<PAGE>
============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10662
-------
CROSS TIMBERS OIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-2347769
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
810 Houston Street, Suite 2000, Fort Worth, Texas 76102
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(817) 870-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
NONE
----------------------------------------------------
(Former name, former address and former fiscal year,
if change since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of November 1, 1996
---------------------------- ----------------------------------
Common stock, $.01 par value 16,249,561
================================================================================
<PAGE>
CROSS TIMBERS OIL COMPANY
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at September 30, 1996 and December 31, 1995.................. 3
Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1996
and 1995..................................................... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996 and 1995........ 5
Notes to Consolidated Financial Statements..................... 6-9
Report of Independent Public Accountants....................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 11-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 17
Item 5. Other Information.............................................. 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures..................................................... 18
2
<PAGE>
P A R T I. F I N A N C I A L I N F O R M A T I O N
CROSS TIMBERS OIL COMPANY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) SEPTEMBER 30,
1996 DECEMBER 31,
(Unaudited) 1995
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 3,725 $ 2,212
Accounts receivable, net..................... 26,683 27,582
Inventory.................................... 621 -
Deferred income tax benefit.................. 422 1,661
Other current assets......................... 1,489 1,282
--------- ---------
Total Current Assets........................ 32,940 32,737
--------- ---------
Property and Equipment, at cost - successful
efforts method:
Producing properties......................... 567,039 493,800
Undeveloped properties....................... 2,052 1,939
Gas gathering and other...................... 22,265 48,064
--------- ---------
Total Property and Equipment................ 591,356 543,803
Accumulated depreciation, depletion and
amortization................................ (203,323) (179,329)
--------- ---------
Net Property and Equipment................. 388,033 364,474
--------- ---------
Investment in Equity Securities, at market value... 14,399 -
--------- ---------
Other Assets....................................... 4,607 5,464
--------- ---------
TOTAL ASSETS....................................... $ 439,979 $ 402,675
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities..... $ 32,320 $ 25,314
Payable to Royalty Trust..................... 2,182 1,890
Accrued stock incentive compensation......... 447 3,881
-------- ---------
Total Current Liabilities................... 34,949 31,085
-------- ---------
Long-term Debt (Note 2)............................ 278,721 238,475
-------- ---------
Deferred Income Tax................................ 4,986 2,382
-------- ---------
Other Long-term Liabilities........................ - 33
-------- ---------
Commitments and Contingencies (Note 3)
Stockholders' Equity (Notes 6 and 7):
Series A convertible preferred stock
($.01 par value, 25,000,000 shares
authorized, 1,138,729 issued, at
liquidation value of $25)................... 28,468 -
Common stock ($.01 par value, 100,000,000
shares authorized, 17,534,530 and
18,415,257 shares issued)................... 175 184
Additional paid-in capital................... 135,616 156,670
Treasury stock (1,057,769 and 30,516 shares). (23,585) (528)
Unrealized loss on investment in equity
securities.................................. (890) -
Retained earnings (deficit).................. (18,461) (25,626)
-------- ---------
Total Stockholders' Equity................. 121,323 130,700
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $439,979 $ 402,675
======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Oil........................................ $19,375 $15,158 $ 54,222 $45,299
Gas........................................ 17,090 10,141 48,123 27,251
Gas gathering, processing, and marketing... 2,411 2,123 8,651 4,329
Other...................................... 325 644 1,021 3,342
------- ------- -------- -------
Total Revenues............................. 39,201 28,066 112,017 80,221
------- ------- -------- -------
EXPENSES
Production................................. 9,989 9,216 29,158 25,669
Taxes on production and property........... 3,016 2,295 8,479 6,895
Depreciation, depletion and amortization... 9,742 9,984 27,589 26,225
General and administrative................. 2,507 238 12,167 5,242
Gas gathering and processing............... 1,967 782 4,745 1,825
Interest expense, net...................... 4,525 3,517 12,066 8,469
Trust development costs.................... 247 186 718 474
------- ------- -------- -------
Total Expenses............................. 31,993 26,218 94,922 74,799
------- ------- -------- -------
INCOME BEFORE INCOME TAX
AND EXTRAORDINARY ITEM..................... 7,208 1,848 17,095 5,422
------- ------- -------- -------
INCOME TAX
Current.................................... 6 440 85 440
Deferred................................... 2,482 197 5,812 1,365
------- ------- -------- -------
Total Income Tax Expense................... 2,488 637 5,897 1,805
------- ------- -------- -------
INCOME BEFORE EXTRAORDINARY ITEM................ 4,720 1,211 11,198 3,617
Extraordinary Item (Note 4)................ - 609 - 609
------- ------- -------- -------
NET INCOME...................................... 4,720 1,820 11,198 4,226
Preferred stock dividends.................. 73 - 73 -
------- ------- -------- -------
EARNINGS AVAILABLE TO COMMON STOCK.............. $ 4,647 $ 1,820 $ 11,125 $ 4,226
======= ======= ======== =======
EARNINGS PER COMMON SHARE
Before extraordinary item.................. $0.26 $0.07 $0.61 $ 0.22
Extraordinary item......................... - 0.03 - 0.04
------- ------- -------- -------
Total...................................... $0.26 $0.10 $0.61 $ 0.26
