<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, Commission file number 1-10982
1999
Cross Timbers Royalty Trust
(Exact name of registrant as specified in the Cross Timbers Royalty Trust
Indenture)
Texas 75-6415930
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
Bank of America, N.A. 75283-0650
Trustee (Zip Code)
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:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Units of Beneficial Interest New York Stock Exchange
</TABLE>
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, 2000, there were 6,000,000 units of beneficial interest of the
trust outstanding. The aggregate market value of the units (based on the
closing price on the New York Stock Exchange on March 1, 2000) held by non-
affiliates of the registrant on that date was approximately $52.9 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:
1999 Annual Report to Unitholders--Part II
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
Item 1. Business
Cross Timbers Royalty Trust is an express trust created under the laws of
Texas pursuant to the Cross Timbers Royalty Trust Indenture entered into on
February 12, 1991 between predecessors of Cross Timbers Oil Company, as
grantors, and NCNB Texas National Bank, as trustee. Bank of America, 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 of Cross Timbers Oil conveyed defined
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% defined net profits interest carved out of substantially all royalty
and overriding royalty interests owned by the predecessors in those
states, and
-- one in each of the states of Texas and Oklahoma, to convey a 75% defined
net profits interest carved out of specific working interests owned by
the predecessors in those states.
The conveyance of these interests, referred to collectively herein as the
"royalty trust interests," was effective for production from October 1, 1990.
The royalty trust interests and the underlying properties are further
described under Item 2.
In exchange for the conveyance of the royalty trust interests to the trust,
the predecessors of Cross Timbers Oil received 12,000,000 units of beneficial
interest of the trust, which were converted into 6,000,000 units following a
1-for-2 reverse split in January 1992. Predecessors of Cross Timbers Oil
distributed units to their owners in February 1991 and November 1992, and in
February 1992, sold units in the trust's initial public offering. 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 Cross
Timbers Oil to purchase two million units. As of March 1, 2000, 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 are the gross proceeds received from the sale of production, less
production costs. For the 90% royalty trust interests and the 75% royalty
trust interests, "production costs" generally include applicable property
taxes, transportation, marketing and other charges. For the 75% royalty trust
interests only, production costs also include capital and operating costs paid
(e.g., drilling, production and other direct costs of owning and operating the
property) and a monthly overhead charge that is adjusted annually. The monthly
overhead charge at December 31, 1999 was $22,684. If production costs exceed
gross proceeds for any conveyance, such excess is carried forward to the
computation of net proceeds for future months until the excess 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 will
be reduced by the overpayment, plus interest at the prime rate.
1
<PAGE>
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 Cross Timbers Oil acquired the
underlying working interest in December 1997 and became operator. As a working
interest owner, Cross Timbers Oil can generally 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 monthly distribution
amount to unitholders is determined by:
Adding--
(1) royalty income received,
(2) estimated interest income to be received on the monthly distribution
amount, including an adjustment for the difference between the
estimated and actual interest received for the prior monthly
distribution amount,
(3) cash available as a result of reduction of cash reserves, and
(4) any other cash receipts, and
Subtracting the sum of--
(1) liabilities paid and
(2) the reduction in cash available due to establishment of or increase in
any cash reserve.
The monthly distribution amount is distributed to unitholders 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 and announces the distribution per unit at
least ten days prior to the monthly record date.
The trustee may establish cash reserves for contingencies. Cash held for
such reserves, as well as for pending payment of the monthly distribution
amount may be invested in federal obligations or certificates of deposit of
major banks.
The trustee's function is to collect the royalty income from the royalty
trust interests, to pay all trust expenses and pay the monthly distribution
amount to unitholders. The trustee's powers are specified by the terms of the
indenture. The trust cannot engage in any business activity or acquire any
assets other than the royalty trust interests and specific short-term cash
investments. The trust has no employees since all administrative functions are
performed by the trustee.
Approximately 79% of the royalty income received by the trust during 1999,
as well as 60% of the estimated proved reserves of the royalty trust interests
at December 31, 1999 (based on the discounted present value using year-end oil
and gas prices), is attributable to natural gas. There has historically been
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 unitholders or at such time as the trust's gross revenue is less
than $1,000,000 for two successive years.
The royalty trust interests are composed of:
--the 90% royalty trust interests which are carved from:
a) producing royalty and overriding royalty interest properties in Texas,
Oklahoma and New Mexico, and
b) 11.11% non-participating royalty interests in nonproducing properties
located primarily in Texas and Oklahoma;
--the 75% royalty trust interests which are carved from nonoperated working
interests in four properties in Texas and three properties in Oklahoma.
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.
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 29.3 Bcf at December 31,
1999, or approximately 82% 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 or 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. During 1996, additional eastward pipeline capacity was
completed in the San Juan Basin, reducing the dependence of San Juan Basin gas
on California markets and effectively increasing San Juan Basin gas prices in
relation to prices from other regions. Gas-powered electricity generation
continues to increase in the southwest U.S., thereby increasing demand for San
Juan Basin gas. Additional eastward pipeline capacity for western Canadian gas
supplies, which previously were primarily directed to U.S. West Coast markets,
has also improved the market 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. or 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, 1999, there were 1,480 gross (66.5
net) productive oil wells, 989 gross (41.6 net) injection wells and no wells
in process of drilling on these properties. During 1999, 8 gross (0.1 net)
producing wells were drilled. No wells were drilled during 1998. During 1997,
15 gross (1.5 net) producing wells were drilled.
Oil and Gas Production
Trust production is recognized in the period royalty income is received,
which is the month following receipt by Cross Timbers Oil, and generally two
months after the time of oil production and three months after gas production.
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, 1999 were as follows:
<TABLE>
<CAPTION>
75% Royalty Trust
90% Royalty Trust Interests Interests Total
-------------------------------- -------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Production
Underlying Properties
Oil--Sales (Bbls)..... 92,650 100,592 95,453 255,959 291,777 328,528 348,609 392,369 423,981
Average per day
(Bbls)............... 254 276 262 701 799 900 955 1,075 1,162
Gas--Sales (Mcf)...... 3,548,594 3,398,203 4,301,707 94,429 103,890 117,164 3,643,023 3,502,093 4 ,418,871
Average per day
(Mcf)................ 9,722 9,310 11,785 259 285 321 9,981 9,595 12,106
Royalty Trust Interests
Oil--Sales (Bbls)..... 77,783 83,856 82,723 19,894 20,918 94,491 97,677 104,774 177,214
Average per day
(Bbls)............... 213 230 227 55 57 259 268 287 486
Gas--Sales (Mcf)...... 3,152,693 3,010,809 3,844,158 10,249 7,857 33,342 3,162,942 3,018,666 3,877,500
Average per day
(Mcf)................ 8,638 8,249 10,532 28 21 91 8,666 8,270 10,623
Average Sales Price
Oil (per Bbl)......... $ 14.54 $ 14.04 $ 19.41 $ 15.01 $ 13.18 $ 19.14 $ 14.88 $ 13.40 $ 19.20
Gas (per Mcf)......... $ 2.01 $ 2.05 $ 2.05 $ 1.35 $ 1.34 $ 1.93 $ 1.99 $ 2.03 $ 2.04
</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 Natural 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 unitholder (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, has estimated oil
and gas reserves attributable to the underlying properties and royalty trust
interests as of December 31, 1999, 1998, 1997 and 1996. 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 $22.75 per Bbl in 1999,
$9.50 per Bbl in 1998, $15.50 per Bbl in 1997 and $24.25 per Bbl in 1996. The
year-end weighted average realized gas prices used to determine the
standardized measure were $2.19 per Mcf in 1999, $1.88 per Mcf in 1998, $1.76
per Mcf in 1997 and $2.64 per Mcf in 1996.
