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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-10982
CROSS TIMBERS ROYALTY TRUST
(Exact name of registrant as specified in the Cross Timbers Royalty Trust
Indenture)
TEXAS 75-6415930
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
NATIONSBANK OF TEXAS, N.A.
TRUSTEE
P.O. BOX 1317
FORT WORTH, TEXAS 76101-1317
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number including area code: (817) 390-6592
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
UNITS OF BENEFICIAL INTEREST NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 7, 1997, there were 6,000,000 Units of beneficial interest of the
Trust outstanding with an aggregate market value on that date of $88.5
million.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below is the only document parts of which are incorporated herein by
reference and the parts of this report into which the document is
incorporated:
1996 Annual Report to Unit Holders--Part II
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<PAGE>
PART I
ITEM 1. BUSINESS
Cross Timbers Royalty Trust ("Trust") is an express trust created under the
laws of Texas by the Cross Timbers Royalty Trust Indenture ("Indenture")
entered into on February 12, 1991 between the predecessors to Cross Timbers
Oil Company ("Cross Timbers Oil"), as grantors, and NCNB Texas National Bank,
as Trustee. The predecessors to Cross Timbers Oil ("predecessors") were 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. NationsBank of Texas, N.A.,
successor of NCNB Texas National Bank, is now the Trustee of the Trust. The
principal office of the Trust is located at 500 West Seventh Street, Fort
Worth, Texas 76102 (telephone number 817-390-6592).
On February 12, 1991, the predecessors conveyed net overriding royalty
interests (equivalent to net profits interests) to the Trust under five
separate conveyances:
-- one in each of the states of Texas, Oklahoma and New Mexico, to convey a
90% net overriding royalty interest carved out of substantially all
royalty and overriding royalty interests owned by the predecessors in
those states ("90% Royalty Trust Interests"), and
-- one in each of the states of Texas and Oklahoma, to convey a 75% net
overriding royalty interest carved out of specific working interests
owned by the predecessors in those states ("75% Royalty Trust
Interests").
The conveyance of these interests (collectively referred to as "Royalty
Trust Interests") was effective as to production from and after October 1,
1990 at 7:00 a.m. The Royalty Trust Interests and the predecessors' interests
in the properties from which they were carved ("Underlying Properties") are
further described under Item 2.
In exchange for the conveyance of the Royalty Trust Interests to the Trust,
the predecessors received 12,000,000 Units of Beneficial Interest of the Trust
("Units"), which were converted into 6,000,000 Units following a 1-for-2
reverse split in January 1992. Approximately 40% of the Units were distributed
to the owners of the predecessors in February 1991. The remaining 60% of the
Units were retained by Cross Timbers Oil Company, L.P., the successor
partnership to the predecessors that was effectively merged into Cross Timbers
Oil in May 1993. Cross Timbers Oil Company, L.P. sold Units in the Trust's
initial public offering in March 1992 and distributed its remaining Units to
its partners in November 1992. Units are listed and traded on the New York
Stock Exchange under the symbol "CRT."
In July 1996, Cross Timbers Oil's Board of Directors authorized the purchase
of one million Units. Following Cross Timbers Oil's completion of its program
to purchase one million Units in January 1997, its Board of Directors
authorized the purchase of up to one million additional Units. As of February
28, 1997, Cross Timbers Oil owned 1,073,900 Units or 17.9% of the outstanding
Units.
Under the terms of each of the five conveyances, the Trust receives royalty
income from the Royalty Trust Interests on the last business day of each
month. Royalty income is determined by Cross Timbers Oil by multiplying the
net profit percentage (90% or 75%) times net proceeds from the Underlying
Properties for each of the five conveyances during the previous month. "Net
proceeds" is defined as the excess of gross proceeds over production costs.
"Gross proceeds" generally means amounts received from the sale of production
(net of production taxes), subject to certain adjustments. For the 90% Royalty
Trust Interests and the 75% Royalty Trust Interests, "production costs"
generally means property taxes accrued, transportation, marketing and other
charges. For the 75% Royalty Trust Interests only, "production costs" also
includes capital and operating costs paid (e.g., drilling, production and
other direct costs of owning and operating the property) and a monthly
overhead charge of approximately $19,057 (total for both 75% conveyances). If
production costs exceed gross
1
<PAGE>
proceeds for any conveyance, such excess is carried forward to the computation
of net proceeds for future months until the excess costs (plus interest
accrued as specified in the conveyance) are completely recovered. Such excess
production costs and related accrued interest from one conveyance cannot be
used to reduce net proceeds from any other conveyance.
The Trust is not liable for any production costs or liabilities attributable
to the Royalty Trust Interests. If at any time the Trust receives royalty
income in excess of the amount due, the Trust is not obligated to return such
overpayment, but royalty income payable to the Trust for the next month shall
be reduced by the overpayment, plus interest at the rate specified in the
conveyance.
Cross Timbers Oil does not operate or control any of the Underlying
Properties. As a working interest owner, Cross Timbers Oil may decline
participation in any operation and allow consenting parties to conduct such
operations, as provided under the operating agreements. Cross Timbers Oil also
can assign, sell, or otherwise transfer its interest in the Underlying
Properties, subject to the Royalty Trust Interests, or can abandon an
Underlying Property that is a working interest if it is incapable of producing
in paying quantities, as determined by Cross Timbers Oil.
To the extent it has the right to do so, Cross Timbers Oil is responsible
for marketing its production from the Underlying Properties under existing
sales contracts or new arrangements on the best terms reasonably obtainable in
the circumstances.
Royalty income received by the Trust on or before the last business day of
the month generally represents receipts attributable to oil production two
months prior and gas production three months prior. The amount to be
distributed to Unit holders each month by the Trustee ("monthly distribution
amount") is determined by aggregating (i) royalty income received, (ii) cash
available as a result of reduction of cash reserves and (iii) any other cash
receipts (other than interest on the monthly distribution amount), and
subtracting the sum of (i) liabilities paid and (ii) reduction in cash
available due to establishment of or increase in any cash reserve. The monthly
distribution amount and estimated interest received on such amount through the
distribution date is distributed to Unit holders of record within ten business
days after the monthly record date. The monthly record date is generally the
last business day of the month. The Trustee calculates the monthly
distribution amount (together with estimated interest to be received) and
announces the distribution per Unit at least ten days prior to the monthly
record date.
Cash reserves may be established for contingencies at the discretion of the
Trustee. At the discretion of the Trustee, cash held for such reserves, as
well as for pending payment of the monthly distribution amount, are invested
in obligations issued or unconditionally guaranteed by the United States or
any agency or instrumentality thereof, repurchase agreements secured by such
obligations, or certificates of deposit of any bank having capital, surplus
and undivided profits in excess of $100,000,000.
The function of the Trustee is to collect the income attributable to the
Royalty Trust Interests, to pay all expenses of the Trust, and to remit the
monthly distribution amount to Unit holders. The Trustee's powers are
enumerated in and limited by the terms of the Indenture. The Trust is not
empowered to carry on any business activity and, other than investing cash on
hand in specific short-term cash investments, is prohibited from acquiring any
assets other than the Royalty Trust Interests. The Trust has no employees
since all administrative functions are performed by the Trustee.
Approximately 64% of the royalty income received by the Trust during 1996,
and approximately 62% of the estimated proved reserves of the Royalty Trust
Interests at December 31, 1996 (based on the discounted present value using
year-end oil and gas prices) is attributable to natural gas. There is
generally a greater demand for gas during the winter months than the rest of
the year. Otherwise, Trust income generally is not subject to seasonal
factors, nor dependent upon patents, licenses, franchises or concessions. The
Trust conducts no research activities.
2
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ITEM 2. PROPERTIES
The Royalty Trust Interests are the principal asset of the Trust. The
Trustee cannot acquire any other asset, with the exception of certain short-
term investments as specified under Item 1. The Trustee is prohibited from
selling any portion of the Royalty Trust Interests unless approved by at least
80% of the Unit holders or at such time as the Trust's gross revenue is less
than $1,000,000 for two successive years.
The Royalty Trust Interests (as defined under Item 1) are comprised of:
-- the 90% Royalty Trust Interests which are carved from:
i) producing royalty and overriding royalty interest properties in
Texas, Oklahoma and New Mexico ("underlying royalties"), and
ii) 11.11% non-participating royalty interests in nonproducing
properties located primarily in Texas and Oklahoma ("underlying
nonproducing royalties")
-- the 75% Royalty Trust Interests which are carved from non-operated
working interests in four properties in Texas and three properties in
Oklahoma ("underlying working interest properties").
All underlying royalties, underlying nonproducing royalties and underlying
working interest properties are currently owned by Cross Timbers Oil. Cross
Timbers Oil may sell all or any portion of the Underlying Properties at any
time, subject to and burdened by the Royalty Trust Interests.
The following information included in this Item 2 is based upon information
provided to the Trustee by Cross Timbers Oil.
PRODUCING ACREAGE, WELLS AND DRILLING
Underlying Royalties. The underlying royalties are royalty and overriding
royalty interests primarily located in mature producing oil and gas fields.
The most significant producing region in which the underlying royalties are
located is the San Juan Basin in northwestern New Mexico. The Trust's
estimated proved reserves from this region totaled 33.3 Bcf at December 31,
1996, comprising approximately 82% of the Trust's total gas reserves at that
date. Cross Timbers Oil estimates that underlying royalties in the San Juan
Basin include more than 2,000 gross (approximately 30 net) wells, covering
over 60,000 gross acres. Most of these wells are operated by Amoco Production
Company and Burlington Resources Oil & Gas Company. Production from
conventional gas wells is primarily from the Dakota, Mesaverde and Pictured
Cliffs formations.
