<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1998 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
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
NationsBank, N.A. 75283-0650
(Zip Code)
Trustee
P.O. Box 830650
Dallas, Texas
(Address of principal executive
offices)
Registrant's telephone number including area code: (877) 228-5084
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
Units of Beneficial Interest New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 1, 1999, there were 6,000,000 Units of beneficial interest of the
Trust outstanding with an aggregate market value on that date of $54 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:
1998 Annual Report to Unit Holders--Part II
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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, N.A., successor of NCNB Texas National
Bank, is now the Trustee of the Trust. The principal office of the Trust is
located at 901 Main Street, Dallas, Texas 75202 (telephone number 877-228-
5084).
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 March 1, 1999, Cross Timbers Oil owned
1,360,000 Units or 22.7% of the outstanding Units.
On June 16, 1998, the Trust and Cross Timbers Oil filed a registration
statement with the Securities and Exchange Commission to sell the 1,360,000
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.
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 $21,440 (total for both 75% conveyances). If production
costs exceed gross proceeds for any
1
<PAGE>
conveyance, such excess is carried forward to the computation of net proceeds
for future months until the excess costs (plus interest accrued as specified
in the conveyances) 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 adding (a) royalty income received, (b) cash
available as a result of reduction of cash reserves and (c) any other cash
receipts (other than interest on the monthly distribution amount), and
subtracting the sum of (1) liabilities paid and (2) 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.
At its discretion, the Trustee can establish cash reserves for
contingencies. Also at the Trustee's discretion, 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 80% of the royalty income received by the Trust during 1998,
as well as 87% of the estimated proved reserves of the Royalty Trust Interests
at December 31, 1998 (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 30.9 Bcf at December 31,
1998, or approximately 85% 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. During 1998, gas-
powered electricity generation increased in the southwest U.S., thereby
increasing demand for San Juan Basin gas.
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 or
tertiary recovery operations:
<TABLE>
<CAPTION>
Ownership of
Cross Timbers Oil
-----------------
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, 1998, there were 1,513 gross (66.8
net) productive oil wells, 1,134 gross (43.2 net) injection wells and no wells
in process of drilling on these properties. No wells were drilled during 1998.
During 1997, 15 gross (1.5 net) producing wells were drilled. During 1996, 36
gross (2.9 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, 1998 are as follows:
<TABLE>
<CAPTION>
90% Royalty 75% Royalty
Trust Interests Trust Interests Total
----------------------------- ----------------------- -----------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
--------- --------- --------- ------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Production
Underlying Properties
Oil--Sales (Bbls)...... 100,592 95,453 89,632 291,777 328,528 347,168 392,369 423,981 436,800
Average per day
(Bbls)................ 276 262 245 799 900 948 1,075 1,162 1,193
Gas--Sales (Mcf)....... 3,398,203 4,301,707 4,275,047 103,890 117,164 110,313 3,502,093 4,418,871 4,385,360
Average per day (Mcf).. 9,310 11,785 11,681 285 321 301 9,595 12,106 11,982
Royalty Trust Interests
Oil--Sales (Bbls)...... 83,856 82,723 77,686 20,918 94,491 90,729 104,774 177,214 168,415
Average per day
(Bbls)................ 230 227 212 57 259 248 287 486 460
Gas--Sales (Mcf)....... 3,010,809 3,844,158 3,797,722 7,857 33,342 31,225 3,018,666 3,877,500 3,828,947
Average per day (Mcf).. 8,249 10,532 10,376 21 91 86 8,270 10,623 10,462
Average Price
Underlying Properties
Oil (per Bbl).......... $14.04 $19.41 $18.56 $13.18 $19.14 $18.61 $13.40 $19.20 $18.60
Gas (per Mcf).......... $2.05 $2.05 $1.50 $1.34 $1.93 $1.92 $2.03 $2.04 $1.51
</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 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.
4
<PAGE>
Pricing and Sales Information
Oil and gas are generally sold from the Underlying Properties at market-
sensitive prices. 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, 1998, 1997, 1996 and 1995. 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.
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
5
<PAGE>
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.
Year-end oil prices used to determine the standardized measure were based on
a West Texas Intermediate crude oil posted price of $9.50 per Bbl in 1998,
$15.50 per Bbl in 1997, $24.25 per Bbl in 1996, and $18.00 per Bbl in 1995.
The year-end weighted average gas prices used to determine the standardized
measure were $1.88 per Mcf in 1998, $1.76 per Mcf in 1997, $2.64 per Mcf in
1996 and $1.37 per Mcf in 1995.
