<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended March 31, 1998
--------------
Commission File No. 1-10982
-------
CROSS TIMBERS ROYALTY TRUST
Texas I.R.S. No. 75-6415930
NationsBank, N.A.
P.O. Box 1317
Fort Worth, Texas 76101-1317
Telephone Number 817/390-6592
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Number of units of beneficial interest outstanding at May 1, 1998: 6,000,000
---------
<PAGE>
CROSS TIMBERS ROYALTY TRUST
PART I - FINANCIAL STATEMENTS
- -----------------------------
Item 1. Financial Statements.
The condensed financial statements included herein are presented, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted pursuant to such rules and
regulations, although the Trustee believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Trust's latest annual report on Form 10-K. In the
opinion of the Trustee, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the assets, liabilities and trust
corpus of the Cross Timbers Royalty Trust at March 31, 1998, and the
distributable income and changes in trust corpus for the three-month periods
ended March 31, 1998 and 1997, have been included. Distributable income for
such interim periods is not necessarily indicative of the distributable income
for the full year.
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NationsBank, N.A., as Trustee
for the Cross Timbers Royalty Trust:
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the Cross Timbers Royalty Trust as of March 31, 1998 and the
related condensed statements of distributable income and changes in trust corpus
for the three-month periods ended March 31, 1998 and 1997. These financial
statements are the responsibility of the Trustee.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
The accompanying condensed financial statements are prepared on a modified cash
basis as described in Note 1 which is a comprehensive basis of accounting other
than generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
the basis of accounting described in Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Cross
Timbers Royalty Trust as of December 31, 1997 included in the Trust's 1997
annual report on Form 10-K, and in our report dated March 18, 1998, we expressed
an unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying condensed statement of assets, liabilities and trust
corpus as of December 31, 1997 is fairly stated in all material respects in
relation to the statement of assets, liabilities and trust corpus included in
the Trust's 1997 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 7, 1998
3
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and short-term investments.................. $ 536,526 $ 662,486
Interest to be received.......................... 885 1,065
Net overriding royalty interests in oil and gas
properties - net (Note 1)...................... 37,423,696 38,104,367
----------- ------------
$37,961,107 $ 38,767,918
=========== ============
LIABILITIES AND TRUST CORPUS
Distribution payable to Unit holders............. $ 537,411 $ 663,551
Trust corpus (6,000,000 Units of beneficial
interest authorized and outstanding)........... 37,423,696 38,104,367
----------- ------------
$37,961,107 $ 38,767,918
=========== ============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
4
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Royalty income.................................. $2,335,418 $3,114,590
Interest income................................. 3,771 4,350
---------- ----------
Total income.................................... 2,339,189 3,118,940
Administration expense.......................... 44,220 49,405
---------- ----------
Distributable income............................ $2,294,969 $3,069,535
========== ==========
Distributable income per Unit (6,000,000 Units) $ 0.382494 $ 0.511589
========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
5
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Trust Corpus, beginning of period................. $38,104,367 $41,337,673
Amortization of net overriding royalty interests.. (680,671) (849,382)
Distributable income.............................. 2,294,969 3,069,535
Distributions declared............................ (2,294,969) (3,069,535)
----------- -----------
Trust Corpus, end of period....................... $37,423,696 $40,488,291
=========== ===========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
6
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF ACCOUNTING
The financial statements of Cross Timbers Royalty Trust ("the Trust") are
prepared on the following basis:
- Royalty income recorded for a month is the amount computed and paid by
the interest owner, Cross Timbers Oil Company ("Cross Timbers Oil"), to
NationsBank, N.A. ("Trustee"), as Trustee for the Trust. Royalty income
consists of the amounts received by Cross Timbers Oil from the sale of
production less applicable costs ("net proceeds") from the properties
underlying the net overriding royalty interests ("Royalty Trust
Interests") conveyed to the Trust. Net proceeds are multiplied by net
profit percentages of 90% in the case of Royalty Trust Interests carved
from certain royalty interests in New Mexico, Oklahoma and Texas ("90%
Royalty Trust Interests") and 75% in the case of Royalty Trust Interests
carved from seven working interest properties in Oklahoma and Texas ("75%
Royalty Trust Interests").
Applicable costs deducted in the calculation of net proceeds for the 90%
Royalty Trust Interests generally include applicable taxes,
transportation, marketing and legal costs, and do not include other
production and development costs. For the 75% Royalty Trust Interests,
such costs include production expenses, development costs, applicable
taxes, operating charges and other costs.
- Royalty income is computed separately for each of five conveyances under
which the Royalty Trust Interests were conveyed to the Trust. If monthly
costs exceed revenues for any conveyance ("excess costs"), such excess
cannot reduce royalty income from other conveyances, but is carried
forward with accrued interest to be recovered from future net proceeds of
that conveyance. See Note 3.
