<PAGE>
1997
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 1-10662
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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)
Registrant's telephone number, including area code (817) 870-2800
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ---------------------------- ---------------------------------------------
Common stock, $.01 par value New York Stock Exchange
Series A convertible preferred New York Stock Exchange
stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to be the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 2, 1998 was approximately $593 million
Number of Shares of Common Stock outstanding as of March 2, 1998 - 38,972,860
----------
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Part III of this Report is incorporated by reference from the Registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders, which will be
filed with the Commission no later than April 30, 1998.
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<PAGE>
CROSS TIMBERS OIL COMPANY
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. and 2. Business and Properties......................................... 1
3. Legal Proceedings............................................... 14
4. Submission of Matters to a Vote of Security Holders............. 14
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters..................................... 15
6. Selected Financial Data......................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 18
8. Financial Statements and Supplementary Data..................... 26
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 26
PART III
10. Directors and Executive Officers of the Registrant.............. 26
11. Executive Compensation.......................................... 26
12. Security Ownership of Certain Beneficial Owners and Management.. 26
13. Certain Relationships and Related Transactions.................. 26
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 27
<PAGE>
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
General
Cross Timbers Oil Company and its wholly owned subsidiaries ("the Company")
are engaged in the acquisition, development, exploitation and exploration of
producing oil and gas properties, and in the production, processing, marketing
and transportation of oil and natural gas. The Company has grown primarily
through acquisitions of proved oil and gas reserves, followed by development and
exploitation activities and strategic acquisitions of additional interests in or
near such acquired properties. The Company's proved reserves are principally
located in relatively long-lived fields with well-established production
histories concentrated in western Oklahoma, the Permian Basin of West Texas and
New Mexico, the Hugoton Field of Oklahoma and Kansas, the San Juan Basin of
northwestern New Mexico and the Green River Basin of Wyoming.
The Company's estimated proved reserves at December 31, 1997 were 47.9
million barrels ("Bbls") of oil and 815.8 billion cubic feet ("Bcf") of natural
gas and 13.8 million Bbls of natural gas liquids, as compared to December 31,
1996 proved reserves of 42.4 million Bbls of oil and 540.5 Bcf of natural gas.
Increased proved reserves during 1997 are primarily the result of predominantly
gas-producing property acquisitions and development and exploitation activities,
partially offset by production. During 1997, the Company's daily oil and gas
production averaged 10,905 Bbls and 135,855 Mcf. Fourth quarter 1997 daily oil
and gas production averaged 11,378 Bbls and 150,907 Mcf. Following its December
1997 acquisition of gas-producing properties in the San Juan Basin, the Company
began separate reporting of natural gas liquids production related to this
acquisition. Natural gas liquids production for the month of December 1997 was
80,500 Bbls or 2,596 Bbls per day.
The Company's properties are characterized by relatively long reserve life
and highly predictable well production profiles. Based on December 31, 1997
proved reserves and projected 1998 production, the average reserve-to-production
index of the Company's proved reserves is 13.3 years. In general, the Company's
properties have extensive production histories and production enhancement
opportunities. While the Company's properties are geographically diversified,
the producing fields are concentrated within core areas, allowing for
substantial economies of scale in production and cost-effective application of
reservoir management techniques gained from prior operations. By operating the
majority of its properties, the Company can control expenses, capital allocation
and the timing of development and exploitation activities in its fields, thus
allowing the Company to reduce production costs of acquired properties.
The Company has generated a substantial inventory of approximately 950
potential development drilling locations within its existing properties (of
which 486 have been attributed proved undeveloped reserves), to support future
net reserve additions. Approximately 200 of these locations will require
certain regulatory approvals and legislation in Oklahoma prior to drilling.
The Company has recently begun to emphasize exploration of unproved
reserves as part of its business strategy. During 1997, the Company expensed
$2.1 million in connection with its exploration program, primarily including
seismic and other geological and geophysical analysis costs. The Company has
allocated 10% to 15% of its 1998 budget, or up to $13.5 million for exploration
activities.
The Company employs a disciplined acquisition program refined by senior
management to augment its core properties and expand its reserve base. The
Company's engineers and geologists use their expertise and experience gained
through the management of existing core properties to target properties to be
acquired with similar geological and reservoir characteristics.
A subsidiary of the Company operates a gas gathering system in Major
County, Oklahoma, where a significant portion of the Company's gas is produced.
Since August 1, 1995, another subsidiary of the Company has operated a gas
gathering system and a gas processing plant in the Hugoton Field of Kansas and
Oklahoma.
1
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Most of the Company's production is sold at market-responsive prices. The
Company also markets its oil and gas, including sales of gas under forward sales
contracts. The Company occasionally uses futures contracts and other price risk
management instruments to hedge pricing risks.
History of the Company
Cross Timbers Oil Company was incorporated in Delaware in 1990 to act as
the managing general partner of Cross Timbers Oil Company, L.P. ("Partnership"),
and ultimately to acquire the business and properties of the Partnership. The
Partnership was formed to combine in February 1991 the business and operations
of six limited partnerships and two corporations that were founded between 1986
and 1989. On May 18, 1993, the Partnership exchanged its common units of
ownership for an equal number of shares of common stock in Cross Timbers Oil
Company and the Company sold 8.3 million shares of common stock (adjusted for
subsequent stock splits) in its initial public offering.
During 1991, the predecessors of the Company formed Cross Timbers Royalty
Trust ("Royalty Trust") by carving net profits interests out of substantially
all the royalty and overriding royalty interests that the Company's predecessors
then owned in Texas, New Mexico and Oklahoma, and certain nonoperated working
interest properties in Texas and Oklahoma. The Company makes monthly net
profits payments to the Royalty Trust based on revenues received and costs
disbursed for the properties from which the net profits interests were carved.
Royalty Trust units of beneficial interest ("Units") are listed on the New York
Stock Exchange under the symbol "CRT." During 1996 and 1997, the Company
purchased 1,326,300, or 22%, of the outstanding Units. The Board of Directors
has authorized the purchase of up to two million, or 33%, of the outstanding
Units.
Current Operating Environment
The oil and gas industry is affected by many factors that the Company
generally cannot control. Crude oil prices are generally determined by global
supply and demand. After hitting a five-year low at the end of 1993, oil prices
reached their highest levels since the Persian Gulf War in 1990 during fourth
quarter 1996 and January 1997. Crude oil prices ranged from $17 to $20 during
most of 1997, then declined to a $16 average in December and to the $14 to $15
level in first quarter 1998. The recent weakening in oil prices has generally
been attributed to increased OPEC production following its November 1997
decision to increase quotas, increased non-OPEC production from the North Sea
and Latin America, and the recent United Nations decision to allow increased
Iraqi crude oil sales for humanitarian reasons. Also contributing to decline
have been a mild 1997/1998 winter in the U.S. and Europe and the sudden drop in
demand from depressed economies in the Far East. After hitting a decade low of
$11.00, prices in late March 1998 began to increase upon news that some of the
major oil exporting countries planned to meet regarding curtailment of
production.
Natural gas prices are influenced by national and regional supply and
demand, which is often dependent upon weather conditions. Natural gas competes
with alternative energy sources as a fuel for heating and the generation of
electricity. Gas prices were adversely impacted in 1995 as a result of the
winter of 1994/1995 being one of the warmest of the century. Prices increased
in fourth quarter 1995 and continued their upward spiral through February 1996
because of low storage levels and colder than expected weather. Generally
because of colder weather, storage concerns and U.S. economic growth, prices
remained relatively high during most of 1996 and 1997, reaching their highest
levels since 1985. Gas prices declined, however, in December 1997 and have
remained lower in first quarter 1998, primarily because of an abnormally mild
winter in the central and eastern U.S. and elevated storage levels.
Business Strategy
The primary components of the Company's business strategy are (i) acquiring
long-lived, operated oil and gas properties, (ii) increasing production and
reserves through aggressive management of operations and through development,
exploitation and exploration activities, and (iii) retaining management and
technical staff that have substantial experience in the Company's core areas.
Acquiring Long-Lived, Operated Properties. The Company seeks to acquire
long-lived, onshore operated producing properties that (i) contain complex
multiple-producing horizons with the potential for increases in reserves and
production, (ii) are in the Company's core operating areas or in areas with
similar geologic and reservoir characteristics and (iii) present opportunities
to reduce expenses through more efficient operations. The Company
2
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believes that the properties it acquires provide opportunities to increase
production and reserves through the implementation of mechanical and operational
improvements, workovers, behind-pipe completions, secondary recovery operations,
new development wells and other exploitation activities. The Company also seeks
to acquire facilities related to gathering, processing, marketing and
transporting oil and gas in areas where it owns reserves. Such facilities can
enhance profitability, reduce gathering, processing, marketing and
transportation costs, provide marketing flexibility and give the Company access
to additional markets. The Company's ability to successfully purchase properties
is dependent upon, among other things, competition for such purchases and the
availability of cash resources.
Increasing Production and Reserves. A principal component of the Company's
strategy is to increase production and reserves through aggressive management of
operations and through development, exploitation and exploration. The Company
believes that its principal properties possess geologic and reservoir
characteristics that make them well suited for production increases through low-
risk exploitation and drilling programs. The Company has generated an inventory
of approximately 950 potential drilling locations for this program.
Additionally, the Company reviews operations and mechanical data on operated
properties to determine if actions can be taken to reduce operating costs or
increase production. Such actions include installing, repairing and upgrading
lifting equipment, redesigning downhole equipment to improve production from
different zones, modifying surface facilities and conducting restimulations and
recompletions. The Company may also initiate, upgrade or revise existing
secondary recovery operations and drill development wells.
The Company attempts to select projects that it believes will have the
potential to add substantially to proved reserves and cash flow. Although it
has not historically engaged in significant exploratory activities, the Company
believes that it can prudently and successfully add growth potential through
exploratory activities given improved technology, its experienced technical
staff and its expanded base of operations.
Experienced Management and Technical Staff. Most of the Company's senior
management and technical staff have worked together for over 20 years and have
substantial experience in the Company's core operating areas. Bob R. Simpson and
Steffen E. Palko, who were co-founders of the Company and its predecessors, were
previously executive officers of Southland Royalty Company, one of the largest
U.S. independent oil and gas producers prior to its acquisition by Burlington
Northern, Inc. in 1985.
Other Strategies. The Company may also acquire working interests in
producing properties that do not include the right to operate such properties
("nonoperated interests") if such interests otherwise meet its acquisition
criteria. The Company attempts to acquire nonoperated interests in fields that
are operated by major or established independent oil companies, where such
fields represent a significant investment to the operator and are therefore more
likely to be carefully managed by it. The Company may also acquire nonoperated
interests with the intent of ultimately aggregating, through future
acquisitions, sufficient interests to obtain the right to operate the
properties. The Company attempts to acquire nonoperated interests where
geologic conditions indicate the potential for undeveloped reserves that the
operator will exploit.
The Company also attempts to acquire a portion of its oil and gas reserves
in the form of royalty interests. Royalty interests offer less exposure to
operational liabilities because they do not participate in operating activities
and do not bear production or development costs. However, royalty interests
typically allow only limited influence on the operation or development of
properties.
Business Goals. In May 1997, the Company announced strategic goals for
1998 and 1999, including 50% increases in cash flow per share and proved
reserves per share. Specifically, the Company's goal is to increase cash flow
per share to $2.97 in 1998 and to $3.67 in 1999, an aggregate increase of 50%
from 1997's goal of $2.45 (all adjusted for the February 25, 1998 three-for-two
stock split). Proved reserves at year-end 1999 are targeted at 5.4 barrels of
oil equivalent ("BOE") per share, or 50% above the Company's year-end 1997 goal
of 3.6 BOE per share. Debt per BOE in 1998 and 1999 is expected to be $2.40.
These goals were based on May 1997 commodity prices which, net to the Company,
were approximately $20 per Bbl of oil and $2.00 per Mcf of gas.
The Company also announced its plans to make strategic acquisitions
totaling $260 to $280 million from May 1997 through the end of 1999. After
closing the Amoco Acquisition in December 1997 and the expected closing of the
EEX Acquisition in April 1998, the Company has significantly exceeded this goal.
3
<PAGE>
The Company has budgeted $70 to $90 million for its 1998 exploration and
development program which is expected to be funded primarily by cash flow from
operations. Exploration expenditures are expected to be 10% to 15% of the 1998
budget. The total capital budget, including acquisitions, will be adjusted
throughout 1998 to capitalize on opportunities offering the highest rates of
return after considering oil and gas price volatility.
ACQUISITIONS
During 1995, the Company acquired predominantly gas-producing properties
for a total cost of $131 million, and a gas processing plant and gathering
facility for $29 million. The Santa Fe Acquisition, the largest of these
acquisitions, closed on August 1, 1995 and consisted of mostly operated
properties, a gas processing plant and gathering system in the Hugoton Field of
Kansas and Oklahoma. The 1995 acquisitions increased proved reserves by
approximately 3 million Bbls and 171 Bcf.
During 1996, the Company acquired predominantly gas-producing properties
for a total cost of $106 million. The Enserch Acquisition, the largest of these
acquisitions, closed in July 1996 at a cost of $39.4 million and primarily
consisted of operated interests in the Green River Basin of southwestern
Wyoming. In November 1996, the Company acquired additional interests in the
Fontenelle Unit, the most significant property included in the Enserch
Acquisition, at a cost of $12.5 million. In December 1996, the Company acquired
primarily operated interests in gas-producing properties in the Ozona area of
the Permian Basin of West Texas for $28.1 million. From July through December
1996, the Company acquired 16% of the publicly traded outstanding units of
beneficial interest in Cross Timbers Royalty Trust ("Units"), at a total cost of
$12.8 million. The 1996 acquisitions increased proved reserves by approximately
1.6 million Bbls and 153.4 Bcf.
During 1997, the Company acquired predominantly gas-producing properties
for a total cost of $256 million. The Amoco Acquisition, the largest of these
acquisitions, closed December 1, 1997 at an estimated adjusted purchase price of
$195 million, including five-year warrants to purchase 937,500 shares of the
Company's common stock at a price of $15.31 per share. This acquisition
consists primarily of operated properties in the San Juan Basin of New Mexico.
In May 1997, the Company acquired primarily gas-producing properties in
Oklahoma, Kansas and Texas for an estimated adjusted purchase price of $39
million. The Company also acquired an additional 6% of the Royalty Trust Units
at a cost of $5.4 million. The 1997 acquisitions increased proved reserves by
approximately 3.2 million Bbls of oil, 248 Bcf of natural gas and 13.9 million
Bbls of natural gas liquids.
On February 25, 1998, the Company announced it had entered into a
definitive agreement with EEX Corporation to acquire producing properties and
undeveloped acreage in East Texas. The transaction is expected to close in late
April 1998 with an effective date of January 1, 1998. After purchase price
adjustments, the preliminary purchase price of $265 million is expected to be
reduced to $245 million. The Company's internal engineers estimate proved
reserves attributable to the acquisition to be 250 Bcf and 1.6 million Bbls as
of April 1998.
4
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SIGNIFICANT PROPERTIES
The following table summarizes proved reserves and discounted present
value, before income tax, of proved reserves by the Company's major operating
areas at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Proved Reserves
-------------------------------------------- Discounted
Natural Gas Present Value
Liquids before Income Tax of
Oil (Bbls) Gas (Mcf) (Bbls) Proved Reserves
------------- ------------ ------------- -----------------------
<S> <C> <C> <C> <C> <C>
Permian Basin... 38,960 99,687 - $233,739 29.9%
Mid-Continent... 5,721 167,563 - 175,605 22.4%
San Juan Basin.. 1,228 221,986 13,810 168,787 21.6%
Hugoton......... 260 161,299 - 111,468 14.3%
Rocky Mountain.. 1,279 154,846 - 80,791 10.3%
Other (a)....... 406 10,394 - 11,932 1.5%
--------- --------- ------------ --------- --------
Total........... 47,854 815,775 13,810 $782,322 100.0%
========= ========= ============ ========= ========
</TABLE>
(a) Includes 375,000 Bbls and 8,790,000 Mcf and discounted present value
before income tax of $9,922,000 related to the Company's 22% ownership
of Royalty Trust Units at December 31, 1997.
PERMIAN BASIN AREA
Prentice Field. The Prentice Field is located in Terry and Yoakum
Counties, Texas. In 1993, the Company acquired its initial interest in the
Prentice Northeast Unit in three separate transactions, accumulating a 62.1%
interest. In January 1994, the Company purchased an additional 29.4% interest in
the Prentice Northeast Unit, increasing the Company's total ownership to 91.5%.
The Company assumed operations of the Unit effective March 1, 1994. Current net
production from the 186-well Unit is approximately 3,350 Bbls of oil and 500 Mcf
of gas per day. The Company also owns an interest in 80 gross (1.7 net)
nonoperated wells.
Discovered in 1950, the Prentice Field produces from carbonate reservoirs
in the Clear Fork and Glorieta formations at depths ranging from 6,000 to 7,000
feet. The Prentice Field has been separated into several waterflood units for
secondary recovery operations. The Prentice Northeast Unit was formed in 1964
with waterflood operations commencing a year later. Development potential
exists through infill drilling and improvement of waterflood efficiency.
Tertiary recovery potential also exists through carbon dioxide flooding.
During 1997, the Company drilled 31 gross (28.4 net) development wells in
the Prentice Northeast Unit. Twenty-four of these wells were 10-acre infill
wells and the remaining seven wells were strategically located to extend the
prospective area for infill development in the central and northern portion of
the Unit. The Company plans to drill a total of up to 25 wells during 1998
depending upon oil prices.
Russell Field. The Russell Field is located in Gaines County, Texas. The
Company owns an interest in 25 gross (23.4 net) wells that it operates and 137
gross (42.6 net) wells operated by others. Current net daily oil and gas
production is approximately 900 Bbls and 470 Mcf.
The Russell Field, discovered in 1943, produces from the San Andres,
Glorieta, Middle Clear Fork and Devonian formations at depths ranging from 4,800
to 10,800 feet. Exploitation potential exists through restimulations,
recompletions, infill drilling, and the implementation of secondary recovery
operations in the Middle Clear Fork and San Andres formations.
Ozona Area. The Company acquired interests in 1996 in the Henderson,
Ozona, and Davidson Ranch fields located in Crockett County, Texas. The Company
has interests in 111 gross (64.9 net) wells that it operates and 133 gross (27.5
net) wells operated by others. Current net daily production is approximately
11.3 MMcf and 58 Bbls.
Oil and gas were first discovered in the Ozona area in 1962. Production is
from the Pennsylvanian Canyon sandstones and Strawn carbonates at depths ranging
from 6,500 to 9,000 feet. Development potential for this area
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includes infill drilling, field extension and delineation drilling, and the
possibility of horizontal drilling in the Strawn Formation.
During 1997, the Company drilled a total of 23 gross (15.4 net) operated
wells and participated in 14 gross (2.3 net) wells operated by others, making it
one of the Company's most active gas development areas. The Company plans to
drill or participate in drilling a total of 34 wells during 1998.
University Block 9. The University Block 9 Field is located in Andrews
County, Texas. The Company owns a 100% working interest in 55 wells that it
operates. Current net daily production is approximately 2,570 Bbls of oil and
2,160 Mcf of gas.
The University Block 9 Field was discovered in 1953. Productive zones are
of Wolfcamp, Pennsylvanian, and Devonian age at 8,400, 8,700 and 10,400 feet,
respectively. The Company operates the Wolfcamp Unit, Penn Unit, and 23 of the
24 active Devonian wells. Development potential includes proper wellbore
utilization, recompletions, infill drilling and improvement of waterflood
efficiency.
This field was one of the Company's most active oil development areas
during 1997, where the Company drilled 16 wells, 6 of which were in the process
of drilling at year-end. During 1998, the Company plans to drill up to 20 wells
depending upon oil prices.
MID-CONTINENT AREA
Major County Area. The Company is one of the largest producers in the
Ringwood, Northwest Okeene and Cheyenne Valley fields in Major County, Oklahoma.
The Company operates 451 gross (389.4 net) wells and has an interest in 202
gross (45.8 net) wells operated by others. Current net daily oil and gas
production is approximately 1,050 Bbls and 33,300 Mcf.
Oil and gas were first discovered in the Major County area in 1945. The
fields in the Major County area are located in the Anadarko Basin and are
characterized by oil and gas production from a variety of structural and
stratigraphic traps. Productive zones range from 6,500 to 9,400 feet and
include the Oswego, Red Fork, Chester, Manning, Mississippian, Hunton and
Arbuckle formations.
The Company develops the Major County area primarily through mechanical
improvements, restimulations, recompletions to shallower zones and development
drilling. During 1997, the Company participated in the drilling of 32 gross
(24.8 net) wells in the western portion of the County, targeted at the
Mississippian and Chester formations. The Company has budgeted 24 wells in Major
County for 1998.
A subsidiary of the Company operates a gathering system and pipeline in the
Major County area. The gathering system collects gas from 425 wells through 300
miles of pipeline in the Major County area. The gathering system has current
throughput of approximately 28,500 Mcf per day, 70% of which is produced from
Company-operated wells. Estimated capacity of the gathering system is 40,000
Mcf per day. Gas is delivered to a processing plant owned and operated by a
third party, and then transmitted by a 26-mile Company-operated pipeline to
connections with other pipelines.
Since 1994, the Company has operated its Major County gathering system.
Through its direct maintenance and management, the Company has achieved
operating cost reductions and improved reliability. During 1994 and 1995, the
gathering system was converted from centralized to field compression through the
installation of four field compression stations. Field compression has allowed
the system to operate more efficiently and to expand into previously
inaccessible areas.
Elk City Field. The Elk City Field is located in Beckham and Washita
Counties of western Oklahoma. The Company operates the Elk City Unit with 35
gross (31.6 net) wells and owns an interest in 9 gross (1.5 net) wells operated
by others. Current net production of the Elk City Field is approximately 160
Bbls of oil and 4,500 Mcf of gas per day.
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The Elk City Field was discovered in 1947 and has been extensively
developed. Production is from the Hoxbar (9,500 feet), Atoka (13,100 feet) and
Morrow (15,500 feet) zones. The Company's primary development activities in
this field have been to initiate mechanical efficiencies and to recomplete
additional productive intervals. Recompletions and zone isolations have been
successful and additional opportunities for these types of workovers remain in
the field. Recent recompletions to the Atoka Formation have resulted in
significant reserve additions. There are several other deep wellbores with
similar recompletion potential.
HUGOTON AREA
The Hugoton Field, discovered in 1922, covers parts of Texas, Oklahoma and
Kansas and is the largest gas field in the United States. It is estimated that
5 million productive acres exist in the entire field. The Company owns an
interest in 390 gross (365.9 net) wells that it operates and 84 gross (18.8 net)
wells operated by others. Current net production averages approximately 35,900
Mcf of gas per day and 125 Bbls of oil per day.
Approximately 70% of the Company's Hugoton gas production is delivered to
the Tyrone Plant, a gas processing plant operated by the Company. In May 1996,
the Company completed the installation of a field compressor on the southern end
of the Tyrone gathering system. This unit compresses gas from 45 wells, 39 of
which are owned by the Company, and has resulted in a significant production
increase. The Company also completed the installation and start-up of a residue
compressor and 11.5 miles of high pressure residue pipeline during August 1996.
The installation of these facilities allows the Company to operate the Tyrone
Plant more efficiently and allows access to three additional interstate
pipelines.
While much of the Kansas portion of the Hugoton Field has been infill
drilled on 320-acre spacing, the Company believes that there are up to 40
additional potential infill drilling locations. The Oklahoma portion is drilled
on 640-acre spacing. The Company believes that there are approximately 200
potential infill drilling locations, subject to regulatory approval and possibly
new legislation being enacted in Oklahoma.
During 1997, the Company drilled 18 gross (12.1 net) wells to the Chester,
Council Grove and Chase formations. The Company plans to drill 12 wells during
1998.
ROCKY MOUNTAIN AREA
San Juan Basin. The San Juan Basin of northwestern New Mexico and
southwestern Colorado contains the largest reserves of natural gas in the Rocky
Mountains and, within the United States, is second in size only to the Hugoton
Field. The Company acquired most of its interests in the San Juan Basin in
December 1997 from Amoco Corporation. The Company owns an interest in 616 gross
(498 net) wells that it operates and 974 gross (177.2 net) wells operated by
others. Of these wells, 60 gross (49.8 net) operated wells and 20 gross (3.6
net) non-operated wells are dual completions. Current net daily production
averages approximately 39,000 Mcf of gas, 230 Bbls of oil and 2,500 Bbls of
natural gas liquids.
The Company has identified 139 infill wellsites, primarily in the Dakota
and Fruitland Coal formations, relating to 8.6 million BOE of proved undeveloped
reserves that the Company expects will require approximately $17.3 million to
drill and complete. In addition, the Company plans to evaluate more than 150
potential infill wellsites over the next year. The Company plans to drill 20
operated wells during 1998.
Green River Basin. The Green River Basin is located in southwestern
Wyoming. The Company has interests in 147 gross (137.3 net) wells that it
operates and 48 gross (8.2 net) wells operated by others in the Fontenelle,
Nitchie Gulch and Pine Canyon fields. Current net daily production is
approximately 28,100 Mcf of gas and 60 Bbls of oil.
Gas production was discovered in the Fontenelle area in the early 1970's.
The producing reservoirs are the Cretaceous Frontier and Dakota sandstones at
depths ranging from 7,500 to 10,000 feet. Exploitation potential for the fields
in this area include restimulations, recompletions and development drilling.
During 1997, the Company drilled 32 gross (29 net) wells in the Fontenelle
Unit. The Company plans to drill approximately 15 wells during 1998.
7
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During 1997, the Company also installed additional field compression to
lower overall field operating pressures and to improve overall field
performance. The Company also completed an interconnect to another pipeline in
the southeastern part of the Fontenelle field that added an additional market
for the gas.
RESERVES
The following are estimated quantities of proved reserves and cash flows
therefrom as of December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31
--------------------------------
1997 1996 1995
---------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Proved developed:
Oil (Bbls).......................... 33,835 31,883 28,946
Gas (Mcf)........................... 677,710 466,412 320,230
Natural gas liquids (Bbls).......... 11,494 - -
Proved undeveloped:
Oil (Bbls).......................... 14,019 10,557 11,042
Gas (Mcf)........................... 138,065 74,126 37,840
Natural gas liquids (Bbls).......... 2,316 - -
Total proved:
Oil (Bbls).......................... 47,854 42,440 39,988
Gas (Mcf)........................... 815,775 540,538 358,070
Natural gas liquids (Bbls).......... 13,810 - -
Estimated future net cash flows:
Before income tax................ $1,484,542 $1,737,024 $712,907
After income tax................. $1,193,167 $1,286,037 $581,888
Present value of estimated future
net cash flows, discounted at 10%:
Before income tax................ $ 782,322 $ 946,150 $405,706
After income tax................. $ 642,109 $ 706,481 $335,156
</TABLE>
Miller and Lents, Ltd. ("Miller and Lents"), an independent petroleum
engineering firm, prepared the estimates of the Company's proved reserves and
the future net cash flow (and present value thereof) attributable to proved
reserves at December 31, 1997, 1996 and 1995. As prescribed by the Securities
and Exchange Commission, such proved reserves were estimated using oil and gas
prices and production and development costs as of December 31 of each such year,
without escalation. See Note 12 to Consolidated Financial Statements for
additional information regarding estimated proved reserves.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of the Company.
Reserve engineering is a subjective process of estimating subsurface
accumulations of oil and gas that cannot be measured in an exact manner, and the
accuracy of any reserve estimate is a function of the quality of available data
and the interpretation thereof. As a result, estimates by different engineers
often vary, sometimes significantly. In addition, physical factors such as the
results of drilling, testing and production subsequent to the date of an
estimate, as well as economic factors such as change in product prices, may
justify revision of such estimates. Accordingly, oil and gas quantities
ultimately recovered will vary from reserve estimates.
During 1997, the Company filed estimates of oil and gas reserves as of
December 31, 1996 with the U.S. Department of Energy on Form EIA-23. These
estimates are consistent with the reserve data reported in Note 12 to
Consolidated Financial Statements for the year ended December 31, 1996, with the
exception that Form EIA-23 includes only reserves from properties operated by
the Company.
8
<PAGE>
EXPLORATION AND PRODUCTION DATA
For the following data, "gross" refers to the total wells or acres in which
the Company owns a working interest and "net" refers to gross wells or acres
multiplied by the percentage working interest owned by the Company. Although
many of the Company's wells produce both oil and gas, a well is categorized as
an oil well or a gas well based upon the ratio of oil to gas production.
Producing Wells
The following table summarizes the Company's producing wells as of December
31, 1997, all of which are located in the United States:
<TABLE>
<CAPTION>
Operated Wells Non-Operated Wells Total (a)
-------------------- --------------------- --------------------
Gross Net Gross Net Gross Net
---------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Oil................ 608 552.3 3,139 186.9 3,747 739.2
Gas................ 1,705 1,447.5 1,566 296.3 3,271 1,743.8
----- ------- ----- ----- ----- -------
Total.............. 2,313 1,999.8 4,705 483.2 7,018 2,483.0
===== ======= ===== ===== ===== =======
</TABLE>
(a) One gross (1 net) oil well and 79 gross (52.4 net) gas wells are dual
completions.
Drilling Activity
The following table summarizes the number of development wells drilled by
the Company during the years indicated. As of December 31, 1997, the Company
was in the process of drilling 29 gross (19.7 net) wells.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1997 1996 1995
----------------- ------------------- ------------------
Gross Net Gross Net Gross Net
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Development wells:
Completed as-
Oil wells........ 82 53.4 92 45.5 71 17.3
Gas wells........ 119 85.9 70 38.1 24 16.8
Non-productive..... 5 3.2 4 2.7 2 1.1
--- ----- ---- ---- -- ----
Total.............. 206 142.5 166 86.3 97 35.2
--- ----- ---- ---- -- ----
Exploratory wells:
Completed as-
Gas wells........ 2 0.6 - - - -
Non-productive..... 1 0.1 - - - -
--- ----- ---- ---- -- ----
Total.............. 3 0.7 - - - -
--- ----- ---- ---- -- ----
Total (a)........... 209 143.2 166 86.3 97 35.2
=== ===== ==== ==== == ====
</TABLE>
(a) Included in totals are 57 gross (6.9 net), 85 gross (10.4 net) and 61
gross (3.2 net) wells drilled on nonoperated interests in 1997, 1996 and
1995, respectively. Excluded from above totals are 21 gross (0.4 net) and
31 gross (0.6 net) carbon dioxide wells drilled on non-operated interests
in 1996 and 1995, respectively.
9
<PAGE>
Acreage
The following table summarizes developed and undeveloped leasehold acreage
in which the Company owns a working interest as of December 31, 1997. Excluded
from this summary is acreage in which the Company's interest is limited to
royalty, overriding royalty and other similar interests.
<TABLE>
<CAPTION>
Developed (a)(b) Undeveloped
------------------------ -----------------------
Gross Net Gross Net
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Oklahoma.... 334,973 278,713 934 753
Texas....... 98,143 60,997 23,834 12,917
Kansas...... 80,500 67,821 - -
New Mexico.. 221,539 95,536 5,534 3,458
Wyoming..... 43,811 31,144 1,360 990
Other....... 8,929 6,493 7,072 4,644
------- ------- ------ ------
Total....... 787,895 540,704 38,734 22,762
======= ======= ====== ======
</TABLE>
(a) "Developed acres" are acres spaced or assignable to productive wells.
(b) Certain leasehold acreage in Oklahoma and Texas is subject to a 75% net
profits interest conveyed to the Royalty Trust.
Oil and Gas Sales Prices and Production Costs
The following table shows the average sales prices per Bbl of oil
(including condensate), Mcf of gas and per Bbl of natural gas liquids produced
and the production costs and production and property taxes per barrel of oil
equivalent ("BOE," computed on an energy equivalent basis of 6 Mcf to 1 Bbl):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales prices:..........................
