ VAUGHN O. VENNERBERG, II
----------------------------------
Vaughn O. Vennerberg, II
Senior Vice President - Land
ATTEST:
NATIONSBANK, N.A., acting not in its
individual capacity but solely as the
Trustee of the Hugoton Royalty Trust
/s/ DONALD A. YUCHS
- ----------------------------
By: /s/ RON E. HOOPER
----------------------------------
Ron E. Hooper, Vice President
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STATE OF TEXAS (S)
(S)
COUNTY OF TARRANT (S)
This instrument was acknowledged before me on this 14th day of January,
1999, by Vaughn O. Vennerberg II, Senior Vice President - Land of Cross Timbers
Oil Company, on behalf of said corporation.
Commission Expires: /s/ KIM FIELDS RHOADS
11-13-99 --------------------------------------------
- -------- Notary Public State of Texas
[NOTARY SEAL APPEARS HERE]
THE STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on this 14th day of January,
1999, by Ron E. Hooper, Vice President of NationsBank, N.A., Trustee of the
Hugoton Royalty Trust, on behalf of said Bank as Trustee of the Hugoton Royalty
Trust.
Commission Expires: /s/ JANA L. EGELER
10-22-02 --------------------------------------------
- -------- Notary Public State of Texas
[NOTARY SEAL APPEARS HERE]
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SCHEDULE A
[Description of Subject Interests - Omitted]
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SCHEDULE B
Attached to and made a part of that certain Net Overriding Royalty Conveyance
(Hugoton Royalty Trust) dated effective December 1, 1998 (the "Conveyance")
ACCOUNTING PROCEDURE
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
Conveyance.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are used in the
calculation of Gross Proceeds, Net Proceeds, Processing Costs and
Production Costs, as said terms are defined in the Conveyance.
"Operator" shall mean Cross Timbers Oil Company or any of its affiliates
that conduct Joint Operations on the Joint Property.
"Parties" shall mean Operator and the Hugoton Royalty Trust (herein
referred to as the "Trust").
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
"Technical Employees" shall mean those employees having special and
specific engineering, geological or other professional skills, and whose
primary function in Joint Operations is the handling of specific operating
conditions and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies.
2. Designation and Responsibilities of Operator
Cross Timbers Oil Company shall be the Operator of the Joint Property, and
shall, to the extent it has the legal right to do so, conduct and direct
and have full control of all operations on the Joint Property as permitted
and required by, and within the limits of the Conveyance.
3. Payments and Accounting
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Joint Property and shall charge the Joint Account with the appropriate
proportionate share upon the expense basis provided herein. Operator shall
keep an accurate record of the expenses incurred and charges and credits
made and received.
4. Application of Agreement
This Accounting Procedure will apply to Joint Properties where Cross
Timbers Oil Company is the Operator and the Operator owns all or a portion
of the leasehold interest in the Joint Properties. In the event there is
an existing Accounting Procedure or related instrument governing the
operations of the Joint Properties, this Accounting Procedure will control
except as to the overhead rate stated in the existing Accounting Procedure
or related instrument.
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5. Conflicts
In the event there exists any conflict between the terms of this Accounting
Procedure or any Accounting Procedure that applies to the Joint Properties
and the Conveyance to which it is attached, the Conveyance will control.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items, which shall be
allocated to Processing Costs or Production Costs as appropriate:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Joint Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable laws and regulations, and costs
related to employees of Operator performing any environmental work
involving the Joint Property.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
3. Labor
A. (1) Salaries and wages of Operator's field employees employed on the
Joint Property in the conduct of Joint Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on
the Joint Property.
(4) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of
the Joint Property.
(5) Salaries and wages of support employees whose duties are
primarily field related in connection with the Joint Operations,
regardless of their location (e.g., field superintendents and
clerical employees located in the field).
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II. Such costs under this Paragraph 3B may be charged on a
"when and as paid basis" or by "percentage assessment" on the amount
of salaries and wages chargeable to the Joint Account under Paragraph
3A of this Section II. If percentage assessment is used, the rate
shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under Paragraphs 3A and 3B of this
Section II.
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Operator's
labor cost chargeable to the Joint Account under
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Paragraph 3A and 3B of this Section II shall be Operator's actual cost not
to exceed the percent most recently recommended by the Council of Petroleum
Accountants Societies.
5. Material
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made to the Joint
Account for a distance greater than the distance from the nearest
reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store where
like material is normally available, or railway receiving point
nearest the Joint Property. No charge shall be made to the Joint
Account for moving Material to other properties belonging to Operator.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual
charge is $400 or less excluding accessorial charges. The $400 will be
adjusted to the amount most recently recommended by the Council of
Petroleum Accountants Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and
Paragraph i, ii, and iii, of Section III. The cost of professional
consultant services and contract services of technical personnel directly
engaged on the Joint Property if such charges are excluded from the
overhead rates.
8. Equipment and Facilities Furnished By Operator
A. Operator shall charge the Joint Account for use of equipment and
facilities owned by Operator or any of its affiliates at rates
commensurate with costs of ownership and operation. Such rates shall
include costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross investment less
accumulated depreciation not to exceed twelve percent (12%) per annum.
Such rates shall not exceed average commercial rates currently
prevailing in the immediate area of the Joint Property.
B. In lieu of charges in paragraph 8A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less 20%. For automotive equipment, Operator may elect to
use rates published by the Petroleum Motor Transport Association.
C. This Paragraph 8 shall not affect any current charges made by Operator
to the Joint Account related to transportation, gathering, treating,
compression or processing or related charges by an affiliate of
Operator.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting from
Operator's gross negligence or willful misconduct.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments and amounts paid for settlement
of claims incurred in or resulting from operations under the Conveyance or
necessary to protect or recover the Joint
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Property, and the costs and expenses incurred in connection with hearings
and other matters before governmental bodies and agencies and costs and
expenses incurred in curing title to the Joint Property. Costs incurred by
Operator in procuring abstracts and fees paid outside attorneys for title
examination (including preliminary, supplemental, shut-in gas royalty
opinions and division order title opinions) shall be borne by the Joint
Account. Operator shall make no charge for services rendered by its staff
attorneys or other personnel in the performance of the above functions. All
other legal expense is considered to be covered by the overhead provisions
of Section III.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the benefit
of the Parties. If the ad valorem taxes are based in whole or in part upon
separate valuations of each party's interest, then notwithstanding anything
to the contrary herein, charges to the Joint Account shall be made and paid
by the Parties hereto in accordance with the tax value generated by each
party's interest.
12. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint Operations
are conducted in a state in which Operator may act as self-insurer for
Worker's Compensation and/or Employers Liability under the respective
state's laws, Operator may, at its election, include the risk under its
self-insurance program and in that event, Operator shall include a charge
at Operator's cost not to exceed manual rates.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Joint Property, including costs
required by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
or any form of telephonic equipment or service used in serving the Joint
Property. In the event communication facilities/systems serving the Joint
Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section II.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing
operations on a Fixed Rate Basis, Paragraph 1A. Such charge shall be
in lieu of costs and expenses of all offices and salaries or wages
plus applicable burdens and expenses of all personnel, except those
directly chargeable under Paragraph 3A, Section II. The cost and
expense of services from outside sources in connection with matters of
taxation, traffic, accounting or matters before or involving
governmental agencies shall not be considered as included in the
overhead rates.
ii. The salaries, wages and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract
services of technical personnel directly employed on the Joint
Property shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services and contract services
of technical personnel either temporarily or permanently assigned to
and directly employed in the operation of the Joint Property shall not
be covered by the overhead rates.
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A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
For wells located in the Hugoton Field
Drilling Well Rate $2,350.00
(Prorated for less than a full month)
Producing Well Rate $235.00
For wells located in all other areas
Drilling Well Rate $4,760.00
(Prorated for less than a full month)
Producing Well Rate $476.00
(2) Application of Overhead - Fixed Rate Basis shall be as follows:
(a) Drilling Well Rate
(1) Charges for drilling wells shall begin on the date the
well is spudded and terminate on the date the drilling
rig, completion rig, or other units used in completion
of the well is released, whichever is later, except
that no charge shall be made during suspension of
drilling or completion operations for fifteen (15) or
more consecutive calendar days.
(2) Charges for wells undergoing any type of workover or
recompletion or swabbing shall be made at the drilling
well rate. Such charges shall be applied for the period
from date such operations, with rig or other units
used, commence through date of rig or other unit
release, except that no charge shall be made during
suspension of operations for fifteen (15) or more
consecutive calendar days.
(b) Producing Well Rates
(1) An active well either produced or injected into for any
portion of the month shall be considered as a one-well
charge for the entire month.
(2) Each active completion in a multi-completed well in
which production is not commingled down hole shall be
considered as a one-well charge providing each
completion is considered a separate well by the
governing regulatory authority.
(3) An inactive gas well shut in because of overproduction
or failure of purchaser to take the production shall be
considered as a one-well charge providing the gas well
is directly connected to a permanent sales outlet.
(4) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on
any well. This one-well charge shall be made whether or
not the well has produced except when drilling well
rate applies.
(5) All other inactive wells (including but not limited to
inactive wells covered by unit allowable, lease
allowable, transferred allowable, etc.) shall not
qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April
each year beginning in 1999. The adjustment shall be computed by
multiplying the rate currently in use by the percentage increase
or decrease in the average weekly earnings of Crude Petroleum and
Gas Production Workers for the last calendar year compared to the
calendar year preceding as shown by the index of average weekly
earnings of Crude Petroleum and Gas Production Workers as
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published by the United States Department of Labor, Bureau of
Labor Statistics. The adjusted rates shall be the rates currently
in use, plus or minus the computed adjustment.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernable as a fixed asset required for the development
and operation of the Joint Property, Operator shall charge the Joint
Account for overhead based on the following rates for any Major
Construction project in excess of $25,000.00:
A. 5% of first $100,000 or total cost if less, plus
B. 3% of costs in excess of $100,000 but less than $1,000,000, plus
C. 2% of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose
of this paragraph, the component parts of a single project shall not be
treated separately and the cost of drilling and workover wells and
artificial lift equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by
the Parties, which are necessary to restore the Joint Property to the
equivalent condition that existed prior to the event causing the
expenditures, Operator shall charge the Joint Account for overhead based on
the following rates:
A. 5% of total costs through $100,000; plus
B. 3% of total costs in excess of $100,000 but less than $1,000,000; plus
C. 2% of total costs in excess of $1,000,000.
Expenditures subject to the overheads in this Section 3 above will not be
reduced by insurance recoveries, and no other overhead provisions of this
Section III shall apply.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Materials and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property.
Operator shall make timely disposition of idle and/or surplus Material, such
disposal being made either through sale to Operator, or sale to outsiders.
Operator may purchase, but shall be under no obligation to purchase, interest of
the Trust in surplus condition A or B Material at the prices defined below.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts, adjustments or rebates received. In case of
Material found to be defective or returned to vendor for any other reasons,
credit shall be passed to the Joint Account when adjustment has been
received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator shall be priced on the
following basis exclusive of cash discounts:
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
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(a) Tubular goods, sized 2-3/8 inches OD and larger, except line
pipe, shall be priced at Eastern mill published carload
prices effective as of date of movement plus transportation
cost using the 80,000 pound carload weight basis to the
railway receiving point nearest the Joint Property for which
published rail rates for tubular good exist. If the 80,000
pound rail rate is not offered, the 70,000 pound or 90,000
pound rail rate may be used. Freight charges for tubing
will be calculated from Lorain, Ohio and casing from
Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall
be computed at the mill base of that mill plus
transportation cost from that mill to the railway receiving
point nearest the Joint Property as provided above in
Paragraph 2.a.(1)(a). For transportation cost from points
other than Eastern mills, the 30,000 pound Oil Field Haulers
Association interstate truck rate shall be used.
(c) Special end finish tubular goods shall be priced at the
lowest published out-of-stock price, f.o.b. Houston, Texas,
plus transportation cost, using Oil Field Haulers
Association interstate 30,000 pound truck rate, to the
railway receiving point nearest the Joint Property.
(d) Macaroni tubing (size less than 2-3/8 inch OD) shall be
priced at the lowest published out-of-stock prices f.o.b.
the supplier plus transportation costs, using the Oil Field
Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest
the Joint Property.
(2) Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) 30,000 pounds or more shall be
priced under provisions of tubular goods pricing in
Paragraph A.(1)(a) as provided above. Freight charges shall
be calculated from Lorain, Ohio.
(b) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) less than 30,000 pounds shall be
priced at Eastern mill published carload base prices
effective as of date of shipment, plus 20 percent, plus
transportation costs based on freight rates as set forth
under provisions of tubular goods pricing in Paragraph
A.(1)(a) as provided above. Freight charges shall be
calculated from Lorain, Ohio.
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger
shall be priced f.o.b. the point of manufacture at current
new published prices plus transportation cost to the railway
receiving point nearest the Joint Property.
(d) Line pipe, including fabricated line pipe, drive pipe and
conduit not listed on published price lists shall be priced
at quoted prices plus freight to the railway receiving point
nearest the Joint Property or at prices agreed to by the
Parties.
(3) Other Material shall be priced at the current new price, in
effect at date of movement, as listed by a reliable supply store
nearest the Joint Property, or point of manufacture, plus
transportation costs, if applicable, to the railway receiving
point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint
Property shall be priced at the current new price, in effect on
date of movement, as listed by a reliable supply store nearest
the Joint Property, or point of manufacture, plus transportation
costs, if applicable, to the railway receiving point nearest the
Joint Property. Unused new tubulars will be priced as provided
above in Paragraph 2 A (1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse
without reconditioning:
(1) Material moved to the Joint Property
At seventy-five percent (75%) of current new price, as determined
by Paragraph A.
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(2) Material used on and moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as new Material.
(b) At sixty-five percent (65%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as used Material.
(3) Material not used on and moved from the Joint Property
At seventy-five percent (75%) of current new price as determined
by Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the
transferring property.
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and
suitable for its original function until after reconditioning
shall be priced at fifty percent (50%) of current new price as
determined by Paragraph A. The cost of reconditioning shall be
charged to the receiving property, provided Condition C value
plus cost of reconditioning does not exceed Condition B value.
(2) Condition D
Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a
basis commensurate with its use. Operator may dispose of
Condition D Material under procedures normally used by Operator
without prior approval of the Assignee.
(a) Casing, tubing or drill pipe used as line pipe shall be
priced as Grade A and B seamless line pipe of comparable
size and weight. Used casing, tubing or drill pipe utilized
as line pipe shall be priced at used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service
lines than standard line pipe, e.g. power oil lines, shall
be priced under normal pricing procedures for casing,
tubing, or drill pipe. Upset tubular goods shall be priced
on a non upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose
of Condition E Material under procedures normally utilized by
Operator without prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that
which would justify a price as provided above may be specially priced
as reasonably determined by Operator. Such price should result in the
Joint Account being charged with the value of the service rendered by
such Material.
E. Pricing Conditions
(1) Loading and unloading costs related to the movement of the
Material to the Joint Property shall be charged in accordance
with the methods specified in COPAS Bulletin 21.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
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3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which
the Operator has no control, the Operator may charge the Joint Account for
the required Material at the Operator's actual cost incurred in providing
such Material, in making it suitable for use, and in moving it to the Joint
Property.
4. Warranty of Material Furnished by Operator
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the
Joint Account Controllable Material.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of
the inventory. Inventory adjustments shall be made by Operator to the
Joint Account for overages and shortages, but Operator shall be held
accountable only for shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the
duty of the party selling to notify all other Parties as quickly as
possible after the transfer of interest takes place. In such cases, both
the seller and the purchaser shall be governed by such inventory. In cases
involving a change of Operator, all Parties shall be governed by such
inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due
to change of Operator shall be charged to the Joint Account.
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Exhibit 10.2
NET OVERRIDING ROYALTY CONVEYANCE
Hugoton Royalty Trust
STATE OF OKLAHOMA (S)
(S)
COUNTIES OF BEAVER, (S)
BECKHAM, CIMARRON, (S) KNOW ALL MEN BY THESE PRESENTS:
ELLIS, HARPER, MAJOR, (S)
TEXAS, WASHITA, WOODS (S)
AND WOODWARD (S)
THAT CROSS TIMBERS OIL COMPANY, a corporation formed under the laws of the
State of Delaware ("Assignor"), for and in consideration of the sum of Ten
Dollars ($10.00) and other good and valuable consideration to Assignor paid by
NATIONSBANK, N.A., a bank organized under the laws of the United States, acting
not in its individual corporate capacity but solely as trustee under that
certain Trust Indenture establishing the Hugoton Royalty Trust dated as of
December 1, 1998 ("Assignee"), the receipt and sufficiency of which are hereby
acknowledged, has bargained, sold, granted, conveyed, transferred, assigned, set
over and delivered, and by these presents does bargain, sell, grant, convey,
transfer, assign, set over and deliver unto Assignee a net overriding royalty
interest ("the Royalty Interest") in and to the Subject Hydrocarbons in and
under, and if, as and when produced, saved and sold from, the Subject Lands
during the term of the Subject Interests equal to eighty percent (80%) of the
Net Proceeds attributable to the Subject Interests, as each of the above
capitalized words is defined in Article I hereof and all as more fully provided
herein.
TO HAVE AND TO HOLD the Royalty Interest, together with all and singular
the rights and appurtenances thereto in anywise belonging, unto Assignee, its
successors and assigns, subject, however, to the terms and provisions of this
Conveyance; and Assignor does by these presents bind and obligate itself, its
successors and assigns, to WARRANT and FOREVER defend all and singular the
Royalty Interest unto the said Assignee, its successors and assigns, against
every person whomsoever lawfully claiming or to claim the same or any part
thereof by, through or under Assignor, but not otherwise.
