<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended March 31, 1999
--------------
Commission File No. 1-10476
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HUGOTON ROYALTY TRUST
Texas I.R.S. No. 58-6379215
NationsBank, N.A. (d/b/a Bank of America, N.A.)
P.O. Box 830650
Dallas, Texas 75283-0650
Telephone Number 877/228-5083
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes_____ No X
-----
Number of units of beneficial interest outstanding at May 1, 1999: 40,000,000
----------
<PAGE>
HUGOTON ROYALTY TRUST
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
- -------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
GLOSSARY OF TERMS................................................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 4
Report of Independent Public Accountants......................... 5
Condensed Statements of Assets, Liabilities and Trust Corpus
at March 31, 1999 and December 31, 1998......................... 6
Condensed Statements of Distributable Income
for the Three Months Ended March 31, 1999....................... 7
Condensed Statements of Changes in Trust Corpus
for the Three Months Ended March 31, 1999........................ 8
Notes to Condensed Financial Statements.......................... 9
Item 2. Trustee's Discussion and Analysis................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures....................................................... 19
</TABLE>
2
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HUGOTON ROYALTY TRUST
GLOSSARY OF TERMS
- -----------------
The following are definitions of significant terms used in this Form 10-Q:
Bbl Barrel (of oil)
Mcf Thousand cubic feet (of gas)
net profits interest An interest in an oil and gas property measured by net
profits from the sale of production, rather than a
specific portion of production.
net proceeds Gross proceeds received by Cross Timbers from sale of
production from the underlying properties, less
applicable costs.
underlying properties Cross Timbers' interest in certain oil and gas
properties from which the net profits interests were
carved. The underlying properties include working
interests in predominantly gas-producing properties
located in Kansas, Oklahoma and Wyoming.
3
<PAGE>
HUGOTON ROYALTY TRUST
PART I - FINANCIAL STATEMENTS
- -----------------------------
Item 1. Financial Statements.
The condensed financial statements included herein are presented, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted pursuant to such rules and
regulations, although the trustee believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the trust's financial statements
and the notes thereto included in the trust's Registration Statement on Form
S-1. In the opinion of the trustee, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the assets, liabilities and
trust corpus of the Hugoton Royalty Trust at March 31, 1999, and the
distributable income and changes in trust corpus for the three-month period
ended March 31, 1999, have been included. Distributable income for such interim
periods is not necessarily indicative of the distributable income for the full
year.
4
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NationsBank, N. A. (d/b/a Bank of America, N. A.), as Trustee
for the Hugoton Royalty Trust:
We have reviewed the accompanying condensed statements of assets, liabilities
and trust corpus of the Hugoton Royalty Trust as of March 31, 1999 and the
related condensed statements of distributable income and changes in trust corpus
for the three-month period ended March 31, 1999. These financial statements are
the responsibility of the trustee.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
The accompanying condensed financial statements are prepared on a modified cash
basis as described in Note 2 which is a comprehensive basis of accounting other
than generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with the basis of accounting described in Note 2.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Hugoton
Royalty Trust as of December 31, 1998 included in the trust's Registration
Statement on Form S-1, and in our report dated March 15, 1999, we expressed an
unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying condensed statement of assets, liabilities and trust
corpus as of December 31, 1998 is fairly stated in all material respects in
relation to the statement of assets, liabilities and trust corpus included in
the trust's financial statements from which they have been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 17, 1999
5
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HUGOTON ROYALTY TRUST
- --------------------------------------------------------------------------------
Condensed Statements Of Assets, Liabilities And Trust Corpus
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and short-term investments............... $ 3,563,075 $ 1,000
Net profits interests in oil and gas
properties - net (Notes 1 and 2)............ 245,470,651 247,066,951
------------ ------------
$249,033,726 $247,067,951
============ ============
LIABILITIES AND TRUST CORPUS
Distribution payable to unitholders........... $ 3,562,075 $ -
Trust corpus (40,000,000 units of beneficial
interest authorized and outstanding)........ 245,471,651 247,067,951
------------ ------------
$249,033,726 $247,067,951
============ ============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
6
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HUGOTON ROYALTY TRUST
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF DISTRIBUTABLE INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1999
--------------
<S> <C>
Royalty income........................................... $ 3,565,075
Administration expense................................... 3,000
-------------
Distributable income..................................... $ 3,562,075
=============
Distributable income per unit (40,000,000 units)......... $ 0.089052
=============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
7
<PAGE>
HUGOTON ROYALTY TRUST
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CHANGES IN TRUST CORPUS (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1999
---------------
<S> <C>
Trust corpus, beginning of period........................... $ 247,067,951
Amortization of net profits interests....................... (1,596,300)
Distributable income........................................ 3,562,075
Distributions declared...................................... (3,562,075)
--------------
Trust corpus, end of period................................. $ 245,471,651
==============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
8
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HUGOTON ROYALTY TRUST
- --------------------------------------------------------------------------------
Notes to Condensed Financial Statements (Unaudited)
1. Trust Organization and Provisions
Hugoton Royalty Trust was created on December 1, 1998 by Cross Timbers Oil
Company. Effective on that date, Cross Timbers conveyed 80% defined net
profits interests in certain predominantly gas-producing working interest
properties in Kansas, Oklahoma and Wyoming to the trust under three
separate conveyances.