Oil (per Bbl)........................ $18.90 $21.38 $17.09
Gas (per Mcf)........................ $ 2.20 $ 1.97 $ 1.42
Natural gas liquids (per Bbl)........ $ 9.66 - -
Production costs per BOE............... $ 3.54 $ 4.05 $ 4.26
Production and property taxes per BOE.. $ 1.33 $ 1.23 $ 1.04
</TABLE>
DELIVERY COMMITMENTS
The Company sells to a single purchaser approximately 10,000 Mcf of gas per
day through July 1998 and 11,650 Mcf of gas per day from August 1998 through
July 2005. The Company has also entered contracts with two purchasers to sell a
total of 30,000 Mcf per day in March 1998 and 10,000 Mcf per day in April, May
and June 1998. Deliveries under these contracts are generally in Oklahoma, where
the Company's production and reserves are adequate to meet these sales
commitments.
The Company has committed to sell up to 4,500 Mcf of gas per day to a
cogeneration facility under a take-or-pay contract that expires in September
2004. The Company generally purchases gas at market prices to fill this
commitment.
COMPETITION AND MARKETS
The Company faces competition from other oil and gas companies in all
aspects of its business, including acquisition of producing properties and oil
and gas leases, marketing of oil and gas, and obtaining goods, services and
labor. Many of its competitors have substantially larger financial and other
resources. Factors that affect the
10
<PAGE>
Company's ability to acquire producing properties include available funds,
available information about the property and the Company's standards established
for minimum projected return on investment. Because gathering systems are the
only practical method for the intermediate transportation of natural gas,
competition for natural gas delivery is presented by other pipelines and gas
gathering systems. Competition is also presented by alternative fuel sources,
including heating oil and other fossil fuels. Because of the long-lived nature
of the Company's oil and gas reserves and management's expertise in exploiting
these reserves, management believes that it is effective in competing in the
market.
The Company's ability to market oil and gas depends on many factors beyond
its control, including the extent of domestic production and imports of oil and
gas, the proximity of the Company's gas production to pipelines, the available
capacity in such pipelines, the demand for oil and gas, the effects of weather,
and the effects of state and federal regulation. The Company cannot assure that
it will always be able to market all of its production or obtain favorable
prices. The Company, however, does not currently believe that the loss of any
of its oil or gas purchasers would have a material adverse effect on its
operations.
Decreases in oil and gas prices have had, and could have in the future, an
adverse effect on the Company's acquisition and development programs, proved
reserves, revenues, profitability, cash flow and dividends. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "General - Product Prices."
FEDERAL AND STATE REGULATIONS
There have been, and continue to be, numerous federal and state laws and
regulations governing the oil and gas industry that are often changed in
response to the current political or economic environment. Compliance with this
regulatory burden is often difficult and costly and may carry substantial
penalties for noncompliance. The following are some specific regulations that
may affect the Company. The Company cannot predict the impact of these or
future legislative or regulatory initiatives.
Federal Regulation of Natural Gas
The interstate transportation and sale for resale of natural gas is subject
to federal regulation, including transportation rates charged and various other
matters, by the Federal Energy Regulatory Commission ("FERC"). The Company's
gathering system and 26-mile pipeline have been declared exempt from FERC
jurisdiction, and therefore, the Company's gathering service is not regulated by
FERC. Federal wellhead price controls on all domestic gas were terminated on
January 1, 1993. The Company cannot predict the impact of government regulation
on any natural gas facilities.
In 1992, FERC issued Orders Nos. 636 and 636-A, requiring operators of
pipelines to unbundle transportation services from sales services and allow
customers to pay for only the services they require, regardless of whether the
customer purchases gas from such pipelines or from other suppliers. The United
States Court of Appeals upheld the unbundling provisions and other components of
FERC's orders but remanded several issues to FERC for further explanation. On
February 27, 1997, FERC issued Order No. 636-C, addressing the Court's concern.
Petitions for rehearing on Order No. 636-C are pending. FERC's order remains
subject to judicial review and may be changed as a result of that review.
Although FERC's regulations should generally facilitate the transportation of
gas produced from the Company's properties and the direct access to end-user
markets, the impact of these regulations on marketing the Company's production
or on its gas transportation business cannot be predicted. The Company,
however, does not believe that it will be affected any differently than other
natural gas producers and marketers with which it competes.
Federal Regulation of Oil
Sales of crude oil, condensate and natural gas liquids are not currently
regulated and are made at market prices. The net price received from the sale
of these products is affected by market transportation costs. A significant
part of the Company's oil production is transported by pipeline. The Energy
Policy Act of 1992 required the FERC to adopt a simplified ratemaking
methodology for interstate oil pipelines. In 1993 and 1994, the FERC issued
Order Nos. 561 and 561-A, adopting rules that establish new rate methods for
such pipelines. Under the new rules, effective January 1, 1995, interstate oil
pipelines can change rates based on an inflation index, though other rate
mechanisms may be used
11
<PAGE>
in specific circumstances. The United States Court of Appeals upheld FERC's
orders in 1996. The Company cannot predict the effect these rules may have on
the cost of moving oil to market.
State Regulation
The oil and gas operations of the Company are subject to various types of
regulation at the state and local levels. Such regulation includes requirements
for drilling permits, the method of developing new fields, the spacing and
operations of wells and waste prevention. The production rate may be regulated
and the maximum daily production allowable from oil and gas wells may be
established on a market demand or conservation basis. These regulations may
limit the Company's production from its wells and the number of wells or
locations the Company can drill.
The Company may become party to agreements relating to the construction or
operations of pipeline systems for the transportation of natural gas. To the
extent that such gas is produced, transported and consumed wholly within one
state, such operations may, in certain instances, be subject to the state's
administrative authority charged with regulating pipelines. The rates the
Company could charge for gas, the transportation of gas, and the construction
and operation of such pipelines would be subject to the regulations governing
such matters. Certain states have recently adopted regulations with respect to
gathering systems, and other states are considering regulations with respect to
gathering systems. New regulations passed have not had a material effect on the
operations of the Company's gathering systems, but the Company cannot predict
whether any further rules will be adopted or, if adopted, the effect these rules
may have on the Company's gathering systems.
Federal, State or Indian Leases
The Company's operations on federal, state or Indian oil and gas leases are
subject to numerous restrictions, including nondiscrimination statutes. Such
operations must be conducted pursuant to certain on-site security regulations
and other permits and authorizations issued by the Bureau of Land Management,
Minerals Management Service and other agencies.
ENVIRONMENTAL REGULATIONS
Various federal, state and local laws regulating the discharge of materials
into the environment, or otherwise relating to the protection of the
environment, directly impact oil and gas exploration, development and production
operations, and consequently may impact the Company's operations and costs.
Management believes that the Company is in substantial compliance with
applicable environmental laws and regulations. To date, the Company has not
expended any material amounts to comply with such regulations, and management
does not currently anticipate that future compliance will have a materially
adverse effect on the consolidated financial position or results of operations
of the Company.
EMPLOYEES
The Company had 349 and 306 employees as of December 31, 1997 and 1996,
respectively. None of the Company's employees are represented by a union. The
Company considers its relations with its employees to be good.
12
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The officers of the Company are elected by and serve until their successors
are elected by the Board of Directors.
BOB R. SIMPSON, 49, was a co-founder of the Company with Mr. Palko and has
been Chairman and Chief Executive Officer of the Company since July 1, 1996.
Prior thereto, Mr. Simpson served as Vice Chairman and Chief Executive Officer
or held similar positions with the Company since 1986. Mr. Simpson was Vice
President of Finance and Corporate Development (1979-1986) and Tax Manager
(1976-1979) of Southland Royalty Company.
STEFFEN E. PALKO, 47, was a co-founder of the Company with Mr. Simpson and
has been Vice Chairman and President or held similar positions with the Company
since 1986. Mr. Palko was Vice President - Reservoir Engineering (1984-1986)
and Manager of Reservoir Engineering (1982-1984) of Southland Royalty Company.
J. RICHARD SEEDS, 52, has been a director of the Company since July 1996
and has served as Executive Vice President since May 1997. Mr. Seeds previously
was Career Guidance Counselor with the Springtown Independent School District
(1993-1997) and an independent personal investment manager (1986-1993). Mr.
Seeds was Vice President of Finance and Controller (1979-1986) and Controller
(1977-1979) of Southland Royalty Company.
LOUIS G. BALDWIN, 48, has been Senior Vice President and Chief Financial
Officer or held similar positions with the Company since 1986. Mr. Baldwin was
Assistant Treasurer (1979-1986) and Financial Analyst (1976-1979) at Southland
Royalty Company.
KEITH A. HUTTON, 39, has been Senior Vice President - Asset Development or
held similar positions with the Company since 1987. From 1982 to 1987, Mr.
Hutton was a Reservoir Engineer with Sun Exploration & Production Company.
BENNIE G. KNIFFEN, 47, has been Senior Vice President and Controller or
held similar positions with the Company since 1986. From 1976 to 1986, Mr.
Kniffen held the position of Director of Auditing or similar positions with
Southland Royalty Company.
LARRY B. MCDONALD, 51, has been Senior Vice President - Operations or held
similar positions with the Company since 1990. Prior to that time, Mr. McDonald
owned and operated McDonald Energy, Inc. (1986-1990).
TIMOTHY L. PETRUS, 43, has been Senior Vice President - Acquisitions or
held similar positions with the Company since 1988. Prior to that time, Mr.
Petrus was a Vice President with Texas American Bank (1980-1988) and was a
Senior Project Engineer with Exxon (1976-1980).
KENNETH F. STAAB, 41, has been Senior Vice President of Engineering or held
similar positions with the Company since 1986. Prior to that time, Mr. Staab
was a Reservoir Engineer with Southland Royalty Company (1982-1986).
THOMAS L. VAUGHN, 51, has been Senior Vice President - Operations or held
similar positions with the Company since 1988. From 1986 to 1988, Mr. Vaughn
owned and operated Vista Operating Company.
VAUGHN O. VENNERBERG II, 43, has been Senior Vice President - Land or held
similar positions with the Company since 1987. Prior to that time, Mr.
Vennerberg was Land Manager with Hutton Gas Operating Company (1986-1987).
13
<PAGE>
ITEM 3. 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. The plaintiff alleges
that such deductions are a breach of the Company's contractual obligations to
the class and is seeking to recover an unspecified amount of damages as a result
of the alleged breach. The plaintiff is also seeking a determination of the
Company's obligations to the plaintiff and the class regarding production or
other costs. The Company has responded that it has complied with all of its
contractual obligations and denied that the matter is appropriate for
determination as a class action. The parties have conducted discovery on the
class certification issues, but no further action has been taken in the case.
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.
The Company and certain of its subsidiaries are involved in various other
lawsuits and certain governmental proceedings arising in the ordinary course of
business. Company management and legal counsel do not believe that the ultimate
resolution of these claims, including the class action lawsuit described above,
will have a material effect on the Company's financial position, liquidity or
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of 1997.
14
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange and
trades under the symbol "XTO." The following table sets forth quarterly high
and low sales prices and cash dividends declared for each quarter of 1997 and
1996 (as adjusted for the three-for-two stock splits effected on March 19, 1997
and February 25, 1998):
<TABLE>
<CAPTION>
High Low Dividends
------- ------- ---------
<S> <C> <C> <C>
1997
First Quarter... $13.719 $10.422 $.037
Second Quarter.. 13.750 9.828 .037
Third Quarter... 16.375 12.328 .037
Fourth Quarter.. 19.125 13.297 .037
1996
First Quarter... $ 8.328 $ 6.938 $.033
Second Quarter.. 11.438 7.563 .033
Third Quarter... 12.781 8.500 .033
Fourth Quarter.. 11.891 10.000 .033
</TABLE>
The determination of the amount of future dividends, if any, to be declared
and paid is in the sole discretion of the Company's Board of Directors and will
depend on the Company's financial condition, earnings and funds from operations,
the level of its capital expenditures, dividend restrictions in its financing
agreements, its future business prospects and other matters as the Board of
Directors deems relevant. Furthermore, the Company's Revolving Credit Agreement
with banks restricts the amount of dividends to 25% of cash flow from operations
for the latest four consecutive quarterly periods. The Company's 9 1/4% and 8
3/4% senior subordinated notes also place certain restrictions on distributions
to common shareholders, including dividend payments.
On February 17, 1998, the Board of Directors declared a dividend of $.04
per share payable on April 15, 1998 to shareholders of record on March 31, 1998.
On March 2, 1998, the Company had 320 shareholders of record.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for each of the
years, and as of year-end, in the five-year period ended December 31, 1997.
This information should be read in conjunction with Item 7, Management's
Discussion and Analysis, and the Consolidated Financial Statements at Item
14(a).
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ----------- ------------- ---------- ------------
(in thousands except production, per share and per unit data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA (a)
Revenues:.......................................
Oil and condensate............................. $ 75,223 $ 75,013 $ 60,349 $ 53,324 $ 39,747
Gas and natural gas liquids.................... 110,104 73,402 40,543 38,389 34,649
Gas gathering, processing and marketing........ 9,851 12,032 7,091 4,274 3,717
Other.......................................... 5,494 944 4,922 288 69
--------- --------- --------- -------- ---------
Total Revenues................................. $ 200,672 $ 161,391 $ 112,905 $ 96,275 $ 78,182
========= ========= ========= ======== =========
Earnings (loss) available to common stock....... $ 23,905 $ 19,790 $(10,538)(b) $ 3,048 $(4,012)(c)
========= ========= =========== ======== ==========
Per common share (d)
Basic.......................................... $ 0.60 $ 0.50 $(0.28)(b) $ 0.09 $(0.12)(c)
========= ========= ========= ======== =========
Diluted........................................ $ 0.59 $ 0.48 (0.28)(b) $ 0.08 $(0.12)(c)
========= ========= ========= ======== =========
Pro forma earnings (loss) (e)................... - - - - $ (251)
========= ========= ========= ======== =========
Per common share/unit-basic and diluted (d)(e).. - - - - $ (0.01)
========= ========= ========= ======== =========
Weighted average common shares/
units outstanding.............................. 39,773 39,913 38,072 35,829 32,682
========= ========= ========= ======== =========
Dividends/distributions declared
per common share/unit (f)..................... $ 0.15 $ 0.13 $ 0.13 $ 0.13 $ 0.13
========= ========= ========= ======== =========
CONSOLIDATED STATEMENT OF CASH FLOWS DATA (a)
Operating cash flow (g)......................... $ 89,979 $ 68,263 $ 40,439 $ 37,816 $ 27,925
Cash provided (used) by:
Operating activities........................... $ 98,006 $ 59,694 $ 32,938 $ 42,293 $ 32,209
Investing activities........................... $(311,322) $(124,871) $(160,416) $(62,745) $(104,789)
Financing activities........................... $ 213,195 $ 66,902 $ 121,852 $ 26,232 $ 70,332
CONSOLIDATED BALANCE SHEET DATA (a)
Property and equipment, net.................... $ 723,836 $ 450,561 $ 364,474 $244,555 $ 228,551
Total assets................................... $ 788,455 $ 523,070 $ 402,675 $292,451 $ 258,019
Long-term debt................................. $ 539,000 $ 314,757 $ 238,475 $142,750 $ 111,750
Owners' equity................................. $ 170,243 $ 142,668 $ 130,700 $113,333 $ 115,168
OPERATING DATA (a)
Average daily production:.......................
Oil (Bbls)..................................... 10,905 9,584 9,677 9,497 6,968
Gas (Mcf)...................................... 135,855 101,845 78,408 58,182 51,260
Natural gas liquids (Bbls)..................... 220 - - - -
Barrels of oil equivalent (BOE)................ 33,768 26,558 22,745 19,194 15,511
Average sales price:
Oil (per Bbl).................................. $ 18.90 $ 21.38 $ 17.09 $ 15.38 $ 15.63
Gas (per Mcf).................................. $ 2.20 $ 1.97 $ 1.42 $ 1.81 $ 1.85
Natural gas liquids (per Bbl).................. $ 9.66 - - - -
Production costs (per BOE)...................... $ 3.54 $ 4.05 $ 4.26 $ 4.62 $ 5.16
Production and property taxes (per BOE)......... $ 1.33 $ 1.23 $ 1.04 $ 1.23 $ 1.19
Proved reserves:
Oil (Bbls)..................................... 47,854 42,440 39,988 33,581 21,082
Gas (Mcf)...................................... 815,775 540,538 358,070 177,061 169,119
Natural gas liquids............................ 13,810 - - - -
Barrels of oil equivalent (BOE)................ 197,627 132,530 99,666 63,091 49,269
OTHER DATA
Ratio of earnings to fixed charges (h).......... 2.2 2.6 (0.2) (i) 1.5 0.9
</TABLE>
16
<PAGE>
(a) Significant producing property acquisitions in each of the years presented
affect the comparability of year-to-year financial and operating data.
(b) Includes effect of a $20.3 million pre-tax, non-cash impairment charge
recorded upon adoption of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
(c) Includes effect of a one-time, non-cash accounting charge of $4 million for
net deferred income tax liabilities recorded upon the merger of the Company
with the former Partnership.
(d) Adjusted for the three-for-two stock splits effected on March 19, 1997 and
February 25, 1998.
(e) As if all former Partnership income was subject to corporate income tax,
exclusive of the charge in (c) above.
(f) Excludes non-recurring distributions of the former Partnership.
(g) Defined as cash provided by operating activities before changes in working
capital.
(h) For purposes of calculating this ratio, earnings include income (loss) from
continuing operations before income tax and fixed charges. Fixed charges
include interest expense, the portion of rentals (calculated as one-third)
considered to be representative of the interest factor and preferred stock
dividends.
(i) Includes effect of the charge in (b) above. Excluding the effect of this
charge, the ratio of earnings to fixed charges is 1.3.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cross Timbers Oil Company ("the Company") was organized in October 1990
to ultimately acquire the business and properties of predecessor entities that
were created from 1986 through 1989. The Company completed its initial public
offering of common stock in May 1993.
The Company follows the successful efforts method of accounting (see Note 1
to Consolidated Financial Statements). As of October 1, 1995, the Company
adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, recording a pre-tax, non-cash impairment
charge of $20.3 million. The Company has implemented the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, but continues to
record compensation of stock-based awards using Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. As of December 31,
1997, the Company adopted SFAS No. 128, Earnings Per Share, which requires that
basic and diluted earnings per share be reported for all periods. In June 1997,
the Financial Accounting Standards Board issued SFAS No. 130, Reporting of
Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The Company will be required to comply with
the provisions of these statements in its 1998 financial statements. The
Company has not assessed the effect that these new standards will have on its
consolidated financial statements and/or disclosures.
In addition to the adoption of accounting principles described above, the
following events affect the comparative results of operations and/or financial
condition for the years ended December 31, 1997, 1996 and 1995, and/or may
impact future operations and financial condition. Throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations,
references to barrels of oil equivalent ("BOE") refer to quantities of
production for the indicated period (with gas quantities converted to barrels on
an energy equivalent ratio of six Mcf to one barrel).
Three-for-Two Stock Splits. The Company effected a three-for-two stock split on
March 19, 1997, and on February 25, 1998. All common stock shares, treasury
stock shares and per share amounts have been retroactively restated to reflect
both stock splits.
1998 Acquisition. On February 25, 1998, the Company announced it had entered
into a definitive agreement with EEX Corporation to acquire producing properties
and undeveloped acreage in East Texas. The transaction is expected to close in
late April 1998 with an effective date of January 1, 1998 and to be financed
through bank lines of credit. After purchase price adjustments, the preliminary
purchase price of $265 million is expected to be reduced to $245 million.
1997 Acquisitions. During 1997, the Company acquired predominantly gas-
producing properties for a total cost of $256 million. The Amoco Acquisition,
the largest of these acquisitions, closed December 1, 1997 for an estimated
adjusted purchase price of $195 million, including $5.7 million for five-year
warrants to purchase 937,500 shares of the Company's common stock at $15.31 per
share, and consisted of producing oil and gas properties in the San Juan Basin
of New Mexico. 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. During
1997, the Company acquired an additional 6% of the publicly traded outstanding
units of beneficial interest in Cross Timbers Royalty Trust, at a cost of $5.4
million. These 1997 acquisitions were primarily funded by bank borrowings and
cash flow from operations (see "Liquidity and Capital Resources-Financing"
below). See Note 10 to Consolidated Financial Statements.
1996 Acquisitions. In 1996, the Company acquired primarily gas-producing
properties for a total cost of $106 million. The Enserch Acquisition, the
largest of these acquisitions, closed in July 1996 at a cost of $39.4 million
and primarily consisted of operated interests in the Green River Basin of
southwestern Wyoming. In November 1996, the Company acquired additional
interests in the Fontenelle Unit, the most significant property included in the
Enserch Acquisition, at a cost of $12.5 million. In December 1996, the Company
acquired primarily operated interests in gas-producing properties in the Ozona
area of the Permian Basin of West Texas for $28.1 million. From July through
December 1996, the Company acquired 16% of the publicly traded outstanding units
of beneficial interest in Cross Timbers Royalty Trust at a total cost of $12.8
million. These 1996 acquisitions were primarily funded by bank borrowings. See
Note 10 to Consolidated Financial Statements.
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1995 Acquisitions. During 1995, the Company acquired predominantly gas-
producing properties for a total cost of $131 million, and a gas processing
plant and gathering facility for $29 million. The Santa Fe Acquisition, the
largest of these acquisitions, closed on August 1, 1995 and consisted of mostly
operated properties and related facilities in the Hugoton Field of Kansas and
Oklahoma. The 1995 acquisitions were primarily funded by bank borrowings and
proceeds from the 1995 common stock offering and asset sales. See Note 10 to
Consolidated Financial Statements.
1997, 1996 and 1995 Development and Exploration Programs. During 1997, the
Company drilled 60 oil and 109 gas wells and completed 100 recompletions and
workovers. During 1996, the Company drilled 48 oil wells and 52 gas wells and
completed 125 recompletions and workovers. In 1995, the Company drilled 40
wells and performed 61 recompletions and workovers. Oil development was
concentrated in the Prentice Northeast Unit of West Texas during these three
years, as well as the University Block 9 Field during 1997. Gas development
focused on the Ozona Field of West Texas in the last half of 1997, the
Fontenelle Unit of southwestern Wyoming during 1997 and 1996 and Major County,
Oklahoma during 1996 and 1995. Exploration activity during 1997 was primarily
geological and geophysical analysis, including seismic, of undeveloped
properties at total cost of $2.1 million. Exploration activity was concentrated
in Cleveland and Texas counties of Oklahoma, Henderson County, Texas, Lea
County, New Mexico and the Illinois Basin. Exploratory expenditures were
insignificant in 1996 and 1995.
1998 Development and Exploration Program. The Company has budgeted $70 to $90
million for its 1998 development and exploration program which is expected to be
funded primarily by cash flow from operations. Exploration expenditures are
expected to be 10% to 15% of the 1998 budget. The total capital budget,
including acquisitions, will be adjusted throughout 1998 to capitalize on
opportunities offering the highest rates of return.
1997 Senior Subordinated Notes. The Company sold $125 million of 9 1/4% senior
subordinated notes on April 2, 1997 and $175 million of 8 3/4% senior
subordinated notes on October 28, 1997. Net proceeds of $121.1 million and
$169.9 million from the 9 1/4% Notes and 8 3/4% Notes, respectively, were used
to reduce bank borrowings under the loan agreement. See Note 2 to Consolidated
Financial Statements.
1997 and 1996 Conversion of Subordinated Notes. During November and December
1996, $27.7 million principal of the Company's 5 1/4% convertible subordinated
notes was converted by noteholders into 2,696,521 shares of common stock. In
January 1997, the remaining principal of $29.7 million was converted by
noteholders into 2,892,363 shares of common stock and $29,000 was redeemed.
1996 Preferred Stock Exchange. In September 1996, pursuant to the Company's
exchange offer, a total of 2,979,249 shares of common stock were exchanged for
1,138,729 shares of Series A convertible preferred stock. See Note 5 to
Consolidated Financial Statements.
1995 Common Stock Offering. In August 1995, the Company sold 5,062,500 shares
of common stock. The net proceeds of $29.5 million from this offering were used
to partially fund the Santa Fe Acquisition.
1997 and 1996 Treasury Stock Purchases. As part of its 1997 and 1996 strategic
acquisition plans, the Board of Directors has authorized the purchase of a total
of 7.5 million shares of the Company's common stock. During 1997 and 1996, the
Company purchased 2.4 million and 2.9 million shares of common stock on the open
market at a total cost of $28 million and $30.7 million, respectively. An
additional 484,000 shares have been purchased through March 20, 1998 at a cost
of $7.5 million. These purchases were primarily funded by bank borrowings. As
of March 20, 1998, 1.7 million treasury shares remain available to purchase.
Investment in Equity Securities. During 1997 and 1996, the Company acquired
less than 5% of two publicly traded independent oil and gas producers at a total
cost of $6.5 million and $16.1 million, respectively. During 1997, the Company
sold its investment in equity securities at a gain of $2.4 million. The Company
realized a gain of $1.6 million upon the sale of an investment in equity
securities during 1995.
Property Sales. In 1997, 1996 and 1995, sales of producing properties resulted
in net gains of $1.8 million, $500,000 and $3 million, respectively.
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Stock Incentive Compensation. Stock incentive compensation includes stock
appreciation right ("SAR") compensation and performance share compensation, and
is the result of these stock awards and subsequent increases in the Company's
stock price. See Note 9 to Consolidated Financial Statements. During 1997,
stock incentive compensation totaled $3.7 million, which included SAR
compensation of $400,000 (cash payments of $300,000) and non-cash performance
share compensation of $3.3 million. In 1996, stock incentive compensation
totaled $6.2 million, which included SAR compensation of $3.7 million (cash
payments of $7.1 million, partially offset by prior accruals) and non-cash
performance share compensation of $2.5 million. During 1995, stock incentive
compensation totaled $5.1 million, which included SAR compensation of $2.3
million (cash payments of $800,000) and non-cash performance share compensation
of $2.8 million. Exercises and forfeitures under the 1991 Stock Incentive Plan
have reduced outstanding stock incentive units (including SARs) from 836,000 at
year-end 1995 to 51,000 at year-end 1996, and 25,000 at year-end 1997.
Extraordinary Item. During 1995, the Company recognized an extraordinary gain
of $700,000 (net of income tax of $300,000) as a result of the purchase and
early retirement of $8.3 million principal amount of the Company's 5 1/4%
convertible subordinated notes. In 1996, the Company redeemed, purchased and
retired a total of $9 million principal amount of the notes at a loss before
income tax of $400,000. This loss was not presented as an extraordinary item
because it was not material to 1996 earnings.
Product Prices. Oil and gas prices are affected not only by supply and demand
factors, but are also subject to substantial seasonal, political and other
fluctuations that are generally beyond the ability of the Company to control or
predict.
Crude oil prices are generally affected by global politics and supply,
particularly among OPEC members. The average posted per barrel price of West
Texas Intermediate ("WTI") oil, a benchmark crude, was $18.63, $20.45 and $16.77
in 1997, 1996 and 1995, respectively. Despite the anticipation of and eventual
resumption of Iraqi exports, oil prices reached their highest levels since the
1990 Persian Gulf War during fourth quarter 1996 and January 1997. After demand
slightly outpaced supply in January 1997, the crude oil market remained in
balance during most of the year, supporting prices in the range of $17 to $20
per barrel, before sliding to an average posted WTI price of $16.18 in December.
Further declines in 1998 have resulted in an average posted WTI price of $14.22
for January and February. The recent weakening in oil prices is due to increased
OPEC production following its November 1997 decision to increase quotas, as well
as increased non-OPEC production from the North Sea and Latin America. The price
decline has also been attributed to mild winters in the U.S. and Europe and the
sudden drop in demand from depressed economies in the Far East. After hitting a
decade low of $11.00, prices in late March 1998 began to increase upon news that
some of the major oil exporting countries planned to meet regarding curtailment
of production. Based on 1997 production, the Company estimates that a $1.00 per
barrel increase or decrease in the average oil sales price would result in
approximately a $3.8 million change in 1998 annual income before income tax.
Natural gas prices are generally influenced by national and regional supply
and demand, which is often dependent upon the weather. Specific gas prices are
also based on the location of production, pipeline capacity, gathering charges
and the energy content of the gas. Throughout most of 1995, gas prices were
relatively weak, primarily because of unseasonably warm weather. Gas prices
increased in fourth quarter 1995 and continued their upward spiral through
February 1996 because of low storage levels and colder than expected weather.
Generally because of colder weather, storage concerns and U.S. economic growth,
prices remained relatively high during most of 1996 and 1997, reaching their
highest levels since 1985. Gas prices declined, however, in December 1997 and
have remained lower in first quarter 1998, primarily because of an abnormally
mild winter in the central and eastern U.S. and elevated storage levels.
Despite continued growth in domestic demand, 1998 gas prices will largely depend
on the weather, gas storage levels, increased supplies resulting from domestic
exploration and Canadian imports, and price competition from other energy
sources. Based on 1997 production, the Company estimates that a $0.10 per Mcf
increase or decrease in the average gas sales price would result in
approximately a $4.5 million change in 1998 annual income before income tax.
See Note 6 to Consolidated Financial Statements regarding commodity price
hedging instruments the Company has entered to reduce its exposure to gas price
fluctuations.
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RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Earnings available to common stock for 1997 were $23.9 million as compared
with $19.8 million for 1996. This significant improvement in earnings was the
result of higher gas prices and increased gas production from the 1996 and 1997
acquisitions and development programs. Results for 1997 and 1996 included the
effects of stock incentive compensation of $3.7 million and $6.2 million,
respectively. Also included in 1997 results were net gains on sale of
properties and equity securities of $1.8 million and $2.4 million, respectively,
and lawsuit settlement proceeds of $1.3 million. A $500,000 gain on sale of
properties was included in 1996 results. Earnings for 1997 and 1996 were
reduced by dividends of $1.8 million and $500,000, respectively, on preferred
stock issued in September 1996.
Revenues for 1997 were $200.7 million, or 24% above 1996 revenues of $161.4
million. Oil revenue remained constant as a 13% increase in oil production was
offset by a 12% decrease in oil prices from an average of $21.38 in 1996 to
$18.90 in 1997 (see "General-Product Prices" above). Increased production was
primarily because of the 1997 acquisitions and development programs.
Gas revenue increased $36.7 million or 50% because of a 33% increase in
production combined with a 12% price increase (see "General-Product Prices"
above). Increased gas production was attributable to the 1996 and 1997
acquisitions and development programs. Gas revenues for 1997 also included
$800,000 from San Juan Basin natural gas liquids production attributable to the
December 1997 Amoco Acquisition.
Gas gathering, processing and marketing revenues decreased $2.2 million
primarily because of a decrease in margin and gas volumes. Other revenues
increased $4.6 million primarily because of increased net gains on sale of
properties and equity securities and lawsuit settlement proceeds received in
1997.
Expenses for 1997 totaled $161.5 million as compared with total 1996
expenses of $130.4 million. All expenses other than general and administrative
expense increased in 1997 primarily because of the 1996 and 1997 acquisitions
and exploration and development programs.
Production expense increased $4.2 million or 11%. Per BOE, production
expense decreased from $4.05 to $3.54. This decrease is primarily because of
the lower operating costs of gas-producing properties acquired in 1996 and 1997,
the timing of workovers, increasing production without comparable increases in
lifting costs and other operating efficiencies initiated after acquiring
operated properties. Exploration expense for 1997 totaled $2.1 million, and
were predominantly geological and geophysical costs related to the 1997
exploration program. Exploration costs in 1996 and prior were included in
production expense since not significant.
Taxes on production and property increased 37% or $4.5 million because of
increased oil and gas revenues, as well as increased property taxes related to
the 1996 and 1997 acquisitions. Taxes on production and property per BOE
increased 8% from $1.23 to $1.33 because of increased gas prices and higher
property tax rates.
Depreciation, depletion and amortization ("DD&A") increased $9.9 million,
or 26%, primarily because of the 1996 and 1997 acquisitions and development
programs. On a BOE basis, DD&A decreased slightly from $3.89 in 1996 to $3.87
in 1997.
General and administrative expense decreased $602,000, or 4%, because of a
$2.5 million decrease in stock incentive compensation, partially offset by
increased expenses from Company growth. Excluding stock incentive compensation,
general and administrative expense per BOE was $0.99 in 1997 as compared to
$1.04 in 1996.
Gas gathering and processing expense increased $1.6 million or 23%. This
increase was primarily because of rental expense related to the Tyrone plant and
gathering system lease that began in March 1996 and the Major County, Oklahoma
gathering system lease that began in November 1996. This increase offsets
related decreases in DD&A and interest.
