<PAGE>
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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, 1997 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. 76101-1317
TRUSTEE (Zip Code)
P.O. BOX 1317
FORT WORTH, TEXAS
(Address of principal executive
offices)
Registrant's telephone number including area code: (817) 390-6592
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS 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 6, 1998, there were 6,000,000 Units of beneficial interest of the
Trust outstanding with an aggregate market value on that date of $95.3
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:
1997 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 pursuant to 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. 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 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."
During 1996 and 1997, Cross Timbers Oil's Board of Directors authorized the
purchase of two million Units. As of February 28, 1998, Cross Timbers Oil
owned 1,360,000 Units or 22.7% 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 $19,440 (total for both 75% conveyances). If production
costs exceed gross proceeds for any conveyance, such excess is carried forward
to the computation of net proceeds for future months until the excess
1
<PAGE>
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, with the exception of approximately 20 overriding royalty
interests in the San Juan Basin in which the Company acquired the underlying
working interest in December 1997 and became operator. 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 69% of the royalty income received by the Trust during 1997,
as well as 69% of the estimated proved reserves of the Royalty Trust Interests
at December 31, 1997 (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
<PAGE>
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 composed 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 31.7 Bcf at December 31,
1997, or approximately 83% 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, 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. It is not known
whether any of this development activity has directly affected Trust reserves
or production. The most significant recent activity in the San Juan Basin was
the completion of additional eastward pipeline capacity during 1996, 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 Altura 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, 1997, there were 1,639 gross (76.5
net) productive oil wells, 1,127 gross (41.9 net) injection wells and no wells
in process of drilling on these properties. During 1997, 15 gross (1.5 net)
producing wells were drilled. During 1996, 36 gross (2.9 net) producing wells
were drilled. During 1995, 24 gross (1.5 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, 1997 are as follows:
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
----------------------------- ----------------------- -----------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
--------- --------- --------- ------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION
Underlying Properties
Oil--Sales (Bbls)...... 95,453 89,632 85,823 328,528 347,168 354,745 423,981 436,800 440,568
Average per day
(Bbls)................ 262 245 235 900 948 972 1,162 1,193 1,207
Gas--Sales (Mcf)....... 4,301,707 4,275,047 3,403,458 117,164 110,313 109,496 4,418,871 4,385,360 3,512,954
Average per day (Mcf).. 11,785 11,681 9,325 321 301 300 12,106 11,982 9,625
Royalty Trust Interests
Oil--Sales (Bbls)...... 82,723 77,686 71,329 94,491 90,729 77,795 177,214 168,415 149,124
Average per day
(Bbls)................ 227 212 196 259 248 213 486 460 409
Gas--Sales (Mcf)....... 3,844,158 3,797,722 2,967,670 33,342 31,225 23,834 3,877,500 3,828,947 2,991,504
Average per day (Mcf).. 10,532 10,376 8,131 91 86 65 10,623 10,462 8,196
AVERAGE PRICE
Underlying Properties
Oil (per Bbl).......... $19.41 $18.56 $16.08 $19.14 $18.61 $15.05 $19.20 $18.60 $15.25
Gas (per Mcf).......... $2.05 $1.50 $1.30 $1.93 $1.92 $1.40 $2.04 $1.51 $1.30
</TABLE>
NONPRODUCING ACREAGE
The underlying nonproducing royalties contain approximately 200,000 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
GENERAL
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 "Discounted
Present Value of the Coal Seam Tax Credit" 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, 1997, 1996, 1995 and 1994. 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, 1997,
1996, 1995 and 1994 were based on a West Texas Intermediate crude oil posted
price of $15.50, $24.25, $18.00 and $16.00 per Bbl, respectively. The weighted
average year-end gas prices used to determine the standardized measure at
December 31, 1997, 1996, 1995 and 1994 were $1.76, $2.64, $1.37 and $1.51 per
Mcf, respectively.
PROVED RESERVES
The following table reconciles the change in proved reserves attributable to
the Royalty Trust Interests from December 31, 1994 through December 31, 1997
(in thousands):
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
---------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
------ -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Extensions,
discoveries and other
additions............ 107.9 270.0 -0- -0- 107.9 270.0
Revisions of prior
estimates............ 25.5 1,779.7 (745.8) (301.5) (720.3) 1,478.2
Production............ (82.7) (3,844.1) (94.5) (33.4) (177.2) (3,877.5)
----- -------- -------- ------- ------- --------
Balance, December 31,
1997................... 731.5 37,886.2 964.7 355.6 1,696.2 38,241.8
===== ======== ======== ======= ======= ========
</TABLE>
During 1997, 1996 and 1995, revisions of prior estimates of the 90% Royalty
Trust Interests' proved gas reserves were primarily because of lower than
anticipated production declines. During 1997, proved oil reserves of the 90%
Royalty Trust Interests increased primarily because of development drilling on
Trust royalty acreage in Lea County, New Mexico. Revisions of prior estimates
of the 75% Royalty Trust Interests' proved reserves in each of these years
were primarily the result of changes in the year-end oil prices used in
estimating proved reserves. See "General" above.
