<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended June 30, 1999
-------------
Commission File No. 1-10982
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CROSS TIMBERS ROYALTY TRUST
Texas I.R.S. No. 75-6415930
Bank of America, N.A.
P.O. Box 830650
Dallas, Texas 75283-0650
Telephone Number 877/228-5084
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
------- -------
Number of units of beneficial interest outstanding at August 1, 1999: 6,000,000
---------
<PAGE>
CROSS TIMBERS ROYALTY TRUST
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
- ------------------------------------------------------
TABLE OF CONTENTS
Page
----
Glossary of Terms............................................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 4
Report of Independent Public Accountants..................... 5
Condensed Statements of Assets, Liabilities and Trust
Corpus at June 30, 1999 and December 31, 1998............... 6
Condensed Statements of Distributable Income for the
Three and Six Months Ended June 30, 1999 and 1998........... 7
Condensed Statements of Changes in Trust Corpus for the
Three and Six Months Ended June 30, 1999 and 1998.......... 8
Notes to Condensed Financial Statements...................... 9
Item 2. Trustee's Discussion and Analysis............................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 18
Signatures................................................... 19
2
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CROSS TIMBERS ROYALTY TRUST
GLOSSARY OF TERMS
- -----------------
The following are definitions of significant terms used in this Form 10-Q:
Bbl Barrel (of oil)
Mcf Thousand cubic feet (of gas)
net profits interest An interest in an oil and gas property measured by net
profits from the sale of production, rather than a
specific portion of production.
net proceeds Amount received by Cross Timbers Oil from sale of
production from the underlying properties, less
applicable costs.
royalty trust interests Defined net profits interests that were carved from the
underlying properties and entitle the trust to receive
for each of the following:
90% royalty trust interests - 90% of the net
proceeds from the underlying properties, which
are royalty and overriding royalty interests in
Texas, Oklahoma and New Mexico.
75% royalty trust interests - 75% of the net
proceeds from the underlying properties, which
are working interests in Texas and Oklahoma.
underlying properties Cross Timbers Oil's interest in certain oil and gas
properties from which the royalty trust interests were
carved. The underlying properties include royalty and
overriding royalty interests in producing and non-
producing properties in Texas, Oklahoma and New Mexico,
and working interests in producing properties located
in Texas and Oklahoma.
3
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CROSS TIMBERS ROYALTY TRUST
PART I - FINANCIAL STATEMENTS
- -----------------------------
Item 1. Financial Statements.
The condensed financial statements included herein are presented, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted pursuant to such rules and
regulations, although the trustee believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the trust's latest annual report on Form 10-K. In the
opinion of the trustee, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the assets, liabilities and trust
corpus of the Cross Timbers Royalty Trust at June 30, 1999, and the
distributable income and changes in trust corpus for the three and six-month
periods ended June 30, 1999 and 1998, have been included. Distributable income
for such interim periods is not necessarily indicative of the distributable
income for the full year.
4
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Bank of America, N.A., as Trustee
for the Cross Timbers Royalty Trust:
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the Cross Timbers Royalty Trust as of June 30, 1999 and the
related condensed statements of distributable income and changes in trust corpus
for the three and six-month periods ended June 30, 1999 and 1998. These
financial statements are the responsibility of the trustee.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
The accompanying condensed financial statements are prepared on a modified cash
basis as described in Note 1 which is a comprehensive basis of accounting other
than generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with the basis of accounting described in Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Cross
Timbers Royalty Trust as of December 31, 1998 included in the trust's 1998
annual report on Form 10-K, and in our report dated March 16, 1999, we expressed
an unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying condensed statement of assets, liabilities and trust
corpus as of December 31, 1998 is fairly stated in all material respects in
relation to the statement of assets, liabilities and trust corpus included in
the trust's 1998 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
August 6, 1999
5
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CROSS TIMBERS ROYALTY TRUST
Condensed Statements of Assets, Liabilities and Trust Corpus
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and short-term investments.............. $ 432,929 $ 528,758
Interest to be received...................... 673 781
Net profits interests in oil and gas
properties - net (Note 1).................. 35,183,110 36, 024,941