Interest expense increased $9.6 million or 56% because of a 36% increase in
weighted average borrowings to partially fund the 1996 and 1997 acquisitions and
purchases of treasury stock, combined with a 20% increase in the
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weighted average interest rate. Weighted average principal outstanding during
1997 was $351 million at an average interest rate of 7.6% compared with weighted
average principal of $259 million at 6.4% for 1996. Interest expense per BOE
increased from $1.76 in 1996 to $2.16 in 1997 primarily as the result of an
increase in the weighted average interest rate (primarily attributable to the
senior subordinated notes sold in April and October 1997), as well as the result
of financing expenditures for other than oil and gas producing properties
(investment in equity securities and treasury stock purchases) with bank and
other short-term borrowings.
1996 COMPARED TO 1995
Earnings available to common stock for 1996 were $19.8 million as compared
to a net loss of $10.5 million for 1995. Significantly improved results were
because of higher oil and gas prices and increased gas production from the 1995
and 1996 acquisitions and development programs. Additionally, 1995 results
included a $20.3 million, pre-tax, non-cash impairment charge recorded upon
adoption of SFAS 121. Results for 1996 and 1995 included the effects of stock
incentive compensation of $6.2 million and $5.1 million, respectively. Also
included in 1995 results were net gains on sale of properties and equity
securities of $3 million and $1.6 million, respectively, and a $700,000
extraordinary gain on the Company's purchase and retirement of a portion of its
convertible subordinated notes. Earnings for 1996 have been reduced by dividends
of $500,000 on preferred stock that was issued in September 1996.
Revenues for 1996 were $161.4 million, or 43% above 1995 revenues of $112.9
million. Oil revenue increased $14.7 million or 24% primarily because of a 25%
increase in oil prices from an average of $17.09 in 1995 to $21.38 in 1996 (see
"General- Product Prices" above). The Company's 1996 average oil price was
above the average WTI price of $20.45 because of improved oil marketing margins.
Oil production declined 1% from 1995 to 1996 primarily because of property sales
and natural decline, largely offset by the effects of the 1995 and 1996
acquisitions and development programs.
Gas revenue increased $32.9 million or 81% because of a 39% price increase
(see "General- Product Prices" above) combined with a 30% increase in
production. Increased gas production was attributable to the 1995 and 1996
acquisitions and development programs.
Gas gathering, processing and marketing revenues increased $4.9 million
primarily because of revenues from the gas processing plant and gathering
facility acquired as part of the Santa Fe Acquisition on August 1, 1995. Other
revenues decreased $4 million primarily because of net gains on sale of
properties and equity securities in 1995.
Expenses for 1996 totaled $130.4 million as compared with total 1995
expenses of $129.9 million. Expenses for 1995 included the $20.3 million
impairment charge recorded upon adoption of SFAS No. 121 in October 1995. All
expenses other than impairment increased in 1996 primarily because of the 1995
and 1996 acquisitions.
Production expense increased $4 million or 11%. Per BOE, production
expense decreased from $4.26 to $4.05. This decrease is primarily because the
1995 and 1996 acquisitions were predominantly gas-producing properties that
generally have lower production costs per BOE.
Taxes on production and property increased 38% or $3.3 million because of
increased oil and gas revenues. Taxes on production and property per BOE
increased 18% from $1.04 to $1.23 primarily because of higher oil and gas
prices.
Depreciation, depletion and amortization ("DD&A") increased $1 million, or
3%, primarily because of the 1995 and 1996 acquisitions and development
programs. On a BOE basis, DD&A decreased from $4.44 in 1995 to $3.89 in 1996.
Decreased DD&A per BOE is the result of increased proved reserve estimates at
January 1, 1996, reduced depletable costs resulting from the SFAS 121 provision
recorded in fourth quarter 1995, and the sale and operating leaseback of the
Tyrone gas processing plant and related gathering system.
General and administrative expense increased $3.3 million, or 25%, because
of Company growth and increased stock incentive compensation. Excluding stock
incentive compensation, general and administrative expense per BOE was $1.04 in
1996 as compared to $0.97 in 1995.
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Gas gathering and processing expense increased from $2.5 million in 1995 to
$6.9 million in 1996. This increase was primarily because of rental expense
related to the Tyrone plant and gathering system lease that began in March 1996.
This increase offsets related decreases in DD&A and interest.
Interest expense increased $4.5 million or 36% primarily because of
increased debt to partially fund the 1995 and 1996 acquisitions and purchases of
treasury stock and equity securities. Weighted average principal outstanding
during 1996 was $259 million at an average interest rate of 6.4% compared with
weighted average principal of $195.1 million at 6.2% for 1995. Interest expense
per BOE increased from $1.51 in 1995 to $1.76 in 1996 primarily because of
financing expenditures for other than oil and gas producing properties with bank
and other short-term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from operating
activities, public offerings of equity and debt, and bank debt. The Company's
cash requirements, other than for operations, are generally for the acquisition,
exploration and development of oil and gas properties, and debt and dividend
payments. The Company believes that its sources of liquidity are adequate to
fund its cash requirements during 1998.
Cash provided by operating activities was $98 million in 1997, compared
with $59.7 million in 1996 and $32.9 million in 1995. The fluctuation from 1996
to 1997 was primarily because of increased gas prices and production, combined
with the timing of cash receipts. Before changes in working capital, cash flow
from operations was $90 million, $68.3 million and $40.4 million in 1997, 1996
and 1995, respectively.
The 1997, 1996 and 1995 acquisitions were primarily financed by proceeds
from long-term debt borrowings. The 1995 acquisitions were also partially funded
by proceeds from a public offering of common stock. Exploration and development
expenditures and dividend payments have generally been funded by cash flow from
operations.
Financial Condition
Total assets increased from $523 million at December 31, 1996 to $788
million at December 31, 1997, primarily because of the 1997 acquisitions. As of
December 31, 1997, total capitalization of the Company was $709 million, of
which 76% was long-term debt. This compares with capitalization of $457 million
at December 31, 1996, of which 69% was long-term debt. The increase in the
debt-to-capitalization ratio from year-end 1996 to 1997 is because of increased
borrowings under the Company's loan agreement to fund the 1997 acquisitions and
other capital expenditures (see "Financing" below).
Working Capital
The Company generally uses available cash to reduce bank debt and,
therefore, does not maintain large cash and cash equivalent balances. Short-
term liquidity needs are satisfied by bank commitments under the loan agreement
(see "Financing" below). Because of this, and since the Company's principal
source of operating cash flows (i.e., proved reserves to be produced in the
following year) cannot be reported as working capital, the Company often has low
or negative working capital.
Financing
On November 21, 1997, the Company entered into a new Revolving Credit
Agreement with commercial banks ("loan agreement"). As of December 31, 1997,
the loan agreement had a borrowing base and commitment of $365 million with
resulting unused borrowing capacity of $136 million. The interest rate on
borrowings at December 31, 1997 was 7.1%. The Company periodically renegotiates
the loan agreement to increase the borrowing commitment and extend the revolving
facility; however, there is no assurance that the Company will continue to do so
in the future. After the anticipated closing of the EEX Acquisition in April
1998, the Company expects the borrowing base and commitment to be at least $560
million.
The borrowing base is redetermined annually based on the value and expected
cash flow of the Company's proved oil and gas reserves. If outstanding
borrowings are greater than the redetermined borrowing base, outstanding
borrowings must be reduced to the level of the redetermined borrowing base
within a specified period. Otherwise,
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borrowings under the loan agreement do not mature until December 31,
2002, but may be prepaid at any time without penalty.
During 1995, the Company purchased and retired $8.3 million principal
amount of its 5 1/4% convertible subordinated notes ("5 1/4% Notes"), resulting
in an extraordinary gain of $700,000. During 1996, the Company redeemed,
purchased and retired a total of $9 million principal amount of the notes at a
loss of $400,000, and holders of the 5 1/4% Notes converted principal of $27.7
million into 2,696,521 shares of common stock. In January 1997, the remaining
$29.7 million of the 5 1/4% Notes was converted by noteholders into 2,892,363
shares of common stock and $29,000 was redeemed.
In August 1995, the Company sold 5.1 million shares of common stock for net
proceeds of $29.5 million that were used to partially fund the Santa Fe
Acquisition. In September 1996, pursuant to the Company's exchange offer, a
total of 2,979,249 shares of common stock were exchanged for 1,138,729 shares of
Series A convertible preferred stock.
In April 1997, the Company sold $125 million of 9 1/4% senior subordinated
notes ("9 1/4% Notes") and in October 1997, the Company sold $175 million of 8
3/4% senior subordinated notes ("8 3/4% Notes"). Net proceeds of $121.1 million
and $169.9 million from the sale of 9 1/4% Notes and the 8 3/4% Notes,
respectively, were used to reduce bank borrowings under the loan agreement. See
Note 2 Consolidated Financial Statements.
On February 25, 1998, the Company filed a shelf registration statement with
the Securities and Exchange Commission to potentially offer securities which may
include debt securities, preferred stock, common stock or warrants to purchase
debt securities, preferred stock or common stock. The securities will be
offered at an aggregate offering price not to exceed $200 million, at prices and
on terms to be determined at the time of the sale. Net proceeds from the sale
will be used for general corporate purposes, including reduction of bank
borrowings under the loan agreement.
Capital Expenditures
In May 1997, the Company announced its plan to make strategic acquisitions
totaling $260 to $280 million from that date through the end of 1999. As a
result of closing the Amoco Acquisition in December 1997 at an estimated cost of
$195 million and the expected closing of the EEX Acquisition in April 1998 at an
estimated cost of $245 million, the Company has significantly exceeded this
goal. Acquisition costs totaled $255.6 million, $105.8 million and $131.3
million during 1997, 1996 and 1995, respectively. Producing property
acquisitions include purchases of outstanding beneficial units ("Units") of
Cross Timbers Royalty Trust at a cost of $5.4 million for 6% of the Units in
1997 and $12.8 million for 16% of the Units in 1996. As of December 31, 1997,
the Company owned 1,326,300 Units; the Board of Directors has authorized a total
purchase of up to two million Units. Acquisitions were primarily funded by bank
debt. See Note 10 to Consolidated Financial Statements.
The Company continues to pursue acquisitions that meet its criteria,
although there are no assurances that such properties will be available. The
Company plans to fund future acquisitions through a combination of cash flow
from operations and bank borrowings; proceeds from public equity and debt
transactions may also be utilized.
In 1997, exploration and development cash expenditures totaled $90.5
million compared with the budget of $70 million. On an incurred basis,
exploration and development costs for 1997 totaled $88.6 million. In 1996,
exploration and development cash expenditures totaled $32.3 million, compared
with the budget of $40 million. The Company has budgeted $70 to $90 million for
the 1998 development program. As it has done historically, the Company expects
to fund the 1998 development program from cash flow from operations. Since
there are no material long-term commitments associated with this budget, the
Company has the flexibility to adjust its actual development expenditures in
response to changes in product prices, industry conditions, and the effects of
the Company's acquisition and development programs.
A minor portion of the Company's existing properties are operated by third
parties which control the timing and amount of expenditures required to exploit
the Company's interests in such properties. Therefore, the Company can give no
assurances regarding the timing or amount of such expenditures.
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To date, the Company's expenditures to comply with environmental or safety
regulations have not been significant, and the Company currently does not expect
such expenditures to be significant during 1998. However, developments such as
new regulations, enforcement policies or claims for damages could result in
significant future costs.
Dividends
The Board of Directors has declared quarterly dividends of $0.033 per
common share since the Company's inception through 1996 and $0.037 per common
share in 1997. In January 1998, the Board of Directors increased the quarterly
dividend to $0.04 per share, or $6.2 million annually. Continued dividend
payments are dependent upon available cash flow, as well as other factors. In
addition, the Company's loan agreement restricts the amount of common stock
dividends to 25% of operating cash flow for the last four quarters.
Cumulative dividends on Series A convertible preferred stock are paid
quarterly, when declared by the Board of Directors, based on an annual rate of
$1.5625 per share, or $1.8 million annually.
Year 2000
The Company is in the process of reviewing and making necessary
modifications to its computer systems for year 2000 compliance. Costs incurred
to date to modify the Company's computer systems have not been material, and
future costs are not expected to be material. Timely completion of such
modifications is not considered to be a material risk to the Company. The
Company currently does not have information regarding the year 2000 compliance
status of its major suppliers and customers. In the event that any of the
Company's significant suppliers or customers does not timely achieve year 2000
compliance, the Company's operations could be adversely affected.
PRODUCTION IMBALANCES
The Company has gas production imbalance positions that are the result of
partial interest owners selling more or less than their proportionate share of
gas on jointly owned wells. Imbalances are generally settled by
disproportionate gas sales over the remaining life of the well or by cash
payment by the overproduced party to the underproduced party. The Company uses
the entitlement method of accounting for natural gas sales. At December 31,
1997, the Company's consolidated balance sheet includes a net receivable of $5.1
million for a net underproduced balancing position of 1,114,000 Mcf of natural
gas and 8,049,000 Mcf of carbon dioxide. Production imbalances do not have, and
are not expected to have, a significant impact on the Company's liquidity or
operations.
DERIVATIVES
The Company uses derivatives on a limited basis to hedge interest rate and
product price risks, as opposed to their use for trading purposes. To reduce
variable interest rate exposure on debt, the Company had entered into a series
of interest rate swap agreements, the last of which expired September 1996. The
Company had no other significant derivative transactions or balances from 1994
to 1997. During the first quarter of 1998, the Company entered into several
derivative transactions to hedge its exposure to price fluctuations for gas
production from January 1998 through December 2000. See Note 6 to Consolidated
Financial Statements.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Item 7, as well as statements included
in Items 1 and 2 of this report, relating to future development expenditures,
strategic acquisitions, proved reserves and other matters of anticipated
financial and operating performance constitute forward-looking statements.
These statements are based on assumptions concerning oil and gas prices,
drilling results and production, and administrative and other costs that
management believes are reasonable based on currently available information.
However, management's assumptions and the Company's future performance are both
subject to a wide range of risks, uncertainties and other factors that could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. Risks and uncertainties that may affect the operations and
results of the Company's performance include, but are not limited to, commodity
price fluctuations, competitive energy supplies, market demand, drilling risks,
governmental regulations and uncertainties of proved reserve estimates. In
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addition, potential producing property acquisitions that meet the Company's
profitability, size, and geographic and other criteria may not be available on
acceptable economic terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary information are
included under Item 14(a):
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets......................... 28
Consolidated Statements of Operations............... 29
Consolidated Statements of Cash Flows............... 30
Consolidated Statements of Stockholders' Equity..... 31
Notes to Consolidated Financial Statements.......... 32
Report of Independent Public Accountants............ 49
Selected Quarterly Financial Data
(Note 11 to Consolidated Financial Statements)..... 45
Information about Oil and Gas Producing Activities
(Note 12 to Consolidated Financial Statements)..... 46
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the portion of Item 10 relating to Executive Officers of the
Registrant which is included in Part I of this Report, the information called
for by Items 10 through 13 is incorporated by reference from the Company's
Notice of Annual Meeting and Proxy Statement to be filed with the Securities and
Exchange Commission no later than April 30, 1998.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
Page
----
1. Financial Statements:
Consolidated Balance Sheets at December 31, 1997 and 1996..........28
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.................................29
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................30
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.................................31
Report of Independent Public Accountants...........................49
2. Financial Statement Schedules:
All financial schedules have been omitted because they are not
applicable or the required information is presented in the financial
statements or the notes to financial statements.
3. Exhibits:
See Index to Exhibits at page 51 for a description of the exhibits
filed as a part of this report.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
quarter ended December 31, 1997 and through March 27, 1998:
On December 16, 1997, the Company filed a report on Form 8-K dated
December 1, 1997 regarding its acquisition of certain producing oil
and gas properties in the San Juan Basin of New Mexico from a
subsidiary of Amoco Corporation.
On February 17, 1998, the Company filed a report on Form 8-K/A
(Amendment No. 1 to Form 8-K dated December 1, 1997) to file
financial statements for the acquisition of certain producing oil and
gas properties in the San Juan Basin of New Mexico from a subsidiary
of Amoco Corporation.
On February 23, 1998, the Company filed a report on Form 8-K dated
February 18, 1998 regarding the issuance of news release number 98-04
announcing earnings for the quarter and year ended December 31, 1997.
On February 25, 1998, the Company filed a report on Form 8-K dated
February 25, 1998 regarding its intent to acquire producing
properties and undeveloped acreage in the East Texas Basin from EEX
Corporation.
27
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
------------------------
1997 1996
------------ ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................. $ 3,816 $ 3,937
Accounts receivable, net (Note 6)..................................... 43,996 44,320
Deferred income tax benefit (Note 3).................................. 445 558
Other current assets.................................................. 3,905 2,965
--------- ---------
Total Current Assets................................................ 52,162 51,780
--------- ---------
Property and Equipment, at cost --
successful efforts method (Notes 1 and 2):
Producing properties.................................................. 931,259 639,990
Undeveloped properties................................................ 6,406 2,493
Other property and equipment.......................................... 23,703 16,470
--------- ---------
Total Property and Equipment.......................................... 961,368 658,953
Accumulated depreciation, depletion and amortization.................. (237,532) (208,392)
--------- ---------
Net Property and Equipment.......................................... 723,836 450,561
--------- ---------
Investment in Equity Securities, at market value........................ - 16,714
--------- ---------
Other Assets............................................................ 12,457 4,015
--------- ---------
TOTAL ASSETS............................................................ $ 788,455 $ 523,070
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.............................. $ 52,266 $ 45,729
Payable to Royalty Trust.............................................. 2,073 2,770
Accrued stock incentive compensation (Note 9)......................... 554 483
Short-term debt (Note 2).............................................. - 3,000
--------- ---------
Total Current Liabilities........................................... 54,893 51,982
--------- ---------
Long-term Debt (Note 2)................................................. 539,000 314,757
--------- ---------
Deferred Income Taxes Payable (Note 3).................................. 21,320 10,323
--------- ---------
Other Long-term Liabilities (Note 4).................................... 2,999 3,340
--------- ---------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Note 5):
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,
46,310,710 and 42,314,965 shares issued)........................... 463 423
Additional paid-in capital............................................ 210,954 164,436
Treasury stock (6,860,779 and 3,868,171 shares)....................... (76,656) (40,219)
Unrealized gain on investment in equity securities.................... - 638
Retained earnings (deficit)........................................... 7,014 (11,078)
--------- ---------
Total Stockholders' Equity.......................................... 170,243 142,668
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 788,455 $ 523,070
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data)
YEAR ENDED DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Oil and condensate................................... $ 75,223 $ 75,013 $ 60,349
Gas and natural gas liquids.......................... 110,104 73,402 40,543
Gas gathering, processing and marketing.............. 9,851 12,032 7,091
Other................................................ 5,494 944 4,922
-------- -------- --------
Total Revenues....................................... 200,672 161,391 112,905
-------- -------- --------
EXPENSES
Production........................................... 43,580 39,365 35,338
Exploration.......................................... 2,088 - -
Taxes on production and property..................... 16,405 11,944 8,646
Depreciation, depletion and amortization............. 47,721 37,858 36,892
Impairment (Note 1).................................. - - 20,280
General and administrative (Note 9).................. 15,818 16,420 13,156
Gas gathering and processing......................... 8,517 6,905 2,528
Interest, net........................................ 26,677 17,072 12,523
Trust development costs.............................. 665 854 561
-------- -------- --------
Total Expenses....................................... 161,471 130,418 129,924
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX
AND EXTRAORDINARY ITEM.............................. 39,201 30,973 (17,019)
Income Tax Expense (Benefit) (Note 3)................ 13,517 10,669 (5,825)
-------- -------- --------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......... 25,684 20,304 (11,194)
EXTRAORDINARY ITEM (Note 1).......................... - - 656
-------- -------- --------
NET INCOME (LOSS).................................... 25,684 20,304 (10,538)
Preferred stock dividends............................ 1,779 514 -
-------- -------- --------
EARNINGS (LOSS) AVAILABLE TO COMMON STOCK............ $ 23,905 $ 19,790 $(10,538)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE (Notes 1 and 7)
Basic............................................... $0.60 $0.50 $(0.28)
======== ======== ========
Diluted............................................. $0.59 $0.48 $(0.28)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 5).. 39,773 39,913 38,072
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
(Note 8)
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................................... $ 25,684 $ 20,304 $ (10,538)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............................. 47,721 37,858 36,892
Impairment........................................................... - - 20,280
Exploration.......................................................... 2,088 - -
Performance share compensation....................................... 3,315 2,545 2,945
Accrued stock appreciation right compensation........................ 71 (3,398) 1,447
Deferred income tax.................................................. 13,393 10,213 (6,023)
Gain from sale of properties and equity securities................... (4,157) (576) (4,520)
Extraordinary item................................................... - - (656)
Other non-cash items................................................. 1,864 1,317 612
Changes in working capital (a)....................................... 8,027 (8,569) (7,501)
--------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES.................................. 98,006 59,694 32,938
--------- --------- ---------
INVESTING ACTIVITIES
Sale of equity securities.............................................. 24,626 402 16,923
Investment in equity securities........................................ (6,479) (16,093) (123)
Sale of property and equipment......................................... 17,972 37,388 13,095
Property acquisitions.................................................. (238,294) (109,535) (131,342)
Exploration and development costs...................................... (90,470) (32,291) (19,296)
Gas plant, gathering and other additions............................... (18,677) (4,742) (39,673)
--------- --------- ---------
CASH USED BY INVESTING ACTIVITIES...................................... (311,322) (124,871) (160,416)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt........................................... 688,400 188,000 193,000
Payments on long-term debt............................................. (437,430) (81,200) (96,040)
Proceeds from sale of common stock, net................................ - - 29,450
Dividends.............................................................. (7,571) (5,339) (4,951)
Proceeds on exercise of stock options.................................. 750 904 744
Preferred stock exchange offer costs................................... - (540) -
Purchase of treasury stock............................................. (30,954) (34,923) (351)
--------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES.................................. 213,195 66,902 121,852
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (121) 1,725 (5,626)
CASH AND CASH EQUIVALENTS, JANUARY 1................................... 3,937 2,212 7,838
--------- --------- ---------
CASH AND CASH EQUIVALENTS, DECEMBER 31................................. $ 3,816 $ 3,937 $ 2,212
========= ========= =========
(a) CHANGES IN WORKING CAPITAL
Accounts receivable................................................ $ 246 $ (16,999) $ (9,365)
Other current assets............................................... (970) (1,683) 963
Accounts payable, accrued liabilities and payable to Royalty Trust. 8,751 10,113 901
--------- --------- ---------
DECREASE (INCREASE) IN WORKING CAPITAL............................... $ 8,027 $ (8,569) $ (7,501)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
(Note 5)
SHARES STOCKHOLDERS' EQUITY
---------------------------------- -----------------------------------------------------------
COMMON STOCK
------------------- ADDITIONAL RETAINED
PREFERRED IN PREFERRED COMMON PAID-IN TREASURY EARNINGS
STOCK ISSUED TREASURY STOCK STOCK CAPITAL STOCK (DEFICIT)
---------- -------- --------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994... - 35,833 2 $ - $ 358 $123,054 $ (11) $ (9,953)
Sale of common stock.......... - 5,062 - - 50 29,400 - -
Issuance of performance
shares....................... - 369 - - 4 2,943 - -
Stock option exercises........ - 170 67 - 2 1,043 (517) -
Common stock dividends
($0.13 per share)............ - - - - - - - (5,135)
Net loss...................... - - - - - - - (10,538)
---------- -------- --------- ------------ --------- ---------- -------- ----------
BALANCES, DECEMBER 31, 1995... - 41,434 69 - 414 156,440 (528) (25,626)
Issuance/vesting of
performance shares........... - 168 106 - 2 2,673 (1,038) -
Stock option exercises........ - 996 768 - 10 7,189 (7,931) -
Treasury stock purchases...... - - 2,925 - - - (30,722) -
Exchange of Series A
convertible preferred stock
for common stock............ 1,139 (2,979) - 28,468 (30) (28,978) - -
Conversion of subordinated
convertible notes to
common stock................ - 2,696 - - 27 27,112 - -
Common stock dividends
($0.13 per share)............ - - - - - - - (5,242)
Preferred stock dividends
($0.45 per share)............ - - - - - - - (514)
Net income.................... - - - - - - - 20,304
---------- -------- --------- ------------ --------- ---------- -------- ----------
BALANCES, DECEMBER 31, 1996... 1,139 42,315 3,868 28,468 423 164,436 (40,219) (11,078)
Issuance/vesting of
performance shares........... - 180 76 - 2 3,431 (1,098) -
Stock option exercises........ - 924 566 - 9 8,183 (7,326) -
Treasury stock purchases...... - - 2,351 - - - (28,013) -
Conversion of subordinated
convertible notes to
common stock................ - 2,892 - - 29 29,179 - -
Issuance of warrants.......... - - - - - 5,725 - -
Common stock dividends
($0.15 per share)............ - - - - - - - (5,813)
Preferred stock dividends
($1.56 per share)............ - - - - - - - (1,779)
Net income.................... - - - - - - - 25,684
---------- -------- --------- ------------ --------- ---------- -------- ----------
BALANCES, DECEMBER 31, 1997... 1,139 46,311 6,861 $28,468 $ 463 $ 210,954 $(76,656) $ 7,014
========== ======== ========= ============ ========= ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
CROSS TIMBERS OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cross Timbers Oil Company, a Delaware corporation, was organized in October
1990 to ultimately acquire the business and properties of predecessor entities
that were created from 1986 through 1989. Cross Timbers Oil Company completed
its initial public offering of common stock in May 1993.
The accompanying consolidated financial statements include the financial
statements of Cross Timbers Oil Company and its wholly owned subsidiaries ("the
Company"). All significant intercompany balances and transactions have been
eliminated in the consolidation. In preparing the accompanying financial
statements, management has made certain estimates and assumptions that affect
reported amounts in the financial statements and disclosures of contingencies.
Actual results may differ from those estimates.
All common stock shares and per share amounts in the accompanying financial
statements have been adjusted for the three-for-two stock splits effected on
March 19, 1997 and February 25, 1998 (Note 5).
The Company is an independent oil and gas company with production and
exploration concentrated in Texas, Oklahoma, Kansas, New Mexico and Wyoming.
The Company also gathers, processes and markets gas, transports and markets oil
and conducts other activities directly related to the oil and gas producing
industry.
Property and Equipment
The Company follows the successful efforts method of accounting,
capitalizing costs of successful exploratory wells and expensing costs of
unsuccessful exploratory wells. Exploratory geological and geophysical costs
are expensed as incurred. All developmental costs are capitalized. The Company
generally pursues acquisition and development of proved reserves, although the
Company increased its exploration activities in 1997. Most of the property
costs reflected on the accompanying consolidated balance sheets are from
acquisitions of producing properties from other oil and gas companies. As of
December 31, 1997 and 1996, producing properties balances include costs of
$26,570,000 and $6,115,000, respectively, related to wells in progress of
drilling.
Depreciation, depletion and amortization of producing properties is
computed on the unit-of-production method based on estimated proved oil and gas
reserves. Other property and equipment is generally depreciated using the
straight-line method over estimated useful lives which range from 3 to 40 years.
Repairs and maintenance are expensed, while renewals and betterments are
generally capitalized.
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. Based generally on a
field-level assessment, producing properties were written down to estimated fair
value when their net basis exceeded estimated direct future net cash flows from
such properties. The Company's resulting impairment provision was $20,280,000
before income tax. After initial adoption of SFAS No. 121, the Company assesses
impairment of long-lived assets whenever events or changes in circumstances
indicate that the net basis of the asset may not be recoverable. No impairment
was recorded in 1997 or 1996 and, prior to adoption of SFAS No. 121 in 1995, no
impairment of producing properties was required, based on a total Company
assessment using undiscounted estimated future net cash flows. Impairment of
individually significant undeveloped properties is assessed on a property-by-
property basis and impairment of other undeveloped properties is assessed and
amortized on an aggregate basis.
Cross Timbers Royalty Trust
The Company makes monthly net profits payments to Cross Timbers Royalty
Trust ("Royalty Trust") based on revenues and costs related to properties from
which net profits interests were carved. Net profits payments to the Royalty
Trust are generally based on revenues received and costs disbursed by the
Company in the prior month. For financial reporting purposes, the Company
reduces oil and gas revenues and taxes on production for amounts allocated to
the Royalty Trust. The Royalty Trust's portion of development costs are
expensed as trust development costs in the accompanying consolidated statements
of operations. As of December 31, 1997 and 1996, the Company owned 22% and 16%,
respectively,
32
<PAGE>
of the Royalty Trust's publicly traded units of beneficial interest ("Units")
(Note 10). Royalty Trust Units are traded on the New York Stock Exchange under
the symbol "CRT".
Cash and Cash Equivalents
Cash equivalents are considered to be all highly liquid investments having
an original maturity of three months or less.
Investment in Equity Securities
Investment in equity securities at December 31, 1996 is reported at market
value and classified as available-for-sale securities, rather than trading
securities, in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Accordingly, the related unrealized gain on
investment at December 31, 1996, net of deferred income taxes, is excluded from
earnings and is reported as a separate component of stockholders' equity. There
was no investment in equity securities at December 31, 1997.
Other Assets
Other assets primarily include deferred debt costs that are amortized over
the term of the related debt (Note 2). Other assets are presented net of
accumulated amortization of $2,860,000 and $2,628,000 at December 31, 1997 and
1996, respectively.
Derivatives
The Company uses derivatives on a limited basis to hedge interest rate and
product price risks, as opposed to their use for trading purposes. Amounts
receivable or payable under interest swap agreements are recorded as adjustments
to interest expense. Gains and losses on commodity futures contracts and other
price risk management instruments are recognized in oil and gas revenues when
the hedged transaction occurs. Cash flows related to derivative transactions
are included in operating activities.
Production Imbalances
The Company uses the entitlement method of accounting for gas sales, based
on the Company's net revenue interest in production. Accordingly, revenue is
deferred when gas deliveries exceed the Company's net revenue interest, while
revenue is accrued for under-deliveries. Production imbalances are generally
recorded at the estimated sales price in effect at the time of production. At
December 31, 1997, the Company recorded a net receivable of $5,054,000 for a net
underproduced balancing position of 1,114,000 Mcf of natural gas and 8,049,000
Mcf of carbon dioxide. At December 31, 1996, the Company recorded a net
receivable of $3,964,000 for a net underproduced balancing position of 821,000
Mcf of natural gas and 6,824,000 Mcf of carbon dioxide.
Gas Gathering, Processing and Marketing Revenues
Gas produced by the Company and third parties is marketed by the Company to
brokers, local distribution companies and end-users. Gas gathering and
marketing revenues are recognized in the month of delivery based on customer
nominations. Gas processing and marketing revenues are recorded net of cost of
gas sold of $57.1 million, $56.4 million and $30 million for 1997, 1996 and
1995, respectively. These amounts are net of intercompany eliminations.
Other Revenues
Other revenues include gain/loss from sale of equity securities and from
sale of property and equipment. During 1997 and 1996, the Company realized
gains on sale of property and equipment of $1,757,000 and $520,000,
respectively, and on sale of equity securities of $2,400,000 and $56,000,
respectively. During 1995, the Company realized a gain on sales of properties
of $2,960,000.
Exploration Expense
During 1997, the Company incurred $2.1 million of exploration costs,
primarily composed of geological and geophysical costs related to the 1997
exploration program. Exploration costs were not significant prior to 1997.
33
<PAGE>
Interest Expense
Interest expense includes amortization of deferred debt costs and is
presented net of interest income of $71,000, and capitalized interest of
$1,185,000 for the year ended December 31, 1997 and net of interest income of
$152,000 and $399,000 for the years ended December 31, 1996 and 1995,
respectively.
Stock-Based Compensation
In accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, no compensation is recorded for stock options or
other stock-based awards that are granted to employees with an exercise price
equal to or above the common stock price on the grant date. Compensation
related to performance share grants is recognized from the grant date until the
performance conditions are satisfied, based on the market price of the Company's
common stock. The pro forma effect of recording stock-based compensation at the
estimated fair value of awards on the grant date, as prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, is disclosed in Note 9.
Extraordinary Item
During 1995, the Company recognized an extraordinary gain of $656,000 (net
of income tax of $338,000), or $0.01 per common share, upon the purchase and
early retirement of a portion of the Company's 5 1/4% convertible subordinated
notes. A loss of $430,000, before income tax, on purchases and redemption of the
notes in 1996 was not presented as an extraordinary item because it was not
material to 1996 earnings.