6
<PAGE>
PROVED DEVELOPED RESERVES
The following are estimated quantities of proved developed oil and gas
reserves as of December 31, 1994 and each following year-end through December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
--------------- --------------------------------
OIL GAS OIL GAS OIL GAS
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
------ -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
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
===== ======== ======== ====== ======= ========
December 31, 1997.............. 727.9 35,947.4 908.6 346.8 1,636.5 36,294.2
===== ======== ======== ====== ======= ========
</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, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------------- -------------------------- ----------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows..... $ 77,217 $119,971 $ 67,576 $14,975 $ 45,237 $22,295 $ 92,192 $165,208 $ 89,871
Future production
taxes.................. (5,346) (8,282) (4,628) (847) (2,611) (1,252) (6,193) (10,893) (5,880)
-------- -------- -------- ------- -------- ------- -------- -------- --------
Future net cash flows... 71,871 111,689 62,948 14,128 42,626 21,043 85,999 154,315 83,991
10% discount factor..... (36,221) (56,805) (31,880) (6,282) (20,663) (9,868) (42,503) (77,468) (41,748)
-------- -------- -------- ------- -------- ------- -------- -------- --------
Standardized measure.... $ 35,650 $ 54,884 $ 31,068 $ 7,846 $ 21,963 $11,175 $ 43,496 $ 76,847 $ 42,243
======== ======== ======== ======= ======== ======= ======== ======== ========
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVES
The following reconciles the changes during 1997, 1996 and 1995 in the
standardized measure (in thousands):
<TABLE>
<CAPTION>
90% ROYALTY 75% ROYALTY
TRUST INTERESTS TRUST INTERESTS TOTAL
-------------------------- -------------------------- --------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- ------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Standardized measure,
January 1.............. $ 54,884 $31,068 $33,754 $ 21,963 $11,175 $ 7,487 $ 76,847 $42,243 $41,241
Extensions, discoveries
and other additions... 1,311 460 388 -0- 178 41 1,311 638 429
Accretion of discount.. 4,861 2,767 3,099 1,980 1,012 692 6,841 3,779 3,791
Revisions of prior
estimates, changes in
price and other....... (16,689) 27,159 (1,576) (14,264) 11,298 4,098 (30,953) 38,457 2,522
Royalty income......... (8,717) (6,570) (4,597) (1,833) (1,700) (1,143) (10,550) (8,270) (5,740)
-------- ------- ------- -------- ------- ------- -------- ------- -------
Standardized measure,
December 31............ $ 35,650 $54,884 $31,068 $ 7,846 $21,963 $11,175 $ 43,496 $76,847 $42,243
======== ======= ======= ======== ======= ======= ======== ======= =======
</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, 1997, 1996 and 1995. Such estimates are based on
projected coal seam gas production through the year 2002 as estimated by
independent engineers, the current year estimated Btu content and the coal
seam tax credit of $1.05, $1.03 and $1.01 per MMBtu at December 31, 1997, 1996
and 1995, respectively. See "Regulation--Coal Seam Tax Credit."
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Undiscounted........................................... $3,390 $3,946 $4,125
====== ====== ======
Discounted present value at 10%........................ $2,784 $3,150 $3,214
====== ====== ======
</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 gas production falls below specified levels. 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 settled this lawsuit in 1996. 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 1997 prices and levels of production, Cross Timbers Oil has advised
the Trustee that Payout is not projected to occur for more than 20 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.
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.
8
<PAGE>
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 1997 was approximately $1.05 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,
regulations and laws relating 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
On May 14, 1997, the Trustee announced the settlement of a lawsuit filed in
December 1991 by Cross Timbers Oil and its predecessor-in-title against
Coastal Oil and Gas Corporation ("Coastal") in the Eleventh Judicial District
Court in San Juan County, New Mexico. Cross Timbers Oil and its predecessor-
in-title were seeking to recover revenues suspended by Coastal and to obtain a
judgment confirming their interests. The revenues suspended were attributable
to certain San Juan Basin overriding royalty interests underlying the 90%
Royalty Trust Interests ("subject interests").
As part of the settlement, Coastal agreed to pay the suspended revenues and
all future revenues attributable to the subject interests. Coastal further
agreed that the subject interests would not be reduced or converted to a cost-
bearing interest as was previously contended. As a result of the settlement,
the Trust received additional royalty income of approximately $465,000 or
$.0775 per Unit that was included in the June Trust distribution paid on July
15, 1997 to Unit holders of record on June 30, 1997, and it received
approximately $268,000 or $.0447 per Unit of royalty income which was
distributed on September 15, 1997 to Unit holders of record on August 29,
1997.
To facilitate further development of the subject interests, Cross Timbers
Oil agreed to reduce its overriding royalty interest by one-half on any newly
drilled wells. This will result in a corresponding reduction in the Trust's
net profits interest in the new wells drilled on the subject interests.