In exchange for the property conveyances to the trust, 40,000,000 units of
beneficial interest in the trust were issued to Cross Timbers. On April 8,
1999, Cross Timbers sold 15,000,000 units in the trust's initial public
offering. On May 7, 1999, Cross Timbers sold an additional 2,004,000 units
pursuant to the underwriters' overallotment option. The trust did not
receive any proceeds from the sale of trust units.
NationsBank, N. A. (d/b/a Bank of America, N. A.) is the trustee for the
trust. The trust indenture provides, among other provisions, that:
- the trust shall not engage in any business or commercial activity or
acquire any asset other than the net profits interests initially
conveyed to the trust;
- the trust may sell or otherwise dispose of all or any part of the
net profits interests if approved by at least 80% of the
unitholders, or upon termination of the trust. Otherwise, the trust
may only sell up to 1% of the value of the net profits interests in
any calendar year, pursuant to notice from Cross Timbers of its
desire to sell the related underlying properties. Any such sale must
be for cash with the proceeds promptly distributed to the
unitholders;
- the trustee may establish a cash reserve for payment of any
liability which is contingent, uncertain in amount or that is not
currently due and payable;
- the trustee is authorized to borrow funds required to pay
liabilities of the trust, provided that such borrowings are repaid
in full prior to further distributions to unitholders;
- the trustee will make monthly cash distributions to unitholders as
provided in the trust indenture (see Note 3); and
- the trust will terminate upon the first occurrence of:
- disposition of all net profits interests pursuant to terms
of the trust indenture,
- gross proceeds from the underlying properties is less than
$1 million per year for two successive years, or
- a vote of at least 80% of the trust unitholders to
terminate the trust in accordance with provisions of the
trust indenture.
9
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2. Basis of Accounting
The financial statements of the trust are prepared on the following basis
and are not intended to present financial position and results of
operations in conformity with generally accepted accounting principles
("GAAP"):
- Royalty income is recorded in the month received by the trustee.
- Trust expenses are recorded based on liabilities paid and cash
reserves established by the trustee.
- Distributions to unitholders are recorded when declared by the
trustee.
The trust's financial statements differ from those prepared in conformity
with GAAP because revenues are recognized when received rather than accrued
in the month of production, expenses are recognized when paid rather than
when incurred and certain cash reserves may be established by the trustee
for certain contingencies which would not be recorded under GAAP.
The initial carrying value of the net profits interests of $247,066,951
represents Cross Timbers' net book value for the interests on December 1,
1998, the date of the transfer to the trust. Amortization of the net
profits interests is calculated on a unit-of-production basis and charged
directly to trust corpus. Accumulated amortization as of March 31, 1999 is
$1,596,300.
3. Distributions to Unitholders
The trustee determines the amount to be distributed to unitholders each
month by totaling royalty income, interest income and other cash receipts,
and subtracting liabilities paid and adjustments in cash reserves
established by the trustee. The resulting amount is distributed to
unitholders of record generally within ten business days after the monthly
record date, the last business day of the month.