Exploitation of coal seam gas reserves in the Fruitland formation was the
most significant recent development activity in the San Juan Basin until the
drilling period for the federal income tax credit expired on January 1, 1993
(see "Regulation-Coal Seam Tax Credit"). Since that date, major operators in
the San Juan Basin have continued to report development of coal seam gas
reserves without the incentive of the federal income tax credit, although it
is not known whether any of this development activity has directly affected
Trust reserves or production. The most significant activity in the San Juan
Basin during 1996 was the completion of additional eastward pipeline capacity,
reducing the dependence of San Juan Basin gas on California markets.
The underlying royalties also include royalties in the Sand Hills field of
Crane County, Texas. Most of these properties are operated by Exxon Company,
U.S.A. and Chevron, U.S.A. The Sand Hills field was discovered in 1931 and
includes production from three main intervals, the Tubb, McKnight and Judkins.
Development potential for the field includes recompletions and additional
infill drilling.
The underlying royalties contain approximately 462,000 gross (approximately
26,000 net) producing acres. Information regarding the number of wells on
royalty properties is generally not made available to royalty interest owners.
Accordingly, an accurate well count for all underlying royalties cannot be
provided.
3
<PAGE>
Underlying Working Interest Properties. The underlying working interest
properties, detailed below, are developed properties undergoing secondary
recovery operations:
<TABLE>
<CAPTION>
OWNERSHIP OF
CROSS TIMBERS OIL
-----------------
NET
WORKING REVENUE
UNIT COUNTY/ STATE OPERATOR INTEREST INTEREST
---- ------------- -------- -------- --------
<S> <C> <C> <C> <C>
North Cowden Ector/ Texas Amoco Production Company 1.7% 1.4%
North Central Levelland Hockley/ Texas Mobil Producing Texas and New Mexico, Inc. 3.2% 2.1%
Penwell Ector/ Texas Texaco Exploration and Production, Inc. 5.2% 4.6%
Sharon Ridge Canyon Borden/ Texas Exxon Company, U.S.A. 4.3% 2.8%
Hewitt Carter/ Oklahoma Exxon Company, U.S.A. 11.3% 9.9%
Wildcat Jim Penn Carter/ Oklahoma Texaco Exploration and Production, Inc. 8.6% 7.5%
South Graham Deese Carter/ Oklahoma Maynard Oil Company 8.2% 7.0%
</TABLE>
The underlying working interest properties consist of 60,154 gross (2,290
net) producing acres. As of December 31, 1996, there were 1,665 gross (76.5
net) productive oil wells, 1,130 gross (42.1 net) injection wells and no wells
in process of drilling on these properties. During 1996, 36 gross (2.9 net)
producing wells were drilled. During 1995, 24 gross (1.5 net) producing wells
were drilled. During 1994, 39 gross (1.0 net) producing wells were drilled.
OIL AND GAS PRODUCTION
Trust production is recognized in the period royalty income is received. Oil
and gas production and average sales prices attributable to the Underlying
Properties and the Royalty Trust Interests for the three years ended December
31, 1996 are as follows:
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
----------------------------- ----------------------- -----------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
--------- --------- --------- ------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION
Underlying Properties
Oil -- Sales (Bbls).... 89,632 85,823 92,900 347,168 354,745 373,764 436,800 440,568 466,664
Average per day
(Bbls)................ 245 235 255 948 972 1,024 1,193 1,207 1,279
Gas -- Sales (Mcf)..... 4,275,047 3,403,458 4,062,769 110,313 109,496 115,896 4,385,360 3,512,954 4,178,665
Average per day
(Mcf)................. 11,681 9,325 11,131 301 300 317 11,982 9,625 11,448
Royalty Trust Interests
Oil -- Sales (Bbls).... 77,686 71,329 78,573 90,729 77,795 21,716 168,415 149,124 100,289
Average per day
(Bbls)................ 212 196 215 248 213 60 460 409 275
Gas -- Sales (Mcf)..... 3,797,722 2,967,670 3,548,090 31,225 23,834 7,477 3,828,947 2,991,504 3,555,567
Average per day
(Mcf)................. 10,376 8,131 9,721 86 65 21 10,462 8,196 9,742
AVERAGE PRICE
Underlying Properties
Oil (per Bbl).......... $18.56 $16.08 $14.57 $18.61 $15.05 $13.56 $18.60 $15.25 $13.76
Gas (per Mcf).......... $ 1.50 $ 1.30 $ 1.71 $ 1.92 $ 1.40 $ 1.26 $ 1.51 $ 1.30 $ 1.69
</TABLE>
NONPRODUCING ACREAGE
The underlying nonproducing royalties contain approximately 204,000 gross
(approximately 3,000 net) acres in Texas, Oklahoma and New Mexico which were
nonproducing at the date of the Trust's creation. Cross Timbers Oil is the
owner of underlying mineral interests in the majority of this acreage. The
Trust is entitled to
4
<PAGE>
10% of oil and gas production attributable to the underlying mineral
properties, but is not entitled to delay rental payments or lease bonuses.
There has been no significant development of such nonproducing acreage since
the Trust's creation.
PRICING AND SALES INFORMATION
Oil and gas are generally sold from the Underlying Properties at posted and
spot prices, respectively. The majority of sales from the underlying working
interest properties are to major oil and gas companies. Information about
purchasers of oil and gas from royalty properties is generally not provided by
operators to Cross Timbers Oil as a royalty owner, or to the Trust.
OIL AND GAS RESERVES
The following are definitions adopted by the Securities and Exchange
Commission and the Financial Accounting Standards Board which are applicable
to terms used in the following discussion of oil and gas reserves:
Proved reserves- Estimated quantities of crude oil, natural gas and
natural gas liquids which, upon analysis of geologic and engineering data,
appear with reasonable certainty to be recoverable in the future from known
oil and gas reservoirs under existing economic and operating conditions.
Proved developed reserves- Proved reserves which can be expected to be
recovered through existing wells with existing equipment and operating
methods.
Proved undeveloped reserves- Proved reserves which are expected to be
recovered from new wells on undrilled acreage, or from existing wells where
a relatively major expenditure is required.
Estimated future net revenues- Also referred to herein as "estimated
future net cash flows." Computational result of applying current prices of
oil and gas (with consideration of price changes only to the extent
provided by existing contractual arrangements) to estimated future
production from proved oil and gas reserves as of the date of the latest
balance sheet presented, less estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved
reserves. Estimated future net revenues do not include the effects of the
coal seam tax credit, since the Trust is not a taxable entity and the
credit inures directly to the benefit of the Unit holder (see "Standardized
Measure of Discounted Future Net Cash Flows from Proved Reserves" below).
Present value of estimated future net revenues- Also referred to herein
as "standardized measure of discounted future net cash flows" or
"standardized measure." Computational result of discounting estimated
future net revenues at a rate of 10% annually.
Miller and Lents, Ltd., independent petroleum engineers, have estimated oil
and gas reserves attributable to the Royalty Trust Interests as of December
31, 1996, 1995, 1994 and 1993. Numerous uncertainties are inherent in
estimating reserve volumes and values and such estimates are subject to change
as additional information becomes available. The reserves actually recovered
and the timing of production of these reserves may be substantially different
from the original estimates.
Reserve quantities and revenues for the Royalty Trust Interests were
estimated from projections of reserves and revenues attributable to the
combined interests of the Trust and Cross Timbers Oil in the subject
properties. Since the Trust has defined net profits interests, the Trust does
not own a specific ownership percentage of the oil and gas reserve quantities.
Accordingly, reserves allocated to the Trust pertaining to its 75% net profits
interest in the working interest properties have effectively been reduced to
reflect recovery of the Trust's 75% portion of applicable production and
development costs. 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
Royalty Trust Interests.
5
<PAGE>
The standardized measure of discounted future net cash flows and changes in
such discounted cash flows as presented below are prepared using assumptions
required by the Financial Accounting Standards Board. Such assumptions include
the use of year-end prices for oil and 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 representative in estimating future revenues or reserve data. Future
net cash flows are discounted at an annual rate of 10%. No provision is
included for federal income taxes since future net revenues are not subject to
taxation at the trust level.
Oil prices used to determine the standardized measure at December 31, 1996,
1995, 1994 and 1993 were based on a West Texas Intermediate crude oil posted
price of $24.25, $18.00, $16.00 and $12.50 per Bbl, respectively. The weighted
average year-end gas prices used to determine the standardized measure at
December 31, 1996, 1995, 1994 and 1993 were $2.64, $1.37, $1.51 and $1.75 per
Mcf, respectively.