======= ======= ======== =======
DIVIDENDS PER COMMON SHARE....................... $0.075 $0.075 $0.225 $ 0.225
======= ======= ======== =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING......................... 17,620 17,518 18,104 16,462
======= ======= ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
(Note 5)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 11,198 $ 4,226
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........ 27,589 26,225
Stock appreciation right compensation........... (3,434) (791)
Performance share compensation.................. 712 -
Deferred income tax............................. 5,812 1,365
(Gain) loss from sale of property and equity
securities..................................... (346) (2,968)
Extraordinary item.............................. - (609)
Other non-cash items............................ 597 279
Changes in working capital (a).................... 3,329 (3,906)
-------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES............. 45,457 23,821
-------- ---------
INVESTING ACTIVITIES
Sale of equity securities....................... 402 16,920
Sale of property and equipment.................. 28,527 8,990
Property acquisitions........................... (50,549) (124,793)
Development costs............................... (20,820) (15,823)
Investment in equity securities................ (16,093) (123)
Gas gathering and other additions............... (3,602) (36,849)
-------- ---------
CASH USED BY INVESTING ACTIVITIES............... (62,135) (151,678)
-------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt.................... 98,000 180,000
Payments on long-term debt...................... (57,700) (82,461)
Proceeds from common stock offering............. - 29,450
Preferred stock exchange costs.................. (540) -
Common stock dividends.......................... (4,105) (3,586)
Proceeds from exercise of stock options......... 826 388
Purchase of treasury stock...................... (18,290) (164)
-------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES........... 18,191 123,627
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 1,513 (4,230)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... 2,212 7,838
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 3,725 $ 3,608
======== =========
(a) CHANGES IN WORKING CAPITAL
Accounts receivable........................... $ 739 $ (3,643)
Inventory..................................... (621) 1,544
Other current assets.......................... (207) (338)
Accounts payable, accrued liabilities and
payable to Royalty Trust..................... 3,418 (1,469)
-------- ---------
(INCREASE) DECREASE IN WORKING CAPITAL......... $ 3,329 $ (3,906)
======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CROSS TIMBERS OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Cross Timbers Oil
Company ("the Company"), with the exception of the consolidated balance sheet at
December 31, 1995, have not been audited by independent accountants. In the
opinion of the Company's management, the accompanying financial statements
reflect all adjustments necessary to present fairly the financial position at
September 30, 1996, the results of operations for the three and nine-month
periods ended September 30, 1996 and 1995 and the cash flows for the nine-month
periods ended September 30, 1996 and 1995. All such adjustments are of a normal
recurring nature. The results for interim periods are not necessarily
indicative of annual results.
Certain disclosures have been condensed or omitted from these financial
statements. Accordingly, these financial statements should be read with the
Company's consolidated financial statements included in the Company's 1995
annual report on Form 10-K.
2. LONG-TERM DEBT
As of September 30, 1996, outstanding bank debt was $215 million,
compared with borrowing commitments under the bank loan agreement of $240
million and unused capacity of $25 million. Outstanding convertible
subordinated note debt was $63.7 million at September 30, 1996. During the
first nine months of 1996, the Company purchased $2.8 million principal amount
of the notes at a loss of $20,000.
The Company has issued a notice for the December 2, 1996 redemption of
$31.9 million principal amount of its convertible subordinated notes. Notes
called for redemption may be converted into common stock on or before November
29, 1996 at a price of $23.125 per common share (or 43.243 common shares for
each $1,000 principal amount of the notes). Notes not converted into common
stock will be redeemed at a price of 103.675% plus accrued interest of .452%,
resulting in a maximum redemption payment of $33.2 million to be funded by bank
debt. If all notes called are redeemed, the Company will recognize a $1.3
million extraordinary loss upon such redemption.
In connection with the note redemption, bank borrowing commitments
increased on November 1, 1996 to $275 million, which will be reduced to $261
million at December 31, 1997. Upon anticipated closing of acquisitions in
November and December 1996 (Note 8), bank borrowing commitments will increase to
$300 million, which will be reduced to $285 million at December 31, 1997. As of
November 1, 1996, maturities of long-term debt are: no maturities in 1996 and
1997, $3 million in 1998, $43 million in 1999 and $44 million in 2000. Upon
closing of the acquisitions in November and December 1996, and assuming all
notes called are redeemed, maturities for 1997 and 1998 will increase to $15
million and $37 million, respectively.
3. COMMITMENTS AND CONTINGENCIES
Leases
In March 1996, the Company sold the Tyrone gas processing plant and
related gathering system (acquired in August 1995) for $28 million and agreed to
lease the facility from the buyers for an initial term of eight years at annual
rentals of $4 million, and with fixed renewal options for an additional 13
years. If the lessor decides to sell the facility at the end of the initial
term or any renewal period, the lessor must first offer to sell it to the
Company. The Company has a right of first refusal of any third party offers to
buy the facility after the initial term. This transaction was recorded as a
sale and an operating lease, with no gain or loss on the sale. Proceeds of the
sale were used to reduce borrowings under the bank loan agreement.