Proved Reserves
The following table reconciles the change in proved reserves attributable to
the Royalty Trust Interests from December 31, 1995 through December 31, 1998
(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,
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
Extensions,
discoveries and other
additions............ 3.6 95.7 -0- -0- 3.6 95.7
Revisions of prior
estimates............ 25.3 1,482.1 (696.7) (282.4) (671.4) 1,199.7
Production............ (83.9) (3,010.8) (20.9) (7.9) (104.8) (3,018.7)
----- -------- -------- ------- ------- --------
Balance, December 31,
1998................... 676.5 36,453.2 247.1 65.3 923.6 36,518.5
===== ======== ======== ======= ======= ========
</TABLE>
During 1998, 1997 and 1996, 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, 1995 and each following year-end through December
31, 1998 (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, 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
===== ======== ======== ====== ======= ========
December 31, 1998.............. 672.8 34,514.0 206.4 60.7 879.2 34,574.7
===== ======== ======== ====== ======= ========
</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, 1998, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
90% Royalty 75% Royalty
Trust Interests Trust Interests Total
December 31, December 31, December 31,
---------------------------- -------------------------- ----------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows..... $ 77,207 $ 77,217 $119,971 $ 2,582 $14,975 $ 45,237 $ 79,789 $ 92,192 $165,208
Future production
taxes.................. (5,401) (5,346) (8,282) (131) (847) (2,611) (5,532) (6,193) (10,893)
-------- -------- -------- ------- ------- -------- -------- -------- --------
Future net cash flows... 71,806 71,871 111,689 2,451 14,128 42,626 74,257 85,999 154,315
10% discount factor..... (37,222) (36,221) (56,805) (1,259) (6,282) (20,663) (38,481) (42,503) (77,468)
-------- -------- -------- ------- ------- -------- -------- -------- --------
Standardized measure.... $ 34,584 $ 35,650 $ 54,884 $ 1,192 $ 7,846 $ 21,963 $ 35,776 $ 43,496 $ 76,847
======== ======== ======== ======= ======= ======== ======== ======== ========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows from
Proved Reserves
The following reconciles the changes during 1998, 1997 and 1996 in the
standardized measure (in thousands):
<TABLE>
<CAPTION>
90% Royalty 75% Royalty
Trust Interests Trust Interests Total
-------------------------- -------------------------- --------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Standardized measure,
January 1.............. $35,650 $ 54,884 $31,068 $ 7,846 $ 21,963 $11,175 $43,496 $ 76,847 $42,243
Extensions, discoveries
and other additions... 155 1,311 460 0 0 178 155 1,311 638
Accretion of discount.. 3,176 4,861 2,767 698 1,980 1,012 3,874 6,841 3,779
Revisions of prior
estimates, changes in
price and other....... 2,369 (16,689) 27,159 (7,038) (14,264) 11,298 (4,669) (30,953) 38,457
Royalty income......... (6,766) (8,717) (6,570) (314) (1,833) (1,700) (7,080) (10,550) (8,270)
------- -------- ------- ------- -------- ------- ------- -------- -------
Standardized measure,
December 31............ $34,584 $ 35,650 $54,884 $ 1,192 $ 7,846 $21,963 $35,776 $ 43,496 $76,847
======= ======== ======= ======= ======== ======= ======= ======== =======
</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 table
summarizes the estimated coal seam tax credit attributable to the 90% Royalty
Trust Interests at December 31, 1998, 1997 and 1996. Such estimates are based
on projected coal seam gas production through the year 2002 as estimated by
independent engineers. The estimates are also based on the current year
estimated Btu content and the coal seam tax credit of $1.05 per MMBtu at
December 31, 1998 and 1997 and $1.03 per MMBtu at December 31, 1996. See
"Regulation--Coal Seam Tax Credit."
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Undiscounted........................................... $2,780 $3,390 $3,946
====== ====== ======
Discounted present value at 10%........................ $2,359 $2,784 $3,150
====== ====== ======
</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, receiving past production due to the
Trust and receiving further compensation for an agreement to reduce the
Trust's interest in the involved properties.
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 1998 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.
8
<PAGE>
State Regulation
The various states regulate the production and sale of oil and natural gas,
including imposing requirements for obtaining drilling permits, the method of
developing new fields, the spacing and operation of wells and the prevention
of waste of oil and gas resources. The rates of production may be regulated
and the maximum daily production allowables from both oil and gas wells may be
established on a market demand or conservation basis, or both.
Coal Seam Tax Credit
The Trust receives royalty income from coal seam wells. Under Section 29 of
the Internal Revenue Code, coal seam gas produced prior to January 1, 2003
from wells drilled after December 31, 1979 and before January 1, 1993,
qualifies for the federal income tax credit for producing nonconventional
fuels. This tax credit for 1998 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
Cross Timbers Oil has advised the Trustee that a lawsuit relating to certain
Texas properties underlying the 75% Royalty Trust Interests has been settled.
Neither the Trust nor Cross Timbers Oil was named as a party in the suit,
filed by surface owners of certain lands in Ector County, Texas. The surface
owners brought suit against various oil and gas operators and leasehold
interest owners that own oil and gas leases covering the lands involved,
alleging that the oil and gas operations of the named defendants polluted the
surface and subsurface of the land involved. The Trust's interest in the
property involved is a 75% net overriding royalty in Cross Timbers Oil's 5.2%
working interest. The cost of the settlement net to the Trust's interest was
approximately $18,000.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Unit holders during 1998.
9
<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, 1998 is
incorporated herein by reference.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Royalty Income.......... $ 7,079,632 $10,549,668 $ 8,269,875 $ 5,739,704 $ 6,934,038
Distributable Income.... 6,927,338 10,407,250 8,076,964 5,578,227 6,748,876
Distributable Income per
Unit................... 1.154555 1.734541 1.346162 0.929705 1.124811
Distributions per Unit.. 1.154555 1.734541 1.346162 0.929705 1.124811
Total Assets at Year-
End.................... 36,554,480 38,767,918 42,716,284 45,547,459 49,587,753
</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, 1998 on pages 5, 6
and 7 of the Trust's Annual Report to Unit holders for the year ended December
31, 1998 is incorporated herein by reference.
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 Unit holders is largely dependent upon performance by
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 systems. 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.