PROVED RESERVES
The following table reconciles the change in proved reserves attributable to
the Royalty Trust Interests from December 31, 1993 through December 31, 1996
(in thousands):
<TABLE>
<CAPTION>
75% ROYALTY
90% ROYALTY TRUST
TRUST INTERESTS INTERESTS TOTAL
---------------- -------------- -----------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
------ -------- ------- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993. 733.1 43,580.8 553.4 180.9 1,286.5 43,761.7
Extensions, discoveries
and other additions...... 13.9 344.8 -0- -0- 13.9 344.8
Revisions of prior
estimates................ 15.8 880.0 474.7 169.5 490.5 1,049.5
Production................ (78.6) (3,548.1) (21.7) (7.5) (100.3) (3,555.6)
----- -------- ------- ----- ------- --------
Balance, December 31, 1994. 684.2 41,257.5 1,006.4 342.9 1,690.6 41,600.4
Extensions, discoveries
and other additions...... 4.2 296.7 10.0 -0- 14.2 296.7
Revisions of prior
estimates................ 52.4 2,299.0 341.5 121.1 393.9 2,420.1
Production................ (71.3) (2,967.7) (77.8) (23.8) (149.1) (2,991.5)
----- -------- ------- ----- ------- --------
Balance, December 31, 1995. 669.5 40,885.5 1,280.1 440.2 1,949.6 41,325.7
Extensions, discoveries
and other additions...... 7.7 174.6 17.1 -0- 24.8 174.6
Revisions of prior
estimates................ 81.3 2,418.2 598.5 281.5 679.8 2,699.7
Production................ (77.7) (3,797.7) (90.7) (31.2) (168.4) (3,828.9)
----- -------- ------- ----- ------- --------
Balance, December 31, 1996. 680.8 39,680.6 1,805.0 690.5 2,485.8 40,371.1
===== ======== ======= ===== ======= ========
</TABLE>
During 1994, revisions of prior estimates were primarily the result of the
increase in the year-end oil price from $12.50 per Bbl in 1993 to $16.00 per
Bbl in 1994.
During 1995, revisions of prior estimates of the 90% Royalty Trust
Interests' proved gas reserves were primarily because of lower than
anticipated production declines. Revisions of prior estimates of the 75%
Royalty Trust Interests' proved reserves were primarily the result of the
increase in the year-end oil price from $16.00 per Bbl in 1994 to $18.00 per
Bbl in 1995.
During 1996, revisions of prior estimates of the 90% Royalty Trust
Interests' proved gas reserves were primarily because of lower than
anticipated production declines, as well as the increase in the year-end gas
price from $1.37 in 1995 to $2.64 in 1996. Revisions of prior estimates of the
75% Royalty Trust Interests' proved reserves were primarily because of the
increase in the year-end oil price from $18.00 per Bbl in 1995 to $24.25 in
1996.
6
<PAGE>
PROVED DEVELOPED RESERVES
The following are estimated quantities of proved developed oil and gas
reserves as of December 31, 1993 and each following year-end through December
31, 1996 (in thousands):
<TABLE>
<CAPTION>
75% ROYALTY
90% ROYALTY TRUST
TRUST INTERESTS INTERESTS TOTAL
--------------- ------------- ----------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
------ -------- ------- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993................ 727.8 41,026.3 502.8 173.2 1,230.6 41,199.5
===== ======== ======= ===== ======= ========
December 31, 1994................ 678.4 38,708.1 939.6 334.4 1,618.0 39,042.5
===== ======== ======= ===== ======= ========
December 31, 1995................ 665.2 38,866.6 1,203.5 429.3 1,868.7 39,295.9
===== ======== ======= ===== ======= ========
December 31, 1996................ 676.6 37,705.7 1,701.2 675.7 2,377.8 38,381.4
===== ======== ======= ===== ======= ========
</TABLE>
Changes in proved developed reserves are explained under "Proved Reserves"
above.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVES
The following are summary calculations of the standardized measure of
discounted future net cash flows as of December 31, 1996, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
-------------------------- ------------------------- --------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------- --------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
-------- ------- ------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows..... $119,971 $67,576 $76,053 $45,237 $22,295 $15,203 $165,208 $89,871 $91,256
Future production taxes. (8,282) (4,628) (5,243) (2,611) (1,252) (816) (10,893) (5,880) (6,059)
-------- ------- ------- ------- ------- ------- -------- ------- -------
Future net cash flows... 111,689 62,948 70,810 42,626 21,043 14,387 154,315 83,991 85,197
10% discount factor..... (56,805) (31,880) (37,056) (20,663) (9,868) (6,900) (77,468) (41,748) (43,956)
-------- ------- ------- ------- ------- ------- -------- ------- -------
Standardized measure.... $ 54,884 $31,068 $33,754 $21,963 $11,175 $ 7,487 $ 76,847 $42,243 $41,241
======== ======= ======= ======= ======= ======= ======== ======= =======
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVES
The following reconciles the changes during 1996, 1995 and 1994 in the
standardized measure (in thousands):
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
------------------------- ------------------------ -------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
------- ------- ------- ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Standardized measure,
January 1.............. $31,068 $33,754 $38,099 $11,175 $ 7,487 $2,812 $42,243 $41,241 $40,911
Extensions, discoveries
and other additions... 460 388 357 178 41 -0- 638 429 357
Accretion of discount.. 2,767 3,099 3,480 1,012 692 262 3,779 3,791 3,742
Revisions of prior
estimates, changes in
price and other....... 27,159 (1,576) (1,564) 11,298 4,098 4,729 38,457 2,522 3,165
Royalty income......... (6,570) (4,597) (6,618) (1,700) (1,143) (316) (8,270) (5,740) (6,934)
------- ------- ------- ------- ------- ------ ------- ------- -------
Standardized measure,
December 31............ $54,884 $31,068 $33,754 $21,963 $11,175 $7,487 $76,847 $42,243 $41,241
======= ======= ======= ======= ======= ====== ======= ======= =======
</TABLE>
7
<PAGE>
DISCOUNTED PRESENT VALUE OF THE COAL SEAM TAX CREDIT
The standardized measure above does not include the effects of the coal seam
tax credit since the Trust is not a taxable entity. The following summarizes
the estimated coal seam tax credit attributable to the 90% Royalty Trust
Interests at December 31, 1996, 1995 and 1994. Such estimates are based on
coal seam proved reserves as estimated by independent engineers, the current
year estimated Btu content and the coal seam tax credit of $1.03, $1.01 and
$1.00 per MMBtu at December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Undiscounted........................................... $5,942 $5,753 $5,250
====== ====== ======
Discounted present value at 10%........................ $3,895 $3,766 $3,446
====== ====== ======
</TABLE>
CERTAIN PROVISIONS AFFECTING SAN JUAN BASIN ROYALTY INTERESTS
Certain instruments creating or governing some of the Underlying Properties
that are royalties and overriding royalties in the San Juan Basin contain
provisions that purportedly either reduce the overriding royalty interest or
convert the royalty or overriding royalty interest into a working interest
when average daily gas production in any month falls below 500 Mcf per well.
Although the interpretation, application and continued effect of these
reduction or conversion provisions are in dispute, Cross Timbers Oil believes
these provisions were included in these instruments because of a federal
regulation, that has since been repealed, limiting the amount of royalties and
overriding royalties placed on federal leases in the San Juan Basin. No
assurances, however, can be made regarding the effect of these provisions on
the Trust. Cross Timbers Oil and other royalty interest owners filed a
lawsuit, later joined by the Trust in 1993, to recover revenues suspended by
working interest owners based on their interpretation of these reduction or
conversion provisions. The Trust, Cross Timbers Oil and the other royalty
owners have settled this lawsuit. See Item 3, "Legal Proceedings."
REVERSION AGREEMENT
Certain of the underlying royalties are subject to a reversion agreement
between Cross Timbers Oil and a third party. The agreement calls for Cross
Timbers Oil to transfer 25% of its interest in those properties to the third
party when amounts received by Cross Timbers Oil from the Underlying
Properties subject to the agreement equal the purchase price of the properties
plus a 1% per month return on the unrecouped purchase price ("Payout"). If
Payout were to occur and the 25% interest were to be transferred to the third
party, the amounts payable to the Trust would be proportionately reduced.
Based on current prices and levels of production, Cross Timbers Oil has
advised the Trustee that Payout is not projected to occur for more than 25
years. Unless prices and production increase substantially, this reversion
agreement is not expected to have a material impact on the Trust.
REGULATION
Natural Gas Regulation
The interstate transportation and sale for resale of natural gas is subject
to federal regulation, including transportation rates charged and various
other matters, by the Federal Energy Regulatory Commission ("FERC"). Federal
price controls on wellhead sales of domestic natural gas terminated on January
1, 1993. While natural gas prices are currently unregulated, Congress
historically has been active in the area of natural gas regulation. It is
impossible to 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, such proposals might have
on the operations of the Underlying Properties.
8
<PAGE>
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. The rates of production may be regulated
and the maximum daily production allowables from both oil and gas wells may be
established on a market demand or conservation basis, or both.
Coal Seam Tax Credit
The Trust receives royalty income from coal seam wells. Under Section 29 of
the Internal Revenue Code, coal seam gas produced prior to January 1, 2003
from wells drilled after December 31, 1979 and before January 1, 1993,
qualifies for the federal income tax credit for producing nonconventional
fuels. This tax credit for 1996 was approximately $1.03 per MMBtu. Such
credit, calculated based on the Unit holder's pro rata share of qualifying
production, may not reduce the Unit holder's regular tax liability (after the
foreign tax credit and certain other nonrefundable 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.
Other Regulation
The petroleum industry is also subject to compliance with various other
federal, state and local regulations and laws, including, but not limited to,
environmental protection, occupational safety, resource conservation and equal
employment opportunity. Cross Timbers Oil has advised the Trustee that it does
not believe that compliance with these laws will have any material adverse
effect upon the Unit holders.