ARTICLE I
DEFINITIONS
As used herein, the following words, terms or phrases have the following
meanings:
SECTION 1.01. "Affiliate" means, as to the party specified, any Person
controlling, controlled by or under common control with such party, with the
concept of control in such context meaning the possession, directly or
indirectly, of the power to direct or cause the direction of the management
<PAGE>
and policies of another, whether through the ownership of voting securities, by
contract or otherwise. The Trust shall not be deemed an Affiliate of Assignor.
SECTION 1.02. "Assignor" means the Assignor named herein while Assignor
owns all or any part of or interest in the Subject Interests and any other
Person or Persons (excluding Assignee) who hereafter may acquire all or any part
of or interest in the Subject Interests.
SECTION 1.03. "Assignee" means the Assignee named herein (and any successor
Trustee under the Trust Indenture) while it owns all or any part of or interest
in the Royalty Interest and any other Person or Persons who may acquire legal
title to all or any part of or interest in the Royalty Interest.
SECTION 1.04. "Computation Period" means (i) initially, the period
commencing on the Effective Date and ending on February 28, 1999, and (ii) each
calendar month thereafter.
SECTION 1.05. "Conveyance" means this Net Overriding Royalty Conveyance.
SECTION 1.06. "Effective Date" means 7:00 o'clock A.M., local time in
effect at the location of each Subject Interest, on December 1, 1998.
SECTION 1.07. "Excess Production Costs" means, for any Computation Period,
an amount equal to the excess, if any, of Production Costs for such Computation
Period over Gross Proceeds for such Computation Period.
SECTION 1.08. "Existing Sales Contracts" means all contracts and
agreements in effect as of the Effective Date between or among Assignor and any
Affiliate of Assignor, or between or among any Affiliates of Assignor, for the
Sale, Processing, treatment, compression, gathering or transportation of Subject
Hydrocarbons.
SECTION 1.09. "Gross Proceeds" means, for any Computation Period, and
subject to Section 2.01 (i) during the term of the Existing Sales Contracts, the
proceeds received by Assignor under the Existing Sales Contracts attributable to
the Sale of Subject Hydrocarbons Sold during such Computation Period by Assignor
after the Effective Date, and (ii) as to Subject Hydrocarbons Sold by Assignor
during such Computation Period after the Effective Date other than under the
Existing Sales Contracts (A) if Sold under a Sales Contract with a Non-Affiliate
of Assignor, the proceeds received by Assignor under such Sales Contract, or (B)
if Sold under a Sales Contract with an Affiliate of Assignor, the proceeds
received by Assignor under such Sales Contract but in no event less than 98% of
the proceeds received by such Affiliate upon the resale of such Subject
Hydrocarbons to a Non-Affiliate of Assignor, and (iii) the proceeds received by
Assignor in respect of underproduced gas imbalances attributable to the Subject
Interests as of the Effective Date, but in all instances, subject to the
following:
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(a) There shall be excluded from Gross Proceeds all Property Taxes
that are deducted or excluded from proceeds of Sale received by Assignor.
(b) There shall be excluded any amount for Subject Hydrocarbons
attributable to nonconsent operations conducted with respect to the Subject
Interests (or any portion thereof) as to which Assignor shall be a
nonconsenting party and which is dedicated to the recoupment or
reimbursement of costs and expenses of the consenting party or parties by
the terms of the relevant operating agreement, unit agreement, contract for
development or other instrument providing for such nonconsent operations.
Assignor agrees that its election not to participate in such operations
shall be made in conformity with the provisions of Section 6.01 of this
Conveyance, but third persons shall not be under any duty to determine that
such election so conformed.
(c) There shall be excluded any amount which Assignor shall receive
as any of the following: consideration for transfer or sale of any of the
Subject Interests (subject to the Royalty Interest) or equipment or other
personal property or fixtures on the Subject Lands; payments for gas not
taken, when such payments are made (but to the extent such payments are
allocated to gas taken in the future such payments shall be included
without interest in Gross Proceeds when such gas is taken); damages arising
from any cause other than drainage or reservoir injury; rental for
reservoir use; payments made to Assignor in connection with the drilling of
any well on any of the Subject Lands or lands in the vicinity thereof (such
exclusion including dry and bottom hole payments, provided that if such
well is drilled on the Subject Lands and Assignor incurs Production Costs
in connection therewith such payments shall reduce Production Costs) or in
connection with any adjustment of any well and leasehold equipment upon
unitization of any of the Subject Interests; provided there shall be
included in Gross Proceeds advance or prepaid payments for future
production received by Assignor to the extent not subject to repayment in
the event of insufficient subsequent production (and to the extent so
subject to repayment shall be included without interest in Gross Proceeds
when the Subject Hydrocarbons on which such payment was so advanced or
prepaid are actually produced) and payments made to Assignor in connection
with the deferring of drilling of any well on any of the Subject Lands
(including payments from an operator in the vicinity for refraining from
drilling an offset well).
(d) There shall be excluded any amount for Subject Hydrocarbons lost
in the production or marketing thereof or used by Assignor in conformity
with ordinary or prudent practices for drilling, production and plant
operations (including gas injection, secondary recovery, pressure
maintenance, repressuring, cycling operations, plant fuel or shrinkage)
conducted for the purpose of drilling for, producing or Processing Subject
Hydrocarbons or for operations on any unit or plant to which the Subject
Interests are committed, but only so long as such Subject Hydrocarbons are
so used.
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(e) Amounts received as a loan by Assignor from a purchaser of
Subject Hydrocarbons, whether with or without interest, shall not be
considered to be derived from the sale of Subject Hydrocarbons.
(f) If a controversy or possible controversy exists (whether by
reason of any statute, order, decree, rule, regulation, contract or
otherwise) between Assignor and any purchaser as to the correct sales price
of any Subject Hydrocarbons or, for any other reason, as to Assignor's
right to receive or collect the proceeds of sale of any Subject
Hydrocarbons, then
(i) amounts withheld by the purchaser or deposited by it with
an escrow agent shall not be considered to be received by Assignor
until actually collected by Assignor, but the amounts received by
Assignor shall include any interest, penalty or other amount paid to
Assignor in respect thereof;
(ii) amounts received by Assignor and promptly deposited by it
with an escrow agent shall not be considered to have been received by
Assignor, but all amounts thereafter paid to Assignor by such escrow
agent shall be considered to be amounts received from the Sale of
Subject Hydrocarbons; and
(iii) amounts received by Assignor and not deposited with an
escrow agent shall be considered to be received for purposes of this
Section 1.09.
SECTION 1.10. "Hydrocarbons" means oil, gas (which term includes coal bed
gas, coal seam gas and methane) and all other minerals produced in association
with oil or gas (including, but not limited to, helium, sulphur and carbon
dioxide), but excluding all other minerals, whether similar or dissimilar.
SECTION 1.11. "Monthly Record Date" for each month means the close of
business on the last day of such month which is not a Saturday, Sunday or other
day on which national banking institutions in the City of Fort Worth, Texas, are
closed as authorized or required by law, unless Assignee determines that a
different date is required to comply with applicable law or the rules of a
securities exchange or quotation system pursuant to the terms of the Trust
Indenture, in which event it means such different date.
SECTION 1.12. "Net Proceeds" means, for any Computation Period, the excess
of Gross Proceeds for such Computation Period over Production Costs for such
Computation Period.
SECTION 1.13. "Non-Affiliate" means, as to the party specified, any Person
who is not an Affiliate of such party.
SECTION 1.14. "Person" means any individual, corporation, partnership,
limited liability company, trust, estate or other entity, organization or
association.
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SECTION 1.15. "Prime Interest Rate" means the variable rate of interest
most recently announced by NationsBank, N.A. as its "prime rate."
SECTION 1.16. "Process" or "Processing" means to extract or otherwise
recover natural gas liquids from natural gas included in the Subject
Hydrocarbons through the processes of absorption, condensation, adsorption,
cryogenic or other methods in a manner that does not constitute Separation.
SECTION 1.17. "Processing Costs" means the costs to Assignor or any
Affiliate of Assignor to Process Subject Hydrocarbons before the Sale thereof,
which costs for purposes hereof shall consist of the sum of (a) any such
Processing charges paid to Non-Affiliates, (b) the charges by Affiliates of
Assignor under Existing Sales Contracts, and (c) the charges by Affiliates of
Assignor other than under Existing Sales Contracts so long as such charges do
not materially exceed charges prevailing in the area for similar services at the
time of contracting for such charges.
If Assignor (or its Affiliates) receives a share of the production of
others or of plant products therefrom (or proceeds of sale thereof) for
Processing such production of others, such share shall not be included in
Subject Hydrocarbons (or Gross Proceeds). If Assignor (or its Affiliates) does
not bear any Processing Costs but the owners or operators of a plant receive a
share of the Subject Hydrocarbons (or proceeds of sale thereof) for Processing
them, such share (or proceeds) shall be excluded from the Subject Hydrocarbons
(and Gross Proceeds).
SECTION 1.18. "Production Costs" means, for any Computation Period, to the
extent not excluded for purposes of calculating Gross Proceeds, whether capital
or non-capital in nature,
(a) the sum of
(i) all amounts paid by Assignor or any Affiliate of Assignor
as any of the following: royalty, overriding royalty or other
presently existing burden against production or the proceeds of Sale
of production attributable to the Subject Interests; delay rental;
shut-in gas well royalty or payment; minimum royalty; payments to
lessors or others in the area in connection with the drilling or
deferring of drilling of any well on any of the Subject Lands or lands
in the vicinity thereof (including dry and bottom hole payments and
payments made to others for refraining from drilling an offset well)
or in connection with any adjustment of any well and leasehold
equipment upon unitization of any of the Subject Interests; and rent
and other consideration paid for use of or damage to the surface;
(ii) the Property Tax Accrual;
(iii) the overhead costs paid by Assignor or any Affiliate of
Assignor under any joint operating agreement applicable to any of the
Subject Interests to which
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Assignor and one or more Non-Affiliates of Assignor are parties and
where Assignor or any Affiliate of Assignor is not the operator of
such Subject Interest;
(iv) the overhead rate provided for in any joint operating
agreement applicable to any of the Subject Interests where Assignor or
any Affiliate of Assignor is the operator of such Subject Interests,
less the portion, if any, of the overhead rate due from Non-Affiliates
of Assignor;
(v) with respect to any Subject Interests operated by Assignor
or any of its Affiliates and not subject to a joint operating
agreement, an overhead fee as shown on Schedule B attached hereto and
subject to adjustment as provided in Schedule B attached hereto;
(vi) all other costs, expenses and liabilities (including
Processing Costs) paid or incurred by Assignor or any Affiliate of
Assignor for investigating, exploring, prospecting, drilling and
mining for, operating and producing Subject Hydrocarbons and sale and
marketing thereof, including without implied limitation: costs for
equipping, plugging back, reworking, completing, recompleting and
plugging and abandoning of any well on the Subject Lands and of making
the Subject Hydrocarbons ready or available for market; costs for
construction and operation of gathering lines, tanks, transmission
lines, meters and other production and delivery facilities; costs,
whether paid in cash or by a share of Subject Hydrocarbons, of
transporting, compressing, dehydrating, separating, treating, storing
and marketing the Subject Hydrocarbons and disposing of extraneous
substances produced in association with Subject Hydrocarbons (provided
that such costs, if paid to or incurred by an Affiliate of Assignor
other than pursuant to an Existing Sales Contract, shall not
materially exceed charges prevailing in the area for similar services
at the time of contracting for such charges); costs for secondary
recovery, pressure maintenance, repressuring, cycling and other
operations conducted for the purpose of enhancing production; costs or
expenses (whether paid in cash or by delivery of gas) incurred in
resolving overproduced gas imbalances attributable to the Subject
Interests as of the Effective Date and thereafter; and costs for
litigation concerning title to or operation of the Subject Interests
and any other acts or omissions of Assignor consistent herewith or
brought by Assignor to protect the Subject Interests; and costs for
litigation or regulatory proceedings concerning title to or operation
of the Subject Interests and any other acts or omissions of Assignor
consistent herewith or brought by Assignor to protect the Subject
Interests or to protect or enforce any rights, contractual or
otherwise, of Assignor to produce or market Subject Hydrocarbons
therefrom;
(vii) Excess Production Costs for the preceding Computation
Period (including any remaining Excess Production Costs carried
forward from any preceding Computation Period);
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(viii) interest on the amount of Excess Production Costs at the
beginning of any Computation Period, calculated from the first day to
the last day of the Computation Period, at the Prime Interest Rate in
effect at the beginning of such Computation Period;
(ix) any amounts paid by Assignor or any Affiliate of Assignor
whether as refund, interest or penalty, to a purchaser or any
governmental agency or other Person because the amount initially
received by Assignor (or Affiliate of Assignor) as sales price for
Sales after the Effective Date was more or allegedly more than
permitted by the terms of any applicable contract, statute,
regulation, order, decree or other obligation; provided such amounts
(in the case of a refund), or the amounts with respect to which the
interest or penalty was paid, were previously included in Gross
Proceeds;
(x) any other amounts paid by Assignor or any Affiliate of
Assignor with respect to ownership or operation of the Subject
Interests after the Effective Date or Sales of production therefrom
after the Effective Date, whether as refund, fine, interest or
penalty, pursuant to litigation or settlement of threatened litigation
or order of governmental agency, provided that Assignor has not
breached Section 6.01 hereof;
(xi) all consideration hereafter paid and costs and expenses
hereafter incurred by Assignor or any Affiliate of Assignor for any
renewals or extensions of leases or other rights acquired after the
Effective Date which are included in the definition herein of Subject
Interests; and
(xii) any accrual or reserve which Assignor or any Affiliate of
Assignor shall have the right, at its election, to charge to
Production Costs for operations (other than day-to-day operations)
budgeted under an operating agreement or approved under an
authorization for expenditures ("AFE"), which accrual or reserve may
be based on the reasonably expected time of performing such operation
or on an estimated percentage of completion of the operation or on any
other reasonable method, and which accrual is in lieu of charging the
cost of such operation when paid for by Assignor (or Affiliate of
Assignor) but which shall be adjusted if and to the extent actual
costs differ from such accrual or reserve;
(b) but excluding
(i) costs which would otherwise be treated as Production Costs
(but which shall not be so treated for purposes hereof until the
following amounts have been fully credited against such costs) equal
to amounts reimbursed or credited to Assignor by insurance from damage
to property, by sales of property or transfers of
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property off the leases included in the Subject Interests or by
proceeds from unitization or other disposition of property; and
(ii) except for resolution of gas imbalances which are included
in Section 1.18(a)(vi) above, any amounts which would otherwise be
Production Costs but which are attributable to periods before the
Effective Date; and
(iii) costs that otherwise would be treated as Production Costs
but which have already been excluded or deducted from Gross Proceeds
under Section 1.09; and
(iv) costs incurred by any Affiliate of Assignor for which such
Affiliate has received a fee, reimbursement or other payment from
Assignor, where such payment by Assignor constitutes a Production
Cost; and
(v) costs paid or accrued by Assignor during the month of
December 1998 for the drilling, equipping, reworking, plugging back,
completing or recompleting of any well on the Subject Lands.
SECTION 1.19. "Property Taxes" means the sum of all general property (ad
valorem), production, severance, sales, gathering and excise taxes and other
taxes (whether state, federal or otherwise), except income taxes, assessed or
levied on or in connection with the Subject Interests, the Royalty Interest or
the production therefrom or equipment on the Subject Lands, or against Assignor
as owner of the Subject Interests or Assignee as owner of the Royalty Interest.
SECTION 1.20. "Property Tax Accrual" means, for any Computation Period, an
amount that may be set aside by Assignor as an accrual to be applied against
Property Taxes other than those that are deducted or excluded from Gross
Proceeds pursuant to Section 1.09(a) above, which accruals shall be adjusted to
the extent actual Property Taxes differ.
SECTION 1.21. "Sale" and "Sold" mean all forms of dispositions of Subject
Hydrocarbons for value, including exchanges and other dispositions for value.
SECTION 1.22. "Sales Contracts" means all contracts and agreements for the
sale of Subject Hydrocarbons.
SECTION 1.23. "Separation" means liquid separation operations in the
vicinity of the well using a conventional mechanical liquid gas separator but
excluding operations involving heat exchange, adiabatic cooling, absorption,
adsorption or refrigeration principles.
SECTION 1.24. "Subject Hydrocarbons" means all Hydrocarbons in and under,
and which may be produced, saved and sold from, and which shall accrue and be
attributable to, the Subject Interests, including plant products attributable
thereto from Processing gas or casinghead gas included
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in the Subject Hydrocarbons before sale thereof (but not including products
derived from processing oil).
SECTION 1.25. "Subject Interests" means, subject to the exclusions stated
below, each kind and character of right, title, claim or interest which Assignor
has on the Effective Date in or under each oil, gas or mineral lease,
unitization or pooling agreement (and the units created thereby), royalty
interests, overriding royalty interests, fee mineral interests and net profits
interests and any other agreements, conveyances, assignments or instruments
which are described or referred to in Schedule A, and all the right, title,
claim or interest which Assignor has on the Effective Date in and to the Subject
Lands, whether such right, title, claim or interest be under and by virtue of a
lease, a unitization or pooling agreement or order, an operating agreement, a
division order, a transfer order or any other type of agreement, conveyance,
assignment or instrument or under any other type of claim or title, legal or
equitable, recorded or unrecorded, even though Assignor's interests be
incorrectly or incompletely described in, or a description thereof be omitted
from, Schedule A, all as the same shall be enlarged by the discharge of any
payments out of production or by the removal of any charges or encumbrances to
which any of the same are subject and any and all renewals and extensions of any
of the same, but subject to all burdens to which Assignor's such right, title,
claim or interest is subject (while same remains so subject), limited, however,
if Assignor's interest in any Subject Interest should terminate at any time, to
the period to which Assignor's interest in such Subject Interest is limited.