Earnings per Common Share
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings Per
Share, which changed the method of computing and disclosing earnings per share
for all periods. Under SFAS No. 128, the Company must report basic earnings per
share, which excludes the effect of potentially dilutive securities, and diluted
earnings per share, which includes the effect of all potentially dilutive
securities unless their impact is antidilutive. The Company previously only
reported earnings per share excluding potentially dilutive securities because
their effect was antidilutive or less than 3% dilutive, as prescribed by the
accounting pronouncement superseded by SFAS No. 128. See Note 7.
Earnings (loss) per common share for all periods presented is based on
weighted average common shares outstanding as adjusted for the three-for-two
stock splits on March 19, 1997 and February 25, 1998 (Note 5).
Sales to Major Customers
In 1997, gas sales to one purchaser were approximately 14% of total
revenues. In 1996, gas sales to two purchasers were approximately 15% and 14%
of total revenues. There were no sales to a single purchaser that exceeded 10%
of total revenues in 1995.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting of Comprehensive Income, and SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. The Company will be required to
comply with the provisions of these statements in its 1998 financial statements.
The Company has not assessed the effect that these new standards will have on
its consolidated financial statements and/or disclosures.
34
<PAGE>
2. DEBT
The Company's outstanding debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
SHORT-TERM DEBT:
Short-term borrowings, 7.9% at December 31, 1997.............. $ 10,000 $ 13,000
Reclassified to long-term debt................................ (10,000) (10,000)
-------- --------
Total short-term debt......................................... $ - $ 3,000
======== ========
LONG-TERM DEBT:
Senior debt-
Bank debt under revolving credit agreements,
7.1% at December 31, 1997.................................. $229,000 $275,000
Subordinated debt-
5 1/4% convertible subordinated notes due November 1, 2003.. - 29,757
9 1/4% senior subordinated notes due April 1, 2007.......... 125,000 -
8 3/4% senior subordinated notes due November 1, 2009....... 175,000 -
-------- --------
Sub-total long-term debt...................................... 529,000 304,757
Reclassified from short-term debt............................. 10,000 10,000
-------- --------
Total long-term debt.......................................... $539,000 $314,757
======== ========
</TABLE>
Senior Debt
On November 21, 1997, the Company entered into a new Revolving Credit
Agreement with commercial banks ("loan agreement"). As of December 31, 1997,
the loan agreement had a borrowing base and commitment of $365 million with
resulting unused borrowing capacity of $136 million. The borrowing base is
redetermined annually based on the value and expected cash flow of the Company's
proved oil and gas reserves. If outstanding borrowings are greater than the
redetermined borrowing base, outstanding borrowings must be reduced to the level
of the redetermined borrowing base within a specified period. Otherwise,
borrowings under the loan agreement do not mature until December 31, 2002, but
may be prepaid at any time without penalty. The Company periodically
renegotiates the loan agreement to increase the borrowing commitment and extend
the revolving facility. After the closing of the EEX Acquisition in April 1998
(Note 10), the Company expects the borrowing base and commitment to be at least
$560 million.
Reclassification of short-term to long-term debt represents unused capacity
under the loan agreement based on outstanding debt balances at December 31, 1997
and expected borrowing commitments through December 31, 1998. The Company has
both the intent and ability to refinance this debt on a long-term basis.
Restrictions set forth in the loan agreement include limitations on the
incurrence of additional indebtedness, the creation of certain liens, and the
redemption or prepayment of subordinated indebtedness. The loan agreement also
limits dividends to 25% of cash flow from operations for the latest four
consecutive quarterly periods. The Company is also required to maintain a
current ratio of not less than one (where unused borrowing commitments are
included as a current asset).
The loan agreement provides the option of borrowing at floating interest
rates based on the prime rate or at fixed rates for periods of up to six months
based on certificate of deposit rates or London Interbank Offered Rates
("LIBOR"). Borrowings under the loan agreement at December 31, 1997 were based
on LIBOR rates with a maturity of 30 days and accrued at the applicable LIBOR
rate plus 1%. Interest is paid at maturity, or quarterly if the term is for a
period of 90 days or more. The Company also incurs a commitment fee of 3/8% on
unused borrowing commitments. The weighted average interest rate on senior debt
was 6.9%, 6.7% and 7.1% during 1997, 1996 and 1995, respectively.
35
<PAGE>
Subordinated Debt
During 1995, the Company purchased and retired $8.3 million principal
amount of its 5 1/4% convertible subordinated notes ("5 1/4% Notes"), resulting
in an extraordinary gain of $656,000 (Note 1). During 1996, the Company
redeemed, purchased and retired a total of $9 million principal amount of the 5
1/4% Notes at a loss before income tax of $430,000, and holders of the 5 1/4%
Notes converted principal of $27.7 million into common stock at a conversion
price of $10.28 per share (Note 5). In January 1997, the remaining $29.7
million principal amount of the 5 1/4% Notes was converted by noteholders into
common stock and $29,000 principal was redeemed.
The Company sold $125 million of 9 1/4% senior subordinated notes ("9 1/4%
Notes") on April 2, 1997, and $175 million of 8 3/4% senior subordinated notes
("8 3/4% Notes") on October 28, 1997 (the 9 1/4% Notes and the 8 3/4% Notes
collectively referred to as "the Notes"). The Notes are general unsecured
indebtedness that is subordinate to bank borrowings under the loan agreement.
Net proceeds of $121.1 million and $169.9 million from the 9 1/4% Notes and 8
3/4% Notes, respectively, were used to reduce bank borrowings under the loan
agreement. The 9 1/4% Notes mature on April 1, 2007 and interest is payable
each April 1 and October 1, while the 8 3/4% Notes mature on November 1, 2009
with interest payable each May 1 and November 1.
The Company has the option to redeem the 9 1/4% Notes on April 1, 2002 and
the 8 3/4% Notes on November 1, 2002 at a price of approximately 105%, and
thereafter at prices declining ratably at each anniversary to 100% in 2005. In
addition, on or prior to April 1, 2000 and November 1, 2000 for the 9 1/4% Notes
and 8 3/4% Notes, respectively, the Company may redeem up to one-third of the
Notes with the net proceeds from one or more public equity offerings at a price
of approximately 109% plus accrued interest, subject to certain requirements.
Upon a change in control (as defined) of the Company, the holders of the Notes
have the right to require the Company to purchase all or a portion of their
Notes at 101% plus accrued interest.
The Notes were issued under indentures that place certain restrictions on
the Company, including limitations on additional indebtedness, liens, dividend
payments, treasury stock purchases, disposition of proceeds from asset sales,
transfers of assets and transactions with subsidiaries and affiliates.
See also Note 5 "- Registration Statement."
3. INCOME TAX
The effective income tax rate for the Company (before extraordinary item)
was different than the statutory federal income tax rate for the following
reasons (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Income tax expense (benefit) at the
federal statutory rate of 34%......................... $13,329 $10,531 $(5,786)
State and local taxes and other......................... 188 138 (39)
------- ------- -------
Income tax expense (benefit)............................ $13,517 $10,669 $(5,825)
======= ======= =======
</TABLE>
Components of income tax expense (benefit) before extraordinary item are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current income tax...................................... $ 124 $ 456 $ 198
Deferred income tax expense (benefit)................... 22,509 13,152 (3,221)
Net operating loss carryforward......................... (9,116) (2,939) (2,802)
------- ------- -------
Income tax expense (benefit)............................ $13,517 $10,669 $(5,825)
======= ======= =======
</TABLE>
36
<PAGE>
Deferred tax assets and liabilities are the result of temporary
differences between the financial statement carrying values and tax bases of
assets and liabilities. The Company's net deferred tax liabilities are recorded
as a current asset of $445,000 and a long-term liability of $21,320,000 at
December 31, 1997, and a current asset of $558,000 and a long-term liability of
$10,323,000 at December 31, 1996. Significant components of net deferred tax
liabilities are (in thousands):
<TABLE>
<CAPTION>
December 31
----------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Intangible development costs............................................. $37,856 $21,764
Tax depletion and depreciation in excess of financial statement amounts.. 8,008 3,298
Other.................................................................... 2,228 1,905
------- -------
Total deferred tax liabilities.................................... 48,092 26,967
------- -------
Deferred tax assets:
Net operating loss carryforwards......................................... 20,926 11,810
Trust development expenses............................................... 3,959 3,733
Accrued stock appreciation right and performance share compensation...... 739 787
Other.................................................................... 1,593 872
------- -------
Total deferred tax assets......................................... 27,217 17,202
------- -------
Net deferred tax liabilities............................................... $20,875 $ 9,765
======= =======
</TABLE>
As of December 31, 1997, the Company has estimated tax loss carryforwards
of approximately $62 million that are scheduled to expire in 2008 through 2012.
4. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases offices, vehicles and certain other equipment in its
primary locations under non-cancelable operating leases. As of December 31,
1997, minimum future lease payments for all non-cancelable lease agreements
(including the sale and operating leaseback agreements described below) were as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998................ $ 6,645
1999................ 6,445
2000................ 6,188
2001................ 6,102
2002................ 6,086
Remaining........... 8,707
-------
$40,173
=======
</TABLE>
Amounts incurred by the Company under operating leases (including renewable
monthly leases) were $9,132,000, $5,489,000, and $1,912,000 in 1997, 1996 and
1995, respectively.
In March 1996, the Company sold its Tyrone gas processing plant and related
gathering system for $28 million and entered an agreement to lease the facility
from the buyers for an initial term of eight years at annual rentals of $4
million, and with fixed renewal options for an additional 13 years. The Company
does not have the right or option to purchase, nor does the lessor have the
obligation to sell the facility at any time. However, if the lessor decides to
sell the facility at the end of the initial term or any renewal period, the
lessor must first offer to sell it to the Company at its fair market value.
Additionally, the Company has a right of first refusal of any third party offers
to buy the facility after the initial term. This transaction has been recorded
as a sale and operating leaseback, with no gain or loss on the sale. Proceeds
of the sale were used to reduce borrowings under the loan agreement (Note 2).
In November 1996, the Company sold its gathering system in Major County,
Oklahoma for $8 million and entered an agreement to lease the facility from the
buyers for an initial term of eight years, with fixed renewal options for an
additional 10 years. Rentals are adjusted monthly based on the 30-day LIBOR
rate (Note 2) and may be irrevocably fixed by the Company with 20 days advance
notice. As of December 31, 1997, annual rentals were $1.7 million. The Company
does not have the right or option to purchase, nor does the lessor have the
obligation to sell the facility at any time. However,
37
<PAGE>
if the lessor decides to sell the facility at the end of the initial term or any
renewal period, the lessor must first offer to sell it to the Company at its
fair market value. Additionally, the Company has a right of first refusal of any
third party offers to buy the facility after the initial term. This transaction
has been recorded as a sale and operating leaseback, with a deferred gain of
$3.4 million on the sale. The deferred gain is amortized over the lease term
based on pro rata rentals and is recorded in other long-term liabilities in the
accompanying balance sheet. Proceeds of the sale were used to reduce borrowings
under the loan agreement.
Employment Agreements
Two executive officers have entered into year-to-year employment agreements
with the Company. The agreements are automatically renewed each year-end unless
terminated by either party upon thirty days notice prior to each December 31.
Under these agreements, each of the officers receives a minimum annual salary of
$300,000 and is entitled to participate in any incentive compensation programs
administered by the Board of Directors. The agreements also provide that, in
the event the officer terminates his employment for good reason, as defined in
the agreement, the officer will receive severance pay equal to the amount that
would have been paid under the agreement had it not been terminated. If such
termination follows a change in control of the Company, the officer is entitled
to a lump-sum payment of three times his most recent annual compensation.
Sales Contracts
The Company sells gas to a single purchaser under a ten-year contract that
began August 1, 1995. From August 1995 through July 1998 ("initial period"),
10,000 Mcf of gas per day is sold at a contract price equal to a monthly natural
gas index for deliveries in Oklahoma plus $.35 per Mcf through December 1996,
and plus $.30 per Mcf from January 1997 through July 1998. For December 1997,
the initial period contract price was $2.65 per Mcf. From August 1998 through
July 2005 ("final period"), 11,650 Mcf of gas per day will be sold at a contract
price of approximately 10% of the month's average NYMEX futures contract for
West Texas Intermediate crude oil, adjusted for the point of physical delivery.
For December 1997, the final period contract price would have been $1.63 per
Mcf, assuming delivery in Oklahoma. The Company's spot price for December 1997
deliveries in Oklahoma was $2.32 per Mcf.
The Company has entered contracts with two purchasers to sell a total of
30,000 Mcf per day in March 1998 and 10,000 Mcf per day in April, May and June
1998. The production is to be delivered in Oklahoma at the NYMEX index price,
as adjusted for Btu content and gathering charges, less a weighted average
delivery point differential ("basis") of $.18 per Mcf. See Note 6.
Since August 1991, the Company has sold gas to a cogeneration facility
under a take-or-pay contract that expires in September 2004. The Company has
committed to sell up to 4,500 Mcf of gas per day under this contract, subject to
certain modifications, at a price based on a composite energy cost index. Since
the Company generally purchases such gas at spot prices, there is exposure to
loss during months of rapidly increasing gas prices. The Company recognized a
net loss on this contract of $551,000 and $206,000 during 1997 and 1996,
respectively, and a net profit of $453,000 during 1995.
Section 29 Tax Credits
In January 1998, the Company entered a contract to monetize Section 29 tax
credits generated by production from qualified properties, most of which were
acquired in December 1997. As a result, the Company anticipates receiving
approximately $1.8 million annually from 1998 through 2002 which will be
recorded as gas revenue.
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. The plaintiff alleges
that such deductions are a breach of the Company's contractual obligations to
the class and is seeking to recover an unspecified amount of damages as a result
of the alleged breach. The plaintiff is also seeking a determination of the
Company's obligations to the plaintiff and the class regarding production or
other costs. The Company has responded that it has complied with all of its
contractual obligations and denied that the matter is appropriate for
determination as a class action. The parties have conducted discovery on the
class certification issues, but no further action has been taken in the case.
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.
38
<PAGE>
The Company and certain of its subsidiaries are involved in various other
lawsuits and certain governmental proceedings arising in the ordinary course of
business. Company management and legal counsel do not believe that the ultimate
resolution of these claims, including the class action lawsuit described above,
will have a material effect on the Company's financial position, liquidity or
operations.
Other
To date, the Company's expenditures to comply with environmental or safety
regulations have not been significant and are not expected to be significant in
the future. However, developments such as new regulations, enforcement policies
or claims for damages could result in significant future costs.
5. EQUITY
Three-for-Two Stock Splits
The Company effected a three-for-two common stock split on March 19, 1997
and on February 25, 1998. All common stock shares, treasury stock shares and
per share amounts have been retroactively restated to reflect both stock splits.
Public Offering of Common Stock
In August 1995, the Company completed a public offering of 9,816,243 shares
of common stock, of which 5,062,500 shares were sold by the Company and
4,753,743 shares were sold by stockholders. The Company's net proceeds from the
offering of $29.5 million were used to partially fund a significant producing
property acquisition.
Performance Shares
During 1997, 1996 and 1995, the Company issued 180,000, 167,625 and 369,562
performance shares (Note 8).
Series A Convertible Preferred Stock
In September 1996, pursuant to the Company's exchange offer, a total of
2,979,249 shares of common stock were exchanged for 1,138,729 shares of Series
A convertible preferred stock ("Preferred Stock"). The Company incurred costs
of $540,000 related to this exchange offer. All exchanged shares of common
stock have been canceled and are authorized but unissued. Preferred Stock is
recorded in the accompanying consolidated balance sheet at its liquidation
preference of $25 per share.
Cumulative dividends on Preferred Stock are payable quarterly in arrears,
when declared by the Board of Directors, based on an annual rate of $1.5625 per
share. The Preferred Stock has no stated maturity and no sinking fund, and is
redeemable, in whole or in part, by the Company after October 15, 1999.
Redemption is allowed only under certain circumstances on or before October 15,
2000 at $26.09 per share, and thereafter unconditionally at prices declining
ratably annually to $25.00 per share after October 15, 2006, plus dividends
accrued and unpaid to the redemption date.
The Preferred Stock is convertible at the option of the holder at any time,
unless previously redeemed, into shares of common stock at a rate of 2.16 shares
of common stock for each share of Preferred Stock, subject to adjustment in
certain events. Preferred Stock holders are allowed one vote for each common
share into which their Preferred Stock may be converted.
Treasury Stock
During 1997, 1996 and 1995, the Company acquired 2,571,396, 3,341,515 and
45,490 shares of its common stock at an average cost per share of $12.06, $10.45
and $7.72, respectively. Additionally, the Company received 421,212, 457,994
and 21,465 shares in 1997, 1996 and 1995 that are held in treasury, as payment
for the option price upon exercise of stock options.
Convertible Debt
During November and December 1996, $27.7 million principal of the Company's
5 1/4% convertible subordinated notes (Note 2) was converted by noteholders into
2,696,521 shares of common stock. In January 1997, principal of $29.7 million
of the notes was converted by noteholders into 2,892,363 shares of common stock.
39
<PAGE>
Common Stock Warrants
As partial consideration for producing properties acquired in December 1997
(Note 10), the Company issued warrants to purchase 937,500 shares of common
stock at a price of $15.31 per share for a period of five years. These warrants
were valued at $5,725,000 and were recorded as additional paid-in capital.
Common Stock Dividends
Since the Company's inception, the Board of Directors has declared
quarterly dividends of $0.033 per common share through 1996 and $0.037 per
common shares in 1997. In January 1998, the Board of Directors increased its
regular quarterly cash dividend to $0.04 per share payable April 15, 1998 to
shareholders of record on March 31, 1998. See Note 2 regarding restrictions on
dividends.
Registration Statement
On February 25, 1998, the Company filed a shelf registration statement with
the Commission to potentially offer securities which may include debt
securities, preferred stock, common stock or warrants to purchase debt
securities, preferred stock or common stock. The securities will be offered at
an aggregate offering price not to exceed $200 million, at prices and on terms
to be determined at the time of sale. Net proceeds from the sale of such
securities will be used for general corporate purposes, including reduction of
bank borrowings under the loan agreement (Note 2).
6. FINANCIAL INSTRUMENTS
Commodity Price Hedging Instruments
The Company periodically enters into futures contracts, energy swaps,
collars, basis swaps and option agreements to hedge its exposure to price
fluctuations on crude oil and natural gas sales. The Company did not have any
significant hedging activity from 1994 through 1997. See Note 4.
In January 1998, the Company entered into gas price collars with floor and
ceiling prices of $2.01 and $2.46 per Mcf for 30,000 Mcf per day from March
through September 1998. In February and March 1998, the Company entered into
futures contracts to sell 10,000 Mcf per day from May through August 1998 at a
price of $2.35 per Mcf. Prices to be realized by the Company for hedged
production will be less than these hedged prices because of location, quality
and other adjustments.
In January 1998, the Company entered into basis swap agreements with three
financial institutions that effectively fix the delivery point differential
("basis") at $0.27 per Mcf on San Juan Basin gas production of 10,000 Mcf per
day in January 1998, 20,000 Mcf per day from February 1998 through March 1999,
and 10,000 Mcf per day from April 1999 through December 2000.
Fair Value
Because of their short-term maturity, the fair value of cash and cash
equivalents, accounts receivable and accounts payable approximates their
carrying values at December 31, 1997 and 1996. The following are estimated fair
values and carrying values of the Company's other financial instruments (none of
which are held or issued for trading purposes) at these dates (in thousands):
<TABLE>
<CAPTION>
Asset (Liability)
---------------------------------------------
December 31, 1997 December 31, 1996
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Investment in equity securities.. $ - $ - $ 16,714 $ 16,714
Short-term debt.................. $ - $ - $ (3,000) $ (3,000)
Long-term debt................... $(539,000) $(538,288) $(314,757) $(317,331)
</TABLE>
The above fair values were estimated based on: investment in equity
securities- quoted market price; short and long-term debt- short-term borrowings
and bank borrowings approximate the carrying value because of short-term
interest rate maturities, while the fair value of subordinated notes is
estimated to be $299.3 million and $32.2 million at December 31, 1997 and 1996
based on a current market quote.
40
<PAGE>
Concentrations of Credit Risk
Although the Company's cash equivalents and derivative financial
instruments are exposed to the risk of credit loss, the Company does not believe
such risk to be significant. Cash equivalents are high-grade, short-term
securities, placed with highly rated financial institutions. Most of the
Company's receivables are from a broad and diverse group of energy companies
and, accordingly, do not represent a significant credit risk. The Company's gas
marketing activities generate receivables from customers including pipeline
companies, local distribution companies and end-users in various industries.
Letters of credit or other appropriate security are obtained as considered
necessary to limit risk of loss. The Company recorded an allowance for
collectibility of all accounts receivable of $911,000 at December 31, 1997 and
1996.
7. EARNINGS PER SHARE
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>
Earnings
Earnings Shares per Share
--------- ------- ------------
<S> <C> <C> <C>
1997
- ------------------------------------------------------
Basic
Net income..................................... $ 25,684
Preferred stock dividends...................... (1,779)
--------
Earnings available to common stock - basic..... 23,905 39,773 (a) $ 0.60
=========
Diluted
Effect of dilutive securities (b):
Stock options.......................... - 451
Warrants..................................... - 3
5 1/4% convertible subordinated notes.. 46 115
-------- ------
Earnings available to common stock - diluted... $ 23,951 40,342 (a) $ 0.59
======== ====== =========
1996
- ------------------------------------------------------
Basic
Net income..................................... $ 20,304
Preferred stock dividends...................... (514)
--------
Earnings available to common stock - basic..... 19,790 39,913 $ 0.50
Diluted =========
Effect of dilutive securities:
Stock options.......................... - 361
5 1/4% convertible subordinated notes........ 2,570 6,039
-------- ------
Earnings available to common stock - diluted... $ 22,360 46,313 $ 0.48
======== ====== =========
1995
- ------------------------------------------------------
Basic
Net loss before extraordinary item - basic..... $(11,194) 38,072 $ (0.29)
====== =========
Extraordinary item............................. 656
--------
Net loss after extraordinary item - basic...... $(10,538) 38,072 $ (0.28)
======== ====== =========
Diluted
Effect of dilutive securities.................. - (c) - (c)
Net loss before extraordinary item - diluted... $(11,194) 38,072 $ (0.29)
======== ====== =========
Net loss after extraordinary item - diluted.... $(10,538) 38,072 $ (0.28)
======== ====== =========
</TABLE>
(a) The Company acquired 484,000 treasury shares from January through
March 1998.
(b) Based on common shares outstanding at December 31, 1997, potential
conversion of Series A convertible preferred stock becomes dilutive to
earnings per share at annual and quarterly net income levels exceeding
approximately $28.5 million and $7.1 million, respectively.
(c) Because of the loss, convertible securities have an antidilutive
effect on loss per share.
41
<PAGE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
The consolidated statements of cash flows exclude the following non-cash
transactions (Notes 5, 9 and 10):
- Conversion of $29.7 million and $27.7 million principal amount of 5 1/4%
Convertible subordinated notes into 2,892,363 and 2,696,521 shares of
common stock in 1997 and 1996, respectively
- Issuance of warrants in 1997 to purchase 937,500 shares of common stock
and exchange of properties valued at $15.7 million, as partial
consideration for producing properties acquired
- Grants of 180,000, 167,625 and 369,562 performance shares to key
employees and nonemployee directors in 1997, 1996 and 1995,
respectively.
- Receipt of 421,212, 457,994, and 21,465 shares of common stock for the
option price of exercised stock options in 1997, 1996 and 1995
- Exchange of 2,979,249 shares of common stock for 1,138,729 shares of
Series A convertible preferred stock in 1996
Interest payments during 1997 totaled $21,276,000, including $1,185,000 of
capitalized interest. Interest payments during 1996 and 1995 totaled
$16,369,000 and $12,202,000 respectively. Income tax payments during 1997, 1996
and 1995 totaled $941,000, $6,000 and $541,000, respectively.
9. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company sponsors a 401(k) benefit plan that allows employees to
contribute and defer a portion of their wages. The Company matches employee
contributions of up to 8% of wages (10% of wages as of January 1, 1998).
Employee contributions vest immediately while the Company's matching
contributions vest 100% after three years of service. All employees over 21
years of age and with at least three months service with the Company may
participate. Company contributions under the plan were $1,180,000, $979,000 and
$814,000 in 1997, 1996 and 1995, respectively.
1991 Stock Incentive Plan
A total of 1,012,500 incentive units ("Units"), have been granted to
directors, officers and other key employees under the 1991 Stock Incentive Plan
("1991 Plan"). Units consist of a stock option ("Option") and a stock
appreciation right ("SAR"). An Option provides the right to purchase one share
of common stock at the exercise price, which generally is the market price at
the date the Unit is granted. A SAR entitles the recipient to a payment equal to
twice the excess of the market price of one share of common stock on the date
the Option is exercised over the exercise price. As of December 31, 1997, 3,341
Units remain available for grant under the 1991 Plan. General and administrative
expense includes stock incentive compensation related to SARs of $359,000, $3.7
million and $2.3 million for 1997, 1996 and 1995, respectively. SAR cash
payments were $288,000, $7.1 million and $800,000 in 1997, 1996 and 1995,
respectively.
1994 and 1997 Stock Incentive Plans
Under the 1994 Stock Incentive Plan ("1994 Plan") and the 1997 Stock
Incentive Plan ("1997 Plan"), a total of 2,250,000 shares of common stock may be
issued under each plan to directors, officers and other key employees pursuant
to grants of Options or performance shares of common stock ("performance
shares"). At December 31, 1997, 25,177 and 320,625 shares remained available
for grant under the 1994 Plan and the 1997 Plan, respectively. Options vest and
become exercisable on terms specified when granted by the compensation committee
("the Committee") of the Board of Directors. Options granted under the 1994
Plan are not exercisable prior to six months and no Option is exercisable after
ten years from its grant date. Options granted under the 1994 Plan and the 1997
Plan generally vest in equal amounts over five years, with provisions for
earlier vesting if specified performance requirements are met. As of December
31, 1997, there are 878,625 outstanding stock options that vest when the common
stock price reaches $20.
Performance shares are subject to restrictions determined by the Committee
and are subject to forfeiture if performance targets established by the
Committee are not met. Otherwise, holders of performance shares generally have
all the voting, dividend and other rights of other stockholders. The Company
issued to key employees 169,875, 154,125 and
42
<PAGE>
356,062 performance shares during 1997, 1996 and 1995, respectively, of which
243,000 and 356,062 vested in 1997 and 1996, respectively, when the common stock
price reached specified levels. General and administrative expense includes
compensation related to these performance share grants of $3.3 million, $2.5
million and $2.8 million in 1997, 1996 and 1995, respectively. As of December
31, 1997, there are 81,000 performance shares that vest when the common stock
price reaches $20. The Company also issued to nonemployee directors a total of
10,125 performance shares in 1997 and 13,500 in each of 1996 and 1995.
Unit/ Option Activity and Balances
The following summarizes Unit and Option activity and balances from 1995
through 1997:
<TABLE>
<CAPTION>
Weighted 1994 and
Average 1991 Plan 1997 Plan
Exercise Incentive Stock
Price Units Options
-------- ---------- ----------
<S> <C> <C> <C>
1995
----------------------------------
Beginning of year........... $ 6.12 1,006,502 1,229,659
Grants................... 7.37 - 177,187
Exercises................ 5.36 (169,790) -
Forfeitures.............. 6.55 (902) (7,596)
--------- ---------
End of year................. 6.27 835,810 1,399,250
========= =========
Exercisable at end of year.. 5.70 783,689 212,256
========= =========
1996
----------------------------------
Beginning of year........... $ 6.27 835,810 1,399,250
Grants................... 9.64 - 303,750
Exercises................ 5.70 (784,658) (211,079)
Forfeitures.............. 6.61 (189) (4,925)
--------- ---------
End of year................. 7.32 50,963 1,486,996
========= =========
Exercisable at end of year.. 6.66 50,963 1,006,146
========= =========
1997
----------------------------------
Beginning of year........... $ 7.32 50,963 1,486,996
Grants................... 12.11 - 1,757,250
Exercises................ 6.75 (26,213) (897,229)
Forfeitures.............. 8.79 - (18,315)
--------- ---------
End of year................. 11.11 24,750 2,328,702
========= =========
Exercisable at end of year.. 10.96 24,750 1,119,044
========= =========
</TABLE>
The following summarizes information about Units/ Options at December 31,
1997:
<TABLE>
<CAPTION>
Units/ Options Outstanding Units/ Options Exercisable
------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Number Term Price Number Price
- --------------- --------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
1991 Plan
$5.32 - $7.56.... 24,750 4.1 years $ 5.44 24,750 $ 5.44
1994 and 1997 Plans
$6.61 - $7.89.... 305,580 7.3 years 7.11 198,467 6.90
$9.67 - $10.92... 272,622 8.4 years 9.68 48,702 9.68
$12.04 - $13.40.. 1,750,500 9.4 years 12.12 871,875 12.12
--------- ---------
2,353,452 9.0 years 11.11 1,143,794 10.96
========== =========
</TABLE>
43
<PAGE>
Estimated Fair Value of Grants
Using the Black-Scholes option-pricing model and the following assumptions,
the weighted average fair value of option grants was estimated to be $5.05,
$3.82 and $2.58 for options granted in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rates......... 6.4% 6.4% 5.8%
Dividend yield................... 1.6% 1.4% 1.4%
Weighted average expected lives.. 5 years 6 years 6 years
Volatility....................... 47% 35% 31%
</TABLE>
Pro Forma Effect of Recording Stock-Based Compensation at Estimated Fair
Value
The following are pro forma earnings (loss) available to common stock and
earnings (loss) per common share for 1997 and 1996, as if stock-based
compensation had been recorded at the estimated fair value of stock awards at
the grant date, as prescribed by SFAS 123, Accounting for Stock-Based
Compensation (Note 1):
<TABLE>
<CAPTION>
(in thousands, except per share data)
1997 1996 1995
------- --------- ---------
<S> <C> <C> <C>
Earnings (loss) available to common stock
As reported...................................... $23,905 $ 19,790 $(10,538)
Pro forma........................................ $21,646 $ 19,767 $(11,200)
Earnings (loss) per common share:
Basic As reported............................. $ 0.60 $ 0.50 $ (0.28)
Pro forma............................... $ 0.54 $ 0.50 $ (0.29)
Diluted As reported............................. $ 0.59 $ 0.48 $ (0.28)
Pro forma............................... $ 0.54 $ 0.48 $ (0.29)
</TABLE>
10. ACQUISITIONS
From July 1996 through May 1997, the Company purchased 1,326,300, or 22%,
of the outstanding Units in the Royalty Trust at a cost of $18.2 million, funded
primarily with bank debt. The Company purchased an additional 33,700 Units in
January 1998 at a cost of $500,000. The Board of Directors has authorized the
purchase of up to two million, or 33%, of the outstanding Units. The Company
considers its investment in Units as an acquisition of oil and gas properties;
accordingly, the cost of these Units has been included in producing properties
in the accompanying consolidated balance sheets.
On July 19, 1996, the Company acquired primarily gas-producing properties
in the Green River Basin of southwestern Wyoming from Enserch Exploration
("Enserch Acquisition") for an adjusted purchase price of $39.4 million. The
properties primarily consist of operated interests in the Fontenelle, Nitchie
Gulch and Pine Canyon fields. On November 21, 1996, the Company acquired
additional interests in the Fontenelle Unit, the most significant property
included in the Enserch Acquisition, for an adjusted purchase price of $12.5
million. These acquisitions were funded by bank debt and cash flow from
operations.
On December 2, 1996, the Company acquired primarily gas-producing
properties in the Northern Val Verde area of the Permian Basin of West Texas.
The properties are primarily operated interests in the Henderson, Ozona and
Davidson Ranch fields. The adjusted purchase price of $28.1 million was funded
by bank debt and cash flow from operations.