Cross Timbers Oil is in the process of reviewing its computer systems and
computer-controlled field equipment and making the necessary modifications for
Year 2000 compliance. Cross Timbers Oil has completed modifications and
testing of its primary accounting and land computer programs. The remaining
computer systems have been inventoried and assessed. Remediation and testing
of significant remaining systems are expected to be complete by August 1999.
Based on its review, 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.
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. The Trustee and Cross
Timbers Oil have identified significant third parties whose Year 2000
compliance could significantly affect them, and are in the process of formally
inquiring about their Year 2000 status. However, despite their efforts to
assure that such third parties are Year 2000 compliant, the Trustee and Cross
Timbers Oil cannot provide assurance that all significant third parties will
10
<PAGE>
achieve timely Year 2000 compliance. Such failure to achieve Year 2000
compliance could have a material adverse impact on timely Trust distributions
to Unit holders.
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 October 1999.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Under the terms of the Indenture, the Trustee cannot engage the Trust in any
business activity nor cause the Trust to enter into any investments other than
investing cash on hand in specific short-term cash investments. Therefore, the
Trust cannot hold any derivative financial instruments. Additionally, any
gains or losses from any hedging activities conducted by Cross Timbers Oil are
specifically excluded from the calculation of net proceeds due the Trust under
the forms of the Royalty Trust conveyances.
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 16, 1999, appearing on
pages 9 through 12 of the Trust's Annual Report to Unit holders for the year
ended December 31, 1998 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, 1998.
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
of the holders of a majority of all the Units then outstanding.
Item 11. Executive Compensation
The Trustee received the following annual compensation from 1996 through
1998 as specified in the Trust Indenture:
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Compensation (1)
--------------------------- ---- ----------------
<S> <C> <C>
NationsBank, N.A., Trustee 1998 $3,540
1997 7,806
1996 10,072
</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 1, 1999 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. 327,990 Units (2) 5.5%
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, 1998, Haven Capital
Management, Inc. has the sole power to dispose of 323,990 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. As of March 1, 1999, NationsBank owned, in various
fiduciary capacities, an aggregate of 115,646 Units with a shared right to
vote 11,287 of these Units and no right to vote 36,702 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,
1998 is $21,440 per month, or $257,280 annually (net to the Trust of $16,080
or $192,960 annually), and is subject to annual adjustment based on an oil and
gas industry index.
During 1998, NationsBank, N.A. received $11,200 for oil and gas consulting
services performed on behalf of the Trust. See Item 11 for the remuneration
received by the Trustee from 1996 through 1998 and Item 12(b) for information
concerning Units owned by the Trustee, NationsBank, N.A., 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, 1998
and 1997
Statements of Distributable Income for the years ended December 31,
1998, 1997 and 1996
Statements of Changes in Trust Corpus for the years ended December 31,
1998, 1997 and 1996
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, 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, 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, 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, 1998.
(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, N.A., P.O. Box 830650, Dallas, Texas 75283-0650.
(b) Reports on Form 8-K
During the last quarter of the Trust's fiscal year ended December 31, 1998,
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, N.A., TRUSTEE
JOE B. GRISSOM
By: _________________________________
Joe B. Grissom
Vice President
CROSS TIMBERS OIL COMPANY
BENNIE G. KNIFFEN
Date: March 31, 1999 By: _________________________________
Bennie G. Kniffen
Senior Vice President and
Controller
(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 1998 and 1997:
<TABLE>
<CAPTION>
Sales Price
----------------- Distributions
High Low per Unit
-------- ------- -------------
<S> <C> <C> <C>
1998
- ----------------
First Quarter... $17.250 $13.563 $0.382494
Second Quarter.. 17.688 13.500 0.267899
Third Quarter... 14.250 11.063 0.272882
Fourth Quarter.. 12.688 7.625 0.231280
---------
$1.154555
=========
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
=========
- -------------------------------------------------
</TABLE>
At December 31, 1998, there were 6,000,000 Units outstanding and approximately
174 Unit holders of record; 5,651,107 of these Units were held by 12 depository
institutions. As of March 1, 1999, 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 from the underlying working interest properties in either Texas or
Oklahoma, the 75% Royalty Trust Interests for that state will not
contribute to Trust royalty income, and such excess costs will not reduce
royalty income from the other 75% Royalty Trust Interests or from the 90%
Royalty Trust Interests. Because of excess costs, the Texas 75% Royalty
Trust Interests did not contribute to Trust royalty income from April 1998
through the end of the year, and the Oklahoma 75% Royalty Trust Interests
did not contribute in August and September 1998. Such excess costs
generally occur during periods of higher development activity and lower oil
prices. 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 1998 and held
them throughout 1998 would be entitled to a cost depletion deduction of
approximately 8% of his cost. Assuming cost of $14.50 per Unit, cost
depletion would offset 100% of taxable Trust income. After considering the
coal seam tax credit and assuming a 30% tax rate, the 1998 pre-tax return
as a percentage of Unit cost would be 13%. (NOTE- Because the Units are a
depleting asset, a portion of this return 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>
1998 1997 1996
---------------- ---------------- ------------------
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.. $ .094 $1.128 $ .121 $1.453 $ .091 $1.095
- - 75% Royalty Trust Interests.. .004 .052 .025 .306 .024 .283
Administration expense.........
(net of interest income)..... (.002) (.025) (.002) (.024) (.003) (.032)
------ ------ ------ ------ ------ ------
Total Distribution............. $ .096 $1.155 $ .144 $1.735 $ .112 $1.346
====== ====== ====== ====== ====== ======
Nonconventional Fuel...........