Proved Reserves
The following table reconciles the change in proved reserves attributable to
the royalty trust interests and underlying properties from December 31, 1996
through December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Royalty Trust Interests
----------------------------------------------------
75% Royalty
90% Royalty Trust Underlying
Trust Interests Interests Total Properties
---------------- --------------- ----------------- ------------------
Oil Gas Oil Gas Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
------ -------- ------- ------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 680.8 39,680.6 1,805.0 690.5 2,485.8 40,371.1 5,282.3 46,421.8
Extensions, discoveries
and other additions... 107.9 270.0 -0- -0- 107.9 270.0 122.3 310.8
Revisions of prior
estimates............. 25.5 1,779.7 (745.8) (301.5) (720.3) 1,478.2 (562.3) 1,761.7
Production............. (82.7) (3,844.1) (94.5) (33.4) (177.2) (3,877.5) (424.0) (4,418.9)
----- -------- ------- ------ ------- -------- -------- --------
Balance, December 31,
1997................... 731.5 37,886.2 964.7 355.6 1,696.2 38,241.8 4,418.3 44,075.4
Extensions, discoveries
and other additions... 3.6 95.7 -0- -0- 3.6 95.7 4.1 265.6
Revisions of prior
estimates............. 25.3 1,482.1 (696.7) (282.4) (671.4) 1,199.7 (1,620.1) 894.5
Production............. (83.9) (3,010.8) (20.9) (7.9) (104.8) (3,018.7) (392.4) (3,502.1)
----- -------- ------- ------ ------- -------- -------- --------
Balance, December 31,
1998................... 676.5 36,453.2 247.1 65.3 923.6 36,518.5 2,409.9 41,733.4
Extensions, discoveries
and other additions... 10.5 162.2 -0- -0- 10.5 162.2 13.1 186.0
Revisions of prior
estimates............. 109.9 1,462.1 1,251.8 533.4 1,361.7 1,995.5 2,385.7 2,322.0
Production............. (77.8) (3,152.7) (19.9) (10.2) (97.7) (3,162.9) (348.6) (3,643.0)
----- -------- ------- ------ ------- -------- -------- --------
Balance, December 31,
1999................... 719.1 34,924.8 1,479.0 588.5 2,198.1 35,513.3 4,460.1 40,598.4
===== ======== ======= ====== ======= ======== ======== ========
</TABLE>
During 1999, 1998 and 1997, upward 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 and the
underlying properties' proved oil 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 attributable to the royalty trust interests and underlying properties
as of December 31, 1996 and each following year-end through December 31, 1999
(in thousands):
<TABLE>
<CAPTION>
Royalty Trust Interests
------------------------------------------------
90% Royalty 75% Royalty Underlying
Trust Interests Trust Interests Total Properties
--------------- -------------------------------- ----------------
Oil Gas Oil Gas Oil Gas Oil Gas
(Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
------ -------- -------- -------------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996....... 676.6 37,705.7 1,701.2 675.7 2,377.8 38,381.4 5,044.7 44,172.4
===== ======== ======== ====== ======= ======== ======= ========
December 31, 1997....... 727.9 35,947.4 908.6 346.8 1,636.5 36,294.2 4,231.6 43,576.1
===== ======== ======== ====== ======= ======== ======= ========
December 31, 1998....... 672.8 34,514.0 206.4 60.7 879.2 34,574.7 2,195.1 39,520.1
===== ======== ======== ====== ======= ======== ======= ========
December 31, 1999....... 715.7 33,036.5 1,375.0 570.3 2,090.7 33,606.8 4,245.6 38,463.3
===== ======== ======== ====== ======= ======== ======= ========
</TABLE>
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 for the royalty trust interests and
underlying properties as of December 31, 1999, 1998 and 1997 (in thousands):
Royalty Trust Interests
<TABLE>
<CAPTION>
90% Royalty 75% Royalty
Trust Interests Trust Interests Total
December 31, December 31, December 31,
---------------------------- -------------------------- ----------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows..... $ 97,902 $ 77,207 $ 77,217 $ 36,670 $ 2,582 $14,975 $134,572 $ 79,789 $ 92,192
Future production
taxes.................. (7,751) (5,401) (5,346) (2,487) (131) (847) (10,238) (5,532) (6,193)
-------- -------- -------- -------- ------- ------- -------- -------- --------
Future net cash flows... 90,151 71,806 71,871 34,183 2,451 14,128 124,334 74,257 85,999
10% discount factor..... (46,573) (37,222) (36,221) (17,135) (1,259) (6,282) (63,708) (38,481) (42,503)
-------- -------- -------- -------- ------- ------- -------- -------- --------
Standardized measure.... $ 43,578 $ 34,584 $ 35,650 $ 17,048 $ 1,192 $ 7,846 $ 60,626 $ 35,776 $ 43,496
======== ======== ======== ======== ======= ======= ======== ======== ========
</TABLE>
Underlying Properties
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows............................... $200,075 $104,659 $143,174
Future costs:
Production...................................... (52,858) (20,265) (43,451)
Development..................................... (517) (519) (526)
-------- -------- --------
Future net cash flows............................. 146,700 83,875 99,197
10% discount factor............................... (74,879) (43,282) (48,803)
-------- -------- --------
Standardized measure.............................. $ 71,821 $ 40,593 $ 50,394
======== ======== ========
</TABLE>
7
<PAGE>
Changes in Standardized Measure of Discounted Future Net Cash Flows from
Proved Reserves
The following reconciles the changes during 1999, 1998 and 1997 in the
standardized measure for the royalty trust interests (in thousands):
<TABLE>
<CAPTION>
90% Royalty 75% Royalty
Trust Interests Trust Interests Total
-------------------------- -------------------------- --------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- -------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Standardized measure, January 1.... $34,584 $35,650 $ 54,884 $ 1,192 $ 7,846 $ 21,963 $35,776 $43,496 $ 76,847
Extensions, discoveries and other
additions........................ 384 155 1,311 -0- -0- -0- 384 155 1,311
Accretion of discount............. 3,078 3,176 4,861 106 698 1,980 3,184 3,874 6,841
Revisions of prior estimates,
changes in price and other....... 11,864 2,369 (16,689) 16,109 (7,038) (14,264) 27,973 (4,669) (30,953)
Royalty income.................... (6,332) (6,766) (8,717) (359) (314) (1,833) (6,691) (7,080) (10,550)
------- ------- -------- ------- ------- -------- ------- ------- --------
Standardized measure, December 31.. $43,578 $34,584 $ 35,650 $17,048 $ 1,192 $ 7,846 $60,626 $35,776 $ 43,496
======= ======= ======== ======= ======= ======== ======= ======= ========
</TABLE>
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, 1999, 1998 and 1997. Such estimates are based
on projected coal seam gas production through the year 2002 (after which date
the tax credit will no longer be available) as estimated by independent
engineers. The estimates are also based on the current year estimated Btu
content and the coal seam tax credit of $1.02 per MMBtu at December 31, 1999
and $1.05 per MMBtu at December 31, 1998 and 1997. See "Regulation--Coal Seam
Tax Credit."