6
<PAGE>
Other
In January 1996, the Company committed with a bank to enter into two
interest rate swap agreements if LIBOR rates declined to specified strike rates
on April 17, 1996. The Company received $500,000 as consideration for this
commitment that expired unexercised on April 17, resulting in recognition of
such proceeds as other income.
In June 1996, Holshouser v. Cross Timbers Oil Company, a class action
lawsuit, was filed in the District Court of Major County, Oklahoma. The action
was filed on behalf of all parties who, at any time since June 1991, have
allegedly had production or other costs deducted by the Company from royalties
paid on gas produced in Oklahoma when the royalty is based upon a specified
percentage of the proceeds received from the gas sold. The plaintiff alleges
that such deductions are a breach of the Company's contractual obligations to
the class and is seeking to recover an unspecified amount of damages as a result
of the alleged breach. Management cannot determine at this time the potential
liability of this claim, but intends to vigorously defend the action.
4. EXTRAORDINARY ITEM
The Company recognized an extraordinary gain of $609,000 (net of income
tax of $314,000) in September 1995 upon the purchase and retirement of a portion
of the Company's convertible subordinated notes. See also Note 2.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The following are total interest and income tax payments during each of
the periods (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Interest.......... $10,654 $7,357
Income tax........ 6 400
</TABLE>
The accompanying consolidated statements of cash flows excludes the
following non-cash equity transactions during the nine-month periods ended
September 30, 1996 and 1995:
- Exchange of 1,324,111 shares of common stock for 1,138,729 shares of
Series A Convertible Preferred Stock in September 1996 (Note 7)
- Grants of 6,000 fully vested performance shares to nonemployee
directors in each of 1996 and 1995 (Note 6)
- Receipt of 203,403 and 7,340 shares of common stock for the option
price of exercised stock options in 1996 and 1995, respectively
(Note 6)
6. STOCK INCENTIVE PLANS
During the nine months ended September 30, 1996, 347,070 stock incentive
units granted under the 1991 Stock Incentive Plan ("Units") were exercised at a
weighted average exercise price of $12.22. As a result of these exercises, the
Company received proceeds of $4.2 million (including 149,191 shares of common
stock valued at $3.4 million), issued 347,070 shares of common stock, paid stock
appreciation right compensation of $7.1 million, purchased 21,950 treasury
shares for $400,000 and withheld 104,746 treasury shares valued at $2.5 million
for employee payroll taxes. Related stock appreciation right compensation
expense for the nine months ended September 30, 1996 was $3.7 million, which is
included in general and administrative expense in the consolidated statement of
operations. As of September 30, 1996, 18,305 Units were exercisable at a
weighted average exercise price of $13.89.
7
<PAGE>
During the nine months ended September 30, 1996, 90,313 stock options
granted under the 1994 Stock Incentive Plan ("1994 Plan") were exercised at a
weighted average price of $14.94. As a result of these exercises, the Company
received as exercise proceeds 54,212 shares of common stock valued at $1.3
million, issued 90,313 shares of common stock and withheld 10,614 treasury
shares valued at $260,000 for employee payroll taxes. As of September 30, 1996,
434,641 stock options under the 1994 Stock Incentive Plan were exercisable at a
weighted average price of $14.94.
In May and June 1996, 158,250 performance shares that were granted in
November 1995 under the 1994 Plan became fully vested. The Company recognized
compensation expense related to these performance shares of $700,000 during the
first nine months of 1996 and $2.8 million in the fourth quarter of 1995. Upon
vesting, 47,150 treasury shares with a value of $1 million were withheld by the
Company for employee payroll taxes.
In May 1996, the stockholders approved an increase in the number of
shares available for grant under the 1994 Plan from 800,000 to 1,000,000.
During the first nine months of 1996, 135,000 stock options were granted to
employees and nonemployee directors and 6,000 fully vested performance shares
were granted to nonemployee directors under the 1994 Plan.
7. SERIES A CONVERTIBLE PREFERRED STOCK
Pursuant to the Company's exchange offer, a total of 1,324,111 shares of
common stock were exchanged for 1,138,729 shares of Series A Convertible
Preferred Stock ("Preferred Stock") in September 1996. The Company incurred
costs of $540,000 related to this exchange offer. All exchanged shares of
common stock have been canceled and are authorized but unissued. Preferred
Stock is recorded in the accompanying consolidated balance sheet at its
liquidation preference of $25 per share.
Cumulative dividends on Preferred Stock are paid quarterly, when
declared by the Company's Board of Directors, based on an annual rate of $1.5625
per share. The Preferred Stock has no stated maturity and no sinking fund, and
is not redeemable through October 15, 1999. It may be redeemed, in whole or in
part, by the Company at $26.09 per share, if redeemed on or before October 15,
2000 (but only under certain circumstances), and thereafter unconditionally at
prices declining ratably annually to $25.00 per share after October 15, 2006,
plus dividends accrued and unpaid to the redemption date.