Royalty income received by the trustee is equal to the net proceeds
received in the prior month by the owners of the underlying properties,
multiplied by 80%. Net proceeds are the gross proceeds received from the
sale of production from the underlying properties, less applicable costs.
Such costs generally include applicable taxes, transportation, legal and
marketing charges, production costs, development and drilling costs, and
overhead (Note 5).
For trust distributions declared through March 2000, the related royalty
income will be based on gross proceeds equal to the greater of:
- the actual amount received from sales of production, or
- the imputed amount that would be received from sales of production
at a gas price of $2.00 per Mcf. During the three months ended March
31, 1999, imputed proceeds based on a $2.00 gas price exceeded
actual proceeds by $950,135 ($760,108 net to the trust).
Cross Timbers, as owner of the underlying properties, computes royalty
income separately for each of the three conveyances (Note 1). If costs
exceed gross proceeds for any conveyance, such excess costs cannot be used
to reduce the amounts to be received under the other conveyances. The trust
is not liable for
10
<PAGE>
excess costs; however, future royalty income from the net profits interests
created by that conveyance will be reduced by such excess costs plus
interest.
4. Federal Income Taxes
Tax counsel has advised the trust that, under current tax laws, the trust
will be classified as a grantor trust for Federal income tax purposes and
therefore is not subject to taxation at the trust level. However, the
opinion of tax counsel is not binding on the Internal Revenue Service.
For federal income tax purposes, unitholders are considered to own the
trust's income and principal as though no trust were in existence. The
income of the trust is deemed to be received or accrued by the unitholders
at the time such income is received or accrued by the trust, rather than
when distributed by the trust.
Cross Timbers has advised the trustee that the trust receives royalty
income from tight sands gas wells. Production from tight sands gas wells
drilled between December 31, 1979 and January 1, 1993 qualifies for the
federal income tax credit for producing nonconventional fuels under Section
29 of the Internal Revenue Code. This tax credit is recalculated annually
based on each year's qualifying production through the year 2002. Such
credit, based on the unitholder's pro rata share of qualifying production,
may not reduce his regular tax liability (after the foreign tax credit and
certain other non-refundable credits) below his tentative minimum tax. Any
part of the Section 29 credit not allowed for the tax year solely because
of this limitation is subject to certain carryover provisions. The 1999
tight sands tax credit is estimated to be $0.02 per unit. Final 1999 tight
sands tax credit data will be provided to unitholders with year-end tax
information. Unitholders should consult their tax advisors regarding use of
this credit and other trust tax compliance matters.
5. Cross Timbers Oil Company
Cross Timbers operates approximately 90% of the wells on the underlying
properties. In computing net proceeds, Cross Timbers deducts an overhead
charge for reimbursement of administrative expenses on the underlying
properties it operates. Overhead charges are approximately $540,000 per
month and are subject to annual adjustment based on an oil and gas industry
index.
As of May 21, 1999, Cross Timbers owns 22,996,000 units, or 57.5% of the
trust.
6. Contingencies
Cross Timbers 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
Cross Timbers.
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 reducing
royalties for improper charges for production, marketing, gathering,
processing and transportation costs and selling natural gas through
affiliated companies at prices less favorable from those paid by third
parties. The
11
<PAGE>
plaintiffs are seeking an accounting and payment of the monies allegedly
owed to them. Cross Timbers believes that it has strong defenses to this
lawsuit and intends to vigorously defend its position. However, if a
judgment or settlement increases the amount of future payments to royalty
owners, the trust would bear its proportionate share of the increased
payments through reduced net proceeds. The amount of any reduction in net
proceeds is not presently determinable, but, in management's opinion, 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 Cross
Timbers underpaid royalties on natural gas produced from federal leases and
lands owned by Native Americans by at least 20% during the past 10 years as
a result of mismeasuring the volume of natural gas and wrongfully analyzing
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 of between $5,000 and
$10,000 for each violation of the U.S. False Claims Act, and an order for
Cross Timbers to cease the allegedly improper measuring practices.
According to the U. S. Department of Justice, the plaintiff has made
similar allegations in actions filed against over 300 other companies.