Source Tax Credit......... * $ .162 * $ .212 * $ .189
====== ====== ======
</TABLE>
* - Not applicable
2
<PAGE>
TO UNIT HOLDERS
- ---------------
We are pleased to present the 1998 Annual Report of Cross Timbers Royalty Trust
and the Trust's 1998 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, 1998, royalty income totaled $7,079,632 and,
after deducting Trust administration expense, net of interest income,
distributable income was $6,927,338 or $1.154555 per Unit. Royalty income and
distributions for the year were 33% lower than 1997 comparable amounts primarily
because of lower oil sales prices and lower gas sales volumes related to lawsuit
settlement proceeds of $733,000 received in 1997.
Natural gas prices averaged $2.03 per thousand cubic feet ("Mcf") for 1998 sales
from the Underlying Properties, relatively unchanged from the 1997 average price
of $2.04 per Mcf. Gas sales volumes from the Underlying Properties for the year
ended December 31, 1998 totaled 3,502,093 Mcf, a 21% decrease from 1997. Gas
sales volumes in 1997 included 636,000 Mcf attributable to a lawsuit settlement.
Oil sales volumes from the Underlying Properties during 1998 were 392,369 Bbls,
or 7% below 1997 levels, primarily because of temporary disruption of production
related to mechanical complications and initial stages of development projects
on some of the properties underlying the 75% Royalty Interests. The average
Trust oil price decreased to $13.40 per barrel ("Bbl"), down 30% from the 1997
average price of $19.20. Oil prices weakened in December 1997 and continued
their decline to a 20-year low in December 1998. Following news of further
agreed production cuts by OPEC and other oil producers, the posted oil price
climbed above $14 in March 1999. For further information on oil prices, see
"Trustee's Discussion and Analysis - Prices."
Primarily because of lower oil prices, costs exceeded revenues on the 75%
Royalty Trust Interests during 1998. As of March 1999, cumulative excess costs
and accrued interest of $808,361 ($606,271 net to the Trust) must be recovered
from future net proceeds of the Texas 75% Royalty Trust Interests, and
cumulative excess costs and accrued interest of $19,301 ($14,476 net to the
Trust) must be recovered from net proceeds of the Oklahoma 75% Royalty Trust
Interests.
Cross Timbers Oil has advised the Trustee that, with continued improved oil
prices, the Oklahoma 75% Royalty Trust Interests should recover excess costs in
the second quarter of 1999. Cross Timbers Oil has also advised, however, that
until oil prices further improve and a carbon dioxide injection project is
completed on one of the underlying properties, it cannot predict when the Texas
75% Royalty Trust Interests will again contribute to Trust royalty income.
Because costs exceeded revenues for most 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. For further information, see "Trustee's Discussion and
Analysis - Costs."
Coal seam gas sales volumes from the Underlying Properties were 1,165,736 Mcf in
1998, 21% below 1997 coal seam gas volumes as a result of volumes included in
1997 related to a lawsuit settlement, timing of cash receipts and natural
decline. The resulting 1998 coal seam tax credit was $0.162287 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, 1998, proved reserves of the Royalty Trust Interests were
estimated by independent engineers to be 924,000 Bbls of oil and 36.5 billion
cubic feet ("Bcf") of natural gas. Estimated oil reserves decreased 46% from
year-end 1997 to 1998 primarily as a result of the decrease in year-end oil
prices from $15.50 to $9.50 per Bbl and the resulting reduced allocation of
reserves to the Royalty Trust Interests. Gas reserves decreased 4% from year-
end 1997 to 1998 primarily because of production. 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, 1998 are
$74.3 million or $12.38 per Unit. Using an annual discount factor of 10%, the
present value of estimated future net revenues at December 31, 1998 is $35.8
million or $5.96 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 1999,
Trust distributions are considered portfolio income, rather than passive income.
Unit holders should consult their tax advisors for further information.
NationsBank, 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,
1998 is approximately 8 years for oil and 12 years for gas. The reserve-to-
production index is calculated using total proved reserves and estimated 1999
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 13% oil and 87% 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 97% of the discounted future net cash flows from the Trust's
proved reserves at December 31, 1998. Approximately 90% of the discounted
future net cash flows from the 90% Royalty Trust Interests is from gas reserves,
totaling 36.5 Bcf. Oil reserves underlying the 90% Royalty Trust Interests are
primarily located in West Texas and are estimated at December 31, 1998 to be
677,000 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 79% of Trust 1998
gas sales volumes and 64% of Trust 1998 royalty income. As of December 31,
1998, the Trust's proved reserves in this region are estimated to be 30.9 Bcf,
or 85% 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.
This credit for 1998 coal seam gas sales from the San Juan Basin was
approximately $1.05 per MMBtu or $0.162287 per Unit, while the coal seam credit
for 1997 was $1.05 per MMBtu or $0.212340 per Unit. The lower coal seam tax
credit per Unit is primarily because of lawsuit settlement volumes included in
1997, the timing of cash receipts and natural decline. As of December 31, 1998,
the Trust's proved coal seam reserves are estimated to be 5.9 Bcf, as compared
with 6.7 Bcf at December 31, 1997.
75% Royalty Trust Interests
Underlying the 75% Royalty Trust Interests are working interests in seven large
properties in Texas and Oklahoma operated primarily by established oil
companies. These properties are located in mature fields that are undergoing
secondary or tertiary 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 247,000 Bbls at year-end 1998. Based on year-end
oil and gas prices, proved reserves from these interests represent 3% of the
discounted future net cash flows of the Trust's proved reserves at December 31,
1998.