The Preferred Stock is convertible at the option of the holder at any
time, unless previously redeemed, into shares of common stock at a rate of
.961538 shares of common stock for each share of Preferred Stock, subject to
adjustment in certain events.
8. ACQUISITIONS
At the end of March 1995, the Company acquired predominantly gas-
producing properties in Kansas, Oklahoma and Texas from Apache Corporation for
$20 million and in northwestern Oklahoma from Meridian Oil, Inc. and certain of
its affiliates for $4.1 million. During the second quarter of 1995, the Company
completed other acquisitions totaling approximately $7 million. These
acquisitions were primarily financed with bank debt under the Company's
revolving credit agreements.
On August 1, 1995, the Company acquired gas-producing properties and a
related gathering system and gas processing plant from Santa Fe Minerals, Inc.
("Santa Fe Acquisition"). The properties consist primarily of operated
interests in the Hugoton Field of Kansas and Oklahoma. Of the $123 million
adjusted purchase price, $94 million was allocated to producing properties and
$29 million was allocated to gas gathering and processing facilities. The Santa
Fe Acquisition was primarily financed by borrowings under the Company's loan
agreement, proceeds from the 1995 common stock offering, and asset sales.
8
<PAGE>
On July 19, 1996, the Company acquired primarily gas-producing
properties in the Green River Basin of southwestern Wyoming from Enserch
Exploration ("Enserch Acquisition"). The Company's internal engineers estimate
the proved gas reserves for these properties to be 81 billion cubic feet. The
preliminary purchase price of $40 million will be reduced by an estimated $1.5
million for net revenues from the April 1, 1996 effective date of the
acquisition through the closing date of July 19. The Company funded the
acquisition with bank debt and cash flow from operations.
These acquisitions were recorded using the purchase method of
accounting. The following presents pro forma results of operations for the nine
months ended September 30, 1996 and 1995 and the year ended December 31, 1995 as
if these acquisitions (net of related dispositions) and the 1995 common stock
offering had been consummated as of January 1, 1995. These pro forma results
are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
-----------------------------------
Nine Months Ended Year Ended
(in thousands, except per share data) September 30, December 31,
------------------- ------------
1996 1995 1995
----------------------------------
<S> <C> <C> <C>
Revenues......................................... $116,437 $96,974 $131,491
======== ======= ========
Income before income tax and extraordinary item.. $ 17,029 $ 1,081 $(21,085)
======== ======= ========
Income before extraordinary item................. $ 11,154 $ 752 $(13,878)
======== ======= ========
Earnings available for common stock.............. $ 11,081 $ 1,361 $(13,222)
======== ======= ========
Earnings per common share
Before extraordinary item....................... $ 0.61 $ 0.04 $ (0.76)
======== ======= ========
After extraordinary item........................ $ 0.61 $ 0.07 $ (0.73)
======== ======= ========
Weighted average common shares outstanding....... 18,104 18,188 18,212
======== ======= ========
</TABLE>
In July 1996, the Company announced that it would purchase up to one million
units of beneficial interest in Cross Timbers Royalty Trust ("Units") as part of
its acquisition program. As of September 30, 1996, the Company had purchased
292,040 Units at a cost of $3.3 million. Unit purchases, funded primarily with
bank debt, are regarded by the Company as an acquisition of oil and gas
properties.
In October 1996, the Company entered into an agreement with an
undisclosed party to acquire additional interests in the Enserch Acquisition
properties for $13 million. Proved gas reserves are estimated to total 25
billion cubic feet for this acquisition that is expected to close in November
1996. Also in October 1996, the Company entered into an agreement to acquire
producing properties in the Permian Basin of West Texas from New York Life
Insurance Company and American Exploration Company for $27.5 million. The
Company's internal engineers estimate proved gas reserves to be 33 billion cubic
feet and proved oil reserves to be 300,000 barrels of oil. Anticipated closing
of this acquisition is in December 1996. Both acquisitions will be funded by
bank debt.
9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have reviewed the accompanying consolidated balance sheet of Cross Timbers
Oil Company (a Delaware Corporation) as of September 30, 1996 and the related
consolidated statements of operations for the three and nine-month periods ended
September 30, 1996 and 1995, and the consolidated statements of cash flows for
the nine-month periods ended September 30, 1996 and 1995. These financial
statements are the responsibility of the Company's management.
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 conducted 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.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Cross Timbers Oil Company as of
December 31, 1995 included in the Company's 1995 annual report on Form 10-K, and
in our report dated February 5, 1996, we expressed an unqualified opinion on
that statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1995 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1995 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
November 1, 1996
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with management's
discussion and analysis contained in the Company's 1995 annual report on Form
10-K, as well as with the consolidated financial statements and notes thereto
included in this quarterly report on Form 10-Q.