There shall be excluded from the term "Subject Interests" any interest hereafter
acquired by Assignor in and to any of the Subject Lands, except any interest
acquired pursuant to existing agreements for no new consideration and renewals
or extensions of existing leases and other such agreements. For purposes of
this Conveyance "renewals or extensions" of any lease or other such agreement
shall be limited to renewals or extensions of an existing lease or other such
agreement obtained by the present owner thereof (or such owner's successors in
interest) while such lease is in force or within six months after such lease or
other such agreement terminates. Assignor shall be under no duty to seek
renewals or extensions of any lease or other such agreement.
SECTION 1.26. "Subject Lands" means the lands which are described in and
which are subject to the oil, gas or mineral leases, unitization or pooling
agreements or orders, operating agreements, division orders, transfer orders or
other type of agreement, conveyance, assignment or instrument described in
Schedule A attached hereto, provided that, where the description in Schedule A
excepts land or refers to an instrument insofar only as it covers certain land
or certain depths in certain land, no interest in such excepted land or depths
or in land other that to which such reference is limited shall be included in
the terms "Subject Lands" or "Subject Interests".
SECTION 1.27. "Trust" means the Hugoton Royalty Trust established by the
Trust Indenture.
SECTION 1.28. "Trust Indenture" means the Royalty Trust Indenture by and
between Cross Timbers Oil Company and NationsBank, N.A. dated as of December 1,
1998, establishing the Hugoton Royalty Trust, an express Texas Trust under the
Texas Trust Code.
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ARTICLE II
MARKETING OF SUBJECT HYDROCARBONS
SECTION 2.01. Sales Contracts. Assignor, to the extent it has the right to
do so, shall market or cause to be marketed the Subject Hydrocarbons and
Assignee shall have no authority to market the Subject Hydrocarbons or to take
in-kind any Subject Hydrocarbons. For such purpose, Sales of Subject
Hydrocarbons may continue to be made pursuant to Existing Sales Contracts.
Assignor may amend such Existing Sales Contracts and may enter into one or more
Sales Contracts in the future at the prices and on the terms Assignor shall deem
proper in Assignor's sole and absolute discretion, which may include sales to
Affiliates of Assignor. Further, Assignor may commit any of the Subject
Interests (including the Royalty Interest attributable thereto) to one or more
agreements for Processing pursuant to which, by way of example and not by way of
limitation, the plant owner or operator (which may be an Affiliate of Assignor)
receives a portion of the Subject Hydrocarbons or plant products derived
therefrom or proceeds of the Sale thereof as a fee for Processing. Gross
Proceeds of Subject Hydrocarbons shall be determined on the basis of amounts
actually received by Assignor (and not, except as provided in Section 1.09,
proceeds received by any of Assignor's Affiliates) from Sales under Sales
Contracts regardless of whether at the time of production or Sale market value
should be different from proceeds of Sale. In no event shall Gross Proceeds or
Production Costs include any revenues, expenses, gains or losses resulting from
option transactions or other futures or hedging transactions (other than forward
Sales of the Subject Hydrocarbons) which, if engaged in by Assignor or any of
its Affiliates in respect of Subject Hydrocarbons, shall be solely for the
account of Assignor or such Affiliate.
SECTION 2.02. Delivery of Subject Hydrocarbons. All Subject Hydrocarbons
Sold by Assignor, whether pursuant to Sales Contracts or otherwise, shall be
delivered, by Assignor to the purchasers thereof, into the pipelines to which
the wells producing such Subject Hydrocarbons may be connected or to such other
point of purchase as is reasonably required in the marketing of such Subject
Hydrocarbons.
SECTION 2.03. Reliance by Third Party. As to any party, the acts of
Assignor shall be binding on Assignee. It shall not be necessary for Assignee to
join with Assignor in any division or transfer order, lease extension or Sales
Contract, and proceeds of Sale of the Subject Hydrocarbons shall be paid by the
purchasers thereof (or others disbursing proceeds) directly to Assignor without
necessity of joinder by or consent of Assignee.
ARTICLE III
PAYMENTS
SECTION 3.01. Payment. On or before each Monthly Record Date, beginning
with the Monthly Record Date for March, 1999, Assignor shall pay to Assignee as
an overriding royalty
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hereunder an amount equal to eighty percent (80%) of the Net Proceeds for the
preceding Computation Period.
SECTION 3.02. Interest on Past Due Payments. Except as otherwise provided
in Section 9.05 hereof, any amount not paid by Assignor to Assignee when due
shall bear, and Assignor will pay, interest determined at the end of each month,
from such due date until such amount is paid, at the rate of the lesser of (a)
the Prime Interest Rate plus 4% or (b) the maximum lawful contract rate of
interest permitted by the applicable usury laws, now or hereafter enacted, which
interest rate (the "Maximum Rate") shall change when and as said laws change,
effective at the close of business on the day such change in said laws becomes
effective; but, if there shall be no Maximum Rate, then the rate shall be as
specified in the foregoing clause (a).
SECTION 3.03. Overpayment. If at any time Assignor pays Assignee more than
the amount due, Assignee shall not be obligated to return any such overpayment,
but the amount or amounts otherwise payable to Assignee for any subsequent
period or periods shall be reduced by such overpayment, plus an amount equal to
interest during the period of such overpayment at the rate of the lesser of (a)
the Prime Interest Rate or (b) the Maximum Rate; but if there shall be no
Maximum Rate, then the rate shall be as specified in the foregoing clause (a).
ARTICLE IV
RECORDS AND REPORTS
SECTION 4.01. Books and Records. Assignor shall at all times maintain true
and correct books and records sufficient to determine the amounts payable to
Assignee hereunder, including, but not limited to, a Net Proceeds account to
which Gross Proceeds and Production Costs are credited and charged.
SECTION 4.02. Inspections. The books and records referred to in Section
4.01 shall be open for inspection by Assignee and its agents and representatives
at the office of Assignor during normal business hours and after reasonable
advance notice.
SECTION 4.03. Quarterly Statements. Within thirty (30) days next following
the close of each calendar quarter, Assignor shall deliver to Assignee a
statement showing the computation of Net Proceeds attributable to such quarter.
SECTION 4.04. Assignee's Exceptions to Quarterly Statements. If Assignee
shall take exception to any item or items included in the quarterly statements
rendered by Assignor, Assignee shall notify Assignor in writing within 180 days
after the receipt of the report and annual audit furnished pursuant to Section
4.07 hereof, setting forth in such notice the specific charges complained of and
to which exception is taken or the specific credits which should have been made
and allowed; and, with respect to such complaints and exceptions as are
justified, adjustment shall be made. If Assignee shall fail to give Assignor
notice of such complaints and exceptions prior to the expiration
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of such 180 day period, then the statements for such calendar year as originally
rendered by Assignor shall be deemed to be correct as rendered.
SECTION 4.05. Geological and Other Data. Upon request by Assignee, Assignor
shall, subject to the limitations of confidentiality or nondisclosure
obligations to co-owners or other third parties, furnish to Assignee access to
all geological, well and production data which Assignor has on hand relating to
operations on the Subject Interests. Assignor will use reasonable efforts to
obtain waivers of any such confidentiality or nondisclosure obligations that
prevent it from providing to Assignee any requested information, but Assignor
shall not be obligated to incur any expense or detriment above a nominal amount
to obtain such waiver. Assignor shall also furnish to Assignee, upon request by
Assignee, reports showing the status of development, producing and other
operations conducted by Assignor on the Subject Interests. Assignor shall, upon
request by Assignee, furnish to Assignee all reserve reports or studies in the
possession of Assignor from time to time relating to the Subject Interests,
whether prepared by Assignor or by third party consulting engineers; provided,
it is agreed that Assignor makes no representations or warranties as to the
accuracy or completeness of any such reports or studies and shall have no
liability to Assignee or any other Person resulting from their use of such
reports or studies, and Assignee agrees not to attribute to Assignor or such
third-party consulting engineers any such reports or studies or the contents
thereof in any securities filings or reports to owners or holders of "Beneficial
Interests" in the Trust. All information furnished to Assignee pursuant to this
section is confidential and for the sole benefit of Assignee and shall not be
shown by Assignee to any other Person, except that this provision shall not
prohibit the disclosure by Assignee of any information that (i) at the time of
disclosure is generally available to the public (other than as a result of a
disclosure by Assignee), (ii) was available to Assignee on a nonconfidential
basis from a source other than Assignor, provided that such source is not known
by Assignee to be bound by a confidentiality obligation owed to Assignor, or
(iii) Assignee is legally required to disclose, provided that Assignee has given
to Assignor notice of such requirement and a reasonable opportunity to seek, at
Assignor's expense, a protective order and other appropriate relief from such
requirement.
SECTION 4.06. Monthly Estimates. On or before ten days (excluding
Saturdays, Sundays and other days on which national banking institutions in the
City of Fort Worth, Texas, are closed as authorized or required by law) before
each Monthly Record Date (beginning with the Monthly Record Date for March,
1999), Assignor shall deliver to Assignee a statement of Assignor's best
estimate of the amount payable to Assignee on or before such Monthly Record
Date.
SECTION 4.07. Annual Audits and Reports. Within 90 days after the end of
the calendar year, Assignor shall deliver to Assignee a statement which has been
audited by a nationally recognized firm of independent public accountants
selected by Assignor, which shall show the information provided for in Section
4.03 on an annual basis. Assignee shall bear the cost of each such audit.
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SECTION 4.08. Reserve Reports. Assignor may, but is not obligated to,
provide an annual reserve report for the Royalty Interest prepared by
independent consulting reservoir engineers. If such reserve report is provided
by Assignor, Assignee will reimburse Assignor for the cost thereof.
ARTICLE V
LIABILITY OF ASSIGNEE
In no event shall Assignee be liable or responsible in any way for any
Production Costs (including Excess Production Costs) or other costs or
liabilities incurred by Assignor or others attributable to the Subject Interests
or to the Hydrocarbons produced therefrom.
ARTICLE VI
OPERATION OF SUBJECT INTERESTS
SECTION 6.01. Prudent Operator Standard. Assignor agrees, to the extent it
has the legal right to do so under the terms of any lease, operating agreement,
contract for development or similar instrument affecting or pertaining to the
Subject Interests (or any portion thereof), that it will conduct and carry on
the maintenance and operation of the Subject Interests with reasonable and
prudent business judgment and in accordance with good oil and gas field
practices, and that it will drill such wells as a reasonably prudent operator
would drill from time to time in order to protect the Subject Interests from
drainage. However, nothing contained in this Section 6.01 shall be deemed to
prevent or restrict Assignor from electing not to participate in any operation
which is to be conducted under the terms of any operating agreement, contract
for development or similar instrument affecting or pertaining to the Subject
Interests (or any portion thereof) and allowing consenting parties to conduct
nonconsent operations thereon, if such election is made by Assignor in good
faith. Notwithstanding anything elsewhere herein to the contrary, Assignor shall
never be liable to Assignee for the manner in which Assignor performs its duties
hereunder as long as Assignor has acted in good faith.
SECTION 6.02. Abandonment of Properties. Nothing herein contained shall
obligate Assignor to continue to operate any well or to operate or maintain in
force or attempt to maintain in force any of the Subject Interests when, in
Assignor's opinion, such well or Subject Interest ceases to produce or is not
capable of producing Hydrocarbons in paying quantities. The expiration of a
Subject Interest in accordance with the terms and conditions applicable thereto
shall not be considered to be a voluntary surrender or abandonment thereof.
SECTION 6.03. Insurance. Although Assignor is permitted to carry policies
of insurance covering the property upon the Subject Interests and risks incident
to the operation thereof and to charge premiums therefor to the Net Proceeds
account, Assignor shall not be required to carry insurance on such property or
covering any of such risks unless it elects to do so. In no event shall Assignor
be liable to Assignee on account of any losses sustained which are not covered
by insurance.
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SECTION 6.04. Certain Rights to Manage the Subject Interests.
Notwithstanding anything in this Conveyance to the contrary, Assignor shall have
the right and power, acting in good faith and as a reasonably prudent oil and
gas operator, to execute, deliver, and perform operating agreements, oil and gas
leases, farmout agreements, exploration agreements, participation agreements,
drilling agreements, acreage contribution agreements, dry-hole agreements,
bottom-hole agreements, joint venture agreements, partnership agreements, and
other similar instruments and agreements that cover or affect the Subject
Interests and to make all decisions or elections required thereunder, including,
but not limited to, decisions to consent or non-consent to drilling and other
operations. The applicable Royalty Interest shall in each case be bound by such
instrument or agreement (and decisions or elections thereunder), without the
necessity of any execution, consent, joinder, or ratification by Assignee, and
the Royalty Interest shall thereafter be calculated and paid with respect to the
interests reserved, obtained, or modified by Assignor in such transaction, not
by reference to the Subject Interests that existed before such transaction. For
example, but not by way of limitation, (a) Assignor may farm out any Subject
Interest that is an oil and gas lease, and the Subject Interest therein shall
subsequently be the overriding royalty interest, reversionary working interest,
and/or other rights and interests reserved by Assignor in the farmout, not the
original leasehold interest, or (b) Assignor may execute an oil and gas lease to
cover any Subject Interest that is a mineral interest, and the Subject Interest
shall subsequently be the royalty and other lease benefits obtained or reserved
by Assignor in such lease, not the original mineral interest.
ARTICLE VII
POOLING AND UNITIZATION
SECTION 7.01. Pooled Subject Interests. To the extent any of the Subject
Interests have been heretofore pooled and unitized for the production of
Hydrocarbons, such Subject Interests are and shall be subject to the terms and
provisions of such pooling and unitization agreements, and the Royalty Interest
in each such Subject Interest shall apply to and affect only the production from
such units which accrues to such Subject Interest under and by virtue of the
applicable pooling and unitization agreements.
SECTION 7.02. Right to Pool and Unitize. Assignor shall have the exclusive
right and power (as between Assignor and Assignee), exercisable only during the
period provided in Section 7.03 hereof, to pool or unitize any of the Subject
Interests and to alter, change or amend or terminate any pooling or unitization
agreements heretofore or hereafter entered into, as to all or any part of the
Subject Lands, as to any one or more of the formations or horizons thereunder,
and as to any one or more Hydrocarbons, upon such terms and provisions as
Assignor shall in its sole and absolute discretion determine. If and whenever
through the exercise of such right and power, or pursuant to any law hereafter
enacted or any rule, regulation or order of any governmental body or official
hereafter promulgated, any of the Subject Interests are pooled or unitized in
any manner, the Royalty Interest insofar as it affects such Subject Interest
shall also be pooled and unitized, and in any such event such Royalty Interest
in such Subject Interest shall apply to and affect only the production which
accrues to such Subject Interest under and by virtue of the pooling and
unitization, and it shall
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not be necessary for Assignee to agree to, consent to, ratify, confirm or adopt
any exercise of such right and power by Assignor.
SECTION 7.03. Applicable Period. Assignor's power and rights in Section
7.02 shall be exercisable only during the period of the life of the last
survivor of the descendants of the signers of the Declaration of Independence
living on the date of execution hereof, plus twenty-one (21) years after the
death of such last survivor, or the term of this Conveyance, whichever period
shall first expire.
ARTICLE VIII
GOVERNMENT REGULATION
All obligations of Assignor hereunder shall be subject to all present and
future valid federal, state and local laws, statutes, codes and orders; and all
applicable rules, orders, regulations and decisions of every court, governmental
agency, body or authority having jurisdiction over the Hydrocarbons in and under
and that may be produced from the Subject Interests. Assignor's obligations are
specifically, but not by way of limitation, subject, to the extent in effect, to
all applicable provisions of the Emergency Petroleum Allocation Act of 1973, the
Department of Energy Organization Act, the Natural Gas Act, the Natural Gas
Policy Act of 1978, the Natural Gas Wellhead Decontrol Act of 1989 and each
other statute purporting to provide regulation of the Sale of Hydrocarbons or
establishing maximum prices at which the same may be Sold and all applicable
laws, orders, rules and regulations thereunder of the Federal Energy Regulatory
Commission, the Department of Energy and each other legislative or governmental
body, agency, board or commission having jurisdiction. If maximum rates
permitted under such statutes, rules and regulations for the Subject
Hydrocarbons are lower than prices established in Sales Contracts, then the
lower regulated prices received by Assignor shall control. Assignor shall be
entitled to use its reasonable discretion in making filings, for itself and on
behalf of Assignee, with the Federal Energy Regulatory Commission, the
Department of Energy or any other governmental body, agency, board or commission
having jurisdiction, affecting the price or prices at which Subject Hydrocarbons
may be Sold, and with purchasers of production, operators or others with respect
to any excise tax.
ARTICLE IX
ASSIGNMENTS
SECTION 9.01. Assignment by Assignor. Assignor shall have the right to
assign, sell, transfer, convey, mortgage or pledge the Subject Interests, or any
part thereof, subject to the Royalty Interest and the terms and provisions of
this Conveyance. From and after the effective date of any such assignment, sale,
transfer or conveyance by Assignor, the assignee thereunder shall succeed to all
the requirements upon and responsibilities of Assignor hereunder, as to the
interests in the Subject Interests so acquired by such assignee, and, from and
after the said effective date, Assignor shall be
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relieved of such requirements and responsibilities, excepting only those accrued
or due for performance prior to such effective date.
