-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O3YSO2+ViVhQqHyqVy42RftOqlDONMQzaGrVh9X4igWaAnX7IAu44IFAkaC85uUa puBx/t9um922/pvTbSiBqA== 0000930661-98-001125.txt : 19980514 0000930661-98-001125.hdr.sgml : 19980514 ACCESSION NUMBER: 0000930661-98-001125 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROSS TIMBERS ROYALTY TRUST CENTRAL INDEX KEY: 0000881787 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 756415930 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10982 FILM NUMBER: 98618677 BUSINESS ADDRESS: STREET 1: 500 WEST SEVENTH ST STE 1300 STREET 2: P O BOX 1317 CITY: FORT WORTH STATE: TX ZIP: 76101-1317 BUSINESS PHONE: 8173906592 MAIL ADDRESS: STREET 2: P O BOX 1317 CITY: FORT WORTH STATE: TX ZIP: 76101-1317 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1998 -------------- Commission File No. 1-10982 ------- CROSS TIMBERS ROYALTY TRUST Texas I.R.S. No. 75-6415930 NationsBank, N.A. P.O. Box 1317 Fort Worth, Texas 76101-1317 Telephone Number 817/390-6592 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of units of beneficial interest outstanding at May 1, 1998: 6,000,000 --------- CROSS TIMBERS ROYALTY TRUST PART I - FINANCIAL STATEMENTS - ----------------------------- Item 1. Financial Statements. The condensed financial statements included herein are presented, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the Trustee believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Trust's latest annual report on Form 10-K. In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the assets, liabilities and trust corpus of the Cross Timbers Royalty Trust at March 31, 1998, and the distributable income and changes in trust corpus for the three-month periods ended March 31, 1998 and 1997, have been included. Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year. 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS NationsBank, N.A., as Trustee for the Cross Timbers Royalty Trust: We have reviewed the accompanying condensed statement of assets, liabilities and trust corpus of the Cross Timbers Royalty Trust as of March 31, 1998 and the related condensed statements of distributable income and changes in trust corpus for the three-month periods ended March 31, 1998 and 1997. These financial statements are the responsibility of the Trustee. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. The accompanying condensed financial statements are prepared on a modified cash basis as described in Note 1 which is a comprehensive basis of accounting other than generally accepted accounting principles. Based on our review, we are not aware of any material modifications that should be made to such condensed financial statements for them to be in conformity with the basis of accounting described in Note 1. We have previously audited, in accordance with generally accepted auditing standards, the statement of assets, liabilities and trust corpus of the Cross Timbers Royalty Trust as of December 31, 1997 included in the Trust's 1997 annual report on Form 10-K, and in our report dated March 18, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 1997 is fairly stated in all material respects in relation to the statement of assets, liabilities and trust corpus included in the Trust's 1997 annual report on Form 10-K from which it has been derived. ARTHUR ANDERSEN LLP Fort Worth, Texas May 7, 1998 3 CROSS TIMBERS ROYALTY TRUST - ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
MARCH 31, DECEMBER 31, 1998 1997 ----------- ------------- (Unaudited) ASSETS Cash and short-term investments.................. $ 536,526 $ 662,486 Interest to be received.......................... 885 1,065 Net overriding royalty interests in oil and gas properties - net (Note 1)...................... 37,423,696 38,104,367 ----------- ------------ $37,961,107 $ 38,767,918 =========== ============ LIABILITIES AND TRUST CORPUS Distribution payable to Unit holders............. $ 537,411 $ 663,551 Trust corpus (6,000,000 Units of beneficial interest authorized and outstanding)........... 37,423,696 38,104,367 ----------- ------------ $37,961,107 $ 38,767,918 =========== ============
The accompanying notes to condensed financial statements are an integral part of these statements. 4 CROSS TIMBERS ROYALTY TRUST - ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 ------------- ------------- Royalty income.................................. $2,335,418 $3,114,590 Interest income................................. 3,771 4,350 ---------- ---------- Total income.................................... 2,339,189 3,118,940 Administration expense.......................... 44,220 49,405 ---------- ---------- Distributable income............................ $2,294,969 $3,069,535 ========== ========== Distributable income per Unit (6,000,000 Units) $ 0.382494 $ 0.511589 ========== ==========