Royalties paid by Cross Timbers for production from underlying properties
on federal and Native American lands during 1998 totaled approximately $2.8
million. After its review, the U. S. Department of Justice decided in April
1999 not to intervene and has asked the court to unseal the case. Although
the court unsealed the case in May 1999, the Company has not been served
with this complaint. 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 amount that is presently not determinable,
but, in Cross Timbers' management's opinion, is not expected to be material
to the trust's distributable income, financial position or liquidity.
Item 2. Trustee's Discussion and Analysis.
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 have material adverse
effects on companies and organizations that rely upon those systems.
The trust's timely receipt of royalty income and disbursement of distributable
income to unitholders is largely dependent upon performance of computer systems
and computer-controlled equipment of Cross Timbers, ChaseMellon Shareholder
Services, L.L.C. and other third parties, including oil and natural gas
purchasers and significant service providers such as electric utility companies
and natural gas plant, pipeline and gathering system operators. Since the trust
does not use the trustee's computer systems in any significant capacity, the
trustee's Year 2000 compliance will not 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 modifications and testing of its
primary accounting and land computer programs. The remaining computer systems
have been inventoried and assessed. Remediation and testing of significant
remaining systems are expected to be complete by August 1999.
Some of Cross Timbers' critical field equipment, such as natural gas processors,
are partially controlled or regulated by embedded computer chips. Based on a
preliminary review of all operating areas, Cross Timbers
12
<PAGE>
has identified no significant compliance exceptions. As of April 1999, the types
of field equipment in all operated areas have been inventoried. Cross Timbers
plans to complete remediation and testing of any identified exceptions for
significant computer-controlled field equipment by August 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
and computer-controlled equipment for Year 2000 compliance represents a material
risk to the trust. No costs of such modifications will be incurred by the
trust.
The trustee and Cross Timbers have identified significant third parties whose
Year 2000 compliance could significantly affect them, and are in the process of
formally inquiring about their Year 2000 status. However, despite their efforts
to assure that such third parties are Year 2000 compliant, the trustee and Cross
Timbers cannot provide assurance that all significant third parties will achieve
timely Year 2000 compliance. Such failure to achieve Year 2000 compliance could
have a material adverse impact on timely trust distributions to unitholders.
The potential effect of Year 2000 non-compliance by third parties is currently
unknown.
Cross Timbers is currently identifying appropriate contingency plans in the
event of potential problems resulting from failure of its computer systems on
January 1, 2000. Cross Timbers has not completed any contingency plans to date.
Specific contingency plans will be developed in response to the results of
testing scheduled to be complete by August 1999, as well as the assessed
probability and risk of system or equipment failure. Contingency plans may
include installing backup computer systems or equipment, temporarily replacing
systems or equipment with manual processes and identifying alternative
suppliers, service companies and purchasers. Cross Timbers expects its
contingency plans to be complete by October 1999.
Three Months Ended March 31, 1999
- ---------------------------------
The net profits interests were conveyed to the trust on December 1, 1998,
effective for production from that date. For the quarter ended March 31, 1999,
royalty income was $3,565,075. After deducting administration expense of $3,000,
distributable income for first quarter 1999 was $3,562,075, or $0.089052 per
unit. The distribution in this amount was made to Cross Timbers, the only
unitholder of record on March 31, 1999.
Royalty income is recorded when received by the trust, which is the month
following receipt by Cross Timbers, and generally two months after oil and gas
production. Accordingly, trust royalty income for the quarter ended March 31,
1999 is generally associated with production for December 1998 and January 1999.
Royalty income is generally affected by three major factors:
- oil and gas sales volumes,
- oil and gas sales prices, and
- costs deducted in the calculation of royalty income.
Volumes
First quarter 1999 only includes approximately two months of oil and gas sales
volumes. Cross Timbers received the proceeds from these oil and gas sales in
January and February 1999, which were generally related to the production months
of December 1998 and January 1999, respectively. Daily gas sales volumes
averaged 88,948 Mcf, while oil sales volumes averaged 1,057 Bbls per day. Daily
oil and gas sales volumes are lower in the trust's initial accounting period
because of the interval between production and cash receipts,
13
<PAGE>
resulting in less than three full months of sales volumes. Cross Timbers also
did not receive proceeds from some underlying properties that it acquired in
November 1998 and from several development projects completed in late 1998 and
early 1999.