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 from a subsidiary of
Amoco Corporation ("Amoco Acquisition") 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
44
<PAGE>
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 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 years ended December 31, 1997 and 1996 as if these acquisitions had been
consummated as of January 1, 1996. These pro forma results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
(in thousands, except per share data) Pro Forma (Unaudited)
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues.................................... $237,515 $216,915
======== ========
Net income.................................. $ 26,469 $ 19,507
======== ========
Earnings available to common stock.......... $ 24,690 $ 18,993
======== ========
Earnings per common share:
Basic.................................. $ 0.62 $ 0.48
======== ========
Diluted................................ $ 0.61 $ 0.47
======== ========
</TABLE>
On February 25, 1998, the Company entered into an agreement with EEX
Corporation to acquire producing properties and undeveloped acreage in the East
Texas Basin for $265 million ("EEX Acquisition"). The transaction is
anticipated to close in late April 1998 with an effective date of January 1,
1998. The preliminary purchase price of $265 million is expected to be reduced
to $245 million by purchase price adjustments. The acquisition is also subject
to third party consents and other typical purchase price adjustments. The
Company plans to finance the acquisition through bank lines of credit.
11. QUARTERLY FINANCIAL DATA (Unaudited)
The following are summarized quarterly financial data for the years ended
December 31, 1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter
---------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
- ---------------------------------
Revenues.................... $53,494 $45,969 $44,086 $57,123
Gross profit (a)............ $25,833 $17,044 $14,594 $24,225
Earnings available to
common stock.............. $10,650 $ 3,735 $ 2,779 $ 6,741
Earnings per common share
Basic..................... $ 0.26 $ 0.09 $ 0.07 $ 0.17
Diluted................... $ 0.25 $ 0.09 $ 0.07 $ 0.17
Average shares outstanding.. 40,395 39,498 39,581 39,629
1996
- ---------------------------------
Revenues.................... $36,081 $36,735 $39,201 $49,374
Gross profit (a)............ $13,482 $13,606 $14,240 $23,137
Earnings available to
common stock.............. $ 4,671 $ 1,807 $ 4,647 $ 8,665
Earnings per common share
Basic..................... $ 0.11 $ 0.04 $ 0.12 $ 0.23
Diluted................... $ 0.11 $ 0.04 $ 0.11 $ 0.22
Average shares outstanding.. 41,402 41,171 39,644 37,465
</TABLE>
(a) Revenues less expenses, other than general and administrative, net
interest expense and income tax.
45
<PAGE>
12. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(Unaudited)
All of the Company's operations are directly related to oil and gas
producing activities located in the United States.
Costs Incurred Related to Oil and Gas Producing Activities
The following table summarizes costs incurred whether such costs are
capitalized or expensed for financial reporting purposes (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Acquisitions:
Producing properties.... $251,663 $105,252 $130,929
Undeveloped properties.. 3,964 563 413
Development (a)............ 86,555 44,758 20,797
Exploration (b)............ 2,088 280 264
-------- -------- --------
Total...................... $344,270 $150,853 $152,403
======== ======== ========
</TABLE>
(a) Includes $800,000 of capitalized interest in 1997. No interest was
capitalized in prior years.
(b) Includes geological and geophysical costs of $1,672,000, $103,000 and
$169,000 in 1997, 1996 and 1995, respectively.
Proved Reserves
Independent petroleum engineers have estimated the Company's proved oil and
gas reserves, all of which are located in the United States. Proved reserves
are the estimated quantities that geologic and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are
the quantities expected to be recovered through existing wells with existing
equipment and operating methods. Due to the inherent uncertainties and the
limited nature of reservoir data, such estimates are subject to change as
additional information becomes available. The reserves actually recovered and
the timing of production of these reserves may be substantially different from
the original estimate. Revisions result primarily from new information obtained
from development drilling and production history and from changes in economic
factors.
Standardized Measure
The standardized measure of discounted future net cash flows ("standardized
measure") and changes in such cash flows are prepared using assumptions required
by the Financial Accounting Standards Board. Such assumptions include the use
of year-end prices for oil and gas and year-end costs for estimated future
development and production expenditures to produce year-end estimated proved
reserves. Discounted future net cash flows are calculated using a 10% rate.
Estimated future income taxes are calculated by applying year-end statutory
rates to future pre-tax net cash flows, less the tax basis of related assets and
applicable tax credits.
The standardized measure does not represent management's estimate of the
Company's future cash flows or the value of proved oil and gas reserves.
Probable and possible reserves, which may become proved in the future, are
excluded from the calculations. Furthermore, year-end prices used to determine
the standardized measure of discounted cash flows, are influenced by seasonal
demand and other factors and may not be the most representative in estimating
future revenues or reserve data.
46
<PAGE>
<TABLE>
<CAPTION>
Oil Gas Natural Gas
(Bbls) (Mcf) Liquids (Bbls) (a)
---------------- ----------- ------------------
PROVED RESERVES (in thousands)
<S> <C> <C> <C>
December 31, 1994............................. 33,581 177,061
Revisions................................... 1,314 4,507
Extensions, additions and discoveries....... 6,378 41,899
Production.................................. (3,532) (28,619)
Purchases in place.......................... 3,056 170,711
Sales in place.............................. (809) (7,489)
---------- ----------
December 31, 1995............................. 39,988 358,070
Revisions................................... 2,361 29,379
Extensions, additions and discoveries....... 2,220 37,480
Production.................................. (3,508) (37,275)
Purchases in place.......................... 1,552 153,400
Sales in place.............................. (173) (516)
---------- ----------
December 31, 1996............................. 42,440 540,538 -
Revisions................................... (989) (14,182) -
Extensions, additions and discoveries....... 9,263 112,906 -
Production.................................. (3,980) (49,587) (80)
Purchases in place.......................... 3,195 248,040 13,890
Sales in place.............................. (2,075) (21,940) -
---------- ---------- ----------
December 31, 1997............................. 47,854 815,775 13,810
========== ========== ==========
PROVED DEVELOPED RESERVES
December 31, 1994............................. 26,948 164,169
========== ==========
December 31, 1995............................. 28,946 320,230
========== ==========
December 31, 1996............................. 31,883 466,412
========== ==========
December 31, 1997............................. 33,835 677,710 11,494
========== ========== ==========
STANDARDIZED MEASURE OF DISCOUNTED FUTURE December 31
-------------------------------------
NET CASH FLOWS RELATING TO PROVED RESERVES 1997 1996 1995
---------- ---------- ----------
(in thousands)
Future cash inflows........................... $2,604,453 $2,634,641 $1,322,345
Future costs:.................................
Production.................................. (979,317) (819,780) (536,831)
Development................................. (140,594) (77,837) (72,607)
---------- ---------- ----------
Future net cash flows before income tax....... 1,484,542 1,737,024 712,907
Future income tax............................. (291,375) (450,987) (131,019)
---------- ---------- ----------
Future net cash flows......................... 1,193,167 1,286,037 581,888
10% annual discount........................... (551,058) (579,556) (246,732)
---------- ---------- ----------
Standardized measure (b)...................... $ 642,109 $ 706,481 $ 335,156
========== ========== ==========
</TABLE>
(a) Proved reserves attributable to natural gas liquids were not considered
significant prior to the Amoco Acquisition in December 1997 (Note 10).
Natural gas liquids proved reserves as disclosed include only San Juan
Basin properties purchased in this acquisition.
(b) Before income tax, the standardized measure (or discounted present value
of future net cash flows) was $782,322,000 $946,150,000 and $405,706,000
at December 31, 1997, 1996 and 1995, respectively.
47
<PAGE>
<TABLE>
<CAPTION>
CHANGES IN STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS 1997 1996 1995
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Standardized measure, January 1........ $ 706,481 $ 335,156 $213,146
--------- --------- --------
Revisions:
Prices and costs..................... (388,559) 360,053 67,528
Quantity estimates................... 55,497 34,099 8,709
Accretion of discount................ 86,845 37,291 22,242
Future development costs............. (120,073) (36,267) (41,416)
Income tax........................... 99,455 (169,118) (36,109)
Production rates and other........... (1,614) (155) (2,682)
--------- --------- --------
Net revisions...................... (268,449) 225,903 18,272
Extensions, additions and discoveries.. 92,582 49,802 44,135
Production............................. (125,343) (97,106) (56,909)
Development costs...................... 73,062 33,484 16,616
Purchases in place (a)................. 207,387 160,670 106,137
Sales in place......................... (43,611) (1,428) (6,241)
--------- --------- --------
Net change......................... (64,372) 371,325 122,010
--------- --------- --------
Standardized measure, December 31...... $ 642,109 $ 706,481 $335,156
========= ========= ========
</TABLE>
(a) Based on the year-end present value (at year-end prices and costs) plus
the cash flow received from such properties during the year, rather than
the estimated present value at the date of acquisition.
Year-end oil prices used in the estimation of proved reserves and
calculation of the standardized measure were $15.50, $24.25, $18.00, and $16.00
per Bbl at December 31, 1997, 1996, 1995 and 1994, respectively. Year-end
average gas prices were $2.20, $3.02, $1.68, and $1.66 per Mcf at December 31,
1997, 1996, 1995 and 1994. Year-end average natural gas liquids prices were
$11.07 at December 31, 1997. Proved oil and gas reserves and the standardized
measure at December 31, 1997 include 375,000 Bbls and 8,790,000 Mcf, and
$9,286,000, respectively, attributable to the Company's 22% ownership of the
Royalty Trust (Note 10).
Price and cost revisions are primarily the net result of changes in year-
end prices, based on beginning of year reserve estimates. Quantity estimate
revisions during 1997 are primarily the result of proved undeveloped reserve
additions attributable to increased development costs. Quantity estimate
revisions during 1996 are primarily the effect of the extended economic life of
proved reserves that resulted from development workovers and higher year-end oil
and gas prices.
48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Cross Timbers Oil Company
We have audited the accompanying consolidated balance sheets of Cross Timbers
Oil Company and its subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
As described in Note 1, effective October 1, 1995, the Company adopted Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 18, 1998
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of March
1998.
CROSS TIMBERS OIL COMPANY
By Bob R. Simpson
--------------------------------------
Bob R. Simpson, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 30th day of March 1998.
PRINCIPAL EXECUTIVE OFFICERS (AND DIRECTORS) DIRECTORS
Bob R. Simpson J. Luther King, Jr.
- --------------------------------------- -----------------------------------
Bob R. Simpson, Chairman of the Board J. Luther King, Jr.
and Chief Executive Officer
Steffen E. Palko Jack P. Randall
- --------------------------------------- -----------------------------------
Steffen E. Palko, Vice Chairman Jack P. Randall
of the Board and President
J. Richard Seeds Scott G. Sherman
- --------------------------------------- -----------------------------------
J. Richard Seeds, Scott G. Sherman
Executive Vice President
PRINCIPAL FINANCIAL OFFICER PRINCIPAL ACCOUNTING OFFICER
Louis G. Baldwin Bennie G. Kniffen
- --------------------------------------- -----------------------------------
Louis G. Baldwin, Senior Vice President Bennie G. Kniffen,
and Chief Financial Officer Senior Vice President
and Controller
50
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description Page
- -------- ----------------------------------------------------------- ------
3.1 Certificate of Incorporation of Cross Timbers Oil Company,
as amended through and restated on May 18, 1994 (incorporated
by reference to Exhibit 4.1 to Registration Statement on
Form S-8, File No. 33-81766)
3.2 Bylaws of Cross Timbers Oil Company (incorporated by
reference to Exhibit 3.4 to Registration Statement on
Form S-1, File No. 33-59820)
4.1 Form of Certificate of Designations of Series A Convertible
Preferred Stock, par value $.01 per share (incorporated by
reference to Exhibit 4 to Form 8-A/A, Amendment No. 1, dated
September 3, 1996)
4.2 Indenture dated as of April 1, 1997, between Cross Timbers
Oil Company and The Bank of New York, as Trustee for the
9 1/4% Senior Subordinated Notes due 2007 (incorporated
by reference to Exhibit 4.1 to Registration Statement of
Form S-4, File No. 333-26603).
4.3 Indenture, dated as of October 28, 1997, between Cross Timbers
Oil Company and the Bank of New York, as Trustee for the
8 3/4% Senior Subordinated Notes due 2009 (incorporated by
reference to Exhibit 4.1 to Registration Statement on
Form S-4, File No. 333-39097).
10.1 Revolving Credit Agreement dated November 21, 1997, between
Cross Timbers Oil Company and certain commercial banks
named therein (incorporated by reference to Exhibit 99.1
to Form 8-K dated December 1, 1997)
10.2 Employment Agreement between the Company and Bob R. Simpson,
dated February 21, 1995 (incorporated by reference to
Exhibit 10.6 to Form 10-K for the year ended
December 31, 1994)
10.3 Employment Agreement between the Company and Steffen E. Palko,
dated February 21, 1995 (incorporated by reference to Exhibit
10.7 to Form 10-K for the year ended December 31, 1994)
10.4 1991 Stock Incentive Plan (incorporated by reference to
Exhibit 10.7 to Registration Statement on Form S-1,
File No. 33-59820)
10.5 Form of grant under 1991 Stock Incentive Plan (incorporated by
reference to Exhibit 10.8 to Registration Statement on Form S-1,
File No. 33-59820)
10.6 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 4.4 to Registration Statement on Form S-8, File
No. 33-81766)
10.7 Form of grant under 1994 Stock Incentive Plan (incorporated by
reference to Exhibit 4.5 to Registration Statement on Form S-8,
File No. 33-81766)
10.8 1997 Stock Incentive Plan, as amended February 25, 1998
51
<PAGE>
Exhibit
No. Description Page
- -------- ----------------------------------------------------------- ------
10.9 Form of grant under 1997 Stock Incentive Plan, as amended
February 25, 1998
a. Employee option grant
b. Employee performance share grant
c. Non-employee director option grant
d. Non-employee director performance share grant
e. Amendment to award agreements under the 1997 Stock
Incentive Plan
10.10 Registration Rights Agreement among Cross Timbers Oil Company
and partners of Cross Timbers Oil Company, L.P. (incorporated
by reference to Exhibit 10.9 to Registration Statement on
Form S-1, File No. 33-59820)
10.11 Warrant Agreement dated December 1, 1997 by and between
Cross Timbers Oil Company and Amoco Corporation
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Cross Timbers Oil Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Miller and Lents, Ltd.
- --------------------------------
Copies of the above exhibits not contained herein are available, at the
cost of reproduction, to any security holder upon written request to the
Secretary, Cross Timbers Oil Company, 810 Houston St., Suite 2000, Fort
Worth, Texas 76102.
52
<PAGE>
EXHIBIT 10.8
CROSS TIMBERS OIL COMPANY
1997 STOCK INCENTIVE PLAN
Amended as of February 25, 1998
<PAGE>
CROSS TIMBERS OIL COMPANY
STOCK INCENTIVE PLAN
ARTICLE 1. GENERAL
Section 1.1 Purpose. The purposes of this Stock Incentive Plan (the
"Plan") are to: (1) associate the interests of the management of CROSS TIMBERS
OIL COMPANY and its subsidiaries and affiliates (collectively referred to as the
"Company") closely with the stockholders to generate an increased incentive to
contribute to the Company's future success and prosperity, thus enhancing the
value of the Company for the benefit of its stockholders; (2) provide management
with a proprietary ownership interest in the Company commensurate with Company
performance, as reflected in increased stockholder value; (3) maintain
competitive compensation levels thereby attracting and retaining highly
competent and talented directors and employees; and (4) provide an incentive to
management for continuous employment with the Company. Certain capitalized
terms are defined in Section 6.7.
Section 1.2. Administration.
(a) The Plan shall be administered by the Compensation Committee of
the Board of Directors of the Company (the "Committee"), as constituted
from time to time, consisting of two or more members who shall each be an
Outside Director appointed by the Board of Directors.
(b) The Committee shall have the authority in its sole discretion
and from time to time to:
(i) designate the executive employees (as defined in
Section 1.3) of the Company eligible to participate in the Plan;
(ii) grant Awards provided in the Plan in such form and
amount as the Committee shall determine;
(iii) impose such limitations, restrictions and conditions,
not inconsistent with this Plan, upon any such Award as the Committee
shall deem appropriate; and
(iv) interpret the Plan and any agreement, instrument or
other document executed in connection with the Plan, adopt, amend and
rescind rules and regulations relating to the Plan, and make all other
determinations and take all other action necessary or advisable for
the implementation and administration of the Plan.
(c) Decisions and determinations of the Committee on all matters
relating to the Plan shall be in its sole discretion and shall be final,
conclusive and binding upon all persons, including the Company, any
participant, any stockholder of the Company and any employee.
1
<PAGE>
A majority of the members of the Committee may determine its actions and
fix the time and place of its meetings. No member of the Committee shall be
liable for any action taken or decision made in good faith relating to the
Plan or any Award thereunder.
Section 1.3. Eligibility for Participation. Participants in the Plan
shall be selected by the Committee from the executive employees of the Company
or its Subsidiaries. For the purposes of this Plan, (i) the term "executive
employee" shall include only employees who are officers, or who are determined
by the Committee, in its discretion, to be key professional, managerial,
administrative, or technical employees or supervisors, and (ii) the term
"Subsidiary" means any corporation or other entity of which at least 50% of the
voting securities are owned by the Company directly or through one or more other
corporations, each of which is also a Subsidiary. With respect to non-corporate
entities, Subsidiary shall mean an entity managed or controlled by the Company
or any Subsidiary and with respect to which the Company or any Subsidiary is
allocated more than half of the profits and losses thereof.
Section 1.4. Types of Awards Under Plan. Awards under the Plan may be in
the form of any one or more of the following:
(i) Stock Options, as described in Article II;
(ii) Incentive Stock Options, as described in Article III; and/or
(iii) Performance Shares, as described in Article IV.
Awards under the Plan shall be evidenced by an Award Agreement between the
Company and the recipient of the Award, in form and substance satisfactory to
the Committee, and not inconsistent with this Plan. Award Agreements may
provide such vesting schedules for Stock Options and Incentive Stock Options,
and such other terms, conditions and provisions as are not inconsistent with the
terms of this Plan. Subject to the express provisions of the Plan, and within
the limitations of the Plan, the Committee may modify, extend or renew
outstanding Award Agreements, or accept the surrender of outstanding Awards and
authorize the granting of new Awards in substitution therefor. However, except
as provided in this Plan, no modification of an Award shall impair the rights of
the holder thereof without his consent.
Section 1.5. Aggregate Limitation on Awards.
(a) Shares of stock which may be issued under the Plan shall be
authorized and unissued or treasury shares of Common Stock of the Company
("Common Stock"). The maximum number of shares of Common Stock which may
be issued pursuant to Awards issued under the Plan shall be 2,250,000, of
which 1,125,000 may be issued as Performance Shares. In addition, the
maximum number of shares that may be issued to any individual hereunder
pursuant to Options or Performance Shares issued hereunder during any one
year shall be 225,000 and 112,500, respectively, and the maximum number
that may be issued to any individual pursuant to Options or Performance
Shares issued hereunder during the life of the Plan shall be 450,000 and
225,000, respectively.
2
<PAGE>
(b) For purposes of calculating the maximum number of shares of
Common Stock which may be issued under the Plan at any time:
(i) all the shares issued (including the shares, if any,
withheld for tax withholding requirements) under the Plan shall be
counted when issued upon exercise of a Stock Option or Incentive Stock
Option; and
(ii) only the net shares issued as Performance Shares shall be
counted (shares reacquired by the Company because of failure to
achieve a performance target or failure to become fully vested for any
other reason shall again be available for issuance under the Plan).
(c) Shares tendered by a participant as payment for shares issued
upon exercise of a Stock Option or Incentive Stock Option may be made
available for issuance under the Plan. Any shares of Common Stock subject
to a Stock Option or Incentive Stock Option which for any reason is
terminated, unexercised or expires shall again be available for issuance
under the Plan.
Section 1.6. Effective Date and Term of Plan.
(a) The Plan shall become effective on the date adopted by the
Board of Directors, subject to approval by the holders of a majority of the
votes of shares of Common Stock and Preferred Stock present in person or by
proxy and entitled to vote at the Annual Meeting of stockholders of the
Company held in 1997.
(b) No Awards shall be made under the Plan after the tenth
anniversary of the effective date of this Plan; provided, however, that
the Plan and all Awards made under the Plan prior to such date shall remain
in effect until such Awards have been satisfied or terminated in accordance
with the Plan and the terms of such Awards.
ARTICLE II. STOCK OPTIONS
Section 2.1. Award of Stock Options. The Committee may from time to time,
and subject to the provisions of the Plan and such other terms and conditions as
the Committee may prescribe, grant to any participant in the Plan one or more
options to purchase for cash or shares the number of shares of Common Stock
("Stock Options") allotted by the Committee. The date a Stock Option is granted
shall mean the date selected by the Committee as of which the Committee allots a
specific number of shares to a participant pursuant to the Plan.
Section 2.2. Stock Option Agreements. The grant of a Stock Option shall
be evidenced by a written Award Agreement, executed by the Company and the
holder of Stock Option (the "Optionee"), stating the number of shares of Common
Stock subject to the Stock Option evidenced thereby, and in such form as the
Committee may from time to time determine.
3
<PAGE>
Section 2.3. Stock Option Price. The option price per share of Common
Stock deliverable upon the exercise of a Stock Option shall be 100% of the fair
market value of a share of Common Stock on the date the Stock Option is granted.
Section 2.4. Term and Exercise. A Stock Option, unless a shorter period
is provided by the Committee or by another Section of this Plan, may be
exercised during a period of ten years from the date of grant thereof (the
"Option Term") and may be subject to such vesting scheduling as the Committee
may provide in an Award Agreement. No Stock Option shall be exercisable after
the expiration of its Option Term.
Section 2.5. Manner of Payment. Each Award Agreement providing for Stock
Options shall set forth the procedure governing the exercise of the Stock Option
granted thereunder, and shall provide that, upon such exercise in respect of any
shares of Common Stock subject thereto, the Optionee shall pay to the Company,
in full, the option price for such shares with cash. The Optionee may also pay
to the Company, in full, the option price with Common Stock owned by the
Optionee on the date of exercise or Common Stock acquired pursuant to such
exercise, provided that the Optionee provides satisfactory evidence, in the
opinion of the Secretary or any Assistant Secretary of the Company, that the
Optionee directly owns on the date of exercise shares of Common Stock sufficient
to pay the option price, and that the Optionee has owned such shares for six
months or more.
Section 2.6. Restrictions on Certain Shares. As soon as practicable after
receipt of payment, the Company shall deliver to the Optionee a certificate or
certificates for such shares of Common Stock. The Optionee shall become a
stockholder of the Company with respect to Common Stock represented by share
certificates so issued and as such shall be fully entitled to receive dividends,
to vote and to exercise all other rights of a stockholder.
Section 2.7. Death, Retirement and Termination of Employment of Optionee.
Unless otherwise provided in an Award Agreement or otherwise agreed to by the
Committee:
(a) Upon the death of the Optionee, any Stock Option to the extent
exercisable on the date of death may be exercised by the Optionee's estate,
or by a person who acquires the right to exercise such Stock Option by
bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within both (i) the remaining Option Term of the
Stock Option and (ii) one year. The provisions of this Section shall apply
notwithstanding that the Optionee's employment may have terminated prior to
death, but only to the extent of any rights exercisable on the date of
termination of the Optionee's employment.
(b) Upon termination of the Optionee's employment by reason of
retirement or permanent disability (as each is determined by the
Committee), the Optionee may exercise any Stock Options, to the extent
exercisable on the date of termination of the Optionee's employment,
provided such option exercise occurs within both (i) the remaining Option
Term of the Stock Option and (ii) six months (in the case of permanent
disability) or three months (in the case of retirement).
4
<PAGE>
(c) Upon termination of the Optionee's employment by reason other
than death, disability or cause (as each is determined by the Committee),
the Optionee may exercise any Stock Options, to the extent exercisable on
the date of termination of the Optionee's employment, provided such option
exercise occurs within both (i) the remaining Option Term of the Stock
Option and (ii) 30 days of the date of termination.
(d) Except as provided in Subsections (a), (b) and (c) of this
Section 2.7, all Stock Options shall terminate immediately upon the
termination of the Optionee's employment.
Section 2.8. Transferability. The Committee may, in its discretion,
authorize all or a portion of the Stock Options to be granted to an Optionee to
be on terms which permit transfer by such Optionee to (i) the spouse, children
or grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or (iii) a
partnership in which (a) the Optionee, (b) such Immediate Family Members, (c)
corporations, the only owners of which are such Immediate Family Members or the
Optionee, or (d) trusts whose only beneficiaries are such Immediate Family
Members or the Optionee, are the only partners, provided that (x) there may be
no consideration for any such transfer, (y) the Award Agreement pursuant to
which such Stock Options are granted must be approved by the Committee, and must
expressly provide for the transferability in a manner consistent with this
Section, and (z) subsequent transfers of transferred Stock Options shall be
prohibited except those in accordance with Section 6.2 hereof. Following
transfer, such Stock Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of Section 2.2 hereof the term "Optionee" shall be deemed to refer to
the transferee. The events of termination of employment of Section 2.7 hereof
shall continue to be applied with respect to the original Optionee, following
which the Stock Options shall be exercisable by the transferee only to the
extent, and for the periods specified in Section 2.4.
ARTICLE III. INCENTIVE STOCK OPTIONS
Section 3.1. Award of Incentive Stock Options. The Committee may, from
time to time and subject to the provisions of the Plan and such other terms and
conditions as the Committee may prescribe, grant to any participant in the Plan
one or more "incentive stock options" (intended to qualify as such under the
provisions of section 422 of the Internal Revenue Code of 1986, as amended
("Incentive Stock Options")) to purchase for cash or shares the number of shares
of Common Stock allotted by the Committee. The date an Incentive Stock Option is
granted shall mean the date selected by the Committee as of which the Committee
allots a specific number of shares to a participant pursuant to the Plan.
Notwithstanding the foregoing, Incentive Stock Options shall not be granted to
any owner of 10% or more of the total combined voting power of all classes of
stock of the Company or its subsidiaries, unless the Incentive Stock Options (i)
have an exercise price of 110% of the fair market value of the Common Stock on
the date of grant, and (ii) may not be exercised more than five years from the
date of grant thereof.
Section 3.2. Incentive Stock Option Agreements. The grant of an Incentive
Stock Option shall be evidenced by a written Award Agreement, executed by the
Company and the holder of an incentive
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Stock Option (the "Optionee"), stating the number of shares of Common Stock
subject to the Incentive Stock Option evidenced thereby and in such form as the
Committee may from time to time determine.
Section 3.3. Incentive Stock Option Price. The option price per share of
Common Stock deliverable upon the exercise of an Incentive Stock Option shall be
100% of the fair market value of a share of Common Stock on the date the
Incentive Stock Option is granted.
Section 3.4. Term and Exercise. Each Incentive Stock Option, unless a
shorter period is provided by the Committee or another Section of this Plan, may
be exercised during a period of ten years from the date of grant thereof (the
"Option Term") and may be subject to such vesting scheduling as the Committee
may provide in an Award Agreement. No Incentive Stock Option shall be
exercisable after the expiration of its Option Term.
Section 3.5. Maximum Amount of Incentive Stock Option Grant. The
aggregate fair market value (determined on the date the Incentive Stock Option
is granted) of Common Stock with respect to which Incentive Stock Options first
become exercisable by an Optionee during any calendar year (under all plans of
the Optionee's employer corporations and their parent and subsidiary
corporations) shall not exceed $100,000.
Section 3.6. Death of Optionee.
(a) Upon the death of the Optionee, any Incentive Stock Option
exercisable on the date of death may be exercised by the Optionee's
estate or by a person who acquires the right to exercise such Incentive
Stock Option by bequest or inheritance or by reason of the death of the
Optionee, provided that such exercise occurs within both the remaining
Option Term of the Incentive Stock Option and one year after the Optionee's
termination of employment.
(b) The provisions of this Section shall apply notwithstanding that
the Optionee's employment may have terminated prior to death, but only to
the extent of any Incentive Stock Options exercisable on the date of death.
Section 3.7. Retirement or Disability. Unless otherwise provided in an
Award Agreement or otherwise agreed to by the Committee, upon the termination of
the Optionee's employment by reason of permanent disability or retirement (as
each is determined by the Committee), the Optionee may exercise any Incentive
Stock Options, provided such option exercise occurs within both (i) the
remaining Option Term of the Incentive Stock Option and (ii) six months (in the
case of permanent disability) or three months (in the case of retirement).
Notwithstanding the terms of an Award Agreement, the tax treatment available
pursuant to Section 422 of the Internal Revenue Code of 1986 upon the exercise
of an Incentive Stock Option shall not be available to an Optionee who exercises
any Incentive Stock Options more than (i) six months after the date of
termination of employment due to permanent disability or (ii) three months after
the date of termination of employment due to retirement.
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Section 3.8. Termination for Other Reasons. Except as provided in
Sections 3.6 and 3.7 or except as otherwise determined by the Committee in an
Award Agreement, all Incentive Stock Options shall terminate immediately upon
the termination of the Optionee's employment.
Section 3.9. Applicability of Stock Options Section. Sections 2.5, Manner
of Payment; and 2.6, Restrictions on Certain Shares, applicable to Stock
Options, shall apply equally to Incentive Stock Options. Said Sections are
incorporated by reference in this Article III, as though fully set forth herein.
ARTICLE IV. PERFORMANCE SHARE AWARDS
Section 4.1. Awards Granted by Committee. Coincident with or following
designation for participation in the Plan, a participant may be granted
Performance Shares. Certificates representing Performance Shares shall be
issued to the participant effective as of the date of the Award. Holders of
Performance Shares shall have all of the voting, dividend and other rights of
stockholders of the Company, subject to the terms of any Award Agreement.
Section 4.2. Amount of Award. The Committee shall establish a maximum
amount of a participant's Award, which amount shall be denominated in shares of
Common Stock.
Section 4.3. Communication of Award. Written notice of the maximum amount
of a participant's Award and the Performance Cycle determined by the Committee,
if any, shall be given to a participant as soon as practicable after approval of
the Award by the Committee. The grant of Performance Shares shall be evidenced
by a written Award Agreement, executed by the Company and the recipient of
Performance Shares, in such form as the Committee may from time to time
determine, providing for the terms of such grant.
Section 4.4. Amount of Award Payable. Performance Shares may be granted
based upon past performance or future performance. In addition to any other
restrictions the Committee may place on Performance Shares, the Committee may,
in its discretion, provide that Performance Shares shall vest upon the
satisfaction of performance targets to be achieved during an applicable
"Performance Cycle." Failure to satisfy the performance targets may result, in
the Committee's discretion as set forth in an Award Agreement, in the forfeiture
of the Performance Shares by the participant and the return of such shares to
the Company or have any other consequence as determined by the Committee.
Performance targets established by the Committee may relate to corporate, group,
unit or individual performance and may be established in terms of market price
of Common Stock, cash flow or cash flow per share, reserve value or reserve
value per share, net asset value or net asset value per share, earnings, or such
other measures or standards determined by the Committee. Multiple performance
targets may be used and the components of multiple performance targets may be
given the same or different weight in determining the amount of an Award earned,
and may relate to absolute performance or relative performance measured against
other groups, units, individuals or entities. Certificates representing
Performance Shares shall bear a legend restricting their transfer and requiring
the forfeiture of the shares to the Company if any performance targets or other
conditions to vesting are not met. The Committee may also require a participant
to deliver certificates representing unvested Performance Shares to the Company
in escrow until the Performance Shares vest.
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Section 4.5. Adjustments. At any time prior to vesting of a Performance
Share, the Committee may adjust previously established performance targets or
other terms and conditions to reflect events such as changes in laws,
regulations or accounting practice, or mergers, acquisitions, divestitures or
any other event determined by the Committee.
Section 4.6. Payments of Awards. Following the conclusion of each
Performance Cycle, the Committee shall determine the extent to which performance
targets have been attained and the satisfaction of any other terms and
conditions with respect to vesting an Award relating to such Performance Cycle.
Subject to the provisions of Section 6.3, to the extent the Committee determines
Performance Shares have vested, the Company shall issue to the participant
certificates representing vested shares free of any legend regarding performance
targets or forfeiture in exchange for such participant's legended certificates.
Section 4.7. Termination of Employment. Unless the Award Agreement
provides for vesting upon death, disability, retirement or other termination of
employment, upon any such termination of employment of a participant prior to
vesting of Performance Shares, all outstanding and unvested Awards of
Performance Shares to such participant shall be cancelled, shall not vest and
shall be returned to the Company.