The accompanying notes to condensed financial statements are an integral part of these statements. 5 CROSS TIMBERS ROYALTY TRUST - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------------ 1998 1997 -------------- -------------- Trust Corpus, beginning of period................. $38,104,367 $41,337,673 Amortization of net overriding royalty interests.. (680,671) (849,382) Distributable income.............................. 2,294,969 3,069,535 Distributions declared............................ (2,294,969) (3,069,535) ----------- ----------- Trust Corpus, end of period....................... $37,423,696 $40,488,291 =========== ===========
The accompanying notes to condensed financial statements are an integral part of these statements. 6 CROSS TIMBERS ROYALTY TRUST - -------------------------------------------------------------------------------- NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF ACCOUNTING The financial statements of Cross Timbers Royalty Trust ("the Trust") are prepared on the following basis: - Royalty income recorded for a month is the amount computed and paid by the interest owner, Cross Timbers Oil Company ("Cross Timbers Oil"), to NationsBank, N.A. ("Trustee"), as Trustee for the Trust. Royalty income consists of the amounts received by Cross Timbers Oil from the sale of production less applicable costs ("net proceeds") from the properties underlying the net overriding royalty interests ("Royalty Trust Interests") conveyed to the Trust. Net proceeds are multiplied by net profit percentages of 90% in the case of Royalty Trust Interests carved from certain royalty interests in New Mexico, Oklahoma and Texas ("90% Royalty Trust Interests") and 75% in the case of Royalty Trust Interests carved from seven working interest properties in Oklahoma and Texas ("75% Royalty Trust Interests"). Applicable costs deducted in the calculation of net proceeds for the 90% Royalty Trust Interests generally include applicable taxes, transportation, marketing and legal costs, and do not include other production and development costs. For the 75% Royalty Trust Interests, such costs include production expenses, development costs, applicable taxes, operating charges and other costs. - Royalty income is computed separately for each of five conveyances under which the Royalty Trust Interests were conveyed to the Trust. If monthly costs exceed revenues for any conveyance ("excess costs"), such excess cannot reduce royalty income from other conveyances, but is carried forward with accrued interest to be recovered from future net proceeds of that conveyance. See Note 3. - Interest income, interest to be received and distribution payable to Unit holders include interest to be earned from the monthly record date (last business date of the month) through the date of the next distribution to Unit holders. - Trust expenses are recorded based on liabilities paid and cash reserves established by the Trustee for liabilities and contingencies. - Distributions to Unit holders are recorded when declared by the Trustee. The financial statements of the Trust differ from financial statements prepared in accordance with generally accepted accounting principles ("GAAP") because revenues are not accrued in the month of production, expenses are recognized when paid rather than when incurred, and certain cash reserves may be established for contingencies which would not be accrued under GAAP. The initial carrying value of the Royalty Trust Interests ($61,100,449) represents the net book value from the historical accounting records (successful efforts method) of predecessors to Cross Timbers Oil on February 12, 1991. Amortization of the Royalty Trust Interests is calculated on a unit-of-production basis and is charged directly to trust corpus. Accumulated amortization as of March 31, 1998 and December 31, 1997 is $23,676,753 and $22,996,082, respectively. 