<TABLE>
<CAPTION>
OIL AND GAS PRODUCTION AND PRICES
- -----------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------- ------------------------------------
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
--------- --------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL PRODUCTION
Oil (Bbls)................... 898,565 911,431 (1%) 2,623,616 2,654,757 (1%)
Gas (Mcf).................... 9,761,334 8,034,676 21% 26,716,518 19,729,737 35%
NEBs......................... 2,525,454 2,250,544 12% 7,076,369 5,943,047 19%
AVERAGE DAILY PRODUCTION
Oil (Bbls)................... 9,767 9,907 (1%) 9,575 9,724 (1%)
Gas (Mcf).................... 106,101 87,333 21% 97,506 72,270 35%
NEBs......................... 27,451 24,463 12% 25,826 21,769 19%
AVERAGE SALES PRICE
Oil per Bbl.................. $21.56 $16.63 30% $20.67 $17.06 21%
Gas per Mcf.................. $1.75 $1.26 39% $1.80 $1.38 30%
</TABLE>
- --------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
NEB - Net equivalent barrel (six Mcf equal one Bbl)
Total oil production decreased slightly from comparable 1995 periods
primarily because of property dispositions, partially offset by new drilling and
acquisitions. Gas production increases from the 1995 to 1996 periods are
primarily attributable to the 1995 and 1996 acquisitions and the 1995 and 1996
development programs, partially offset by property dispositions and natural
decline.
Crude oil prices continued to improve during the third quarter of 1996.
The average posted price for West Texas Intermediate ("WTI"), a benchmark crude,
was $20.79 for third quarter 1996, compared to $16.13 for third quarter 1995.
The Company's average oil price includes oil marketing margins which are
partially offset by lower priced sour crude sales and transportation charges.
Natural gas prices were relatively weak in 1995 until cold weather and
low storage levels caused prices to improve in November 1995 and remain strong
until summer 1996. Milder than normal summer temperatures temporarily weakened
prices through September, but they have recently rebounded. The greatest
relative improvement in gas prices has been in the Rocky Mountain area where
prices have increased from approximately $1.10 per Mcf in spring 1996 to recent
prices above $2.00 per Mcf. The Company generally expects gas prices for the
remainder of 1996 to be higher than comparable 1995 periods.
11
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1995
Third quarter 1996 net income was $4.6 million compared to $1.8 million
for the third quarter of 1995. Improved earnings are primarily the result of
higher oil and gas prices and increased gas production.
Total revenues for the 1996 quarter were $39.2 million, a 40% increase
over third quarter 1995 revenues of $28.1 million. Oil revenue increased $4.2
million (28%) primarily because of the 30% increase in oil prices. Gas revenue
increased $6.9 million (69%) as a result of the 21% increase in gas production
and the 39% price increase.
Gas gathering, processing and marketing revenues increased $300,000
primarily because of the gross profit from the Tyrone gas processing plant and
related gathering system ("Tyrone plant") that was acquired as part of the Santa
Fe Acquisition in August 1995. Other revenues of $300,000 for third quarter
1996 include a $200,000 gain on sale of producing properties.
Expenses for the third quarter of 1996 totaled $32 million as compared
to $26.2 million for third quarter 1995. Production expense increased $800,000
(8%) primarily because of the 1995 and 1996 acquisitions, partially offset by
lower remedial workover costs. Depreciation, depletion and amortization
("DD&A") decreased $200,000 (2%) because of the effects of increased estimated
proved reserves at January 1, 1996, the sale of the Tyrone plant in March 1996
and the impairment reserve recorded upon adoption of Statement of Financial
Accounting Standards No. 121 ("SFAS 121") in fourth quarter 1995, which more
than offset the increases related to the 1995 and 1996 acquisitions.
Third quarter general and administrative expense increased from $200,000
in 1995 to $2.5 million in 1996 primarily because of a third quarter 1995
reduction in stock appreciation right ("SAR") compensation of $1.2 million.
This reduction in stock incentive compensation was the result of a decrease in
the Company's common stock price during the quarter. Virtually all stock
options with SARs were exercised as of June 30, 1996; therefore, the impact of
SAR compensation on third quarter 1996 net income was not significant and should
not be significant in the future. The remaining increase in general and
administrative expense is due to Company growth.
Taxes on production and property increased $700,000 (31%) over the third
quarter of 1995 primarily because of increased oil and gas revenues. Net
interest expense increased $1 million (29%) primarily because of a 26% increase
in weighted average borrowings to fund 1996 producing property acquisitions,
investment in equity securities and treasury stock purchases. Gas gathering and
processing expense increased $1.2 million as a result of Tyrone plant lease
rentals that began in April 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Net income for the nine months ended September 30, 1996 was $11.1
million, compared to $4.2 million for the same 1995 period. Improved earnings
were primarily the result of higher oil and gas prices, increased gas production
and improved gas marketing margins.
Total revenues for the first nine months of 1996 were $112 million, or
40% higher than revenues for the first nine months of 1995. Oil revenue
increased $8.9 million (20%) primarily as the result of the 21% increase in
prices. Gas revenue increased $20.9 million (77%) because of the 30% price
increase combined with the 35% increase in production.