- Interest income, interest to be received and distribution payable to Unit
holders include interest to be earned from the monthly record date (last
business date of the month) through the date of the next distribution to
Unit holders.
- Trust expenses are recorded based on liabilities paid and cash reserves
established by the Trustee for liabilities and contingencies.
- Distributions to Unit holders are recorded when declared by the Trustee.
The financial statements of the Trust differ from financial statements
prepared in accordance with generally accepted accounting principles
("GAAP") because revenues are not accrued in the month of production,
expenses are recognized when paid rather than when incurred, and certain
cash reserves may be established for contingencies which would not be
accrued under GAAP. The initial carrying value of the Royalty Trust
Interests ($61,100,449) represents the net book value from the historical
accounting records (successful efforts method) of predecessors to Cross
Timbers Oil on February 12, 1991. Amortization of the Royalty Trust
Interests is calculated on a unit-of-production basis and is charged
directly to trust corpus. Accumulated amortization as of March 31, 1998 and
December 31, 1997 is $23,676,753 and $22,996,082, respectively.
7
<PAGE>
2. FEDERAL INCOME TAXES
Tax counsel has advised the Trust that, under current tax laws, the Trust
will be classified as a grantor trust for Federal income tax purposes and
therefore is not subject to taxation at the trust level. However, the
opinion of tax counsel is not binding on the Internal Revenue Service.
The Unit holders are considered, for Federal income tax purposes, to own the
Trust's income and principal as though no trust were in existence. The
income of the Trust is deemed to have been received or accrued by the Unit
holders at the time such income is received or accrued by the Trust, rather
than when distributed by the Trust.
Cross Timbers Oil has advised the Trustee that the Trust receives royalty
income from coal seam gas wells. Production from coal seam gas wells drilled
after December 31, 1979, and prior to January 1, 1993, qualifies for the
Federal income tax credit for producing nonconventional fuels under Section
29 of the Internal Revenue Code. This tax credit, which was approximately
$1.05 per MMBtu for 1997, is recalculated annually based on each year's
qualifying production through the year 2002. Such credit, based on the Unit
holder's pro rata share of qualifying production, may not reduce his regular
tax liability (after the foreign tax credit and certain other non-refundable
credits) below his tentative minimum tax. Any part of the Section 29 credit
not allowed for the tax year solely because of this limitation is subject to
certain carryover provisions. Unit holders should consult their tax advisors
regarding Trust tax compliance matters.
Based on 1998 qualifying sales volumes and the factors used in the
calculation of the 1997 coal seam tax credit, the credit for the quarter
ended March 31, 1998 is estimated to be $.037 per Unit. The actual coal seam
credit for the quarter ended March 31, 1997 was $.052 per Unit. The decline
in the first quarter coal seam tax credit from 1997 to 1998 is primarily
because of adjustments to prior period coal seam gas sales volumes. Final
1998 coal seam tax credit data will be provided to Unit holders with year-
end tax information.
3. EXCESS COSTS
Cross Timbers Oil has advised the Trustee that, in the calculation of
royalty income for the month of April 1998, costs exceeded revenues for the
Texas conveyance of the 75% Royalty Trust Interests by $92,914. Such excess
costs plus accrued interest must be recovered from future net proceeds of
the Texas conveyance of the 75% Royalty Trust Interests before this
conveyance can again contribute to Trust royalty income. See Item 2,
"Trustee's Discussion and Analysis - Excess Costs."
8
<PAGE>
Item 2. Trustee's Discussion and Analysis.
Three Months Ended March 31, 1998 and 1997
- ------------------------------------------
For the quarter ended March 31, 1998, royalty income was $2,335,418, compared
with $3,114,590 for the first quarter of 1997. This 25% decrease in royalty
income is primarily the result of significantly lower oil prices and decreased
gas sales volumes.
After considering interest income of $3,771 and administration expense of
$44,220, distributable income for first quarter 1998 was $2,294,969, or
$0.382494 per Unit of beneficial interest. Distributions of $0.148984,
$0.143942 and $0.089568 per Unit were made to Unit holders of record on January
30, February 27 and March 31, 1998, respectively. Distributable income for
first quarter 1997 was $3,069,535, or $0.511589 per Unit.
Royalty income is recorded when received by the Trust, which is the month
following receipt by Cross Timbers Oil, and generally two months after oil
production and three months after gas production. Royalty income is generally
affected by three major factors: 1) oil and gas sales volumes, 2) oil and gas
sales prices and 3) costs deducted in the calculation of royalty income.
Because properties underlying the 90% Royalty Trust Interests are royalty and
overriding royalty interests, they generally bear no costs other than production
and property taxes, related legal costs, and marketing and transportation
charges. In addition to these costs, the 75% Royalty Trust Interests are
subject to production and development costs, since the properties underlying the
75% Royalty Trust Interests are working interests.
