<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
------------------
Commission File No. 1-10982
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CROSS TIMBERS ROYALTY TRUST
Texas I.R.S. No. 75-6415930
Bank of America, N.A.
P.O. Box 830650
Dallas, Texas 75283-0650
Telephone Number 877/228-5084
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
------- -------
Number of units of beneficial interest outstanding at November 1, 1999:
6,000,000
- ---------
<PAGE>
CROSS TIMBERS ROYALTY TRUST
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
- -----------------------------------------------------------
TABLE OF CONTENTS
Page
----
Glossary of Terms................................................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 4
Report of Independent Public Accountants......................... 5
Condensed Statements of Assets, Liabilities and Trust Corpus
at September 30, 1999 and December 31, 1998...................... 6
Condensed Statements of Distributable Income
for the Three and Nine Months Ended September 30, 1999
and 1998......................................................... 7
Condensed Statements of Changes in Trust Corpus
for the Three and Nine Months Ended September 30, 1999
and 1998......................................................... 8
Notes to Condensed Financial Statements.......................... 9
Item 2. Trustee's Discussion and Analysis................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures....................................................... 18
2
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CROSS TIMBERS ROYALTY TRUST
GLOSSARY OF TERMS
- -----------------
The following are definitions of significant terms used in this Form 10-Q:
Bbl Barrel (of oil)
Mcf Thousand cubic feet (of gas)
net profits interest An interest in an oil and gas property measured by net
profits from the sale of production, rather than a
specific portion of production.
net proceeds Amount received by Cross Timbers Oil from sale of
production from the underlying properties, less
applicable costs.
royalty trust interests Defined net profits interests that were carved from the
underlying properties and entitle the trust to receive
for each of the following:
90% royalty trust interests - 90% of the net
proceeds from the underlying properties, which
are royalty and overriding royalty interests in
Texas, Oklahoma and New Mexico.
75% royalty trust interests - 75% of the net
proceeds from the underlying properties, which
are working interests in Texas and Oklahoma.
underlying properties Cross Timbers Oil's interest in certain oil and gas
properties from which the royalty trust interests were
carved. The underlying properties include royalty and
overriding royalty interests in producing and non-
producing properties in Texas, Oklahoma and New Mexico,
and working interests in producing properties located in
Texas and Oklahoma.
3
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CROSS TIMBERS ROYALTY TRUST
PART I - FINANCIAL STATEMENTS
- -----------------------------
Item 1. Financial Statements.
The condensed financial statements included herein are presented, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted pursuant to such rules and
regulations, although the trustee believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the trust's latest annual report on Form 10-K. In the
opinion of the trustee, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the assets, liabilities and trust
corpus of the Cross Timbers Royalty Trust at September 30, 1999, and the
distributable income and changes in trust corpus for the three and nine-month
periods ended September 30, 1999 and 1998, have been included. Distributable
income for such interim periods is not necessarily indicative of the
distributable income for the full year.