Gas gathering, processing and marketing revenues increased $4.3 million
because of improved gas marketing margins and the gross profit from the Tyrone
plant that was acquired as part of the Santa Fe Acquisition in August 1995.
Other revenues of $1 million for the first nine months of 1996 include
recognition of interest rate swap commitment income of $500,000 (see Note 3 to
Consolidated Financial Statements) and a $300,000 gain on sale of
12
<PAGE>
producing properties. Other revenues of $3.3 million in 1995 include a $1.6
million gain realized on sale of equity securities and an $1.4 million gain on
sale of producing properties.
Expenses for the nine months ended September 30, 1996 totaled $94.9
million, or 27% above total expenses for the first nine months of 1995.
Production expense increased $3.5 million (14%) primarily as a result of the
1995 and 1996 acquisitions. DD&A expense increased $1.4 million (5%) as a
result of the 1995 and 1996 acquisitions, partially offset by the effects of
increased estimated proved reserves at January 1, 1996, the sale of the Tyrone
plant and the impairment reserve recorded upon adoption of SFAS 121 in fourth
quarter 1995.
General and administrative expense for the first nine months increased
from $5.2 million in 1995 to $12.1 million in 1996 primarily because of stock
incentive compensation of $4.4 million incurred in the 1996 period compared to a
$400,000 reduction in stock incentive compensation in 1995. Stock incentive
compensation for the first nine months of 1996 includes SAR compensation of $3.7
million and performance share compensation of $700,000. Increased stock
incentive compensation is primarily because of increases in the Company's common
stock price during the first half of 1996 and resulting stock option exercises
and performance share vesting. Virtually all stock options with SARs were
exercised as of June 30, 1996; therefore, the impact of SAR compensation on
future periods should not be significant. The remaining increase in general and
administrative expense is attributable to Company growth.
Taxes on production and property increased $1.6 million (23%) primarily
because of increased oil and gas revenues. Net interest expense increased $3.6
million (42%) primarily as a result of a 37% increase in weighted average
borrowings that were used to fund capital expenditures and treasury stock
purchases. Gas gathering and processing expense increased $2.9 million
primarily because of Tyrone plant lease rentals that began in April following
the sale of the plant in March 1996.
COMPARATIVE EXPENSES PER NET EQUIVALENT BARREL OF PRODUCTION
The following are expenses on a net equivalent barrel (NEB) basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------- ----------------------------------
Increase Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
--------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Production.......................... $3.96 $4.09 (3%) $4.12 $4.32 (5%)
Taxes on production and property.... 1.19 1.02 17% 1.20 1.16 3%
Depreciation, depletion and
amortization (DD&A) (a)........... 3.54 4.08 (13%) 3.58 4.14 (14%)
General and administrative (G&A).... 1.00 0.11 810% 1.72 0.88 95%
Interest............................ 1.79 1.56 15% 1.71 1.43 20%
</TABLE>
----------------------
(a) Includes only DD&A directly related to oil and gas production.
Although total expenses have increased from 1995 to 1996, expenses per
NEB (as shown above) have generally remained stable over these periods. The
following are explanations of the more significant variances:
Production- Decreased production expense per NEB is primarily because
of lower operating costs of gas-producing properties acquired in 1995 and 1996,
and lower remedial workover costs.
Taxes on production and property- Increased taxes per NEB are primarily
because of an increase in gas revenue that is taxed at a higher rate.
13
<PAGE>
DD&A- Decreased DD&A per NEB is attributable to increased proved
reserve estimates at January 1, 1996 and reduced depletable costs resulting from
the $20.3 million impairment provision recorded in fourth quarter 1995 upon
adoption of SFAS 121.
G&A- Increased G&A per NEB is primarily because of stock incentive
compensation. Excluding stock incentive compensation, G&A per NEB was $1.00 and
$.65 for the quarters ended September 30, 1996 and 1995, respectively, and was
$1.10 and $.94 per NEB for the first nine months of 1996 and 1995, respectively.
Interest- Increased interest per NEB is primarily the result of
financing expenditures for other than oil and gas producing properties
(investment in equity securities and treasury stock purchases) with borrowings
under the Company's bank credit facilities.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOW AND WORKING CAPITAL
Cash provided by operating activities was $45.5 million for the first
nine months of 1996 as compared to $23.8 million for the comparable 1995 period.
Operating cash flow (defined as cash provided by operating activities before
changes in working capital) increased 52% from $27.7 million for the first nine
months of 1995 to $42.1 million for the same 1996 period. SAR payments,
resulting from stock option exercises, decreased operating cash flow for the
first nine months of 1996 by approximately $7 million. Virtually all stock
options with SARs were exercised as of June 30, 1996; therefore, the impact of
SAR payments on future operating cash flows is not expected to be significant.
During the nine months ended September 30, 1996, $45.5 million cash
provided by operating activities, $28.9 million from the sale of assets, net
borrowings of long-term debt of $40.3 million, and $800,000 from stock option
exercises were used to fund property acquisitions, development costs and other
capital additions of $91.1 million, dividends of $4.1 million, purchases of
treasury stock of $18.3 million and preferred stock offering costs of $500,000.