7 2. FEDERAL INCOME TAXES Tax counsel has advised the Trust that, under current tax laws, the Trust will be classified as a grantor trust for Federal income tax purposes and therefore is not subject to taxation at the trust level. However, the opinion of tax counsel is not binding on the Internal Revenue Service. The Unit holders are considered, for Federal income tax purposes, to own the Trust's income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by the Unit holders at the time such income is received or accrued by the Trust, rather than when distributed by the Trust. Cross Timbers Oil has advised the Trustee that the Trust receives royalty income from coal seam gas wells. Production from coal seam gas wells drilled after December 31, 1979, and prior to January 1, 1993, qualifies for the Federal income tax credit for producing nonconventional fuels under Section 29 of the Internal Revenue Code. This tax credit, which was approximately $1.05 per MMBtu for 1997, is recalculated annually based on each year's qualifying production through the year 2002. Such credit, based on the Unit holder's pro rata share of qualifying production, may not reduce his regular tax liability (after the foreign tax credit and certain other non-refundable credits) below his tentative minimum tax. Any part of the Section 29 credit not allowed for the tax year solely because of this limitation is subject to certain carryover provisions. Unit holders should consult their tax advisors regarding Trust tax compliance matters. Based on 1998 qualifying sales volumes and the factors used in the calculation of the 1997 coal seam tax credit, the credit for the quarter ended March 31, 1998 is estimated to be $.037 per Unit. The actual coal seam credit for the quarter ended March 31, 1997 was $.052 per Unit. The decline in the first quarter coal seam tax credit from 1997 to 1998 is primarily because of adjustments to prior period coal seam gas sales volumes. Final 1998 coal seam tax credit data will be provided to Unit holders with year- end tax information. 3. EXCESS COSTS Cross Timbers Oil has advised the Trustee that, in the calculation of royalty income for the month of April 1998, costs exceeded revenues for the Texas conveyance of the 75% Royalty Trust Interests by $92,914. Such excess costs plus accrued interest must be recovered from future net proceeds of the Texas conveyance of the 75% Royalty Trust Interests before this conveyance can again contribute to Trust royalty income. See Item 2, "Trustee's Discussion and Analysis - Excess Costs." 8 Item 2. Trustee's Discussion and Analysis. Three Months Ended March 31, 1998 and 1997 - ------------------------------------------ For the quarter ended March 31, 1998, royalty income was $2,335,418, compared with $3,114,590 for the first quarter of 1997. This 25% decrease in royalty income is primarily the result of significantly lower oil prices and decreased gas sales volumes. After considering interest income of $3,771 and administration expense of $44,220, distributable income for first quarter 1998 was $2,294,969, or $0.382494 per Unit of beneficial interest. Distributions of $0.148984, $0.143942 and $0.089568 per Unit were made to Unit holders of record on January 30, February 27 and March 31, 1998, respectively. Distributable income for first quarter 1997 was $3,069,535, or $0.511589 per Unit. 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. Because properties underlying the 90% Royalty Trust Interests are royalty and overriding royalty interests, they generally bear no costs other than production and property taxes, related legal costs, and marketing and transportation charges. In addition to these costs, the 75% Royalty Trust Interests are subject to production and development costs, since the properties underlying the 75% Royalty Trust Interests are working interests. Volumes Oil sales volumes decreased 1% from first quarter 1997 to 1998 because of natural production decline, partially offset by the timing of cash receipts. Gas sales volumes decreased 12% from first quarter 1997 to 1998, primarily because of volume adjustments related to prior periods and the timing of cash receipts. Excluding such prior period adjustments and cash receipt timing differences, gas sales volumes declined approximately 2% from first quarter 1997 to 1998. Such 2% decline includes an estimated 4% natural decline in gas production, partially offset by a 2% increase in gas sales volumes related to new wells drilled during 1997 on some of the Texas 90% Royalty Trust Interests. Prices The average oil price for first quarter 1998 was $16.15 per barrel, a decrease of 29% from the first quarter 1997 average price of $22.62. Because of the two-month interval between oil production and receipt by the Trust of related royalty income, the first quarter 1997 average price