Furthermore, to ensure that production from existing wells is properly
maintained, Cross Timbers Oil agreed to temporarily reduce its interest in
existing wells under certain circumstances, and to consider reducing its
interest under other circumstances. Cross Timbers Oil informed the Trustee
that it believes that such agreed reductions in the subject interests will not
significantly affect estimated future net revenues from the Trust's proved
reserves.
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 others against owners of working interests in certain
gas wells located in San Juan County, New Mexico, in which the Trust owns a
net profits interest, seeking to recover revenues suspended by the defendants.
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
production of natural gas fell below specified levels. See Item 2, "Certain
Provisions Affecting San Juan Basin Royalty Interests." The Trust and other
plaintiffs denied that the interests 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 production falls below specified
levels. The Trust owns a 90% net profits interest in Cross Timbers Oil's
interest, and received $675,000 or $0.1125 per Unit as its portion of the
settlement, which was distributed on January 15, 1997 to Unit holders of
record on December 31, 1996.
9
<PAGE>
Cross Timbers Oil has advised the Trustee that a lawsuit has been filed that
relates to certain Texas properties underlying the 75% Royalty Trust
Interests. Neither the Trust nor Cross Timbers Oil is named as a party in the
suit. 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 surface owners are seeking a recovery for unspecified temporary
and permanent damages to the surface and subsurface and punitive damages
against the named defendants. The Trust's interest in the property involved is
a 75% net overriding royalty in Cross Timbers Oil's 5.2% working interest.
Although the potential to the Trust for lost royalty income from this lawsuit
cannot be currently estimated, Cross Timbers Oil has advised the Trustee that
it does not expect that this lawsuit 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 1997.
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, 1997 is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Royalty Income.......... $10,549,668 $ 8,269,875 $ 5,739,704 $ 6,934,038 $ 7,905,506
Distributable Income.... 10,407,250 8,076,964 5,578,227 6,748,876 7,697,537
Distributable Income per
Unit................... 1.734541 1.346162 0.929705 1.124811 1.282923
Distributions per Unit.. 1.734541 1.346162 0.929705 1.124811 1.282923
Total Assets at Year-
End.................... 38,767,918 42,716,284 45,547,459 49,587,753 52,558,166
</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, 1997 on pages 6 and
7 of the Trust's Annual Report to Unit holders for the year ended December 31,
1997 is incorporated herein by reference.
Year 2000
The Trustee has been advised by Cross Timbers Oil that timely modification
of its computer systems for year 2000 compliance is not considered a material
risk to the Trust and that no costs of such modifications will be incurred by
the Trust. Cross Timbers Oil currently does not have information regarding
year 2000 compliance of major product purchasers and operators of the
Underlying Properties. If these parties do not achieve timely year 2000
compliance, timely Trust distributions to Unit holders could be adversely
affected. Since the Trust does not use the Trustee's computer systems in any
significant capacity, the Trustee's year 2000 compliance will not affect the
Trust.
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 18, 1998, appearing on
pages 9 through 12 of the Trust's Annual Report to Unit holders for the year
ended December 31, 1997 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, 1997.
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
The Trustee received the following annual compensation from 1995 through
1997 as specified in the Trust Indenture:
<TABLE>
<CAPTION>
OTHER ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1)
--------------------------- ---- ------------
<S> <C> <C>
NationsBank of Texas, N.A., Trustee 1997 $7,806
1996 10,072
1995 14,245
</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 6, 1998 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>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
<S> <C> <C>
Cross Timbers Oil Company 1,360,000 Units (1) 22.7%
810 Houston Street, Suite 2000
Fort Worth, TX 76102
Haven Capital Management, Inc. 308,240 Units (2) 5.1%
665 Third Avenue
New York, NY 10017
</TABLE>
(1) Cross Timbers Oil has the sole power to vote and dispose of 1,360,000
Units.
(2) As reported on Schedule 13G, at December 31, 1997, Haven Capital
Management, Inc. has the sole power to dispose of 304,240 Units held in
client accounts, and has sole power to vote and dispose of 4,000 shares
held in its profit sharing plan trust.
(b) Security Ownership of Management. The Trust has no directors or
executive officers. In various fiduciary capacities, NationsBank owned as of
March 10, 1998 an aggregate of 89,377 Units with a shared right to vote 11,287
of these Units and no right to vote 10,433 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,
1997 is $19,440 per month, or $233,280 annually (net to the Trust of $14,580
or $174,960 annually), and is subject to annual adjustment based on an oil and
gas industry index.
During 1997, NationsBank of Texas, N.A. received $10,500 for oil and gas
consulting services performed on behalf of the Trust. See Item 11 for the
remuneration received by the Trustee from 1995 through 1997 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)
Report of Independent Public Accountants
Statements of Assets, Liabilities and Trust Corpus at December 31, 1997
and 1996
Statements of Distributable Income for the years ended December 31,
1997, 1996 and 1995
Statements of Changes in Trust Corpus for the years ended December 31,
1997, 1996 and 1995
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
<TABLE>
<C> <S>
(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, 1997.