Because these Underlying Properties are working interests, production and
development costs are deducted in calculating royalty income from the 75%
Royalty Trust Interests. As a result, royalty income from these interests is
affected by the level of maintenance and development activity on these
Underlying Properties. Royalty income is also subject to reduction for any
prior period excess costs and is dependent upon oil sales volumes and prices.
Total 1998 development costs were $1,143,141, or 32% above 1997 development
costs of $869,051. Budgeted development costs were $1,200,000 for 1998 and
$700,000 for 1997. Most of the increase in 1998 development costs was related to
a carbon dioxide injection project that began in 1998. First quarter 1999
development costs totaled approximately $360,000; these costs are primarily
related to fourth quarter 1998 expenditures. Unit operators have reported to
Cross Timbers Oil that total budgeted costs are approximately $161,000 for 1999
and $91,000 for 2000, net to Cross Timbers Oil's interests. Included in these
amounts are $113,000 in 1999 and $43,000 in 2000 related to the carbon dioxide
injection project.
During 1998, increased development costs and lower oil prices caused costs to
exceed revenues by $505,011 from properties underlying the Texas 75% Royalty
Trust Interests. For information regarding the effect of excess costs on Trust
royalty income, see "Trustee's Discussion and Analysis - Costs."
4
<PAGE>
TRUSTEE'S DISCUSSION AND ANALYSIS
- ---------------------------------
Royalty income for 1998 was $7,079,632, as compared with $10,549,668 for 1997
and $8,269,875 for 1996. The 33% decrease in royalty income from 1997 to 1998
was primarily because of lower oil prices and lower gas volumes related to
lawsuit settlement proceeds of $733,000 received in 1997. The 28% increase in
royalty income from 1996 to 1997 was primarily because of higher gas prices.
During 1998, 1997 and 1996, 80%, 69% and 64%, respectively, of royalty income
was derived from gas sales.
Trust administration expense was $163,151 in 1998 as compared to $158,669 in
1997 and $204,449 for 1996. Interest income was $10,857 in 1998, $16,251 in 1997
and $11,538 in 1996.
Royalty income is recorded when received by the Trust, which is the month
following receipt by Cross Timbers Oil, and generally two months after oil
production and three months after gas production. Royalty income is generally
affected by three major factors: 1) oil and gas sales volumes, 2) oil and gas
sales prices and 3) costs deducted in the calculation of royalty income.
Volumes
Underlying oil sales volumes decreased 7% from 1997 to 1998, as compared to a 3%
decrease from 1996 to 1997. Lower 1998 oil volumes were primarily because of a
temporary disruption of production from mechanical complications and initial
downtime of development projects on some of the properties underlying the 75%
Royalty Trust Interests. Lower 1997 oil sales volumes were primarily
attributable to natural decline.
Underlying gas sales volumes decreased 21% from 1997 to 1998, compared with a 1%
increase from 1996 to 1997. Underlying gas sales volumes for 1997 and 1996
included 636,000 Mcf and 609,000 Mcf, respectively, attributable to lawsuit
settlement proceeds received by the Trust. Excluding the effects of volumes
related to lawsuit settlement proceeds, gas sales volumes declined 7% in 1998
primarily because of natural decline and timing of cash receipts.
Prices
The average oil price for 1998 was $13.40, 30% lower than the 1997 average price
of $19.20. The 1997 oil price was 3% higher than the 1996 average price of
$18.60. Because of the two-month interval between oil production and receipt by
the Trust of related royalty income, the 1998 average price includes the effect
of oil prices that began to weaken in December 1997 and continued to decline
- --------------------------------------------------------------------------------
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, 1998, 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 24,953 $47,068 $19,772
Coal seam................ - 5,921 8,968 5,822
--- ------ ------- -------
Total................. 84 30,874 56,036 25,594
Other New Mexico........... 127 329 1,639 984
Texas...................... 402 3,539 10,304 5,864
Oklahoma................... 64 1,711 3,827 2,142
--- ------ ------- -------
Total.............. 677 36,453 71,806 34,584
--- ------ ------- -------
75% Royalty Trust Interests
Texas...................... 204 59 2,032 1,152
Oklahoma................... 43 6 419 40
--- ------ ------- -------
Total.............. 247 65 2,451 1,192
--- ------ ------- -------
TOTAL.............. 924 36,518 $74,257 $35,776
=== ====== ======= =======
</TABLE>
(a) Based on year-end oil and gas prices. Total estimated proved oil reserves
decreased 46% and discounted estimated future net revenues from proved
reserves decreased 18% from year-end 1997 to 1998, primarily because of a
39% decline in oil prices 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>
through 1998. West Texas Intermediate posted crude oil prices dropped to $8.00
per barrel in December 1998, the lowest level since 1978. This decline has been
caused by low demand, as well as OPEC's failure to further reduce production
quotas at its November 1998 meeting. The average West Texas Intermediate posted
price for January and February 1999 was $9.56. In March 1999, the posted price
climbed above $14 upon news of further agreed production cuts by OPEC and other
oil producers.
The 1998 average gas price was $2.03, relatively unchanged from the 1997 average
price of $2.04, which was 35% above the 1996 average price of $1.51. Prices
remained depressed for the first six months 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 and 1998, as demand increased in southwest U.S.
markets for gas-powered electricity generation. The average fourth quarter 1998
price, related to first quarter 1999 Trust royalty income, was $1.73 per Mcf.