reflects the rise in oil prices to six-year highs in December 1996 and January 1997. Similarly, the first quarter 1998 average oil price includes two months of lower prices following the sharp decline in oil prices that began in December 1997. After hitting a decade-low of $11.00, prices began to increase in late March. The average posted West Texas Intermediate oil price for February through April 1998 (related to royalty income to be received by the Trust in second quarter 1998) was $13.26. The first quarter 1998 average gas price was $2.59 per thousand cubic feet ("Mcf"), or 2% above the first quarter 1997 price of $2.53. Cross Timbers Oil has advised the Trustee that it expects the average gas price for first quarter 1998 production (related to royalty income to be received by the Trust in second quarter 1998) to decline to approximately $1.90 because of reduced demand during a milder than normal winter. 9 Costs Costs deducted in the calculation of first quarter 1998 royalty income (see "Calculation of Royalty Income") increased 5% or $61,876 from total costs for first quarter 1997. This was a result of a 14% or $87,362 increase in production expenses, partially offset by an 8% or $12,840 decrease in development costs and a 4% or $12,646 decrease in production and property taxes. Changes in production expense and development costs are primarily related to the timing of maintenance and development projects on the underlying working interest properties. Decreased Oklahoma drilling costs offset costs related to a carbon dioxide injection project that began on one of the Texas underlying working interest properties in 1998. See "Excess Costs" below. Production taxes decreased with decreased oil and gas revenues, partially offset by increased estimated property taxes. Excess Costs Cross Timbers Oil has advised the Trustee that, in the calculation of Trust royalty income for the month of April 1998, costs exceeded revenues by $92,914 for the Texas conveyance of the 75% Royalty Trust Interests. Such excess costs are the result of lower oil prices and increased development costs related to the carbon dioxide injection project that began during the first quarter. Excess costs from one conveyance cannot reduce royalty income computed under another conveyance; therefore, cumulative excess costs plus accrued interest must be recovered from future net proceeds of the underlying Texas working interest properties before these properties can again contribute to Trust royalty income. The Texas 75% Royalty Trust Interests contributed approximately $0.07 per Unit to first quarter 1997 royalty income, or 14% of first quarter 1997 distributions. Primarily because of lower oil prices in December 1997 and January 1998, the Texas 75% Royalty Trust Interests contributed only $0.015 per Unit to first quarter 1998 royalty income, or 4% of first quarter 1998 distributions. Amortization Amortization of Royalty Trust Interests, which is directly charged to trust corpus, decreased to $680,671 for first quarter 1998 from $849,382 for the prior year quarter. Decreased amortization is the result of lower gas sales volumes for the quarter, as well as reduced oil sales volumes allocated to the Royalty Trust Interests because of lower oil prices. 10 COMPARATIVE OIL AND GAS SALES Oil and gas sales attributable to the Underlying Properties and the Royalty Trust Interests are as follows:
Three Months Ended March 31, (a) -------------------------------- 1998 1997 --------------- --------------- OIL SALES (Bbls)................ Underlying Properties (b).... 104,686 105,459 Average per day............ 1,138 1,146 Average price.............. $16.15 $22.62 Royalty Trust Interests (b).. 37,062 55,539 GAS SALES (Mcf)................. Underlying Properties (b).... 835,901 945,887 Average per day............ 9,086 10,281 Average price.............. $2.59 $2.53 Royalty Trust Interests (b).. 725,665 835,124
(a) Because of the interval between time of production and receipt of royalty income by the Trust, oil and gas sales for the quarter ended March 31 generally represent oil production for the period November through January and gas production for the period October through December. (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 discussion of oil and gas sales is based on the Underlying Properties. 11 CALCULATION OF ROYALTY INCOME The following is the calculation of royalty income received by the Trust for the quarters ended March 31, 1998 and 1997. See Note 1 to Condensed Financial Statements.