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Undiscounted........................................... $1,979 $2,780 $3,390
====== ====== ======
Discounted present value at 10%........................ $1,740 $2,359 $2,784
====== ====== ======
</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 which limited 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, known as payout.
If payout were to occur and the 25% interest were to be transferred to the
third party, the amounts
8
<PAGE>
payable to the trust would be proportionately reduced. Based on 1999 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 higher prices
and production are sustained for several years, this reversion agreement is
not expected to have a material impact on the trust.
Regulation
Natural Gas Regulation
The interstate transportation and sale for resale of natural gas is subject
to federal regulation, including transportation rates charged and various
other matters, by the Federal Energy Regulatory Commission (FERC). Federal
price controls on wellhead sales of domestic natural gas terminated on January
1, 1993. While natural gas prices are currently unregulated, Congress
historically has been active in the area of natural gas regulation. It is
impossible to predict whether new legislation to regulate natural gas might be
proposed, what proposals, if any, might actually be enacted by Congress or the
various state legislatures, and what effect, if any, such proposals might have
on the operations of the underlying properties.
State Regulation
The various states regulate the production and sale of oil and natural gas,
including imposing requirements for obtaining drilling permits, the method of
developing new fields, the spacing and operation of wells and the prevention
of waste of oil and gas resources. The rates of production may be regulated
and the maximum daily production allowables from both oil and gas wells may be
established on a market demand or conservation basis, or both.
Coal Seam Tax Credit
The trust receives royalty income from coal seam gas wells. Under Section 29
of the Internal Revenue Code, coal seam gas produced through the year 2002
from wells drilled after December 31, 1979 and prior to January 1, 1993
qualifies for the federal income tax credit for producing nonconventional
fuels. This tax credit for 1999 was approximately $1.02 per MMBtu. Such
credit, calculated based on the unitholder's pro rata share of qualifying
production, may not reduce the unitholder'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.
A recent court decision may affect the availability of Section 29 credits.
In 1999, a U.S. Court of Appeals held that a well drilled and completed in an
otherwise qualifying formation prior to January 1, 1993 is not eligible for
the Section 29 credit unless the producer received an appropriate well
category determination from the FERC. The decision indicated that lack of a
well category determination may render the Section 29 credit unavailable with
respect to production from wells recompleted in a qualified formation after
January 1, 1993, the date that the FERC's authority to render category
determinations ended. Many producers assert that wells meeting the
definitional requirements applied by FERC in rendering well category
determinations are eligible for the Section 29 credit regardless of whether a
well category determination is actually applied for or received, particularly
for wells recompleted in qualifying formations after January 1, 1993. In
January 2000, the FERC proposed to amend its regulations to reinstate certain
regulations to allow it to provide well category determinations for Section 29
tax credits for well recompletions commenced after January 1, 1993.
As a result of the court decision, the availability of Section 29 credits to
unitholders with respect to some portion of the trust's coal seam gas
production could be subject to challenge. Cross Timbers Oil has advised the
trustee that it cannot determine whether the trust's Section 29 credits will
be materially affected by this decision, or whether the FERC's action will
allow for a resolution of any uncertainty created by the case.
9
<PAGE>
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 unitholders.
Item 3. Legal Proceedings
Certain of the trust properties are involved in various lawsuits and certain
governmental proceedings arising in the ordinary course of business. Cross
Timbers Oil has advised the trustee that it does not believe that the ultimate
resolution of these claims will have a material effect on the trust's annual
distribution income, financial position or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of unitholders during 1999.
10
<PAGE>
PART II
Item 5. Market for Units of the Trust and Related Security Holder Matters
The section entitled "Units of Beneficial Interest" on page 1 of the trust's
Annual Report to Unitholders for the year ended December 31, 1999 is
incorporated herein by reference.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Royalty Income.......... $ 6,691,336 $ 7,079,632 $10,549,668 $ 8,269,875 $ 5,739,704
Distributable Income.... 6,549,803 6,927,338 10,407,250 8,076,964 5,578,227
Distributable Income per
Unit................... 1.091635 1.154555 1.734541 1.346162 0.929705
Distributions per Unit.. 1.091635 1.154555 1.734541 1.346162 0.929705
Total Assets at Year-
End.................... 33,919,338 36,554,480 38,767,918 42,716,284 45,547,459
</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, 1999 on pages 6 and
7 of the trust's Annual Report to Unitholders for the year ended December 31,
1999 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 could have material adverse effects on
companies and organizations that rely upon those systems.
The trust's timely receipt of royalty income and disbursement of
distributable income to unitholders is largely dependent upon performance of
computer systems and computer-controlled equipment of Cross Timbers Oil,
ChaseMellon Shareholder Services, L.L.C. and other third parties, including
property operators, oil and natural gas purchasers and significant service
providers such as electric utility companies and natural gas plant, pipeline
and gathering systems. Since the trust does not use the trustee's computer
systems in any significant capacity, the trustee's Year 2000 compliance does
not materially affect the trust.
Cross Timbers Oil completed remediation and testing of its significant
computer systems and computer-controlled field equipment in December 1999. No
costs of such modifications were incurred by the trust. Cross Timbers Oil has
not experienced any material Year 2000 system failures, and does not foresee
any material system failures in the coming months.
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 are not aware of significant third parties who experienced
material Year 2000 system failures. However, despite their efforts to assure
that such third parties are Year 2000 compliant, the trustee and Cross Timbers
Oil cannot provide assurance that any significant third parties will not
experience material Year 2000 system failures in the coming months. Such
failures could have a material adverse impact on timely trust distributions to
unitholders. Although the potential effect of Year 2000 noncompliance by third
parties is unknown, Cross Timbers Oil has developed contingency plans in the
event of potential problems resulting from related system failures.
11
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The only assets of and sources of income to the trust are the net profits
interests, which generally entitle the trust to receive a share of the net
profits from oil and gas production from the underlying properties.
Consequently, the trust is exposed to market risk from fluctuations in oil and
gas prices. The trust is a passive entity and, other than the trust's ability
to periodically borrow money as necessary to pay expenses, liabilities and
obligations of the trust that cannot be paid out of cash held by the trust,
the trust is prohibited from engaging in borrowing transactions. The amount of
any such borrowings is unlikely to be material to the trust. In addition, the
trustee is prohibited by the trust indenture from engaging in any business
activity or causing 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. As a result of the
limited nature of the trust's borrowing and investing activities, the trust is
not subject to any material interest rate market risk. 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 conveyances. The trust does not engage in transactions in
foreign currencies which could expose the trust to any foreign currency
related market risk.
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 8, 2000, appearing on
pages 9 through 12 of the trust's Annual Report to Unitholders for the year
ended December 31, 1999 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, 1999.