SECTION 9.02. Partial Assignment. If Assignor assigns its interest under
the Subject Interests as to some of such Subject Interests or as to some part
thereof, then, effective as of the date of such assignment, in determining the
Royalty Interest payable with respect to production from such assigned Subject
Interests or parts thereof, the Gross Proceeds, Production Costs and Net
Proceeds attributable to such assigned interests will be computed and determined
by the assignee of such assigned interests in the aggregate as to the assigned
interests owned by such assignee, but separate from and not aggregated with the
computation and determination made by Assignor as to Subject Interests that have
not been assigned by Assignor.
SECTION 9.03. Assignment by Assignee. Assignee has the right to assign the
Royalty Interest in whole or in part only as authorized by the Trust Indenture.
However, no such assignment will affect the method of computing Net Proceeds,
and if more than one Person becomes entitled to participate in the Royalty
Interest, Assignor may withhold from such other Person payments to which such
Person would otherwise be entitled hereunder and the furnishing of any data or
information which Assignor is required by the terms hereof to furnish Assignee
until Assignor is furnished a recordable instrument executed by or binding upon
all Persons interested in the Royalty Interest designating one Person who is to
receive such payments, data and information. In making conveyances or
assignments of any of the Subject Interests (to the extent permitted hereunder),
Assignee need not vest in its grantee or assignee all of the rights of Assignee
hereunder with respect to the interest in the Subject Interests so conveyed or
assigned.
SECTION 9.04. Certain Sales of Subject Interests. Subject to the
limitations set forth in Section 3.02(b) of the Trust Indenture, Assignor may
cause the sale of certain Subject Interests, including the appurtenant Royalty
Interest from time to time and Assignee will join in such sales as provided in
the Trust Indenture. The proceeds of any such sale shall be apportioned and
paid as provided in the Trust Indenture, but the purchasers of such Subject
Interests (inclusive of the appurtenant Royalty Interest) may pay the full
amount of the purchase price therefor to Assignor and shall have no
responsibility to see to the proper allocation thereof between Assignor and
Assignee.
SECTION 9.05. Change in Ownership. No change of ownership or right to
receive payment of the Royalty Interest, or of any part thereof, however
accomplished, shall be binding upon Assignor until notice thereof shall have
been furnished by the Person claiming the benefit thereof, and then only with
respect to payments thereafter made. Notice of sale or assignment shall consist
of a certified copy of the recorded instrument accomplishing the same; notice of
change of ownership or right to receive payment accomplished in any other manner
(for example by reason of incapacity, death or dissolution) shall consist of
certified copies of recorded documents and complete proceedings legally binding
and conclusive of the rights of all parties. Until such notice accompanied by
such documentation shall have been furnished Assignor as above provided, the
payment or tender of all sums payable on the Royalty Interest may be made in the
manner provided herein precisely as if no such change in interest or ownership
or right to receive payment had occurred, or (at Assignor's
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election) Assignor shall have the right to suspend payment of such sums without
interest in the event of such change until such documentation is furnished. The
kind of notice herein provided shall be exclusive, and no other kind, whether
actual or constructive, shall be binding on Assignor.
SECTION 9.06. Rights of Mortgagee or Trustee. If Assignee shall at any
time execute a mortgage or deed of trust covering all or part of the Royalty
Interest, the mortgagee(s) or trustee(s) therein named or the holder of any
obligation secured thereby shall be entitled, to the extent such mortgage or
deed of trust so provides, to exercise all the rights, remedies, powers and
privileges conferred upon Assignee by the terms of this Conveyance and to give
or withhold all consents required to be obtained hereunder by Assignee, but the
provisions of this Section 9.06 shall in no way be deemed or construed to impose
upon Assignor any obligation or liability undertaken by Assignee under such
mortgage or deed of trust or under the obligation secured thereby.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Proportionate Reduction. In the event of failure or
deficiency in title to any of the Subject Interests, the portion of the
production from such Subject Interest out of which the Royalty Interest
attributable to such Subject Interest shall be payable shall be reduced in the
same proportion that such Subject Interest is reduced. Notwithstanding the
foregoing, if any Person claims that this Conveyance gives rise to a
preferential right of such Person to acquire any portion of the Royalty Interest
(or any of the Subject Interests), then Assignor shall indemnify Assignee and
the trustee of the Trust against any liability, expense, damage or loss in
regard to such claim and the provisions of Section 6.05 of the Trust Indenture
shall apply with respect to such indemnity obligation. If such claim results in
the acquisition of any portion of the Royalty Interest by the Person claiming
the preferential right then, subject to the proviso below, Assignor shall pay to
Assignee the amount determined by multiplying (i) the product of 40,000,000
multiplied by the initial public offering price of the Trust's units of
beneficial interest by (ii) a fraction, the numerator of which is the value of
the portion of the Royalty Interest acquired by the Person claiming the
preferential right, as determined by reference to the most recent Reserve Report
(as defined in the Trust Indenture) of the Trust and the denominator of which is
the value of all the Royalty Interest as determined by reference to such Reserve
Report; provided, however, that if the Person claiming such preferential right
makes any payment to the Trust in connection with the acquisition of a portion
of the Royalty Interest, then the amount of such payment shall be credited
against Assignor's payment obligation set forth above, but not to create a
negative number.
SECTION 10.02. Term. This Conveyance shall remain in force as long as any
of the Subject Interests are in effect.
SECTION 10.03. Further Assurances. Should any additional instruments of
assignment and conveyance be required to describe more specifically any
interests subject hereto, Assignor agrees to execute and deliver the same. Also,
if any other or additional instruments are required in
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connection with the transfer of State, Federal or Indian lease interests in
order to comply with applicable laws, regulations or agreements, Assignor will
execute and deliver the same.
SECTION 10.04. Notices. All notices, statements, payments and
communications between the parties hereto shall be deemed to have been
sufficiently given and delivered if enclosed in a post paid wrapper and
deposited in the United States Mails directed, or if personally delivered, to
the party to whom the same is directed or to be furnished or made at the
respective addresses, as follows:
If to Assignor:
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, Texas 76102
Attention: Corporate Secretary
If to Assignee:
NationsBank, N.A.
17th Floor
901 Main Street
NationsBank Plaza
Dallas, Texas 75202
Attention: Trust Department
Either party or the successors or assignees of the interest or rights or
obligations of either party hereunder may change its address or designate a new
or different address or addresses for the purposes hereof by a similar notice
given or directed to all parties interested hereunder at the time.
SECTION 10.05. Binding Effect. This Conveyance shall bind and inure to the
benefit of the successors and assigns of Assignor and Assignee.
SECTION 10.06. Governing Law. The validity, effect and construction of
this Conveyance shall be governed by the laws of the State of Texas.
SECTION 10.07. Headings. Article and Section headings used in this
Conveyance are for convenience only and shall not affect the construction of
this Conveyance.
SECTION 10.08. Substitution of Warranty. This instrument is made with full
substitution and subrogation of Assignee in and to all covenants of warranty by
others heretofore given or made with respect to the Subject Interests or any
part thereof or interest therein.
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SECTION 10.09. Counterpart Execution. This Conveyance may be executed in
multiple counterparts, each of which shall be an original. Certain counterparts
may have descriptions relating to different recording jurisdictions omitted from
Schedule A. A counterpart with all such descriptions is being filed for record
in Major County, Oklahoma. Where a description covers an interest located in
more than one county, such description may be included in counterparts recorded
in each county but such inclusion of the same description in more than one
counterpart does not have any cumulative effect as to the interests covered by
such description.
IN WITNESS WHEREOF, each of the parties hereto has caused this Conveyance
to be executed in its name and behalf and delivered as of the Effective Date.
ATTEST:
CROSS TIMBERS OIL COMPANY
/s/ VIRGINIA ANDERSON
- -----------------------------
Virginia Anderson, Secretary
of Cross Timbers Oil Company By: /s/ VAUGHN O. VENNERBERG, II
--------------------------------
Vaughn O. Vennerberg, II
Senior Vice President - Land
ATTEST:
NATIONSBANK, N.A., acting not in its
individual capacity but solely as the
/s/ DONALD A. YUCHS Trustee of the Hugoton Royalty Trust
- -----------------------------
By: /s/ RON E. HOOPER
-------------------------------
Ron E. Hooper, Vice President
19
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STATE OF TEXAS (S)
(S)
COUNTY OF TARRANT (S)
This instrument was acknowledged before me on this 14th day of January,
1999, by Vaughn O. Vennerberg II, Senior Vice President - Land of Cross Timbers
Oil Company, on behalf of said corporation.
Commission Expires: /s/ KIM FIELDS RHOADS
11-33-99 -------------------------------------
- -------- Notary Public State of Texas
[NOTARY SEAL APPEARS HERE]
THE STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on this 14th day of January,
1999, by Ron E. Hooper, Vice President of NationsBank, N.A., Trustee of the
Hugoton Royalty Trust, on behalf of said Bank as Trustee of the Hugoton Royalty
Trust.
Commission Expires: /s/ JANA L. EGELER
10-22-02 -------------------------------------
- -------- Notary Public State of Texas
[NOTARY SEAL APPEARS HERE]
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SCHEDULE A
[Description of Subject Interests - Omitted]
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SCHEDULE B
Attached to and made a part of that certain Net Overriding Royalty Conveyance
(Hugoton Royalty Trust) dated effective December 1, 1998 (the "Conveyance")
ACCOUNTING PROCEDURE
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
Conveyance.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are used in the
calculation of Gross Proceeds, Net Proceeds, Processing Costs and
Production Costs, as said terms are defined in the Conveyance.
"Operator" shall mean Cross Timbers Oil Company or any of its affiliates
that conduct Joint Operations on the Joint Property.
"Parties" shall mean Operator and the Hugoton Royalty Trust (herein
referred to as the "Trust").
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
"Technical Employees" shall mean those employees having special and
specific engineering, geological or other professional skills, and whose
primary function in Joint Operations is the handling of specific operating
conditions and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies.
2. Designation and Responsibilities of Operator
Cross Timbers Oil Company shall be the Operator of the Joint Property, and
shall, to the extent it has the legal right to do so, conduct and direct
and have full control of all operations on the Joint Property as permitted
and required by, and within the limits of the Conveyance.
3. Payments and Accounting
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Joint Property and shall charge the Joint Account with the appropriate
proportionate share upon the expense basis provided herein. Operator shall
keep an accurate record of the expenses incurred and charges and credits
made and received.
4. Application of Agreement
This Accounting Procedure will apply to Joint Properties where Cross
Timbers Oil Company is the Operator and the Operator owns all or a portion
of the leasehold interest in the Joint Properties. In the event there is
an existing Accounting Procedure or related instrument governing the
operations of the Joint Properties, this Accounting Procedure will control
except as to the overhead rate stated in the existing Accounting Procedure
or related instrument.
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5. Conflicts
In the event there exists any conflict between the terms of this Accounting
Procedure or any Accounting Procedure that applies to the Joint Properties
and the Conveyance to which it is attached, the Conveyance will control.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items, which shall be
allocated to Processing Costs or Production Costs as appropriate:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Joint Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable laws and regulations, and costs
related to employees of Operator performing any environmental work
involving the Joint Property.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
3. Labor
A. (1) Salaries and wages of Operator's field employees employed on the
Joint Property in the conduct of Joint Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on
the Joint Property.
(4) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of
the Joint Property.
(5) Salaries and wages of support employees whose duties are
primarily field related in connection with the Joint Operations,
regardless of their location (e.g., field superintendents and
clerical employees located in the field).
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II. Such costs under this Paragraph 3B may be charged on a
"when and as paid basis" or by "percentage assessment" on the amount
of salaries and wages chargeable to the Joint Account under Paragraph
3A of this Section II. If percentage assessment is used, the rate
shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under Paragraphs 3A and 3B of this
Section II.
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Operator's
labor cost chargeable to the Joint Account under
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Paragraph 3A and 3B of this Section II shall be Operator's actual cost not
to exceed the percent most recently recommended by the Council of Petroleum
Accountants Societies.
5. Material
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made to the Joint
Account for a distance greater than the distance from the nearest
reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store where
like material is normally available, or railway receiving point
nearest the Joint Property. No charge shall be made to the Joint
Account for moving Material to other properties belonging to Operator.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual
charge is $400 or less excluding accessorial charges. The $400 will be
adjusted to the amount most recently recommended by the Council of
Petroleum Accountants Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and
Paragraph i, ii, and iii, of Section III. The cost of professional
consultant services and contract services of technical personnel directly
engaged on the Joint Property if such charges are excluded from the
overhead rates.
8. Equipment and Facilities Furnished By Operator
A. Operator shall charge the Joint Account for use of equipment and
facilities owned by Operator or any of its affiliates at rates
commensurate with costs of ownership and operation. Such rates shall
include costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross investment less
accumulated depreciation not to exceed twelve percent (12%) per annum.
Such rates shall not exceed average commercial rates currently
prevailing in the immediate area of the Joint Property.
B. In lieu of charges in paragraph 8A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less 20%. For automotive equipment, Operator may elect to
use rates published by the Petroleum Motor Transport Association.
C. This Paragraph 8 shall not affect any current charges made by Operator
to the Joint Account related to transportation, gathering, treating,
compression or processing or related charges by an affiliate of
Operator.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting from
Operator's gross negligence or willful misconduct.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments and amounts paid for settlement
of claims incurred in or resulting from operations under the Conveyance or
necessary to protect or recover the Joint
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Property, and the costs and expenses incurred in connection with hearings
and other matters before governmental bodies and agencies and costs and
expenses incurred in curing title to the Joint Property. Costs incurred by
Operator in procuring abstracts and fees paid outside attorneys for title
examination (including preliminary, supplemental, shut-in gas royalty
opinions and division order title opinions) shall be borne by the Joint
Account. Operator shall make no charge for services rendered by its staff
attorneys or other personnel in the performance of the above functions. All
other legal expense is considered to be covered by the overhead provisions
of Section III.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the benefit
of the Parties. If the ad valorem taxes are based in whole or in part upon
separate valuations of each party's interest, then notwithstanding anything
to the contrary herein, charges to the Joint Account shall be made and paid
by the Parties hereto in accordance with the tax value generated by each
party's interest.
12. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint Operations
are conducted in a state in which Operator may act as self-insurer for
Worker's Compensation and/or Employers Liability under the respective
state's laws, Operator may, at its election, include the risk under its
self-insurance program and in that event, Operator shall include a charge
at Operator's cost not to exceed manual rates.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Joint Property, including costs
required by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
or any form of telephonic equipment or service used in serving the Joint
Property. In the event communication facilities/systems serving the Joint
Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section II.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing
operations on a Fixed Rate Basis, Paragraph 1A. Such charge shall be
in lieu of costs and expenses of all offices and salaries or wages
plus applicable burdens and expenses of all personnel, except those
directly chargeable under Paragraph 3A, Section II. The cost and
expense of services from outside sources in connection with matters of
taxation, traffic, accounting or matters before or involving
governmental agencies shall not be considered as included in the
overhead rates.
ii. The salaries, wages and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract
services of technical personnel directly employed on the Joint
Property shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services and contract services
of technical personnel either temporarily or permanently assigned to
and directly employed in the operation of the Joint Property shall not
be covered by the overhead rates.
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A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
For wells located in the Hugoton Field
Drilling Well Rate $2,350.00
(Prorated for less than a full month)
Producing Well Rate $235.00
For wells located in all other areas
Drilling Well Rate $4,760.00
(Prorated for less than a full month)
Producing Well Rate $476.00
(2) Application of Overhead - Fixed Rate Basis shall be as follows:
(a) Drilling Well Rate
(1) Charges for drilling wells shall begin on the date the
well is spudded and terminate on the date the drilling
rig, completion rig, or other units used in completion
of the well is released, whichever is later, except
that no charge shall be made during suspension of
drilling or completion operations for fifteen (15) or
more consecutive calendar days.
(2) Charges for wells undergoing any type of workover or
recompletion or swabbing shall be made at the drilling
well rate. Such charges shall be applied for the period
from date such operations, with rig or other units
used, commence through date of rig or other unit
release, except that no charge shall be made during
suspension of operations for fifteen (15) or more
consecutive calendar days.
(b) Producing Well Rates
(1) An active well either produced or injected into for any
portion of the month shall be considered as a one-well
charge for the entire month.
(2) Each active completion in a multi-completed well in
which production is not commingled down hole shall be
considered as a one-well charge providing each
completion is considered a separate well by the
governing regulatory authority.
(3) An inactive gas well shut in because of overproduction
or failure of purchaser to take the production shall be
considered as a one-well charge providing the gas well
is directly connected to a permanent sales outlet.
(4) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on
any well. This one-well charge shall be made whether or
not the well has produced except when drilling well
rate applies.
