<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, 1998
------------------
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 October 30, 1998
---------------------------- ----------------------------------
Common stock, $.01 par value 45,711,556
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<PAGE>
CROSS TIMBERS OIL COMPANY
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997............................................ 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997..................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997............................ 5
Notes to Consolidated Financial Statements.................... 6
Report of Independent Public Accountants...................... 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 21
Item 5. Other Information............................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................. 22
Signatures.................................................... 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
CROSS TIMBERS OIL COMPANY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
SEPTEMBER 30,
1998 DECEMBER 31,
(Unaudited) 1997
---------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................... $ 5,693 $ 3,816
Accounts receivable, net........................................ 44,638 43,996
Investment in equity securities (Note 2)........................ 112,839 -
Deferred income tax benefit..................................... 13,355 445
Other current assets............................................ 5,179 3,905
---------------- --------------
Total Current Assets........................................... 181,704 52,162
---------------- --------------
Property and Equipment, at cost - successful efforts method:
Producing properties............................................ 1,268,469 931,259
Undeveloped properties.......................................... 6,581 6,406
Gas gathering and other......................................... 27,493 23,703
---------------- --------------
Total property and equipment................................... 1,302,543 961,368
Accumulated depreciation, depletion and amortization............. (292,717) (237,532)
---------------- --------------
Net Property and Equipment................................... 1,009,826 723,836
---------------- --------------
Other Assets..................................................... 12,963 12,457
---------------- --------------
TOTAL ASSETS..................................................... $ 1,204,493 $ 788,455
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........................ $ 59,419 $ 52,266
Payable to Royalty Trust........................................ 755 2,073
Accrued stock incentive compensation............................ 347 554
---------------- --------------
Total Current Liabilities...................................... 60,521 54,893
---------------- --------------
Long-term Debt (Note 3).......................................... 873,000 539,000
---------------- --------------
Deferred Income Tax.............................................. 16,195 21,320
---------------- --------------
Other Long-term Liabilities...................................... 2,748 2,999
---------------- --------------
Commitments and Contingencies (Note 4)
Stockholders' Equity:
Series A Convertible preferred stock ($.01 par value, 25,000,000
shares authorized, 1,138,729 issued at liquidation
value of $25).................................................. 28,468 28,468
Common stock ($.01 par value, 100,000,000 shares authorized,
54,035,966 and 46,310,710 shares issued)....................... 540 463
Additional paid-in capital...................................... 352,788 210,954
Treasury stock (7,872,839 and 6,860,779 shares)................. (101,124) (76,656)
Retained earnings (deficit)..................................... (28,643) 7,014
---------------- --------------
Total Stockholders' Equity.................................... 252,029 170,243
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $ 1,204,493 $ 788,455
================ ==============
</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,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Oil and condensate....................................... $ 12,602 $17,887 $ 41,338 $ 56,470
Gas and natural gas liquids.............................. 51,216 23,293 129,987 74,714
Gas gathering, processing and marketing.................. 2,950 2,436 6,736 7,558
Other.................................................... 276 118 603 2,798
-------- ------- -------- --------
Total Revenues........................................... 67,044 43,734 178,664 141,540
-------- ------- -------- --------
EXPENSES
Production............................................... 16,558 10,830 42,647 31,960
Exploration.............................................. 1,208 547 6,297 1,122
Taxes, transportation and other.......................... 8,123 3,650 20,490 11,576
Depreciation, depletion and amortization................. 22,160 12,012 57,849 34,529
General and administrative............................... 3,208 2,915 10,042 10,457
Gas gathering and processing............................. 2,016 2,168 6,251 6,325
Trust development costs.................................. 411 285 1,045 566
-------- ------- -------- --------
Total Expenses........................................... 53,684 32,407 144,621 96,535
-------- ------- -------- --------
OPERATING INCOME.......................................... 13,360 11,327 34,043 45,005
-------- ------- -------- --------
OTHER INCOME (EXPENSE)
Gain (loss) on investment in equity securities (Note 2).. (45,984) 244 (40,295) 1,361
Interest expense, net.................................... (13,642) (6,783) (37,781) (18,033)
-------- ------- -------- --------
Total Other Income (Expense)............................. (59,626) (6,539) (78,076) (16,672)
-------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX........................... (46,266) 4,788 (44,033) 28,333
-------- ------- -------- --------
INCOME TAX
Current.................................................. 42 17 62 105
Deferred................................................. (15,748) 1,548 (15,000) 9,730
-------- ------- -------- --------
Total Income Tax Expense (Benefit)....................... (15,706) 1,565 (14,938) 9,835
-------- ------- -------- --------
NET INCOME (LOSS)......................................... (30,560) 3,223 (29,095) 18,498
Preferred Stock Dividends................................ 444 444 1,334 1,334
-------- ------- -------- --------
EARNINGS (LOSS) AVAILABLE TO COMMON STOCK................. $(31,004) $ 2,779 $(30,429) $ 17,164
======== ======= ======== ========
EARNINGS (LOSS) PER COMMON SHARE (Note 6)
Basic and Diluted........................................ $ (0.69) $ 0.07 $ (0.71) $ 0.43
======== ======= ======== ========
DIVIDENDS DECLARED PER COMMON SHARE....................... $ 0.04 $ 0.037 $ 0.12 $ 0.111
======== ======= ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING....................................... 44,765 39,581 42,737 39,822
======== ======= ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
(in thousands)
(Note 8)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................... $ (29,095) $ 18,498
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization.......................... 57,849 34,529
Exploration....................................................... 6,297 1,122
Stock incentive compensation...................................... 1,413 1,704
Deferred income tax............................................... (15,000) 9,730
(Gain) loss from sale of property and long-term
investment in equity securities.................................. 105 (3,478)
Unrealized loss on investment in equity securities................ 37,502 -
Other non-cash items.............................................. 999 1,442
Changes in working capital (a)........................................ (154,793) 2,805
--------- ---------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......................... (94,723) 66,352
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of long-term investment in equity securities....... - 20,875
Long-term investment in equity securities............................. - (6,479)
Proceeds from sale of property and equipment.......................... 419 17,097
Property acquisitions................................................. (262,464) (88,291)
Exploration and development costs..................................... (41,487) (52,758)
Gas plant, gathering and other additions.............................. (5,649) (10,935)
--------- ---------
CASH USED BY INVESTING ACTIVITIES..................................... (309,181) (120,491)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt.......................................... 785,700 322,050
Payments on long-term debt............................................ (457,700) (236,080)
Common stock offering................................................. 133,304 -
Dividends............................................................. (6,168) (5,675)
Net proceeds (payments) related to stock option exercises............. (397) 602
Purchase of treasury stock............................................ (48,958) (27,158)
--------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES................................. 405,781 53,739
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 1,877 (400)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 3,816 3,937
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 5,693 $ 3,537
========= =========
(a) CHANGES IN WORKING CAPITAL
Accounts receivable............................................... $ (62) $ 6,208
Investment in equity securities................................... (150,342) -
Other current assets.............................................. (1,209) (2,625)
Accounts payable, accrued liabilities and payable to Royalty
Trust............................................................ (3,180) (778)
--------- ---------
(INCREASE) DECREASE IN WORKING CAPITAL............................. $(154,793) $ 2,805
========= =========
</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, 1997, have not been audited by independent public accountants. In
the opinion of the Company's management, the accompanying consolidated financial
statements reflect all adjustments necessary to present fairly the financial
position at September 30, 1998 and the results of operations for the three and
nine-month periods ended September 30, 1998 and 1997 and cash flows of the
Company for the nine-month periods ended September 30, 1998 and 1997. All such
adjustments are of a normal recurring nature. Certain amounts presented in
prior period financial statements have been reclassified for consistency with
current period presentation. See Note 2. 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 1997
annual report on Form 10-K.
2. INVESTMENT IN EQUITY SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, equity
securities acquired during 1998 have been recorded as trading securities since
such securities were principally held for resale in the near future.
Accordingly, such investments at September 30, 1998 have been recorded as a
current asset at market value, unrealized holding gains and losses have been
recognized in the consolidated statement of operations, and cash flows from
purchases and sales of equity securities have been included in cash provided
(used) by operating activities in the consolidated statement of cash flows.
Gains (losses) on trading securities and interest related to the cost of these
investments have been classified as other income (expense). Such gains (losses)
were previously classified as other revenue, and interest related to such
investments was previously classified as interest expense.
Prior to 1998, the Company's investments in equity securities were recorded
as available-for-sale securities. As a result, such investments were recorded
as long-term assets at market value, unrealized holding gains and losses were
recorded as a separate component of stockholders' equity and cash flows from
purchases and sales of equity securities were included in cash provided (used)
by investing activities.
Net unrealized losses on investment in equity securities for the three and
nine months ended September 30, 1998 were $43.3 million and $37.5 million,
respectively. See Note 7. Realized gains on the sale of equity securities were
$17,000 and $352,000 for the three months ended September 30, 1998 and 1997,
respectively, and $764,000 and $2,009,000 for the nine months ended September
30, 1998 and 1997, respectively. Interest expense related to the cost of these
investments was $2,712,000 and $108,000 for the three months ended September 30,
1998 and 1997, respectively, and $3,557,000 and $648,000 for the nine months
ended September 30, 1998 and 1997, respectively. As of November 10, 1998, the
market value of investment in equity securities was $110.1 million, resulting in
an unrealized holding loss of $40.3 million. These investments are equity
securities of select energy companies which the Company believes are currently
undervalued.
3. LONG-TERM DEBT
Senior Debt
On April 17, 1998, the Company entered into a new Revolving Credit Agreement
with commercial banks ("loan agreement"), the borrowings under which mature on
June 30, 2003. On August 28, 1998, the borrowing base and commitment were
increased to $568 million to reflect recent acquisitions. Upon closing the Cook
Inlet Acquisition
6
<PAGE>
(Note 10), the borrowing base and commitment were increased to $600 million.
Other provisions of the loan agreement are generally the same as the prior
Revolving Credit Agreement.
On September 30, 1998, outstanding bank borrowings and short-term borrowings
were $553 million and $14 million, respectively. Short-term borrowings at
September 30, 1998 are classified as long-term debt because of the Company's
ability and intent to refinance this debt on a long-term basis. Unused
borrowing capacity at September 30, 1998 was $33 million. See Note 4 regarding
interest rate swap agreements.