----------- ------------
$35,616,712 $36,554,480
=========== ============
LIABILITIES AND TRUST CORPUS
Distribution payable to unitholders.......... $ 433,602 $ 529,539
Trust corpus (6,000,000 units of beneficial
interest authorized and outstanding)....... 35,183,110 36,024,941
----------- ------------
$35,616,712 $36,554,480
=========== ============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
6
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CROSS TIMBERS ROYALTY TRUST
Condensed Statements of Distributable Income (Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Royalty income................. $1,213,539 $1,654,355 $2,693,394 $3,989,773
Interest income................ 1,771 2,541 3,799 6,312
---------- ---------- ---------- ----------
Total income................... 1,215,310 1,656,896 2,697,193 3,996,085
Administration expense......... 43,935 49,497 85,430 93,717
---------- ---------- ---------- ----------
Distributable income........... $1,171,375 $1,607,399 $2,611,763 $3,902,368
========== ========== ========== ==========
Distributable income per unit
(6,000,000 units)........... $ 0.195230 $0.267899 $0.435295 $0.650393
========== ========== ========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
7
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CROSS TIMBERS ROYALTY TRUST
=====================================================================
Condensed Statements of Changes in Trust Corpus (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Trust corpus, beginning of period.. $35,570,963 $37,423,696 $36,024,941 $38,104,367
Amortization of net profits
interests...................... (387,853) (501,760) (841,831) (1,182,431)
Distributable income............... 1,171,375 1,607,399 2,611,763 3,902,368
Distributions declared............. (1,171,375) (1,607,399) (2,611,763) (3,902,368)
----------- ----------- ----------- -----------
Trust corpus, end of period........ $35,183,110 $36,921,936 $35,183,110 $36,921,936
=========== =========== =========== ===========
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
8
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CROSS TIMBERS ROYALTY TRUST
=====================================================================
Notes to Condensed Financial Statements (Unaudited)
1. Basis of Accounting
The financial statements of the Cross Timbers Royalty Trust are prepared on
the following basis:
- Royalty income recorded for a month is the amount computed and paid by the
interest owner, Cross Timbers Oil Company, to Bank of America, N.A., as
trustee for the trust. Royalty income consists of net proceeds received by
Cross Timbers Oil from the underlying properties in the prior month,
multiplied by net profit percentages of 90% for the 90% royalty trust
interests, and 75% for the 75% royalty trust interests.
Applicable costs deducted in the calculation of net proceeds for the 90%
royalty trust interests generally include applicable taxes, transportation,
marketing and legal costs, and do not include other production and
development costs. For the 75% royalty trust interests, such costs include
production expenses, development costs, applicable taxes, operating charges
and other costs.
- Royalty income is computed separately for each of five conveyances under
which the royalty trust interests were conveyed to the trust. If monthly
costs exceed revenues for any conveyance, such excess costs cannot reduce
royalty income from other conveyances, but are carried forward with accrued
interest to be recovered from future net proceeds of that conveyance. See
Note 3.
- Interest income, interest to be received and distribution payable to
unitholders include interest to be earned from the monthly record date (last
business day of the month) through the date of the next distribution to
unitholders.
- Trust expenses are recorded based on liabilities paid and cash reserves
established by the trustee for liabilities and contingencies.
- Distributions to unitholders are recorded when declared by the trustee.
The financial statements of the trust differ from financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
because revenues are not accrued in the month of production, expenses are
recognized when paid rather than when incurred, and certain cash reserves may
be established for contingencies which would not be accrued under GAAP. The
initial carrying value of the royalty trust interests ($61,100,449) represents
Cross Timbers Oil's historical net book value on February 12, 1991, the
creation date of the trust. Amortization of the royalty trust interests is
calculated on a unit-of-production basis and is charged directly to trust
corpus. Accumulated amortization as of June 30, 1999 and December 31, 1998 is
$25,917,339 and $25,075,508 respectively.
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2. Federal Income Taxes
Tax counsel has advised the trust that, under current tax laws, the trust
will be classified as a grantor trust for federal income tax purposes and
therefore is not subject to taxation at the trust level. However, the
opinion of tax counsel is not binding on the Internal Revenue Service.
The unitholders are considered, for federal income tax purposes, to own the
trust's income and principal as though no trust were in existence. The
income of the trust is deemed to have been received or accrued by the
unitholders at the time such income is received or accrued by the trust,
rather than when distributed by the trust.