(5) All other inactive wells (including but not limited to
inactive wells covered by unit allowable, lease
allowable, transferred allowable, etc.) shall not
qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April
each year beginning in 1999. The adjustment shall be computed by
multiplying the rate currently in use by the percentage increase
or decrease in the average weekly earnings of Crude Petroleum and
Gas Production Workers for the last calendar year compared to the
calendar year preceding as shown by the index of average weekly
earnings of Crude Petroleum and Gas Production Workers as
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published by the United States Department of Labor, Bureau of
Labor Statistics. The adjusted rates shall be the rates currently
in use, plus or minus the computed adjustment.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernable as a fixed asset required for the development
and operation of the Joint Property, Operator shall charge the Joint
Account for overhead based on the following rates for any Major
Construction project in excess of $25,000.00:
A. 5% of first $100,000 or total cost if less, plus
B. 3% of costs in excess of $100,000 but less than $1,000,000, plus
C. 2% of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose
of this paragraph, the component parts of a single project shall not be
treated separately and the cost of drilling and workover wells and
artificial lift equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by
the Parties, which are necessary to restore the Joint Property to the
equivalent condition that existed prior to the event causing the
expenditures, Operator shall charge the Joint Account for overhead based on
the following rates:
A. 5% of total costs through $100,000; plus
B. 3% of total costs in excess of $100,000 but less than $1,000,000; plus
C. 2% of total costs in excess of $1,000,000.
Expenditures subject to the overheads in this Section 3 above will not be
reduced by insurance recoveries, and no other overhead provisions of this
Section III shall apply.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Materials and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property.
Operator shall make timely disposition of idle and/or surplus Material, such
disposal being made either through sale to Operator, or sale to outsiders.
Operator may purchase, but shall be under no obligation to purchase, interest of
the Trust in surplus condition A or B Material at the prices defined below.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts, adjustments or rebates received. In case of
Material found to be defective or returned to vendor for any other reasons,
credit shall be passed to the Joint Account when adjustment has been
received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator shall be priced on the
following basis exclusive of cash discounts:
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
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(a) Tubular goods, sized 2-3/8 inches OD and larger, except line
pipe, shall be priced at Eastern mill published carload
prices effective as of date of movement plus transportation
cost using the 80,000 pound carload weight basis to the
railway receiving point nearest the Joint Property for which
published rail rates for tubular good exist. If the 80,000
pound rail rate is not offered, the 70,000 pound or 90,000
pound rail rate may be used. Freight charges for tubing
will be calculated from Lorain, Ohio and casing from
Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall
be computed at the mill base of that mill plus
transportation cost from that mill to the railway receiving
point nearest the Joint Property as provided above in
Paragraph 2.a.(1)(a). For transportation cost from points
other than Eastern mills, the 30,000 pound Oil Field Haulers
Association interstate truck rate shall be used.
(c) Special end finish tubular goods shall be priced at the
lowest published out-of-stock price, f.o.b. Houston, Texas,
plus transportation cost, using Oil Field Haulers
Association interstate 30,000 pound truck rate, to the
railway receiving point nearest the Joint Property.
(d) Macaroni tubing (size less than 2-3/8 inch OD) shall be
priced at the lowest published out-of-stock prices f.o.b.
the supplier plus transportation costs, using the Oil Field
Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest
the Joint Property.
(2) Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) 30,000 pounds or more shall be
priced under provisions of tubular goods pricing in
Paragraph A.(1)(a) as provided above. Freight charges shall
be calculated from Lorain, Ohio.
(b) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) less than 30,000 pounds shall be
priced at Eastern mill published carload base prices
effective as of date of shipment, plus 20 percent, plus
transportation costs based on freight rates as set forth
under provisions of tubular goods pricing in Paragraph
A.(1)(a) as provided above. Freight charges shall be
calculated from Lorain, Ohio.
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger
shall be priced f.o.b. the point of manufacture at current
new published prices plus transportation cost to the railway
receiving point nearest the Joint Property.
(d) Line pipe, including fabricated line pipe, drive pipe and
conduit not listed on published price lists shall be priced
at quoted prices plus freight to the railway receiving point
nearest the Joint Property or at prices agreed to by the
Parties.
(3) Other Material shall be priced at the current new price, in
effect at date of movement, as listed by a reliable supply store
nearest the Joint Property, or point of manufacture, plus
transportation costs, if applicable, to the railway receiving
point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint
Property shall be priced at the current new price, in effect on
date of movement, as listed by a reliable supply store nearest
the Joint Property, or point of manufacture, plus transportation
costs, if applicable, to the railway receiving point nearest the
Joint Property. Unused new tubulars will be priced as provided
above in Paragraph 2 A (1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse
without reconditioning:
(1) Material moved to the Joint Property
At seventy-five percent (75%) of current new price, as determined
by Paragraph A.
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(2) Material used on and moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as new Material.
(b) At sixty-five percent (65%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as used Material.
(3) Material not used on and moved from the Joint Property
At seventy-five percent (75%) of current new price as determined
by Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the
transferring property.
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and
suitable for its original function until after reconditioning
shall be priced at fifty percent (50%) of current new price as
determined by Paragraph A. The cost of reconditioning shall be
charged to the receiving property, provided Condition C value
plus cost of reconditioning does not exceed Condition B value.
(2) Condition D
Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a
basis commensurate with its use. Operator may dispose of
Condition D Material under procedures normally used by Operator
without prior approval of the Assignee.
(a) Casing, tubing or drill pipe used as line pipe shall be
priced as Grade A and B seamless line pipe of comparable
size and weight. Used casing, tubing or drill pipe utilized
as line pipe shall be priced at used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service
lines than standard line pipe, e.g. power oil lines, shall
be priced under normal pricing procedures for casing,
tubing, or drill pipe. Upset tubular goods shall be priced
on a non upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose
of Condition E Material under procedures normally utilized by
Operator without prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that
which would justify a price as provided above may be specially priced
as reasonably determined by Operator. Such price should result in the
Joint Account being charged with the value of the service rendered by
such Material.
E. Pricing Conditions
(1) Loading and unloading costs related to the movement of the
Material to the Joint Property shall be charged in accordance
with the methods specified in COPAS Bulletin 21.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
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3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which
the Operator has no control, the Operator may charge the Joint Account for
the required Material at the Operator's actual cost incurred in providing
such Material, in making it suitable for use, and in moving it to the Joint
Property.
4. Warranty of Material Furnished by Operator
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the
Joint Account Controllable Material.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of
the inventory. Inventory adjustments shall be made by Operator to the
Joint Account for overages and shortages, but Operator shall be held
accountable only for shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the
duty of the party selling to notify all other Parties as quickly as
possible after the transfer of interest takes place. In such cases, both
the seller and the purchaser shall be governed by such inventory. In cases
involving a change of Operator, all Parties shall be governed by such
inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due
to change of Operator shall be charged to the Joint Account.
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EXHIBIT 10.3
NET OVERRIDING ROYALTY CONVEYANCE
Hugoton Royalty Trust
STATE OF WYOMING (S)
(S) KNOW ALL MEN BY THESE PRESENTS:
COUNTIES OF LINCOLN, (S)
SUBLETTE AND SWEETWATER (S)
THAT CROSS TIMBERS OIL COMPANY, a corporation formed under the laws of the
State of Delaware ("Assignor"), for and in consideration of the sum of Ten
Dollars ($10.00) and other good and valuable consideration to Assignor paid by
NATIONSBANK, N.A., a bank organized under the laws of the United States, acting
not in its individual corporate capacity but solely as trustee under that
certain Trust Indenture establishing the Hugoton Royalty Trust dated as of
December 1, 1998 ("Assignee"), the receipt and sufficiency of which are hereby
acknowledged, has bargained, sold, granted, conveyed, transferred, assigned, set
over and delivered, and by these presents does bargain, sell, grant, convey,
transfer, assign, set over and deliver unto Assignee a net overriding royalty
interest ("the Royalty Interest") in and to the Subject Hydrocarbons in and
under, and if, as and when produced, saved and sold from, the Subject Lands
during the term of the Subject Interests equal to eighty percent (80%) of the
Net Proceeds attributable to the Subject Interests, as each of the above
capitalized words is defined in Article I hereof and all as more fully provided
herein.
TO HAVE AND TO HOLD the Royalty Interest, together with all and singular
the rights and appurtenances thereto in anywise belonging, unto Assignee, its
successors and assigns, subject, however, to the terms and provisions of this
Conveyance; and Assignor does by these presents bind and obligate itself, its
successors and assigns, to WARRANT and FOREVER defend all and singular the
Royalty Interest unto the said Assignee, its successors and assigns, against
every person whomsoever lawfully claiming or to claim the same or any part
thereof by, through or under Assignor, but not otherwise.
ARTICLE I
DEFINITIONS
As used herein, the following words, terms or phrases have the following
meanings:
SECTION 1.01. "Affiliate" means, as to the party specified, any Person
controlling, controlled by or under common control with such party, with the
concept of control in such context meaning the possession, directly or
indirectly, of the power to direct or cause the direction of the management
<PAGE>
and policies of another, whether through the ownership of voting securities, by
contract or otherwise. The Trust shall not be deemed an Affiliate of Assignor.
SECTION 1.02. "Assignor" means the Assignor named herein while Assignor
owns all or any part of or interest in the Subject Interests and any other
Person or Persons (excluding Assignee) who hereafter may acquire all or any part
of or interest in the Subject Interests.
SECTION 1.03. "Assignee" means the Assignee named herein (and any successor
Trustee under the Trust Indenture) while it owns all or any part of or interest
in the Royalty Interest and any other Person or Persons who may acquire legal
title to all or any part of or interest in the Royalty Interest.
SECTION 1.04. "Computation Period" means (i) initially, the period
commencing on the Effective Date and ending on February 28, 1999, and (ii) each
calendar month thereafter.
SECTION 1.05. "Conveyance" means this Net Overriding Royalty Conveyance.
SECTION 1.06. "Effective Date" means 7:00 o'clock A.M., local time in
effect at the location of each Subject Interest, on December 1, 1998.
SECTION 1.07. "Excess Production Costs" means, for any Computation Period,
an amount equal to the excess, if any, of Production Costs for such Computation
Period over Gross Proceeds for such Computation Period.
SECTION 1.08. "Existing Sales Contracts" means all contracts and
agreements in effect as of the Effective Date between or among Assignor and any
Affiliate of Assignor, or between or among any Affiliates of Assignor, for the
Sale, Processing, treatment, compression, gathering or transportation of Subject
Hydrocarbons.
SECTION 1.09. "Gross Proceeds" means, for any Computation Period, and
subject to Section 2.01 (i) during the term of the Existing Sales Contracts, the
proceeds received by Assignor under the Existing Sales Contracts attributable to
the Sale of Subject Hydrocarbons Sold during such Computation Period by Assignor
after the Effective Date, and (ii) as to Subject Hydrocarbons Sold by Assignor
during such Computation Period after the Effective Date other than under the
Existing Sales Contracts (A) if Sold under a Sales Contract with a Non-Affiliate
of Assignor, the proceeds received by Assignor under such Sales Contract, or (B)
if Sold under a Sales Contract with an Affiliate of Assignor, the proceeds
received by Assignor under such Sales Contract but in no event less than 98% of
the proceeds received by such Affiliate upon the resale of such Subject
Hydrocarbons to a Non-Affiliate of Assignor, and (iii) the proceeds received by
Assignor in respect of underproduced gas imbalances attributable to the Subject
Interests as of the Effective Date, but in all instances, subject to the
following:
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(a) There shall be excluded from Gross Proceeds all Property Taxes
that are deducted or excluded from proceeds of Sale received by Assignor.
(b) There shall be excluded any amount for Subject Hydrocarbons
attributable to nonconsent operations conducted with respect to the Subject
Interests (or any portion thereof) as to which Assignor shall be a
nonconsenting party and which is dedicated to the recoupment or
reimbursement of costs and expenses of the consenting party or parties by
the terms of the relevant operating agreement, unit agreement, contract for
development or other instrument providing for such nonconsent operations.
Assignor agrees that its election not to participate in such operations
shall be made in conformity with the provisions of Section 6.01 of this
Conveyance, but third persons shall not be under any duty to determine that
such election so conformed.
(c) There shall be excluded any amount which Assignor shall receive as
any of the following: consideration for transfer or sale of any of the
Subject Interests (subject to the Royalty Interest) or equipment or other
personal property or fixtures on the Subject Lands; payments for gas not
taken, when such payments are made (but to the extent such payments are
allocated to gas taken in the future such payments shall be included
without interest in Gross Proceeds when such gas is taken); damages arising
from any cause other than drainage or reservoir injury; rental for
reservoir use; payments made to Assignor in connection with the drilling of
any well on any of the Subject Lands or lands in the vicinity thereof (such
exclusion including dry and bottom hole payments, provided that if such
well is drilled on the Subject Lands and Assignor incurs Production Costs
in connection therewith such payments shall reduce Production Costs) or in
connection with any adjustment of any well and leasehold equipment upon
unitization of any of the Subject Interests; provided there shall be
included in Gross Proceeds advance or prepaid payments for future
production received by Assignor to the extent not subject to repayment in
the event of insufficient subsequent production (and to the extent so
subject to repayment shall be included without interest in Gross Proceeds
when the Subject Hydrocarbons on which such payment was so advanced or
prepaid are actually produced) and payments made to Assignor in connection
with the deferring of drilling of any well on any of the Subject Lands
(including payments from an operator in the vicinity for refraining from
drilling an offset well).
(d) There shall be excluded any amount for Subject Hydrocarbons lost
in the production or marketing thereof or used by Assignor in conformity
with ordinary or prudent practices for drilling, production and plant
operations (including gas injection, secondary recovery, pressure
maintenance, repressuring, cycling operations, plant fuel or shrinkage)
conducted for the purpose of drilling for, producing or Processing Subject
Hydrocarbons or for operations on any unit or plant to which the Subject
Interests are committed, but only so long as such Subject Hydrocarbons are
so used.
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(e) Amounts received as a loan by Assignor from a purchaser of Subject
Hydrocarbons, whether with or without interest, shall not be considered to
be derived from the sale of Subject Hydrocarbons.
(f) If a controversy or possible controversy exists (whether by reason
of any statute, order, decree, rule, regulation, contract or otherwise)
between Assignor and any purchaser as to the correct sales price of any
Subject Hydrocarbons or, for any other reason, as to Assignor's right to
receive or collect the proceeds of sale of any Subject Hydrocarbons, then
(i) amounts withheld by the purchaser or deposited by it with an
escrow agent shall not be considered to be received by Assignor until
actually collected by Assignor, but the amounts received by Assignor
shall include any interest, penalty or other amount paid to Assignor
in respect thereof;
(ii) amounts received by Assignor and promptly deposited by it
with an escrow agent shall not be considered to have been received by
Assignor, but all amounts thereafter paid to Assignor by such escrow
agent shall be considered to be amounts received from the Sale of
Subject Hydrocarbons; and
(iii) amounts received by Assignor and not deposited with an
escrow agent shall be considered to be received for purposes of this
Section 1.09.
SECTION 1.10. "Hydrocarbons" means oil, gas (which term includes coal bed
gas, coal seam gas and methane) and all other minerals produced in association
with oil or gas (including, but not limited to, helium, sulphur and carbon
dioxide), but excluding all other minerals, whether similar or dissimilar.
SECTION 1.11. "Monthly Record Date" for each month means the close of
business on the last day of such month which is not a Saturday, Sunday or other
day on which national banking institutions in the City of Fort Worth, Texas, are
closed as authorized or required by law, unless Assignee determines that a
different date is required to comply with applicable law or the rules of a
securities exchange or quotation system pursuant to the terms of the Trust
Indenture, in which event it means such different date.
SECTION 1.12. "Net Proceeds" means, for any Computation Period, the excess
of Gross Proceeds for such Computation Period over Production Costs for such
Computation Period.
SECTION 1.13. "Non-Affiliate" means, as to the party specified, any Person
who is not an Affiliate of such party.
SECTION 1.14. "Person" means any individual, corporation, partnership,
limited liability company, trust, estate or other entity, organization or
association.
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SECTION 1.15. "Prime Interest Rate" means the variable rate of interest
most recently announced by NationsBank, N.A. as its "prime rate."
SECTION 1.16. "Process" or "Processing" means to extract or otherwise
recover natural gas liquids from natural gas included in the Subject
Hydrocarbons through the processes of absorption, condensation, adsorption,
cryogenic or other methods in a manner that does not constitute Separation.
SECTION 1.17. "Processing Costs" means the costs to Assignor or any
Affiliate of Assignor to Process Subject Hydrocarbons before the Sale thereof,
which costs for purposes hereof shall consist of the sum of (a) any such
Processing charges paid to Non-Affiliates, (b) the charges by Affiliates of
Assignor under Existing Sales Contracts, and (c) the charges by Affiliates of
Assignor other than under Existing Sales Contracts so long as such charges do
not materially exceed charges prevailing in the area for similar services at the
time of contracting for such charges.
If Assignor (or its Affiliates) receives a share of the production of
others or of plant products therefrom (or proceeds of sale thereof) for
Processing such production of others, such share shall not be included in
Subject Hydrocarbons (or Gross Proceeds). If Assignor (or its Affiliates) does
not bear any Processing Costs but the owners or operators of a plant receive a
share of the Subject Hydrocarbons (or proceeds of sale thereof) for Processing
them, such share (or proceeds) shall be excluded from the Subject Hydrocarbons
(and Gross Proceeds).