12
<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 1997 through
1999 as specified in the trust indenture:
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Compensation (1)
--------------------------- ---- ----------------
<S> <C> <C>
Bank of America, N.A., Trustee 1999 $3,346
1998 3,540
1997 7,806
</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, 2000 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
</TABLE>
(1) Cross Timbers Oil has the sole power to vote and dispose of 1,360,000
units.
(b) Security Ownership of Management. The trust has no directors or
executive officers. As of March 1, 2000, Bank of America, N.A. owned, in
various fiduciary capacities, an aggregate of 116,596 units with a shared
right to vote 27,596 of these units and no right to vote 89,000 of these
units. Bank of America, N.A. disclaims any beneficial interests in these
units. The number of units reflected in this paragraph includes units held by
all branches of Bank of America, N.A.
(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,
1999 was $22,684 per month, or $272,208 annually (net to the trust of $17,013
per month or $204,156 annually), and is subject to annual adjustment based on
an oil and gas industry index.
During 1999, Bank of America, N.A. received $11,375 for oil and gas
consulting services performed on behalf of the trust. See Item 11 for the
remuneration received by the trustee from 1997 through 1999 and Item 12(b) for
information concerning units owned by the trustee, Bank of America, N.A., in
various fiduciary capacities.
13
<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, 1999
and 1998
Statements of Distributable Income for the years ended December 31,
1999, 1998 and 1997
Statements of Changes in Trust Corpus for the years ended December 31,
1999, 1998 and 1997
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
(4) (a) Cross Timbers Royalty Trust Indenture amended and restated on
January 13, 1992 by NationsBank, N.A. (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.) 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.) 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.
(13) Cross Timbers Royalty Trust Annual Report to unitholders for the
year ended December 31, 1999.
(23.1) Consent of Arthur Andersen LLP
(23.2) Consent of Miller and Lents, Ltd.
Copies of the above Exhibits are available to any unitholder, at the
actual cost of reproduction, upon written request to the trustee, Bank
of America, 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, 1999,
there were no reports filed on Form 8-K by the trust with the Securities and
Exchange Commission.
14
<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 BANK OF AMERICA, N.A., TRUSTEE
By RON E. HOOPER
___________________________________
Ron E. Hooper
Vice President
CROSS TIMBERS OIL COMPANY
Date: March 30, 2000 By LOUIS G. BALDWIN
___________________________________
Louis G. Baldwin
Executive Vice President and
Chief Financial Officer
(The trust has no directors or executive officers.)
15
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- --------------------------------------------------------------------------------
GLOSSARY OF TERMS
- -----------------
The following are definitions of significant terms used in this Annual Report:
Bbl Barrel (of oil)
Bcf Billion cubic feet (of natural gas)
Mcf Thousand cubic feet (of natural gas)
MMBtu One million British Thermal Units, a common energy
measurement
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 Gross proceeds received by Cross Timbers Oil Company
from sale of production from the underlying properties,
less applicable costs
royalty income Net proceeds, multiplied by the net profits percentage
of 75% or 90%, that is paid to the trust
royalty interest A nonoperating interest in an oil and gas property that
(and overriding provides the owner a specified share of production
royalty interest) without any production or development 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.
working interest An operating interest in an oil and gas property that
provides the owner a specified share of production that
is subject to all production and development costs
Forward Looking Statements
This Annual Report, including the accompanying Form 10-K, 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 Annual Report and Form 10-K, including, without limitation, statements
regarding anticipated recovery of excess costs, estimates of proved reserves,
future development plans and costs, and industry and market conditions, are
forward looking statements. Although Cross Timbers Oil believes that the
expectations reflected in such forward looking statements are reasonable,
neither Cross Timbers Oil nor the trustee can give any assurance that such
expectations will prove to be correct.
i
<PAGE>
THE TRUST
- --------------------------------------------------------------------------------
Cross Timbers Royalty 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, and 75% net overriding
royalty interests in certain working interest properties in Texas and Oklahoma.
These royalty trust interests were conveyed to the trust by predecessors of
Cross Timbers Oil Company, which currently owns the 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 unitholders.
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 paid to month-end unitholders of record within ten business days.
UNITS OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
The units of beneficial interest 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 1999 and 1998:
<TABLE>
<CAPTION>
Sales Price Distributions
-------------------------
High Low per Unit
------------ ----------- -------------
<S> <C> <C> <C>
1999
- --------------------------
First Quarter............... $ 10.125 $ 8.438 $ 0.240065
Second Quarter.............. 10.750 9.000 0.195230
Third Quarter............... 13.875 10.125 0.276342
Fourth Quarter.............. 12.750 9.250 0.379998
------------
$ 1.091635
============
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
============
</TABLE>
At December 31, 1999, there were 6,000,000 units outstanding and approximately
162 unitholders of record; 5,510,189 of these units were held by a depository
institution. As of March 1, 2000, Cross Timbers Oil owned 1,360,000 units.
1
<PAGE>
SUMMARY
- --------------------------------------------------------------------------------
The trust was created to collect and distribute monthly royalty income to
unitholders. 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 underlying royalty
and overriding royalty interests in producing properties in Texas,
Oklahoma and New Mexico. 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 underlying working
interests in seven large, predominantly oil-producing properties in
Texas and Oklahoma. 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 until all excess costs and accrued interest have
been recovered from future net proceeds of that state. However, 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 in 1999, and the Oklahoma 75% royalty trust
interests did not contribute to trust royalty income from February
through June 1999 and for September 1999. 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."
Unitholders 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. Unitholders are entitled to this tax credit (also referred
to as "coal seam tax credit") which may be used to reduce the
unitholder's regular income tax liability.
- Cost Depletion is generally available to unitholders as a deduction
from royalty income. Available depletion is dependent upon the
unitholder's cost of units, purchase date and prior allowable
depletion.
As an example, a unitholder that acquired units in
January 1999 and held them throughout 1999 would be
entitled to a cost depletion deduction of approximately
9% of his cost. Assuming a cost of $9.00 per unit, cost
depletion would offset 73% of 1999 taxable trust income.
After considering the coal seam tax credit and assuming
a 30% tax rate, the 1999 taxable equivalent return as a
percentage of unit cost would be 18%. (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>
1999 1998 1997
------------------------ ------------------------ ------------------------
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.. $ .088 $ 1.055 $ .094 $ 1.128 $ .121 $ 1.453
- - 75% royalty trust interests.. .005 .060 .004 .052 .025 .306
Administration expense.........
(net of interest income)..... (.002) (.023) (.002) (.025) (.002) (.024)
---------- ---------- ---------- ---------- ---------- ----------
Total Distribution............. $ .091 $ 1.092 $ .096 $ 1.155 $ .144 $ 1.735
========== ========== ========== ========== ========== ==========
Nonconventional Fuel...........
Source Tax Credit......... * $ .158 * $ .162 * $ .212
========== ========== ==========
</TABLE>
* - Not applicable
2
<PAGE>
TO UNITHOLDERS
- --------------
We are pleased to present the 1999 Annual Report of Cross Timbers Royalty Trust
and the trust's 1999 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, 1999, royalty income totaled $6,691,336 and,
after deducting trust administration expense, net of interest income,
distributable income was $6,549,803 or $1.091635 per unit. Royalty income and
distributions for the year were 5% lower than 1998 comparable amounts primarily
because of recovery of prior year excess costs.