Three Months Ended March 31, ------------------------------------------------- 1998 1997 ----------------------- ----------------------- 90% 75% 90% 75% Royalty Royalty Royalty Royalty Trust Trust Trust Trust Interests Interests Interests Interests ---------- ---------- ---------- ---------- REVENUES................... Oil sales................. $ 410,780 $1,279,730 $ 490,486 $1,894,773 Gas sales................. 2,115,125 45,704 2,317,868 74,712 ---------- ---------- ---------- ---------- Total.................... 2,525,905 1,325,434 2,808,354 1,969,485 ---------- ---------- ---------- ---------- COSTS...................... Production and property taxes.................... 211,444 136,366 232,135 128,321 Production expenses (a) 705,541 9,162 609,017 Development costs......... - 146,989 - 159,829 ---------- ---------- ---------- ---------- Total.................... 211,444 988,896 241,297 897,167 ---------- ---------- ---------- ---------- Net Proceeds............... 2,314,461 336,538 2,567,057 1,072,318 Net Profits Percentage..... 90% 75% 90% 75% ---------- ---------- ---------- ---------- ROYALTY INCOME............. $2,083,015 $ 252,403 $2,310,351 $ 804,239 ========== ========== ========== ==========
(a) Production expenses for the 75% Royalty Trust Interests include an overhead fee that is deducted and retained by Cross Timbers Oil. This fee is currently $19,438 per month, or $58,314 per quarter. This overhead fee is subject to adjustment each May based on an oil and gas industry index. 12 PART II - OTHER INFORMATION - --------------------------- Items 1 through 4. Not applicable. Item 5. Other Information. At the close of business on May 6, 1998, the Trustee merged with and into NationsBank, N.A. The Trustee is now NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as Trustee. Item 6. (a) Exhibits. Page ---- (4) (a) Cross Timbers Royalty Trust Indenture Amended and Restated on January 13, 1992 by NationsBank of Texas, N.A.(now NationsBank, N.A.), as Trustee, heretofore filed as Exhibit 3.1 to the Trust's Registration Statement No. 33-44385 filed with the Securities and Exchange Commission on February 19, 1992, is incorporated herein by reference. (b) Net Overriding Royalty Conveyance (Cross Timbers Royalty Trust, 90% - Texas) from South Timbers Limited Partnership, West Timbers Limited Partnership, North Timbers Limited Partnership, East Timbers Limited Partnership, Hickory Timbers Limited Partnership, and Cross Timbers Partners, L.P. (predecessors of Cross Timbers Oil Company, L.P. which subsequently merged into Cross Timbers Oil Company) to NCNB Texas National Bank (now NationsBank, N.A.), as Trustee, dated February 12, 1991 (without Schedules A and B), heretofore filed as Exhibit 10.1 to the Trust's Registration Statement No. 33-44385 filed with the Securities and Exchange Commission on February 19, 1992, is incorporated herein by reference. (c) Net Overriding Royalty Conveyance (Cross Timbers Royalty Trust, 75% - Texas) from South Timbers Limited Partnership, West Timbers Limited Partnership, North Timbers Limited Partnership, East Timbers Limited Partnership, Hickory Timbers Limited Partnership, and Cross Timbers Partners, L.P. (predecessors of Cross Timbers Oil Company, L.P. which subsequently merged into Cross Timbers Oil Company) to NCNB Texas National Bank (now NationsBank, N.A.), as Trustee, dated February 12, 1991 (without Schedules A and B), heretofore filed as Exhibit 10.5 to the Trust's Registration Statement No. 33-44385 filed with the Securities and Exchange Commission on February 19, 1992, is incorporated herein by reference. (15) (a) Awareness letter of Arthur Andersen LLP 15 (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the quarter for which this report is filed. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. CROSS TIMBERS ROYALTY TRUST By NATIONSBANK, N.A., TRUSTEE By JOE B. GRISSOM ----------------------------- Joe B. Grissom Vice President CROSS TIMBERS OIL COMPANY Date: May 13, 1998 By LOUIS G. BALDWIN ----------------------------- Louis G. Baldwin Senior Vice President and Chief Financial Officer 14 EX-15.(A) 2 AWARENESS LETTER OF ARTHUR ANDERSEN LLP EXHIBIT 15 NationsBank, N.A. as Trustee for the Cross Timbers Royalty Trust: We are aware that Cross Timbers Oil Company has incorporated by reference in its Registration Statement No. 33-55784 on Form S-8 Cross Timbers Royalty Trust's Form 10-Q for the quarter ended March 31, 1998, which includes our report dated May 7, 1998, covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. ARTHUR ANDERSEN LLP Fort Worth, Texas May 13, 1998 15 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 536,526 0 885 0 0 537,411 61,100,449 23,676,753 37,961,107 537,411 0 0 0 0 37,423,696 37,961,107 2,335,418 2,339,189 0 0 44,220 0 0 2,294,969 0 2,294,969 0 0 0 2,294,969 .382 .382
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