ITEM 3. LEGAL PROCEEDINGS
In December 1991, Cross Timbers Oil and its predecessor-in-title filed a
lawsuit in the Eleventh Judicial District Court in San Juan County, New Mexico
against Coastal Oil and Gas Corporation ("Coastal") and another party (with
which the plaintiffs have since settled and dismissed from the suit). The
plaintiffs are seeking to recover revenues suspended by Coastal and to obtain
a judgment confirming the plaintiffs' interests. The suspended revenues are
attributable to certain San Juan Basin overriding royalty interests underlying
the 90% Royalty Trust Interests ("subject interests"). In August 1995, the
court granted the plaintiffs a summary judgment against Coastal, affirming the
ownership percentage of the subject interests claimed by the plaintiffs.
Because other issues still remain to be tried before a final determination can
be made in this matter, the ultimate outcome of this case cannot currently be
predicted. The Trust is not a party to this litigation, but pays its
proportionate share of litigation costs.
Cross Timbers Oil has advised the Trustee that suspended revenues related to
the Coastal lawsuit are estimated to be $700,000 net to the Trust. Further, if
the plaintiffs are not successful in this case, Cross Timbers Oil estimates
that the discounted future net cash flows from the Trust's proved reserves as
of December 31, 1996 would potentially be reduced by approximately $1,000,000.
Neither Cross Timbers Oil nor the Trustee can currently predict the outcome of
this lawsuit, or whether or when the suspended revenues will be received.
In August 1993, the Trust joined a lawsuit filed in the Eleventh Judicial
District Court in San Juan County, New Mexico that was previously filed by
Cross Timbers Oil and two other overriding royalty interest owners against
Hallador Petroleum Company ("Hallador") and other owners of working interests
in certain gas wells located in San Juan County, New Mexico, in which the
Trust owns a net profits interest. The Trust and other plaintiffs were seeking
to recover revenues suspended by the defendants and a judgment confirming the
plaintiffs' interests. The defendants alleged that certain provisions in
earlier documents signed by the plaintiffs' predecessors-in-title purported to
convert the interests reserved by the plaintiffs into working interests during
any month in which average daily production of natural gas fell below 500 Mcf
per well. See Item 2, "Certain Provisions Affecting San Juan Basin Royalty
Interests." The Trust and other plaintiffs denied that the interests
9
<PAGE>
ever converted and asserted that the purported language was inapplicable. In
November 1996, the Trust and other plaintiffs settled this lawsuit. Pursuant
to the settlement, Cross Timbers Oil received $750,000 in exchange for
reducing its 7.5% overriding royalty interest in these properties to a 1.875%
overriding royalty interest that does not convert to a working interest when
daily production falls below 500 Mcf per well. The Trust owns a 90% net
profits interest in Cross Timbers Oil's interest, and received $675,000 as its
portion of the settlement, which was distributed on January 15, 1997 to Unit
holders of record on December 31, 1996. The case is being dismissed. Because
revenues from these properties have been suspended since 1990, future Trust
distributions will not be reduced from historical levels by this settlement.
The settlement's estimated impact on the discounted future net cash flows from
the Trust's proved reserves was not material.
Cross Timbers Oil has advised the Trustee that two lawsuits have been filed
that relate to certain Texas properties underlying the 75% Royalty Trust
Interests. Neither the Trust nor Cross Timbers Oil is named as a party in
either suit. In the first case filed, surface owners of certain lands in Ector
County, Texas brought suit in December 1994 in the 280th Judicial District
Court of Harris County, Texas against various oil and gas operators and
leasehold interest owners that own oil and gas leases covering the lands
involved. The surface owners have alleged that the oil and gas operations of
the named defendants have polluted the surface and subsurface of the land
involved, including an underlying aquifer. The Trust's interest in the
property involved is a 75% net overriding royalty in Cross Timbers Oil's 5.2%
working interest.
In the second case, a surface owner of lands located in Ector and Andrews
Counties, Texas filed suit in September 1994 in the 125th Judicial District
Court of Harris County, Texas. The surface owner has alleged that oil and gas
operations on his land by various defendant oil and gas operators have
contaminated the surface and the subsurface water on the land. The Trust's
interest in the property involved is a 75% net overriding royalty in Cross
Timbers Oil's 1.7% working interest.
In each of the two cases, the surface owners are seeking a recovery for
unspecified temporary and permanent damages to the surface and subsurface and
punitive damages against the named defendants. Although the potential to the
Trust for lost royalty income from these lawsuits cannot be currently
estimated, Cross Timbers Oil has advised the Trustee that it does not expect
that these lawsuits will have a materially adverse effect on trust corpus.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Unit holders during 1996.
10
<PAGE>
PART II
ITEM 5. MARKET FOR UNITS OF THE TRUST AND RELATED SECURITY HOLDER MATTERS
The section entitled "Units of Beneficial Interest" on page 1 of the Trust's
Annual Report to Unit holders for the year ended December 31, 1996 is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Royalty Income.......... $8,269,875 $5,739,704 $6,934,038 $7,905,506 $7,440,276
Distributable Income.... 8,076,964 5,578,227 6,748,876 7,697,537 7,304,414
Distributable Income per
Unit................... 1.346162 0.929705 1.124811 1.282923 1.217402
Distributions per Unit.. 1.346162 0.929705 1.124811 1.282923 1.217402
Total Assets at Year-
End.................... 42,716,284 45,547,459 49,587,753 52,558,166 55,901,376
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Trustee's Discussion and Analysis" of financial condition and results
of operations for the three-year period ended December 31, 1996 on pages 6 and
7 of the Trust's Annual Report to Unit holders for the year ended December 31,
1996 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Trust and the notes thereto, together with
the report thereon of Arthur Andersen LLP dated March 13, 1997, appearing on
pages 9 through 12 of the Trust's Annual Report to Unit holders for the year
ended December 31, 1996 are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants or disagreements with accountants
on any matter of accounting principles or practices or financial statement
disclosures during the two years ended December 31, 1996.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Trust has no directors or executive officers. The Trustee is a corporate
trustee which may be removed, with or without cause, by the affirmative vote
at a meeting of the Unit holders of the holders of a majority of all the Units
then outstanding.
ITEM 11. EXECUTIVE COMPENSATION
During 1996, 1995 and 1994, the Trustee received the following annual
compensation as specified in the Trust Indenture:
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR COMPENSATION (1)
--------------------------- ---- ---------------
<S> <C> <C>
NationsBank of Texas, N.A., Trustee 1996 $10,072
1995 $14,245
1994 $16,281
</TABLE>
(1) Under the Trust Indenture, the Trustee is entitled to an administrative
fee of: (i) 1/20 of 1% of the first $100 million of the annual gross
revenue of the Trust, and 1/30 of 1% of the annual gross revenue of the
Trust in excess of $100 million, and (ii) Trustee's standard hourly rates
for time in excess of 300 hours annually.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners. The following table
sets forth as of March 7, 1997 information with respect to each person known
to the Trustee to beneficially own more than 5% of the outstanding Units of
the Trust:
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP CLASS
---------------- -------------------- -------
<S> <C> <C>
Cross Timbers Oil Company 1,073,900 Units (1) 17.9%
810 Houston Street, Suite 2000
Fort Worth, TX 76102
</TABLE>
(1) Cross Timbers Oil has the sole power to vote and dispose of 1,073,900
Units. Excluded from this amount is 198,100 Units beneficially owned by
Bob R. Simpson, the Chairman and Chief Executive Officer of Cross Timbers
Oil, who is also a reporting person on the Schedule 13D filed by Cross
Timbers Oil.
(b) Security Ownership of Management. The Trust has no directors or
executive officers. In various fiduciary capacities, NationsBank owned as of
March 7, 1997 an aggregate of 82,497 Units with a shared right to vote 11,287
of these Units and no right to vote 4,433 of these Units. NationsBank
disclaims any beneficial interests in these Units. The number of Units
reflected in this paragraph includes Units held by all branches of
NationsBank.
(c) Changes in Control. The Trustee knows of no arrangements which may
subsequently result in a change in control of the Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In computing royalty income paid to the Trust for the 75% Royalty Trust
Interests, Cross Timbers Oil deducts an overhead charge as reimbursement for
costs associated with monitoring these interests. This charge at December 31,
1996 is $19,057 per month ($228,684 annually) and is subject to annual
adjustment based on an oil and gas industry index.
During 1996, NationsBank of Texas, N.A. received $13,500 for oil and gas
consulting services performed on behalf of the Trust. See Item 11 for the
remuneration received by the Trustee during the years ended December 31, 1996,
1995 and 1994 and Item 12(b) for information concerning Units owned by
NationsBank in various fiduciary capacities.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements (incorporated by reference in Item 8 of this report)
Reports of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus at December 31, 1996
and 1995
Statements of Distributable Income for the years ended December 31,
1996, 1995 and 1994
Statements of Changes in Trust Corpus for the years ended December 31,
1996, 1995 and 1994
Notes to Financial Statements
2.Financial Statement Schedules
Financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
3.Exhibits
(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.
(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.) 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.) 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.
(13) Cross Timbers Royalty Trust Annual Report to security holders for
fiscal year ended December 31, 1996.
(23.1) Consent of Arthur Andersen LLP
(23.2) Consent of Miller and Lents, Ltd.
(27) Financial Data Schedule
Copies of the above Exhibits are available to any Unit holder, at the
actual cost of reproduction, upon written request to the Trustee,
NationsBank of Texas, N.A., P.O. Box 1317, Fort Worth, Texas 76101.