Natural gas prices for 1999 averaged $1.99 per Mcf for sales from the underlying
properties, a 2% decrease from the 1998 average price of $2.03 per Mcf. Gas
sales volumes from the underlying properties for the year ended December 31,
1999 totaled 3,643,023 Mcf, a 4% increase from 1998 production of 3,502,093 Mcf.
Increased gas revenue was more than offset by increased purchaser deductions for
gathering and compression charges which were netted in the gas sales price prior
to 1999.
Oil sales volumes from the underlying properties during 1999 were 348,609 Bbls,
or 11% below 1998 levels, primarily because of temporary disruption of
production related to mechanical complications on one of the underlying working
interest properties. The average oil price increased to $14.88 per Bbl, up 11%
from the 1998 average price of $13.40.
During 1998 and early 1999, costs exceeded revenues from the Texas 75% royalty
trust interests because of low oil prices and costs associated with a carbon
dioxide injection project. With increased oil prices and completion of this
development project, the properties underlying the Texas 75% royalty trust
interests recovered $527,387 ($395,540 net to the trust) of excess costs during
the last half of 1999. As of March 2000, cumulative excess costs and accrued
interest of approximately $146,000 ($109,500 net to the trust) must be recovered
from future net proceeds of the Texas 75% royalty trust interests before these
interests can again contribute to trust royalty income.
Cross Timbers Oil has advised the trustee that, with continued higher oil prices
and lower development costs, the Texas 75% royalty trust interests should
recover remaining excess costs by third quarter 2000. The Texas 75% royalty
trust interests did not contribute to 1999 royalty income, as compared to a
contribution of $0.02 per unit to 1998 royalty income, or 1% of total 1998
distributions, and $0.18 per unit, or approximately 10% of distributions in
1997.
Coal seam gas sales volumes from the underlying properties were 1,173,950 Mcf in
1999, or approximately 1% higher than 1998 coal seam gas production of 1,165,736
Mcf. The resulting 1999 coal seam tax credit was $0.157564 per unit. This credit
(or a portion thereof, if units were held less than the full year) is available
to be applied against the unitholder's regular federal income tax liability,
subject to certain limitations. Unitholders should consult their tax advisors
regarding use of this credit.
As of December 31, 1999, proved reserves of the royalty trust interests were
estimated by independent engineers to be 2,198,000 Bbls of oil and 35.5 Bcf of
natural gas. Estimated oil reserves increased 138% from year-end 1998 to 1999
primarily because of the increase in year-end oil prices from $9.50 to $22.75
per Bbl and the resulting increased allocation of reserves to the royalty trust
interests. Gas reserves decreased 3% from year-end 1998 to 1999 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 of the royalty trust
interests at December 31, 1999 are $124.3 million, or $20.72 per unit. Using an
annual discount factor of 10%, the present value of estimated future net
revenues at December 31, 1999 is $60.6 million, or $10.10 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 unitholders in February 2000,
trust distributions are considered portfolio income, rather than passive income.
Unitholders should consult their tax advisors for further information.
Cross Timbers Royalty Trust
By: Bank of America, N.A., Trustee
By: Ron E. Hooper
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,
1999 is approximately 12 years for oil and gas. The reserve-to-production index
is calculated using total proved reserves and estimated 2000 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 40% oil and 60% 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 that are primarily mineral interests.
90% Royalty Trust Interests
Royalty and overriding royalty properties underlying the 90% royalty trust
interests represent 72% of the discounted future net cash flows from the trust's
proved reserves at December 31, 1999. Approximately 83% of the discounted future
net cash flows from the 90% royalty trust interests is from gas reserves,
totaling 34.9 Bcf. Oil reserves underlying the 90% royalty trust interests are
primarily located in West Texas and are estimated at December 31, 1999 to be
719,000 Bbls.
Because the properties underlying the 90% royalty trust interests are royalty
interests and overriding royalty interests, 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 80% of trust 1999
gas sales volumes and 64% of trust 1999 royalty income. As of December 31, 1999,
the trust's proved reserves in this region are estimated to be 29.3 Bcf, or 82%
of total trust gas reserves.
Through the year 2002, sales of production from coal seam wells drilled after
December 31, 1979 and prior to January 1, 1993 qualify for a federal income tax
credit under Section 29 of the Internal Revenue Code for nonconventional fuel
sources. This credit for 1999 coal seam gas sales from the San Juan Basin was
approximately $1.02 per MMBtu or $0.157564 per unit, while the coal seam credit
for 1998 was $1.05 per MMBtu or $0.162287 per unit. As of December 31, 1999, the
trust's proved coal seam gas reserves are estimated to be 5.4 Bcf, as compared
with 5.9 Bcf at December 31, 1998.
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 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 1,479,000 Bbls at year-end 1999. Based on year-end
oil and gas prices, proved reserves from these interests represent 28% of the
discounted future net cash flows of the trust's proved reserves at December 31,
1999.
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 1999 development costs were $736,060, or 36% below 1998 development costs
of $1,143,141. Most of the decrease in 1999 development costs was related to
completion of the carbon dioxide injection project that began in 1998 on one of
the Texas underlying properties. First quarter 2000 development costs totaled
approximately $214,000; these costs are primarily related to fourth quarter 1999
expenditures.
As reported to Cross Timbers Oil by unit operators in February of each year,
budgeted development costs were $161,000 for 1999 and $1,200,000 for 1998.
Actual development costs often differ from amounts budgeted because of changes
in product prices that may affect the timing of projects. Also, costs are
deducted in the calculation of trust royalty income several months after they
are incurred by the operator. Unit operators have reported to Cross Timbers Oil
that total budgeted costs are approximately $356,000 for 2000 and $298,000 for
2001, net to Cross Timbers Oil's interests.
Higher development costs and lower oil prices during 1998 and early 1999 caused
costs to exceed revenues from the properties underlying the Texas 75% royalty
trust interests. During 1999, $527,386 ($395,540 net to the trust) of such
excess costs were recovered. For information regarding the effect of excess
costs on trust royalty income, see "Trustee's Discussion and Analysis - Costs."