4
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Bank of America, N.A., as Trustee
for the Cross Timbers Royalty Trust:
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the Cross Timbers Royalty Trust as of September 30, 1999 and the
related condensed statements of distributable income and changes in trust corpus
for the three and nine-month periods ended September 30, 1999 and 1998. These
financial statements are the responsibility of the trustee.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
The accompanying condensed financial statements are prepared on a modified cash
basis as described in Note 1 which is a comprehensive basis of accounting other
than generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with the basis of accounting described in Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Cross
Timbers Royalty Trust as of December 31, 1998 included in the trust's 1998
annual report on Form 10-K, and in our report dated March 16, 1999, we expressed
an unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying condensed statement of assets, liabilities and trust
corpus as of December 31, 1998 is fairly stated in all material respects in
relation to the statement of assets, liabilities and trust corpus included in
the trust's 1998 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
November 4, 1999
5
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CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
Condensed Statements of Assets, Liabilities and Trust Corpus
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and short-term investments.............. $ 546,542 $ 528,758
Interest to be received...................... 1,078 781
Net profits interests in oil and gas
properties - net (Note 1).................. 34,422,975 36,024,941
----------- ------------
$34,970,595 $36,554,480
=========== ============
LIABILITIES AND TRUST CORPUS
Distribution payable to unitholders.......... $ 547,620 $ 529,539
Trust corpus (6,000,000 units of beneficial
interest authorized and outstanding)....... 34,422,975 36,024,941
----------- ------------
$34,970,595 $36,554,480
=========== ============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
6
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
Condensed Statements of Distributable Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Royalty income................. $1,696,721 $1,672,455 $4,390,115 $5,662,228
Interest income................ 2,876 2,596 6,675 8,908
---------- ---------- ---------- ----------
Total income................... 1,699,597 1,675,051 4,396,790 5,671,136
Administration expense......... 41,545 37,763 126,975 131,480
---------- ---------- ---------- ----------
Distributable income........... $1,658,052 $1,637,288 $4,269,815 $5,539,656
========== ========== ========== ==========
Distributable income per unit
(6,000,000 units)........... $ 0.276342 $ 0.272882 $ 0.711637 $ 0.923276
========== ========== ========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
7
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CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
Condensed Statements of Changes in Trust Corpus (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Trust corpus, beginning of period.. $35,183,110 $36,921,936 $36,024,941 $38,104,367
Amortization of net profits
interests...................... (760,135) (486,814) (1,601,966) (1,669,245)
Distributable income............... 1,658,052 1,637,288 4,269,815 5,539,656
Distributions declared............. (1,658,052) (1,637,288) (4,269,815) (5,539,656)
----------- ----------- ----------- -----------
Trust corpus, end of period........ $34,422,975 $36,435,122 $34,422,975 $36,435,122
=========== =========== =========== ===========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
8
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CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
Notes to Condensed Financial Statements (Unaudited)
1. Basis of Accounting
The financial statements of the Cross Timbers Royalty Trust are prepared on
the following basis:
- Royalty income recorded for a month is the amount computed and paid by
the interest owner, Cross Timbers Oil Company, to Bank of America,
N.A., as trustee for the trust. Royalty income consists of net
proceeds received by Cross Timbers Oil from the underlying properties
in the prior month, multiplied by net profit percentages of 90% for
the 90% royalty trust interests, and 75% for the 75% royalty trust
interests.
Applicable costs deducted in the calculation of net proceeds for the
90% royalty trust interests generally include applicable taxes,
transportation, marketing and legal costs, and do not include other
production and development costs. For the 75% royalty trust interests,
such costs include production expenses, development costs, applicable
taxes, operating charges and other costs.
- Royalty income is computed separately for each of five conveyances
under which the royalty trust interests were conveyed to the trust. If
monthly costs exceed revenues for any conveyance, such excess costs
cannot reduce royalty income from other conveyances, but are carried
forward with accrued interest to be recovered from future net proceeds
of that conveyance. See Note 3.
- Interest income, interest to be received and distribution payable to
unitholders include interest to be earned from the monthly record date
(last business day of the month) through the date of the next
distribution to unitholders.
- Trust expenses are recorded based on liabilities paid and cash
reserves established by the trustee for liabilities and contingencies.
- Distributions to unitholders are recorded when declared by the
trustee.
The financial statements of the trust differ from financial statements
prepared in accordance with generally accepted accounting principles
("GAAP") because revenues are not accrued in the month of production,
expenses are recognized when paid rather than when incurred, and certain
cash reserves may be established for contingencies which would not be
accrued under GAAP. The initial carrying value of the royalty trust
interests ($61,100,449) represents Cross Timbers Oil's historical net book
value on February 12, 1991, the creation date of the trust. Amortization of
the royalty trust interests is calculated on a unit-of-production basis and
is charged directly to trust corpus. Accumulated amortization was
$26,677,474 as of September 30, 1999 and $25,075,508 as of December 31,
1998.