(b) Reports on Form 8-K
During the last quarter of the Trust's fiscal year ended December 31, 1996,
there were no reports filed on Form 8-K by the Trust with the Securities and
Exchange Commission.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1997 By LOUIS G. BALDWIN
-----------------------------------
Louis G. Baldwin
Senior Vice President and
Chief Financial Officer
(The Trust has no directors or executive officers.)
14
<PAGE>
EXHIBIT 13
THE TRUST
Cross Timbers Royalty Trust ("the Trust") was created on February 12, 1991 by
conveyance of 90% net overriding royalty interests in certain royalty and
overriding royalty interest properties in Texas, Oklahoma and New Mexico ("90%
Royalty Trust Interests"), and 75% net overriding royalty interests in certain
working interest properties in Texas and Oklahoma ("75% Royalty Trust
Interests"). These net overriding royalty interests (collectively referred to
as "Royalty Trust Interests") were conveyed to the Trust by predecessors of
Cross Timbers Oil Company ("Cross Timbers Oil") which currently owns the
properties underlying the Royalty Trust Interests ("Underlying Properties").
The Royalty Trust Interests are the only assets of the Trust, other than cash
held for payment of liabilities and for distribution to Unit holders.
Royalty income received monthly by the Trust is calculated and paid by Cross
Timbers Oil based on net proceeds received from the Underlying Properties in the
prior month. Distributions, as calculated by the Trustee, are generally paid to
month-end Unit holders of record within ten business days.
UNITS OF BENEFICIAL INTEREST
The units of beneficial interest ("Units") in the Trust are listed and traded on
the New York Stock Exchange under the symbol "CRT." The following are the high
and low Unit sales prices and total cash distributions per Unit paid by the
Trust during each quarter of 1996 and 1995:
<TABLE>
<CAPTION>
Sales Price Distributions
------------------
High Low per Unit
------- --------- -------------
<S> <C> <C> <C>
1996
- ----------------
First Quarter... $11.000 $ 9.625 $ 0.254087
Second Quarter.. 10.750 9.750 0.309984
Third Quarter... 12.500 10.375 0.299200
Fourth Quarter.. 15.750 11.750 0.482891
1995
- ----------------
First Quarter... $11.625 $ 9.500 $ 0.251490
Second Quarter.. 11.875 10.500 0.281357
Third Quarter... 11.000 9.750 0.198205
Fourth Quarter.. 10.625 9.625 0.198653
</TABLE>
At December 31, 1996, there were 6,000,000 Units outstanding and approximately
205 Unit holders of record; 5,230,870 of these Units were held by two depository
institutions. As of February 28, 1997, Cross Timbers Oil owned 1,073,900 Units.
1
<PAGE>
SUMMARY
The Trust was created to collect and distribute monthly royalty income to Unit
holders. Trust royalty income is received from two major components, the 90%
Royalty Trust Interests and the 75% Royalty Trust Interests.
- THE 90% ROYALTY TRUST INTERESTS were carved from royalty and overriding
royalty interests in producing properties in Texas, Oklahoma and New Mexico
("the underlying royalty interest properties"). Most royalty income is
from long-lived gas properties in the San Juan Basin of northwestern New
Mexico. Because the 90% Royalty Trust Interests are not subject to
production or development costs, royalty income from these interests
generally only varies because of changes in sales volumes or prices.
- THE 75% ROYALTY TRUST INTERESTS were carved from working interests in seven
large, predominantly oil-producing properties in Texas and Oklahoma ("the
underlying working interest properties"). Royalty income from these
properties is reduced by production and development costs. For most of
1994, all or a portion of the 75% Royalty Trust Interests did not
contribute to Trust royalty income because costs exceeded revenues from the
underlying working interest properties. Such excess costs generally occur
during periods of higher development activity and lower oil prices.
Unit holders may also be eligible to receive the following tax benefits. Unit
holders should consult their tax advisors.
- THE NONCONVENTIONAL FUEL SOURCE TAX CREDIT is related to coal seam gas
production through the year 2002 from wells drilled after December 31, 1979
and prior to January 1, 1993 underlying the 90% Royalty Trust Interests.
Unit holders are entitled to this tax credit (also referred to as "coal
seam tax credit") which may be used to reduce the Unit holder's regular
income tax liability.
- COST DEPLETION is generally available to Unit holders as a deduction from
royalty income. Available depletion is dependent upon the Unit holder's
cost of Units, purchase date and prior allowable depletion.
As an example, a Unit holder that acquired Units in January 1996 and
held them throughout 1996 would be entitled to a cost depletion
deduction of approximately 10%. Assuming cost of $11 per Unit, cost
depletion would offset 78% of taxable Trust income. After considering
the coal seam tax credit and assuming a 30% tax rate, the 1996 pre-tax
yield of Units would be 18.8%. (NOTE- Because the Units are a depleting
asset, a portion of this yield is effectively a return of capital.)
The following summarizes the effect of the above components on distributions per
Unit for the last three years:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
MONTHLY ANNUAL Monthly Annual Monthly Annual
AVERAGE TOTAL Average Total Average Total
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Royalty Income
- - 90% Royalty Trust Interests.. $ .091 $1.095 $ .064 $ .766 $ .092 $1.103
- - 75% Royalty Trust Interests.. .024 .283 .016 .191 .004 .053
Administration expense
(net of interest income)..... (.003) (.032) (.002) (.027) (.002) (.031)
------ ------ ------ ------ ------ ------
Total Distribution............. $ .112 $1.346 $ .078 $ .930 $ .094 $1.125
====== ====== ====== ====== ====== ======
Nonconventional Fuel
Source Tax Credit......... * $ .189 * $ .180 * $ .203
====== ====== ======
* - Not applicable
</TABLE>
2
<PAGE>
TO UNIT HOLDERS
We are pleased to present the 1996 Annual Report of Cross Timbers Royalty Trust
and the Trust's 1996 Form 10-K. Both of these reports contain important
information about the Royalty Trust Interests, including information provided to
the Trustee by Cross Timbers Oil, and should be read in conjunction with each
other.
For the year ended December 31, 1996, Trust royalty income and distributable
income reached historical highs since the Trust's inception in February 1991.
Royalty income for the year totaled $8,269,875 and, after deducting Trust
administration expense, net of interest income, distributable income was
$8,076,964 or $1.346162 per Unit. Royalty income and distributions are 44%
higher than 1995 comparable amounts because of increased gas sales volumes,
primarily related to a lawsuit settlement, and higher oil and gas sales prices.
Gas sales volumes from the Underlying Properties for the year ended December 31,
1996 increased 25% from 1995, to a total of 4,385,360 Mcf. Increased gas
volumes are primarily the result of the settlement in November of a lawsuit that
Cross Timbers Oil and the Trust had filed against working interest owners that
had suspended revenues from certain wells in the San Juan Basin. Additionally,
San Juan Basin production was partially curtailed in 1995 because of low gas
prices.
As a result of this lawsuit settlement, Cross Timbers Oil received $750,000 in
exchange for reducing its 7.5% overriding royalty interest in the related
properties to a 1.875% interest. The Trust's portion of the settlement was
$675,000. Gas sales volumes from the underlying properties attributed to the
settlement were 609,000 Mcf. Because revenues from these properties have been
suspended since 1990, future Trust distributions will not be reduced from
historical levels by this settlement. For further information regarding
litigation involving the Trust, see Item 3 of the accompanying Form 10-K.
The average Trust oil price increased to $18.60 per barrel ("Bbl"), up 22% from
the 1995 price of $15.25. Natural gas prices averaged $1.51 per thousand cubic
feet ("Mcf") for 1996 sales from the Underlying Properties, or 16% above the
1995 average price of $1.30 per Mcf. Because of the interval between time of
production and receipt of royalty income by the Trust, the significant rise in
oil prices that began in March 1996 did not begin to positively impact Trust
average prices and distributable income until May. In addition, San Juan Basin
gas prices that began to strengthen in July 1996 did not begin to positively
impact Trust average prices and distributable income until October.
Oil sales volumes from the Underlying Properties during 1996 were 436,800 Bbls,
or 1% below 1995 levels because of natural decline in production. Natural
decline was largely offset by production increases resulting from infill
drilling on some of the working interest properties.
Coal seam gas sales volumes from the Underlying Properties were 1,368,058 Mcf in
1996, or 4% above 1995 coal seam gas volumes. The resulting 1996 coal seam tax
credit was $0.189374 per Unit. This credit (or a portion thereof, if Units were
held less than the full year) is available to be applied against the Unit
holder's regular federal income tax liability, subject to certain limitations.
Unit holders should consult their tax advisors regarding use of this credit.
As of December 31, 1996, proved reserves of the Royalty Trust Interests were
estimated by independent engineers to be 2,486,000 Bbls of oil and 40.4 billion
cubic feet ("Bcf") of natural gas. Estimated oil reserves increased 28% from
year-end 1995 to 1996 primarily as a result of the increase in year-end oil
prices from $18.00 to $24.25 per Bbl. Gas reserves decreased 2% from year-end
1995 to 1996 primarily because of production, largely offset by increased
estimates for San Juan Basin reserves underlying the 90% Royalty Trust
Interests. All reserve information prepared by independent engineers has been
provided to the Trustee by Cross Timbers Oil.
Estimated future net revenues from proved reserves at December 31, 1996 are $154
million or $25.72 per Unit. Using an annual discount factor of 10%, the present
value of estimated future net revenues at December 31, 1996 is $77 million or
$12.81 per Unit. Proved reserve estimates and related future net revenues have
been determined based on year-end oil and gas prices, as well as other
guidelines prescribed by the Financial Accounting Standards Board as further
described under Item 2 of the accompanying Form 10-K.