4
<PAGE>
- --------------------------------------------------------------------------------
Estimated Proved Reserves and Future Net Revenues
The following are proved reserves of the underlying properties and proved
reserves and future net revenues from proved reserves of the royalty trust
interests at December 31, 1999, as estimated by independent engineers (in
thousands):
<TABLE>
<CAPTION>
Underlying Properties Royalty Trust Interests
--------------------------- ------------------------------------------------------------------
Proved Reserves (a) Proved Reserves (a) (b) Future Net Revenues
--------------------------- -------------------------------
Oil Gas Oil Gas from Proved Reserves (a)(c)
-------------------------------
(Bbls) (Mcf) (Bbls) (Mcf) Undiscounted Discounted
------------ ------------ -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
90% Royalty Trust Interests
San Juan Basin
Conventional............... 82 26,531 74 23,878 $ 55,075 $ 23,281
Coal Seam.................. - 5,992 - 5,393 8,681 5,642
------------ ------------ -------------- ------------- -------------- ---------------
Total................... 82 32,523 74 29,271 63,756 28,923
Other New Mexico............. 146 346 131 291 3,459 2,063
Texas........................ 497 4,235 444 3,619 17,831 9,799
Oklahoma..................... 87 2,057 70 1,744 5,105 2,793
------------ ------------ -------------- ------------- -------------- ---------------
Total................... 812 39,161 719 34,925 90,151 43,578
------------ ------------ -------------- ------------- -------------- ---------------
75% Royalty Trust Interests
Texas........................ 1,921 848 892 394 20,881 9,718
Oklahoma..................... 1,727 589 587 194 13,302 7,330
------------ ------------ -------------- ------------- -------------- ---------------
Total................... 3,648 1,437 1,479 588 34,183 17,048
------------ ------------ -------------- ------------- -------------- ---------------
TOTAL................... 4,460 40,598 2,198 35,513 $ 124,334 $ 60,626
============ ============ ============== ============= ============== ===============
</TABLE>
__________________________
(a) Based on year-end oil and gas prices. Total estimated proved oil reserves
increased 138% and discounted estimated future net revenues from proved
reserves increased 69% from year-end 1998 to 1999, primarily because of a
139% increase 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>
TRUSTEE'S DISCUSSION AND ANALYSIS
- ---------------------------------
Years Ended December 31, 1999, 1998 and 1997
Royalty income for 1999 was $6,691,336, as compared with $7,079,632 for 1998 and
$10,549,668 for 1997. The 5% decrease in royalty income from 1998 to 1999 was
primarily because of recovery of prior year excess costs. 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. During 1999, 1998 and 1997, 79%, 80% and 69%, respectively, of royalty
income was derived from gas sales.
Trust administration expense was $152,631 in 1999 as compared to $163,151 in
1998 and $158,669 in 1997. Interest income was $11,098 in 1999, $10,857 in 1998
and $16,251 in 1997.
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 11% from 1998 to 1999, as compared to a
7% decrease from 1997 to 1998. Approximately half the 1999 decline was
attributable to a temporary disruption of production resulting from mechanical
complications on one of the underlying Oklahoma working interest properties.
Production on this property gradually increased over the last half of 1999. The
unit operator is planning a well workover program to increase production levels
after pumping unit mechanical problems in the last half of 1998 forced many
wells to be shut-in, since oil prices were too low to support costly repairs.
The remainder of the 1999 decline in oil volumes primarily reflected natural
production decline. The decline in oil volumes from 1997 to 1998 was the result
of the same mechanical complications that affected 1999 volumes, as well as the
initial downtime of development projects on some of the properties underlying
the 75% royalty trust interests.
Underlying gas sales volumes increased 4% from 1998 to 1999 as compared to a 21%
decrease from 1997 to 1998. Higher 1999 volumes were primarily attributable to
significant receipts related to prior periods. Underlying gas sales volumes for
1997 included 636,000 Mcf attributable to lawsuit settlement proceeds received
by the trust. Excluding the effects of volumes related to lawsuit settlement
proceeds, gas sales volumes declined 7% from 1997 to 1998 primarily because of
natural decline and timing of cash receipts.
Prices
The average oil price for 1999 was $14.88 per Bbl, 11% higher than the 1998
average oil price of $13.40, which was 30% lower than the 1997 average price of
$19.20. 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
through 1998. West Texas Intermediate posted crude oil prices dropped to $8.00
per barrel in December 1998, the lowest level since 1978. After OPEC members and
other oil producers agreed to production cuts in March 1999, oil prices climbed
throughout the year. The posted price reached $24.00 in December 1999 and $27.50
in February 2000, the highest levels since the 1990 Persian Gulf War. OPEC
members met on March 27, 2000 and agreed to increase production quotas by 6.3%.
The 1999 average gas price was $1.99 per Mcf, a 2% decrease from the 1998
average gas price of $2.03, which was relatively unchanged from the 1997 average
price of $2.04. Prior to 1999, purchaser deductions were netted in the gas
price. As of 1999, these purchaser deductions are included in taxes,
transportation and other costs (see "Costs" below). Considering the effect of
this change in classification, gas prices declined 16% from 1998 to 1999. Gas
prices were lower in 1999 primarily because of the abnormally warm winter of
1998-1999 across the United States that resulted in higher levels of gas in
storage. San Juan Basin gas prices, in particular, were lower in 1999 because of
an abundance of hydroelectric energy in West Coast markets following a winter
with abnormally high precipitation. Gas prices trended higher during 1999 as gas
in storage declined.
San Juan Basin gas prices have strengthened relative to prices in other regions
because of increased demand in the southwest U.S., including increased use of
gas during the summer to generate electricity. Also, recently completed
pipelines have redirected a portion of western Canadian gas supplies from West
Coast to East Coast markets alleviating some downward price pressure for gas
sold in California.
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 adjustment for excess costs (see "Excess Costs" below), total costs
deducted in the calculation of royalty income were $4,732,936 in 1999,
$4,919,005 in 1998 and $5,036,713 in 1997. The 4% decrease in costs from 1998 to
1999 is primarily attributable to decreased development costs and production
expense, offset by increased purchaser deductions for gathering and compression
charges (included in taxes, transportation and other) which had been netted in
the gas sales price prior to 1999. The 2% decrease in costs from 1997 to 1998 is
primarily the result of lower production taxes
6
<PAGE>
- --------------------------------------------------------------------------------
Calculation of Royalty Income
The following is a summary of the calculation of royalty income received by the
trust:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31 (a) Ended December 31 (a)
--------------------------------------------------- ----------------------------------
1999 1998 1997 1999 1998
--------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales Volumes
Oil (Bbls) (b)
Underlying properties.... 348,609 392,369 423,981 94,307 94,599
Average per day...... 955 1,075 1,162 1,025 1,028
Royalty trust interests.. 97,677 104,774 177,214 34,379 23,177
Gas (Mcf) (b)
Underlying properties.... 3,643,023 3,502,093 4,418,871 973,070 774,699
Average per day...... 9,981 9,595 12,106 10,577 8,421
Royalty trust interests.. 3,162,942 3,018,666 3,877,500 838,047 663,450
Average Sales Price
Oil (per Bbl)............. $14.88 $13.40 $19.20 $20.21 $12.59
Gas (per Mcf)............. $1.99 $2.03 $2.04 $2.39 $1.81
Revenues
Oil sales................. $ 5,189,030 $ 5,256,626 $ 8,141,456 $ 1,905,541 $ 1,190,796
Gas sales................. 7,260,100 7,093,431 9,024,527 2,324,001 1,402,438
--------------- --------------- --------------- --------------- ----------------
Total Revenues........... 12,449,130 12,350,057 17,165,983 4,229,542 2,593,234
--------------- --------------- --------------- --------------- ----------------
Costs
Taxes, transportation
and other............... 1,606,058 1,192,864 1,510,799 498,362 225,172
Production expense (c).... 2,390,818 2,583,000 2,656,863 595,221 578,870
Development costs......... 736,060 1,143,141 869,051 119,903 350,160
Excess costs.............. (432,789) (515,078) - - (150,735)
Recovery of excess costs
and accrued interest..... 634,277 10,184 - 396,230 10,184
--------------- --------------- --------------- --------------- ----------------
Total Costs.............. 4,934,424 4,414,111 5,036,713 1,609,716 1,013,651
--------------- --------------- --------------- --------------- ----------------
Net Proceeds............... $ 7,514,706 $ 7,935,946 $ 12,129,270 $ 2,619,826 $ 1,579,583
=============== =============== =============== =============== ================
Royalty Income............. $ 6,691,336 $ 7,079,632 $ 10,549,668 $ 2,301,221 $ 1,417,404
=============== =============== =============== =============== ================
</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, while oil and gas sales for the
three months 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 is based on
the underlying properties.