Other Debt
As part of the Cook Inlet Acquisition, the Company executed a $6 million non-
interest bearing promissory note payable to Shell. Payments of $3 million, $2
million and $1 million are due when the average NYMEX crude oil price for sixty
consecutive calendar days equals or exceeds $18.50, $19.50 and $20.50,
respectively.
4. COMMITMENTS AND CONTINGENCIES
Gas Sales Commitments
The Company has entered into futures contracts to sell 100,000 Mcf of gas per
day in October at a weighted average price of $2.33 per Mcf, 130,000 Mcf per day
in November at $2.35 per Mcf, 30,000 Mcf per day in December at $2.53 per Mcf,
30,000 Mcf per day in January 1999 at $2.63 per Mcf, 100,000 Mcf per day in
February at $2.51 per Mcf, 80,000 Mcf per day in March at $2.38 per Mcf, 30,000
Mcf per day in April at $2.25 per Mcf and 10,000 Mcf per day in May and June at
$2.30 per Mcf. Company production is also subject to a ceiling price of $2.99
per Mcf for 32,000 Mcf per day in February 1999.
Prices to be realized by the Company for hedged production will be less than
these hedged prices because of location, quality and other adjustments. The
Company has entered into basis swap agreements that effectively fix the San Juan
Basin basis at $0.26 per Mcf for 30,000 Mcf per day in October through March
1999 and 20,000 Mcf per day for April and May 1999, and $0.28 per Mcf for 10,000
Mcf per day from June 1999 through December 2000. The Company has also entered
basis swap agreements that effectively fix the Wyoming basis at $0.26 per Mcf
for 30,000 Mcf per day from November 1998 through March 1999.
The Company has committed to sell all gas production from certain properties
in the East Texas Basin Acquisition (Note 10) to EEX Corporation at market
prices through the earlier of December 31, 2001, or until a total of
approximately 34.3 billion cubic feet (27.8 billion cubic feet net to the
Company's interest) of gas has been delivered. Based on current production, this
sales commitment is approximately 24,700 Mcf (20,000 Mcf net to the Company's
interest) per day.
From August 1995 through July 1998 the Company received an additional $0.30
to $0.35 per Mcf on 10,000 Mcf of gas per day. In exchange therefor, the
Company has agreed to sell 11,650 Mcf per day from August 1998 through May 2000
at the index price and 21,650 Mcf per day from June 2000 through July 2005 at a
contract price of approximately 10% of the month's average NYMEX futures
contract for West Texas Intermediate crude oil, adjusted for point of physical
delivery.
Interest Rate Swap Agreements
In September 1998, the Company entered into interest rate swap agreements to
reduce the impact of changes in interest rates on its variable-rate debt,
effectively fixing its average interest rate at 5.5% on a total notional balance
of $150 million until September 2005.
Litigation
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. On or about
7
<PAGE>
March 30, 1998, the plaintiffs dismissed the action without prejudice. On April
3, 1998, the same plaintiffs, along with additional parties, filed a similar
class action lawsuit against the Company in the District Court of Dewey County,
Oklahoma, styled Booth, et al. v. Cross Timbers Oil Company. The action was
filed on behalf of all persons who, at any time since June 1991, have been paid
royalties on gas produced from any gas well within the State of Oklahoma under
which the Company has assumed the obligation to pay royalties. The plaintiffs
allege that the Company has reduced royalty payments by post-production
deductions and has entered into contracts with subsidiaries that were not arms-
length transactions, which reduced the royalties paid to the plaintiffs and
those similarly situated, and that such actions are a breach of the leases under
which the royalties are paid. The plaintiffs are seeking an accounting of the
monies allegedly owed to them. The Company filed a motion to dismiss the action
due to lack of proper venue, which was denied. This decision is being appealed.
Management believes it has strong defenses against this claim and intends to
vigorously defend the action. Management's estimate of the potential liability
from this claim has been accrued in the accompanying financial statements.
5. EQUITY
Common Stock
On April 27, 1998, the Company completed a public offering of 7,500,000
shares of common stock, of which 7,203,450 shares were sold by the Company and
296,550 shares were sold by a stockholder. The Company's net proceeds from the
offering of $133.3 million were used to partially repay bank debt used to fund
the East Texas Basin Acquisition that closed on April 24, 1998 (Note 10). The
offering was made pursuant to a shelf registration statement filed with the
Securities and Exchange Commission ("the Commission") on February 25, 1998 to
potentially offer securities that could include debt securities, preferred
stock, common stock or warrants to purchase debt securities, preferred stock or
common stock. The shelf registration statement was amended on April 8, 1998 to
increase the maximum total price of securities to be offered to $400 million.
On September 30, 1998, the Company issued 1,921,850 shares to Shell for the
Cook Inlet Acquisition (Note 10) recorded at the value on that date of $14.91
per share, or a total of $28.6 million. The Company plans to register these
shares with the Commission by early 1999 for possible resale by Shell. The
Company has effectively guaranteed a $20 per share value to Shell upon
registration with the Commission. This liability of $5.09 per share, or a total
of $9.8 million, is included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheet at September 30, 1998.
Shareholder Rights Plan
On August 25, 1998, the Board of Directors adopted a shareholder rights plan
that is designed to assure that all shareholders receive fair and equal
treatment in the event of any proposed takeover of the Company. Under this
plan, a dividend of one preferred share purchase right ("Right") was declared
for each outstanding share of common stock, par value $.01 per share, payable on
September 15, 1998 to shareholders of record on that date. Each Right entitles
shareholders to buy one one-thousandth of a share of newly created Series A
Junior Participating Preferred Stock at an exercise price of $80, subject to
adjustment in the event a person acquires, or makes a tender or exchange offer
for, 15% or more of the outstanding common stock. In such event, each Right
entitles the holder (other than the person acquiring 15% or more of the
outstanding common stock) to purchase shares of common stock with a market value
of twice the Right's exercise price. At any time prior to such event, the Board
of Directors may redeem the Rights at one cent per Right. The Rights can be
transferred only with Common Stock and expire in ten years.
8
<PAGE>
6. COMMON SHARES OUTSTANDING AND EARNINGS PER COMMON SHARE
On February 25, 1998, the Company effected a three-for-two common stock
split. All share and per share amounts have been restated to reflect the stock
split on a retroactive basis.
The following reconciles earnings (numerator) and shares (denominator) used
in the computation of basic and diluted earnings per share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Earnings Earnings
Earnings Shares per Share Earnings Shares per Share
--------- ------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income (loss)............... $(30,560) $ 3,223
Preferred stock dividends....... (444) (444)
-------- --------
Earnings (loss) available to
common stock - basic.......... (31,004) 44,765 $ (0.69) 2,779 39,581 $ 0.07
========= =========
Diluted:
Effect of dilutive securities:
Stock options.................. 401 504
Preferred stock (a)............ - -
Warrants....................... 17 -
-------- ------ -------- --------
Earnings (loss) available to
common stock - diluted........ $(31,004) 45,183 $ (0.69)(b) $ 2,779 40,085 $ 0.07
======== ====== ========= ======== ======== =========
Nine Months Ended September 30,
---------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Earnings Earnings
Earnings Shares per Share Earnings Shares per Share
--------- ------ ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income (loss)............... $(29,095) $ 18,498
Preferred stock dividends....... (1,334) (1,334)
-------- --------
Earnings (loss) available to
common stock - basic.......... (30,429) 42,737 $ (0.71) 17,164 39,822 $ 0.43
========== =========
Diluted:
Effect of dilutive securities:
Stock options.................. 560 325
Preferred stock (a)............ - -
Warrants....................... 89 -
5 1/4% convertible
subordinated notes............ - 46 153
-------- ------ -------- --------
Earnings (loss) available to
common stock - diluted........ $(30,429) 43,386 $ (0.71)(b) $ 17,210 40,300 $ 0.43
======== ====== ========= ======== ======== =========
</TABLE>
(a) Based on common shares outstanding at October 1, 1998, potential conversion
of Series A convertible preferred stock becomes dilutive to earnings per
share when annual and quarterly earnings available to common stock exceed
approximately $33.4 million and $8.3 million, respectively.
(b) Because of the antidilutive effect of dilutive securities on loss per
common share, diluted earnings (loss) available to common stock is the same
as basic.
9
<PAGE>
7. COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, the following are components of comprehensive
income (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss).......................... $(30,560) $ 3,223 $(29,095) $18,498
-------- ------- -------- -------
Other comprehensive income -
Unrealized gain (loss) on securities:
Unrealized holding gain (loss)......... (43,289) (1,719) (37,502) (839)
Less unrealized holding (gain) loss
included in net income............... 43,289 - 37,502 -
-------- ------- -------- -------
Total other comprehensive income (loss)
before tax............................. - (1,719) - (839)
Income tax benefit (expense) related to
items of other comprehensive income.... - 584 - 285
-------- ------- -------- -------
Total other comprehensive income (loss).... - (1,135) - (554)
-------- ------- -------- -------
Total comprehensive income (loss).......... $(30,560) $ 2,088 $(29,095) $17,944
======== ======= ======== =======
</TABLE>
8. 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,
--------------------
1998 1997
------- -------
<S> <C> <C>
Interest............ $34,159 $12,570
Income tax.......... (454) 841
</TABLE>
The accompanying consolidated statements of cash flows exclude the following
non-cash transactions during the nine-month periods ended September 30, 1998 and
1997:
- Conversion of $29.7 million principal amount of 5 1/4% convertible
subordinated notes into 2,892,363 shares of common stock in January 1997
- The Cook Inlet Acquisition on September 30, 1998 (Note 10), a purchase of
oil-producing properties for 1,921,850 shares of common stock, a related
effective guarantee of $20 per share value when the shares are registered
by early 1999 (Note 5) and a $6 million note payable (Note 3)
- Vesting of 81,000 and 172,125 performance shares in 1998 and 1997,
respectively, and issuance of 82,125 and 180,000 performance shares in 1998
and 1997, respectively (Note 9)
- Receipt of 10,393 shares (valued at $205,000) and 423,389 shares (valued at
$5,467,000) of common stock for the option price of exercised stock options
in 1998 and 1997, respectively
9. EMPLOYEE BENEFIT PLANS
Stock Incentive Plans
During the nine months ended September 30, 1998, 720,000 stock options were
granted under the 1997 Stock Incentive Plan ("1997 Plan"). In February 1998,
216,000 stock options were granted under the 1997 Plan that vest and become
exercisable annually in equal amounts over a five-year period, with provision
for accelerated vesting of half of
10
<PAGE>
the options when the common stock price first closed above $20 (which occurred
on March 26, 1998), and of the remainder when the common stock price first
closes above $25. In May 1998, 504,000 stock options were granted under the 1997
Plan that vest and become exercisable annually in equal amounts over a five-year
period, with provision for vesting of half the options when the common stock
price first closes above $25, and of the remainder when the common stock price
first closes above $30.