As discussed in the Tax Instructions provided to Unit holders in February 1997,
Trust distributions are considered portfolio income, rather than passive income.
Unit holders should consult their tax advisors for further information.
NationsBank of Texas, N.A., Trustee
By: Joe B. Grissom
Joe B. Grissom
Vice President
3
<PAGE>
THE UNDERLYING PROPERTIES
The Underlying Properties include over 2,900 producing properties with
established production histories in Texas, Oklahoma and New Mexico. The average
reserve-to-production index for the Underlying Properties as of December 31,
1996 is approximately 13 years for oil and 12 years for gas. The reserve-to-
production index is calculated using total proved reserves and estimated 1997
production for the Underlying Properties. Based on discounted future net
revenues at year-end oil and gas prices, the proved reserves of the Underlying
Properties are approximately 38% oil and 62% natural gas. The Underlying
Properties also include certain non-producing properties in Texas, Oklahoma and
New Mexico. Cross Timbers Oil owns a mineral interest in most of these non-
producing properties.
90% ROYALTY TRUST INTERESTS
Royalty and overriding royalty properties underlying the 90% Royalty Trust
Interests represent 71% of the discounted future net cash flows from the Trust's
proved reserves at December 31, 1996. Approximately 85% of the discounted
future net cash flows from the 90% Royalty Trust Interests is from gas reserves,
totaling 39.7 Bcf. Primarily located in West Texas, oil reserves underlying the
90% Royalty Trust Interests are estimated at December 31, 1996 to be 681,000
Bbls.
Because the properties underlying the 90% Royalty Trust Interests are royalties
and overriding royalties, royalty income from these properties is not reduced by
production and development costs. Additionally, royalty income from these
interests cannot be reduced by any excess costs of the 75% Royalty Trust
Interests. The Trust therefore should generally receive monthly royalty income
from these interests, as determined by oil and gas sales volumes and prices.
Most of the Trust's gas reserves are located in the San Juan Basin of
northwestern New Mexico, one of the United States' largest natural gas fields.
Royalties underlying the San Juan Basin provided approximately 80% of Trust 1996
gas sales volumes and 50% of Trust 1996 royalty income. As of December 31,
1996, the Trust's proved reserves in this region are estimated to be 33.3 Bcf,
or 82% of total Trust gas reserves.
Until January 1, 2003, production from coal seam wells drilled after December
31, 1979 and before January 1, 1993 qualifies for the federal income tax credit
under Section 29 of the Internal Revenue Code for nonconventional fuel sources.
Such credit for 1996 coal seam gas sales from the San Juan Basin was
approximately $1.03 per MMBtu or $0.189374 per Unit. As of December 31, 1996,
the Trust's proved coal seam reserves are estimated to be 6.4 Bcf.
Exploitation of coal seam gas reserves was the most significant recent
development activity in the San Juan Basin until the drilling period for the
federal income tax credit expired on January 1, 1993. Since that date, major
operators in the San Juan Basin have continued to report development of coal
seam gas reserves without the incentive of the federal income tax credit,
although it is not known whether any of this development activity has directly
affected Trust reserves or production. The most significant activity in the San
Juan Basin during 1996 was the completion of additional eastward pipeline
capacity, reducing the dependence of San Juan Basin gas on California markets.
75% ROYALTY TRUST INTERESTS
Underlying the 75% Royalty Trust Interests are working interests in seven large
properties in Texas and Oklahoma operated primarily by major oil companies.
Each of these properties is located in mature fields that are undergoing
secondary recovery operations. With its relatively minor working interest,
Cross Timbers Oil generally has little influence or control over operations on
any of these properties.
Proved reserves from the 75% Royalty Trust Interests are almost entirely oil,
estimated to be approximately 1,805,000 Bbls at year-end 1996. Based on year-
end oil and gas prices, proved reserves from these interests represent 29% of
the discounted future net cash flows of the Trust's proved reserves at December
31, 1996.
Because these Underlying Properties are working interests, production and
development costs are deducted in calculating royalty income from the 75%
Royalty Trust Interests. As a result, royalty income from these interests is
affected by the level of maintenance and development activity on these
Underlying Properties. Royalty income is also subject to reduction for any
prior period excess costs and is dependent upon oil sales volumes and prices.
Total 1996 development costs were $1,164,112, or 55% above 1995 development
costs of $750,315. Most of 1996 development costs were related to infill
drilling projects that began in December 1995. Unit operators have reported to
Cross Timbers Oil that total budgeted costs are approximately $700,000, net to
Cross Timbers Oil's interests, for each of 1997 and 1998. Budgeted development
costs were $800,000 for each of 1996 and 1995.
4
<PAGE>
ESTIMATED PROVED RESERVES AND FUTURE NET REVENUES
The following are proved reserves and future net revenues from proved reserves
of the Royalty Trust Interests at December 31, 1996, as estimated by independent
engineers (in thousands):
<TABLE>
<CAPTION>
Estimated Proved Reserves (a)(b) Estimated Future Net Revenues
----------------------------------
Oil Gas from Proved Reserves (a)(c)
-----------------------------
(Bbls) (Mcf) Undiscounted Discounted
---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
90% ROYALTY TRUST INTERESTS
San Juan Basin
Conventional........... 91 26,837 $ 64,363 $27,056
Coal seam.............. - 6,439 14,358 9,412
----- ------ -------- -------
Total............... 91 33,276 78,721 36,468
Other New Mexico......... 42 379 2,010 1,112
Texas.................... 459 3,933 22,627 12,576
Oklahoma................. 89 2,093 8,331 4,728
----- ------ -------- -------
Total............ 681 39,681 111,689 54,884
----- ------ -------- -------
75% ROYALTY TRUST INTERESTS
Texas.................... 998 441 24,029 11,342
Oklahoma................. 807 249 18,597 10,621
----- ------ -------- -------
Total............ 1,805 690 42,626 21,963
----- ------ -------- -------
TOTAL............ 2,486 40,371 $154,315 $76,847
===== ====== ======== =======
</TABLE>
(a) Based on year-end oil and gas prices. For further information regarding
Trust proved reserves, see Item 2 of the accompanying Form 10-K.
(b) Since the Trust has defined net profits interests, the Trust does not own a
specific ownership percentage of the oil and gas reserves. 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 Royalty Trust
Interests.
(c) Before income taxes (and the tax benefit of the estimated coal seam tax
credit) since future net revenues are not subject to taxation at the trust
level.
5
<PAGE>
TRUSTEE'S DISCUSSION AND ANALYSIS
Royalty income for 1996 was $8,269,875, as compared with $5,739,704 for 1995 and
$6,934,038 for 1994. The 44% increase in royalty income from 1995 to 1996 was
primarily because of higher oil and gas prices and increased gas sales volumes
related to a lawsuit settlement. The 17% decline in royalty income from 1994 to
1995 was primarily because of lower gas prices and gas sales volumes. During
1996 and 1995, 64% and 62%, respectively, of royalty income was derived from gas
sales, as compared to 80% in 1994.
Trust administration expense was $204,449 in 1996 as compared to $169,501 and
$192,443 for 1995 and 1994, respectively. Interest income was $11,538, $8,024
and $7,281 during 1996, 1995 and 1994, respectively.
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.
Volumes
Underlying oil sales volumes decreased 1% from 1995 to 1996, as compared to a 6%
decline from 1994 to 1995. These decreases were primarily attributable to
natural production decline. The decline from 1995 to 1996 was largely offset by
production increases related to infill drilling on some of the underlying
working interest properties.
Underlying gas sales volumes increased 25% from 1995 to 1996, compared with a
16% decrease from 1994 to 1995. The increase in gas sales volumes from 1995 to
1996 was primarily because of 609,000 Mcf attributed to the settlement of a
significant lawsuit in 1996 (see Item 3 of the accompanying Form 10-K), combined
with the effect of partially curtailed production in 1995 because of lower
prices. The decrease in gas sales volumes from 1994 to 1995 was primarily
because of suspended revenues received in 1994 following partial settlement of a
lawsuit, as well as initial receipts in 1994 from two significant coal seam
wells.
Prices
The 1996 average oil price of $18.60 was 22% higher than the 1995 average oil
price of $15.25, which was 11% higher than the 1994 average price of $13.76.
After remaining weak for most of this three-year period, oil prices began to
rise significantly in March 1996. Because of the two-month lag between oil
production and receipt of payment by the Trust, improved oil prices did not
begin to affect the Trust until May 1996. Also because of this lag, the 1994
average price includes the full impact of the sharp fall in oil prices at year-
end 1993.
The 1996 average gas price was $1.51, or 16% above the 1995 average gas price of
$1.30, which was 23% below the 1994 average price of $1.69. Average gas prices
remained depressed for most of this three-year period, primarily because of gas
oversupplies in California, the primary market for San Juan Basin gas. During
third quarter 1996, however, San Juan Basin prices rose to two-year highs,
reflecting the impact of increased demand and reduced supplies in the California
market, as well as the effects of new eastward bound pipeline capacity from the
San Juan Basin. Gas prices further improved in the fourth quarter of 1996 with
increased weather-related demand. Because of the three-month interval between
gas production and receipt of royalty income by the Trust, higher fourth quarter
gas prices did not impact Trust average gas prices until first quarter 1997.
