<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, 1997
--------------
Commission File No. 1-10982
-------
CROSS TIMBERS ROYALTY TRUST
Texas I.R.S. No. 75-6415930
NationsBank of Texas, N.A.
P.O. Box 1317
Fort Worth, Texas 76101-1317
Telephone Number 817/390-6592
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 X No____
-----
Number of units of beneficial interest outstanding at May 1, 1997: 6,000,000
---------
<PAGE>
CROSS TIMBERS 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 financial statements and the
notes thereto included in the Trust's latest annual report on Form 10-K. 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 Cross Timbers Royalty Trust at March 31, 1997, and the
distributable income and changes in trust corpus for the three-month periods
ended March 31, 1997 and 1996, have been included. Distributable income for
such interim periods is not necessarily indicative of the distributable income
for the full year.
Arthur Andersen LLP, independent certified public accountants, have made a
limited review of the condensed financial statements as of March 31, 1997, and
for the three-month periods ended March 31, 1997 and 1996 included herein.
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NationsBank of Texas, N.A., as Trustee
for the Cross Timbers Royalty Trust:
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the Cross Timbers Royalty Trust as of March 31, 1997 and the
related condensed statements of distributable income and changes in trust corpus
for the three-month periods ended March 31, 1997 and 1996. 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 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 1 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 such condensed financial statements for them to be in conformity with
the basis of accounting described in Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Cross
Timbers Royalty Trust as of December 31, 1996 included in the Trust's 1996
annual report on Form 10-K, and in our report dated March 13, 1997, 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, 1996 is fairly stated in all material respects in
relation to the statement of assets, liabilities and trust corpus included in
the Trust's 1996 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 5, 1997
3
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and short-term investments.................. $ 1,145,898 $ 1,376,687
Interest to be received.......................... 1,394 1,924
Net overriding royalty interests in oil and gas
properties - net (Note 1)...................... 40,488,291 41,337,673
----------- ------------
$41,635,583 $42,716,284
=========== ============
LIABILITIES AND TRUST CORPUS
Distribution payable to Unit holders............. $ 1,147,292 $ 1,378,611
Trust corpus (6,000,000 Units of beneficial
interest authorized and outstanding)........... 40,488,291 41,337,673
----------- ------------
$41,635,583 $42,716,284
=========== ============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
4
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Royalty income..................................... $3,114,590 $1,557,678
Interest income.................................... 4,350 2,166
---------- ----------
Total income....................................... 3,118,940 1,559,844
Administration expense............................. 49,405 35,326
---------- ----------
Distributable income............................... $3,069,535 $1,524,518
========== ==========
Distributable income per Unit (6,000,000 Units).... $0.511589 $ 0.254087
========= ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
5
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Trust Corpus, beginning of period............................ $41,337,673 $45,118,209
Amortization of net overriding royalty interests............. (849,382) (788,922)
Distributable income......................................... 3,069,535 1,524,518
Distributions declared....................................... (3,069,535) (1,524,518)
----------- -----------
Trust Corpus, end of period.................................. $40,488,291 $44,329,287
=========== ===========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
6
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF ACCOUNTING
The financial statements of Cross Timbers Royalty Trust ("the Trust") are
prepared on the following basis:
- Royalty income recorded for a month is the amount computed and paid by the
interest owner, Cross Timbers Oil Company ("Cross Timbers Oil"), to
NationsBank of Texas, N.A. ("Trustee"), as Trustee for the Trust. Royalty
income consists of the amounts received by Cross Timbers Oil from the sale
of production less applicable costs ("net proceeds") from the properties
underlying the net overriding royalty interests ("Royalty Trust Interests")
conveyed to the Trust. Net proceeds are multiplied by net profit percentages
of 90% in the case of Royalty Trust Interests carved from certain royalty
interests in New Mexico, Oklahoma and Texas ("90% Royalty Trust Interests")
and 75% in the case of Royalty Trust Interests carved from seven working
interest properties in Oklahoma and Texas ("75% Royalty Trust Interests").
Applicable costs deducted in the calculation of net proceeds for the 90%
Royalty Trust Interests generally include applicable taxes, transportation,
marketing and legal costs, and do not include other production and
development costs. For the 75% Royalty Trust Interests, such costs include
production expenses, development costs, applicable taxes, operating charges
and other costs.
- Royalty income is computed separately for each of five conveyances under
which the Royalty Trust Interests were conveyed to the Trust. If monthly
costs exceed revenues for any conveyance ("excess costs"), such excess
cannot reduce royalty income from other conveyances, but is carried forward
with accrued interest to be recovered from future net proceeds of that
conveyance.