In March 1998, 81,000 performance shares vested that were granted in 1997.
All compensation related to these performance shares was recorded as of December
31, 1997. In May 1998, 72,000 performance shares were granted under the 1997
Plan that vest when the common stock price first closes above $22.50. As of
September 30, 1998, compensation of $1.6 million has been recorded related to
these performance shares. Upon vesting of these performance shares, 72,000
additional performance shares will be granted that vest when the common stock
price first closes above $25.
In May 1998, the stockholders approved the 1998 Stock Incentive Plan ("1998
Plan") under which 6 million shares of common stock are available for grant.
Grants under the 1998 Plan are subject to the provision that outstanding stock
options and performance shares under all the Company's stock incentive plans
cannot exceed 6% of the Company's outstanding common stock at the time such
grants are made. During the first nine months of 1998, 654,500 stock options
were granted under the 1998 Plan. Additionally, 810,375 stock options were
designated to be granted to specific optionees upon each of their exercises of
all outstanding vested options granted under the 1997 Plan. Stock options will
vest and become exercisable annually in equal amounts over a five-year period,
with provision for accelerated vesting of half the options when the common stock
price first closes above $25, and of the remainder when the common stock price
first closes above $30.
Royalty Trust Option Plan
In May 1998, the stockholders approved the 1998 Royalty Trust Option Plan
("Option Plan"). Under the terms of the Option Plan, the Company may grant to
key employees options to purchase units of beneficial interest in the Cross
Timbers Royalty Trust or in one or more royalty trusts that may be established
by the Company. Such options will allow the purchase of royalty trust units of
beneficial interest at fair market value on the date of grant in an aggregate
amount not to exceed $12 million. No options have yet been granted.
10. ACQUISITIONS
On May 14, 1997, the Company acquired primarily gas-producing properties in
Oklahoma, Kansas and Texas for an estimated adjusted purchase price of $39
million from a subsidiary of Burlington Resources Inc. The properties are
primarily operated interests. The Company funded the acquisition with bank debt
and cash flow from operations.
On December 1, 1997, the Company acquired interests in certain producing oil
and gas properties in the San Juan Basin of New Mexico ("San Juan Basin
Acquisition") from a subsidiary of Amoco Corporation ("Amoco") for $252 million,
including warrants to purchase 937,500 shares of the Company's common stock at a
price of $15.31 per share for a period of five years. After adjustments for
other acquisition costs, estimated cash flows through date of closing and
preferential purchase rights exercised by third parties, the properties were
purchased for approximately $195 million, including approximately $5.7 million
value for the warrants. Amoco elected to accept certain producing properties
owned by the Company valued at $15.7 million in lieu of cash, reducing cash
consideration to $173.6 million, which was funded through bank lines of credit.
Additional purchase price revisions may result from post-closing adjustments.
On April 24, 1998, the Company acquired producing properties in the East
Texas Basin from EEX Corporation ("East Texas Basin Acquisition") for $265
million. After purchase price adjustments primarily resulting from net revenues
from the January 1, 1998 effective date through April 24, 1998, the properties
were purchased for an estimated price of $245 million. In connection with the
acquisition, the Company sold a production payment to EEX Corporation for $30
million. The production payment is payable from production from certain
properties acquired in the East Texas Basin Acquisition during the 10-year
period beginning January 1, 2002. EEX Corporation effectively pays all taxes,
royalties and production expenses related to such production. The Company has
the option to repurchase a portion of this production payment each December,
beginning in 1998. The cost of the East Texas Basin Acquisition (net of the
11
<PAGE>
production payment sold) of $215 million was funded by bank borrowings which
were partially repaid by proceeds from the sale of common stock (Note 5).
Purchase price revisions may result from post-closing adjustments.
On September 30, 1998, the Company acquired oil-producing properties in the
Middle Ground Shoal Field of Alaska's Cook Inlet ("Cook Inlet Acquisition") from
various Shell Oil Company affiliates ("Shell") in exchange for 1,921,850 shares
of the Company's common stock. These shares are subject to certain price
guarantees regarding the share value in early 1999 and other considerations
(Note 5), including a non-interest bearing note payable of $6 million (Note 3).
The Company plans to register these shares with the Commission by early 1999 for
possible resale by Shell. The acquired interests include a 100% working interest
in two State of Alaska leases, two offshore production platforms and a 50%
interest in certain operated production pipelines and onshore processing
facilities. The acquisition has an effective date of July 1, 1998, and is
subject to customary post-closing adjustments.
These acquisitions have been recorded using the purchase method of
accounting. The following presents unaudited pro forma results of operations for
the nine months ended September 30, 1998 and 1997 and the year ended December
31, 1997, as if these acquisitions and the April 1998 sale of common stock had
been consummated as of January 1, 1998 and 1997. These pro forma results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
------------------------------------------
Nine Months Ended
(in thousands, except per share data) September 30, Year Ended
------------------------ December 31,
1998 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
Revenues................................... $213,926 $261,010 $354,912
======== ======== ========
Net income (loss).......................... $(25,001) $ 41,231 $ 57,932
======== ======== ========
Earnings (loss) available to common stock.. $(26,335) $ 39,897 $ 56,153
======== ======== ========
Earnings (loss) per common share
Basic.................................... $ (0.55) $ 0.82 $ 1.15
======== ======== ========
Diluted.................................. $ (0.55) $ 0.80 $ 1.12
======== ======== ========
Weighted average shares
outstanding............................. 47,554 48,947 48,898
======== ======== ========
</TABLE>
During October 1998, the Company entered into agreements with an undisclosed
seller to acquire producing properties in northwest Oklahoma and the San Juan
Basin of New Mexico for a total of $33.4 million. These acquisitions are
anticipated to close November 20 with an effective date of October 1, 1998 and
are subject to typical purchase price adjustments. The Company will acquire
these properties with bank debt.
11. CROSS TIMBERS ROYALTY TRUST
On June 16, 1998, the Company and Cross Timbers Royalty Trust filed a
registration statement with the Securities and Exchange Commission to register
the Company's 1,360,000 Units for sale in a public offering. The filing of the
registration statement has been made in anticipation of improving commodity
prices and related market conditions for oil and gas equities. In accordance
with Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
discontinued depleting the Units in second quarter 1998. The Units are
classified as producing properties in the accompanying balance sheet at a net
cost of $16.4 million at September 30, 1998. The market value of the Units
approximated cost at that date. For the nine months ended September 30, 1998 and
1997, the Company's results of operations included net income from the Units of
$658,000 and $419,000, respectively.
12
<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, 1998 and the related
consolidated statements of operations for the three and nine-month periods ended
September 30, 1998 and 1997, and the consolidated statements of cash flows for
the nine-month periods ended September 30, 1998 and 1997. 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, 1997 included in the Company'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
consolidated balance sheet as of December 31, 1997 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1997 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
October 21, 1998
13
<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 1997 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
- ---------------------------------
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL PRODUCTION
Oil (Bbls)................... 1,026,528 984,371 4% 3,219,251 2,933,597 10%
Gas (Mcf).................... 22,901,659 12,511,761 83% 59,402,221 35,703,643 66%
Natural gas liquids (Bbls)... 339,639 - - 777,676 - -
Mcfe......................... 31,098,661 18,417,987 69% 83,383,783 53,305,225 56%
AVERAGE DAILY PRODUCTION
Oil (Bbls)................... 11,158 10,700 4% 11,792 10,746 10%
Gas (Mcf).................... 248,931 135,997 83% 217,591 130,783 66%
Natural gas liquids (Bbls)... 3,692 - - 2,849 - -
Mcfe......................... 338,029 200,196 69% 305,435 195,257 56%
AVERAGE SALES PRICE
Oil per Bbl.................. $12.28 $18.17 (32%) $12.84 $19.25 (33%)
Gas per Mcf.................. $2.10 $1.86 13% $2.07 $2.09 (1%)
Natural gas liquids per Bbl.. $9.22 - - $9.33 - -
</TABLE>
- ---------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
Mcfe - Thousand cubic feet of natural gas equivalent (computed on an energy
equivalent of one Bbl equals six Mcf)
Total oil and gas production increased from comparable 1997 periods primarily
because of acquisitions, new drills and workovers, partially offset by natural
decline.
The average posted price for West Texas Intermediate ("WTI"), a benchmark
crude, was $11.59 for third quarter 1998 compared to $17.64 for third quarter
1997. The Company's average oil price includes oil marketing margins which are
partially offset by lower priced sour crude sales and transportation charges.
During fourth quarter 1996 and first quarter 1997, oil prices reached their
highest levels since the 1990 Persian Gulf War. This is contrasted against 1998
oil prices that continued to decline throughout the first half of the year
following OPEC's November 1997 agreement to increase production. Although OPEC
agreed in late June to curtail production to pre-November 1997 levels, there has
been little impact on oil prices. The WTI average posting for October was
$11.87.
Natural gas prices remained lower throughout most of first quarter 1998 after
an abnormally mild winter in the central and eastern U. S. and elevated storage
levels, while prices for second quarter 1998 partially rebounded to levels above
second quarter 1997. Third quarter 1998 prices declined from second quarter
levels, but paralleled third quarter 1997 prices and are expected to increase
through the fourth quarter. The Company uses gas futures contracts to reduce
price-risk on a portion of its gas production. During the three and nine-month
periods ended September 30, 1998, gas futures contracts and similar arrangements
resulted in additional gas revenue of $4.1 million ($0.18 per Mcf) and $5.8
million ($0.10 per Mcf), respectively. See Note 4 to Consolidated Financial
Statements.
14
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1997
For the third quarter 1998, the Company reported a loss available to common
stock of $31 million, which includes a $46 million ($30.3 million after tax)
predominantly unrealized loss on investment in equity securities. Comparative
third quarter 1997 earnings available to common stock was $2.8 million.