(23.1) Consent of Arthur Andersen LLP
(23.2) Consent of Miller and Lents, Ltd.
</TABLE>
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, 1997,
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
JOE B. GRISSOM
By: ____________________________________
Joe B. Grissom
Vice President
CROSS TIMBERS OIL COMPANY
LOUIS G. BALDWIN
Date: March 30, 1998 By: ____________________________________
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 by the Trust on the last business day of each month 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 1997 and 1996:
<TABLE>
<CAPTION>
Sales Price
--------------- Distributions
High Low per Unit
----------- ------------- ---------
<S> <C> <C> <C>
1997
- ----------------
First Quarter................ $15.750 $13.625 $0.511589
Second Quarter............... 16.750 14.250 0.536106
Third Quarter................ 17.750 16.000 0.353022
Fourth Quarter............... 18.500 16.000 0.333824
---------
$1.734541
=========
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
---------
$1.346162
=========
</TABLE>
At December 31, 1997, there were 6,000,000 Units outstanding and approximately
193 Unit holders of record; 5,333,365 of these Units were held by 12 depository
institutions. As of February 28, 1998, Cross Timbers Oil owned 1,360,000 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. If costs exceed
revenues, the 75% Royalty Trust Interests will not contribute to Trust
royalty income, but such excess costs will not reduce royalty income from
the 90% Royalty Trust Interests. Such excess costs generally occur during
periods of higher development activity and lower oil prices. Excess costs
are expected to occur during 1998; for further information, see "Trustee's
Discussion and Analysis - Costs."
Unit holders may be eligible to receive the following tax benefits but 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 1997 and held
them throughout 1997 would be entitled to a cost depletion deduction of
approximately 9% of his cost. Assuming cost of $15.75 per Unit, cost
depletion would offset 80% of taxable Trust income. After considering the
coal seam tax credit and assuming a 30% tax rate, the 1997 pre-tax yield
of Units would be 16.7%. (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>
1997 1996 1995
----------------- ----------------- -----------------
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.. $ .121 $1.453 $ .091 $1.095 $ .064 $ .766
- - 75% Royalty Trust Interests.. .025 .306 .024 .283 .016 .191
Administration expense
(net of interest income)..... (.002) (.024) (.003) (.032) (.002) (.027)
------ ------ ------ ------ ------ ------
Total Distribution............. $ .144 $1.735 $ .112 $1.346 $ .078 $ .930
====== ====== ====== ====== ====== ======
Nonconventional Fuel
Source Tax Credit......... * $ .212 * $ .189 * $ .180
====== ====== ======
</TABLE>
* - Not applicable
2
<PAGE>
TO UNIT HOLDERS
- ---------------
We are pleased to present the 1997 Annual Report of Cross Timbers Royalty Trust
and the Trust's 1997 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, 1997, Trust royalty income and distributable
income reached historical highs since the Trust's inception in February 1991.
Royalty income totaled $10,549,668 and, after deducting Trust administration
expense, net of interest income, distributable income was $10,407,250 or
$1.734541 per Unit. Royalty income and distributions for the year were 28%
higher than 1996 comparable amounts primarily because of higher gas sales
prices.
Natural gas prices averaged $2.04 per thousand cubic feet ("Mcf") for 1997 sales
from the Underlying Properties, or 35% above the 1996 average price of $1.51 per
Mcf. San Juan Basin gas prices were significantly higher throughout 1997
because of increased demand in California and expanded markets provided by
additional eastward bound pipeline capacity out of the San Juan Basin that was
completed in 1996.
Gas sales volumes from the Underlying Properties for the year ended December 31,
1997 increased 1% from 1996, to a total of 4,418,871 Mcf. Gas sales volumes in
1997 and 1996 include volumes attributable to the settlement of two unrelated
lawsuits.
During 1997, the Trust received approximately $733,000, or $0.122 per Unit, in
royalty income attributable to the settlement of a lawsuit that Cross Timbers
Oil had filed to recover revenues suspended from certain San Juan Basin wells.
Gas sales volumes from the Underlying Properties related to this settlement were
636,000 Mcf. During 1996, the Trust received $675,000, or $0.113 per Unit, in
royalty income related to the settlement of a lawsuit filed by Cross Timbers Oil
and the Trust, also to recover revenues suspended from certain San Juan Basin
wells. Gas sales volumes attributable to the 1996 lawsuit settlement were
609,000 Mcf. For further information regarding litigation involving the Trust,
see Item 3 of the accompanying Form 10-K.
The average Trust oil price increased to $19.20 per barrel ("Bbl"), up 3% from
the 1996 average price of $18.60. Oil sales volumes from the Underlying
Properties during 1997 were 423,981 Bbls, or 3% below 1996 levels because of
natural decline in production.
Oil prices weakened in December 1997 and continued their decline to a decade-low
level in March 1998. Because of the two-month interval between the time of oil
production and receipt of related royalty income by the Trust, the decline in
prices began to affect Trust royalty income in February 1998. For further
information on prices, see "Trustee's Discussion and Analysis - Prices."