SECTION 1.18. "Production Costs" means, for any Computation Period, to the
extent not excluded for purposes of calculating Gross Proceeds, whether capital
or non-capital in nature,
(a) the sum of
(i) all amounts paid by Assignor or any Affiliate of Assignor
as any of the following: royalty, overriding royalty or other
presently existing burden against production or the proceeds of Sale
of production attributable to the Subject Interests; delay rental;
shut-in gas well royalty or payment; minimum royalty; payments to
lessors or others in the area in connection with the drilling or
deferring of drilling of any well on any of the Subject Lands or lands
in the vicinity thereof (including dry and bottom hole payments and
payments made to others for refraining from drilling an offset well)
or in connection with any adjustment of any well and leasehold
equipment upon unitization of any of the Subject Interests; and rent
and other consideration paid for use of or damage to the surface;
(ii) the Property Tax Accrual;
(iii) the overhead costs paid by Assignor or any Affiliate of
Assignor under any joint operating agreement applicable to any of the
Subject Interests to which
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Assignor and one or more Non-Affiliates of Assignor are parties and
where Assignor or any Affiliate of Assignor is not the operator of
such Subject Interest;
(iv) the overhead rate provided for in any joint operating
agreement applicable to any of the Subject Interests where Assignor or
any Affiliate of Assignor is the operator of such Subject Interests,
less the portion, if any, of the overhead rate due from Non-Affiliates
of Assignor;
(v) with respect to any Subject Interests operated by Assignor
or any of its Affiliates and not subject to a joint operating
agreement, an overhead fee as shown on Schedule B attached hereto and
subject to adjustment as provided in Schedule B attached hereto;
(vi) all other costs, expenses and liabilities (including
Processing Costs) paid or incurred by Assignor or any Affiliate of
Assignor for investigating, exploring, prospecting, drilling and
mining for, operating and producing Subject Hydrocarbons and sale and
marketing thereof, including without implied limitation: costs for
equipping, plugging back, reworking, completing, recompleting and
plugging and abandoning of any well on the Subject Lands and of making
the Subject Hydrocarbons ready or available for market; costs for
construction and operation of gathering lines, tanks, transmission
lines, meters and other production and delivery facilities; costs,
whether paid in cash or by a share of Subject Hydrocarbons, of
transporting, compressing, dehydrating, separating, treating, storing
and marketing the Subject Hydrocarbons and disposing of extraneous
substances produced in association with Subject Hydrocarbons (provided
that such costs, if paid to or incurred by an Affiliate of Assignor
other than pursuant to an Existing Sales Contract, shall not
materially exceed charges prevailing in the area for similar services
at the time of contracting for such charges); costs for secondary
recovery, pressure maintenance, repressuring, cycling and other
operations conducted for the purpose of enhancing production; costs or
expenses (whether paid in cash or by delivery of gas) incurred in
resolving overproduced gas imbalances attributable to the Subject
Interests as of the Effective Date and thereafter; and costs for
litigation concerning title to or operation of the Subject Interests
and any other acts or omissions of Assignor consistent herewith or
brought by Assignor to protect the Subject Interests; and costs for
litigation or regulatory proceedings concerning title to or operation
of the Subject Interests and any other acts or omissions of Assignor
consistent herewith or brought by Assignor to protect the Subject
Interests or to protect or enforce any rights, contractual or
otherwise, of Assignor to produce or market Subject Hydrocarbons
therefrom;
(vii) Excess Production Costs for the preceding Computation
Period (including any remaining Excess Production Costs carried
forward from any preceding Computation Period);
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(viii) interest on the amount of Excess Production Costs at the
beginning of any Computation Period, calculated from the first day to
the last day of the Computation Period, at the Prime Interest Rate in
effect at the beginning of such Computation Period;
(ix) any amounts paid by Assignor or any Affiliate of Assignor
whether as refund, interest or penalty, to a purchaser or any
governmental agency or other Person because the amount initially
received by Assignor (or Affiliate of Assignor) as sales price for
Sales after the Effective Date was more or allegedly more than
permitted by the terms of any applicable contract, statute,
regulation, order, decree or other obligation; provided such amounts
(in the case of a refund), or the amounts with respect to which the
interest or penalty was paid, were previously included in Gross
Proceeds;
(x) any other amounts paid by Assignor or any Affiliate of
Assignor with respect to ownership or operation of the Subject
Interests after the Effective Date or Sales of production therefrom
after the Effective Date, whether as refund, fine, interest or
penalty, pursuant to litigation or settlement of threatened litigation
or order of governmental agency, provided that Assignor has not
breached Section 6.01 hereof;
(xi) all consideration hereafter paid and costs and expenses
hereafter incurred by Assignor or any Affiliate of Assignor for any
renewals or extensions of leases or other rights acquired after the
Effective Date which are included in the definition herein of Subject
Interests; and
(xii) any accrual or reserve which Assignor or any Affiliate of
Assignor shall have the right, at its election, to charge to
Production Costs for operations (other than day-to-day operations)
budgeted under an operating agreement or approved under an
authorization for expenditures ("AFE"), which accrual or reserve may
be based on the reasonably expected time of performing such operation
or on an estimated percentage of completion of the operation or on any
other reasonable method, and which accrual is in lieu of charging the
cost of such operation when paid for by Assignor (or Affiliate of
Assignor) but which shall be adjusted if and to the extent actual
costs differ from such accrual or reserve;
(b) but excluding
(i) costs which would otherwise be treated as Production
Costs (but which shall not be so treated for purposes hereof until the
following amounts have been fully credited against such costs) equal
to amounts reimbursed or credited to Assignor by insurance from damage
to property, by sales of property or transfers of
7
<PAGE>
property off the leases included in the Subject Interests or by
proceeds from unitization or other disposition of property; and
(ii) except for resolution of gas imbalances which are included
in Section 1.18(a)(vi) above, any amounts which would otherwise be
Production Costs but which are attributable to periods before the
Effective Date; and
(iii) costs that otherwise would be treated as Production Costs
but which have already been excluded or deducted from Gross Proceeds
under Section 1.09; and
(iv) costs incurred by any Affiliate of Assignor for which such
Affiliate has received a fee, reimbursement or other payment from
Assignor, where such payment by Assignor constitutes a Production
Cost; and
(v) costs paid or accrued by Assignor during the month of
December 1998 for the drilling, equipping, reworking, plugging back,
completing or recompleting of any well on the Subject Lands.
SECTION 1.19. "Property Taxes" means the sum of all general property (ad
valorem), production, severance, sales, gathering and excise taxes and other
taxes (whether state, federal or otherwise), except income taxes, assessed or
levied on or in connection with the Subject Interests, the Royalty Interest or
the production therefrom or equipment on the Subject Lands, or against Assignor
as owner of the Subject Interests or Assignee as owner of the Royalty Interest.
SECTION 1.20. "Property Tax Accrual" means, for any Computation Period, an
amount that may be set aside by Assignor as an accrual to be applied against
Property Taxes other than those that are deducted or excluded from Gross
Proceeds pursuant to Section 1.09(a) above, which accruals shall be adjusted to
the extent actual Property Taxes differ.
SECTION 1.21. "Sale" and "Sold" mean all forms of dispositions of Subject
Hydrocarbons for value, including exchanges and other dispositions for value.
SECTION 1.22. "Sales Contracts" means all contracts and agreements for the
sale of Subject Hydrocarbons.
SECTION 1.23. "Separation" means liquid separation operations in the
vicinity of the well using a conventional mechanical liquid gas separator but
excluding operations involving heat exchange, adiabatic cooling, absorption,
adsorption or refrigeration principles.
SECTION 1.24. "Subject Hydrocarbons" means all Hydrocarbons in and under,
and which may be produced, saved and sold from, and which shall accrue and be
attributable to, the Subject Interests, including plant products attributable
thereto from Processing gas or casinghead gas included
8
<PAGE>
in the Subject Hydrocarbons before sale thereof (but not including products
derived from processing oil).
SECTION 1.25. "Subject Interests" means, subject to the exclusions stated
below, each kind and character of right, title, claim or interest which Assignor
has on the Effective Date in or under each oil, gas or mineral lease,
unitization or pooling agreement (and the units created thereby), royalty
interests, overriding royalty interests, fee mineral interests and net profits
interests and any other agreements, conveyances, assignments or instruments
which are described or referred to in Schedule A, and all the right, title,
claim or interest which Assignor has on the Effective Date in and to the Subject
Lands, whether such right, title, claim or interest be under and by virtue of a
lease, a unitization or pooling agreement or order, an operating agreement, a
division order, a transfer order or any other type of agreement, conveyance,
assignment or instrument or under any other type of claim or title, legal or
equitable, recorded or unrecorded, even though Assignor's interests be
incorrectly or incompletely described in, or a description thereof be omitted
from, Schedule A, all as the same shall be enlarged by the discharge of any
payments out of production or by the removal of any charges or encumbrances to
which any of the same are subject and any and all renewals and extensions of any
of the same, but subject to all burdens to which Assignor's such right, title,
claim or interest is subject (while same remains so subject), limited, however,
if Assignor's interest in any Subject Interest should terminate at any time, to
the period to which Assignor's interest in such Subject Interest is limited.
There shall be excluded from the term "Subject Interests" any interest hereafter
acquired by Assignor in and to any of the Subject Lands, except any interest
acquired pursuant to existing agreements for no new consideration and renewals
or extensions of existing leases and other such agreements. For purposes of
this Conveyance "renewals or extensions" of any lease or other such agreement
shall be limited to renewals or extensions of an existing lease or other such
agreement obtained by the present owner thereof (or such owner's successors in
interest) while such lease is in force or within six months after such lease or
other such agreement terminates. Assignor shall be under no duty to seek
renewals or extensions of any lease or other such agreement.
SECTION 1.26. "Subject Lands" means the lands which are described in and
which are subject to the oil, gas or mineral leases, unitization or pooling
agreements or orders, operating agreements, division orders, transfer orders or
other type of agreement, conveyance, assignment or instrument described in
Schedule A attached hereto, provided that, where the description in Schedule A
excepts land or refers to an instrument insofar only as it covers certain land
or certain depths in certain land, no interest in such excepted land or depths
or in land other that to which such reference is limited shall be included in
the terms "Subject Lands" or "Subject Interests".
SECTION 1.27. "Trust" means the Hugoton Royalty Trust established by the
Trust Indenture.
SECTION 1.28. "Trust Indenture" means the Royalty Trust Indenture by and
between Cross Timbers Oil Company and NationsBank, N.A. dated as of December 1,
1998, establishing the Hugoton Royalty Trust, an express Texas Trust under the
Texas Trust Code.
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ARTICLE II
MARKETING OF SUBJECT HYDROCARBONS
SECTION 2.01. Sales Contracts. Assignor, to the extent it has the right to
do so, shall market or cause to be marketed the Subject Hydrocarbons and
Assignee shall have no authority to market the Subject Hydrocarbons or to take
in-kind any Subject Hydrocarbons. For such purpose, Sales of Subject
Hydrocarbons may continue to be made pursuant to Existing Sales Contracts.
Assignor may amend such Existing Sales Contracts and may enter into one or more
Sales Contracts in the future at the prices and on the terms Assignor shall deem
proper in Assignor's sole and absolute discretion, which may include sales to
Affiliates of Assignor. Further, Assignor may commit any of the Subject
Interests (including the Royalty Interest attributable thereto) to one or more
agreements for Processing pursuant to which, by way of example and not by way of
limitation, the plant owner or operator (which may be an Affiliate of Assignor)
receives a portion of the Subject Hydrocarbons or plant products derived
therefrom or proceeds of the Sale thereof as a fee for Processing. Gross
Proceeds of Subject Hydrocarbons shall be determined on the basis of amounts
actually received by Assignor (and not, except as provided in Section 1.09,
proceeds received by any of Assignor's Affiliates) from Sales under Sales
Contracts regardless of whether at the time of production or Sale market value
should be different from proceeds of Sale. In no event shall Gross Proceeds or
Production Costs include any revenues, expenses, gains or losses resulting from
option transactions or other futures or hedging transactions (other than forward
Sales of the Subject Hydrocarbons) which, if engaged in by Assignor or any of
its Affiliates in respect of Subject Hydrocarbons, shall be solely for the
account of Assignor or such Affiliate.
SECTION 2.02. Delivery of Subject Hydrocarbons. All Subject Hydrocarbons
Sold by Assignor, whether pursuant to Sales Contracts or otherwise, shall be
delivered, by Assignor to the purchasers thereof, into the pipelines to which
the wells producing such Subject Hydrocarbons may be connected or to such other
point of purchase as is reasonably required in the marketing of such Subject
Hydrocarbons.
SECTION 2.03. Reliance by Third Party. As to any party, the acts of
Assignor shall be binding on Assignee. It shall not be necessary for Assignee to
join with Assignor in any division or transfer order, lease extension or Sales
Contract, and proceeds of Sale of the Subject Hydrocarbons shall be paid by the
purchasers thereof (or others disbursing proceeds) directly to Assignor without
necessity of joinder by or consent of Assignee.
ARTICLE III
PAYMENTS
SECTION 3.01. Payment. On or before each Monthly Record Date, beginning
with the Monthly Record Date for March, 1999, Assignor shall pay to Assignee as
an overriding royalty
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hereunder an amount equal to eighty percent (80%) of the Net Proceeds for the
preceding Computation Period.
SECTION 3.02. Interest on Past Due Payments. Except as otherwise provided
in Section 9.05 hereof, any amount not paid by Assignor to Assignee when due
shall bear, and Assignor will pay, interest determined at the end of each month,
from such due date until such amount is paid, at the rate of the lesser of (a)
the Prime Interest Rate plus 4% or (b) the maximum lawful contract rate of
interest permitted by the applicable usury laws, now or hereafter enacted, which
interest rate (the "Maximum Rate") shall change when and as said laws change,
effective at the close of business on the day such change in said laws becomes
effective; but, if there shall be no Maximum Rate, then the rate shall be as
specified in the foregoing clause (a).
SECTION 3.03. Overpayment. If at any time Assignor pays Assignee more than
the amount due, Assignee shall not be obligated to return any such overpayment,
but the amount or amounts otherwise payable to Assignee for any subsequent
period or periods shall be reduced by such overpayment, plus an amount equal to
interest during the period of such overpayment at the rate of the lesser of (a)
the Prime Interest Rate or (b) the Maximum Rate; but if there shall be no
Maximum Rate, then the rate shall be as specified in the foregoing clause (a).
ARTICLE IV
RECORDS AND REPORTS
SECTION 4.01. Books and Records. Assignor shall at all times maintain true
and correct books and records sufficient to determine the amounts payable to
Assignee hereunder, including, but not limited to, a Net Proceeds account to
which Gross Proceeds and Production Costs are credited and charged.
SECTION 4.02. Inspections. The books and records referred to in Section
4.01 shall be open for inspection by Assignee and its agents and representatives
at the office of Assignor during normal business hours and after reasonable
advance notice.
SECTION 4.03. Quarterly Statements. Within thirty (30) days next following
the close of each calendar quarter, Assignor shall deliver to Assignee a
statement showing the computation of Net Proceeds attributable to such quarter.
SECTION 4.04. Assignee's Exceptions to Quarterly Statements. If Assignee
shall take exception to any item or items included in the quarterly statements
rendered by Assignor, Assignee shall notify Assignor in writing within 180 days
after the receipt of the report and annual audit furnished pursuant to Section
4.07 hereof, setting forth in such notice the specific charges complained of and
to which exception is taken or the specific credits which should have been made
and allowed; and, with respect to such complaints and exceptions as are
justified, adjustment shall be made. If Assignee shall fail to give Assignor
notice of such complaints and exceptions prior to the expiration
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of such 180 day period, then the statements for such calendar year as originally
rendered by Assignor shall be deemed to be correct as rendered.
SECTION 4.05. Geological and Other Data. Upon request by Assignee, Assignor
shall, subject to the limitations of confidentiality or nondisclosure
obligations to co-owners or other third parties, furnish to Assignee access to
all geological, well and production data which Assignor has on hand relating to
operations on the Subject Interests. Assignor will use reasonable efforts to
obtain waivers of any such confidentiality or nondisclosure obligations that
prevent it from providing to Assignee any requested information, but Assignor
shall not be obligated to incur any expense or detriment above a nominal amount
to obtain such waiver. Assignor shall also furnish to Assignee, upon request by
Assignee, reports showing the status of development, producing and other
operations conducted by Assignor on the Subject Interests. Assignor shall, upon
request by Assignee, furnish to Assignee all reserve reports or studies in the
possession of Assignor from time to time relating to the Subject Interests,
whether prepared by Assignor or by third party consulting engineers; provided,
it is agreed that Assignor makes no representations or warranties as to the
accuracy or completeness of any such reports or studies and shall have no
liability to Assignee or any other Person resulting from their use of such
reports or studies, and Assignee agrees not to attribute to Assignor or such
third-party consulting engineers any such reports or studies or the contents
thereof in any securities filings or reports to owners or holders of "Beneficial
Interests" in the Trust. All information furnished to Assignee pursuant to this
section is confidential and for the sole benefit of Assignee and shall not be
shown by Assignee to any other Person, except that this provision shall not
prohibit the disclosure by Assignee of any information that (i) at the time of
disclosure is generally available to the public (other than as a result of a
disclosure by Assignee), (ii) was available to Assignee on a nonconfidential
basis from a source other than Assignor, provided that such source is not known
by Assignee to be bound by a confidentiality obligation owed to Assignor, or
(iii) Assignee is legally required to disclose, provided that Assignee has given
to Assignor notice of such requirement and a reasonable opportunity to seek, at
Assignor's expense, a protective order and other appropriate relief from such
requirement.
SECTION 4.06. Monthly Estimates. On or before ten days (excluding
Saturdays, Sundays and other days on which national banking institutions in the
City of Fort Worth, Texas, are closed as authorized or required by law) before
each Monthly Record Date (beginning with the Monthly Record Date for March,
1999), Assignor shall deliver to Assignee a statement of Assignor's best
estimate of the amount payable to Assignee on or before such Monthly Record
Date.