Costs
Because properties underlying the 90% Royalty Trust Interests are royalty and
overriding royalty interests, the calculation of royalty income from these
interests only includes cost deductions for production and property taxes,
related legal costs, and marketing and transportation charges. In addition to
these costs, the calculation of royalty income from the 75% Royalty Trust
Interests includes deductions for production and development costs since the
related Underlying Properties are working interests. If monthly costs exceed
revenues for any of the five conveyances under which the Royalty Trust Interests
were conveyed to the Trust, such excess costs cannot reduce royalty income from
other conveyances, but must be recovered, with accrued interest, from future net
proceeds of that conveyance.
Total costs deducted in the calculation of royalty income were $5,183,440,
$4,651,132 and $5,723,056 during 1996, 1995 and 1994, respectively. The 11%
increase in costs from 1995 to 1996 was primarily the result of increased
development and production expenses related to infill drilling projects that
began in December 1995 on certain properties underlying the 75% Royalty Trust
Interests, partially offset by a decrease in charges related to a 1995
waterflood expansion project. Production taxes also increased because of higher
oil and gas sales. The 19% decrease in costs from 1994 to 1995 was primarily
the result of completed infill drilling projects and reduced production expenses
on certain properties underlying the 75% Royalty Trust Interests. Production
expenses generally fluctuate with the timing of major maintenance projects.
Costs for the year ended December 31, 1994 also include the recovery of 1993
excess costs and accrued interest on such costs totaling $131,248.
6
<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>
Year Ended December 31 (a)
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OIL SALES (Bbls):
Underlying Properties (b)....... 436,800 440,568 466,664
Average per day.............. 1,193 1,207 1,279
Average price per Bbl........ $ 18.60 $ 15.25 $ 13.76
Royalty Trust Interests (b)(c).. 168,415 149,124 100,289
GAS SALES (Mcf):
Underlying Properties (b)....... 4,385,360 3,512,954 4,178,665
Average per day.............. 11,982 9,625 11,448
Average price per Mcf........ $ 1.51 $ 1.30 $ 1.69
Royalty Trust Interests (b)..... 3,828,947 2,991,504 3,555,567
</TABLE>
(a) Because of the interval between time of production and receipt of royalty
income by the Trust, oil and gas sales for the year ended December 31
generally relate to oil production from November through October and gas
production from October through September.
(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 analysis of oil and
gas sales is based on the Underlying Properties.
(c) Fewer oil sales volumes were allocated to the 75% Royalty Trust Interests
in 1994 because of higher development costs and lower oil prices. Oil
sales volumes allocated to the 75% Royalty Trust Interests were 90,729
Bbls, 77,795 Bbls and 21,716 Bbls in 1996, 1995 and 1994, respectively.
CALCULATION OF ROYALTY INCOME
The following is a summary of the calculation of royalty income received by the
Trust:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------
1996 1995 1994
----------------------- ------------------------ ------------------------
90% 75% 90% 75% 90% 75%
ROYALTY ROYALTY Royalty Royalty Royalty Royalty
TRUST TRUST Trust Trust Trust Trust
INTERESTS INTERESTS Interests Interests Interests Interests
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil sales................. $1,663,559 $6,460,678 $1,379,926 $5,339,255 $1,353,908 $5,067,569
Gas sales................. 6,413,846 211,960 4,409,674 153,689 6,930,794 145,506
---------- ---------- ---------- ---------- ---------- ----------
Total................... 8,077,405 6,672,638 5,789,600 5,492,944 8,284,702 5,213,075
---------- ---------- ---------- ---------- ---------- ----------
COSTS
Taxes on production and
property................. 734,521 534,735 619,914 599,120 800,102 574,113
Production and other
expenses................. 43,399 2,706,673 62,051 2,619,561 131,282 3,014,257
Development costs......... - 1,164,112 - 750,315 - 1,072,054
Net excess cost recovery
and interest............. - - - 171 - 131,248
---------- ---------- ---------- ---------- ---------- ----------
Total................... 777,920 4,405,520 681,965 3,969,167 931,384 4,791,672
---------- ---------- ---------- ---------- ---------- ----------
NET PROCEEDS............... 7,299,485 2,267,118 5,107,635 1,523,777 7,353,318 421,403
Net Profits Percentage..... 90% 75% 90% 75% 90% 75%
---------- ---------- ---------- ---------- ---------- ----------
ROYALTY INCOME............. $6,569,536 $1,700,339 $4,596,871 $1,142,833 $6,617,986 $ 316,052
========== ========== ========== ========== ========== ==========
</TABLE>
7
<PAGE>
RESULTS OF 4TH QUARTER
During the quarter ended December 31, 1996, the Trust received royalty income
totaling $2,928,035 and reported distributable income of $2,897,347, or $.482891
per Unit. Distributions were $.111382, $.141741, and $.229768 per Unit to Unit
holders of record on October 31, November 29 and December 31, respectively.
Fourth quarter 1995 royalty income was $1,212,104 and distributable income was
$1,191,919 or $.198653 per Unit.
Higher fourth quarter 1996 royalty income was primarily because of the receipt
of $675,000 related to the settlement of a lawsuit. Additionally, fourth
quarter 1995 royalty income was reduced primarily because of lower gas prices
and price-curtailed San Juan Basin production. Administration expense and
interest income for fourth quarter 1996 were $34,846 and $4,158, respectively,
compared with fourth quarter 1995 amounts of $21,926 and $1,740, respectively.
Fourth quarter underlying oil sales volumes declined 2% from 1995 to 1996 as a
result of natural decline and timing of cash receipts. Underlying gas sales
volumes increased 679,819 Mcf or 84%, primarily because of an additional 609,000
Mcf in fourth quarter 1995 related to a lawsuit settlement (see Item 3 of the
accompanying Form 10-K). The remaining increase in gas sales volumes is the
result of the timing of cash receipts and the effect of price-curtailed
production in fourth quarter 1995.
The average fourth quarter 1996 oil price was $21.28 or 45% above the fourth
quarter 1995 average price of $14.65, reflecting the significant rise in oil
prices that began in March 1996. The average fourth quarter gas price was $1.64
per Mcf in 1996 as compared to $1.16 in 1995. The low 1995 gas price was the
result of gas oversupplies in California, the primary market for San Juan Basin
gas, and unseasonably warm weather. Improved fourth quarter 1996 prices are
primarily due to improved California market conditions and increased eastward
bound pipeline capacity out of the San Juan Basin.
Total costs deducted in the calculation of royalty income increased $212,080 or
19% from fourth quarter 1995 to 1996. Increased costs are primarily related to
infill drilling projects that began in December 1995 on some of the underlying
working interest properties, partially offset by a decrease in charges related
to a 1995 waterflood expansion project.
COMPARATIVE OIL AND GAS SALES
Fourth quarter 1996 and 1995 oil and gas sales attributable to the Underlying
Properties and the Royalty Trust Interests are as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31 (a)
----------------------------
1996 1995
------------- --------------
<S> <C> <C>
OIL SALES (Bbls):
Underlying Properties.... 108,158 110,087
Average per day......... 1,176 1,197
Average price per Bbl... $ 21.28 $ 14.65
Royalty Trust Interests.. 48,117 34,733
GAS SALES (Mcf):
Underlying Properties.... 1,487,181 807,362
Average per day......... 16,165 8,776
Average price per Mcf... $ 1.64 $ 1.16
Royalty Trust Interests.. 1,315,680 689,174
</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 December 31
generally relate to oil production from August through October and gas
production from July through September.
8
<PAGE>
CROSS TIMBERS ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Assets
Cash and short-term investments.................. $ 1,376,687 $ 428,610
Interest to be received.......................... 1,924 640
Net overriding royalty interests in oil and gas
properties - net (Notes 1 and 2)............... 41,337,673 45,118,209
----------- -----------
$42,716,284 $45,547,459
=========== ===========
Liabilities and Trust Corpus
Distribution payable to Unit holders............. $ 1,378,611 $ 429,250
Trust corpus (6,000,000 Units of beneficial
interest authorized and outstanding)........... 41,337,673 45,118,209
----------- -----------
$42,716,284 $45,547,459
=========== ===========
</TABLE>
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Royalty income.................. $8,269,875 $5,739,704 $6,934,038
Interest income................. 11,538 8,024 7,281
---------- ---------- ----------
Total income................... 8,281,413 5,747,728 6,941,319
Administration expense.......... 204,449 169,501 192,443
---------- ---------- ----------
Distributable income........... $8,076,964 $5,578,227 $6,748,876
========== ========== ==========
Distributable income per Unit
(6,000,000 Units)............. $1.346162 $0.929705 $ 1.124811
========== ========== ==========
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Trust Corpus,
beginning of year............. $45,118,209 $48,731,991 $52,085,504
Amortization of net
overriding royalty
interests..................... (3,780,536) (3,613,782) (3,353,513)
Distributable income............ 8,076,964 5,578,227 6,748,876
Distributions declared.......... (8,076,964) (5,578,227) (6,748,876)
----------- ----------- -----------
Trust Corpus,
end of year................... $41,337,673 $45,118,209 $48,731,991
=========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
9
<PAGE>
CROSS TIMBERS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
1. TRUST ORGANIZATION AND PROVISIONS
Cross Timbers Royalty Trust ("Trust") was created on February 12, 1991 by
predecessors of Cross Timbers Oil Company ("Cross Timbers Oil"), when the
following interests ("Royalty Trust Interests") were conveyed under five
separate conveyances to the Trust effective October 1, 1990, in exchange for
6,000,000 units of beneficial interest in the Trust ("Units"):
- net overriding royalty interests equivalent to 90% defined net profits
interests in certain producing and nonproducing royalty interest
properties in Texas, Oklahoma and New Mexico ("90% Royalty Trust
Interests"), and
- net overriding royalty interests equivalent to 75% defined net profits
interests in certain non-operated working interest properties in Texas
and Oklahoma ("75% Royalty Trust Interests").