(c) Includes an overhead fee which is deducted and retained by Cross Timbers
Oil. As of December 31, 1999, this fee was $22,684 per month and is subject
to adjustment each May based on an oil and gas industry index.
- --------------------------------------------------------------------------------
7
<PAGE>
associated with lower oil and gas revenues, largely offset by increased
development costs. Higher 1998 development costs were primarily associated with
a carbon dioxide injection project on one of the properties underlying the Texas
75% royalty trust interests.
Excess Costs
During 1999, costs exceeded revenues for properties underlying the Texas 75%
royalty trust interests by $327,318 and the Oklahoma 75% royalty trust interests
by $105,471. 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 for the Texas 75% royalty trust interests were primarily
the result of low oil prices and increased development costs related to the 1998
carbon dioxide injection project, while excess costs for the Oklahoma 75%
royalty trust interests were primarily related to low oil prices and reduced oil
sales volumes related to mechanical complications on one of the underlying
properties.
Excess costs from one conveyance cannot reduce royalty income computed under
another conveyance, but must be recovered from future net proceeds of the same
conveyance before the conveyance can again contribute to trust royalty income.
With improved oil prices in the last half of 1999, excess costs of $527,387 were
recovered for the Texas 75% royalty trust interests and excess costs and accrued
interest of $106,890 were recovered for the Oklahoma 75% royalty trust
interests. Excess costs and accrued interest from the Oklahoma 75% royalty trust
interests were fully recovered in October 1999.
Remaining excess costs and accrued interest were $375,802 ($281,852 net to the
trust) as of December 31, 1999 which 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 2000, cumulative excess costs
and accrued interest of the Texas 75% royalty trust interests totaled
approximately $146,000 ($109,500 net to the trust). The Texas 75% royalty trust
interests did not contribute to 1999 royalty income and only contributed $0.02
per unit to 1998 royalty income as compared to $0.18 per unit to 1997 royalty
income, or 10% of total 1997 distributions. Cross Timbers Oil has advised the
trustee that, with continued higher oil prices and lower development costs, the
Texas 75% royalty trust interests should fully recover remaining excess costs
and accrued interest by third quarter 2000.
Fourth Quarter 1999 and 1998
During the quarter ended December 31, 1999, the trust received royalty income
totaling $2,301,221, compared with fourth quarter 1998 royalty income of
$1,417,404. The 62% increase in royalty income from fourth quarter 1998 to 1999
was primarily because of higher oil and gas prices and increased gas sales
volumes.
Administration expense was $25,656 and interest income was $4,423, resulting in
fourth quarter 1999 distributable income of $2,279,988, or $0.379998 per unit.
Distributable income for fourth quarter 1998 was $1,387,682 or $0.231280 per
unit. Distributions to unitholders for the quarter ended December 31, 1999 were:
Record Date Payment Date Per Unit
----------------- ---------------- -----------
October 29, 1999 November 15, 1999 $ 0.097064
November 30, 1999 December 14, 1999 0.130600
December 31, 1999 January 14, 2000 0.152334
-----------
$ 0.379998
===========
Volumes
Fourth quarter underlying oil sales volumes remained relatively unchanged from
1998 to 1999. Underlying gas sales volumes increased 26% primarily because of
significant receipts related to prior periods.
Prices
The average fourth quarter 1999 oil price was $20.21 per Bbl, or 61% higher than
the fourth quarter 1998 average price of $12.59. The average fourth quarter gas
price was $2.39 per Mcf in 1999, or 32% higher than the fourth quarter 1998
average price of $1.81. Prior to 1999, purchaser deductions were netted in the
gas price. As of 1999, these purchaser deductions are included in taxes,
transportation and other costs (see "Costs" below). Considering the effect of
this change in classification, gas prices increased 17% from fourth quarter 1998
to 1999. For further information about oil and gas prices, see "Years Ended
December 31, 1999, 1998 and 1997 - Prices" above.
Costs
Before adjustment for excess costs, costs deducted in the calculation of fourth
quarter 1999 royalty income increased $59,284, or 5%, from fourth quarter 1998.
This was primarily the result of a $273,190, or 121%, increase in taxes,
transportation and other costs related to approximately $238,000 in purchaser
deductions for gathering and compression charges in fourth quarter 1999 which
had been netted in the gas sales price prior to 1999. This was partially offset
by a $230,257, or 66%, decrease in development costs related to completion of
the carbon dioxide injection project on one of the properties underlying the
Texas 75% royalty trust interest properties.
During fourth quarter 1999, excess costs of $396,230 ($297,173 net to the trust)
were recovered, compared with net excess costs of $140,551 ($105,413 net to the
trust) during fourth quarter 1998. Recovery of excess costs in 1999 is the
result of higher oil prices and decreased development costs related to the 1998
carbon dioxide injection project. See "Years Ended December 31, 1999, 1998 and
1997 - Costs" above.
See Item 7 of the accompanying Form 10-K for trust year 2000 compliance
considerations, and Item 7a for disclosures of market risks affecting the trust.
8
<PAGE>
Cross Timbers Royalty Trust
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and short-term investments.............. $ 912,164 $ 528,758
Interest to be received...................... 1,840 781
Net profits interests in oil and gas
properties - net (Notes 1 and 2)............ 33,005,334 36,024,941
----------- -----------
$33,919,338 $36,554,480
=========== ===========
Liabilities and Trust Corpus
Distribution payable to unitholders.......... $ 914,004 $ 529,539
Trust corpus (6,000,000 units of beneficial
interest authorized and outstanding)........ 33,005,334 36,024,941
----------- -----------
$33,919,338 $36,554,480
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Royalty income......................... $ 6,691,336 $ 7,079,632 $ 10,549,668
Interest income........................ 11,098 10,857 16,251
----------- ----------- ------------
Total income.......................... 6,702,434 7,090,489 10,565,919
Administration expense................. 152,631 163,151 158,669
----------- ----------- ------------
Distributable income.................. $ 6,549,803 $ 6,927,338 $ 10,407,250
=========== =========== ============
Distributable income per unit
(6,000,000 units)................... $ 1.091635 $ 1.154555 $ 1.734541
=========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
Cross Timbers Royalty Trust
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Trust corpus,
beginning of year.................... $36,024,941 $38,104,367 $ 41,337,673
Amortization of net
profits interests.................... (3,019,607) (2,079,426) (3,233,306)
Distributable income................... 6,549,803 6,927,338 10,407,250
Distributions declared................. (6,549,803) (6,927,338) (10,407,250)
----------- ----------- ------------
Trust corpus,
end of year.......................... $33,005,334 $36,024,941 $ 38,104,367
=========== =========== ============
</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 was created on February 12, 1991 by
predecessors of Cross Timbers Oil, when the following 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:
- 90% defined net profits interests in certain producing and
nonproducing royalty interest properties in Texas, Oklahoma and New
Mexico, and
- 75% defined net profits interests in certain non-operated working
interest properties in Texas and Oklahoma.