SECTION 4.07. Annual Audits and Reports. Within 90 days after the end of
the calendar year, Assignor shall deliver to Assignee a statement which has been
audited by a nationally recognized firm of independent public accountants
selected by Assignor, which shall show the information provided for in Section
4.03 on an annual basis. Assignee shall bear the cost of each such audit.
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SECTION 4.08. Reserve Reports. Assignor may, but is not obligated to,
provide an annual reserve report for the Royalty Interest prepared by
independent consulting reservoir engineers. If such reserve report is provided
by Assignor, Assignee will reimburse Assignor for the cost thereof.
ARTICLE V
LIABILITY OF ASSIGNEE
In no event shall Assignee be liable or responsible in any way for any
Production Costs (including Excess Production Costs) or other costs or
liabilities incurred by Assignor or others attributable to the Subject Interests
or to the Hydrocarbons produced therefrom.
ARTICLE VI
OPERATION OF SUBJECT INTERESTS
SECTION 6.01. Prudent Operator Standard. Assignor agrees, to the extent it
has the legal right to do so under the terms of any lease, operating agreement,
contract for development or similar instrument affecting or pertaining to the
Subject Interests (or any portion thereof), that it will conduct and carry on
the maintenance and operation of the Subject Interests with reasonable and
prudent business judgment and in accordance with good oil and gas field
practices, and that it will drill such wells as a reasonably prudent operator
would drill from time to time in order to protect the Subject Interests from
drainage. However, nothing contained in this Section 6.01 shall be deemed to
prevent or restrict Assignor from electing not to participate in any operation
which is to be conducted under the terms of any operating agreement, contract
for development or similar instrument affecting or pertaining to the Subject
Interests (or any portion thereof) and allowing consenting parties to conduct
nonconsent operations thereon, if such election is made by Assignor in good
faith. Notwithstanding anything elsewhere herein to the contrary, Assignor shall
never be liable to Assignee for the manner in which Assignor performs its duties
hereunder as long as Assignor has acted in good faith.
SECTION 6.02. Abandonment of Properties. Nothing herein contained shall
obligate Assignor to continue to operate any well or to operate or maintain in
force or attempt to maintain in force any of the Subject Interests when, in
Assignor's opinion, such well or Subject Interest ceases to produce or is not
capable of producing Hydrocarbons in paying quantities. The expiration of a
Subject Interest in accordance with the terms and conditions applicable thereto
shall not be considered to be a voluntary surrender or abandonment thereof.
SECTION 6.03. Insurance. Although Assignor is permitted to carry policies
of insurance covering the property upon the Subject Interests and risks incident
to the operation thereof and to charge premiums therefor to the Net Proceeds
account, Assignor shall not be required to carry insurance on such property or
covering any of such risks unless it elects to do so. In no event shall Assignor
be liable to Assignee on account of any losses sustained which are not covered
by insurance.
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SECTION 6.04. Certain Rights to Manage the Subject Interests.
Notwithstanding anything in this Conveyance to the contrary, Assignor shall have
the right and power, acting in good faith and as a reasonably prudent oil and
gas operator, to execute, deliver, and perform operating agreements, oil and gas
leases, farmout agreements, exploration agreements, participation agreements,
drilling agreements, acreage contribution agreements, dry-hole agreements,
bottom-hole agreements, joint venture agreements, partnership agreements, and
other similar instruments and agreements that cover or affect the Subject
Interests and to make all decisions or elections required thereunder, including,
but not limited to, decisions to consent or non-consent to drilling and other
operations. The applicable Royalty Interest shall in each case be bound by such
instrument or agreement (and decisions or elections thereunder), without the
necessity of any execution, consent, joinder, or ratification by Assignee, and
the Royalty Interest shall thereafter be calculated and paid with respect to the
interests reserved, obtained, or modified by Assignor in such transaction, not
by reference to the Subject Interests that existed before such transaction. For
example, but not by way of limitation, (a) Assignor may farm out any Subject
Interest that is an oil and gas lease, and the Subject Interest therein shall
subsequently be the overriding royalty interest, reversionary working interest,
and/or other rights and interests reserved by Assignor in the farmout, not the
original leasehold interest, or (b) Assignor may execute an oil and gas lease to
cover any Subject Interest that is a mineral interest, and the Subject Interest
shall subsequently be the royalty and other lease benefits obtained or reserved
by Assignor in such lease, not the original mineral interest.
ARTICLE VII
POOLING AND UNITIZATION
SECTION 7.01. Pooled Subject Interests. To the extent any of the Subject
Interests have been heretofore pooled and unitized for the production of
Hydrocarbons, such Subject Interests are and shall be subject to the terms and
provisions of such pooling and unitization agreements, and the Royalty Interest
in each such Subject Interest shall apply to and affect only the production from
such units which accrues to such Subject Interest under and by virtue of the
applicable pooling and unitization agreements.
SECTION 7.02. Right to Pool and Unitize. Assignor shall have the exclusive
right and power (as between Assignor and Assignee), exercisable only during the
period provided in Section 7.03 hereof, to pool or unitize any of the Subject
Interests and to alter, change or amend or terminate any pooling or unitization
agreements heretofore or hereafter entered into, as to all or any part of the
Subject Lands, as to any one or more of the formations or horizons thereunder,
and as to any one or more Hydrocarbons, upon such terms and provisions as
Assignor shall in its sole and absolute discretion determine. If and whenever
through the exercise of such right and power, or pursuant to any law hereafter
enacted or any rule, regulation or order of any governmental body or official
hereafter promulgated, any of the Subject Interests are pooled or unitized in
any manner, the Royalty Interest insofar as it affects such Subject Interest
shall also be pooled and unitized, and in any such event such Royalty Interest
in such Subject Interest shall apply to and affect only the production which
accrues to such Subject Interest under and by virtue of the pooling and
unitization, and it shall
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not be necessary for Assignee to agree to, consent to, ratify, confirm or adopt
any exercise of such right and power by Assignor.
SECTION 7.03. Applicable Period. Assignor's power and rights in Section
7.02 shall be exercisable only during the period of the life of the last
survivor of the descendants of the signers of the Declaration of Independence
living on the date of execution hereof, plus twenty-one (21) years after the
death of such last survivor, or the term of this Conveyance, whichever period
shall first expire.
ARTICLE VIII
GOVERNMENT REGULATION
All obligations of Assignor hereunder shall be subject to all present and
future valid federal, state and local laws, statutes, codes and orders; and all
applicable rules, orders, regulations and decisions of every court, governmental
agency, body or authority having jurisdiction over the Hydrocarbons in and under
and that may be produced from the Subject Interests. Assignor's obligations are
specifically, but not by way of limitation, subject, to the extent in effect, to
all applicable provisions of the Emergency Petroleum Allocation Act of 1973, the
Department of Energy Organization Act, the Natural Gas Act, the Natural Gas
Policy Act of 1978, the Natural Gas Wellhead Decontrol Act of 1989 and each
other statute purporting to provide regulation of the Sale of Hydrocarbons or
establishing maximum prices at which the same may be Sold and all applicable
laws, orders, rules and regulations thereunder of the Federal Energy Regulatory
Commission, the Department of Energy and each other legislative or governmental
body, agency, board or commission having jurisdiction. If maximum rates
permitted under such statutes, rules and regulations for the Subject
Hydrocarbons are lower than prices established in Sales Contracts, then the
lower regulated prices received by Assignor shall control. Assignor shall be
entitled to use its reasonable discretion in making filings, for itself and on
behalf of Assignee, with the Federal Energy Regulatory Commission, the
Department of Energy or any other governmental body, agency, board or commission
having jurisdiction, affecting the price or prices at which Subject Hydrocarbons
may be Sold, and with purchasers of production, operators or others with respect
to any excise tax.
ARTICLE IX
ASSIGNMENTS
SECTION 9.01. Assignment by Assignor. Assignor shall have the right to
assign, sell, transfer, convey, mortgage or pledge the Subject Interests, or any
part thereof, subject to the Royalty Interest and the terms and provisions of
this Conveyance. From and after the effective date of any such assignment, sale,
transfer or conveyance by Assignor, the assignee thereunder shall succeed to all
the requirements upon and responsibilities of Assignor hereunder, as to the
interests in the Subject Interests so acquired by such assignee, and, from and
after the said effective date, Assignor shall be
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relieved of such requirements and responsibilities, excepting only those accrued
or due for performance prior to such effective date.
SECTION 9.02. Partial Assignment. If Assignor assigns its interest under
the Subject Interests as to some of such Subject Interests or as to some part
thereof, then, effective as of the date of such assignment, in determining the
Royalty Interest payable with respect to production from such assigned Subject
Interests or parts thereof, the Gross Proceeds, Production Costs and Net
Proceeds attributable to such assigned interests will be computed and determined
by the assignee of such assigned interests in the aggregate as to the assigned
interests owned by such assignee, but separate from and not aggregated with the
computation and determination made by Assignor as to Subject Interests that have
not been assigned by Assignor.
SECTION 9.03. Assignment by Assignee. Assignee has the right to assign the
Royalty Interest in whole or in part only as authorized by the Trust Indenture.
However, no such assignment will affect the method of computing Net Proceeds,
and if more than one Person becomes entitled to participate in the Royalty
Interest, Assignor may withhold from such other Person payments to which such
Person would otherwise be entitled hereunder and the furnishing of any data or
information which Assignor is required by the terms hereof to furnish Assignee
until Assignor is furnished a recordable instrument executed by or binding upon
all Persons interested in the Royalty Interest designating one Person who is to
receive such payments, data and information. In making conveyances or
assignments of any of the Subject Interests (to the extent permitted hereunder),
Assignee need not vest in its grantee or assignee all of the rights of Assignee
hereunder with respect to the interest in the Subject Interests so conveyed or
assigned.
SECTION 9.04. Certain Sales of Subject Interests. Subject to the
limitations set forth in Section 3.02(b) of the Trust Indenture, Assignor may
cause the sale of certain Subject Interests, including the appurtenant Royalty
Interest from time to time and Assignee will join in such sales as provided in
the Trust Indenture. The proceeds of any such sale shall be apportioned and
paid as provided in the Trust Indenture, but the purchasers of such Subject
Interests (inclusive of the appurtenant Royalty Interest) may pay the full
amount of the purchase price therefor to Assignor and shall have no
responsibility to see to the proper allocation thereof between Assignor and
Assignee.
SECTION 9.05. Change in Ownership. No change of ownership or right to
receive payment of the Royalty Interest, or of any part thereof, however
accomplished, shall be binding upon Assignor until notice thereof shall have
been furnished by the Person claiming the benefit thereof, and then only with
respect to payments thereafter made. Notice of sale or assignment shall consist
of a certified copy of the recorded instrument accomplishing the same; notice of
change of ownership or right to receive payment accomplished in any other manner
(for example by reason of incapacity, death or dissolution) shall consist of
certified copies of recorded documents and complete proceedings legally binding
and conclusive of the rights of all parties. Until such notice accompanied by
such documentation shall have been furnished Assignor as above provided, the
payment or tender of all sums payable on the Royalty Interest may be made in the
manner provided herein precisely as if no such change in interest or ownership
or right to receive payment had occurred, or (at Assignor's
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election) Assignor shall have the right to suspend payment of such sums without
interest in the event of such change until such documentation is furnished. The
kind of notice herein provided shall be exclusive, and no other kind, whether
actual or constructive, shall be binding on Assignor.
SECTION 9.06. Rights of Mortgagee or Trustee. If Assignee shall at any
time execute a mortgage or deed of trust covering all or part of the Royalty
Interest, the mortgagee(s) or trustee(s) therein named or the holder of any
obligation secured thereby shall be entitled, to the extent such mortgage or
deed of trust so provides, to exercise all the rights, remedies, powers and
privileges conferred upon Assignee by the terms of this Conveyance and to give
or withhold all consents required to be obtained hereunder by Assignee, but the
provisions of this Section 9.06 shall in no way be deemed or construed to impose
upon Assignor any obligation or liability undertaken by Assignee under such
mortgage or deed of trust or under the obligation secured thereby.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Proportionate Reduction. In the event of failure or
deficiency in title to any of the Subject Interests, the portion of the
production from such Subject Interest out of which the Royalty Interest
attributable to such Subject Interest shall be payable shall be reduced in the
same proportion that such Subject Interest is reduced. Notwithstanding the
foregoing, if any Person claims that this Conveyance gives rise to a
preferential right of such Person to acquire any portion of the Royalty Interest
(or any of the Subject Interests), then Assignor shall indemnify Assignee and
the trustee of the Trust against any liability, expense, damage or loss in
regard to such claim and the provisions of Section 6.05 of the Trust Indenture
shall apply with respect to such indemnity obligation. If such claim results in
the acquisition of any portion of the Royalty Interest by the Person claiming
the preferential right then, subject to the proviso below, Assignor shall pay to
Assignee the amount determined by multiplying (i) the product of 40,000,000
multiplied by the initial public offering price of the Trust's units of
beneficial interest by (ii) a fraction, the numerator of which is the value of
the portion of the Royalty Interest acquired by the Person claiming the
preferential right, as determined by reference to the most recent Reserve Report
(as defined in the Trust Indenture) of the Trust and the denominator of which is
the value of all the Royalty Interest as determined by reference to such Reserve
Report; provided, however, that if the Person claiming such preferential right
makes any payment to the Trust in connection with the acquisition of a portion
of the Royalty Interest, then the amount of such payment shall be credited
against Assignor's payment obligation set forth above, but not to create a
negative number.
SECTION 10.02. Term. This Conveyance shall remain in force as long as any
of the Subject Interests are in effect.
SECTION 10.03. Further Assurances. Should any additional instruments of
assignment and conveyance be required to describe more specifically any
interests subject hereto, Assignor agrees to execute and deliver the same. Also,
if any other or additional instruments are required in
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connection with the transfer of State, Federal or Indian lease interests in
order to comply with applicable laws, regulations or agreements, Assignor will
execute and deliver the same.
SECTION 10.04. Notices. All notices, statements, payments and
communications between the parties hereto shall be deemed to have been
sufficiently given and delivered if enclosed in a post paid wrapper and
deposited in the United States Mails directed, or if personally delivered, to
the party to whom the same is directed or to be furnished or made at the
respective addresses, as follows:
If to Assignor:
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, Texas 76102
Attention: Corporate Secretary
If to Assignee:
NationsBank, N.A.
17th Floor
901 Main Street
NationsBank Plaza
Dallas, Texas 75202
Attention: Trust Department
Either party or the successors or assignees of the interest or rights or
obligations of either party hereunder may change its address or designate a new
or different address or addresses for the purposes hereof by a similar notice
given or directed to all parties interested hereunder at the time.
SECTION 10.05. Binding Effect. This Conveyance shall bind and inure to the
benefit of the successors and assigns of Assignor and Assignee.
SECTION 10.06. Governing Law. The validity, effect and construction of
this Conveyance shall be governed by the laws of the State of Texas.
SECTION 10.07. Headings. Article and Section headings used in this
Conveyance are for convenience only and shall not affect the construction of
this Conveyance.
SECTION 10.08. Substitution of Warranty. This instrument is made with full
substitution and subrogation of Assignee in and to all covenants of warranty by
others heretofore given or made with respect to the Subject Interests or any
part thereof or interest therein.
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SECTION 10.09. Counterpart Execution. This Conveyance may be executed in
multiple counterparts, each of which shall be an original. Certain counterparts
may have descriptions relating to different recording jurisdictions omitted from
Schedule A. A counterpart with all such descriptions is being filed for record
in Lincoln County, Wyoming. Where a description covers an interest located in
more than one county, such description may be included in counterparts recorded
in each county but such inclusion of the same description in more than one
counterpart does not have any cumulative effect as to the interests covered by
such description.
IN WITNESS WHEREOF, each of the parties hereto has caused this Conveyance
to be executed in its name and behalf and delivered as of the Effective Date.
ATTEST:
CROSS TIMBERS OIL COMPANY
/s/ VIRGINIA ANDERSON
- ----------------------------
Virginia Anderson, Secretary
of Cross Timbers Oil Company By: /s/ VAUGHN O. VENNERBERG, II
-----------------------------
Vaughn O. Vennerberg, II
Senior Vice President - Land
ATTEST:
NATIONSBANK, N.A., acting not in its
individual capacity but solely as the
/s/ DONALD A. YUCHS Trustee of the Hugoton Royalty Trust
- ----------------------------
By: /s/ RON E. HOOPER
-----------------------------
Ron E. Hooper, Vice President
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STATE OF TEXAS (S)
(S)
COUNTY OF TARRANT (S)
This instrument was acknowledged before me on this 14th day of January,
1999, by Vaughn O. Vennerberg II, Senior Vice President - Land of Cross Timbers
Oil Company, on behalf of said corporation.
Commission Expires: /s/ KIM FIELDS RHOADS
11-13-99 ----------------------------------
- ------------------ Notary Public State of Texas
[NOTARY SEAL APPEARS HERE]
THE STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was acknowledged before me on this 14th day of January,
1999, by Ron E. Hooper, Vice President of NationsBank, N.A., Trustee of the
Hugoton Royalty Trust, on behalf of said Bank as Trustee of the Hugoton Royalty
Trust.
Commission Expires: /s/ JANA L. EGELER
10-22-02 ----------------------------------
- ------------------ Notary Public State of Texas
[NOTARY SEAL APPEARS HERE]
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SCHEDULE A
[Description of Subject Interests - Omitted]
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SCHEDULE B
Attached to and made a part of that certain Net Overriding Royalty Conveyance
(Hugoton Royalty Trust) dated effective December 1, 1998 (the "Conveyance")
ACCOUNTING PROCEDURE
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
Conveyance.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are used in the
calculation of Gross Proceeds, Net Proceeds, Processing Costs and
Production Costs, as said terms are defined in the Conveyance.