Section 4.8. Transfer Restriction. Any Award Agreement providing for the
issuance of Performance Shares to any person who at the time of grant is subject
to the restrictions of Section 16(b) of the Exchange Act, shall provide that
such Common Stock cannot be resold for a period of six months following the
grant of such Performance Shares.
ARTICLE V. AUTOMATIC GRANTS
Section 5.1. Grant. Each director who is not an employee of the Company,
its subsidiaries, affiliates and managers ("Non-Employee Director") shall on the
date on which he or she is initially elected or appointed a director of the
Company be granted a Stock Option to purchase 2,250 shares of Common Stock for
the fair market price on the date of such grant, for an Option Term of ten
years. Thereafter, on the first business day following the Annual Meeting of
Stockholders of each subsequent year in which the Non-Employee Director is still
serving as a director (whether or not such Non-Employee Director's term has been
continuous), he or she shall automatically be granted a Stock Option to purchase
an additional 2,250 shares of Common Stock for the fair market price on the date
of such grant for an Option Term of ten years, and shall automatically be
granted, in lieu of a cash fee for serving as a director of the Company, 3,375
Performance Shares, which shall vest six months after the date of grant, except
in the case of the death of the director, in which case they shall vest upon the
death of such director.
Section 5.2. Applicable Provisions. The provisions of Section 2.7(a)
relating to the death of an Optionee shall apply to options granted to Non-
Employee Directors under Section 5.1, and the Committee may not agree to the
contrary in an Award Agreement or otherwise. The provisions of Subsections
2.7(b), (c) and (d) relating to disability and other termination of employment
shall not apply to options granted under Section 5.1, and the failure of a Non-
Employee Director to be re-elected as a director of the Company shall not affect
the Stock Options granted under this Article V.
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ARTICLE VI. MISCELLANEOUS
Section 6.1. General Restriction. Each Award under the Plan shall be
subject to the requirement that, if at any time the Committee shall determine
that (i) the listing, registration or qualification of the shares of Common
Stock subject or related thereto upon any securities exchange or under any state
or Federal law, or (ii) the consent or approval of any government regulatory
body, or (iii) an agreement by the grantee of an Award with respect to the
disposition of shares of Common Stock, is necessary or desirable as a condition
of, or in connection with the granting of such Award or the issue or purchase of
shares of Common Stock thereunder, such Award may not be consummated in whole or
in part unless such listing, registration, qualification, consent, approval or
agreement shall have been effected or obtained free of any conditions not
acceptable to the Committee.
Section 6.2. Non-Assignability. Except as permitted by Section 2.8
hereof, no Award under the Plan shall be assignable or transferable by the
recipient thereof, except by will or by the laws of descent and distribution.
During the life of the recipient, such Award shall be exercisable only by such
person or by such person's guardian or legal representative.
Section 6.3. Withholding Taxes. Whenever the Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the Company
shall have the right to require the grantee to remit to the Company as amounts
sufficient to satisfy any Federal, state and/or local withholding tax
requirements prior to the delivery of any certificates for such shares.
Alternatively, the Company may issue, transfer or vest only such number of
shares of Common Stock net of the number of shares sufficient to satisfy the
withholding tax requirements. For withholding tax purposes, the shares of Common
Stock shall be valued on the date the withholding obligation is incurred.
Section 6.4. Right to Terminate Employment. Nothing in the Plan or in any
Agreement entered into pursuant to the Plan shall confer upon any participant
the right to continue in the employment of the Company or affect any right which
the Company may have to terminate the employment of such participant.
Section 6.5. Non-Uniform Determinations. The Committee's determinations
under the Plan (including without limitation determinations of the persons to
receive Awards, the form, amount and timing of such Awards, the terms and
provisions of such Awards and the agreements evidencing same) need not be
uniform and may be made by it selectively among persons who receive, or are
eligible to receive, Awards under the Plan, whether or not such persons are
similarly situated.
Section 6.6. Rights as a Stockholder. The recipient of any Award under
the Plan shall have no rights as a stockholder with respect thereto unless and
until certificates for shares of Common Stock are issued to him.
Section 6.7. Definitions. In this Plan the following definitions shall
apply:
(a) "Award" shall mean a grant of Stock Options, Incentive Stock
Options or Performance Shares under the Plan.
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(b) "Fair market value" as of any date and in respect of any share
of Common Stock means the average of the high and low sales price on such
date or on the next business day, if such date is not a business day, of a
share of Common Stock reflected in the consolidated trading tables of The
Wall Street Journal (presently the NYSE - Composite Transactions) or any
other publication selected by the Committee, provided that, if shares of
Common Stock shall not have been traded on the New York Stock Exchange or
other public securities market for more than 10 days immediately preceding
such date or if deemed appropriate by the Committee for any other reason,
the fair market value of shares of Common Stock shall be as determined by
the Committee in such other manner as it may deem appropriate. In no event
shall the fair market value of any share of Common Stock be less than its
par value.
(c) "Option" means a Stock Option or Incentive Stock Option.
(d) "Option price" means the purchase price per share of Common
Stock deliverable upon the exercise of a Stock Option or Incentive Stock
Option.
(e) "Outside Director" means a director of the Company who (i) is
not a current employee of the Company; (ii) is not a former employee of the
Company who receives compensation from the Company for prior services
(other than benefits under a tax-qualified retirement plan); (iii) has not
been an officer of the Company; (iv) does not receive remuneration from the
Company, either directly or indirectly, in any capacity other than as a
director; and (v) does not possess an interest in a transaction, or is
engaged in a business relationship, that would require disclosure under
Item 404(a) or (b) of Regulation S-K promulgated by the Securities and
Exchange Commission.
(f) "Performance Cycle" means the period of time, if any, as
specified by the Committee over which Performance Shares are to be
vested.
Section 6.8. Leaves of Absence. The Committee shall be entitled to make
such rules, regulations and determinations as it deems appropriate under the
Plan in respect of any leave of absence taken by the recipient of any Award.
Without limiting the generality of the foregoing, the Committee shall be
entitled to determine (i) whether or not any such leave of absence shall
constitute a termination of employment within the meaning of the Plan and (ii)
the impact, if any, of any such leave of absence on Awards under the Plan
theretofore made to any recipient who takes such leave of absence.
Section 6.9. Newly Eligible Employees. The Committee shall be entitled to
make such rules, regulations, determinations and Awards as it deems appropriate
in respect of any employee who becomes eligible to participate in the Plan or
any portion thereof after the commencement of an Award or incentive period.
Section 6.10. Adjustments.
(a) In the event of any change in the outstanding Common Stock by
reason of a stock dividend or distribution, recapitalization, merger,
consolidation, split-up, combination,
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exchange of shares or the like, the Committee may appropriately adjust the
number of shares of Common Stock which may be issued under the Plan, the
number of shares of Common Stock subject to Option or Performance Shares
theretofore granted under the Plan, and any and all other matters deemed
appropriate by the Committee.
(b) In the event of a subdivision or consolidation of shares or
other increase or reduction in the number of shares of the Common Stock
outstanding without receiving compensation therefor in money, services or
property, then (a) in the event of an increase in the number of such shares
outstanding, the number of shares of Common Stock purchasable pursuant to a
Stock Option granted automatically pursuant to Section 5.1 after the date
of increase, and the number of Performance Shares granted automatically
pursuant to Section 5.1 after the date of such increase, shall be
proportionately increased; and (b) in the event of a decrease in the number
of such shares outstanding the number of shares of Common Stock purchasable
pursuant to a Stock Option granted automatically pursuant to Section 5.1
after the date of decrease, and the number of Performance Shares granted
automatically pursuant to Section 5.1 after the date of such decrease shall
be proportionately decreased.
Section 6.11. Changes in the Company's Capital Structure.
(a) The existence of outstanding Options or Performance Shares
shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalization,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company or any issue of
bonds, debentures, preferred or prior preference stock ahead of or
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of
its assets or business, or any other corporate act or proceeding, whether
of a similar character or otherwise.
(b) If, while there are outstanding Options or Performance Shares,
the Company shall effect a subdivision or consolidation of shares or other
increase or reduction in the number of shares of the Common Stock
outstanding without receiving compensation therefor in money, services or
property, then, subject to the provisions, if any, in the Award Agreement
(a) in the event of an increase in the number of such shares outstanding,
the number of shares of Common Stock then subject to Options hereunder or
Performance Shares granted hereunder shall be proportionately increased;
and (b) in the event of a decrease in the number of such shares outstanding
the number of shares then available for Option hereunder or the number of
Performance Shares granted hereunder shall be proportionately decreased.
Any such adjustment in outstanding Options will be made without change to
the total exercise price applicable to such Option and with a corresponding
adjustment in the exercise price per share.
(c) After a merger of one or more corporations into the Company, or
after a consolidation of the Company and one or more corporations in which
the Company shall be the surviving corporation, (i) each holder of an
outstanding Option shall, at no additional cost, be entitled upon exercise
of such Option to receive (subject to any required action by stockholders)
in lieu of the number of shares as to which such Option shall then be so
exercisable, the number and class of shares of stock, other securities or
consideration to which
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such holder would have been entitled to receive pursuant to the terms of
the agreement of merger or consolidation if, immediately prior to such
merger or consolidation, such holder had been the holder of record of a
number of shares of the Company equal to the number of shares as to which
such Option had been exercisable and (ii) unless otherwise provided by the
Committee, the number of shares of Common Stock, other securities or
consideration to be received with respect to unvested Performance Shares
shall continue to be subject to the Award Agreement, including any vesting
provisions thereof.
(d) If the Company is about to be merged into or consolidated with
another corporation or other entity under circumstances where the Company
is not the surviving corporation, or if the Company is about to sell or
otherwise dispose of substantially all of its assets to another corporation
or other entity while unvested Performance Shares or unexercised Options
remain outstanding, the Committee may direct that any of the following
shall occur:
(i) If the successor entity is willing to assume the obligation
to deliver shares of stock or other securities after the effective
date of the merger, consolidation or sale of assets, as the case may
be, each holder of an outstanding Option shall be entitled to receive,
upon the exercise of such Option and payment of the option price, in
lieu of shares of Common Stock, such shares of stock or other
securities as the holder of such option would have been entitled to
receive had such Option been exercised immediately prior to the
consummation of such merger, consolidation or sale, and the terms of
such Option shall apply as nearly as practicable to the shares of
stock or other securities purchasable upon exercise of the Option
following such merger, consolidation or sale of assets;
(ii) The Committee may waive any limitations set forth in or
imposed pursuant to this Plan or any Award Agreement with respect to
such Option or Performance Share such that (A) such Option shall
become exercisable prior to the record or effective date of such
merger, consolidation or sale of assets or (B) the vesting of such
Performance Share shall occur upon such merger, consolidation or sale
of asset; and/or
(iii) The Committee may cancel all outstanding Options as of
the effective date of any such merger, consolidation or sale of assets
provided that prior notice of such cancellation shall be given to each
holder of an Option at least 30 days prior to the effective date of
such merger, consolidation or sale of assets, and each holder of an
Option shall have the right to exercise such Option, to the extent
exercisable, during a period of not less than 30 days prior to the
effective date of such merger, consolidation or sale of assets.
(e) Except as herein provided, the issuance by the Company of Common
Stock or any other shares of capital stock or securities convertible into
shares of capital stock, for cash, property, labor done or other
consideration, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to outstanding Options.
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Section 6.12. Amendment of the Plan.
(a) The Committee may, without further action by the stockholders
and without receiving further consideration from the participants, amend
this Plan or condition or modify Awards under this Plan in response to
changes in securities or other laws or rules, regulations or regulatory
interpretations thereof applicable to this Plan or to comply with stock
exchange rules or requirements.
(b) The Committee may at any time and from time to time terminate
or modify or amend the Plan in any respect, except that without stockholder
approval the committee may not (i) increase the maximum number of shares of
Common Stock which may be issued under the Plan or to any individual (other
than increases pursuant to Sections 6.10 and 6.11), or (ii) change the
employees or class of employees eligible to participate in the Plan. The
termination or any modification or amendment of the Plan, except as
provided in subsection (a), shall not, without the consent of a
participant, affect his or her rights under an Award previously granted to
him or her.
The undersigned hereby certifies that this is a true and correct copy of
the Cross Timbers Oil Company 1997 Stock Incentive Plan, as adopted by the
Company's Board of Directors on February 18, 1997 and the Company's stockholders
on May 20, 1997, as amended.
By
-----------------------------------
Virginia Anderson, Secretary
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EXHIBIT 10.9
AWARD AGREEMENT UNDER
CROSS TIMBERS OIL COMPANY
1997 STOCK INCENTIVE PLAN
-------------------------
THIS AGREEMENT is entered into this _____ day of _________________, 1998,
between Cross Timbers Oil Company, a Delaware corporation (herein called
"Company"), and __________________________ (herein called "Grantee"), pursuant
to the provisions of the Cross Timbers Oil Company 1997 Stock Incentive Plan, as
amended (herein called the "Plan"). The Compensation Committee of the Board of
Directors of the Company has determined that Grantee is eligible to participate
as a Grantee under the Plan and, to carry out its purposes, has this day
authorized the grant, pursuant to the Plan, of the options set forth below to
Grantee.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties do hereby agree as follows:
1. GRANT OF OPTIONS. Subject to all of the terms, conditions, and
provisions of the Plan and of this Agreement, the Company hereby grants to
Grantee options under the Plan pursuant to which Grantee shall have the right
and option under the Plan to purchase from the Company all or any part of an
aggregate of ____________________ shares of the common stock of the Company, of
the par value of one cent ($0.01) per share ("Common Stock"), which shares shall
consist of authorized but unissued shares or issued shares reacquired by the
Company. Such options are not intended to be Incentive Stock Options, as
defined in the Plan.
<PAGE>
2. OPTION PRICE. The option or purchase price payable by Grantee to the
Company in exercise of this option shall be $__________________ per share, being
the fair market value of the Common Stock of the Company on this date (the
"Grant Date") as determined according to the Plan. Upon exercise of this
option, Grantee must pay to the Company, in full, the option price for the
shares of Common Stock issuable pursuant to such exercise with cash. Grantee
may also pay to the Company, in full, the option price with Common Stock owned
by Grantee on the date of exercise or Common Stock acquired pursuant to such
exercise, provided that Grantee provides satisfactory evidence, in the opinion
of the Secretary or any Assistant Secretary of the Company, that Grantee
directly owns on the date of exercise shares of Common Stock sufficient to pay
the option price, and that the Grantee has owned such shares for six months or
more (such Common Stock being valued at fair market value on the date of such
exercise).
3. EXERCISE PERIOD.
(a) One-fifth of the options granted on a Grant Date will become
exercisable on each of the first, second, third, fourth, and fifth
anniversaries of such Grant Date. Alternatively, one-half of the
total number of options granted will become exercisable when the
Common Stock closes on the New York Stock Exchange at or above $______
per share. If the Common Stock closes on the New York Stock Exchange
at or above $______ per share, then the remaining options granted will
become exercisable. If the Common Stock is not listed on the New York
Stock Exchange, then any reference in this
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<PAGE>
Agreement to the New York Stock Exchange will be deemed to be the
principal securities exchange on which the Common Stock is traded.
(b) The right to exercise options will be cumulative. An option must be
exercised in multiples of 10% of the options then exercisable.
(c) Any options which remain unexercised on the tenth anniversary of the
Grant Date will expire.
(d) Options may be exercised only if the Common Stock is duly registered
under the Securities Act of 1933 and applicable state securities laws,
or unless the issuance is exempt from such registrations.
4. NO EMPLOYMENT COMMITMENT. Grantee acknowledges that neither the grant
of options nor the execution of this Agreement by the Company shall be
interpreted or construed as imposing upon the Company an obligation to retain
Grantee's services for any stated period of time, which employment shall
continue to be at the pleasure of the Company at such compensation as it shall
determine, unless otherwise provided in a written employment agreement.
5. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that:
(a) With respect to the calendar year in which such options are exercised,
Grantee shall include in his gross income for federal income tax
purposes the amount, if any, by which the fair market value of the
stock on the date of exercise as determined in Section 6.7(b) of the
Plan exceeds the option price;
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<PAGE>
(b) The grant of options is special incentive compensation which shall not
be taken into account as "wages" or "salary" in determining the amount
of payment or benefit to Grantee under any pension, thrift, stock, or
deferred compensation plan of the Company; and
(c) In behalf of Grantee's beneficiary, such grant shall not affect the
amount of any life insurance coverage available to such beneficiary
under any life insurance plan covering employees of the Company or any
subsidiary.
6. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the
options herein granted by the Company to Grantee are granted subject to all of
the terms, conditions, and provisions of the Plan. Grantee hereby acknowledges
receipt of a copy of the Plan certified by the Secretary of the Company, and the
parties agree that the entire text of such Plan be, and it is hereby
incorporated herein by reference as fully as if copied herein in full.
Reference to such Plan is therefore made for a full description of the rights
and methods of exercise of the options, the effect of Grantee's termination of
employment, the adjustments to be made in the event of changes in the capital
structure of the Company, and of all of the other provisions, terms, and
conditions of the Plan applicable to the options granted herein. If any of the
provisions of this Agreement shall vary from or be in conflict with the Plan,
the provisions of the Plan will be controlling.
7. TRANSFERABILITY. The options granted hereunder are transferable or
assignable by Grantee in accordance with Section 2.8 of the Plan or by will or
the laws of descent and distribution.
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<PAGE>
IN WITNESS WHEREOF, this Agreement is executed and entered into effective
on the day and year first above expressed.
ATTEST: CROSS TIMBERS OIL COMPANY
By:
- ------------------------------------- ------------------------------------
Virginia Anderson, Name: Bob R. Simpson
Secretary Title: Chairman of the Board and
Chief Executive Officer
---------------------------------------
-----------------------------
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<PAGE>
AWARD AGREEMENT UNDER
CROSS TIMBERS OIL COMPANY
1997 STOCK INCENTIVE PLAN
-------------------------
THIS AGREEMENT is entered into this _____ day of _____________, 1998,
between Cross Timbers Oil Company, a Delaware corporation (herein called
"Company"), and _______________________ (herein called "Grantee"), pursuant to
the provisions of the Cross Timbers Oil Company 1997 Stock Incentive Plan, as
amended (the "Plan"). The Compensation Committee of the Board of Directors of
the Company (the "Committee") has determined that Grantee is eligible to
participate as a Grantee under the Plan and, to carry out its purposes, has this
day authorized the grant, pursuant to the Plan, of the performance shares set
forth below to Grantee.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties do hereby agree as follows:
1. GRANT OF PERFORMANCE SHARES. Subject to all of the terms, conditions,
and provisions of the Plan and of this Agreement, the Company hereby grants to
Grantee under Article IV of the Plan _______________ shares of the common stock
of the Company, of the par value of one cent ($0.01) per share ("Common Stock"),
which shares shall consist of authorized but unissued shares or issued shares
reacquired by the Company. Such shares are being issued as performance shares
under the Plan.
<PAGE>
2. VESTING. The performance shares granted herein shall vest when the
Common Stock closes on the New York Stock Exchange at or above $_____ per share.
If the Common Stock is not listed on the New York Stock Exchange, then any
reference in this Agreement to the New York Stock Exchange will be deemed to be
the principal securities exchange on which the Common Stock is traded.
3. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that:
(a) With respect to the calendar year in which such performance shares are
vested, Grantee shall include in his gross income for federal income tax
purposes the fair market value of the performance shares upon the vesting of the
performance shares.
(b) The grant of options is special incentive compensation which will not
be taken into account as "wages" or "salary" in determining the amount of
payment or benefit to Grantee under any pension, thrift, stock, or deferred
compensation plan of the Company.
(c) In behalf of Grantee's beneficiary, such grant shall not affect the
amount of any life insurance coverage available to such beneficiary under any
life insurance plan covering employees of the Company or any subsidiary.
(d) The Company may hold unvested performance shares in escrow until the
performance shares vest.
4. TERM. Any performance shares which remain unvested on the tenth
anniversary of the date of this Agreement shall be canceled, shall not vest and
shall be returned to the Company.
2
<PAGE>
5. DEATH OR DISABILITY. Upon death of Grantee, or upon termination of
Grantee's employment by reason of permanent disability (as determined by the
Committee), all unvested performance shares granted herein shall immediately
vest.
6. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the
performance shares herein granted by the Company to Grantee are granted subject
to all of the terms, conditions, and provisions of the Plan. Grantee hereby
acknowledges receipt of a copy of the Plan certified by the Secretary of the
Company, and the parties agree that the entire text of such Plan be, and it is
hereby incorporated herein by reference as fully as if copied herein in full.
Reference to such Plan is therefore made for a full description of the rights of
Grantee and of all of the other provisions, terms, and conditions of the Plan
applicable to the performance shares granted herein. If any of the provisions
of this Agreement shall vary from or be in conflict with the Plan, the
provisions of the Plan shall be controlling.
7. NON-TRANSFERABILITY. The performance shares granted hereunder are not
transferable or assignable by Grantee. [THE PERFORMANCE SHARES GRANTED
HEREUNDER SHALL NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, TRANSFERRED, OR
OTHERWISE DISPOSED OF PRIOR TO SIX MONTHS AFTER THE DATE OF GRANT, EXCEPT BY
WILL OR THE LAWS OF DESCENT AND DISTRIBUTION.]
8. NO EMPLOYMENT COMMITMENT. Grantee acknowledges that neither the grant
of performance shares nor the execution of this Agreement by the Company will be
interpreted or construed as imposing upon the Company an obligation to retain
Grantee's services for any stated period of time, which employment shall
continue to be at the
3
<PAGE>
pleasure of the Company at such compensation as it shall determine, unless
otherwise provided in a written employment agreement.
IN WITNESS WHEREOF, this Agreement is executed and entered into effective
on the day and year first above expressed.
CROSS TIMBERS OIL COMPANY
ATTEST:
By:
- -------------------------------------- ------------------------------------
Virginia Anderson, Name: Bob R. Simpson
Secretary Title: Chairman of the Board and
Chief Executive Officer
---------------------------------------
----------------------------------
4
<PAGE>
AWARD AGREEMENT UNDER
CROSS TIMBERS OIL COMPANY
1997 STOCK INCENTIVE PLAN
-------------------------
THIS AGREEMENT is entered into this _____ day of _____________, 1998,
between Cross Timbers Oil Company, a Delaware corporation (herein called
"Company"), and ___________________________, Director of the Company (herein
called "Grantee"), pursuant to the provisions of the Cross Timbers Oil Company
1997 Stock Incentive Plan, as amended (herein called the "Plan"). The
Compensation Committee of the Board of Directors of the Company has determined
that Grantee is eligible to participate as a Grantee under the Plan and, to
carry out its purposes, has this day authorized the grant, pursuant to the Plan,
of the options set forth below to Grantee.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties do hereby agree as follows:
1. GRANT OF OPTIONS. Subject to all of the terms, conditions, and
provisions of the Plan and of this Agreement, the Company hereby grants to
Grantee options under Article V of the Plan pursuant to which Grantee shall have
the right and option under the Plan to purchase from the Company all or any part
of an aggregate of 2,250 shares of the common stock of the Company, of the par
value of one cent ($0.01) per share ("Common Stock"), which shares shall consist
of authorized but unissued shares or issued shares reacquired by the Company.
Such options are not intended to be Incentive Stock Options, as defined in the
Plan.
<PAGE>
2. OPTION PRICE. The option or purchase price payable by Grantee to the
Company in exercise of this option shall be $___________ per share, being the
fair market value of the Common Stock of the Company on this date (the "Grant
Date") as determined according to the Plan. Upon exercise of this option,
Grantee must pay to the Company, in full, the option price for the shares of
Common Stock issuable pursuant to such exercise with cash. Grantee may also pay
to the Company, in full, the option price with Common Stock owned by Grantee on
the date of exercise or Common Stock acquired pursuant to such exercise,
provided that Grantee provides satisfactory evidence, in the opinion of the
Secretary or any Assistant Secretary of the Company, that Grantee directly owns
on the date of exercise shares of Common Stock sufficient to pay the option
price, and that the Grantee has owned such shares for six months or more (such
Common Stock being valued at fair market value on the date of such exercise).
3. EXERCISE PERIOD. Options may be exercised only upon the following
terms and conditions:
(a) One-fifth of the options granted on a Grant Date will become
exercisable on each of the first, second, third, fourth, and fifth
anniversaries of such Grant Date. [ALTERNATIVELY, ONE-HALF OF THE TOTAL
NUMBER OF OPTIONS GRANTED WILL BECOME EXERCISABLE WHEN THE COMMON STOCK
CLOSES ON THE NEW YORK STOCK EXCHANGE AT OR ABOVE $______ PER SHARE. IF
THE COMMON STOCK CLOSES ON THE NEW YORK STOCK EXCHANGE AT OR ABOVE
$______ PER SHARE, THEN THE REMAINING OPTIONS GRANTED WILL BECOME
EXERCISABLE. IF THE COMMON STOCK IS NOT LISTED ON THE NEW YORK STOCK
EXCHANGE, THEN ANY
2
<PAGE>
REFERENCE IN THIS AGREEMENT TO THE NEW YORK STOCK EXCHANGE WILL BE
DEEMED TO BE THE PRINCIPAL SECURITIES EXCHANGE ON WHICH THE COMMON
STOCK IS TRADED.]
(b) The right to exercise options will be cumulative. An option must be
exercised in multiples of 10% of the options then exercisable.
(c) Any options which remain unexercised on the tenth anniversary of the
Grant Date will expire.
(d) In the event that Grantee stands for reelection as a director of the
Company but fails to be reelected, such failure shall not affect
options granted hereunder. In all other events where Grantee does not
continue as a director of the Company, Grantee may thereafter exercise
only those options that were exercisable upon the date Grantee ceased
to be a director and only during the period occurring within two years
after Grantee ceased to be a director (but not after the expiration of
the Option Period), and to the extent not exercised in such two-year
period the options will expire; provided, that, in the event of the
death of Grantee, the options may be exercised as provided in Section
2.7(a) of the Plan. Reference is made to the Plan for other terms and
conditions upon which the options may be exercised or terminate.
(e) Options may be exercised only if the Common Stock is duly registered
under the Securities Act of 1933 and applicable state securities laws,
or unless the issuance is exempt from such registrations.
3
<PAGE>
4. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that
with respect to the calendar year in which such options are exercised, Grantee
shall include in his gross income for federal income tax purposes the amount, if
any, by which the fair market value of the stock on the date of exercise as
determined in Section 6.7(b) of the Plan exceeds the option price.
5. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the
options herein granted by the Company to Grantee are granted subject to all of
the terms, conditions, and provisions of the Plan. Grantee hereby acknowledges
receipt of a copy of the Plan certified by the Secretary of the Company, and the
parties agree that the entire text of such Plan be, and it is hereby
incorporated herein by reference as fully as if copied herein in full.
Reference to such Plan is therefore made for a full description of the rights
and methods of exercise of the options, the adjustments to be made in the event
of changes in the capital structure of the Company, and of all of the other
provisions, terms, and conditions of the Plan applicable to the options granted
herein. If any of the provisions of this Agreement shall vary from or be in
conflict with the Plan, the provisions of the Plan shall be controlling.
6. TRANSFERABILITY. The options granted hereunder are transferable or
assignable by Grantee in accordance with Section 2.8 of the Plan or by will or
the laws of descent and distribution.
IN WITNESS WHEREOF, this Agreement is executed and entered into effective
on the day and year first above expressed.
CROSS TIMBERS OIL COMPANY
4
<PAGE>
ATTEST:
By:
- --------------------------------- ----------------------------------
Virginia Anderson, Name: Bob R. Simpson
Secretary Title: Chairman of the Board and
Chief Executive Officer
------------------------------------
-----------------------
5
<PAGE>
AWARD AGREEMENT UNDER
CROSS TIMBERS OIL COMPANY
1997 STOCK INCENTIVE PLAN
-------------------------
THIS AGREEMENT is entered into this _____ day of _____________, 1998,
between Cross Timbers Oil Company, a Delaware corporation (herein called
"Company"), and __________________________, Director of the Company (herein
called "Grantee"), pursuant to the provisions of the Cross Timbers Oil Company
1997 Stock Incentive Plan, as amended (herein called the "Plan"). The
Compensation Committee of the Board of Directors of the Company has determined
that Grantee is eligible to participate as a Grantee under the Plan and, to
carry out its purposes, has this day authorized the grant, pursuant to the Plan,
of the performance shares set forth below to Grantee.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties do hereby agree as follows:
1. GRANT OF PERFORMANCE SHARES. Subject to all of the terms, conditions,
and provisions of the Plan and of this Agreement, the Company hereby grants to
Grantee under Article V of the Plan 3,375 shares of the common stock of the
Company, of the par value of one cent ($0.01) per share ("Common Stock"), which
shares shall consist of authorized but unissued shares or issued shares
reacquired by the Company. Such shares are being issued as performance shares
under the Plan.
<PAGE>
2. VESTING. The performance shares granted herein shall vest six months
after the date of grant.
3. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that
Grantee shall include in his gross income for federal income tax purposes the
fair market value of the performance shares on the date of grant, which price
per share is _____________.
4. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the
performance shares herein granted by the Company to Grantee are granted subject
to all of the terms, conditions, and provisions of the Plan. Grantee hereby
acknowledges receipt of a copy of the Plan certified by the Secretary of the
Company, and the parties agree that the entire text of such Plan be, and it is
hereby incorporated herein by reference as fully as if copied herein in full.
Reference to such Plan is therefore made for a full description of the rights of
Grantee and of all of the other provisions, terms, and conditions of the Plan
applicable to the performance shares granted herein. If any of the provisions
of this Agreement shall vary from or be in conflict with the Plan, the
provisions of the Plan shall be controlling.
5. NON-TRANSFERABILITY. The performance shares granted hereunder shall
not be sold, assigned, pledged, hypothecated, transferred, or otherwise disposed
of prior to six months after the date of grant, except by will or the laws of
descent and distribution.
2
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed and entered into effective
on the day and year first above expressed.
CROSS TIMBERS OIL COMPANY
ATTEST:
By:
- --------------------------------- -------------------------------------
Virginia Anderson, Name: Bob R. Simpson
Secretary Title: Chairman of the Board and
Chief Executive Officer
---------------------------------------
--------------------------------
3
<PAGE>
AMENDMENT TO AWARD AGREEMENT(S) UNDER
-------------------------------------
CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN
---------------------------------------------------
This Amendment to Award Agreement(s) Under Cross Timbers Oil Company 1997
Stock Incentive Plan ("Amendment") is entered into this 25th day of February,
1998, between Cross Timbers Oil Company, a Delaware corporation (herein called
"Company"), and Grantee (as hereinafter identified), pursuant to the provisions
of the Cross Timbers Oil Company 1997 Stock Incentive Plan (herein called the
"Plan").
RECITALS
--------
A. The Company and Grantee have entered into one or more Award Agreements
Under Cross Timbers Oil Company 1997 Stock Incentive Plan (herein called the
"Agreement"), whereby Grantee was granted options to purchase shares of Common
Stock of the Company.
B. On January 29, 1998, the Board of Directors of the Company approved a
three for two stock split to be effected as a stock dividend for shareholders of
record at the close of business on February 12, 1998. Further, the Board of
Directors of the Company approved the adjustment, pursuant to the Plan, of any
options previously granted under the Plan to proportionately increase the number
of shares of Common Stock then subject to options and to proportionately
decrease the price per share of the options granted, so that the optionees under
the Plan retain the same economic benefit as was previously granted.
C. On February 17, 1998, the Board of Directors of the Company amended the
early vesting provisions of the Agreement to reflect the three for two stock
split to be effected as a stock dividend.
<PAGE>
D. On February 17, 1998, the Board of Directors of the Company amended
Section 1.5(a) of the Plan to proportionately increase the number of shares that
can be granted under the Plan and to any one individual, and amended Section 2.5
of the Plan to provide that an Optionee may pay for his or her options with
Common Stock owned by the Optionee on the date of the exercise or with Common
Stock acquired pursuant to the exercise, provided that the Optionee directly
owns on the date of exercise shares of Common Stock sufficient to pay the option
price and that the Optionee has owned such shares for six months or more.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties do hereby agree to the following:
1. Notwithstanding anything contained in the terms of the Agreement, the
number of shares granted and the option price payable by Grantee to the Company
in exercise of the option under the terms of the Agreement shall be adjusted as
shown on the attached Exhibit A.