Cross Timbers Oil has advised the trustee that the trust receives royalty
income from coal seam gas wells. Production from coal seam gas wells drilled
after December 31, 1979, and prior to January 1, 1993, qualifies for the
federal income tax credit for producing nonconventional fuels under Section
29 of the Internal Revenue Code. This tax credit, which was approximately
$1.05 per MMBtu for 1998, is recalculated annually based on each year's
qualified production through the year 2002. Such credit, based on the
unitholder's pro rata share of qualifying production, may not reduce his
regular tax liability (after the foreign tax credit and certain other non-
refundable credits) below his tentative minimum tax. Any part of the Section
29 credit not allowed for the tax year solely because of this limitation is
subject to certain carryover provisions. Unitholders should consult their
tax advisors regarding use of this credit and other trust tax compliance
matters.
Based on 1999 qualifying sales volumes and the factors used in the
calculation of the 1998 coal seam tax credit, the credit for the quarter and
six months ended June 30, 1999 is estimated to be $0.042 and $0.085 per
unit, respectively. The actual coal seam tax credit for the quarter and six
months ended June 30, 1998 was $0.046 and $0.082, respectively. Final 1999
coal seam tax credit data will be provided to unitholders with year-end tax
information.
3. Excess Costs
Cross Timbers Oil has advised the trustee that costs exceeded revenues from
the underlying properties of the 75% royalty trust interests during the
three and six months ended June 30, 1999 and 1998. The following is a
summary of changes in excess costs by conveyance during these periods. There
were no excess costs for the Oklahoma conveyance during the 1998 periods.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------------- -------- -------------------- --------
Texas Oklahoma Texas Texas Oklahoma Texas
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Cumulative excess costs and accrued
interest - beginning of period..... $808,361 $ 19,301 $ - $519,817 $ - $ -
Excess costs......................... 16,424 46,777 143,400 292,558 71,126 143,400
Recovery of excess costs............. (83,125) (52,814) - (83,125) (58,007) -
Interest............................. 15,944 951 1,340 28,354 1,096 1,340
-------- -------- -------- -------- -------- --------
Cumulative excess costs and
accrued interest - end of period... $757,604 $ 14,215 $144,740 $757,604 $ 14,215 $144,740
======== ======== ======== ======== ======== ========
Net to trust (75%)................... $568,203 $ 10,661 $108,555
======== ======== ========
</TABLE>
10
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Excess costs and accrued interest for each conveyance must be fully
recovered from the respective future net proceeds of the 75% royalty trust
interests before they can again contribute to trust royalty income. Excess
costs and accrued interest from the Oklahoma 75% royalty trust interests
were fully recovered in July 1999. See Item 2, "Trustee's Discussion and
Analysis -Costs."
4. Cross Timbers Oil Company On June 16, 1998, the trust and Cross Timbers
Oil filed a registration statement with the Securities and Exchange
Commission to sell 1,360,000 units (22.7% of outstanding units) held by
Cross Timbers Oil. As Cross Timbers Oil stated in a related news
release, the filing was made in anticipation of better commodity prices
and any sale is dependent on an improved market for oil and gas
equities. The trust did not participate in Cross Timbers Oil's decisions
to acquire or sell units and will not receive any of the proceeds in the
event of such sale.
11
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Item 2. Trustee's Discussion and Analysis.
DISTRIBUTABLE INCOME
Quarter
For the quarter ended June 30, 1999, royalty income was $1,213,539 compared with
$1,654,355 for the second quarter of 1998. This 27% decrease in royalty income
is primarily the result of lower gas production and prices (see "Royalty Income"
below).
After considering interest income of $1,771 and administration expense of
$43,935, distributable income for the quarter ended June 30, 1999 was
$1,171,375, or $0.195230 per unit of beneficial interest. For the quarter ended
June 30, 1998, distributable income was $1,607,399, or $0.267899 per unit.
Distributions to unitholders for the quarter ended June 30, 1999 were:
<TABLE>
<CAPTION>
Distribution
Record Date Payment Date per Unit
------------- ------------ ---------
<S> <C> <C>
April 30, 1999 May 14,1999 $0.065977
May 28, 1999 June 14, 1999 0.056986
June 30, 1999 July 15, 1999 0.072267
---------
$0.195230
=========
</TABLE>
Six Months
For the six months ended June 30, 1999, royalty income was $2,693,394 compared
with $3,989,773 for the same 1998 period. Lower oil and gas prices were the
primary reasons for this 32% decrease in royalty income (see "Royalty Income"
below).