The resulting increase in cash and cash equivalents for the period was $1.5
million.
Total current liabilities at September 30, 1996 increased $3.9 million
from the prior year-end, primarily because of an increase in accounts payable
and accrued liabilities related to drilling and development activity. Accrued
stock incentive compensation decreased $3.4 million as a result of significant
stock option exercises in the second quarter of 1996. The $1.2 million decline
in the current deferred income tax benefit is also related to these stock option
exercises.
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT
Through September 30, the Company's 1996 cash expenditures for
exploitation and development were $20.8 million as compared to $15.8 million for
the same 1995 period. Exploitation and development costs incurred for 1996
through September 30 totaled $24.9 million. Although actual exploitation and
development expenditures may vary significantly due to many factors, the Company
anticipates its 1996 expenditures for exploitation and development activities to
approximate its increased budget of $40 million as approved by the Board of
Directors in May 1996. Such expenditures are expected to be funded by cash flow
from operations.
During the first nine months of 1996, the Company's purchases of equity
securities (for non-trading purposes) totaled $16.1 million. Proceeds from
sales of equity securities during the first nine months of 1996 totaled
$400,000, resulting in a nominal gain.
In May 1996, the Company also announced expected increases in its 1997
development expenditures to $60 to $80 million, and plans to make strategic
acquisitions totaling $120 million over the following 18 months, including
14
<PAGE>
purchases of up to two million shares of the Company's common stock as treasury
stock purchases. As of the end of September, 639,390 treasury shares had been
purchased for $14.1 million. In July 1996, the Company announced that it would
also purchase up to one million units of beneficial interest in Cross Timbers
Royalty Trust ("Units") as part of its acquisition program. As of September 30,
1996, the Company had purchased 292,040 Units at a total cost of $3.3 million.
Unit purchases, funded primarily with bank debt, are regarded by the Company as
an acquisition of oil and gas properties.
In March 1996, the Company sold the Tyrone plant for $28 million and
agreed to lease the facility from the buyers for an initial term of eight years
at annual rentals of $4 million, and with fixed renewal options for an
additional 13 years. Proceeds of the sale were used to reduce bank debt.
On July 19, 1996, the Company acquired primarily gas-producing
properties in the Green River Basin of southwestern Wyoming from Enserch
Exploration ("Enserch Acquisition"). The Company's internal engineers estimate
the proved gas reserves for these properties to be 81 billion cubic feet. The
preliminary purchase price of $40 million will be reduced by an estimated $1.5
million for net revenues from the April 1, 1996 effective date of the
acquisition through the closing date of July 19. The Company funded the
acquisition with bank debt and cash flow from operations.
In October 1996, the Company entered into an agreement with an
undisclosed party to acquire additional interests in the Enserch Acquisition
properties for $13 million. Proved gas reserves are estimated to total 25
billion cubic feet for this acquisition that is expected to close in November
1996. Also in October 1996, the Company entered into an agreement to acquire
producing properties in the Permian Basin of West Texas from New York Life
Insurance Company and American Exploration Company for $27.5 million. The
Company's internal engineers estimate proved gas reserves to be 33 billion cubic
feet and proved oil reserves to be 300,000 barrels of oil. Anticipated closing
of this acquisition is in December 1996. Both acquisitions will be funded by
bank debt.
As of the end of September, the Company had completed drilling 22 oil
wells and 29 gas wells in 1996. A total of 95 recompletions and workovers were
also completed in the first nine months of the year. Results of 1996
development and exploitation activity to date have met management's
expectations.
Twelve wells have been completed under the Prentice Northeast Unit 1996
infill drilling program. Because these wells have exceeded expectations, the
Company plans to drill 16 additional wells in this Unit by year-end.
Two rigs are currently drilling in Major County where the Company
expects to complete 26 wells by year-end. The Company also has drilled two
wells and plans to drill eight additional wells by year-end in the Fontenelle
Unit, located in the Green River Basin of southwestern Wyoming.
DEBT AND EQUITY
During the first nine months of 1996, long-term debt increased $40.2
million, reflecting an increase in bank borrowings of $43 million and a
reduction in convertible subordinated note borrowings of $2.8 million. Bank
debt increases that funded capital acquisitions and treasury stock purchases
were partially offset by the application of proceeds from the sale of the Tyrone
plant in March 1996.
Pursuant to the Company's exchange offer, a total of 1,324,111 shares of
common stock were exchanged for 1,138,729 shares of Series A Convertible
Preferred Stock ("Preferred Stock") in September 1996. The Preferred Stock will
have a liquidation preference of $25 per share and will pay cumulative cash
dividends quarterly based on an annual rate of $1.5625 per share. The Company
incurred costs of $540,000 related to this exchange offer.
The Company has issued a notice for the redemption of $31.9 million
principal amount of its convertible subordinated notes on December 2, 1996.