Because of lower oil prices and an expected increase in development costs, Cross
Timbers Oil has advised the Trustee that it anticipates costs to exceed revenues
from the Texas 75% Royalty Trust Interests conveyance during 1998. The Texas
75% Royalty Trust Interests contributed approximately $0.18 per Unit to 1997
royalty income, or approximately 10% of total 1997 distributions. For further
information, see "Trustee's Discussion and Analysis - Costs."
Coal seam gas sales volumes from the Underlying Properties were 1,478,477 Mcf in
1997, 8% above 1996 coal seam gas volumes. The resulting 1997 coal seam tax
credit was $0.212340 per Unit, while the 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, 1997, proved reserves of the Royalty Trust Interests were
estimated by independent engineers to be 1,696,000 Bbls of oil and 38.2 billion
cubic feet ("Bcf") of natural gas. Estimated oil reserves decreased 32% from
year-end 1996 to 1997 primarily as a result of the decrease in year-end oil
prices from $24.25 to $15.50 per Bbl and the resulting reduced allocation of
reserves to the Royalty Trust Interests. Gas reserves decreased 5% from year-
end 1996 to 1997 primarily because of production, partially offset by increased
estimates for coal seam gas 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, 1997 are $86
million or $14.33 per Unit. Using an annual discount factor of 10%, the present
value of estimated future net revenues at December 31, 1997 is $43.5 million or
$7.25 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. The present value of
estimated future net revenues is not necessarily representative of the market
value of Trust Units.
As discussed in the Tax Instructions provided to Unit holders in February 1998,
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
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,
1997 is approximately 11 years for oil and 12 years for gas. The reserve-to-
production index is calculated using total proved reserves and estimated 1998
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 31% oil and 69% natural gas. Cross Timbers Oil
does not operate or control any of the Underlying Properties, with the exception
of properties from which approximately 20 overriding royalty interests were
carved. 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 82% of the discounted future net cash flows from the Trust's
proved reserves at December 31, 1997. Approximately 84% of the discounted
future net cash flows from the 90% Royalty Trust Interests is from gas reserves,
totaling 37.9 Bcf. Primarily located in West Texas, oil reserves underlying the
90% Royalty Trust Interests are estimated at December 31, 1997 to be 732,000
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 83% of Trust 1997
gas sales volumes and 58% of Trust 1997 royalty income. As of December 31,
1997, the Trust's proved reserves in this region are estimated to be 31.7 Bcf,
or 83% 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 1997 coal seam gas sales from the San Juan Basin was
approximately $1.05 per MMBtu or $0.212340 per Unit, while the coal seam credit
for 1996 was $1.03 per MMBtu or $0.189374 per Unit. As of December 31, 1997,
the Trust's proved coal seam reserves are estimated to be 6.7 Bcf, a 5% increase
from estimated coal seam reserves at December 31, 1996. Increased coal seam
reserve estimates are the result of lower than anticipated production declines.
Although the drilling eligibility period for the coal seam tax credit expired on
January 1, 1993, major operators have continued to develop coal seam reserves.
It is not known whether this development activity has affected Trust reserves or
production. The most significant recent activity in the San Juan Basin was the
completion of additional eastward pipeline capacity during 1996, reducing the
dependence 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 965,000 Bbls at year-end 1997. Based on year-end
oil and gas prices, proved reserves from these interests represent 18% of the
discounted future net cash flows of the Trust's proved reserves at December 31,
1997.
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.
4
<PAGE>
- -------------------------------------------------------------------------------
Total 1997 development costs were $869,051, or 25% below 1996 development costs
of $1,164,112. Most of the decrease in 1997 development costs was related to
the completion of infill drilling projects that began in December 1995.
Budgeted development costs were $700,000 and $800,000 for 1997 and 1996,
respectively. Unit operators have reported to Cross Timbers Oil that total
budgeted costs are approximately $1,200,000 and $930,000, net to Cross Timbers
Oil's interests, for each of 1998 and 1999, respectively. Included in these
amounts are $900,000 and $600,000 in 1998 and 1999, respectively, related to a
carbon dioxide injection project on one of the properties. For information
regarding the effect of increased costs on 1998 Trust royalty income, see
"Trustee's Discussion and Analysis - Costs."