After considering interest income of $3,799 and administration expense of
$85,430, distributable income for the six months ended June 30, 1999 was
$2,611,763, or $0.435295 per unit of beneficial interest. For the six months
ended June 30, 1998, distributable income was $3,902,368, or $0.650393 per unit.
ROYALTY INCOME
Royalty income is recorded when received by the trust, which is the month
following receipt by Cross Timbers Oil, and generally two months after oil
production and three months after gas production. Royalty income is generally
affected by three major factors:
- oil and gas sales volumes,
- oil and gas sales prices, and
- costs deducted in the calculation of royalty income.
Because properties underlying the 90% royalty trust interests are royalty and
overriding royalty interests, they generally bear no costs other than production
and property taxes, related legal costs, and marketing and
12
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transportation charges. In addition to these costs, the 75% royalty trust
interests are subject to production and development costs, since the properties
underlying the 75% royalty trust interests are working interests.
The following are variances in prices, volumes and costs for the underlying
properties:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 (a) Ended June 30 (a)
------------------------------- Increase ------------------------------- Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
----------------- ------------ ----------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Sales Volumes
Oil (Bbls)................ 86,866 97,064 (11%) 174,866 201,750 (13%)
Average per day........... 976 1,091 (11%) 966 1,115 (13%)
Gas (Mcf)................... 815,789 926,605 (12%) 1,734,614 1,762,506 (2%)
Average per day........... 9,064 10,296 (12%) 9,531 9,684 (2%)
Sales Prices
Oil (per Bbl)............... $12.28 $12.91 (5%) $11.36 $14.59 (22%)
Gas (per Mcf)............... $1.79 $1.88 (5%) $1.76 $2.22 (21%)
Revenues
Oil sales................... $1,066,701 $1,252,941 (15%) $1,985,861 $2,943,451 (33%)
Gas sales................... 1,458,981 1,744,978 (16%) 3,051,002 3,905,807 (22%)
---------- ---------- ---------- ----------
Total Revenues............ 2,525,682 2,997,919 (16%) 5,036,863 6,849,258 (26%)
---------- ---------- ---------- ----------
Costs
Taxes, transportation
and other.................. 397,432 327,592 21% 629,101 675,402 (7%)
Production expense.......... 625,349 637,160 (2%) 1,195,955 1,342,701 (11%)
Development costs........... 81,786 331,293 (75%) 441,025 478,282 (8%)
Excess costs................ (63,201) (143,400) (56%) (363,684) (143,400) 154%
Recovery of excess costs.... 135,939 - - 141,132 - -
---------- ---------- ---------- ----------
Total Costs............... 1,177,305 1,152,645 2% 2,043,529 2,352,985 (13%)
---------- ---------- ---------- ----------
Net Proceeds................. $1,348,377 $1,845,274 (27%) $2,993,334 $4,496,273 (33%)
========== ========== ========== ==========
Royalty Income............... $1,213,539 $1,654,355 (27%) $2,693,394 $3,989,773 (32%)
========== ========== ========== ==========
</TABLE>
=======================================
(a) Because of the interval between time of production and receipt of royalty
income by the trust, (1) oil and gas sales for the quarter ended June 30
generally represent oil production for the period February through April
and gas production for the period January through March and (2) oil and
gas sales for the six months ended June 30 generally represent oil
production for the period November through April and gas production for
the period October through March .
The following are explanations of significant variances:
SALES VOLUMES
Oil
Decreases are primarily the result of mechanical complications and initial
downtime of workover and development projects on some of the underlying working
interest properties. Mechanical complications on one of the underlying Oklahoma
working interest properties caused second quarter volumes to decline 6,335 Bbls,
or 25%, and six-month volumes to decline 16,116 Bbls, or 30%, from 1998 to 1999.
Cross Timbers Oil
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has advised the trustee that it expects production from this property to
recover, but cannot predict when recovery will occur.
Gas
Decreased gas sales volumes are primarily because of the timing of cash receipts
and purchaser adjustments.
SALES PRICES
Oil
During December 1998, the average West Texas Intermediate crude oil price fell
to $8.00, the lowest level since 1978. Oil prices began to climb in March 1999
following news of further agreed production cuts by OPEC and other oil
producers.
The average posted West Texas Intermediate oil price for May through July 1999
(related to royalty income to be received by the trust in third quarter 1999)
was $16.01, a 37% increase from the comparable 1998 price of $11.70. The
average posted West Texas Intermediate oil price for July was $17.38.