Prices
The first quarter 1999 average gas price was based on a $2.00 per Mcf minimum
price, which exceeded the actual average price by $0.19 per Mcf. See Note 3 to
the condensed financial statements. The actual average gas price of $1.81 per
Mcf reflects the effect of an abnormally warm winter experienced across the
United States. Cooler spring weather and lower industry production levels
helped to strengthen prices in April.
The average oil price for first quarter 1999 of $10.86 per Bbl includes the
effect of the decline in oil prices to a 20-year low in December 1998. Oil
prices have climbed since March 1999 because of production cuts by OPEC and
other oil producers.
Costs
Costs deducted in the calculation of first quarter 1999 royalty income totaled
$7,285,098. See "Calculation of Royalty Income." These costs generally reflect
Cross Timbers' disbursements for the three months of December 1998 through
February 1999. Production and development costs are generally lower in the
trust's initial accounting period because of the interval between the time
maintenance and development projects occur and when related billings are paid.
Comparative Oil and Gas Sales
The following are oil and gas sales attributable to the underlying properties
and the net profits interests for the three months ended March 31, 1999. The
net profits interests were conveyed to the trust effective for production from
December 1, 1998. Because of the two-month interval between time of production
and receipt of royalty income by the trust, oil and gas sales for the quarter
ended March 31, 1999 generally represent production for the period December 1998
and January 1999.
<TABLE>
<S> <C>
Oil Sales (Bbls)
Underlying properties (a).............................. 65,524
Average per day........................................ 1,057
Average price.......................................... $ 10.86
Net profits interests (a).............................. 25,552
Gas Sales (Mcf)
Underlying properties (a).............................. 5,514,787
Average per day........................................ 88,948
Average price (b)...................................... $ 2.00
Net profits interests (a).............................. 1,824,004
</TABLE>
(a) Oil and gas sales volumes are allocated to the net profits interests
based upon a formula that considers oil and gas prices and the total
amount of production expenses and development costs. Changes in any
of these factors may result in disproportionate fluctuations in
volumes allocated to the net profits interests. Therefore, discussion
of oil and gas sales is based on the underlying properties.
(b) See Note 3 to condensed financial statements.
14
<PAGE>
Calculation of Royalty Income
The following is the calculation of royalty income received by the trust for the
quarter ended March 31, 1999.
<TABLE>
<S> <C>
Revenues
Oil sales.......................................................... $ 711,868
Gas sales (a)...................................................... 11,029,574
-------------
Total............................................................. 11,741,442
-------------
Costs
Production and property taxes, transportation and other............ 1,384,948
Production expenses................................................ 2,314,225
Development costs.................................................. 1,960,301
Overhead (b)....................................................... 1,625,624
-------------
Total............................................................ 7,285,098
-------------
Net Proceeds........................................................ 4,456,344
Net Profits Percentage.............................................. 80%
-------------
Royalty Income...................................................... $ 3,565,075
=============
</TABLE>
(a) See Note 3 to condensed financial statements.
(b) See Note 5 to condensed financial statements.
Forward Looking Statements
This report on Form 10-Q includes "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Form 10-Q, including,
without limitation, statements contained in this "Trustee's Discussion and
Analysis" regarding the net profits interests and industry conditions, are
forward looking statements. Although the trustee and Cross Timbers believe that
the expectations reflected in such forward looking statements are reasonable,
they can give no assurance that such expectations will prove to be correct.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The only assets of and sources of income to the trust are the net profits
interests, which generally entitle the trust to receive a share of the net
profits from oil and gas production from the underlying properties.
Consequently, the trust is exposed to market risk from fluctuations in oil and
gas prices. The trust is a passive entity and, other than the trust's ability
to periodically borrow money as necessary to pay expenses, liabilities and
obligations of the trust that cannot be paid out of cash held by the trust, the
trust is prohibited from engaging in borrowing transactions. The amount of any
such borrowings is unlikely to be material to the trust. In addition, the
trustee is prohibited by the trust indenture from engaging in any business
activity or causing the trust to enter into any investments other than investing
cash on hand in specific short-term cash investments. Therefore, the trust
cannot hold any derivative financial instruments. As a result of the limited
nature of the trust's borrowing and investing activities, the trust is not
subject to any material interest rate market risk. Additionally, any gains or
losses from any hedging activities conducted by Cross Timbers are specifically
excluded from the calculation of net proceeds due the trust under the forms of
the conveyances. The trust does not engage in transactions in foreign currencies
which could expose the trust to any foreign currency related market risk.