9
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2. Federal Income Taxes
Tax counsel has advised the trust that, under current tax laws, the trust
will be classified as a grantor trust for federal income tax purposes and
therefore is not subject to taxation at the trust level. However, the
opinion of tax counsel is not binding on the Internal Revenue Service.
The unitholders are considered, for federal income tax purposes, to own the
trust's income and principal as though no trust were in existence. The
income of the trust is deemed to have been received or accrued by the
unitholders at the time such income is received or accrued by the trust,
rather than when distributed by the trust.
Cross Timbers Oil has advised the trustee that the trust receives royalty
income from coal seam gas wells. Production from coal seam gas wells
drilled after December 31, 1979, and prior to January 1, 1993, qualifies
for the federal income tax credit for producing nonconventional fuels under
Section 29 of the Internal Revenue Code. This tax credit, which was
approximately $1.05 per MMBtu for 1998, is recalculated annually based on
each year's qualified production through the year 2002. Such credit, based
on the unitholder's pro rata share of qualifying production, may not reduce
his regular tax liability (after the foreign tax credit and certain other
non-refundable credits) below his tentative minimum tax. Any part of the
Section 29 credit not allowed for the tax year solely because of this
limitation is subject to certain carryover provisions. Unitholders should
consult their tax advisors regarding use of this credit and other trust tax
compliance matters.
Based on 1999 qualifying sales volumes and the factors used in the
calculation of the 1998 coal seam tax credit, the credit is estimated to be
$0.042 per unit for the quarter and $0.127 per unit for the nine months
ended September 30, 1999. The actual coal seam tax credit was $0.044 per
unit for third quarter 1998 and $0.126 per unit for the nine months ended
September 30, 1998. Final 1999 coal seam tax credit data will be provided
to unitholders with year-end tax information.
3. Excess Costs
Cross Timbers Oil has advised the trustee that costs exceeded revenues from
the underlying properties of the 75% royalty trust interests during the
three and nine months ended September 30, 1999 and 1998. The following is a
summary of changes in excess costs by conveyance during these periods.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------
1999 1998
--------------------- ------------------
Texas Oklahoma Texas Oklahoma
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Cumulative excess costs and accrued
interest - beginning of period...... $ 757,604 $ 14,215 $144,740 $ -
Excess costs......................... 34,760 34,345 210,876 10,067
Recovery of excess costs............. (82,609) (14,305) - -
Interest............................. 14,819 90 4,765 46
--------- -------- -------- -------
Cumulative excess costs and
accrued interest - end of period.... $ 724,574 $ 34,345 $360,381 $10,113
========= ======== ======== =======
Net to trust (75%)................... $ 543,431 $ 25,759 $270,286 $ 7,585
========= ======== ======== =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
1999 1998
--------------------- ------------------
Texas Oklahoma Texas Oklahoma
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Cumulative excess costs and accrued
interest - beginning of period...... $ 519,817 $ - $ - $ -
Excess costs......................... 327,318 105,471 354,276 10,067
Recovery of excess costs............. (165,734) (72,312) - -
Interest............................. 43,173 1,186 6,105 46
--------- -------- -------- -------
Cumulative excess costs and
accrued interest - end of period.... $ 724,574 $ 34,345 $360,381 $10,113
========= ======== ======== =======
Net to trust (75%)................... $ 543,431 $ 25,759 $270,286 $ 7,585
========= ======== ======== =======
</TABLE>
Excess costs and accrued interest for each conveyance must be fully
recovered from the respective future net proceeds of the 75% royalty trust
interests before they can again contribute to trust royalty income. Excess
costs and accrued interest from the Oklahoma 75% royalty trust interests
were fully recovered in October 1999. See Item 2, "Trustee's Discussion and
Analysis - Costs."