Operating income (income before loss on investment in equity securities,
interest expense and income tax) for the third quarter was $13.4 million, or an
18% increase from third quarter 1997 operating income of $11.3 million. Improved
operating income is primarily because of increased production, partially offset
by lower oil prices.
Total revenues for the 1998 quarter were $67 million, a $23.3 million (53%)
increase over third quarter 1997 revenues of $43.7 million. Oil revenue
decreased $5.3 million (30%) because of the 32% decrease in oil prices,
partially offset by the 4% increase in oil volumes. Gas revenue increased $27.9
million (120%) as a result of the 83% increase in gas production, the 13%
increase in gas prices and the addition of natural gas liquids revenue from the
Amoco Acquisition in late 1997. Gas gathering, processing and marketing
revenues increased $500,000 (21%) primarily because of increased margins.
Expenses for third quarter 1998 totaled $53.7 million, a 66% increase over
third quarter 1997 expenses of $32.4 million. Production expense increased $5.7
million (53%) and depreciation, depletion and amortization ("DD&A") increased
$10.1 million (84%) primarily as a result of production increases related to
acquisitions and development. Taxes, transportation and other deductions
increased $4.5 million (123%) primarily because of transportation and
compression charges and property taxes related to the 1997 and 1998
acquisitions. Exploration expense, which primarily includes geological and
geophysical costs, increased $700,000 (121%) because of the 1998 exploration
program. General and administrative expense increased $300,000 (10%) because of
increased salaries and expenses caused by Company growth through acquisitions
and development activity.
Other expense for third quarter 1998 and 1997 was $59.6 million and $6.5
million, respectively. Other expense for third quarter 1998 includes a loss on
investment in equity securities of $46 million (an unrealized loss of $43.3
million and interest expense of $2.7 million related to such investment) and
interest expense of $13.6 million. Other expense for third quarter 1997
includes a $300,000 gain on investment in equity securities (a realized gain of
$400,000 less interest expense of $100,000 related to such investment) and
interest expense of $6.8 million. Because investment in equity securities was
accounted for as available-for-sale securities in 1997, an unrealized loss of
$1.7 million in third quarter 1997 was recorded as a component of stockholders'
equity.
Net interest expense increased $6.8 million (101%) because of an increase of
approximately 100% in the weighted average borrowings used to fund property
acquisitions and treasury stock purchases, combined with an increase in the
weighted average interest rate from 7.6% in the third quarter of 1997 to 7.7% in
the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
For the nine months ended September 30, 1998, loss available to common stock
was $30.4 million, compared with earnings of $17.2 million for the same 1997
period. The 1998 loss includes a $40.3 million ($26.6 million after tax)
predominantly unrealized loss on investment securities.
Operating income for the first nine months of 1998 was $34 million, or a 24%
decrease from operating income of $45 million for the comparable 1997 period.
This decline in operating income is primarily because of lower oil prices,
partially offset by increased production.
Total revenues for the first nine months of 1998 were $178.7 million, or
$37.1 million (26%) higher than revenues for the first nine months of 1997. Oil
revenue decreased $15.1 million (27%) as a result of the 33% decrease in price,
partially offset by the 10% increase in oil production. Gas and natural gas
liquids revenue increased $55.3 million (74%), primarily because of the 66%
increase in gas production and the addition of natural gas liquids production in
late 1997.
15
<PAGE>
Gas gathering, processing and marketing revenues decreased $800,000 (11%)
because of decreased margins. Other revenues decreased $2.2 million (78%)
primarily because of a gain on sale of producing properties and lawsuit
settlement proceeds in the 1997 nine-month period.
Expenses for the nine months ended September 30, 1998 totaled $144.6 million,
or 50% above total expenses of $96.5 million for the nine-month period of 1997.
Production expense increased $10.7 million (33%) and DD&A increased $23.3
million (68%) primarily because of increased production related to acquisitions
and development. Taxes, transportation and other deductions increased $8.9
million (77%) primarily because of transportation and compression charges and
property taxes related to the 1997 and 1998 acquisitions. Exploration expense,
which primarily includes geological and geophysical costs, increased $5.2
million because of the 1998 exploration program.
General and administrative expense decreased $400,000 (4%) primarily because
of a decline in stock incentive compensation to $1.6 million for the first nine
months of 1998 from $2 million for the same 1997 period. Lower stock incentive
compensation is primarily related to stock appreciation right compensation that
fluctuates with changes in the common stock price.
Other expense for the first nine months of 1998 and 1997 was $78.1 million
and $16.7 million, respectively. Other expense for the 1998 period includes a
loss on investment in equity securities of $40.3 million (an unrealized loss of
$37.5 million and interest expense of $3.6 million related to such investment,
partially offset by a realized gain of $800,000) and interest expense of $37.8
million. Other expense for the 1997 period includes a $1.4 million gain on
investment in equity securities (a realized gain of $2 million less interest
expense of $600,000 related to such investment) and interest expense of $18
million. Because investment in equity securities was accounted for as
available-for-sale securities in 1997, an unrealized loss of $800,000 in the
first nine months of 1997 was recorded as a component of stockholders' equity.
Net interest expense increased $19.8 million (110%) as a result of an
increase of approximately 100% in the weighted average borrowings used to
partially fund acquisitions and treasury stock purchases, combined with an
increase in the weighted average interest rate from 7.4% for the nine months of
1997 to 7.9% for the 1998 period. The increased interest rate is primarily
attributable to senior subordinated debt that was issued in April and October
1997.
COMPARATIVE EXPENSES PER MCF EQUIVALENT PRODUCTION
The following are expenses on an Mcf equivalent (Mcfe) basis:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Production........................ $0.53 $0.59 (10%) $0.51 $0.60 (15%)
Taxes, transportation and other... 0.26 0.20 30% 0.25 0.22 14%
Depreciation, depletion and
amortization (DD&A) (a).......... 0.71 0.62 15% 0.67 0.61 10%
General and administrative (G&A).. 0.10 0.16 (38%) 0.12 0.20 (40%)
Interest (b)...................... 0.44 0.37 19% 0.45 0.34 32%
</TABLE>
-------------------------
(a) Includes only DD&A directly related to oil and gas production.
(b) Excludes interest related to investment in equity securities (which
has been reclassified to gain (loss) on investment in equity
securities in the consolidated statements of operations; see Note 2 to
Consolidated Financial Statements).
The following are explanations of the more significant variances:
Production- Decreased production expense per Mcfe is primarily because of
the lower operating costs of gas-producing properties acquired in 1997 and 1998,
the timing of workovers and operating efficiencies initiated after acquiring
operated properties.
16
<PAGE>
Taxes, transportation and other- Increased taxes, transportation and other
expense per Mcfe is primarily because of increased gas transportation and
compression charges related to San Juan Basin properties acquired in December
1997, as well as increased property taxes related to acquisitions.
DD&A- Increased DD&A per Mcfe is primarily related to the increased cost
per Mcfe of properties acquired in the East Texas Basin Acquisition that closed
in April 1998.
G&A- Decreased G&A per Mcfe is primarily the result of production growth
outpacing Company personnel requirements and other administrative expenses.
Interest- Increased interest per Mcfe is primarily the result of increased
debt to partially finance the 1997 and 1998 acquisitions, as well as treasury
stock purchases. Increased interest per Mcfe is also because of a higher
weighted average interest rate, primarily attributable to senior subordinated
debt issued in April and October 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOW AND WORKING CAPITAL
Cash used in operating activities was $94.7 million for the nine months ended
September 30, 1998 compared with $66.4 million for the nine-month 1997 period.
Operating cash flow (defined as cash provided by operating activities before
changes in working capital) decreased 5% from $63.5 million for the nine months
of 1997 to $60.1 million for the same 1998 period primarily because of the
decline in oil prices.
During the nine months ended September 30, 1998, proceeds from bank and
short-term borrowings of $785.7 million and the offering of common stock of
$133.3 million were used to fund operating activities of $94.7 million, net
property acquisitions, development costs and other capital additions of $309.2
million, debt payments of $457.7 million, treasury stock purchases of $49
million, net payments related to stock option exercises of $400,000 and
dividends of $6.1 million. The resulting decrease in cash and cash equivalents
for the period was $1.9 million.
Other significant changes in current assets during the nine months ended
September 30, 1998, include a $112.8 million increase in investment in equity
securities resulting from purchases, partially offset by market value
depreciation and sales. The $13 million increase in current deferred tax
benefit is primarily because of the unrealized loss on the investment in equity
securities at September 30, 1998.
Total current liabilities increased $5.6 million during the first nine months
of 1998 primarily because of acquisition-related accrued liabilities, partially
offset by a reduced payable to Royalty Trust primarily because of lower product
prices.
ACQUISITIONS AND DEVELOPMENT
Exploration and development costs incurred for the nine-month 1998 period
were $39.8 million; exploration and development cash expenditures for the first
nine months of 1998 totaled $41.5 million. This compares with exploration and
development cash expenditures of $52.8 million for the first nine months of
1997. Although actual exploration and development expenditures may vary
significantly due to many factors, the Company anticipates its 1998 expenditures
for exploration and development activities to be $70 to $90 million, as
budgeted, with exploration expenditures of 10% to 15% of the total. Such
expenditures are dependent upon drilling results, property acquisitions and
commodity prices, and are expected to be funded by cash flow from operations.
During the nine months ended September 30, 1998, the Company's purchases of
equity securities totaled $167.3 million. Proceeds from sales of equity
securities totaled $17.7 million, resulting in an $800,000 net realized gain.
The Company recorded a net unrealized loss on investment in equity securities of
$37.5 million for the first nine months of 1998. As of November 10, 1998, the
market value of investment in equity securities was $110.1 million, resulting in
an unrealized holding loss of $40.3 million. These investments are equity
securities of select energy companies which
17
<PAGE>
the Company believes are currently undervalued. The Company expects these
securities to appreciate as oil prices return to more normal levels.
Since May 1996, the Board of Directors has authorized the purchase of 10.5
million shares of the Company's common stock on the open market. During the
first nine months of 1998, the Company purchased 2.9 million shares at a cost of
$48.2 million, with 2.3 million shares remaining available to purchase.