Notes called for redemption may be converted into common stock on or before
November 29, 1996 at a price of $23.125 per common share (or 43.243 common
shares for each $1,000
15
<PAGE>
principal amount of the notes). If all notes called for redemption are
converted, the Company will issue 1,378,000 additional common shares, bringing
total outstanding common shares to approximately 17.6 million. Notes not
converted into common stock will be redeemed at a price of 103.675% plus accrued
interest of .452%, resulting in a maximum redemption payment of $33.2 million to
be funded by bank debt. If all notes called are redeemed, the Company will
recognize a $1.3 million extraordinary loss upon such redemption.
In connection with the note redemption, bank borrowing commitments
increased on November 1, 1996 to $275 million. Upon anticipated closing of
acquisitions in November and December 1996, bank borrowing commitments will
increase to $300 million. See Note 2 to Consolidated Financial Statements.
Stockholders' equity at September 30, 1996 decreased $9.4 million from
year-end as a result of treasury stock additions of $23 million, dividends of
$4.1 million and an unrealized loss of $900,000 (net of deferred taxes of
$500,000) in the investment in equity securities. These decreases in equity
were partially offset by year-to-date net income of $11.2 million and net common
and preferred stock increases of $7.4 million resulting primarily from stock
option exercises.
DIVIDENDS
In August 1996, the Board of Directors of the Company declared a third
quarter dividend of $.075 per common share, or a total of $1.2 million, to be
paid in October 1996 to shareholders of record on September 30, 1996. This
dividend is at the same quarterly rate paid by the Company or its predecessors
since September 1992.
Cumulative dividends on preferred stock are paid quarterly, when
declared by the Company's Board of Directors, based on an annual rate of $1.5625
per share. The first scheduled preferred stock dividend payment on January 15,
1997 will be approximately $500,000.
16
<PAGE>
P A R T I I. O T H E R I N F O R M A T I O N
ITEM 1. LEGAL PROCEEDINGS
Reference is hereby made to the description of a class action lawsuit
filed against the Company in June 1996, included in the Company's Form 10-Q for
the quarter ended June 30, 1996. See Part I, Note 3 to Consolidated Financial
Statements.
The Company and its subsidiaries are named defendants in other lawsuits
and named parties in certain governmental proceedings arising in the ordinary
course of business. While the outcome of these lawsuits or other proceedings
against the Company cannot be predicted with certainty, management does not
expect these matters to have a material adverse effect on the Company's
financial position, liquidity or operations.
ITEMS 2. THROUGH 4.
Not applicable.
ITEM 5. OTHER INFORMATION.
On November 1, 1996, the Company issued a notice for the December 2,
1996 redemption of $31.9 million principal amount of its convertible
subordinated notes. Notes called for redemption may be converted into common
stock on or before November 29, 1996 at a price of $23.125 per common share (or
43.243 common shares for each $1,000 principal amount of the notes). If all
notes called for redemption are converted, the Company will issue 1,378,000
additional common shares, bringing total outstanding common shares to
approximately 17.6 million. Notes not converted into common stock will be
redeemed at a price of 103.675% plus accrued interest of .452%. If the price of
the Company's common stock is $24.125 per share or higher, note holders who
elect to convert will receive common stock having a greater market value than
the cash receivable upon redemption.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
and Description Page
--------------- ----
15 Letter re unaudited interim financial information
15.1 Awareness letter of Arthur Andersen LLP 19
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS OIL COMPANY
Date: November 13, 1996 By BENNIE G. KNIFFEN
-------------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer and
Duly Authorized Officer)
18
<PAGE>
EXHIBIT 15.1
Cross Timbers Oil Company:
We are aware that Cross Timbers Oil Company has incorporated by reference in its
Registration Statements No. 33-64274, No. 33-65238 and No. 33-81766 on Form S-8
its Form 10-Q for the quarter ended September 30, 1996, which includes our
report dated November 1, 1996, 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 a registration statement prepared
or certified by our firm or a report prepared or certified by our firm within
the meaning of Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
November 13, 1996
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 3,725 0
<SECURITIES> 0 0
<RECEIVABLES> 26,683 0
<ALLOWANCES> 0 0
<INVENTORY> 621 0
<CURRENT-ASSETS> 32,940 0
<PP&E> 591,356 0
<DEPRECIATION> 203,323 0
<TOTAL-ASSETS> 439,979 0
<CURRENT-LIABILITIES> 34,949 0
<BONDS> 278,721 0
0 0
28,468 0
<COMMON> 175 0
<OTHER-SE> 92,680 0
<TOTAL-LIABILITY-AND-EQUITY> 439,979 0
<SALES> 39,201 112,017
<TOTAL-REVENUES> 39,201 112,017
<CGS> 0 0
<TOTAL-COSTS> 27,468 82,856
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,525 12,066
<INCOME-PRETAX> 7,208 17,095
<INCOME-TAX> 2,488 5,897
<INCOME-CONTINUING> 4,647 11,125
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,647 11,125
<EPS-PRIMARY> .26 .61
<EPS-DILUTED> .26 .61
</TABLE>