Primarily because of a milder than normal winter, first quarter 1999 prices
(related to second quarter 1999 Trust royalty income) have weakened. San Juan
Basin prices have recently declined because of an apparent abundance of
hydroelectric energy in West Coast markets following a winter with abnormally
high precipitation.
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. Royalty income is calculated monthly for each
of the 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 must be
recovered, with accrued interest, from future net proceeds of that conveyance.
Before the reduction for net excess costs (see "Excess Costs" below), total
costs deducted in the calculation of royalty income were $4,919,005 in 1998,
$5,036,713 in 1997 and $5,183,440 in 1996. The 2% decrease in costs from 1997
to 1998 is primarily the result of lower production taxes associated with lower
oil and gas revenues, largely offset by increased development costs associated
with a carbon dioxide injection project on one of the properties underlying the
Texas 75% Royalty Trust Interests. 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.
Excess Costs
During 1998, costs exceeded revenues for the Texas 75% Royalty Trust Interests
by $505,011 and the Oklahoma 75% Royalty Trust Interests by $10,067. Excess
costs were primarily the result of low oil prices and increased development
costs related to the 1998 carbon dioxide injection project. Excess costs for
the Oklahoma 75% Royalty Trust Interests and interest of $117 were fully
recovered during 1998. Excess costs from one conveyance cannot reduce royalty
income computed under another conveyance; therefore, year-end cumulative excess
costs of $505,011 ($378,758 net to the Trust) plus accrued interest of $14,806
must be recovered from the properties underlying the Texas 75% Royalty Trust
Interests before they can again contribute to Trust royalty income. As of March
1999, cumulative excess costs and accrued interest of the Texas 75% Royalty
Trust Interests totaled $808,361 ($606,271 net to the Trust).
Budgeted development costs for 1999 include $113,000 related to the carbon
dioxide injection project. Cross Timbers Oil has advised the Trustee that,
unless oil prices further improve (see "Prices" above), costs are expected to
exceed revenues for the Texas 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. The Texas 75% Royalty Trust Interests
contributed only $0.02 per Unit to 1998 royalty income as compared to
approximately $0.18 per Unit to 1997 royalty income, or 10% of total 1997
distributions.
As a result of lower oil prices received in first quarter 1999, costs exceeded
revenues from the Oklahoma 75% Royalty Trust Interests, resulting in cumulative
excess costs of $19,301 as of March 1999. Cross Timbers Oil has advised the
Trustee that, with continued improved oil prices, the Oklahoma 75% Royalty Trust
Interests should recover excess costs in second quarter 1999.
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)
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Oil Sales (Bbls):
Underlying Properties (b).... 392,369 423,981 436,800
Average per day........... 1,075 1,162 1,193
Average price per Bbl..... $ 13.40 $ 19.20 $ 18.60
Royalty Trust Interests (b).. 104,774 177,214 168,415
Gas Sales (Mcf):
Underlying Properties (b).... 3,502,093 4,418,871 4,385,360
Average per day........... 9,595 12,106 11,982
Average price per Mcf..... $ 2.03 $ 2.04 $ 1.51
Royalty Trust Interests (b).. 3,018,666 3,877,500 3,828,947
</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
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ -------------------------
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................. $1,412,415 $3,844,211 $ 1,852,999 $6,288,457 $1,663,559 $6,460,678
Gas sales................. 6,954,471 138,960 8,798,653 225,874 6,413,846 211,960
---------- ---------- ----------- ---------- ---------- ----------
Total.................... 8,366,886 3,983,171 10,651,652 6,514,331 8,077,405 6,672,638
---------- ---------- ----------- ---------- ---------- ----------
Costs
Taxes on production and
property................. 846,489 346,375 954,803 555,996 734,521 534,735
Production and other expenses 2,579 2,580,421 12,080 2,644,783 43,399 2,706,673
Development costs......... - 1,143,141 - 869,051 - 1,164,112
Net excess costs.......... - (504,894) - - - -
---------- ---------- ----------- ---------- ---------- ----------
Total.................... 849,068 3,565,043 966,883 4,069,830 777,920 4,405,520
---------- ---------- ----------- ---------- ---------- ----------
Net Proceeds............... 7,517,818 418,128 9,684,769 2,444,501 7,299,485 2,267,118
Net Profits Percentage..... 90% 75% 90% 75% 90% 75%
---------- ---------- ----------- ---------- ---------- ----------
Royalty Income............. $6,766,036 $ 313,596 $ 8,716,292 $1,833,376 $6,569,536 $1,700,339
========== ========== =========== ========== =========== ==========
TOTAL ROYALTY INCOME....... $7,079,632 $ 10,549,668 $8,269,875
========== ============ ==========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
RESULTS OF 4TH QUARTER
- ----------------------
During the quarter ended December 31, 1998, the Trust received royalty income
totaling $1,417,404, compared with fourth quarter 1997 royalty income of
$2,023,646. Royalty income decreased from fourth quarter 1997 to 1998 primarily
because of decreased gas sales volumes and lower oil prices.
Fourth quarter 1998 distributable income was $1,387,682, or $0.231280 per Unit.
Distributions were $0.062374, $0.080649 and $0.088257 per Unit to Unit holders
of record on October 30, November 30 and December 31, respectively.