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, 1997, as estimated by independent
engineers (in thousands):
<TABLE>
<CAPTION>
Estimated Proved Reserves (a)(b) Estimated Future Net Revenues
-------------------------------- from Proved Reserves (a)(c)
Oil Gas -----------------------------
(Bbls) (Mcf) Undiscounted Discounted
--------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
90% Royalty Trust Interests
San Juan Basin
Conventional............ 84 24,942 $ 38,134 $ 15,823
Coal seam............... - 6,750 9,785 6,282
--------------- -------------- ------------- --------------
Total.................. 84 31,692 47,919 22,105
Other New Mexico.......... 143 429 2,853 1,669
Texas..................... 430 3,900 15,773 8,796
Oklahoma.................. 74 1,865 5,326 3,080
--------------- -------------- ------------- --------------
Total............... 731 37,886 71,871 35,650
--------------- -------------- ------------- --------------
75% Royalty Trust Interests
Texas..................... 583 229 8,605 4,475
Oklahoma.................. 382 127 5,523 3,371
--------------- -------------- ------------- --------------
Total............... 965 356 14,128 7,846
--------------- -------------- ------------- --------------
TOTAL............... 1,696 38,242 $ 85,999 $ 43,496
=============== ============== ============= ==============
</TABLE>
(a) Based on year-end oil and gas prices. Total estimated proved oil reserves
decreased 32% and discounted estimated future net revenues from proved
reserves decreased 43% from year-end 1996 to 1997, primarily because of a
36% and 33% decline in oil and gas prices, respectively, over these periods.
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 1997 was $10,549,668, as compared with $8,269,875 for 1996
and $5,739,704 for 1995. The 28% increase in royalty income from 1996 to 1997
was primarily because of higher gas prices. 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. During 1997, 1996
and 1995, 69%, 64% and 62%, respectively, of royalty income was derived from gas
sales.
Trust administration expense was $158,669 in 1997 as compared to $204,449 in
1996 and $169,501 for 1995. Interest income was $16,251, $11,538 and $8,024
during 1997, 1996 and 1995, 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
Primarily because of natural production decline, underlying oil sales volumes
decreased 3% from 1996 to 1997, as compared to a 1% decline from 1995 to 1996.
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 for 1997 and 1996 include 636,000 Mcf and 609,000
Mcf, respectively, attributable to lawsuit settlement proceeds received by the
Trust (see Item 3 of the accompanying Form 10-K). Primarily because of these
lawsuit settlement volumes, underlying gas sales volumes increased 1% from 1996
to 1997, compared with a 25% increase from 1995 to 1996. Increased gas volumes
from 1995 to 1996 also include the effect of partially curtailed production in
1995 because of lower prices.
Prices
The 1997 average oil price of $19.20 was 3% higher than the 1996 average price
of $18.60, which was 22% higher than the 1995 average price of $15.25. Because
of the two-month interval between oil production and receipt by the Trust of
related royalty income, the 1997 average price includes the effect of higher oil
prices in November and December 1996, and excludes the effect of lower December
1997 prices. Increased global production and reduced consumption caused oil
prices to further decline in first quarter 1998, with an average posted West
Texas Intermediate price of $14.22 per barrel for January and February. After
hitting a decade-low of $11.00, prices in late March began to increase upon news
that some of the major oil exporting countries planned to meet regarding
curtailment of production.
The 1997 average gas price was $2.04, or 35% above the 1996 average price of
$1.51, which was 16% above the 1995 average price of $1.30. Prices remained
depressed for the first half 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 increased demand and reduced supplies in California, as well
as the effects of additional eastward bound pipeline capacity from the San Juan
Basin. Increased weather-related demand caused prices to further improve in
late 1996 and early 1997. Because of the three-month interval between
production and the Trust's receipt of royalty income, higher fourth quarter 1996
prices were received in 1997. Gas prices remained relatively higher through
1997 as compared to 1996 and 1995. The average fourth quarter 1997 price,
related to first quarter 1998 Trust royalty income, was $2.51. Primarily because
of a milder than normal winter, the average first quarter 1998 price (related to
Trust royalty income to be received in second quarter 1998) is estimated at
$1.87.
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 deductions for production and property taxes, 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 $5,036,713,
$5,183,440 and $4,651,132 during 1997, 1996 and 1995, respectively. The 3%
decrease in costs from 1996 to 1997 was primarily the result of decreased
development costs after completion of infill drilling on some of the properties
underlying the 75% Royalty Trust Interests. Partially offsetting decreased
development costs were increased production taxes resulting from higher oil and
gas sales. The 11% increase in costs from 1995 to 1996 was primarily the result
of increased development and production costs related to infill drilling that
began in December 1995 on certain properties underlying the 75% Royalty Trust
Interests, partially offset by decreased charges from a 1995 waterflood project.
Production taxes also increased because of higher oil and gas sales.
Budgeted development costs for 1998 and 1999 include $900,000 and $600,000,
respectively, related to a carbon dioxide injection project on one of the Texas
properties underlying the 75% Royalty Trust Interests. Cross Timbers Oil has
advised the Trustee that, unless oil prices significantly increase (see "Prices"
above), costs are expected to exceed revenues for the Texas conveyance of the
75% Royalty Trust Interests until this project has been completed. Any such
excess costs plus accrued interest must be recovered from future net proceeds of
the Texas 75% Royalty Trust Interests before it can again contribute to royalty
income. Cross Timbers Oil anticipates such increased costs in the second quarter
of 1998. The Texas 75% Royalty Trust Interests contributed approximately $0.18
per Unit to 1997 royalty income, or 10% of total 1997 distributions.