2. Paragraph 3(c) of the Agreement is amended as follows:
"(c) One-half of the total number of options granted will become
exercisable when the Common Stock closes on the New York Stock Exchange at
or above $16.67 per share. If the Common Stock closes on the New York
Stock Exchange at or above $20.00 per share, then the remaining options
granted will become exercisable. If the Common Stock is not listed on the
New York Stock Exchange, then any reference in this Agreement to the New
York Stock Exchange will be
<PAGE>
deemed to be the principal securities exchange on which the Common Stock is
traded."
3. The Company and Grantee agree that the terms of the Agreement will be
governed by the Plan as amended, a copy of which is attached hereto.
IN WITNESS WHEREOF, this Amendment is executed and entered into on the date
and year first above stated.
CROSS TIMBERS OIL COMPANY
By:
----------------------------------------
Bob R. Simpson
Chairman of the Board
GRANTEE
------------------------------------------
<PAGE>
EXHIBIT A
Amendment to Award Agreement Under Cross Timbers Oil Company 1997 Stock
-----------------------------------------------------------------------
Incentive Plan
--------------
<TABLE>
<CAPTION>
====================================================================================================
Grantee:
<S> <C> <C> <C> <C> <C> <C>
Award Option Option Existing Option Amended Existing Amended
Agreement Shares Granted Shares Exercised Option Shares Price Option Shares Option Price
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
====================================================================================================
</TABLE>
<PAGE>
EXHIBIT 10.11
WARRANT AGREEMENT
dated as of December 1, 1997
by and between
CROSS TIMBERS OIL COMPANY
and
AMOCO CORPORATION
<PAGE>
THIS WARRANT AGREEMENT is dated as of December 1, 1997, by and between
CROSS TIMBERS OIL COMPANY, a Delaware corporation (the "Company"), and AMOCO
CORPORATION, an Indiana corporation ("Amoco").
W I T N E S S E T H:
--------------------
WHEREAS, the Company and Amoco Production Company, a wholly-owned indirect
subsidiary of Amoco ("Amoco Production"), have entered into a Purchase and Sale
Agreement dated as of September 29, 1997 (the "Acquisition Agreement");
WHEREAS, in partial consideration for Amoco Production's sale of certain
properties under the Acquisition Agreement to the Company, the Company has
agreed to issue warrants to Amoco to purchase shares of the Company's common
stock, par value $0.01 per share (the "Common Stock");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Grant. The Company hereby grants to Amoco the right to
-----
purchase (the "Warrants"), at any time and from time to time until 5:00 p.m.,
Fort Worth, Texas time, on September 29, 2002 (the "Exercise Period"), up to
625,000 shares (the "Shares") of Common Stock (subject to adjustment as provided
in Section 8 hereof) at an exercise price of $22.97 per Share (subject to
adjustment as provided in Section 8 hereof), all subject to the terms and
conditions of this Agreement.
Section 2. Warrant Certificates. The warrant certificates (the
--------------------
"Warrant Certificates") delivered and to be delivered pursuant to this Agreement
shall be substantially in the form set forth in Exhibit A attached hereto and
made a part hereof, with such appropriate insertions and other variations as
required or permitted by this Agreement. The Warrant Certificates shall further
evidence the Warrants granted hereby.
Section 3. Exercise of Warrants; Method of Exercise. The purchase
----------------------------------------
rights represented by the Warrant Certificates are exercisable at the option of
the Holder (as defined herein) thereof, in whole or in part (but not for fewer
than 200,000 Shares), at any time and from time to time during the Exercise
Period. Upon surrender of a Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment to the Company of the
Common Stock Exercise Price (as hereinafter defined) by federal wire transfer of
immediately available funds for the Shares purchased, at the Company's principal
offices in Fort Worth, Texas (currently located at 810 Houston Street, Suite
2000, Fort Worth, Texas 76102), the registered holder of the Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the Shares so purchased. In the case of the purchase of
less than all the Shares purchasable under any Warrant Certificate, the Company,
at its expense, shall cancel such Warrant Certificate upon the surrender thereof
and shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Shares purchasable thereunder. The Holder shall identify the
aggregate principal amount of Shares for which the Warrant is exercised
<PAGE>
on the Form of Election to Purchase.
Section 4. Issuance of Certificates. Upon the exercise of Warrants,
------------------------
the issuance of certificates for the Shares and/or other securities, properties
or rights underlying such Warrants shall be made forthwith (and in any event
within five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax or other governmental charge imposed in
respect of the issuance thereof (other than state or federal income taxes), and
such certificates shall (subject to the provisions of Section 5 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax or other governmental charge that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder thereof and the Company shall not be required to issue
or deliver such certificates unless or until the person or persons requesting
the issuance thereof shall have paid to the Company the amount of such tax or
other governmental charge or shall have established to the satisfaction of the
Company that such tax or charge has been paid or that no tax or other
governmental charge is payable.
The Warrant Certificates and the certificates representing the Shares shall
be executed on behalf of the Company by the manual or facsimile signature of the
then-serving Chairman or Vice Chairman of the Board of Directors or President or
any Vice President of the Company under its corporate seal reproduced thereon
and by the manual or facsimile signature of the then-serving Treasurer or any
Assistant Treasurer or Secretary or any Assistant Secretary of the Company.
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer. Certificates
representing the Shares issuable upon exercise of Warrants shall be dated the
date on which the exercise is perfected by the Holder as provided in Section 3
hereof (the "Exercise Date") and any interest-bearing securities so issued shall
accrue interest from the Exercise Date.
Section 5. Transfers of Warrants.
---------------------
Section 5.1. Investment Intent with respect to Warrants. The Warrants
------------------------------------------
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or state securities laws. The Holder of a Warrant
Certificate, by its acceptance thereof, represents and warrants that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof, and understands and acknowledges that each Warrant
Certificate shall bear a restrictive legend substantially as set forth below:
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES) OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
<PAGE>
"THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE
IS FURTHER RESTRICTED BY THE TERMS OF THE WARRANT AGREEMENT REFERRED TO HEREIN."
Section 5.2. Restrictions on Transferability of Warrants. Subject to
-------------------------------------------
compliance with all applicable federal and state securities laws, the Warrants
and this Agreement may be transferred only in accordance with the provisions of
this Section 5. The Holder of a Warrant Certificate, by its acceptance thereof,
agrees to comply in all respects with the provisions of this Agreement.
Section 5.3. Notice of Proposed Transfer of Warrants. Prior to any
---------------------------------------
proposed transfer of Warrants by an Affiliated Warrant Holder to any third party
that is not an Amoco affiliate (a "Proposed Warrant Transfer"), such Affiliated
Warrant Holder shall notify the Company of its intention to effect such Proposed
Warrant Transfer and the intended manner and circumstances thereof in reasonable
detail, specifying the number of Warrants to be sold, the prospective
purchaser(s) thereof and the price (or the method or formula for determining the
price) and terms and conditions of such sale, and offering to sell such Warrants
to the Company or its designee (a "Warrant Purchase Offer") at such price and on
like terms and conditions (a "Proposed Warrant Transfer Notice").
Section 5.4. Company's Right of Refusal with respect to Proposed Warrant
-----------------------------------------------------------
Transfer. The Company shall have the right to accept (in whole but not in part)
- --------
or reject a Warrant Purchase Offer within 24 hours (exclusive of weekends and
holidays) following receipt of the Proposed Warrant Transfer Notice. If the
Company shall accept such Warrant Purchase Offer within the applicable time
period specified above, then the Company shall purchase the Warrants specified
in the Proposed Warrant Transfer Notice within 10 business days thereafter on
the same terms and conditions set forth therein; provided, however, that if the
purchase price specified in the Proposed Warrant Transfer Notice is to be paid
in cash, then the Company shall deliver the purchase price to the Holder in
immediately available funds by federal wire transfer.
Section 5.5. Company's Rejection of Warrant Purchase Offer.
---------------------------------------------
(a) If the Company (i) rejects such Warrant Purchase Offer, or (ii) does
not accept such Warrant Purchase Offer within the applicable time period set
forth in Section 5.4, or (iii) accepts such Warrant Purchase Offer within the
applicable time period set forth in Section 5.4 but thereafter fails to effect
the purchase of all the Warrants within the applicable time period set forth in
Section 5.4, then such Affiliated Warrant Holder shall be free to enter into an
agreement to sell all (but not less than all) of such Warrants to the original
prospective purchaser and on the terms and conditions specified in the Proposed
Warrant Transfer Notice, except that the per-Warrant sale price may differ but
shall be equal to or greater than the lesser of (i) the originally-proposed
price and (ii) a price equal to (A) the then-current per-share Market Price (as
hereinafter defined) of the Common Stock, less (B) 110% of the per-Warrant
exercise price; provided, however, that, if the Company requests, such
Affiliated Warrant Holder must provide, at its sole expense, (1) a written
opinion of legal counsel who is, and whose legal opinion shall be, reasonably
satisfactory to the Company, addressed to the Company, to the effect that the
Proposed Warrant Transfer may be effected without registration of the applicable
Warrants under the Securities Act, and (2) such certificates and other
information as the Company reasonably
3
<PAGE>
may require to confirm such opinion, whereupon such Affiliated Warrant Holder
shall be entitled to transfer such Warrants in the manner contemplated by such
opinion and by this Section 5; and provided further, however, that if the
Company accepts such Warrant Purchase Offer within the applicable time period
set forth in Section 5.4 but thereafter fails to effect the purchase of all the
Warrants within the applicable time period set forth in Section 5.4, the ability
of the Affiliated Warrant Holder to sell the Warrants to the original
prospective purchaser as set forth above shall not limit other remedies, if any,
that may be available to such Affiliated Warrant Holder as a result thereof.
(b) Any sale of Warrants to the originally-proposed purchaser pursuant to
this Section 5 must be consummated within 30 days after the expiration of the
time period set forth in Section 5.4.
Section 5.6. Limitation on Right of Refusal. The Company's right of
------------------------------
refusal set forth in this Section 5 shall not apply to subsequent transfers of
Warrants by Holders (a) that are not Affiliated Warrant Holders and (b) that
acquired Warrants in compliance with all applicable federal and state securities
laws and with the other applicable transfer provisions of this Warrant
Agreement.
Section 5.7. Definition of "Affiliated Warrant Holder". For the purposes
-----------------------------------------
of this Agreement, the term "Affiliated Warrant Holder" shall mean Amoco and any
Amoco affiliate to whom Amoco or any Amoco affiliate has transferred Warrants.
An Amoco affiliate is any person or entity controlled by, controlling or under
common control with Amoco.
Section 6. Transfers of Shares.
-------------------
Section 6.1. Investment Intent with respect to Shares. The Holder of a
----------------------------------------
Warrant Certificate, by its acceptance thereof, represents and warrants that the
Shares issuable upon exercise of Warrants shall be acquired as an investment and
not with a view to the distribution thereof, and understands and acknowledges
that each certificate representing Warrant Stock shall bear a restrictive legend
substantially as set forth below:
"THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144
UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION
OF SECURITIES) OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE
REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
"THE TRANSFER OR EXCHANGE OF THE COMMON STOCK REPRESENTED BY THIS
CERTIFICATE IS FURTHER RESTRICTED BY THE TERMS OF THAT CERTAIN WARRANT AGREEMENT
DATED AS OF DECEMBER 1, 1997, BY AND BETWEEN THE ISSUER AND AMOCO CORPORATION
(THE "WARRANT AGREEMENT"). THE ISSUER WILL FURNISH A COPY OF THE WARRANT
4
<PAGE>
AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN
REQUEST."
Section 6.2. Restrictions on Transferability of Shares. Subject to
-----------------------------------------
compliance with all applicable federal and state securities laws, Shares may be
transferred only in accordance with the provisions of this Section 6. Each
holder of Warrants and Shares, by its acceptance thereof, agrees to comply in
all respects with the provisions of this Agreement.
Section 6.3. Notice of Proposed Transfer of Shares. Prior to any
-------------------------------------
proposed transfer of Shares by an Affiliated Warrant Stockholder to any third
party that is not an Amoco affiliate (a "Proposed Warrant Stock Transfer"), such
Affiliated Warrant Stockholder shall notify the Company of its intention to
effect such Proposed Warrant Stock Transfer and the intended manner and
circumstances thereof in reasonable detail, specifying the number of Shares to
be sold, the prospective purchaser(s) thereof and the price and terms and
conditions of such sale, and offering to sell such Shares to the Company or its
designee (a "Warrant Stock Purchase Offer") at such price and on like terms and
conditions (a "Proposed Warrant Stock Transfer Notice").
Section 6.4. Company's Right of Refusal with respect to Proposed Warrant
-----------------------------------------------------------
Stock Transfer. The Company shall have the right to accept (in whole but not in
- --------------
part) or reject a Warrant Stock Purchase Offer within 24 hours (exclusive of
weekends and holidays) following receipt of the Proposed Warrant Stock Transfer
Notice. If the Company shall accept such Warrant Stock Purchase Offer within
the applicable time period specified above, then the Company shall purchase the
Shares specified in the Proposed Warrant Stock Transfer within 10 business days
thereafter on the same terms and conditions set forth therein; provided,
however, that if the purchase price specified in the Proposed Warrant Stock
Transfer Notice is to be paid in cash, then the Company shall deliver the
purchase price to the Holder in immediately available funds by federal wire
transfer.
Section 6.5. Company's Rejection of Warrant Stock Purchase Offer.
---------------------------------------------------
(a) If the Company (i) rejects such Warrant Stock Purchase Offer, or (ii)
does not accept such Warrant Stock Purchase Offer within the applicable time
period set forth in Section 6.4, or (iii) accepts such Warrant Stock Purchase
Offer within the applicable time period set forth in Section 6.4 but thereafter
fails to effect the purchase of all such Shares within the applicable time
period set forth in Section 6.4, then such Affiliated Warrant Stockholder shall
be free to enter into an agreement to sell all (but not less than all) of such
Shares to the original prospective purchaser and on the terms and conditions
specified in the Proposed Warrant Stock Transfer Notice, except that the per-
share sale price may differ but shall not be less than the originally-proposed
price less the amount, if any, by which the per share Market Price for Company
Common Stock at the date of purchase is less than such Market Price on the date
of notice of proposed sale; provided, however, that, if the Company requests,
such Affiliated Warrant Holder must provide, at its sole expense, (i) a written
opinion of legal counsel who is, and whose legal opinion shall be, reasonably
satisfactory to the Company, addressed to the Company, to the effect that the
Proposed Warrant Stock Transfer may be effected without registration of the
applicable Shares under the Securities Act, and (ii) such certificates and other
information as the
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Company reasonably may require to confirm such opinion, whereupon such
Affiliated Warrant Stockholder shall be entitled to transfer such Shares in the
manner contemplated by such opinion and by this Section 6; and provided further,
however, that if the Company accepts such Warrant Stock Purchase Offer within
the applicable time period set forth in Section 6.4 but thereafter fails to
effect the purchase of all such Shares within the applicable time period set
forth in Section 6.4, the ability of the Affiliated Warrant Stockholder to sell
such Shares to the original prospective purchaser as set forth above shall not
limit other remedies, if any, that may be available to such Affiliated Warrant
Stockholder as a result thereof.
(b) Any sale of Shares to the originally-proposed purchaser pursuant to
this Section 6 must be consummated within 30 days after the expiration of the
time period set forth in Section 6.4.
Section 6.6. Limitation on Right of Refusal. The Company's right of
------------------------------
refusal set forth in this Section 6 shall not apply to:
(a) any sales, pursuant to Rule 144 under the Securities Act or otherwise,
of a block of fewer than 150,000 Shares;
(b) any sales pursuant to an offering that is registered under the
Securities Act; or
(c) subsequent transfers of Shares by holders (i) that are not Affiliated
Warrant Holders or Affiliated Warrant Stockholders and (ii) that acquired Shares
in compliance with all applicable federal and state securities laws and with the
other applicable transfer provisions of this Warrant Agreement.
Section 6.7. Definition of "Affiliated Warrant Stockholder". For the
----------------------------------------------
purposes of this Agreement, the term "Affiliated Warrant Stockholder" shall mean
Amoco and any Amoco affiliate to whom Amoco or any Amoco affiliate has
transferred (a) Warrants that such transferee exercised for Shares or (b)
Shares.
Section 7. Exercise Price.
--------------
Section 7.1. Initial Exercise Price and Adjusted Exercise Price. The
--------------------------------------------------
initial exercise price of each Warrant shall be $22.97 (the "Initial Exercise
Price"). The adjusted exercise price for Common Stock shall be the price that
shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Section 8 hereof (the
"Adjusted Exercise Price").
Section 7.2. Common Stock Exercise Price. The term "Common Stock Exercise
---------------------------
Price" herein shall mean the Initial Exercise Price or, if the Initial Exercise
Price has been adjusted pursuant to the terms of Section 8 hereof, the Adjusted
Exercise Price.
Section 8. Adjustments to Exercise Price and Number of Securities.
------------------------------------------------------
Section 8.1. Computation of Adjusted Exercise Price. Except as
--------------------------------------
hereinafter provided, in case the Company shall issue or sell, or any Company
subsidiary shall sell, any shares of
6
<PAGE>
Common Stock at any time after the date hereof (other than the issuances or
sales referred to in Section 8.3 or 8.7 hereof), including shares held in the
treasury of the Company or by any Company subsidiary (but excluding (i) shares
issued upon the exercise of any options, rights or warrants and shares issued
upon the direct or indirect conversion or exchange of securities and (ii) shares
issued pursuant to employee or director benefit plans approved by a majority of
the entire Board of Directors of the Company or any Company subsidiary, as the
case may be), for consideration per share less than the Market Price per share
of Common Stock on the date immediately prior to the issuance or sale of such
shares, or without consideration, then forthwith upon such issuance or sale, the
Common Stock Exercise Price shall (until another such issuance or sale or other
event giving rise to an adjustment to the Common Stock Exercise Price pursuant
to this Section 8) be adjusted (calculated to the nearest full cent) by
multiplying the Common Stock Exercise Price in effect immediately prior to such
issuance or sale by the quotient derived by dividing (a) an amount equal to the
sum of (1) the total number of shares of Common Stock outstanding immediately
prior to such issuance or sale plus (2) the number of shares of Common Stock
that the aggregate consideration received by the Company in connection with such
issuance or sale would purchase at such Market Price, by (b) the total number of
shares of Common Stock outstanding immediately after such issuance or sale;
provided, however, that in no event shall the Common Stock Exercise Price be
adjusted pursuant to this computation to an amount in excess of the Common Stock
Exercise Price in effect immediately prior to such computation, except in the
case of a combination of outstanding shares of Common Stock as provided by
Section 8.3 hereof.
As used herein, the "Market Price" of Common Stock at any date shall be
deemed to be the last reported sale price (expressed as a dollar value per
share) or, in case no such reported sale takes place on such day, the average of
the last reported sale prices for the last three (3) trading days, in either
case as officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading or, if not so listed or admitted,
by the National Association of Securities Dealers Automated Quotation System
("NASDAQ") National Market System ("NASDAQ/NMS") or, if not approved for
quotation on the NASDAQ/NMS, the average of the closing bid and asked prices as
furnished by the National Association of Securities Dealers, Inc. (the "NASD")
through NASDAQ or a similar organization if NASDAQ is no longer reporting such
information or, if such security is not quoted on NASDAQ, as determined
reasonably and in good faith by resolution of the Board of Directors of the
Company, based on the best information available to it.
For the purposes of any computation to be made in accordance with this
Section 8.1, the following provisions shall be applicable:
(i) in case of the issuance or sale of shares of Common Stock for
consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the amount of cash received by
the Company for such shares (or, if shares of Common Stock are offered by
the Company for subscription, the subscription price, or, if shares of
Common Stock shall be sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or others
performing similar services or
7
<PAGE>
any expenses incurred in connection therewith;
(ii) in case of the issuance or sale of shares of Common Stock for
consideration part or all of which shall be other than cash, the amount of
the consideration therefor other than cash shall be deemed to be the value
of such consideration as determined in good faith by the Board of Directors
of the Company and shall include any amounts payable to security holders or
any affiliates thereof, including without limitation, pursuant to any
employment agreement, royalty, consulting agreement, covenant not to
compete, earned or contingent payment right or similar arrangement,
agreement or understanding, whether oral or written, all such amounts being
valued for the purposes hereof at the aggregate amount payable thereunder,
whether such payments are absolute or contingent, and irrespective of the
period or uncertainty of payment, the rate of interest, if any, or the
contingent nature thereof; provided, however, that if any Holder does not
agree with such valuation, a mutually acceptable independent appraiser
shall make such valuation, the cost of which shall be borne 50% by the
Company and 50% by the Holders;
(iii) shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company other than the Common Stock shall
be deemed to have been issued immediately after the opening of business on
the day following the record date for the determination of stockholders
entitled to receive such dividend or other distribution and shall be deemed
to have been issued without consideration;
(iv) The reclassification of securities of the Company (other than
shares of Common Stock) into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for
consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such
shares of Common Stock shall be determined as provided in subsection (ii)
of this Section 8.1; and
(v) the number of shares of Common Stock at any one time outstanding
shall include the aggregate number of shares issued or issuable (subject to
readjustment upon the actual issuance thereof), upon the exercise of
options, rights and warrants and upon the conversion or exchange of
convertible or exchangeable securities, but shall exclude the aggregate
number of shares held by Company subsidiaries for the Company's benefit.
Section 8.2. Options, Rights, Warrants and Convertible and Exchangeable
----------------------------------------------------------
Securities. In case the Company shall at any time after the date hereof (except
- ----------
pursuant to an employee or director benefit plan approved by a majority of the
Company's entire Board of Directors) issue options, rights or warrants to
purchase or subscribe for, or exercisable for, shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock, for
consideration per share less than the Market Price for Common Stock immediately
prior to the issuance of such options, rights, warrants or convertible or
exchangeable securities, or without consideration, the Common Stock Exercise
Price in effect immediately prior to the issuance of such options, rights,
warrants or convertible or exchangeable securities, as the case may be, shall
8
<PAGE>
be reduced to a price determined by making a computation in accordance with the
provisions of Section 8.1 hereof; provided, however, that:
(a) the aggregate maximum number of shares of Common Stock, as the case may
be, issuable under such options, rights or warrants shall be deemed to be issued
and outstanding at the time such options, rights or warrants were issued, and
for consideration equal to the minimum purchase or subscription price per share
provided for in such options, rights or warrants at the time of issuance, plus
the consideration (determined in the same manner as consideration received on
the issue or sale of shares in accordance with the terms of the Warrants), if
any, received by the Company for such options, rights or warrants;
(b) the aggregate maximum number of shares of Common Stock issuable upon
conversion or exchange of such convertible or exchangeable securities shall be
deemed to be issued and outstanding at the time of issuance of such securities,
and for consideration equal to the consideration (determined in the same manner
as consideration received on the issue or sale of shares of Common Stock in
accordance with the terms of the Warrants) received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; and
(c) if any change shall occur in the purchase or subscription price per
share provided for in any of such options, rights or warrants or in the
conversion or exchange price per share of such securities, such options, rights,
warrants or conversion or exchange rights, as the case may be, shall be deemed
to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights, warrants or convertible or
exchangeable securities at the new purchase, subscription, conversion or
exchange price in respect of the number of shares issuable upon the exercise of
such options, rights or warrants or the conversion or exchange of such
convertible or exchangeable securities.
Section 8.3. Subdivision and Combination. In case the Company shall at
---------------------------
any time (i) declare a dividend on the Common Stock payable in shares of its
capital stock (including Common Stock), (ii) subdivide or combine the
outstanding shares of Common Stock, or (iii) issue any class of its capital
stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then the Common Stock Exercise Price in
effect immediately prior to the record date for such dividend or the effective
date of such subdivision, combination or reclassification shall forthwith be
proportionately adjusted so that the holder of any Warrant exercised after such
date shall be entitled to receive the aggregate number and kind of capital stock
that, if such Warrant had been exercised immediately prior to such date, such
holder would have owned upon such exercise and been entitled to receive by
virtue of such dividend, division, subdivision, combination or reclassification.
Section 8.4. Adjustment in Number of Securities. Upon each adjustment of
----------------------------------
the Common Stock Exercise Price pursuant to the provisions of this Section 8,
the number of shares of Common Stock issuable upon exercise at the adjusted
Common Stock Exercise Price of each
9
<PAGE>
Warrant shall be adjusted to the nearest full share by multiplying a number
equal to the Common Stock Exercise Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable upon exercise of
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Common Stock Exercise Price.
Section 8.5. Common Stock. If any class, classes and/or series of
------------
capital stock is issued in exchange for Common Stock upon conversion thereof or
in lieu thereof in connection with any change in par or stated value,
recapitalization, reorganization or other transaction, such class, classes
and/or series of capital stock shall thereafter be the Common Stock referred to
herein.
Section 8.6. Merger or Consolidation. In case of any consolidation or
-----------------------
merger of the Company with or into another corporation or other entity (other
than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification or change of the
outstanding Common Stock or other securities issuable upon exercise of Warrants)
or in case of any sale or conveyance to another person, corporation or other
entity of all or substantially of the assets and the property of the Company,
then, as a condition of such consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
execute and deliver to the Holder of each Warrant then outstanding a
supplemental warrant agreement providing that such Holder shall have the right
thereafter to receive, upon exercise of such Warrant (until the expiration of
such Warrant) the kind and amount of securities, rights and property receivable
upon such consolidation, merger, sale or conveyance by a holder of the number of
Shares issuable upon exercise of such Warrant immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments that shall be identical to the adjustments
provided in this Section 8. The above provision of this subsection shall
similarly apply to successive consolidations, mergers, conveyances and sales.
Section 8.7. No Adjustment of Exercise Price in Certain Cases. No
------------------------------------------------
adjustment of the Common Stock Exercise Price shall be made:
(a) upon the issuance or sale of the Warrants, upon exercise of the
Warrants or the issuance of the shares of Common Stock issuable upon the
exercise of the Warrants; or
(b) if the amount of said adjustment shall be less than one cent ($0.01)
per share; provided, however, that in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment that, together
with any adjustment so carried forward, shall amount to at least one cent
($0.01) per share.
Section 8.8. Certificate of Adjustment. After each adjustment of the
-------------------------
Common Stock Exercise Price or the number of Shares purchasable upon exercise of
Warrants pursuant to this Section 8, the Company will promptly prepare a
certificate signed by the Chairman or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Common Stock Exercise Price, as so adjusted; (ii) the
number of Shares purchasable upon exercise of each Warrant after such
adjustment;
10
<PAGE>
and (iii) a brief statement of the facts accounting for such adjustment. The
Company will promptly file such certificate with its records and cause a brief
summary thereof to be sent by first class mail to each Holder at his last
address as it shall appear on the registry books of the Company. No failure to
mail such summary nor any defect therein or in the mailing thereof shall affect
the validity thereof.
Section 8.9. Validity of Warrant Certificate. Irrespective of any
-------------------------------
adjustments or changes in the Common Stock Exercise Price or the number of
Shares purchasable upon exercise of Warrants, Warrant Certificates theretofore
and thereafter issued shall continue to express the Common Stock Exercise Price
per share and the number of Shares purchasable thereunder as of the date such
Warrant Certificates were originally issued; provided, however, that the Holders
shall be entitled to exercise Warrants represented by such Warrant Certificates
after giving effect to each such adjustment and change, and such Warrant
Certificate shall be deemed to incorporate each such adjustment and change as if
new Warrant Certificates reflecting each such adjustment and change had been
issued to the Holders.
Section 8.10. Dividends and Other Distributions. In the event that the
---------------------------------
Company shall at any time prior to the exercise of all Warrants declare a
dividend (other than a dividend consisting solely of shares of Common Stock and
other than a regularly scheduled dividend with respect to any calendar year
declared within such calendar year or the following calendar year that does not
exceed one hundred percent (100%) of net earnings (after taxes) for such
calendar year) or otherwise distribute to all its stockholders any assets
(including shares of any subsidiary), property, rights, evidences of
indebtedness, securities (other than shares of Common Stock) then, forthwith
upon such declaration, the Common Stock Exercise Price (until another such
declaration or other event causing price adjustments to the Common Stock
Exercise Price pursuant to this Section 8) whether issued by the Company or by
another, or other thing of value, shall be adjusted (calculated to the nearest
$0.0001) by multiplying the Common Stock Exercise Price in effect immediately
prior to the record date for such dividend or other distribution by the quotient
derived by dividing (i) the difference between (a) the product of the number of
shares of Common Stock outstanding immediately prior to such declaration
multiplied by the Market Price for Common Stock immediately prior to such
declaration and (b) the aggregate fair market value amount of such dividend or
distribution so declared by (ii) the product of the number of shares of Common
Stock outstanding immediately prior to such declaration multiplied by the Market
Price for Common Stock immediately prior to such declaration. Such adjustments
shall be made on the record date for determination of stockholders entitled to
receive such dividend or distribution.
Section 9. Exchange and Replacement of Warrant Certificates. Each
------------------------------------------------
Warrant Certificate is exchangeable, without expense, upon the surrender thereof
by the Holder at the principal executive office of the Company, for one or more
new Warrant Certificates of like tenor and date representing in the aggregate
the right to purchase the same number of Shares in such denominations as shall
be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all
11
<PAGE>
reasonable expenses incidental thereto, and upon surrender and cancellation of
such Warrant Certificates, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor in lieu thereof.
Section 10. Elimination of Fractional Interests. The Company shall not
-----------------------------------
be required to issue certificates representing fractions of shares of Common
Stock upon the exercise of Warrants, nor shall it be required to issue scrip or
pay cash in lieu of such fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
Section 11. Reservation and Listing of Securities. The Company shall at
-------------------------------------
all times reserve and keep available out of its authorized capital stock, solely
for the purpose of issuance of Common Stock issuable upon exercise of Warrants,
such number of shares of Common Stock as shall be issuable upon exercise
thereof. The Company covenants and agrees that, upon exercise of the Warrants
and payment of the Common Stock Exercise Price, all Shares of Common Stock and
other securities issuable upon such exercise when issued shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any security holder of the Company. As long as Warrants shall be
outstanding, the Company shall use reasonable efforts to cause the Common Stock
issuable upon the exercise of Warrants to be listed (subject to official notice
of issuance) on all securities exchanges on which the Common Stock may then be
listed and/or quoted on NASDAQ/NMS.
The Company represents and warrants that (a) the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of Delaware and has all requisite power, authority and legal right to enter
into this Agreement; (b) this Agreement has been duly executed and delivered by
the Company and constitutes a valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms, subject
to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
and other similar laws now or hereafter in effect relating to or affecting
creditors' rights generally and (ii) general principles of equity (regardless of
whether considered in a proceeding at law or in equity); (c) the Warrants have
been duly authorized, validly issued and are fully paid and non-assessable and
are not subject to any preemptive rights; (d) the issuance of the Warrants does
not violate or conflict with or result in a breach or default under (i) any
material agreement or instrument by which the Company is bound or (ii) any
judgment, decree, rule or regulation applicable to the Company; and (e) as of
September 29, 1997, the Company had 26,393,032 shares of Common Stock issued and
outstanding.
Section 12. Notices to Warrant Holders. Nothing contained in this
--------------------------
Agreement shall be construed as conferring upon the Holders of Warrants the
right to vote or to consent or to receive notice as a stockholder in respect of
any meetings of stockholders for the election of directors or any other matter
or as having any rights whatsoever as a stockholder of the Company. If, however,
at any time prior to the earlier of the expiration of the Warrants or their
exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or
12
<PAGE>
a cash dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of shares of Common Stock
any additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or substantially all
of its property, assets and business as an entirety or a capital reorganization,
merger or share exchange involving the Company shall be proposed;
then, in any one or more of said events, the Company shall give notice of such
event to each Holder of Warrants at least fifteen (15) days prior to the date
fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution or
offer. Such notice shall specify record date or the date of closing the transfer
books, as the case may be. Failure to give such notice or any defect therein
shall not affect the validity of any action taken in connection with such
dividend, distribution, offer, dissolution, liquidation, winding up or sale.
Section 13. Registration Rights.
-------------------
Section 13.1. Registrable Securities. For the purposes of this Agreement,
----------------------
"Registrable Securities" shall mean (a) the Shares, (b) all securities issued as
distributions or dividends on the Shares and (c), all securities into which (i)
the Shares or (ii) any securities issued as distributions or dividends on the
Shares are, in each case, changed, exchanged or converted pursuant to any
reorganization, reclassification, consolidation, merger or share exchange, or to
any sale, transfer or other disposition of Company assets.