Distributable income for fourth quarter 1997 was $2,002,943 or $0.333824 per
Unit. Administration expense and interest income for fourth quarter 1998 were
$31,671 and $1,949, respectively, compared with fourth quarter 1997 amounts of
$23,889 and $3,186, respectively.
Fourth quarter underlying oil sales volumes declined 12% from 1997 to 1998
primarily as a result of one of the Oklahoma underlying working interest
properties being shut-in due to mechanical failures. Natural decline was less
than 1%. Underlying gas sales volumes decreased 18% primarily because of timing
of cash receipts and natural decline. The natural decline rate was
approximately 8%.
The average fourth quarter 1998 oil price was $12.59, or 30% below the fourth
quarter 1997 average price of $17.96. The average fourth quarter gas price was
$1.81 per Mcf in 1998, or 2% lower than the fourth quarter 1997 average price of
$1.85. For further information about oil and gas prices, see "Trustee's
Discussion and Analysis - Prices."
Before the reduction for excess costs, costs deducted in the calculation of
fourth quarter 1998 royalty income decreased $173,300 or 13% from fourth quarter
1997 to 1998. This was primarily the result of a 38% or $136,594 decrease in
production and property tax and a 16% or $113,165 decrease in production expense
related to the timing of maintenance projects and billings by operators. This
was partially offset by a 28% or $76,459 increase in development costs related
to the carbon dioxide injection project on one of the properties underlying the
Texas 75% Royalty Trust Interests.
In calculating Trust royalty income for fourth quarter 1998, costs exceeded
revenues for the Texas 75% Royalty Interests by $150,735, or $113,051 net to the
Trust. Such excess costs are the result of lower oil prices and increased
development costs related to the 1998 carbon dioxide injection project. See
"Trustee's Discussion and Analysis - Costs."
- --------------------------------------------------------------------------------
Comparative Oil and Gas Sales
Fourth quarter 1998 and 1997 oil and gas sales attributable to the Underlying
Properties and the Royalty Trust Interests are as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31 (a)
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Oil Sales (Bbls):
Underlying Properties (b).... 94,599 106,918
Average per day............. 1,028 1,162
Average price per Bbl....... $ 12.59 $ 17.96
Royalty Trust Interests (b).. 23,177 38,060
Gas Sales (Mcf):
Underlying Properties (b).... 774,699 940,900
Average per day............. 8,421 10,227
Average price per Mcf....... $ 1.81 $ 1.85
Royalty Trust Interests (b).. 663,450 817,514
</TABLE>
(a) Because of the interval between time of production and receipt of royalty
income by the Trust, oil and gas sales for the quarter ended December 31
generally relate to oil production from August through October and gas
production from July through September.
(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.
8
<PAGE>
- -------------------------------------------------------------------------------
Cross Timbers Royalty Trust
- ---------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
December 31
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets............................................
Cash and short-term investments.................. $ 528,758 $ 662,486
Interest to be received.......................... 781 1,065
Net overriding royalty interests in oil and gas..
properties - net (Notes 1 and 2)................ 36,024,941 38,104,367
------------ -----------
$ 36,554,480 $38,767,918
============ ===========
Liabilities and Trust Corpus......................
Distribution payable to Unit holders............. $ 529,539 $ 663,551
Trust corpus (6,000,000 Units of beneficial......
interest authorized and outstanding)............ 36,024,941 38,104,367
----------- -----------
$ 36,554,480 $38,767,918
============ ===========
</TABLE>
- -------------------------------------------------------------------------------
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Royalty income................. $7,079,632 $10,549,668 $8,269,875
Interest income................ 10,857 16,251 11,538
---------- ----------- ----------
Total income.................. 7,090,489 10,565,919 8,281,413
Administration expense........ 163,151 158,669 204,449
---------- ----------- ----------
Distributable income.......... $6,927,338 $10,407,250 $8,076,964
========== =========== ==========
Distributable income per Unit
(6,000,000 Units)............ $1.154555 $1.734541 $ 1.346162
========== =========== ==========
</TABLE>
- -------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Trust Corpus,
beginning of year..... $38,104,367 $ 41,337,673 $45,118,209
Amortization of net
overriding royalty
interests............. (2,079,426) (3,233,306) (3,780,536)
Distributable income.... 6,927,338 10,407,250 8,076,964
Distributions declared.. (6,927,338) (10,407,250) (8,076,964)
----------- ------------ -----------
Trust Corpus,
end of year........... $36,024,941 $ 38,104,367 $41,337,673
=========== ============ ===========
</TABLE>
- -------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
9
<PAGE>
Cross Timbers Royalty Trust
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. Trust Organization and Provisions
Cross Timbers Royalty Trust ("Trust") was created on February 12, 1991 by
predecessors of Cross Timbers Oil Company ("Cross Timbers Oil"), when the
following interests ("Royalty Trust Interests") were conveyed under five
separate conveyances to the Trust effective October 1, 1990, in exchange for
6,000,000 units of beneficial interest in the Trust ("Units"):
- net overriding royalty interests equivalent to 90% defined net profits
interests in certain producing and nonproducing royalty interest
properties in Texas, Oklahoma and New Mexico ("90% Royalty Trust
Interests"), and
- net overriding royalty interests equivalent to 75% defined net profits
interests in certain non-operated working interest properties in Texas
and Oklahoma ("75% Royalty Trust Interests").
The properties from which the Royalty Trust Interests were carved
("Underlying Properties") are currently owned by Cross Timbers Oil.