On April 24, 1998, the Company acquired producing properties in the East
Texas Basin from EEX Corporation ("East Texas Basin Acquisition") for $265
million. After purchase price adjustments primarily resulting from net revenues
from the January 1, 1998 effective date through April 24, 1998, the properties
were purchased for an estimated price of $245 million. In connection with the
acquisition, the Company sold a production payment to EEX Corporation for $30
million. The production payment is payable from production on certain
properties acquired in the East Texas Basin Acquisition during the 10-year
period beginning January 1, 2002. EEX Corporation effectively pays all taxes,
royalties and production expenses related to such production. The Company has
the option to repurchase a portion of this production payment each December,
beginning in 1998. The cost of the East Texas Basin Acquisition (net of the
production payment sold) of $215 million was funded by bank borrowings, which
were partially repaid by proceeds from the sale of common stock. See Note 5 to
Consolidated Financial Statements. Purchase price revisions may result from
post-closing adjustments.
On September 30, 1998, the Company acquired oil-producing properties in the
Middle Ground Shoal Field of Alaska's Cook Inlet ("Cook Inlet Acquisition") from
various Shell Oil Company affiliates in exchange for 1,921,850 shares of the
Company's common stock. These shares are subject to certain price guarantees
regarding the share value in early 1999 and other considerations (Note 5),
including a non-interest bearing note payable of $6 million (Note 3). The
acquisition has an effective date of July 1, 1998, and is subject to customary
post-closing adjustments. See Note 10 to Consolidated Financial Statements.
During October 1998, the Company entered into agreements with an undisclosed
seller to acquire producing properties in northwest Oklahoma and the San Juan
Basin of New Mexico for a total of $33.4 million. These acquisitions are
anticipated to close November 20 with an effective date of October 1, 1998 and
are subject to typical purchase price adjustments. The Company will acquire
these properties with bank debt.
On June 16, 1998, the Company and Cross Timbers Royalty Trust filed a
registration statement with the Securities and Exchange Commission ("Commission)
to register the Company's 1,360,000 Units for sale in a public offering. The
filing of the registration statement has been made in anticipation of improving
commodity prices and related market conditions for oil and gas equities.
On October 13, 1998, the Company announced its plans to form the Hugoton
Royalty Trust by conveying an 80% net profits interest in properties that are
principally located in the Hugoton area of Kansas and Oklahoma and the Green
River Basin of Wyoming. These properties represent approximately 30% of the
Company's existing reserve base. The Company anticipates filing a registration
statement with the Commission in early December and expects to apply for listing
of the trust units on the New York Stock Exchange. Subject to industry and
market conditions, the Company plans to offer 10% to 20% of the trust units to
the public during January 1999, and to distribute $2.00 in annual market value
of trust units to the Company's common shareholders, on a quarterly basis,
beginning no later than the first quarter of 2000.
As of the end of September, the Company had drilled 49 wells and participated
in the drilling of 31 non-operated wells. A total of 145 recompletions and
workovers were also completed in the nine months ended September 30, 1998.
Drilling has been focused on gas projects in the Fontenelle Unit located in the
Green River Basin of Wyoming, the Ozona Area of West Texas and the Hugoton Basin
of Oklahoma and Kansas.
Fifteen gas wells have been drilled in the Fontenelle Unit with an additional
five to be drilled by year-end. To date, the completed wells in this region have
averaged initial rates exceeding 700 Mcf per day. Fourteen gas wells have been
drilled in the Ozona Area with an additional ten expected to be drilled by year
end.
18
<PAGE>
Drilling operations commenced in the Hugoton Basin during the third quarter
with six of the planned 18 wells having been drilled by quarter end. Included
in this drilling program are a combination of step-out development and
exploration wells utilizing 3-D seismic to locate prospective drill sites. A
recent drill well is testing at rates exceeding 2,000 Mcf per day from the
Council Grove interval. This well extends the productive limits of the
producing area and establishes additional drill well locations for future
development.
Since assuming operations of the San Juan Basin properties, the Company has
completed over 70 workovers in this region, the majority of which have involved
installation of wellhead compressors or artificial lifts. The Company assumed
operations of the East Texas Basin Acquisition properties on April 24, 1998.
Development of the East Texas properties has also focused on workover
opportunities with over 30 workovers completed to date. Fifteen of these
workovers have focused on recompletions to producing intervals yet to be
produced. The average initial rate for these recompletions is over 700 Mcf per
day. The Company expects to drill 12 to 15 infill wells in the Travis Peak
interval by year end.
Exploration activity in 1998 has focused on the completion of 3-D seismic
surveys in Texas County, Oklahoma and the Nemeha Ridge area of Oklahoma.
Results are currently being evaluated to determine potential drilling locations.
DEBT AND EQUITY
For the nine months ended September 30, 1998, long-term debt increased $334
million because of increased borrowings to partially fund property acquisitions,
treasury stock purchases and investment in equity securities. See Note 3 to
Consolidated Financial Statements.
Stockholders' equity at September 30, 1998 increased $81.8 million from year-
end primarily because of increased capital of $141.9 million related to the
common stock offering, common stock issued for the Cook Inlet Acquisition, stock
option exercises and performance share grants, partially offset by the nine-
month loss of $30.4 million, net treasury stock additions of $24.5 million and
common stock dividends of $5.2 million.
A three-for-two common stock split was effected on February 25, 1998. All
share and per share amounts have been restated for the effect of this stock
split.
On April 27, 1998, the Company completed a public offering of 7,500,000
shares of common stock, of which 7,203,450 shares were sold by the Company and
296,550 shares were sold by a stockholder. The Company's net proceeds from the
offering of $133.3 million were used to partially repay bank debt used to fund
the East Texas Basin Acquisition that closed on April 24, 1998. The offering
was made pursuant to a shelf registration statement filed with the Commission on
February 25, 1998 to potentially offer securities that could include debt
securities, preferred stock, common stock or warrants to purchase debt
securities, preferred stock or common stock. The shelf registration statement
was amended on April 8, 1998 to increase the maximum total price of securities
to be offered to $400 million.
On September 30, 1998, the Company issued 1,921,850 shares of common stock to
Shell as consideration for oil-producing properties acquired in the Cook Inlet
Acquisition. Such common stock is subject to certain price guarantees regarding
share value in early 1999 and other considerations including a non-interest
bearing note payable of $6 million. The Company plans to register these shares
with the Commission by early 1999 for possible resale by Shell.
COMMON STOCK DIVIDENDS
In August 1998, the Board of Directors of the Company declared a third
quarter common stock dividend of $0.04 per share, or a total of $1.8 million,
paid in October 1998. Common stock dividends paid by the Company or its
predecessors were at the rate of $0.033 per common share from September 1992
through 1996 and $0.037 per common share in 1997.
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ACCOUNTING PRONOUNCEMENTS
- -------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities which is required to be adopted for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that derivatives be
reported on the balance sheet at fair value and, if the derivative is not
designated as a hedging instrument, changes in fair value must be recognized in
earnings in the period of change. If the derivative is designated as a hedge
and to the extent such hedge is determined to be effective, changes in fair
value are either a) offset by the change in fair value of the hedged asset or
liability (if applicable) or b) reported as a component of other comprehensive
income in the period of change, and subsequently recognized in earnings when the
offsetting hedged transaction occurs. The definition of derivatives has also
been expanded to include contracts that require physical delivery of oil and gas
if the contract allows for net cash settlement. The Company primarily uses
derivatives to hedge product price risks. Such derivatives are reported at
cost, if any, and gains and losses on such derivatives are reported when the
hedged transaction occurs. Accordingly, the Company's adoption of SFAS No. 133
will have an impact on the reported financial position of the Company, and
although such impact has not been determined, it is currently not believed to be
material. Adoption of SFAS No. 133 should have no significant impact on
reported earnings, but could materially affect comprehensive income. See Note 7
to Consolidated Financial Statements.
YEAR 2000
- ---------
The Company is in the process of reviewing its computer systems and making
the necessary modifications for Year 2000 compliance. As of September 1998, the
Company has completed most of the modifications of its primary accounting and
land computer programs and is currently testing these modifications. Remaining
computer technology to be remediated and tested includes PC-based hardware,
building facilities and embedded systems. All remediation and testing is
currently expected to be complete by June 1999. Based on its review, remediation
efforts and the results of testing to date, the Company does not believe that
timely modification of its computer systems for Year 2000 compliance represents
a material risk to the Company. The Company estimates that its incremental costs
related to Year 2000 compliance efforts to date have not been material, and
expects that future costs will not be material.
The Company has identified significant third parties and is in the process
of formally inquiring about their Year 2000 status. Despite its efforts to
assure that such third parties are Year 2000 compliant, the Company cannot
provide assurance that all significant third parties will achieve compliance in
a timely manner. Such failure to achieve Year 2000 compliance could have a
materially adverse effect on the Company's operations and cash flow, the extent
to which is unknown.
The Company is developing contingency plans in the event of potential
problems resulting from failure of the Company's or significant third parties'
computer systems on January 1, 2000. Such contingency plans are expected to be
complete by September 1999.
FORWARD-LOOKING INFORMATION
- ---------------------------
Certain information included in this quarterly report on Form 10-Q and other
materials filed by the Company with the Commission contain forward-looking
statements relating to the Company's operations and the oil industry. Such
forward-looking statements are based on management's current projections and
estimates and are identified by words such as "expects," "intends," "plans,"
"projects," "anticipates," "believes," "estimates" and similar expressions.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual results may differ materially from what is expressed or forecasted in
such forward-looking statements.
Among the factors that could cause actual results to differ materially are
crude oil and natural gas price fluctuations; the Company's ability to acquire
oil and gas properties that meet its objectives and to identify prospects for
drilling; potential delays or failure to achieve expected production from
existing and future exploration and development projects; potential disruption
to the Company's operations because of failure to achieve timely Year 2000
compliance by the Company or other entities with which it has material
relationships; and potential liability resulting from pending or future
litigation. In addition, such statements may be affected by general domestic and
international economic and political conditions.