16
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
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 reducing royalties for
improper charges for production, marketing, gathering, processing and
transportation costs and selling natural gas through affiliated companies at
prices less favorable from those paid by third parties. The plaintiffs are
seeking an accounting and payment of the monies allegedly owed to them. Cross
Timbers believes that it has strong defenses to this lawsuit and intends to
vigorously defend its position. However, if a judgment or settlement increases
the amount of future payments to royalty owners, the trust would bear its
proportionate share of the increased payments through reduced net proceeds. The
amount of any reduction in net proceeds is not presently determinable, but, in
management's opinion, 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 Cross Timbers underpaid
royalties on natural gas produced from federal leases and lands owned by Native
Americans by at least 20% during the past 10 years as a result of mismeasuring
the volume of natural gas and wrongfully analyzing 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 of between $5,000 and $10,000 for each violation of the U.S. False
Claims Act, and an order for Cross Timbers to cease the allegedly improper
measuring practices. According to the U. S. Department of Justice, the
plaintiff has made similar allegations in actions filed against over 300 other
companies. Royalties paid by Cross Timbers for production from underlying
properties on federal and Native American lands during 1998 totaled
approximately $2.8 million. After its review, the U. S. Department of Justice
decided in April 1999 not to intervene and has asked the court to unseal the
case. Although the court unsealed the case in May 1999, the Company has not
been served with this complaint. 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 amount that is presently not determinable.
Items 2 through 5. Not applicable.
Item 6. (a) Exhibits.
Page
------
(4) (a) Hugoton Royalty Trust Indenture by and
between NationsBank, N.A. (now NationsBank,
N. A. (d/b/a Bank of America, N. A.)), as
Trustee and Cross Timbers Oil Company
heretofore filed as Exhibit 4.1 to the
trust's Registration Statement No. 333-68441
on Form S-1 filed with the Securities and
Exchange Commission on December 4, 1998, is
incorporated herein by reference.
(b) Net Overriding Royalty Conveyance (Hugoton
Royalty Trust, 80% -Kansas) as amended and
restated from Cross Timbers Oil Company to
NationsBank, N.A. (now NationsBank, N. A.
(d/b/a Bank of America, N. A.)), as trustee,
dated December 1,1998 heretofore filed as
Exhibit 10.1.1 to Amendment No. 2 to the
trust's Registration Statement No. 333-68441
on Form S-1 filed
17
<PAGE>
with the Securities and Exchange Commission
on March 16, 1999, is incorporated herein by
reference.
(c) Net Overriding Royalty Conveyance (Hugoton
Royalty Trust, 80% -Oklahoma) as amended and
restated from Cross Timbers Oil Company to
NationsBank, N.A. (now NationsBank, N. A.
(d/b/a Bank of America, N.A.)), as trustee,
dated December 1, 1998, heretofore filed as
Exhibit 10.2.1 to Amendment No. 2 to the
trust's Registration Statement No. 333-68441
on Form S-1 filed with the Securities and
Exchange Commission on March 16, 1999, is
incorporated herein by reference.
(d) Net Overriding Royalty Conveyance (Hugoton
Royalty Trust, 80% - Wyoming) as amended and
restated from Cross Timbers Oil Company to
NationsBank, N.A. (now NationsBank, N.A. (d/b/a
Bank of America, N.A.)), as trustee, dated
December 1, 1998, heretofore filed as Exhibit
10.3.1 to Amendment No. 2 to the trust's
Registration Statement No. 333-68441 on Form
S-1 filed with the Securities and Exchange
Commission on March 16, 1999, is incorporated
herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUGOTON ROYALTY TRUST
By NATIONSBANK, N.A.
(d/b/a BANK OF AMERICA, N.A.), TRUSTEE
By RON E. HOOPER
---------------------------------------
Ron E. Hooper
Vice President
CROSS TIMBERS OIL COMPANY
Date: May 21, 1999 By BENNIE G. KNIFFEN
--------------------------------------
Bennie G. Kniffen
Senior Vice President and
Controller
19
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