4. Cross Timbers Oil Company
On June 16, 1998, the trust and Cross Timbers Oil filed a registration
statement with the Securities and Exchange Commission to sell 1,360,000
units (22.7% of outstanding units) held by Cross Timbers Oil. As Cross
Timbers Oil stated in a related news release, the filing was made in
anticipation of better commodity prices and any sale is dependent on an
improved market for oil and gas equities. The trust did not participate in
Cross Timbers Oil's decisions to acquire or sell units and will not receive
any of the proceeds in the event of such sale.
11
<PAGE>
Item 2. Trustee's Discussion and Analysis.
Distributable Income
Quarter
For the quarter ended September 30, 1999, royalty income was $1,696,721 compared
with $1,672,455 for the third quarter of 1998. This 1% increase in royalty
income is primarily the result of higher oil and gas prices, largely offset by
lower oil and gas production and excess cost recovery. See "Royalty Income"
below.
After considering interest income of $2,876 and administration expense of
$41,545, distributable income for the quarter ended September 30, 1999 was
$1,658,052, or $0.276342 per unit of beneficial interest. For the quarter ended
September 30, 1998, distributable income was $1,637,288, or $0.272882 per unit.
Distributions to unitholders for the quarter ended September 30, 1999 were:
<TABLE>
<CAPTION>
Distribution
Record Date Payment Date per Unit
-------------------- ------------------ ------------
<S> <C> <C>
July 30, 1999 August 13, 1999 $0.076045
August 31, 1999 September 15, 1999 0.109027
September 30, 1999 October 15, 1999 0.091270
---------
$0.276342
=========
</TABLE>
Nine Months
For the nine months ended September 30, 1999, royalty income was $4,390,115
compared with $5,662,228 for the same 1998 period. Lower oil and gas production
and lower product prices were the primary reasons for this 22% decrease in
royalty income. See "Royalty Income" below.
After considering interest income of $6,675 and administration expense of
$126,975, distributable income for the nine months ended September 30, 1999 was
$4,269,815, or $0.711637 per unit of beneficial interest. For the nine months
ended September 30, 1998, distributable income was $5,539,656, or $0.923276 per
unit.
Royalty Income
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:
- oil and gas sales volumes,
- oil and gas sales prices, and
- costs deducted in the calculation of royalty income.
Because properties underlying the 90% royalty trust interests are royalty and
overriding royalty interests, they generally bear no costs other than production
and property taxes, related legal costs, and marketing and
12
<PAGE>
transportation charges. In addition to these costs, the 75% royalty trust
interests are subject to production and development costs, since the properties
underlying the 75% royalty trust interests are working interests.
The following are variances in prices, volumes and costs for the underlying
properties:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 (a) Ended September 30 (a)
------------------------ Increase ------------------------- Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales Volumes
Oil (Bbls) 79,435 96,020 (17%) 254,301 297,770 (15%)
Average per day 863 1,044 (17%) 932 1,091 (15%)
Gas (Mcf)................... 935,338 964,888 (3%) 2,669,952 2,727,394 (2%)
Average per day 10,278 10,603 (3%) 9,780 9,990 (2%)
Sales Prices
Oil (per Bbl)............... $16.34 $11.69 40% $12.91 $13.65 (5%)
Gas (per Mcf)............... $2.02 $1.85 9% $1.85 $2.09 (11%)
Revenues
Oil sales................... $1,297,628 $1,122,379 16% $3,283,489 $4,065,830 (19%)
Gas sales................... 1,885,097 1,785,186 6% 4,936,099 5,690,993 (13%)
---------- ---------- ---------- ----------
Total Revenues 3,182,725 2,907,565 9% 8,219,588 9,756,823 (16%)
---------- ---------- ---------- ----------
Costs
Taxes, transportation
and other 478,595 292,290 64% 1,107,696 967,692 14%
Production expense (b)...... 599,642 661,429 (9%) 1,795,597 2,004,130 (10%)
Development costs........... 175,132 314,699 (44%) 616,157 792,981 (22%)
Excess costs................ (69,105) (220,943) (69%) (432,789) (364,343) 19%
Recovery of excess costs 96,915 - - 238,047 - -
---------- ---------- ---------- ----------
Total Costs 1,281,179 1,047,475 22% 3,324,708 3,400,460 (2%)
---------- ---------- ---------- ----------
Net Proceeds $1,901,546 $1,860,090 2% $4,894,880 $6,356,363 (23%)
========== ========== ========== ==========
Royalty Income $1,696,721 $1,672,455 1% $4,390,115 $5,662,228 (22%)
========== ========== ========== ==========
</TABLE>
(a) Because of the interval between time of production and receipt of royalty
income by the trust, (1) oil and gas sales for the quarter ended September
30 generally represent oil production for the period May through July and
gas production for the period April through June and (2) oil and gas sales
for the nine months ended September 30 generally represent oil production
for the period November through July and gas production for the period
October through June.