- Interest income, interest to be received and distribution payable to Unit
holders include interest to be earned from the monthly record date (last
business date of the month) through the date of the next distribution to
Unit holders.
- Trust expenses are recorded based on liabilities paid and cash reserves
established by the Trustee for liabilities and contingencies.
- Distributions to Unit holders are recorded when declared by the Trustee.
The financial statements of the Trust differ from financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
because revenues are not accrued in the month of production, expenses are
recognized when paid rather than when incurred, and certain cash reserves may
be established for contingencies which would not be accrued under GAAP. The
initial carrying value of the Royalty Trust Interests ($61,100,449) represents
the net book value from the historical accounting records (successful efforts
method) of predecessors to Cross Timbers Oil on February 12, 1991.
Amortization of the Royalty Trust Interests is calculated on a unit-of-
production basis and is charged directly to trust corpus. Accumulated
amortization as of March 31, 1997 and December 31, 1996 is $20,612,158 and
$19,762,776, respectively.
7
<PAGE>
2. 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.
The Unit holders are considered, for Federal income tax purposes, to own the
Trust's income and principal as though no trust were in existence. The income
of the Trust is deemed to have been received or accrued by the Unit holders at
the time such income is received or accrued by the Trust, rather than when
distributed by the Trust.
Cross Timbers Oil has advised the Trustee that the Trust receives royalty
income from coal seam gas wells. Production from coal seam gas wells drilled
after December 31, 1979, and prior to 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, which was approximately $1.03
per MMBtu for 1996, is recalculated annually based on each year's qualifying
production through the year 2002. Such credit, based on the Unit holder'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. Unit holders should consult their tax advisors regarding Trust
tax compliance matters.
Based on 1997 qualifying sales volumes and the factors used in the calculation
of the 1996 coal seam tax credit, the credit for the quarter ended March 31,
1997 is estimated to be $.05 per Unit. Final 1997 coal seam tax credit data
will be provided to Unit holders with year-end tax information.
3. CROSS TIMBERS OIL COMPANY
As of April 30, 1997, Cross Timbers Oil owned 20.3% of the outstanding Trust
Units.
4. LITIGATION
In May 1997, Cross Timbers Oil received suspended revenues related to a recent
lawsuit settlement. See Item 1 of Part II, "Legal Proceedings."
8
<PAGE>
Item 2. Trustee's Discussion and Analysis.
Three Months Ended March 31, 1997 and 1996
- ------------------------------------------
For the quarter ended March 31, 1997, royalty income was $3,114,590, compared
with $1,557,678 for the first quarter of 1996. This 100% increase in royalty
income is the result of sharply higher oil and gas prices.
After considering interest income of $4,350 and administration expense of
$49,405, distributable income for the quarter ended March 31, 1997 was
$3,069,535, or $.511589 per Unit of beneficial interest. Distributions of
$.133623, $.186751 and $.191215 per Unit were made to Unit holders of record on
January 31, February 28 and March 31, 1997, respectively. For the quarter ended
March 31, 1996, distributable income was $1,524,518, or $.254087 per Unit.
Royalty income is recorded when received by the Trust, which is the month
following receipt by Cross Timbers Oil, and generally two months after oil
production and three months after gas production. Royalty income is generally
affected by three major factors: 1) oil and gas sales volumes, 2) oil and gas
sales prices and 3) costs deducted in the calculation of royalty income.
Because properties underlying the 90% Royalty Trust Interests are royalty and
overriding royalty interests, they generally bear no costs other than production
and property taxes, related legal costs, and marketing and transportation
charges. In addition to these costs, the 75% Royalty Trust Interests are
subject to production and development costs, since the properties underlying the
75% Royalty Trust Interests are working interests.
Volumes
Oil sales volumes decreased 1% from first quarter 1996 to 1997 because of
natural decline that was largely offset by increased volumes related to the
timing of cash receipts and infill drilling on one of the underlying working
interest properties. Gas sales volumes decreased 2% from first quarter 1996 to
1997, primarily because of cash receipts in first quarter 1996 related to prior
periods.
Prices
The average oil price for first quarter 1997 was $22.62 per barrel, an increase
of 41% from the first quarter 1996 average price of $16.02. The first quarter
1997 average price reflects the rise in oil prices to six-year highs in December
1996 and January 1997.
The first quarter 1997 average gas price was $2.53 per thousand cubic feet
("Mcf"), or 87% above the first quarter 1996 price of $1.35. The first quarter
1997 average price includes sharply higher prices in November and December 1996
that resulted from increased weather-related demand. Additionally, gas prices
were depressed in 1996 because of gas oversupplies in California, the primary
market for San Juan Basin gas.