For Trust year 2000 compliance considerations, see Item 7 of the accompanying
Form 10-K.
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)
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Oil Sales (Bbls):
Underlying Properties (b).... 423,981 436,800 440,568
Average per day........... 1,162 1,193 1,207
Average price per Bbl..... $ 19.20 $ 18.60 $ 15.25
Royalty Trust Interests (b).. 177,214 168,415 149,124
Gas Sales (Mcf):
Underlying Properties (b).... 4,418,871 4,385,360 3,512,954
Average per day........... 12,106 11,982 9,625
Average price per Mcf..... $ 2.04 $ 1.51 $ 1.30
Royalty Trust Interests (b).. 3,877,500 3,828,947 2,991,504
</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.
------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ --------------------- ----------------------
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................. $ 1,852,999 $6,288,457 $1,663,559 $6,460,678 $1,379,926 $5,339,255
Gas sales................. 8,798,653 225,874 6,413,846 211,960 4,409,674 153,689
----------- ---------- ---------- ---------- ---------- ----------
Total.................... 10,651,652 6,514,331 8,077,405 6,672,638 5,789,600 5,492,944
----------- ---------- ---------- ---------- ---------- ----------
Costs
Taxes on production and
property................. 954,803 555,996 734,521 534,735 619,914 599,120
Production and other
expenses................. 12,080 2,644,783 43,399 2,706,673 62,051 2,619,732
Development costs......... - 869,051 - 1,164,112 - 750,315
----------- ---------- ---------- ---------- ---------- ----------
Total.................... 966,883 4,069,830 777,920 4,405,520 681,965 3,969,167
----------- ---------- ---------- ---------- ---------- ----------
Net Proceeds............... 9,684,769 2,444,501 7,299,485 2,267,118 5,107,635 1,523,777
Net Profits Percentage..... 90% 75% 90% 75% 90% 75%
----------- ---------- ---------- ---------- ---------- ----------
Royalty Income............. $ 8,716,292 $1,833,376 $6,569,536 $1,700,339 $4,596,871 $1,142,833
=========== ========== ========== ========== ========== ==========
</TABLE>
7
<PAGE>
RESULTS OF 4TH QUARTER
- ----------------------
During the quarter ended December 31, 1997, the Trust received royalty income
totaling $2,023,646 and reported distributable income of $2,002,943, or
$0.333824 per Unit. Distributions were $0.111941, $0.111291 and $0.110592 per
Unit to Unit holders of record on October 31, November 28 and December 31,
respectively. Fourth quarter 1996 royalty income was $2,928,035 and
distributable income was $2,897,347 or $0.482891 per Unit.
Royalty income decreased from fourth quarter 1996 to 1997 primarily because of
lawsuit settlement proceeds of $675,000 received during fourth quarter 1996 (see
Item 3 of the accompanying 10-K). The decrease in fourth quarter royalty income
was also attributable to lower oil prices. Administration expense and interest
income for fourth quarter 1997 were $23,889 and $3,186, respectively, compared
with fourth quarter 1996 amounts of $34,846 and $4,158, respectively.
Fourth quarter underlying oil sales volumes declined 1% from 1996 to 1997 as a
result of natural decline. Underlying gas sales volumes decreased 546,281 Mcf
or 37%, primarily because of 609,000 Mcf related to the fourth quarter 1996
lawsuit settlement.
The average fourth quarter 1997 oil price was $17.96 or 16% below the fourth
quarter 1996 average price of $21.28. The average fourth quarter gas price was
$1.85 per Mcf in 1997, or 13% higher than the fourth quarter 1996 average price
of $1.64. For further discussion of oil and gas prices, see "Trustee's
Discussion and Analysis - Prices."
Total costs deducted in the calculation of royalty income decreased $19,014 or
1% from fourth quarter 1996 to 1997, as decreased production taxes resulting
from lower oil and gas sales were largely offset by increased property taxes.
Production expenses and development costs remained relatively constant over
these periods.