20
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. On or about March 30,
1998, the plaintiffs dismissed the action without prejudice. On April 3, 1998,
the same plaintiffs, along with additional parties, filed a similar class action
lawsuit against the Company in the District Court of Dewey County, Oklahoma,
styled Booth, et al. v. Cross Timbers Oil Company. The action was filed on
behalf of all persons who, at any time since June 1991, have been paid royalties
on gas produced from any gas well within the State of Oklahoma under which the
Company has assumed the obligation to pay royalties. The plaintiffs allege that
the Company has reduced royalty payments by post-production deductions and has
entered into contracts with subsidiaries that were not arms-length transactions,
which reduced the royalties paid to the plaintiffs and those similarly situated,
and that such actions are a breach of the leases under which the royalties are
paid. The plaintiffs are seeking an accounting of the monies allegedly owed to
them. The Company filed a motion to dismiss the action due to lack of proper
venue, which was denied. This decision is being appealed. Management believes
it has strong defenses against this claim and intends to vigorously defend the
action. Management's estimate of the potential liability from this claim has
been accrued in the Company's financial statements.
ITEMS 2. THROUGH 4.
Not applicable.
ITEM 5. OTHER INFORMATION
On September 30, 1998, the Company acquired oil-producing properties in the
Middle Ground Shoal Field located in Alaska's Cook Inlet ("Cook Inlet
Acquisition") from various Shell Oil Company affiliates ("Shell"). In exchange
therefor, Shell received 1,921,850 shares of the Company's common stock, subject
to certain price guarantees regarding the share value in early 1999 and other
considerations, including a non-interest bearing note payable of $6 million. The
Company plans to register these shares with the Commission by early 1999 for
possible resale by Shell. The acquired interests include a 100% working interest
in two State of Alaska leases, two offshore production platforms and a 50%
interest in certain operated production pipelines and onshore processing
facilities. The acquisition has an effective date of July 1, 1998, and is
subject to customary post-closing adjustments. The Company's internal engineers
estimate proved reserves attributable to the acquisition to be 12 million
barrels of oil. Current net daily production is approximately 3,600 barrels per
day from 31 producing wells with a reserve-to-production index of nine years.
On October 13, 1998, the Company announced its plans to form the Hugoton
Royalty Trust by conveying an 80% net profits interest in properties that are
principally located in the Hugoton area of Kansas and Oklahoma and the Green
River Basin of Wyoming. These properties represent approximately 30% of the
Company's existing reserve base. The Company anticipates filing a registration
statement with the Commission in early December and expects to apply for listing
of the trust units on the New York Stock Exchange. Subject to industry and
market conditions, the Company plans to offer 10% to 20% of the trust units to
the public during January 1999, and to distribute $2.00 in annual market value
of trust units to the Company's common shareholders, on a quarterly basis,
beginning no later than the first quarter of 2000.
During October 1998, the Company entered into agreements with an undisclosed
seller to acquire producing properties in northwest Oklahoma and the San Juan
Basin of New Mexico for a total of $33.4 million. These acquisitions are
anticipated to close November 20, 1998 with an effective date of October 1, 1998
and are subject to typical purchase price adjustments. The Company will acquire
these properties with bank debt.
21
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
and Description
---------------
10.1 Fourth Amendment to Revolving Credit Agreement, dated August
28, 1998
11 Computation of per share earnings (included in Note 6 to
Consolidated Financial Statements)
15 Letter re unaudited interim financial information
15.1 Awareness letter of Arthur Andersen LLP
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended September 30, 1998 and through November 13, 1998:
On July 2, 1998, the Company filed a report on Form 8-K/A (Amendment
No.1 to Form 8-K dated April 24, 1998) to file pro-forma financial
statements for the acquisition of certain producing properties in the
East Texas Basin from EEX Corporation.
On September 15, 1998, the Company filed a report on Form 8-K dated
August 26, 1998 regarding 1) its plans to begin the systematic
distribution of royalty trusts to its stockholders beginning no later
than early in the year 2000, and 2) its stockholder rights plan and
the declaration of a dividend of one preferred share purchase right
for each outstanding share of common stock of the Company.
22
<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, 1998 By BENNIE G. KNIFFEN
------------------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer and
Duly Authorized Officer)
23
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
THIS AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made and entered
into as of the 28th day of August, 1998, by and among CROSS TIMBERS OIL COMPANY,
a Delaware corporation ("Company"), the Banks that are signatories hereto
(collectively, the "Banks"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Administrative Agent for Banks, NATIONSBANK, N.A., as Syndication Agent for
Banks and CHASE BANK OF TEXAS, N.A., as Documentation Agent for Banks.
W I T N E S S E T H:
WHEREAS, Company, Morgan Guaranty Trust Company of New York, as
Administrative Agent for Banks, NationsBank, N.A., successor in interest by
merger to NationsBank of Texas, N.A., as Syndication Agent for Banks, Chase Bank
of Texas, N.A., as Documentation Agent for Banks, and Banks have entered into
that certain Revolving Credit Agreement, dated as of April 17, 1998, which was
amended by (i) that certain First Amendment to Revolving Credit Agreement dated
as of June 1, 1998 among Company and Banks, (ii) that certain Second Amendment
to Revolving Credit Agreement dated as of June 17, 1998 among Company and Banks,
and (iii) that certain Third Amendment to Revolving Credit Agreement dated as of
June 18, 1998 among Company and Banks (as amended and as in effect as of the
Closing Date (as defined below), as amended and restated hereby and as amended
from time to time hereafter, the "Loan Agreement").
WHEREAS, the parties hereto desire to amend the Loan Agreement as set forth
herein and to restate the Loan Agreement in its entirety to read as set forth in
the Loan Agreement with the amendments specified below.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
ARTICLE I
Definitions and References
1.01 Unless otherwise specifically defined herein, each term used herein
which is defined in the Loan Agreement as in effect immediately prior to the
Closing Date shall have the meaning assigned to such term in the Loan Agreement
as so in effect. Each reference to "hereof," "hereunder," "herein" and "hereby"
and each other similar reference and each reference to "this Loan Agreement" and
each other similar reference contained in the Loan Agreement shall from and
after the Closing Date refer to the Loan Agreement as amended and restated
hereby.
<PAGE>
ARTICLE II
Amendments
2.01 Amendments to Article I. Effective as of the Closing Date, Article
I of the Loan Agreement is amended as follows:
(A) Amendments to Certain Definitions. The definitions of Closing
Date, Commitment and Threshold Amount and subclause (xiii) of the definition of
Permitted Liens as set forth in Article I of the Loan Agreement are amended in
their entirety and the following are substituted therefor:
(i) "Closing Date" shall mean August 28, 1998.
(ii) "Commitment" shall mean at any time Banks' commitment to make the
Loan and any Borrowing thereunder available to Company in an
aggregate amount at any time not to exceed the lesser of (i) the
Borrowing Base then in effect or (ii) the Facility Amount. With
respect to each Bank, its Commitment shall never exceed its
Percentage of the lesser of (i) the Borrowing Base then in effect
or (ii) the Facility Amount. The amount of each Bank's Commitment
may be terminated or reduced from time to time in accordance with
the provisions hereof. The Commitment as of the Closing Date is
$560,000,000, and (a) upon closing of the East Texas Acquisition
the Commitment then in effect shall increase by $8,000,000 and (b)
upon closing of the Shell Acquisition the Commitment then in
effect shall increase by $32,000,000, but in each case subject to
further adjustment as provided in Section 5.05(a).
(iii) "Sub-clause (xiii) of the definition of "Permitted Liens" is
hereby amended in its entirety to read as follows:
"(xiii) (a) Liens granted under the Compressor Lease
Agreements, and (b) Liens granted under aircraft lease
agreements and other equipment lease agreements in which
Company or a Subsidiary is the lessee, provided that the
Indebtedness respecting such lease agreements is permitted
under Section 9.01 hereof;"
(iv) "Threshold Amount" shall mean, at any time during the period
between the Closing Date to April 15, 1999, the lesser of (A) the
amount determined under the PV Borrowing Base Test or (B) the
amount equal to the remainder of (i) the quotient of (a) the
Present Value of Borrowing Base Reserves that are attributable to
the Proved Reserves allocable to the Borrowing Base Assets
(provided that at least eighty-five percent (85%) of such Proved
Reserves shall consist of Proved Developed Producing Reserves)
plus the Gas Subsidiaries' Loan Value divided by (b) 1.35, less
(ii) the unpaid principal balance of the Subordinated Indebtedness
then outstanding. At the Closing Date, the Threshold Amount is
$525,000,000. Upon closing of the East Texas Acquisition, the
Threshold Amount then in effect
2
<PAGE>
shall be increased by $8,000,000, and upon closing of the Shell
Acquisition, the Threshold Amount then in effect shall be
increased by $32,000,000. During the period between the Closing
Date to April 15, 1999, the Threshold Amount shall be determined
(and approved by Majority Banks) as provided in Section 2.03(d)
hereof and upon each redetermination of the Borrowing Base.
(B) Additional Definitions. The following definitions are hereby
included in Article I of the Loan Agreement:
(i) "Compressor Lease Agreements" shall mean collectively, (a)
the wellhead compressor lease agreements in which Company or a
Subsidiary is the lessee for Mineral Properties in the San Juan
Basin area, and providing that the total funding amount under such
lease agreements shall not exceed $4,600,000, (b) the compressor
lease agreements in which Company or a Subsidiary is the lessee
for Mineral Properties in the East Texas area, and providing that
the total funding amount under such lease agreements shall not
exceed $5,000,000, and (c) the compressor lease agreements in
which Company or a Subsidiary is the lessee for Mineral Properties
in the Ozona Texas area, and providing that the total funding
amount under such lease agreements shall not exceed $3,500,000. As
used herein and in Section 9.01 (xi), the term "funding amount"
shall mean the lessor's cost of the compressors and other
equipment that is subject to the applicable lease agreement as set
forth in such lease agreement."
(ii) "East Texas Acquisition" shall mean the acquisition
transaction to be consummated pursuant to which Company, as buyer,
shall acquire the East Texas Properties.
(iii) "East Texas Properties" shall mean the oil and gas
properties to be acquired by Company upon closing of the East
Texas Acquisition. The East Texas Properties comprise additional
undivided interests in certain oil and gas properties included in
the EEX Properties.
(iv) "Shell Acquisition" shall mean the acquisition transaction
to be consummated pursuant to that certain Purchase and Sale
Agreement between Shell Western E&P Inc., Shell Deepwater
Production Royalties Inc. and Shell Offshore Inc., as Seller, and
Company, as Buyer.
(v) "Shell Properties" shall mean the oil and gas properties to
be acquired by Company upon closing of the Shell Acquisition.