Costs
Costs deducted in the calculation of first quarter 1997 royalty income (see
"Calculation of Royalty Income") decreased 7% or $82,433 from total costs for
first quarter 1996. This was a result of a 14% or $25,437 decrease in
development costs and a 13% or $95,726 decrease in production expenses,
partially offset by a 12% or $38,730 increase in production and property taxes.
The decreases in development and production costs generally are related to the
timing of development and maintenance projects on the underlying properties.
The increase in production and property taxes is the result of increased oil and
gas revenues, largely offset by a decrease in estimated property taxes.
9
<PAGE>
COMPARATIVE OIL AND GAS SALES
Oil and gas sales attributable to the Underlying Properties and the Royalty
Trust Interests are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, (a)
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
OIL SALES (Bbls)
Underlying Properties (b)................. 105,459 106,466
Average per day......................... 1,146 1,157
Average price........................... $ 22.62 $ 16.02
Royalty Trust Interests (b)............... 55,539 35,511
GAS SALES (Mcf).................
Underlying Properties (b)................. 945,887 964,710
Average per day......................... 10,281 10,486
Average price........................... $ 2.53 $ 1.35
Royalty Trust Interests (b)............... 835,124 830,757
</TABLE>
(a) Because of the interval between time of production and receipt of royalty
income by the Trust, oil and gas sales for the quarter ended March 31
generally represent oil production for the period November through January
and gas production for the period October through December.
(b) Oil and gas sales volumes are allocated to the Royalty Trust 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 Royalty Trust Interests. Therefore, comparative discussion of oil and
gas sales is based on the Underlying Properties.
10
<PAGE>
CALCULATION OF ROYALTY INCOME
The following is the calculation of royalty income received by the Trust for the
quarters ended March 31, 1997 and 1996. See Note 1 to Condensed Financial
Statements.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
90% 75% 90% 75%
Royalty Royalty Royalty Royalty
Trust Trust Trust Trust
Interests Interests Interests Interests
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Oil sales.................................................. $ 490,486 $1,894,773 $ 358,753 $1,346,785
Gas sales.................................................. 2,317,868 74,712 1,265,517 41,131
---------- ---------- ---------- ----------
Total................................................ 2,808,354 1,969,485 1,624,270 1,387,916
---------- ---------- ---------- ----------
COSTS
Production and property taxes.............................. 232,135 128,321 171,621 150,105
Production expenses (a).................................... 9,162 609,017 24,574 689,331
Development costs.......................................... - 159,829 - 185,266
---------- ---------- ---------- ----------
Total................................................ 241,297 897,167 196,195 1,024,702
---------- ---------- ---------- ----------
Net Proceeds.................................................. 2,567,057 1,072,318 1,428,075 363,214
Net Profits Percentage........................................ 90% 75% 90% 75%
---------- ---------- ---------- ----------
ROYALTY INCOME................................................ $2,310,351 $ 804,239 $1,285,268 $ 272,410
========== ========== ========== ==========
</TABLE>
(a) Production expenses for the 75% Royalty Trust Interests include an overhead
fee which is deducted and retained by Cross Timbers Oil. This fee is
currently $19,057 per month, or $57,171 per quarter. This overhead fee is
subject to adjustment each May based on an oil and gas industry index.
11
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.
On May 14, 1997, the Trustee announced the settlement of a lawsuit filed in
December 1991 by Cross Timbers Oil and its predecessor-in-title against Coastal
Oil and Gas Corporation ("Coastal") in the Eleventh Judicial District Court in
San Juan County, New Mexico. Cross Timbers Oil and its predecessor-in-title were
seeking to recover revenues suspended by Coastal and to obtain a judgment
confirming their interests. The revenues suspended were attributable to certain
San Juan Basin overriding royalty interests underlying the 90% Royalty Trust
Interests ("subject interests").
As part of the settlement, Coastal agreed to pay the suspended revenues and all
future revenues attributable to the subject interests. Coastal further agreed
that the subject interests would not be reduced or converted to a cost-bearing
interest as was previously contended.
Cross Timbers Oil has advised the Trustee that on May 7, 1997 it received
revenues suspended by Coastal since the Trust's inception through December 31,
1995. Accordingly, the Trustee expects to receive additional royalty income of
approximately $460,000 or $.077 per Unit that will be included in the June Trust
distribution to be paid on July 15, 1997 to Unit holders of record on June 30,
1997.