The underlying properties from which the royalty trust interests were
carved are currently owned by Cross Timbers Oil. Bank of America, N.A. is the
trustee of the trust. The trust indenture provides, among other provisions,
that:
- the trust may not engage in any business activity or acquire any
assets other than the royalty trust interests and specific short-term
cash investments;
- the trust may not dispose of all or part of the royalty trust
interests unless approved by 80% of the unitholders, or upon trust
termination, and any sale must be for cash with the proceeds promptly
distributed to the unitholders;
- the trustee may establish a cash reserve for payment of any liability
that is contingent or not currently payable;
- the trustee may borrow funds required to pay trust liabilities if
fully repaid prior to further distributions to unitholders;
- the trustee will make monthly cash distributions to unitholders (Note
3); and
- the trust will terminate upon the first occurrence of:
- disposition of all royalty trust interests pursuant to terms of the
trust indenture,
- gross revenue of the trust is less than $1 million per year for two
successive years, or
- a vote of 80% of the unitholders 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
unitholders 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 for liabilities and contingencies.
- Distributions to unitholders 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 that 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 of the interests 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 was $28,095,115 as of December 31,
1999 and was $25,075,508 as of December 31, 1998.
3. Distributions to Unitholders
The trustee determines the amount to be distributed to unitholders 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 unitholders of record within
ten business days after the monthly record date, the last business day of the
month.
Royalty income received by the trustee consists of net proceeds received in
the prior month by Cross Timbers Oil from the underlying properties multiplied
by 90% or 75% for the 90% and 75% royalty trust interests. Net proceeds are the
gross proceeds received from the sale of production, less applicable costs. 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 (Note 1). If costs exceed
gross proceeds for any conveyance, such excess costs cannot be used to reduce
the amounts to be received under the other conveyances. The trust is not liable
for excess costs; however,
10
<PAGE>
future royalty income from the royalty trust interests created by that
conveyance will be reduced by such excess costs plus accrued interest. See
Note 5.
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, unitholders of a grantor trust 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
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
between December 31, 1979 and 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 $1.02 per MMBtu ($0.157564 per
unit) in 1999, $1.05 per MMBtu ($0.162287 per unit) in 1998 and $1.05 per MMBtu
($0.212340 per unit) in 1997. Such credit, based on the unitholder's pro rata
share of qualifying production, may not reduce the unitholder'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 may be carried over
indefinitely as a credit against the unitholder's regular tax liability, subject
to the tentative minimum tax limitation.
5. 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 years
ended December 31, 1999 and 1998. 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. The following is a summary of changes in excess costs by
conveyance during these periods.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998
--------------------- ------------------
Texas Oklahoma Texas Oklahoma
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Excess costs and accrued interest -
beginning of period.............................. $ 519,817 $ - $ - $ -
Excess costs....................................... 327,318 105,471 505,011 10,067
Recovery of excess costs and accrued interest...... (527,387) (106,890) - (10,184)
Accrued interest................................... 56,054 1,419 14,806 117
--------- --------- -------- --------
Excess costs and accrued interest - end of period.. $ 375,802 $ 0 $519,817 $ 0
========= ========= ======== ========
Net to trust (75%)................................. $ 281,852 $ 0 $389,863 $ 0
========= ========= ======== ========
</TABLE>
As of March 2000, excess costs and accrued interest for the Texas 75%
royalty trust interests totaled approximately $146,000 ($109,500 net to the
trust). Interest is accrued at the prime rate, which was 8.5% at December 31,
1999.
6. 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, 1999 was $22,684 per month, or $272,208 annually (net to the
trust of $17,013 per month or $204,156 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, 2000, Cross Timbers Oil
owned 22.7% of the outstanding trust units.
7. Supplemental Oil and Gas Reserve Information (Unaudited)
Proved oil and gas reserve information is included in Item 2 of the trust's
Annual Report on Form 10-K which is included in this report.
11
<PAGE>
8. Quarterly Financial Data (Unaudited)
The following is a summary of royalty income, distributable income and
distributable income per unit by quarter for 1999 and 1998:
<TABLE>
<CAPTION>
Distributable
Royalty Distributable Income
Income Income per Unit
---------- ------------- -------------
<S> <C> <C> <C>
1999
- ----
First Quarter..... $1,479,855 $ 1,440,388 $ 0.240065
Second Quarter.... 1,213,539 1,171,375 0.195230
Third Quarter..... 1,696,721 1,658,052 0.276342
Fourth Quarter.... 2,301,221 2,279,988 0.379998
---------- ------------- -------------
$6,691,336 $ 6,549,803 $ 1.091635
========== ============= =============
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
========== ============= =============
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
Bank of America, 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 as of December 31, 1999 and
1998, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998 and its distributable income and changes in
trust corpus for each of the three years in the period ended December 31, 1999,
on the modified cash basis of accounting described in Note 2.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 8, 2000
12
<PAGE>
CROSS TIMBERS ROYALTY TRUST
- ---------------------------
901 Main Street, 17/th/ Floor
P.O. Box 830650
Dallas, Texas 75283-0650
(877) 228-5084
Bank of America, N.A., Trustee
A copy of the Cross Timbers Royalty Trust Form 10-K
has been provided with this Annual Report. Additional copies
of this Annual Report and Form 10-K will be provided to
unitholders without charge upon request.
AUDITORS
- --------
Arthur Andersen LLP
Fort Worth, Texas
LEGAL COUNSEL
- -------------
Thompson & Knight L.L.P.
Dallas, Texas
TAX COUNSEL
- -----------
Winstead Sechrest & Minick P.C.
Houston, Texas
TRANSFER AGENT AND REGISTRAR
- ----------------------------
ChaseMellon Shareholder Services, L.L.C.
Dallas, Texas
www.chasemellon.com
<PAGE>
EXHIBIT 23.1
INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
Cross Timbers Royalty Trust
Dallas, 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 8, 2000, included in the Annual Report on
Form 10-K of Cross Timbers Royalty Trust for the year ended December 31, 1999.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 30, 2000
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE]
March 30, 2000
Cross Timbers Royalty Trust
P.O. Box 830650
Dallas, TX 75283-0650
Re: Cross Timbers Royalty Trust
1999 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 29, 2000, regarding the Cross Timbers Royalty
Trust Proved Reserves and Future Net Revenue as of January 1, 2000, in the 1999
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 912,164
<SECURITIES> 0
<RECEIVABLES> 1,840
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 914,004
<PP&E> 61,100,449
<DEPRECIATION> 28,095,115
<TOTAL-ASSETS> 33,919,338
<CURRENT-LIABILITIES> 914,004
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 33,005,334
<TOTAL-LIABILITY-AND-EQUITY> 33,919,338
<SALES> 6,691,336
<TOTAL-REVENUES> 6,702,434
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 152,631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,549,803
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,549,803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,549,803
<EPS-BASIC> 1.092
<EPS-DILUTED> 1.092
</TABLE>