(b) Includes an overhead fee which is deducted and retained by Cross Timbers
Oil. This fee is currently $22,684 per month and is subject to adjustments
each May based on an oil and gas industry index.
The following are explanations of significant variances:
Sales Volumes
Oil
Decreased oil volumes in third quarter 1999 primarily resulted from timing of
cash receipts. The nine-month oil volume fluctuation was primarily the result
of mechanical complications on one of the underlying Oklahoma working interest
properties which caused a decline of 19,900 Bbls. The remaining nine-month
decline is primarily because of the timing of cash receipts.
13
<PAGE>
Gas
Decreased gas sales volumes were primarily related to the timing of cash
receipts.
Sales Prices
Oil
During December 1998, the average posted West Texas Intermediate crude oil price
fell to $8.00, the lowest level since 1978. Oil prices began to climb in March
1999 following news of further agreed production cuts by OPEC and other oil
producers.
The average posted West Texas Intermediate oil price for August through October
1999 (related to royalty income to be received by the trust in fourth quarter
1999) was $19.79, a 69% increase from the comparable 1998 price of $11.71. The
average posted West Texas Intermediate oil price for October was $19.91.
Gas
Gas prices for third quarter 1999 were higher than in third quarter 1998
primarily because of purchaser deductions which were netted in the gas price in
1998. As of 1999, these purchaser deductions are included in taxes,
transportation and other costs.
Gas prices for the nine months of 1999, which are related to October 1998
through June 1999 production, were lower because of an abnormally warm winter
throughout the United States during the first four months of the year. San Juan
Basin gas prices, in particular, were lower because of an abundance of
hydroelectric energy in West Coast markets following a winter with unusually
high precipitation. The average San Juan Basin index gas price for July through
September 1999 (related to royalty income to be received by the trust in fourth
quarter 1999) was $2.31, a 33% increase from the comparable 1998 price.
Costs
Taxes
Taxes, transportation and other for the quarter increased because of
approximately $200,000 in purchaser deductions for gathering and compression
charges which had previously been netted in the gas sales price. For the nine
months ended September 30, 1999, approximately $425,000 in purchaser deductions
have been recorded which were largely offset by lower production taxes related
to lower oil and gas revenues.
Development
Development costs declined significantly in 1999 as the carbon dioxide injection
project on one of the underlying Texas working interest properties neared
completion in the third quarter.
Excess Costs
Because of lower development costs and higher oil and gas prices, excess costs
for third quarter 1999 were lower than third quarter 1998. Excess costs were
higher for the nine-month period because of significant excess costs in the
first quarter of 1999 primarily related to low oil prices and costs of the
carbon dioxide injection project. See Note 3 to the condensed financial
statements. Excess costs of $34,345 ($25,759 net to the trust) on the Oklahoma
75% royalty trust interests were recovered in October 1999.