Section 13.2. Demand Registration. From the date on which the Company
-------------------
issues any Shares until the expiration of the holding period that would permit a
non-affiliate to sell Shares without restriction under Rule 144(k) (the
"Registration Period"), Amoco and/or any holders of Registrable Securities that
acquired such Registrable Securities in compliance with the transfer provisions
of this Agreement (each a "Securityholder") and that are authorized by Amoco or
any transferee will be entitled one time in the aggregate to require the
Company, by delivery to the Company of a notice (the "Demand"), to cause
Registrable Securities held by such Securityholder(s) to be registered for sale
to the public under the Securities Act. Upon receipt of such a notice, the
Company agrees to use reasonable commercial efforts to file a registration
statement (on Form S-3 or a successor form or, if the Company is not then
eligible to use Form S-3 or a successor form, then on a form appropriate for
registration of the Registrable Securities) with the Securities and Exchange
Commission (the "Commission") within 30 days after such request and to effect
such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations
13
<PAGE>
under the Securities Act) as would permit or facilitate the sale and
distribution of such Registrable Securities as are specified in the Demand in
the manner of distribution specified therein, together with all Registrable
Securities of any Securityholder(s) joining in such request as are specified in
requests received by the Company within 15 days after receipt of such Demand;
provided, however, that the Company shall not be obligated to take any action to
effect such registration, qualification or compliance pursuant to this Section
13.2:
(a) in any particular jurisdiction in which the Company would be required
to qualify to do business or to execute a general consent to service of process
in effecting such registration, qualification or compliance except as may be
required by the Securities Act;
(b) during the period starting with the date 45 days prior to the filing
of, and ending on a date 90 days following the effective date of, a registration
statement filed by the Company (other than with respect to a registration
statement relating to a Rule 145 or other business combination transaction, an
offering solely to employees and/or directors or any other registration that is
not appropriate for the registration of Registrable Securities);
(c) at any time when the Securityholders would be required to refrain from
selling Registrable Securities pursuant to Section 13.9(f) hereof;
(d) with respect to Registrable Securities that constitute less than
twenty-four percent (24%) of all Registrable Securities originally outstanding;
or
(e) more than once in the aggregate for all Securityholders.
In the event that any Securityholder seeks to require the Company to effect the
registration of Registrable Securities at a time when the Company is not
obligated to effect such registration pursuant to clause (b) or (c) of the
immediately preceding sentence, such Securityholder shall be entitled to require
the Company to effect the registration of Registrable Securities as soon as the
conditions specified in such clauses (b) and (c) cease to apply.
Notwithstanding anything herein to the contrary, however, no Demand shall
be deemed to have been made if (i) the registration statement relating to the
Demand does not become effective for any reason other than a withdrawal of the
Demand, (ii) the registration statement relating to the Demand does not remain
effective for the period required pursuant to this Agreement because the Company
has failed to fulfill its obligations hereunder or (iii) the Securityholders who
have requested that their Registrable Securities be included in such
registration (A) withdraw their requests because the Company has exercised its
right under this Agreement to delay registration, (B) withdraw their requests,
or are unable to complete the sale of their Registrable Securities pursuant to
the registration statement, because of the requirements of Section 13.10(b)
hereof or (C) withdraw their requests for any reason other than a reason
described in (A) or (B) above and reimburse the Company for all of its expenses
incurred in connection with such registration; provided, however, that no more
than two withdrawals may be made in the aggregate by all Securityholders
pursuant to this clause (iii)(C).
Section 13.3. Company's Purchase Option in lieu of Demand Registration.
--------------------------------------------------------
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<PAGE>
Notwithstanding Section 13.2 above, and in lieu of effecting registration
pursuant to the Demand, the Company shall have the right to purchase all (but
not less than all) of the Registrable Securities that Securityholders have
requested be registered at a price equal to the average closing price of the
Registrable Securities for the 15 trading days immediately succeeding the date
on which the Demand is made as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or, if not
so listed or admitted, on the NASDAQ/NMS or, if not approved for quotation on
the NASDAQ/NMS, the average closing bid price as furnished by the NASD through
NASDAQ or a similar organization if NASDAQ is no longer reporting such
information or, if such security is not quoted on NASDAQ, the price established
pursuant to an appraisal conducted by a third party selected by the Company who
reasonably is acceptable to Securityholders holding a majority of the
Registrable Securities to be included in such registration. The Company must
notify such Securityholders whether or not it intends to exercise its purchase
right by the later of (a) 30 days after the Demand is made and (b), if the
Company exercises any right under this Agreement to delay filing the
registration statement, the end of the delay period (but in any event not to
exceed 90 days). The Company's failure to notify such Securityholders that the
Company intends to exercise its purchase right within the time period specified
in the immediately-preceding sentence shall constitute the Company's election to
proceed with registration in accordance with the Demand and the other provisions
of this Agreement. If the Company exercises its purchase right as outlined
above, the closing of the purchase will occur within five business days
following the date on which the Company has notified such Securityholders that
it intends to exercise its purchase right in accordance with this Section 13.3,
with the purchase price payable in immediately available funds by federal wire
transfer.
Section 13.4. Incidental Registration.
-----------------------
(a) If, at any time or from time to time, the Company shall determine to
register any of its Common Stock, either for its own account or for the account
of a security holder or holders exercising their respective demand registration
rights (other than any such registration relating to a Rule 145 or other
business combination transaction, an offering solely to employees and/or
directors or any other registration that is not appropriate for the registration
of Registrable Securities), the Company will (i) promptly give to each
Securityholder holding at least twenty-four percent (24%) of all Registrable
Securities originally outstanding notice thereof, and (ii) include in such
registration (and any related qualification under the blue sky laws or other
compliance), subject to Section 13.4(b) hereof, all the Registrable Securities
specified in a request made by any such Securityholder within ten (10) days
after its receipt of such notice from the Company. Such registration shall not
constitute a demand registration described under Section 13.2 hereof.
(b) If the registration pursuant to this Section 13.4 hereof is an
underwritten offering, the right of any Securityholder to such registration
shall be conditioned upon such Securityholder's participation in such
underwriting and the inclusion of Registrable Securities in the underwriting to
the extent provided herein. All Securityholders proposing to distribute all or
a portion of their Registrable Securities through such underwriting shall
(together with the Company and the other holders distributing securities through
such underwriting) enter into an
15
<PAGE>
underwriting agreement in customary form with the managing underwriter that the
Company selects for such underwriting, and shall provide to the Company upon
request such information as may be specified in such request. Notwithstanding
any other provision of this Section 13.4, if the managing underwriter in its
sole discretion determines that marketing factors require a limitation of the
number or type of securities to be underwritten, the managing underwriter may
limit the Registrable Securities to be included in such registration to the
extent that such managing underwriter in its sole discretion may deem necessary
or appropriate (the "Maximum Offering Amount"). The Company shall so advise all
Securityholders and the other holders distributing their Company securities
through such underwriting pursuant to piggyback or incidental registration
rights similar to the rights of the Securityholders under this Section 13.4. The
Maximum Offering Amount shall be allocated in the following order:
(i) first, to the Company and to all holders of Company securities
having the right to include such securities in such registration (other
than the Securityholders and those whose right to include Company
securities is expressly pari passu with, or is expressly subordinated to,
that of the Securityholders), who shall be entitled to participate in such
offering in accordance with the relative priorities, if any, as shall exist
among them;
(ii) second, if and to the extent that the total number of Company
securities that the Company and such holders of Company securities
collectively wish to register is less than the Maximum Offering Amount,
then the Securityholders and all holders of Company securities whose right
to include such securities in such registration is expressly pari passu
with the right of the Securityholders shall be entitled to participate in
the registration pro rata in accordance with the number of Registrable
Securities and other Company securities held by each such Securityholder
and other holders, respectively, as to the remainder, with a further pro
rata allocation to the extent any such person has requested registration of
fewer Registrable Securities or other Company securities, as applicable,
than such person is entitled to have registered; and
(iii) third, if and to the extent that the total number of Company
securities to be included in the offering following the allocations set
forth in the two immediately-preceding sentences is less than the Maximum
Offering Amount, then the holders of other Company securities whose right
to include such securities in such registration is expressly subordinated
to that of the Securityholders shall be entitled to participate in such
offering in accordance with the relative priorities, if any, as shall exist
among them.
If any Securityholder disapproves of the terms of any such underwriting, it
may elect to withdraw therefrom by notice to the Company and the managing
underwriter.
(c) The Company shall have the right to terminate or withdraw any
registration under this Section 13.4 prior to the effectiveness of such
registration whether or not any Securityholder has elected to include
Registrable Securities in such registration.
(d) A Securityholder may withdraw from participation in any incidental
registration for any reason and at any time prior to the execution and delivery
of the underwriting agreement, if any, relating to the registration.
16
<PAGE>
(e) The Company agrees that any incidental registration rights that the
Company may grant after the date of this Agreement that are exercisable during
the Exercise Period shall be either pari passu with, or subordinated to, the
incidental registration rights granted under this Agreement.
Section 13.5. Company's Purchase Option in lieu of Incidental
-----------------------------------------------
Registration. Notwithstanding Section 13.4 above, and in lieu of effecting the
- ------------
incidental registration of Registrable Securities as set forth therein, the
Company shall have the right to purchase the Registrable Securities that
Securityholders have requested be included in such Company registration at a
price equal to the price at which the securities in such registration are to be
offered to the public. The Company must notify such Securityholders whether or
not it intends to exercise its purchase right by the date on which the
Commission declares the Company's registration effective. If the Company
exercises its purchase right as outlined above, the closing of the purchase will
occur within five business days following the date on which the Company has
notified such Secuirtyholders that it intends to exercise its purchase right in
accordance with this Section 13.5.
Section 13.6. Expenses of Registration. The Company shall bear all
------------------------
registration, qualification and filing fees (including NASD filing fees), fees
and disbursements of Company counsel and accountants and blue sky fees and
expenses incurred in connection with any registration pursuant to Sections 13.2
or 13.4 hereof. All other fees and expenses incurred in connection with a
registration (including, without limitation, underwriting discounts, selling
commissions and stock transfer taxes applicable to the Company securities
included in the registration) shall be borne by the Company, the Securityholders
and other selling stockholders, as applicable, pro rata on the basis of the
number of Company securities included in such registration.
Section 13.7. Plan of Distribution.
--------------------
(a) The distribution of Registrable Securities pursuant to a registration
under Section 13.2 shall be effected only by or through such investment banking
firm or firms as may be designated by the Securityholders and as are reasonably
satisfactory to the Company in connection with the filing of the applicable
registration statement, acting in such capacity (as broker, dealer, principal or
otherwise), and receiving such compensation, as may be agreed by the
Securityholders of the Registrable Securities to be distributed and such
investment banking firm or firms.
(b) The Company shall give the Securityholder(s) of Registrable Securities
to be included in any registration statement at least ten (10) days' notice
prior to the filing of a registration statement pursuant to Section 13.2 hereof.
Such Securityholder(s) shall advise the Company within five (5) days of receipt
of such notice of the terms of its or their compensation arrangements with the
designated investment banking firm or firms, the capacity in which such firm or
firms will act, the distribution proposed by such Securityholder(s) and such
information regarding such Securityholder(s) and the Registrable Securities that
they hold as the Company
17
<PAGE>
may reasonably request and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
(c) The Securityholders shall be entitled to exclude from any registration
effected pursuant to Section 13.2 hereof any shares of Common Stock other than
Registrable Securities if the investment banking firm or firms designated under
subsection (a) hereof determines that marketing factors require a limitation of
the number of shares to be included in such registration.
Section 13.8. Indemnification.
---------------
(a) The Company will indemnify each Securityholder, each of its officers,
directors, partners, employees and agents and each person controlling such
Securityholder within the meaning of Section 15 of the Securities Act, with
respect to which registration, qualification or compliance has been effected
pursuant to this Agreement, against all expenses, claims, losses, damages or
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act or any other federal,
state or common law rule or regulation applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Securityholder, each of its officers, directors, employees
and agents and each person controlling such Securityholder for any legal and any
other expenses reasonably incurred in connection with investigating, preparing
or defending any such claim, loss, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with any written information furnished to the
Company pursuant to an instrument duly executed by such Securityholder or
controlling person and stated to be specifically for use therein.
(b) Each Securityholder will, if Registrable Securities held by such
Securityholder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Securityholder, each of its officers and
directors and each person controlling such Securityholder within the meaning of
Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Securityholders, such
directors, officers, persons, underwriters or control persons for any legal or
any other expense reasonably
18
<PAGE>
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with any written
information furnished to the Company pursuant to an instrument duly executed by
such Securityholder and stated to be specifically for use therein; provided,
however, that the obligations of each Securityholder shall be limited to an
amount equal to the net proceeds that such Securityholder received upon the sale
of its Registrable Securities.
(c) Each party entitled to indemnification under this Section 13.8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, but the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement unless,
but only to the extent that, the failure to give such notice is actually
prejudicial to an Indemnifying Party's ability to defend such action, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that if the Indemnified Party determines in
good faith that a conflict of interest exists and that therefore it is advisable
for such Indemnified Party or parties to be represented by separate counsel or
that, upon written advice and legal opinion of counsel, there may be sound legal
defenses available to it or them that are different from or in addition to those
available to the Indemnifying Party, then the Indemnifying Party shall not be
entitled to assume such defense and the Indemnified Parties shall be entitled to
counsel at the Indemnifying Party's expense. If an Indemnifying Party is not so
entitled to assume the defense of such action or does not assume such defense,
after having received the notice referred to in the first sentence of this
paragraph, the Indemnifying Party will pay the reasonable fees and expenses of
counsel of the Indemnified Party. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which any Securityholder of
Registrable Securities exercising rights under this Agreement, or any
controlling person of any such Securityholder, makes a claim for indemnification
pursuant to this Section 13.8 but is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
this Section 13.8 provides for indemnification in such case, the Company and
such Securityholder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that such Securityholder is responsible for the portion
represented by the percentage that the public offering price of its Registrable
Securities offered by the registration statement bears to the
19
<PAGE>
public offering price of all securities offered by such registration statement;
and the Company is responsible for the remaining portion not payable by any
Securityholder or other holder; provided, however, that, in any such case, (A)
no such Securityholder will be required to contribute any amount in excess of
the public offering price of all such Registrable Securities offered by it
pursuant to such registration statement, and (B) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
Section 13.9. Obligations of the Company. Whenever required under this
--------------------------
Agreement to use its best efforts to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Securities, and use its best efforts to cause such
registration statement to become effective and to keep such registration
statement effective until the closing of the offering to which the registration
statement relates, but in no event longer than 90 days;
(b) prepare and file with the Commission such amendments and supplements to
such registration statement as may be necessary (i) to update and keep such
registration statement effective as provided in Section 13.9(a) hereof, (ii) to
comply with the provisions of the Securities Act with respect to the disposition
of all Registrable Securities covered by such registration statement and (iii)
to reflect a modification in the manner of distribution of such Registrable
Securities. Notwithstanding anything else to the contrary contained herein, the
Company shall not be required to disclose in any amendment or supplement to a
registration statement or otherwise (A) any confidential information concerning
any matter that is the subject of a notice given under Section 13.9(f) hereof as
to which the Company has a bona fide interest in withholding disclosure, or (B)
historical financial statements or pro forma financial information required by
Regulation S-X of the Commission in connection with a business acquisition or
disposition prior to the date when such information would otherwise be required
to be filed with the Commission (including extensions pursuant to Item 7(a)(4)
of Form 8-K);
(c) furnish to the Securityholders such numbers of copies of any prospectus
included in such registration statement, including any preliminary prospectus,
in conformity with the requirements of the Securities Act, and such other
customary agreements and documents (including attorney opinion letters) as they
may reasonably request in order to facilitate the disposition of such
Registrable Securities owned by them;
(d) use its best efforts to register and qualify the Registrable Securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the
Securityholders whose Registrable Securities have been included in such
registration statement (provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions) and to maintain the effectiveness of such registration and
qualification until the closing of the offering to which the registration
statement relates, but in no event longer than 90 days;
20
<PAGE>
(e) in the event of any underwritten public offering contemplated by
Section 13.2 hereof, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing
underwriter of such offering. Each Securityholder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement;
(f) notify each Securityholder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, or upon the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which the prospectus is used, and, except for periods (not to exceed 90
days per calendar year in the aggregate) during which the Company has a bona
fide corporate interest in withholding disclosure or the time period for filing
with the Commission information referred to in Section 13.9(b)(B) hereof has not
expired, promptly prepare and furnish to such Securityholders a supplement or
amendment to such prospectus, or otherwise update such prospectus through the
filing of a Current Report on Form 8-K or otherwise, so that such prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
(g) upon reasonable request, de-register promptly any Registrable
Securities held by a Securityholder not sold during the period that a
registration statement relating to such Registrable Securities was effective;
(h) appoint a transfer agent and registrar for Registrable Securities that
are registered pursuant to this Agreement and use reasonable efforts to ensure
that the Common Stock CUSIP will apply to the registered Registrable Securities;
and
(i) upon reasonable request, obtain a cold comfort letter from the
Company's independent public accountants in customary form and covering such
matters that are customarily covered by such cold comfort letters.
Section 13.10. Securities Law Compliance.
-------------------------
(a) The Securityholders of Registrable Securities included in any
registration effected pursuant to this Agreement covenant that they will comply
with the Securities Act and with the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), with respect to any such registration, recognizing that
the Company may notify such Securityholders in accordance with Section 13.9(f)
hereof that the registration statement is not then current.
(b) The Securityholders of Registrable Securities included in any
registration effected pursuant to this Agreement agree that, immediately upon
receipt of a notification pursuant to Section 13.9(f) hereof, they will refrain
from selling Registrable Securities until subsequently notified by the Company
that the registration statement is current.
21
<PAGE>
(c) The Company shall file such reports with the Commission as will enable
Securityholders to sell Registrable Securities pursuant to Rule 144 under the
Securities Act; provided, however, that nothing in this Agreement shall be
construed to require the Company to subject itself to the registration
requirements of the Securities Act if the Company is not subject to such
requirements immediately prior to the making of such request.
Section 13.11. Standoff Agreement. Upon request of the underwriters
------------------
managing any underwritten offering of the Company's securities (including,
without limitation, any underwritten offering of Registrable Securities), the
Securityholders agree not to sell, make any short sale of, lend, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in such registration), without the prior consent of
the Company or such underwriters, as the case may be, for such period of time
(not to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters.
Section 13.12. Duty of Cooperation. It shall be a condition to the
-------------------
obligations of the Company under this Agreement that each Securityholder
participating in a registration pursuant to this Agreement:
(a) cooperate with the Company in the preparation and filing of the
documents constituting such Registration Statement (including any post-effective
amendment or supplement thereto) in such manner not inconsistent with the
provisions hereof as the Company may reasonably request, including (without
limitation) furnishing information regarding such Securityholder and the
distribution of securities;
(b) enter into such undertakings with the Company relating to the conduct
of the offering of securities pursuant to such Registration Statement and not
inconsistent with the provisions hereof as the Company may reasonably request in
order to assure compliance with applicable laws; and
(c) upon receipt of any notice from the Company that the Registration
Statement or prospectus is required to be amended or supplemented, comply
promptly and fully with any directive contained therein with respect to the
discontinuance of the offer and sale of such securities.
Section 14. Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly made and given:
(a) when mailed by overnight delivery service:
(i) if to Amoco, to William R. Hutchinson, Vice President, Financial
Operations, Amoco Corporation, 200 East Randolph Drive, Mail Code
3205, Chicago IL 60601;
(ii) if to any Holder or Securityholder other than Amoco, to the
address of such person as shown on the books of the Company; or
22
<PAGE>
(iii) if to the Company, to the Company's General Counsel at the
Company's address set forth in Section 3 hereof or to such other
address as the Company may designate by notice to the Holders and/or
Securityholders; or
(b) when sent by facsimile transmission (with telephonic confirmation of
receipt):
(i) if to Amoco, to William R. Hutchinson, Vice President, Financial
Operations, Amoco Corporation, at 312/856-4346 (confirming telephone
number 312/856-5737) or to such other individual addressee, facsimile
number and/or confirming telephone number as Amoco may designate by
notice to the Holders and/or Securityholders;
(ii) if to any Holder or Securityholder other than Amoco, to the
facsimile and confirming telephone numbers, if any, of such person as
shown on the books of the Company; or
(iii) if to the Company, to the Company's General Counsel at 817/870-
1671 (confirming telephone number 817/870-2800) or to such other
facsimile and confirming telephone numbers as the Company may
designate by notice to the Holders and/or Securityholders.
Section 15. Supplements and Amendments. The Company and Amoco may from
--------------------------
time to time supplement or amend this Agreement without the approval of any
Holders or Securityholders (other than Amoco) in order to cure any ambiguity, to
correct or supplement any provision contained herein that may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder that the Company and Amoco may
deem necessary or desirable and that the Company and Amoco deem shall not
adversely affect the interests of the Holders.
Section 16. Successors. All the covenants and provisions of this
----------
Agreement shall be binding upon and inure to the benefit of the Company and
Amoco and their respective successors and assigns hereunder to the extent set
forth herein.
Section 17. Termination. Except for the covenant of the Company
-----------
contained herein that all Shares shall be validly issued, fully paid and non-
assessable, this Agreement, and all provisions hereof, shall terminate at 5:00
p.m., Fort Worth, Texas time on September 29, 2002.
Section 18. Governing Law; Submission to Jurisdiction. This Agreement
-----------------------------------------
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of Delaware and for all purposes shall be in
accordance with the laws of such State without giving effect to the rules of
such State governing conflicts of laws.
The Company, Amoco, the Holders and the Securityholders hereby agree that
any action, proceeding or claim against it arising out of, or relating in any
way to, this Agreement shall be
23
<PAGE>
brought and enforced in the courts of the State of Texas or of the United States
of America for the Northern District of Texas (Fort Worth Division), and
irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive.
The Company, Amoco, the Holders and the Securityholders hereby irrevocably waive
any objection to such exclusive jurisdiction or inconvenient forum and also
hereby irrevocably waive any right or claim to trial by jury in connection with
any such action, proceeding or claim. Any such process or summons to be served
upon any of the Company, Amoco, the Holders or the Securityholders (at the
option of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address referred to in
Section 14 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or claim.
The Company, Amoco, the Holders and the Securityholders agree that the
prevailing party(ies) in any such action or proceeding shall be entitled to
recover from the other party(ies) all of its(their) reasonable legal costs and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
Section 19. Entire Agreement; Modification or Amendment. This Agreement
-------------------------------------------
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
Section 20. Severability. If any provision of this Agreement shall be
------------
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
Section 21. Captions. The caption headings of the Sections of this
--------
Agreement are for convenience of reference only, are not intended as, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
Section 22. Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall be deemed an original and all of which
taken together shall constitute one and the same instrument.
[The remainder of this page has intentionally been left blank]
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be duly executed as of the day and year first above written.
CROSS TIMBERS OIL COMPANY
[SEAL]
By: /s/ VAUGHN O. VENNERBERG II
----------------------------------
Vaughn O. Vennerberg II,
Senior Vice President--Land
Attest:
By: /s/ FRANK G. MCDONALD
--------------------------------------
Frank G. McDonald, Assistant Secretary
AMOCO CORPORATION
[SEAL]
By: /s/ LON O. BUEHNER
----------------------------------
Printed Name: Lon O. Buehner
------------------------
Title: Attorney-In-Fact
-------------------------------
Attest:
By:
--------------------------------------
Printed Name:
----------------------------
Title:
-----------------------------------
25
<PAGE>
EXHIBIT A
(FORM OF WARRANT CERTIFICATE)
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i)
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES) OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
FURTHER RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., FORT WORTH, TEXAS TIME, SEPTEMBER 29, 2002.
WARRANT NO. 00 ___,000 WARRANTS
This Warrant Certificate certifies that __________________, or its
registered assigns ("Holder"), is the holder of Warrants to purchase, in whole
or in part, at any time from the date of this Warrant Certificate until 5:00
p.m. Fort Worth, Texas time on September 29, 2002 (the "Expiration Date"),
____________________ THOUSAND (___,000) fully paid and non-assessable shares of
Common Stock, par value $0.01 per share (the "Common Stock"), of CROSS TIMBERS
OIL COMPANY, a Delaware corporation (the "Company"), at the initial exercise
price, subject to adjustment in certain events (the "Common Stock Exercise
Price"), of $22.97 per share, upon surrender of this Warrant Certificate and
payment of the Common Stock Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the Warrant
Agreement of even date herewith between the Company and Amoco Corporation (the
"Warrant Agreement"). Each Warrant initially entitles the Holder to purchase
one (1) share of Common Stock. Payment of the Common Stock Exercise Price shall
be made by federal wire transfer of immediately available funds payable to the
order of the Company.
No Warrant may be exercised after 5:00 p.m., Fort Worth, Texas time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
A-1
<PAGE>
The Warrants evidenced by this Warrant Certificate are issued pursuant to
the Warrant Agreement, which is hereby incorporated by reference in, and made a
part of, this instrument and which is hereby referred to for a description of
the rights, limitation of rights, obligations, duties and immunities thereunder
of the Company and the Holder.
The Warrant Agreement provides that, upon the occurrence of certain events
and subject to certain conditions, the Common Stock Exercise Price and the
number and/or kind of securities issuable upon exercise of Warrants may be
adjusted. In such event, at the written request of the Holder and in exchange
for the old Warrant Certificate, the Company will issue a new Warrant
Certificate evidencing the adjustment in the Common Stock Exercise Price and the
number and/or kind of securities issuable upon the exercise of Warrants;
provided, however, that the failure of the Company to issue any such new Warrant
Certificate shall not in any way adversely change, alter or otherwise impair the
rights of the Holder pursuant to the Warrant Agreement.
Upon due presentment for registration of assignment of this Warrant
Certificate at an office or agency of the Company, and subject to the
limitations provided herein and in the Warrant Agreement, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the assignee(s) in
exchange for this Warrant Certificate without charge except for taxes or other
governmental charges that are imposed in connection with such transfer.
Notwithstanding any notation of ownership or other writing hereon made by
anyone, the Company may deem and treat the Holder as the absolute owner(s) of
this Warrant Certificate for the purpose of any exercise of Warrants or of any
distribution to the Holder and for all other purposes, and the Company shall not
be affected by any notice to the contrary.
All terms used in this Warrant Certificate that are defined in the Warrant
Agreement shall have the meanings respectively ascribed to them in the Warrant
Agreement.
[The remainder of this page is intentionally left blank]
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of , .
--------------------- ------
CROSS TIMBERS OIL COMPANY
[SEAL]
By:
-------------------------------------
Printed Name:
---------------------------
Title:
-------------------------------
Attest:
By:
--------------------------------
Printed Name:
-------------------
Title:
-----------------------------
A-3
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________________________
(_______) shares of Common Stock and herewith tenders in payment for such
securities by federal wire transfer of immediately available funds payable to
the order of CROSS TIMBERS OIL COMPANY the amount of $_____________, all in
accordance with the terms of that certain Warrant Agreement dated as of December
1, 1997 by and between CROSS TIMBERS OIL COMPANY and AMOCO CORPORATION. The
undersigned requests that a certificate for such securities be registered to the
following person at the following address:
Printed Name:
------------------------------
SSN or TIN:
-----------------------------------
Address:
-----------------------------------
and that such certificate be delivered to the following person at the following
address:
Printed Name:
------------------------------
Address:
-----------------------------------
Date: Signature:
---------------- -------------------------------------------
(Signature must conform in all respects to name of
Holder as it appears on the face of the Warrant
Certificate)
Holder's Social Security Number
or Taxpayer Identification Number:
------------------
A-4
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the Holder to transfer the Warrant Certificate)
FOR VALUE RECEIVED, _________________________ hereby sells, assigns and
transfers to the following person at the following address:
Printed Name:
-----------------------------
SSN or TIN:
-----------------------------------
Address:
-----------------------------------
___________________ Warrants represented by this Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint __________________ attorney to transfer this Warrant
Certificate on the books of Cross Timbers Oil Company, with full power of
substitution.
Date: Signature:
---------------- -----------------------------------------
(Signature must conform in all respects to name of
Holder as it appears on the face of the Warrant
Certificate)
A-5
<PAGE>
EXHIBIT 12.1
CROSS TIMBERS OIL COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Earnings (loss) available to common stock.. $23,905 $19,790 $(10,538) $ 3,048 $(4,012)
Income Tax Expense......................... 13,517 10,669 (5,825) 1,730 3,643
Interest and Debt Expense.................. 26,747 17,224 12,922 8,289 5,612
Interest Portion of Rentals (a)............ 3,044 1,830 637 519 463
Preferred stock dividends.................. 1,779 514 - - -
------- ------- -------- ------- -------
Earnings (loss) before Provision for
Taxes and Fixed Charges.................. $68,992 $50,027 $ (2,804) $13,586 $ 5,706
======= ======= ======== ======= =======
Interest and Debt Expense.................. $26,747 $17,224 $ 12,922 $ 8,289 $ 5,612
Interest Portion of Rentals (a)............ 3,044 1,830 637 519 463
Preferred stock dividends.................. 1,779 514 - - -
------- ------- -------- ------- -------
Total Fixed Charges........................ $31,570 $19,568 $ 13,559 $ 8,808 $ 6,075
======= ======= ======== ======= =======
Ratio of Earnings to Fixed Charges......... 2.2 2.6 (0.2)(b) 1.5 0.9
Excess of Fixed Charges over Earnings
(Loss)................................. $ - $ - $ 16,363 (b)$ - $ 369
</TABLE>
(a) Calculated as one-third of rentals.
(b) Negative ratio is the result of a $20,280,000 pre-tax, non-cash charge
recorded upon adoption of Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of.
Excluding the effect of this charge, the ratio of earnings to fixed charges
is 1.3.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CROSS TIMBERS OIL COMPANY
JURISDICTION OF
INCORPORATION
--------------
Cross Timbers Operating Company Texas
Cross Timbers Energy Services, Inc. Texas
Cross Timbers Trading Company Texas
Ringwood Gathering Company Delaware
Timberland Gathering & Processing Company, Inc. Texas
WTW Properties, Inc. Texas
<PAGE>
EXHIBIT 23.1
INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT
Cross Timbers Oil Company
Fort Worth, Texas
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements on Form S-8 (Nos. 33-64274, 33-65238,
33-81766, 333-35229 and 333-36569) and on Form S-3 (No. 333-46909) of Cross
Timbers Oil Company of our report dated March 18, 1998, included in the Annual
Report on Form 10-K of Cross Timbers Oil Company for the year ended December 31,
1997.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
March 30, 1998
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE]
March 30, 1998
Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, TX 76102
Re: Cross Timbers Oil Company
1997 Annual Report on Form 10-K
Gentlemen:
The firm of Miller and Lents, Ltd., consents to the use of its name and to
the use of its report dated March 30, 1998, regarding the Cross Timbers Oil
Company Proved Reserves and Future Net Revenue as of January 1, 1998, in the
1997 Annual Report on Form 10-K.
Miller and Lents, Ltd., has no interests in Cross Timbers Oil Company or in
any affiliated companies or subsidiaries and is not to receive any such interest
as payment for such reports and has no director, officer, or employee otherwise
connected with Cross Timbers Oil Company. We are not employed by Cross Timbers
Oil Company on a contingent basis.
Yours very truly,
MILLER AND LENTS, LTD.
By /s/ P.G. Von Tungeln
----------------------
P.G. Von Tungeln
Chairman
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,816
<SECURITIES> 0
<RECEIVABLES> 43,996
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,162
<PP&E> 961,368
<DEPRECIATION> 237,532
<TOTAL-ASSETS> 788,455
<CURRENT-LIABILITIES> 54,893
<BONDS> 539,000
0
28,468
<COMMON> 463
<OTHER-SE> 141,312
<TOTAL-LIABILITY-AND-EQUITY> 788,455
<SALES> 0
<TOTAL-REVENUES> 200,672
<CGS> 0
<TOTAL-COSTS> 134,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,677
<INCOME-PRETAX> 39,201
<INCOME-TAX> 13,517
<INCOME-CONTINUING> 25,684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,905
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.59
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.48
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