2.02. Amendment to Section 5.01(a)(i). Effective as of the Closing Date,
Section 5.01(a)(i) of the Loan Agreement is amended in its entirety and the
following shall be substituted therefor:
3
<PAGE>
"(i) The PV Borrowing Base. The PV Borrowing Base shall be
based upon economic variables which evaluate the discounted
present value of future net income accruing to the Borrowing Base
Assets as established by the Reserve Reports delivered from time
to time hereunder (herein called the "Present Value of Borrowing
Base Reserves") and the Gas Subsidiaries' Loan Value as determined
from time to time. For the period from the Closing Date to April
15, 1999, the PV Borrowing Base Test shall equal the sum of (a)
fifty percent (50%) of the Present Value of Borrowing Base
Reserves that are attributable to the Proved Reserves allocable
to the Borrowing Base Assets; provided, however, that at least
eighty-three percent (83%) of such Proved Reserves shall consist
of Proved Developed Producing Reserves, and (b) the loan value
assigned to the operations of the Gas Marketing Subsidiaries as
determined according to Section 5.07 herein (such loan value is
herein called the "Gas Subsidiaries' Loan Value"). From and after
April 15, 1999, the PV Borrowing Base Test shall equal the sum of
(a) fifty percent (50%) of the Present Value of Borrowing Base
Reserves that are attributable to the Proved Reserves allocable to
the Borrowing Base Assets; provided, however, that at least
eighty-five percent (85%) of such Proved Reserves shall consist of
Proved Developed Producing Reserves, and (b) the Gas Subsidiaries'
Loan Value. The term "Borrowing Base Assets" shall mean only such
Mineral Properties (i) to which Company has good and indefeasible
title and (ii) which are not subject to any liens, encumbrances or
charges, except for Permitted Liens for or against which
Indebtedness is not due and payable."
2.03. Amendment to Section 5.01(a)(ii). Effective as of the Closing
Date, Section 5.01(a)(ii) of the Loan Agreement is amended in its entirety and
the following shall be substituted therefor:
"(ii) The Adjusted PV Borrowing Base Test. For the period from
the Closing Date to April 15, 1999, the Adjusted PV Borrowing Base
Test shall equal the remainder of (i) the quotient of (a) the
Present Value of Borrowing Base Reserves that are attributable to
the Proved Reserves allocable to the Borrowing Base Assets
(provided that at least eighty-three percent (83%) of such Proved
Reserves shall consist of Proved Developed Producing Reserves)
plus the Gas Subsidiaries' Loan Value divided by (b) 1.29, less
(ii) the unpaid principal balance of the Subordinated Indebtedness
then outstanding. From and after April 15, 1999, the Adjusted PV
Borrowing Base Test shall equal the remainder of (i) the quotient
of (a) the Present Value of Borrowing Base Reserves that are
attributable to the Proved Reserves allocable to the Borrowing
Base Assets (provided that at least eighty-five percent (85%) of
such Proved Reserves shall consist of Proved Developed Producing
Reserves) plus the Gas Subsidiaries' Loan Value divided by (b)
1.35, less (ii) the unpaid principal balance of the Subordinated
Indebtedness then outstanding.
4
<PAGE>
2.04. Amendment to Section 5.02. Effective as of the Closing Date,
Section 5.02 of the Loan Agreement is amended in its entirety and the following
is substituted therefor:
"5.02. Initial Borrowing Base. During the period from the
Closing Date to the first to close of the East Texas Acquisition or the
Shell Acquisition, the Borrowing Base shall be $560,000,000. Upon
consummation of the East Texas Acquisition, the Borrowing Base then in
effect shall be increased by $8,000,000, but subject to further adjustment
as provided in Section 5.05(a) Upon consummation of the Shell Acquisition,
the Borrowing Base then in effect shall be increased by $32,000,000, but
subject to further adjustment as provided in Section 5.05(a). The Borrowing
Base in effect from time to time is subject to adjustment as provided in
Sections 5.03, 5.04 and 5.05."
2.05. Amendment to Section 5.05(a). Effective as of the Closing Date,
Section 5.05(a) of the Loan Agreement is amended by including the following
sentences at the conclusion of such section:
"Pursuant to the terms of the purchase and sale agreements
evidencing the East Texas Acquisition and the Shell Acquisition,
at closing of each of the East Texas Acquisition and the Shell
Acquisition, certain of the East Texas Properties and/or the Shell
Properties, may be excluded from such acquisitions and the
purchase price for the East Texas Properties and/or the Shell
Properties may be reduced by the value allocated to such excluded
properties, on account of title defects and/or adverse
environmental conditions. After the collective purchase price for
the East Texas Properties and the Shell Properties has been
reduced by an aggregate amount of $5,000,000 on account of such
title defects and/or environmental conditions, the Borrowing Base
shall thereafter be reduced by the loan value assigned to any
additional properties that are affected by such title defects
and/or environmental conditions according to the reserve report
covering the East Texas Properties and/or the Shell Properties
that was delivered by Company to Agents or, if available, the most
recent Reserve Report delivered to Banks."
2.06. Amendment to Article 7. Effective as of the Closing Date, Article
7 of the Loan Agreement is amended by including the following Sections 7.04 and
7.05:
"7.04. East Texas Acquisition. In addition to the conditions
precedent set forth in Section 7.02, the obligation of Banks to increase
the Borrowing Base and the Commitment by the amounts set forth herein shall
be subject to the following additional conditions precedent:
(a) Title Information. Supplemental title opinions,
updated title reports, existing title opinions, assignments,
division orders, and/or other evidence of title requested by
Agents, covering the properties to be
5
<PAGE>
acquired by Company pursuant to the East Texas Acquisition
evidencing that (subject to Permitted Liens) Company shall have
good and marketable title to such properties that constitute not
less than 60% of the value of all of the East Texas Properties to
be acquired pursuant to the East Texas Acquisition, and
assignments and other instruments of conveyance from East Texas to
Company that vest title to the East Texas Properties to be
acquired pursuant to the East Texas Acquisition in Company.
(b) Notice. No later than three (3) Business Days after
the closing date of the East Texas Acquisition, Company shall
provide Agents (with copy to Administrative Agent's office at
Morgan Christiana Center, 500 Stanton Christiana Road, Newark,
Delaware 19713, Attention: Ms. Sandra Doherty) with written notice
of the closing of the East Texas Acquisition and the Commitment
and Borrowing Base to be in effect after consummation of the East
Texas Acquisition."
"7.05. Shell Acquisition. In addition to the conditions precedent
set forth in Section 7.02, the obligation of Banks to increase the Borrowing
Base and the Commitment by the amounts set forth herein shall be subject to
the following additional conditions precedent:
(a) Environmental Assessment. An environmental assessment
prepared by an independent environmental consultant approved by
Agents covering the Shell Properties to be acquired by Company
under the Shell Acquisition, evidencing that there are no
violations of any Environmental Laws respecting the Shell
Properties that are likely to have a Material Adverse Effect on
Company or its Subsidiaries considered as a whole.
(b) Title Information. Supplemental title opinions,
updated title reports, existing title opinions, assignments,
division orders, and/or other evidence of title requested by
Agents, covering the properties to be acquired by Company pursuant
to the Shell Acquisition evidencing that (subject to Permitted
Liens) Company shall have good and marketable title to such
properties that constitute not less than 60% of the value of all
of the Shell Properties to be acquired pursuant to the Shell
Acquisition, and assignments and other instruments of conveyance
from Shell to Company that vest title to the Shell Properties to
be acquired pursuant to the Shell Acquisition in Company."
(c) Prior Notice. On the closing date of the Shell
Acquisition, Company shall provide Agents (with copy to
Administrative Agent's office at Morgan Christiana Center, 500
Stanton Christiana Road, Newark, Delaware 19713, Attention: Ms.
Sandra Doherty) with written notice of the closing of the Shell
Acquisition and the Commitment and Borrowing Base to be in effect
after consummation of the Shell Acquisition."
6
<PAGE>
2.07. Amendment to Section 9.01. Effective as of the Closing Date,
subclause (xii) of Section 9.01 of the Loan Agreement shall become subclause
(xiii) and subclause (xi) of Section 9.01 of the Loan Agreement is amended by
deleting such subclause and substituting the following subclauses (xi) and
(xii):
"(xi) Indebtedness of Company and the Subsidiaries (a) under the
Compressor Lease Agreements; provided, however, that (i) the total funding
amount under the wellhead compressor lease agreements for Mineral
Properties in the San Juan Basin area shall not to exceed $4,600,000, (ii)
the total funding amount under the compressor lease agreements for Mineral
Properties in the East Texas area shall not to exceed $5,000,000, and (iii)
the total funding amount under the compressor lease agreements for Mineral
Properties in the Ozona Texas area shall not exceed $3,500,000, and (b)
under aircraft lease agreements in which the total funding amount
thereunder shall not exceed $6,200,000, (xii) such other Indebtedness of
Company and the Subsidiaries (in the aggregate) not exceeding $5,000,000 at
any one time outstanding, exclusive of any Indebtedness between Company and
the Subsidiaries, and"
2.08. Amendment to Section 9.03. Effective as of the Closing Date,
Section 9.03 of the Loan Agreement is amended in its entirety and the following
is substituted therefor:
"9.03. Dividends and Distributions. Company shall be permitted to
pay Dividends and repurchase its shares of stock, provided, however, that
(i) the aggregate amount of the Dividends so paid by Company during any
four consecutive calendar quarterly periods shall not exceed twenty-five
percent (25%) of Company's net cash flow from operations during such four
quarterly periods and (ii) in addition to the Dividends permitted in
subclause (i) above, during the term of the Loan, Company shall be
permitted to repurchase up to, but not exceeding, 3,000,000 shares of its
stock; provided, further, however, that without the prior consent of
Majority Banks Company shall pay no Dividends nor shall Company repurchase
any of its shares of stock otherwise permitted above if (i) an Event of
Default exists hereunder, (ii) payment of such permitted Dividends or stock
repurchases would cause an Event of Default hereunder, or (iii) a Borrowing
Base Deficiency exists hereunder. For the purposes of this Section 9.03,
the term "net cash flow from operations" shall mean Company's net income
for the four quarterly periods under review as established by the financial
reports delivered by Company to Banks according to Sections 8.01(a) and
8.01(b) hereof for such quarterly periods, plus depreciation, depletion and
other non-cash charges reflected in such financial information."