- --------------------------------------------------------------------------------
Comparative Oil and Gas Sales
Fourth quarter 1997 and 1996 oil and gas sales attributable to the Underlying
Properties and the Royalty Trust Interests are as follows:
Three Months Ended
December 31 (a)
--------------------
1997 1996
-------- ----------
Oil Sales (Bbls):
Underlying Properties.............. 106,918 108,158
Average per day.................. 1,162 1,176
Average price per Bbl............ $17.96 $21.28
Royalty Trust Interests............ 38,060 48,117
Gas Sales (Mcf):
Underlying Properties.............. 940,900 1,487,181
Average per day.................. 10,227 16,165
Average price per Mcf............ $1.85 $1.64
Royalty Trust Interests............ 817,514 1,315,680
(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
December 31
-------------------------
1997 1996
------------ -----------
Assets
Cash and short-term investments.................. $ 662,486 $ 1,376,687
Interest to be received.......................... 1,065 1,924
Net overriding royalty interests in oil and gas
properties - net (Notes 1 and 2).............. 38,104,367 41,337,673
----------- -----------
$38,767,918 $42,716,284
=========== ===========
Liabilities and Trust Corpus
Distribution payable to Unit holders............. $ 663,551 $ 1,378,611
Trust corpus (6,000,000 Units of beneficial
interest authorized and outstanding).......... 38,104,367 41,337,673
----------- -----------
$38,767,918 $42,716,284
=========== ===========
- --------------------------------------------------------------------------------
STATEMENTS OF DISTRIBUTABLE INCOME
Year Ended December 31
-------------------------------------
1997 1996 1995
------------ ---------- -----------
Royalty income....................... $10,549,668 $8,269,875 $5,739,704
Interest income...................... 16,251 11,538 8,024
----------- ---------- ----------
Total income................... 10,565,919 8,281,413 5,747,728
Administration expense............... 158,669 204,449 169,501
----------- ---------- ----------
Distributable income........... $10,407,250 $8,076,964 $5,578,227
=========== ========== ==========
Distributable income per Unit
(6,000,000 Units)......... $1.734541 $1.346162 $ 0.929705
=========== ========== ==========
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN TRUST CORPUS
Year Ended December 31
------------------------------------------
1997 1996 1995
------------- ------------ -------------
Trust Corpus, beginning of year.. $ 41,337,673 $45,118,209 $48,731,991
Amortization of net
overriding royalty interests... (3,233,306) (3,780,536) (3,613,782)
Distributable income............. 10,407,250 8,076,964 5,578,227
Distributions declared........... (10,407,250) (8,076,964) (5,578,227)
------------ ----------- -----------
Trust Corpus, end of year........ $ 38,104,367 $41,337,673 $45,118,209
============ =========== ===========
- --------------------------------------------------------------------------------
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, 1997 and 1996 was $22,996,082 and
$19,762,776, 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 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. For
the 90% 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 based on revenues received
less costs paid in the prior month. 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
10
<PAGE>
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 was approximately $1.05 per MMBtu
($0.212340 per Unit), $1.03 per MMBtu ($0.189374 per Unit) and $1.01 per MMBtu
($0.180246 per Unit) in 1997, 1996 and 1995, respectively. 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, 1997 is $19,440 per month, or $233,280 annually (net to the
Trust of $14,580 per month or $174,960 annually), and is subject to annual
adjustment based on an oil and gas industry index.
Cross Timbers Oil does not operate or control any of the Underlying
Properties, with the exception of properties from which approximately 20
overriding royalty interests were carved. As of February 28, 1998, Cross
Timbers Oil owned 22.7% of the outstanding Trust Units.
6. Litigation
In May 1997, the Trustee announced the settlement of a lawsuit filed in
December 1991 by Cross Timbers Oil and its predecessor-in-title seeking to
recover revenues suspended by a working interest owner and to obtain a judgment
confirming their interests. As part of the settlement, Cross Timbers Oil
received suspended revenues attributable to certain San Juan Basin overriding
royalty interests underlying the 90% Royalty Trust Interests and distributed to
the Trust proceeds of approximately $733,000, net to the Trust's interest.
Cross Timbers Oil agreed that on the subject properties, it will reduce its
overriding royalty interest by one-half on any newly drilled wells and will
reduce its overriding royalty interest in existing wells on the subject
properties under certain circumstances.
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. 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 had been suspended
since 1990, Trust distributions after this settlement have not been and will not
be reduced from prior historical levels. 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 1997 and 1996:
Distributable
Royalty Distributable Income
Income Income per Unit
----------- ------------- ----------
1997
- ----------------
First Quarter ................. $ 3,114,590 $ 3,069,535 $0.511589
Second Quarter ................ 3,252,445 3,216,639 0.536106
Third Quarter ................. 2,158,987 2,118,133 0.353022
Fourth Quarter ................ 2,023,646 2,002,943 0.333824
----------- ----------- ---------
$10,549,668 $10,407,250 $1.734541
=========== =========== =========
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
=========== =========== =========
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, 1997 and
1996, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the distributable income and changes in trust corpus for
each of the three years in the period ended December 31, 1997, on the modified
cash basis of accounting described in Note 2.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 18, 1998
12
<PAGE>
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
- ----------------------------
ChaseMellon Shareholder Services, L.L.C.
Dallas, Texas
www.chasemellon.com
13
<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
18, 1998, included in the Annual Report on Form 10-K of Cross Timbers Royalty
Trust for the year ended December 31, 1997.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 30, 1998
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE]
March 30, 1998
Cross Timbers Royalty Trust
500 West Seventh Street
P.O. Box 1317
Fort Worth, TX 76102
Re: Cross Timbers Royalty Trust
1997 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 25, 1998, regarding the Cross Timbers Royalty
Trust Proved Reserves and Future Net Revenue as of January 1, 1998, in the 1997
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/ P.G. Von Tungeln
----------------------
P.G. Von Tungeln
Chairman
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 662,486
<SECURITIES> 0
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<DEPRECIATION> 22,996,082
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0
0
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