Coastal has further agreed to pay Cross Timbers Oil by July 31, 1997 all
revenues suspended in 1996 and 1997, which Cross Timbers Oil estimates to be
approximately $200,000 or $.033 per Unit. If received by Cross Timbers Oil in
July, these proceeds will be distributed on September 15, 1997 to Unit holders
of record on August 29, 1997.
To facilitate further development of the subject interests, Cross Timbers Oil
has agreed to reduce its overriding royalty interest by one-half on any newly
drilled wells. This will result in a corresponding reduction in the Trust's net
profits interest in the new wells drilled on the subject interests. Furthermore,
to ensure that production from existing wells is properly maintained, Cross
Timbers Oil has agreed to temporarily reduce its interest in existing wells
under certain circumstances, and to consider reducing its interest under other
circumstances. Cross Timbers Oil has informed the Trustee that it believes that
such agreed reductions in the subject interests will not significantly impact
estimated future net revenues from the Trust's proved reserves.
Items 2 through 4. Not applicable.
Item 5. Other Matters.
See Item 1, "Legal Proceedings."
Item 6. (a) Exhibits.
Page
------
(4) (a) Cross Timbers Royalty Trust Indenture Amended and
Restated on January 13, 1992 by NationsBank of Texas,
N.A., as Trustee, heretofore filed as Exhibit 3.1 to
the Trust's Registration Statement No. 33-44385 filed
with the Securities and Exchange Commission on
February 19, 1992, is incorporated herein by
reference.
12
<PAGE>
Page
------
(b) Net Overriding Royalty Conveyance (Cross Timbers
Royalty Trust, 90% -Texas) from South Timbers Limited
Partnership, West Timbers Limited Partnership, North
Timbers Limited Partnership, East Timbers Limited
Partnership, Hickory Timbers Limited Partnership, and
Cross Timbers Partners, L.P. (predecessors of Cross
Timbers Oil Company, L.P. which subsequently merged
into Cross Timbers Oil Company) to NCNB Texas National
Bank (now NationsBank of Texas, N.A.), as Trustee,
dated February 12, 1991 (without Schedules A and B),
heretofore filed as Exhibit 10.1 to the Trust's
Registration Statement No. 33-44385 filed with the
Securities and Exchange Commission on February 19,
1992, is incorporated herein by reference.
(c) Net Overriding Royalty Conveyance (Cross Timbers
Royalty Trust, 75% -Texas) from South Timbers Limited
Partnership, West Timbers Limited Partnership, North
Timbers Limited Partnership, East Timbers Limited
Partnership, Hickory Timbers Limited Partnership, and
Cross Timbers Partners, L.P. (predecessors of Cross
Timbers Oil Company, L.P. which subsequently merged
into Cross Timbers Oil Company) to NCNB Texas National
Bank (now NationsBank of Texas, N.A.), as Trustee,
dated February 12, 1991 (without Schedules A and B),
heretofore filed as Exhibit 10.5 to the Trust's
Registration Statement No. 33-44385 filed with the
Securities and Exchange Commission on February 19,
1992, is incorporated herein by reference.
(15) (a) Awareness letter of Arthur Andersen LLP 15
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
13
<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.
CROSS TIMBERS ROYALTY TRUST
By NATIONSBANK OF TEXAS, N.A., TRUSTEE
By JOE B. GRISSOM
----------------------------------------
Joe B. Grissom
Vice President
CROSS TIMBERS OIL COMPANY
Date: May 15, 1997 By LOUIS G. BALDWIN
----------------------------------------
Louis G. Baldwin
Senior Vice President and
Chief Financial Officer
14
<PAGE>
EXHIBIT 15
NationsBank of Texas, N.A. as Trustee
for the Cross Timbers Royalty Trust:
We are aware that Cross Timbers Oil Company has incorporated by reference in its
Registration Statement No. 33-55784 on Form S-8 Cross Timbers Royalty Trust's
Form 10-Q for the quarter ended March 31, 1997, which includes our report dated
May 5, 1997, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 15, 1997
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,145,898
<SECURITIES> 0
<RECEIVABLES> 1,394
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,147,292
<PP&E> 61,100,449
<DEPRECIATION> 20,612,158
<TOTAL-ASSETS> 41,635,583
<CURRENT-LIABILITIES> 1,147,292
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 40,488,291
<TOTAL-LIABILITY-AND-EQUITY> 41,635,583
<SALES> 3,114,590
<TOTAL-REVENUES> 3,118,940
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 49,405
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,069,535
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,069,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,069,535
<EPS-PRIMARY> 0.512
<EPS-DILUTED> 0.512
</TABLE>