Volumes
Oil sales volumes decreased 1% from first quarter 1997 to 1998 because of
natural production decline, partially offset by the timing of cash receipts. Gas
sales volumes decreased 12% from first quarter 1997 to 1998, primarily because
of volume adjustments related to prior periods and the timing of cash receipts.
Excluding such prior period adjustments and cash receipt timing differences, gas
sales volumes declined approximately 2% from first quarter 1997 to 1998. Such 2%
decline includes an estimated 4% natural decline in gas production, partially
offset by a 2% increase in gas sales volumes related to new wells drilled during
1997 on some of the Texas 90% Royalty Trust Interests.
Prices
The average oil price for first quarter 1998 was $16.15 per barrel, a decrease
of 29% from the first quarter 1997 average price of $22.62. Because of the
two-month interval between oil production and receipt by the Trust of related
royalty income, the first quarter 1997 average price reflects the rise in oil
prices to six-year highs in December 1996 and January 1997. Similarly, the
first quarter 1998 average oil price includes two months of lower prices
following the sharp decline in oil prices that began in December 1997. After
hitting a decade-low of $11.00, prices began to increase in late March. The
average posted West Texas Intermediate oil price for February through April 1998
(related to royalty income to be received by the Trust in second quarter 1998)
was $13.26.
The first quarter 1998 average gas price was $2.59 per thousand cubic feet
("Mcf"), or 2% above the first quarter 1997 price of $2.53. Cross Timbers Oil
has advised the Trustee that it expects the average gas price for first quarter
1998 production (related to royalty income to be received by the Trust in second
quarter 1998) to decline to approximately $1.90 because of reduced demand during
a milder than normal winter.
9
<PAGE>
Costs
Costs deducted in the calculation of first quarter 1998 royalty income (see
"Calculation of Royalty Income") increased 5% or $61,876 from total costs for
first quarter 1997. This was a result of a 14% or $87,362 increase in
production expenses, partially offset by an 8% or $12,840 decrease in
development costs and a 4% or $12,646 decrease in production and property taxes.
Changes in production expense and development costs are primarily related to the
timing of maintenance and development projects on the underlying working
interest properties. Decreased Oklahoma drilling costs offset costs related to
a carbon dioxide injection project that began on one of the Texas underlying
working interest properties in 1998. See "Excess Costs" below. Production
taxes decreased with decreased oil and gas revenues, partially offset by
increased estimated property taxes.
Excess Costs
Cross Timbers Oil has advised the Trustee that, in the calculation of Trust
royalty income for the month of April 1998, costs exceeded revenues by $92,914
for the Texas conveyance of the 75% Royalty Trust Interests. Such excess costs
are the result of lower oil prices and increased development costs related to
the carbon dioxide injection project that began during the first quarter.
Excess costs from one conveyance cannot reduce royalty income computed under
another conveyance; therefore, cumulative excess costs plus accrued interest
must be recovered from future net proceeds of the underlying Texas working
interest properties before these properties can again contribute to Trust
royalty income. The Texas 75% Royalty Trust Interests contributed approximately
$0.07 per Unit to first quarter 1997 royalty income, or 14% of first quarter
1997 distributions. Primarily because of lower oil prices in December 1997 and
January 1998, the Texas 75% Royalty Trust Interests contributed only $0.015 per
Unit to first quarter 1998 royalty income, or 4% of first quarter 1998
distributions.
Amortization
Amortization of Royalty Trust Interests, which is directly charged to trust
corpus, decreased to $680,671 for first quarter 1998 from $849,382 for the prior
year quarter. Decreased amortization is the result of lower gas sales volumes
for the quarter, as well as reduced oil sales volumes allocated to the Royalty
Trust Interests because of lower oil prices.
10
<PAGE>
COMPARATIVE OIL AND GAS SALES
Oil and gas sales attributable to the Underlying Properties and the Royalty
Trust Interests are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, (a)
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OIL SALES (Bbls)................
Underlying Properties (b).... 104,686 105,459
Average per day............ 1,138 1,146
Average price.............. $16.15 $22.62
Royalty Trust Interests (b).. 37,062 55,539
GAS SALES (Mcf).................
Underlying Properties (b).... 835,901 945,887
Average per day............ 9,086 10,281
Average price.............. $2.59 $2.53
Royalty Trust Interests (b).. 725,665 835,124
</TABLE>
(a) Because of the interval between time of production and receipt of royalty
income by the Trust, oil and gas sales for the quarter ended March 31
generally represent oil production for the period November through January
and gas production for the period October through December.
(b) Oil and gas sales volumes are allocated to the Royalty Trust Interests based
upon a formula that considers oil and gas prices and the total amount of
production expenses and development costs. Changes in any of these factors
may result in disproportionate fluctuations in volumes allocated to the
Royalty Trust Interests. Therefore, comparative discussion of oil and gas
sales is based on the Underlying Properties.