As of September 30, 1999, cumulative excess costs and accrued interest of
$724,574 ($543,431 net to the trust) must be recovered before the Texas 75%
royalty trust interests again contribute to royalty income. The Texas 75%
royalty trust interests are expected to recover approximately $136,000 ($102,000
net to the trust) in excess
14
<PAGE>
costs in November 1999. If recent increased oil prices are sustained, it is
expected that this rate of recovery will continue. Because costs exceeded
revenues for all but the first quarter of 1998, the Texas 75% royalty trust
interests only contributed $0.02 per unit to 1998 royalty income, or 1% of total
1998 distributions, as compared with $0.18 per unit, or approximately 10% of
distributions in 1997.
Oil and Gas Sales Volumes for the Royalty Trust Interests
Oil and gas sales volumes are allocated to the royalty trust interests based
upon a formula that considers oil and gas prices and the total amount of
production expenses and development costs. Changes in any of these factors may
result in disproportionate fluctuations in volumes allocated to the royalty
trust interests. Therefore, comparative discussion of oil and gas sales volumes
is based on the underlying properties.
Oil and gas sales volumes attributable to the royalty trust interests are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Oil Sales (Bbls)... 24,040 22,000 63,298 81,597
Gas Sales (Mcf).... 822,978 829,257 2,324,895 2,355,216
</TABLE>
Amortization
Amortization of royalty trust interests, which is directly charged to trust
corpus, increased to $760,135 for third quarter 1999 from $486,814 for the prior
year quarter. Increased amortization is primarily the result of reduced
estimated reserves at the beginning of 1999 based on lower oil prices.
Year 2000
"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations. Computer systems
that are not Year 2000 compliant by January 1, 2000 may have material adverse
effects on companies and organizations that rely upon those systems.
The trust's timely receipt of royalty income and disbursement of distributable
income to unitholders is largely dependent upon performance of computer systems
and computer-controlled equipment of Cross Timbers Oil, ChaseMellon Shareholder
Services, L.L.C. and other third parties, including property operators, oil and
natural gas purchasers and significant service providers such as electric
utility companies and natural gas plant, pipeline and gathering system
operators. Since the trust does not use the trustee's computer systems in any
significant capacity, the trustee's Year 2000 compliance will not materially
affect the trust.
Cross Timbers Oil has completed remediation and testing of its significant
computer systems and computer-controlled field equipment. The remaining less
critical computer systems have been inventoried and assessed. Functional
solutions and remediation of less critical items is expected to be complete by
the end of December 1999. Less critical items are components not considered to
be critical for production, safety or sales. Based on its remediation efforts
and the results of testing to date, Cross Timbers Oil does not believe that
timely modification of its computer systems and computer-controlled equipment
for Year 2000 compliance represents a material risk to the trust. No costs of
such modifications will be incurred by the trust.
15
<PAGE>
With the exception of approximately 20 overriding royalty interests in the San
Juan Basin, Cross Timbers Oil does not operate any of the underlying properties,
nor does Cross Timbers Oil or any of its affiliates generally purchase
significant production from the underlying properties. Therefore, the trust's
Year 2000 exposure is primarily dependent upon compliance of ChaseMellon
Shareholder Services, L.L.C., property operators and product purchasers of
significant underlying properties, as well as vendors who supply critical goods
and services to these third parties. ChaseMellon Shareholder Services, L.L.C.
has notified Cross Timbers Oil that it is Year 2000 compliant. Cross Timbers
Oil has identified and mailed inquiries to, as well as contacted by phone, oil
and gas purchasers and operators whose Year 2000 compliance could significantly
affect them. Of those contacted, 11% indicated that they are currently Year
2000 compliant, 78% indicated that they are in the process of remediating non-
compliant systems and 11% have not yet responded to written inquiries. All
respondents have stated that they will be compliant before January 1, 2000, if
they are not already compliant. Despite their efforts to assure that such third
parties are Year 2000 compliant, neither the trustee nor Cross Timbers Oil can
provide assurance that all significant third parties will achieve timely Year
2000 compliance. Such failure to achieve Year 2000 compliance could have a
material adverse impact on timely trust distributions to unitholders.