Gas
Gas prices for the first half of 1999, which are related to fourth quarter 1998
and first quarter 1999 production, were lower because of an abnormally warm
winter throughout the United States. San Juan Basin gas prices, in particular,
were lower because of an abundance of hydroelectric energy in West Coast markets
following a winter with unusually high precipitation.
Cooler spring weather and lower industry production levels helped to strengthen
prices beginning in April. The average San Juan Basin index gas price for April
through June 1999 (related to royalty income to be received by the trust in
third quarter 1999) was $1.86, a 4% decrease from the comparable 1998 price.
COSTS
Taxes
Taxes, transportation and other for the quarter increased because of
approximately $185,000 in purchaser deductions for gathering and compression
charges which had previously been netted in the gas sales price. These charges
were partially offset by lower production and property taxes, primarily related
to lower oil and gas revenues. For the six-month period, the reduction in
production and property taxes related to lower revenues exceeded the increase
related to purchaser deductions.
Development
Development costs declined significantly in the second quarter as the carbon
dioxide injection project on one of the underlying Texas working interest
properties neared completion.
Excess costs
Because of lower development costs and higher oil prices, excess costs for the
quarter were lower and the 75% royalty trust interests began to recover prior
excess costs in May 1999. Excess costs are higher for the six-month period
because of significant excess costs in the first quarter of 1999 primarily
related to low oil prices and costs of the carbon dioxide injection project.
See Note 3 to the condensed financial statements.
Cumulative excess costs and accrued interest from the Oklahoma 75% royalty trust
interests were fully recovered in July 1999. During 1998, the Oklahoma 75%
royalty trust interests contributed $0.03 per unit
14
<PAGE>
to royalty income, or approximately 3% of total trust distributions. During
1997, the Oklahoma 75% royalty trust interests contributed $0.12 per unit, or
approximately 7% of total distributions.
As of June 30, 1999, cumulative excess costs and accrued interest of $757,604
must be recovered before the Texas 75% royalty trust interests again contribute
to royalty income. The Texas 75% royalty trust interests recovered
approximately $58,000 in excess costs in each of June and July 1999. With
recent increased oil prices, this recovery rate should increase. Because costs
exceeded revenues for all but the first quarter of 1998, the Texas 75% royalty
trust interests only contributed $0.02 per unit to 1998 royalty income, or 1% of
total 1998 distributions, as compared with $0.18 per unit, or approximately 10%
of distributions in 1997.
OIL AND GAS SALES VOLUMES FOR THE ROYALTY TRUST INTERESTS
Oil and gas sales volumes are allocated to the royalty trust interests based
upon a formula that considers oil and gas prices and the total amount of
production expenses and development costs. Changes in any of these factors may
result in disproportionate fluctuations in volumes allocated to the royalty
trust interests. Therefore, comparative discussion of oil and gas sales volumes
is based on the underlying properties.
Oil and gas sales volumes attributable to the royalty trust interests are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------- --------------------
1999 1998 1999 1998
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Oil Sales (Bbls).. 19,827 22,535 39,258 55,597
Gas Sales (Mcf)... 708,220 800,294 1,501,917 1,525,959
</TABLE>
AMORTIZATION
Amortization of royalty trust interests, which is directly charged to trust
corpus, decreased to $387,853 for second quarter 1999 from $501,760 for the
prior year quarter. For the first half of 1999, amortization decreased to
$841,831 from $1,182,431 for the first half of 1998. Decreased amortization is
the result of lower oil and gas sales volumes, as well as reduced oil sales
volumes allocated to the royalty trust interests because of excess costs.
YEAR 2000
- ---------
"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations. Computer systems
that are not Year 2000 compliant by January 1, 2000 may have material adverse
effects on companies and organizations that rely upon those systems.
The trust's timely receipt of royalty income and disbursement of distributable
income to unitholders is largely dependent upon performance 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
15
<PAGE>
the trustee's computer systems in any significant capacity, the trustee's Year
2000 compliance will not materially 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 the end of 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. ChaseMellon Shareholder Services, L.L.C.
has notified Cross Timbers Oil that it is Year 2000 compliant. The trustee and
Cross Timbers Oil have identified and mailed inquiries to oil and gas purchasers
and operators whose Year 2000 compliance could significantly affect them. Of
those contacted, 11% indicated that they are currently Year 2000 compliant, 56%
indicated that they are in the process of remediating non-compliant systems and
33% have not yet responded to written inquiries. All respondents have stated
that they will be compliant before January 1, 2000, if they are not already
compliant. Cross Timbers Oil will contact non-respondents by the end of August
1999. Despite their efforts to assure that such third parties are Year 2000
compliant, neither the trustee nor Cross Timbers Oil can provide assurance that
all significant third parties will achieve timely Year 2000 compliance. Such
failure to achieve Year 2000 compliance could have a material adverse impact on
timely trust distributions to unitholders.