11
<PAGE>
CALCULATION OF ROYALTY INCOME
The following is the calculation of royalty income received by the Trust for the
quarters ended March 31, 1998 and 1997. See Note 1 to Condensed Financial
Statements.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------
1998 1997
----------------------- -----------------------
90% 75% 90% 75%
Royalty Royalty Royalty Royalty
Trust Trust Trust Trust
Interests Interests Interests Interests
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES...................
Oil sales................. $ 410,780 $1,279,730 $ 490,486 $1,894,773
Gas sales................. 2,115,125 45,704 2,317,868 74,712
---------- ---------- ---------- ----------
Total.................... 2,525,905 1,325,434 2,808,354 1,969,485
---------- ---------- ---------- ----------
COSTS......................
Production and property
taxes.................... 211,444 136,366 232,135 128,321
Production expenses (a) 705,541 9,162 609,017
Development costs......... - 146,989 - 159,829
---------- ---------- ---------- ----------
Total.................... 211,444 988,896 241,297 897,167
---------- ---------- ---------- ----------
Net Proceeds............... 2,314,461 336,538 2,567,057 1,072,318
Net Profits Percentage..... 90% 75% 90% 75%
---------- ---------- ---------- ----------
ROYALTY INCOME............. $2,083,015 $ 252,403 $2,310,351 $ 804,239
========== ========== ========== ==========
</TABLE>
(a) Production expenses for the 75% Royalty Trust Interests include an overhead
fee that is deducted and retained by Cross Timbers Oil. This fee is
currently $19,438 per month, or $58,314 per quarter. This overhead fee is
subject to adjustment each May based on an oil and gas industry index.
12
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Items 1 through 4. Not applicable.
Item 5. Other Information.
At the close of business on May 6, 1998, the Trustee merged with and
into NationsBank, N.A. The Trustee is now NationsBank, N.A.,
successor by merger to NationsBank of Texas, N.A., as Trustee.
Item 6. (a) Exhibits.
Page
----
(4) (a) Cross Timbers Royalty Trust Indenture Amended and Restated on
January 13, 1992 by NationsBank of Texas, N.A.(now NationsBank,
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. which subsequently merged
into Cross Timbers Oil Company) to NCNB Texas National Bank (now
NationsBank, N.A.), as Trustee, dated February 12, 1991 (without
Schedules A and B), heretofore filed as Exhibit 10.1 to the Trust's
Registration Statement No. 33-44385 filed with the Securities and
Exchange Commission on February 19, 1992, is incorporated herein by
reference.
(c) Net Overriding Royalty Conveyance (Cross Timbers Royalty Trust,
75% - Texas) from South Timbers Limited Partnership, West Timbers
Limited Partnership, North Timbers Limited Partnership, East Timbers
Limited Partnership, Hickory Timbers Limited Partnership, and Cross
Timbers Partners, L.P. (predecessors of Cross Timbers Oil Company,
L.P. which subsequently merged into Cross Timbers Oil Company) to
NCNB Texas National Bank (now NationsBank, N.A.), as Trustee, dated
February 12, 1991 (without Schedules A and B), heretofore filed as
Exhibit 10.5 to the Trust's Registration Statement No. 33-44385
filed with the Securities and Exchange Commission on February 19,
1992, is incorporated herein by reference.
(15) (a) Awareness letter of Arthur Andersen LLP 15
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS ROYALTY TRUST
By NATIONSBANK, N.A., TRUSTEE
By JOE B. GRISSOM
-----------------------------
Joe B. Grissom
Vice President
CROSS TIMBERS OIL COMPANY
Date: May 13, 1998 By LOUIS G. BALDWIN
-----------------------------
Louis G. Baldwin
Senior Vice President and
Chief Financial Officer
14
<PAGE>
EXHIBIT 15
NationsBank, N.A. as Trustee
for the Cross Timbers Royalty Trust:
We are aware that Cross Timbers Oil Company has incorporated by reference in its
Registration Statement No. 33-55784 on Form S-8 Cross Timbers Royalty Trust's
Form 10-Q for the quarter ended March 31, 1998, which includes our report dated
May 7, 1998, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 13, 1998
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 536,526
<SECURITIES> 0
<RECEIVABLES> 885
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 537,411
<PP&E> 61,100,449
<DEPRECIATION> 23,676,753
<TOTAL-ASSETS> 37,961,107
<CURRENT-LIABILITIES> 537,411
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 37,423,696
<TOTAL-LIABILITY-AND-EQUITY> 37,961,107
<SALES> 2,335,418
<TOTAL-REVENUES> 2,339,189
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 44,220
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,294,969
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,294,969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,294,969
<EPS-PRIMARY> .382
<EPS-DILUTED> .382
</TABLE>