Cross Timbers Oil is currently identifying appropriate contingency plans in the
event of potential problems resulting from failure of its computer systems on
January 1, 2000. Contingency plans may include installing backup computer
systems or equipment and temporarily replacing systems or equipment with manual
processes. No contingency plans have been completed to date; Cross Timbers Oil
expects contingency plans to be complete by November 1999.
Forward Looking Statements
This report on Form 10-Q includes "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Form 10-Q, including,
without limitation, statements contained in this "Trustee's Discussion and
Analysis" regarding the royalty trust interests, industry conditions and Year
2000 compliance, are forward looking statements. Although the trustee and Cross
Timbers Oil believe that the expectations reflected in these forward looking
statements are reasonable, they can give no assurance that such expectations
will prove to be correct.
Item. 3 Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the trust's market risks, as disclosed in
the trust's Form 10-K for the year ended December 31, 1998.
16
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Items 1 through 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Number
and Description Page
--------------- ----
(4)(a) Cross Timbers Royalty Trust Indenture Amended and Restated
on January 13, 1992 by NCNB Texas National Bank (now Bank
of America, N.A.) as trustee, heretofore filed as Exhibit
3.1 to the trust's Registration Statement No. 33-44385
filed with the Securities and Exchange Commission on
February 19, 1992, is incorporated herein by reference.
(b) Net Overriding Royalty Conveyance (Cross Timbers Royalty
Trust, 90% - Texas) from South Timbers Limited Partnership,
West Timbers Limited Partnership, North Timbers Limited
Partnership, East Timbers Limited Partnership, Hickory
Timbers Limited Partnership, and Cross Timbers Partners,
L.P. (predecessors of Cross Timbers Oil Company, L.P. which
subsequently merged into Cross Timbers Oil Company) to NCNB
Texas National Bank (now Bank of America, N.A.), as trustee,
dated February 12, 1991 (without Schedules A and B),
heretofore filed as Exhibit 10.1 to the trust's Registration
Statement No. 33-44385 filed with the Securities and Exchange
Commission on February 19, 1992, is incorporated herein by
reference.
(c) Net Overriding Royalty Conveyance (Cross Timbers Royalty
Trust, 75% - Texas) from South Timbers Limited Partnership,
West Timbers Limited Partnership, North Timbers Limited
Partnership, East Timbers Limited Partnership, Hickory
Timbers Limited Partnership, and Cross Timbers Partners, L.P.
(predecessors of Cross Timbers Oil Company, L.P. which
subsequently merged into Cross Timbers Oil Company) to NCNB
Texas National Bank (now Bank of America, N.A.), as trustee,
dated February 12, 1991 (without Schedules A and B),
heretofore filed as Exhibit 10.5 to the trust's Registration
Statement No. 33-44385 filed with the Securities and Exchange
Commission on February 19, 1992, is incorporated herein by
reference.
(15) Awareness letter of Arthur Andersen LLP 19
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS ROYALTY TRUST
By BANK OF AMERICA, N.A., TRUSTEE
By RON E. HOOPER
--------------------------------
Ron E. Hooper
Vice President
CROSS TIMBERS OIL COMPANY
Date: November 12, 1999 By LOUIS G. BALDWIN
--------------------------------
Louis G. Baldwin
Executive Vice President
and Chief Financial Officer
18
<PAGE>
EXHIBIT 15
Bank of America, N.A. as Trustee
for the Cross Timbers Royalty Trust:
We are aware that Cross Timbers Oil Company and Cross Timbers Royalty Trust have
incorporated by reference in Registration Statement No. 333-56983 on Form S-3,
and that Cross Timbers Oil Company has incorporated by reference in its
Registration Statement No. 33-55784 on Form S-8, Cross Timbers Royalty Trust's
Form 10-Q for the quarter ended September 30, 1999, which includes our report
dated November 4, 1999, covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act of 1933, that
report is not considered a part of the registration statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
November 12, 1999
19
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