Cross Timbers Oil is currently identifying appropriate contingency plans in the
event of potential problems resulting from failure of its computer systems on
January 1, 2000. Contingency plans may include installing backup computer
systems or equipment and temporarily replacing systems or equipment with manual
processes. No contingency plans have been completed to date; Cross Timbers Oil
expects contingency plans to be complete by October 1999.
FORWARD LOOKING STATEMENTS
- --------------------------
This report on Form 10-Q includes "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Form 10-Q, including,
without limitation, statements contained in this "Trustee's Discussion and
Analysis" regarding the royalty trust interests and industry conditions, are
forward looking statements. Although the trustee and Cross Timbers Oil believe
that the expectations reflected in these forward looking statements are
reasonable, they can give no assurance that such expectations will prove to be
correct.
16
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Item. 3 Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the trust's market risks, as disclosed in
the trust's Form 10-K for the year ended December 31, 1998.
17
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PART II - OTHER INFORMATION
- ----------------------------
Items 1 through 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Number
and Description Page
--------------- ----
(4)(a) Cross Timbers Royalty Trust Indenture Amended and Restated on
January 13, 1992 by NCNB Texas National Bank (now Bank of
America, N.A.) as trustee, heretofore filed as Exhibit 3.1 to
the trust's Registration Statement No. 33-44385 filed with
the Securities and Exchange Commission on February 19, 1992,
is incorporated herein by reference.
(b) Net Overriding Royalty Conveyance (Cross Timbers Royalty
Trust, 90% - Texas) from South Timbers Limited Partnership,
West Timbers Limited Partnership, North Timbers Limited
Partnership, East Timbers Limited Partnership, Hickory
Timbers Limited Partnership, and Cross Timbers Partners, L.P.
(predecessors of Cross Timbers Oil Company, L.P. which
subsequently merged into Cross Timbers Oil Company) to NCNB
Texas National Bank (now Bank of America, N.A.), as trustee,
dated February 12, 1991 (without Schedules A and B), heretofore
filed as Exhibit 10.1 to the trust's Registration Statement
No. 33-44385 filed with the Securities and Exchange Commission
on February 19, 1992, is incorporated herein by reference.
(c) Net Overriding Royalty Conveyance (Cross Timbers Royalty Trust,
75% - Texas) from South Timbers Limited Partnership, West
Timbers Limited Partnership, North Timbers Limited Partnership,
East Timbers Limited Partnership, Hickory Timbers Limited
Partnership, and Cross Timbers Partners, L.P. (predecessors
of Cross Timbers Oil Company, L.P. which subsequently merged
into Cross Timbers Oil Company) to NCNB Texas National Bank
(now Bank of America, N.A.), as trustee, dated February 12, 1991
(without Schedules A and B), heretofore filed as Exhibit 10.5
to the trust's Registration Statement No. 33-44385 filed with
the Securities and Exchange Commission on February 19, 1992,
is incorporated herein by reference.
(15) Awareness letter of Arthur Andersen LLP 20
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS ROYALTY TRUST
By BANK OF AMERICA, N.A., TRUSTEE
By /s/ RON E. HOOPER
-----------------------------
Ron E. Hooper
Vice President
CROSS TIMBERS OIL COMPANY
Date: August 13, 1999 By /s/ BENNIE G. KNIFFEN
-----------------------------
Bennie G. Kniffen
Senior Vice President and
Controller
19
<PAGE>
EXHIBIT 15
Bank of America, N.A. as Trustee
for the Cross Timbers Royalty Trust:
We are aware that Cross Timbers Oil Company and Cross Timbers Royalty Trust have
incorporated by reference in Registration Statement No. 333-56983 on Form S-3,
and that Cross Timbers Oil Company has incorporated by reference in its
Registration Statement No. 33-55784 on Form S-8, Cross Timbers Royalty Trust's
Form 10-Q for the quarter ended June 30, 1999, which includes our report dated
August 6, 1999, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
August 13, 1999
20
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