"Operator" shall mean Cross Timbers Oil Company or any of its affiliates
that conduct Joint Operations on the Joint Property.
"Parties" shall mean Operator and the Hugoton Royalty Trust (herein
referred to as the "Trust").
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
"Technical Employees" shall mean those employees having special and
specific engineering, geological or other professional skills, and whose
primary function in Joint Operations is the handling of specific operating
conditions and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies.
2. Designation and Responsibilities of Operator
Cross Timbers Oil Company shall be the Operator of the Joint Property, and
shall, to the extent it has the legal right to do so, conduct and direct
and have full control of all operations on the Joint Property as permitted
and required by, and within the limits of the Conveyance.
3. Payments and Accounting
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Joint Property and shall charge the Joint Account with the appropriate
proportionate share upon the expense basis provided herein. Operator shall
keep an accurate record of the expenses incurred and charges and credits
made and received.
4. Application of Agreement
This Accounting Procedure will apply to Joint Properties where Cross
Timbers Oil Company is the Operator and the Operator owns all or a portion
of the leasehold interest in the Joint Properties. In the event there is
an existing Accounting Procedure or related instrument governing the
operations of the Joint Properties, this Accounting Procedure will control
except as to the overhead rate stated in the existing Accounting Procedure
or related instrument.
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5. Conflicts
In the event there exists any conflict between the terms of this Accounting
Procedure or any Accounting Procedure that applies to the Joint Properties
and the Conveyance to which it is attached, the Conveyance will control.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items, which shall be
allocated to Processing Costs or Production Costs as appropriate:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Joint Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable laws and regulations, and costs
related to employees of Operator performing any environmental work
involving the Joint Property.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
3. Labor
A. (1) Salaries and wages of Operator's field employees employed on the
Joint Property in the conduct of Joint Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on
the Joint Property.
(4) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of
the Joint Property.
(5) Salaries and wages of support employees whose duties are
primarily field related in connection with the Joint Operations,
regardless of their location (e.g., field superintendents and
clerical employees located in the field).
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II. Such costs under this Paragraph 3B may be charged on a
"when and as paid basis" or by "percentage assessment" on the amount
of salaries and wages chargeable to the Joint Account under Paragraph
3A of this Section II. If percentage assessment is used, the rate
shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under Paragraphs 3A and 3B of this
Section II.
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Operator's
labor cost chargeable to the Joint Account under
2
<PAGE>
Paragraph 3A and 3B of this Section II shall be Operator's actual cost not
to exceed the percent most recently recommended by the Council of Petroleum
Accountants Societies.
5. Material
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made to the Joint
Account for a distance greater than the distance from the nearest
reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store where
like material is normally available, or railway receiving point
nearest the Joint Property. No charge shall be made to the Joint
Account for moving Material to other properties belonging to Operator.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual
charge is $400 or less excluding accessorial charges. The $400 will be
adjusted to the amount most recently recommended by the Council of
Petroleum Accountants Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and
Paragraph i, ii, and iii, of Section III. The cost of professional
consultant services and contract services of technical personnel directly
engaged on the Joint Property if such charges are excluded from the
overhead rates.
8. Equipment and Facilities Furnished By Operator
A. Operator shall charge the Joint Account for use of equipment and
facilities owned by Operator or any of its affiliates at rates
commensurate with costs of ownership and operation. Such rates shall
include costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross investment less
accumulated depreciation not to exceed twelve percent (12%) per annum.
Such rates shall not exceed average commercial rates currently
prevailing in the immediate area of the Joint Property.
B. In lieu of charges in paragraph 8A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less 20%. For automotive equipment, Operator may elect to
use rates published by the Petroleum Motor Transport Association.
C. This Paragraph 8 shall not affect any current charges made by Operator
to the Joint Account related to transportation, gathering, treating,
compression or processing or related charges by an affiliate of
Operator.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting from
Operator's gross negligence or willful misconduct.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments and amounts paid for settlement
of claims incurred in or resulting from operations under the Conveyance or
necessary to protect or recover the Joint
3
<PAGE>
Property, and the costs and expenses incurred in connection with hearings
and other matters before governmental bodies and agencies and costs and
expenses incurred in curing title to the Joint Property. Costs incurred by
Operator in procuring abstracts and fees paid outside attorneys for title
examination (including preliminary, supplemental, shut-in gas royalty
opinions and division order title opinions) shall be borne by the Joint
Account. Operator shall make no charge for services rendered by its staff
attorneys or other personnel in the performance of the above functions. All
other legal expense is considered to be covered by the overhead provisions
of Section III.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the benefit
of the Parties. If the ad valorem taxes are based in whole or in part upon
separate valuations of each party's interest, then notwithstanding anything
to the contrary herein, charges to the Joint Account shall be made and paid
by the Parties hereto in accordance with the tax value generated by each
party's interest.
12. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint Operations
are conducted in a state in which Operator may act as self-insurer for
Worker's Compensation and/or Employers Liability under the respective
state's laws, Operator may, at its election, include the risk under its
self-insurance program and in that event, Operator shall include a charge
at Operator's cost not to exceed manual rates.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Joint Property, including costs
required by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
or any form of telephonic equipment or service used in serving the Joint
Property. In the event communication facilities/systems serving the Joint
Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section II.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing
operations on a Fixed Rate Basis, Paragraph 1A. Such charge shall be
in lieu of costs and expenses of all offices and salaries or wages
plus applicable burdens and expenses of all personnel, except those
directly chargeable under Paragraph 3A, Section II. The cost and
expense of services from outside sources in connection with matters of
taxation, traffic, accounting or matters before or involving
governmental agencies shall not be considered as included in the
overhead rates.
ii. The salaries, wages and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract
services of technical personnel directly employed on the Joint
Property shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services and contract services
of technical personnel either temporarily or permanently assigned to
and directly employed in the operation of the Joint Property shall not
be covered by the overhead rates.
4
<PAGE>
A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
For wells located in the Hugoton Field
Drilling Well Rate $2,350.00
(Prorated for less than a full month)
Producing Well Rate $235.00
For wells located in all other areas
Drilling Well Rate $4,760.00
(Prorated for less than a full month)
Producing Well Rate $476.00
(2) Application of Overhead - Fixed Rate Basis shall be as follows:
(a) Drilling Well Rate
(1) Charges for drilling wells shall begin on the date the
well is spudded and terminate on the date the drilling
rig, completion rig, or other units used in completion
of the well is released, whichever is later, except
that no charge shall be made during suspension of
drilling or completion operations for fifteen (15) or
more consecutive calendar days.
(2) Charges for wells undergoing any type of workover or
recompletion or swabbing shall be made at the drilling
well rate. Such charges shall be applied for the period
from date such operations, with rig or other units
used, commence through date of rig or other unit
release, except that no charge shall be made during
suspension of operations for fifteen (15) or more
consecutive calendar days.
(b) Producing Well Rates
(1) An active well either produced or injected into for any
portion of the month shall be considered as a one-well
charge for the entire month.
(2) Each active completion in a multi-completed well in
which production is not commingled down hole shall be
considered as a one-well charge providing each
completion is considered a separate well by the
governing regulatory authority.
(3) An inactive gas well shut in because of overproduction
or failure of purchaser to take the production shall be
considered as a one-well charge providing the gas well
is directly connected to a permanent sales outlet.
(4) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on
any well. This one-well charge shall be made whether or
not the well has produced except when drilling well
rate applies.
(5) All other inactive wells (including but not limited to
inactive wells covered by unit allowable, lease
allowable, transferred allowable, etc.) shall not
qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April
each year beginning in 1999. The adjustment shall be computed by
multiplying the rate currently in use by the percentage increase
or decrease in the average weekly earnings of Crude Petroleum and
Gas Production Workers for the last calendar year compared to the
calendar year preceding as shown by the index of average weekly
earnings of Crude Petroleum and Gas Production Workers as
5
<PAGE>
published by the United States Department of Labor, Bureau of
Labor Statistics. The adjusted rates shall be the rates currently
in use, plus or minus the computed adjustment.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernable as a fixed asset required for the development
and operation of the Joint Property, Operator shall charge the Joint
Account for overhead based on the following rates for any Major
Construction project in excess of $25,000.00:
A. 5% of first $100,000 or total cost if less, plus
B. 3% of costs in excess of $100,000 but less than $1,000,000, plus
C. 2% of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose
of this paragraph, the component parts of a single project shall not be
treated separately and the cost of drilling and workover wells and
artificial lift equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by
the Parties, which are necessary to restore the Joint Property to the
equivalent condition that existed prior to the event causing the
expenditures, Operator shall charge the Joint Account for overhead based on
the following rates:
A. 5% of total costs through $100,000; plus
B. 3% of total costs in excess of $100,000 but less than $1,000,000; plus
C. 2% of total costs in excess of $1,000,000.
Expenditures subject to the overheads in this Section 3 above will not be
reduced by insurance recoveries, and no other overhead provisions of this
Section III shall apply.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Materials and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property.
Operator shall make timely disposition of idle and/or surplus Material, such
disposal being made either through sale to Operator, or sale to outsiders.
Operator may purchase, but shall be under no obligation to purchase, interest of
the Trust in surplus condition A or B Material at the prices defined below.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts, adjustments or rebates received. In case of
Material found to be defective or returned to vendor for any other reasons,
credit shall be passed to the Joint Account when adjustment has been
received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator shall be priced on the
following basis exclusive of cash discounts:
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
6
<PAGE>
(a) Tubular goods, sized 2-3/8 inches OD and larger, except line
pipe, shall be priced at Eastern mill published carload
prices effective as of date of movement plus transportation
cost using the 80,000 pound carload weight basis to the
railway receiving point nearest the Joint Property for which
published rail rates for tubular good exist. If the 80,000
pound rail rate is not offered, the 70,000 pound or 90,000
pound rail rate may be used. Freight charges for tubing
will be calculated from Lorain, Ohio and casing from
Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall
be computed at the mill base of that mill plus
transportation cost from that mill to the railway receiving
point nearest the Joint Property as provided above in
Paragraph 2.a.(1)(a). For transportation cost from points
other than Eastern mills, the 30,000 pound Oil Field Haulers
Association interstate truck rate shall be used.
(c) Special end finish tubular goods shall be priced at the
lowest published out-of-stock price, f.o.b. Houston, Texas,
plus transportation cost, using Oil Field Haulers
Association interstate 30,000 pound truck rate, to the
railway receiving point nearest the Joint Property.
(d) Macaroni tubing (size less than 2-3/8 inch OD) shall be
priced at the lowest published out-of-stock prices f.o.b.
the supplier plus transportation costs, using the Oil Field
Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest
the Joint Property.
(2) Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) 30,000 pounds or more shall be
priced under provisions of tubular goods pricing in
Paragraph A.(1)(a) as provided above. Freight charges shall
be calculated from Lorain, Ohio.
(b) Line pipe movements (except size 24 inch OD and larger with
walls 3/4 inch and over) less than 30,000 pounds shall be
priced at Eastern mill published carload base prices
effective as of date of shipment, plus 20 percent, plus
transportation costs based on freight rates as set forth
under provisions of tubular goods pricing in Paragraph
A.(1)(a) as provided above. Freight charges shall be
calculated from Lorain, Ohio.
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger
shall be priced f.o.b. the point of manufacture at current
new published prices plus transportation cost to the railway
receiving point nearest the Joint Property.
(d) Line pipe, including fabricated line pipe, drive pipe and
conduit not listed on published price lists shall be priced
at quoted prices plus freight to the railway receiving point
nearest the Joint Property or at prices agreed to by the
Parties.
(3) Other Material shall be priced at the current new price, in
effect at date of movement, as listed by a reliable supply store
nearest the Joint Property, or point of manufacture, plus
transportation costs, if applicable, to the railway receiving
point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint
Property shall be priced at the current new price, in effect on
date of movement, as listed by a reliable supply store nearest
the Joint Property, or point of manufacture, plus transportation
costs, if applicable, to the railway receiving point nearest the
Joint Property. Unused new tubulars will be priced as provided
above in Paragraph 2 A (1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse
without reconditioning:
(1) Material moved to the Joint Property
At seventy-five percent (75%) of current new price, as determined
by Paragraph A.
7
<PAGE>
(2) Material used on and moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as new Material.
(b) At sixty-five percent (65%) of current new price, as
determined by Paragraph A, if Material was originally
charged to the Joint Account as used Material.
(3) Material not used on and moved from the Joint Property
At seventy-five percent (75%) of current new price as determined
by Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the
transferring property.
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and
suitable for its original function until after reconditioning
shall be priced at fifty percent (50%) of current new price as
determined by Paragraph A. The cost of reconditioning shall be
charged to the receiving property, provided Condition C value
plus cost of reconditioning does not exceed Condition B value.
(2) Condition D
Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a
basis commensurate with its use. Operator may dispose of
Condition D Material under procedures normally used by Operator
without prior approval of the Assignee.
(a) Casing, tubing or drill pipe used as line pipe shall be
priced as Grade A and B seamless line pipe of comparable
size and weight. Used casing, tubing or drill pipe utilized
as line pipe shall be priced at used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service
lines than standard line pipe, e.g. power oil lines, shall
be priced under normal pricing procedures for casing,
tubing, or drill pipe. Upset tubular goods shall be priced
on a non upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose
of Condition E Material under procedures normally utilized by
Operator without prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that
which would justify a price as provided above may be specially priced
as reasonably determined by Operator. Such price should result in the
Joint Account being charged with the value of the service rendered by
such Material.
E. Pricing Conditions
(1) Loading and unloading costs related to the movement of the
Material to the Joint Property shall be charged in accordance
with the methods specified in COPAS Bulletin 21.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
8
<PAGE>
3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which
the Operator has no control, the Operator may charge the Joint Account for
the required Material at the Operator's actual cost incurred in providing
such Material, in making it suitable for use, and in moving it to the Joint
Property.
4. Warranty of Material Furnished by Operator
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the
Joint Account Controllable Material.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of
the inventory. Inventory adjustments shall be made by Operator to the
Joint Account for overages and shortages, but Operator shall be held
accountable only for shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the
duty of the party selling to notify all other Parties as quickly as
possible after the transfer of interest takes place. In such cases, both
the seller and the purchaser shall be governed by such inventory. In cases
involving a change of Operator, all Parties shall be governed by such
inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due
to change of Operator shall be charged to the Joint Account.
9
<PAGE>
EXHIBIT 15.1
AWARENESS LETTER--UNAUDITED INTERIM FINANCIAL INFORMATION
Cross Timbers Oil Company
Fort Worth, Texas
We are aware that our reports dated April 20, 1998, July 22, 1998, and
October 21, 1998, which were included in the Cross Timbers Oil Company's
Quarterly Report on Form 10-Q for the quarters ended March 31, 1998, June 30,
1998, and September 30, 1998, are being incorporated by reference in the
Company's Amendment No. 1 to Registration Statement on Form S-3, Registration
Number 333-68441.
We also are aware that the aforementioned reports, pursuant to Regulation C
under the Securities Act of 1933, are not considered a part of the
Registration Statement prepared or certified by our firm within the meaning of
Sections 7 and 11 of that Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
January 25, 1999
<PAGE>
EXHIBIT 23.1
INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
As independent public accountants, we hereby consent to the use of our
reports in this Registration Statement Amendment No. 1 on Form S-1 of Hugoton
Royalty Trust and on Form S-3 of Cross Timbers Oil Company (the Company),
Registration No. 333-68441, dated January 22, 1999 and January 25, 1999, and
to the incorporation by reference of our report dated March 18, 1998 included
in the Company's Form 10-K for the year ended December 31, 1997, our report
dated February 11, 1998 included in the Company's Form 8-K/A Amendment No. 1
dated December 1, 1997 and our report dated April 17, 1998 included in the
Company's Form 8-K and Form 8-K/A Amendment No.1 dated April 24, 1998, and to
all references to our firm included in or made a part of this Registration
Statement.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
January 25, 1999
<PAGE>
EXHIBIT 23.5
[LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE]
January 25, 1999
Hugoton Royalty Trust
901 Main St., 17th Floor
Dallas, Texas 75202
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Forth Worth, Texas 76102
Re: Securities and Exchange Commission
Form S-1/Form S-3 Registration Statement No. 333-68441
Gentlemen:
The firm of Miller and Lents, Ltd., consents to the incorporation of its
estimated Proved Reserves, Future Net Revenues, and Present Values of Future Net
Revenues in the Hugoton Royalty Trust and Cross Timbers Oil Company Form S-1/S-3
Registration Statement, No. 333-68441, and to references to our Firm in such
registration statement.
Miller and Lents, Ltd. has no interests in Hugoton Royalty Trust or Cross
Timbers Oil Company or any of its affiliated companies or subsidiaries and is
not to receive any such interest as payment for such reports and has no
director, officer, or employee, or otherwise, connected with Hugoton Royalty
Trust or Cross Timbers Oil Company. We are not employed by Hugoton Royalty Trust
or Cross Timbers Oil Company on a contingent basis.
Yours very truly,
Miller and Lents, Ltd.
By: /s/ Karen Loving
--------------------------------
Karen Loving
Vice President
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<PAGE>
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<NAME> HUGOTON ROYALTY TRUST
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 247,067
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0
0
<COMMON> 0
<OTHER-SE> 247,068
<TOTAL-LIABILITY-AND-EQUITY> 247,068
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
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