NationsBank, 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: a) disposition of
all Royalty Trust Interests pursuant to terms of the Trust Indenture, b)
when gross revenue of the Trust is less than $1 million per year for two
successive years, or c) 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:
- Royalty income is recognized in the month received rather than accrued in
the month of production.
- Expenses are recognized when paid rather than when incurred.
- 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, 1998 and 1997 was $25,075,508 and
$22,996,082, respectively.
3. Distributions to Unit Holders
The Trustee determines the amount to be distributed to Unit holders each
month by totaling royalty income and other cash receipts, and subtracting
liabilities paid and adjustments in cash reserves established by the Trustee.
The resulting amount (with estimated interest to be received on such amount
through the distribution date) is distributed to Unit holders of record
generally within ten business days after the monthly record date, the last
business day of the month.
Royalty income received by the Trustee consists of the amounts received by
owners of the Underlying Properties from the sale of production, less applicable
costs, multiplied by 90% or 75% for the 90% or 75% Royalty Trust Interests. 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
10
<PAGE>
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. As of December 31, 1998, excess
costs under the Texas 75% Royalty Trust Interests totaled $505,011 ($378,758 net
to the Trust) and related accrued interest was $14,806. As of March 1999, excess
costs and accrued interest under the Texas 75% Royalty Trust Interests totaled
$808,361 ($606,271 net to the Trust), and excess costs and accrued interest
under the Oklahoma 75% Royalty Trust Interests totaled $19,301 ($14,476 net to
the Trust).
4. Federal Income Taxes
Tax counsel has advised the Trust that, under current tax laws, the Trust
will be classified as a grantor trust for federal income tax purposes and
therefore is not subject to taxation at the trust level. However, the opinion of
tax counsel is not binding on the Internal Revenue Service.
For federal income tax purposes, Unit holders are considered to own the
Trust's income and principal as though no trust were in existence. The income
of the Trust is deemed to be 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
($0.162287 per Unit) in 1998, $1.05 per MMBtu ($0.212340 per Unit) in 1997 and
$1.03 per MMBtu ($0.189374 per Unit) in 1996. 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
may be carried over indefinitely as a credit against the Unit holder's regular
tax liability, subject to the tentative minimum tax limitation.
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, 1998 is $21,440 per month, or $257,280 annually (net to the
Trust of $16,080 per month or $192,960 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 March 1, 1999, Cross Timbers
Oil owned 22.7% of the outstanding Trust Units.
6. 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.
7. Quarterly Financial Data (Unaudited)
The following is a summary of royalty income, distributable income and
distributable income per Unit by quarter for 1998 and 1997:
<TABLE>
<CAPTION>
Distributable
Royalty Distributable Income
Income Income per Unit
----------- ------------- -------------
<S> <C> <C> <C>
1998
- ----
First Quarter... $ 2,335,418 $ 2,294,969 $0.382494
Second Quarter.. 1,654,355 1,607,399 0.267899
Third Quarter... 1,672,455 1,637,288 0.272882
Fourth Quarter.. 1,417,404 1,387,682 0.231280
----------- ----------- ---------
$ 7,079,632 $ 6,927,338 $1.154555
=========== =========== =========
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
=========== =========== =========
</TABLE>
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
NationsBank, 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, 1998 and
1997, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1998. 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 the modified cash basis of accounting, which is a comprehensive
basis of accounting other than generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities and trust corpus of the Trust as
of December 31, 1998 and 1997 and its distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1998, on the
modified cash basis of accounting described in Note 2.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 16, 1999
12
<PAGE>
EXHIBIT 23.1
INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
Cross Timbers Royalty Trust
Fort Worth, Texas
As independent public accountants, we hereby consent to the incorporation by
reference in Registration Statement No. 333-56983 on Form S-3 of Cross Timbers
Oil Company and Cross Timbers Royalty Trust and in the Post-Effective Amendment
No. 1 to the Registration Statement No. 33-55784 on Form S-8 of Cross Timbers
Oil Company of our report dated March 16, 1999, included in the Annual Report on
Form 10-K of Cross Timbers Royalty Trust for the year ended December 31, 1998.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 31, 1999
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE]
March 31, 1999
Cross Timbers Royalty Trust
P.O. Box 830650
Dallas, TX 75283-0650
Re: Cross Timbers Royalty Trust
1998 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 22, 1999, regarding the Cross Timbers Royalty
Trust Proved Reserves and Future Net Revenue as of January 1, 1999, in the 1998
Annual Report on Form 10-K.
Miller and Lents, Ltd., has no interests in the Cross Timbers Royalty Trust
or in any affiliated companies or subsidiaries and is not to receive any such
interest as payment for such reports and has no director, officer, or employee
otherwise connected with Cross Timbers Royalty Trust. We are not employed by
Cross Timbers Royalty Trust on a contingent basis.
Yours very truly,
MILLER AND LENTS, LTD.
By /s/ James C. Pearson
--------------------------------
James C. Pearson
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 528,758
<SECURITIES> 0
<RECEIVABLES> 781
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 529,539
<PP&E> 61,100,449
<DEPRECIATION> 25,075,508
<TOTAL-ASSETS> 36,554,480
<CURRENT-LIABILITIES> 529,539
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 36,024,941
<TOTAL-LIABILITY-AND-EQUITY> 36,554,480
<SALES> 7,079,632
<TOTAL-REVENUES> 7,090,489
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 163,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,927,338
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,927,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,927,338
<EPS-PRIMARY> 1.155
<EPS-DILUTED> 1.155
</TABLE>