The properties from which the Royalty Trust Interests were carved
("Underlying Properties") are currently owned by Cross Timbers Oil. NationsBank
of Texas, N.A. is the Trustee of 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 Royalty Trust Interests;
- the Trust may not sell or otherwise dispose of all or any part of the
Royalty Trust Interests unless approved by at least 80% of the Unit
holders, or upon termination of the Trust, and any such sale must be
for cash with the proceeds promptly distributed to the Unit holders;
- the Trustee may establish a cash reserve for payment of any liability
which is contingent, uncertain in amount or that is not currently
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 Unit holders;
- the Trustee will make monthly cash distributions to Unit holders as
provided in the Trust Indenture (Note 3); and
- the Trust will terminate upon the first occurrence of: i) disposition
of all Royalty Trust Interests pursuant to terms of the Trust
Indenture, ii) when gross revenue of the Trust is less than $1 million
per year for two successive years, or iii) a vote of at least 80% of
the Trust Unit holders to terminate the Trust in accordance with
provisions of the Trust Indenture.
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:
- Royalty income is recorded in the month received by the Trustee (Note
3).
- Interest income, interest to be received and distribution payable to
Unit holders include interest to be earned on royalty income from the
monthly record date (last business day of the month) through the date
of the next distribution.
- Trust expenses are recorded based on liabilities paid and cash
reserves established by the Trustee.
- Distributions to Unit holders are recorded when declared by the
Trustee (Note 3).
The most significant differences between the Trust's financial statements
and those prepared in accordance with generally accepted accounting principles
are i) royalty income is recognized in the month received rather than accrued in
the month of production, ii) expenses are recognized when paid rather than when
incurred and iii) cash reserves may be established by the Trustee for certain
contingencies which would not be recorded under generally accepted accounting
principles.
The initial carrying value of the Royalty Trust Interests of $61,100,449
was Cross Timbers Oil's historical net book value on February 12, 1991, the date
of the transfer to the Trust. Amortization of the Royalty Trust Interests is
calculated on a unit-of-production basis and charged directly to trust corpus.
Accumulated amortization as of December 31, 1996 and 1995 was $19,762,776 and
$15,982,240, respectively.
3. DISTRIBUTIONS TO UNIT HOLDERS
The Trustee determines the amount to be distributed to Unit holders each
month by totaling royalty income and other cash receipts, and subtracting
liabilities paid and adjustments in cash reserves established by the Trustee.
The resulting amount (with estimated interest to be received on such amount
through the distribution date) is distributed to Unit holders 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 consists of the amounts received by
owners of the Underlying Properties from the sale of production, less applicable
costs, multiplied by 90% or 75% for the 90% or 75% Royalty Trust Interests,
respectively. For the 90%
10
<PAGE>
Royalty Trust Interests, such costs generally include applicable taxes,
transportation, legal and marketing charges, and do not include other production
and development costs. For the 75% Royalty Trust Interests, such costs include
production costs, development and drilling costs, applicable taxes, operating
charges and other costs.
Cross Timbers Oil, as owner of the Underlying Properties, computes royalty
income separately for each of the five conveyances. If costs exceed receipts
("excess costs") 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 excess costs; however, future royalty income from the Royalty Trust
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, Unit holders 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 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
in 1996, applies to qualified production through the year 2002. Such credit,
based on the Unit holder's pro rata share of qualifying production, may not
reduce the Unit holder's 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.
5. CROSS TIMBERS OIL COMPANY
In computing royalty income paid to the Trust for the 75% Royalty Trust
Interests (Note 3), Cross Timbers Oil deducts an overhead charge as
reimbursement for costs associated with monitoring these interests. This charge
at December 31, 1996 is $19,057 per month ($228,684 annually) and is subject to
annual adjustment based on an oil and gas industry index.
Since Cross Timbers Oil does not operate any of the properties from which
the Royalty Trust Interests were carved, it generally has little control or
influence over the operation of such properties. As of February 28, 1997, Cross
Timbers Oil owned 17.9% of the outstanding Trust Units.
6. LITIGATION
In November 1996, the Trust and Cross Timbers Oil settled a lawsuit with
working interest owners that had suspended revenues from certain wells in the
San Juan Basin. The case is being dismissed as agreed in the settlement. As a
result of this settlement, Cross Timbers Oil received $750,000 in exchange for
reducing its 7.5% overriding royalty interest in these properties to a 1.875%
interest. The Trust received $675,000 as its portion of this settlement.
Because revenues from these properties have been suspended since 1990, future
Trust distributions will not be reduced from historical levels by this
settlement. The settlement's estimated impact on the discounted future net cash
flows from the Trust's proved reserves was not material.
For further information regarding legal proceedings of the Trust, see Item
3 of the Trust's annual report on Form 10-K, which is included in this report.
7. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Proved oil and gas reserve information is included in Item 2 of the Trust's
annual report on Form 10-K which is included in this report.
8. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of royalty income, distributable income and
distributable income per Unit by quarter for 1996 and 1995:
<TABLE>
<CAPTION>
Distributable
Royalty Distributable Income
Income Income per Unit
---------- ------------- -------------
<S> <C> <C> <C>
1996
- ----
First Quarter... $1,557,678 $1,524,518 $0.254087
Second Quarter.. 1,910,966 1,859,900 0.309984
Third Quarter... 1,873,196 1,795,199 0.299200
Fourth Quarter.. 2,928,035 2,897,347 0.482891
---------- ---------- ---------
$8,269,875 $8,076,964 $1.346162
========== ========== =========
1995
- ----
First Quarter... $1,550,723 $1,508,939 $0.251490
Second Quarter.. 1,738,291 1,688,144 0.281357
Third Quarter... 1,238,586 1,189,225 0.198205
Fourth Quarter.. 1,212,104 1,191,919 0.198653
---------- ---------- ---------
$5,739,704 $5,578,227 $0.929705
========== ========== =========
</TABLE>
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NATIONSBANK OF TEXAS, N.A., AS TRUSTEE FOR THE CROSS TIMBERS ROYALTY TRUST:
We have audited the accompanying statements of assets, liabilities and trust
corpus of the Cross Timbers Royalty Trust ("Trust") as of December 31, 1996 and
1995, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Trustee. 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 statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Trustee, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, these financial statements
were prepared on a modified cash basis, which is a comprehensive basis of
accounting other than generally accepted accounting principles.
In our opinion, such financial statements present fairly, in all material
respects, the assets, liabilities and trust corpus of the Trust as of December
31, 1996 and 1995 and the distributable income and changes in trust corpus for
each of the three years in the period ended December 31, 1996, on the modified
cash basis of accounting described in Note 2.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 13, 1997
- --------------------------------------------------------------------------------
CROSS TIMBERS ROYALTY TRUST
500 West Seventh Street, Suite 1300
P.O. Box 1317
Fort Worth, Texas 76101-1317
(817) 390-6592
NationsBank of Texas, N.A., Trustee
A copy of the Cross Timbers Royalty Trust Form 10-K
has been provided with this Annual Report. Additional copies
of this Annual Report and Form 10-K will be provided to
Unit holders without charge upon request.
AUDITORS
- --------
Arthur Andersen LLP
Fort Worth, Texas
LEGAL COUNSEL
- -------------
Boswell & Kober, P.C.
Fort Worth, Texas
TAX COUNSEL
- -----------
Butler & Binion, L.L.P.
Houston, Texas
TRANSFER AGENT AND REGISTRAR
- ----------------------------
Chemical Mellon Shareholder Services, L.L.C.
Dallas, Texas
12
<PAGE>
EXHIBIT 23.1
INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
Cross Timbers Royalty Trust
Fort Worth, Texas
As independent public accountants, we hereby consent to the incorporation by
reference in the Post-Effective Amendment No. 1 to the Registration Statement
No. 33-55784 of Cross Timbers Oil Company on Form S-8 of our report dated March
13, 1997, included in the Annual Report on Form 10-K of Cross Timbers Royalty
Trust for the year ended December 31, 1996.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 28, 1997
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE]
March 28, 1997
Cross Timbers Royalty Trust
500 West 7th Street
P.O. Box 1317
Fort Worth, TX 76102
Re: Cross Timbers Royalty Trust
1996 Annual Report on Form 10-K
Gentlemen:
The firm of Miller and Lents, Ltd., consents to the use of its name and to
the use of its report dated March 11, 1997, regarding the Cross Timbers Royalty
Trust Proved Reserves and Future Net Revenue as of January 1, 1997, in the 1996
Annual Report on Form 10-K.
Miller and Lents, Ltd., has no interests in the Cross Timbers Royalty Trust
or in any affiliated companies or subsidiaries and is not to receive any such
interest as payment for such reports and has no director, officer, or employee
otherwise connected with Cross Timbers Royalty Trust. We are not employed by
Cross Timbers Royalty Trust on a contingent basis.
Yours very truly,
MILLER AND LENTS, LTD.
By /s/ James C. Pearson
------------------------------
James C. Pearson
President
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<PERIOD-START> JAN-01-1996
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