2.09. Amendment to Section 9.14. Effective as of the Closing Date,
Section 9.14 of the Loan Agreement is amended by deleting subclause (vi) thereof
and substituting the following therefor:
7
<PAGE>
"(vi) the Guaranty by Company of its Subsidiaries arising under (a) the
Compressor Lease Agreements, and (b) other equipment leases of its
Subsidiaries not otherwise included in subclauses (ii), (iii) or (iv) above
or in this subclause (vi), provided that the Indebtedness respecting such
other equipment leases is permitted under Section 9.01 hereof, and"
2.10. Amendment to Schedule I. Effective as of the Closing Date, Schedule
I of the Loan Agreement amended in its entirety and the Schedule I attached
hereto shall be substituted therefor.
ARTICLE III
Condition Precedent
3.01 Counterparts; Conditions to Effectiveness.
(a) Majority Banks. As to Sections 2.01(A)(i) and (iii), Section
2.01(B)(i),Section 2.07, Section 2.08 and Section 2.09 hereof, this instrument
shall become effective as to such Sections (and the Loan Agreement shall be
amended and restated in the form of the Loan Agreement immediately before giving
effect hereto and with the amendments referred to in such Sections) as of the
Closing Date when Administrative Agent shall have received a duly executed
counterpart hereof signed by the Company and Majority Banks (or, in the case of
any Bank included within Majority Banks as to which an executed counterpart
shall not have been received, Administrative Agent shall have received
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such Bank).
(b) All Banks. As to Sections 2.01(A)(ii) and (iv), Section 2.01(B)(ii),
(iii), (iv) and (v), Section 2.02, Section 2.03, Section 2.04, Section 2.05,
Section 2.06 and Section 2.10 hereof, this instrument shall become effective as
to such Sections (and the Loan Agreement shall be amended and restated in the
form of the Loan Agreement immediately before giving effect hereto and with the
amendments referred to in such Sections) as of the Closing Date when
Administrative Agent shall have received a duly executed counterpart hereof
signed by the Company and all of the Banks (or, in the case of any Bank as to
which an executed counterpart shall not have been received, Administrative Agent
shall have received telegraphic, telex or other written confirmation from such
party of execution of a counterpart hereof by such Bank).
ARTICLE IV
Ratifications, Representations and Warranties
4.01. Ratifications. The terms and provisions set forth herein shall
modify and supersede all inconsistent terms and provisions set forth in the Loan
Agreement immediately before giving effect hereto and the other Loan Papers,
and, except as expressly modified, amended, and superseded herein, the terms and
provisions of the Loan Agreement and the other Loan Papers are ratified and
confirmed and shall continue in full force and effect. Company and Banks agree
that the Loan Agreement, as amended and restated in its entirety hereby, and the
8
<PAGE>
other Loan Papers shall continue to be legal, valid, binding and enforceable in
accordance with their respective terms.
4.02. Representations, Warranties and Agreements. Company hereby
represents and warrants to Banks that (a) the execution, delivery and
performance of the Loan Agreement as amended and restated in its entirety hereby
has been authorized by all requisite corporate action on the part of Company and
will not violate the Articles/Certificate of Incorporation or Bylaws of Company;
(b) the representations and warranties contained in the Loan Agreement, as
amended and restated in its entirety hereby, and any other Loan Papers are true
and correct on and as of the date hereof and on and as of the date of execution
hereof as though made on and as of each such date; (c) no Default or Event of
Default under the Loan Agreement, as amended and restated in its entirety
hereby, has occurred and is continuing; and (d) Company is in full compliance
with all covenants and agreements contained in the Loan Agreement and the other
Loan Papers, as amended and restated in its entirety hereby.
ARTICLE V
Miscellaneous Provisions
5.01. Reference to Loan Agreement. The other Loan Papers, and any and all
other agreements, documents or instruments now or hereafter executed and
delivered pursuant to the terms hereof or pursuant to the terms of the Loan
Agreement, as amended and restated in its entirety hereby, are hereby amended so
that any reference in the Loan Agreement and such other Loan Papers to the Loan
Agreement shall mean a reference to the Loan Agreement as amended and restated
in its entirety hereby.
5.02. Expenses of Agents. As provided in the Loan Agreement, Company
agrees to pay on demand all reasonable costs and expenses incurred by Agents in
connection with the preparation, negotiation and execution of this Amended and
Restated Revolving Credit Agreement, including, without limitation, the costs
and fees of Agent's legal counsel, and all reasonable costs and expenses
incurred by Banks in connection with the enforcement or preservation of any
rights under the Loan Agreement, as amended and restated in its entirety hereby,
or any other Loan Papers, including, without, limitation, the reasonable costs
and fees of Agents' legal counsel. Company shall not be responsible for the
cost or expense of legal counsel of any other Bank in connection with the
preparation, execution and delivery of this Amendment.
5.03. Counterparts. This instrument may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
5.04. Headings. The headings, captions, and arrangements used herein are
for convenience only and shall not affect the interpretation of this instrument.
5.05. Applicable Law. THE LOAN AGREEMENT AS AMENDED AND RESTATED IN ITS
ENTIRETY HEREBY AND ALL OTHER LOAN PAPERS EXECUTED PURSUANT HERETO SHALL BE
DEEMED TO HAVE BEEN MADE AND TO BE
9
<PAGE>
PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS UNLESS THE LAWS GOVERNING NATIONAL BANKS SHALL HAVE
APPLICATION.
5.06. Final Agreement. THE LOAN AGREEMENT AS AMENDED AND RESTATED IN ITS
ENTIRETY HEREBY AND THE OTHER LOAN PAPERS, EACH AS AMENDED HEREBY, REPRESENT THE
ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON
THE CLOSING DATE THIS AMENDMENT IS EXECUTED. THE LOAN AGREEMENT AS AMENDED AND
RESTATED IN ITS ENTIRETY HEREBY AND THE OTHER LOAN PAPERS, AS AMENDED HEREBY,
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY
PROVISION OF THE LOAN AGREEMENT OR THE OTHER LOANS PAPERS SHALL BE MADE, EXCEPT
BY A WRITTEN AGREEMENT SIGNED BY COMPANY AND EITHER BANKS OR MAJORITY BANKS, AS
PROVIDED IN THE LOAN AGREEMENT.
IN WITNESS WHEREOF, this Amendment has been executed in multiple originals
and is effective as of the date first above-written.
[SIGNATURE PAGES TO FOLLOW]
10
<PAGE>
COMPANY:
CROSS TIMBERS OIL COMPANY,
a Delaware corporation
By: JOHN O'REAR
-----------------------------------------
John O'Rear, Vice President and Treasurer
BANKS:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: ROBERT BOTTAMEDI
-----------------------------------------
Name: Robert Bottamedi
-----------------------------------------
Title: VICE PRESIDENT
-----------------------------------------
NATIONSBANK, N.A.
By: J. SCOTT FOWLER
-----------------------------------------
J. Scott Fowler, Vice President
CHASE BANK OF TEXAS, N.A.
By: LEE E. BECKELMAN
-----------------------------------------
Lee E. Beckelman, Vice President
BANKBOSTON, N.A.
By: TERRENCE RONAN
-----------------------------------------
Name: Terrence Ronan
-----------------------------------------
Title: Director
-----------------------------------------
11
<PAGE>
WELLS FARGO BANK (TEXAS), N.A.
By: CHARLES D. KIRKHAM
-----------------------------------------
Charles D. Kirkham, Vice President
FROST NATIONAL BANK, as the surviving
bank by merger of Overton Bank and Trust, N.A.,
effective May 29, 1998
By: W.H. (BILL) ADAMS, III
-----------------------------------------
W.H. (Bill) Adams, III, Senior Vice
President
ABN-AMRO BANK N.V.
By: W. BRYAN CHAPMAN
-----------------------------------------
Name: W. Bryan Chapman
-----------------------------------------
Title: Group Vice President
-----------------------------------------
By: STUART MURRAY
-----------------------------------------
Name: Stuart Murray
-----------------------------------------
Title: Vice President
-----------------------------------------
BANK OF MONTREAL
By: MELISSA BAUMAN
-----------------------------------------
Name: Melissa Bauman
-----------------------------------------
Title: Director
-----------------------------------------
THE BANK OF NEW YORK
By: RAYMOND J. PALMER
-----------------------------------------
Name: Raymond J. Palmer
-----------------------------------------
Title: Vice President
-----------------------------------------
12
<PAGE>
PARIBAS
By: MARIAN LIVINGSTON
-----------------------------------------
Marian Livingston, Vice President
By: BETSY JOCHER
-----------------------------------------
Betsy Jocher, Assistant Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: PASCAL POUPELLE
-----------------------------------------
Pascal Poupelle
-----------------------------------------
Executive Vice President
-----------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: RONALD E. MCKAIG
-----------------------------------------
Name: Ronald E. McKaig
-----------------------------------------
Title: Vice President
-----------------------------------------
FIRST UNION NATIONAL BANK
By: PAUL N. RIDDLE
-----------------------------------------
Name: Paul N. Riddle
-----------------------------------------
Title: Senior Vice President
-----------------------------------------
BANK ONE, TEXAS, N.A.
By: JOHN S. WARREN
-----------------------------------------
John S. Warren, Vice President
13
<PAGE>
NATEXIS Banque
By: TIMOTHY L. POLVADO
-----------------------------------------
Timothy L. Polvado, Vice President
By: ERIC DITGES
-----------------------------------------
Eric Ditges, Assistant Vice President
THE BANK OF NOVA SCOTIA
By: F.C.H. ASHBY
-----------------------------------------
Name: F.C.H. Ashby
-----------------------------------------
Title: Senior Manager Loan Operations
-----------------------------------------
COMERICA BANK-TEXAS
By: DAVID L. MONTGOMERY
-----------------------------------------
David L. Montgomery, Vice President
14
<PAGE>
EXHIBIT 15.1
Cross Timbers Oil Company:
We are aware that Cross Timbers Oil Company and Cross Timbers Royalty Trust have
incorporated by reference in their Registration Statement on Form S-3 (No. 333-
56983) and that Cross Timbers Oil Company has incorporated by reference in its
Registration Statement on Form S-3 (No. 333-46909) and in its Registration
Statements on Form S-8 (No. 33-64274, No. 33-65238, No. 33-81766, No. 333-35229
and No. 333-36569) its Form 10-Q for the quarter ended September 30, 1998, which
includes our report dated October 21, 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
November 13, 1998
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