<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10662
-------
CROSS TIMBERS OIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-2347769
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
810 Houston Street, Suite 2000, Fort Worth, Texas 76102
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(817) 870-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
NONE
------------------------------------------------------------
(Former name, former address and former fiscal year, if
change since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of August 1, 1998
---------------------------- --------------------------------
Common stock, $.01 par value 44,946,277
================================================================================
<PAGE>
CROSS TIMBERS OIL COMPANY
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Report of Independent Public Accountants 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
CROSS TIMBERS OIL COMPANY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) JUNE 30,
1998 DECEMBER 31,
(Unaudited) 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 8,467 $ 3,816
Accounts receivable, net........................................... 48,978 43,996
Investment in equity securities (Note 2)........................... 136,209 -
Deferred income tax benefit........................................ - 445
Other current assets............................................... 4,945 3,905
---------- ---------
Total Current Assets.............................................. 198,599 52,162
---------- ---------
Property and Equipment, at cost - successful efforts method:
Producing properties............................................... 1,181,059 931,259
Undeveloped properties............................................. 6,330 6,406
Gas gathering and other............................................ 26,710 23,703
---------- ---------
Total Property and Equipment...................................... 1,214,099 961,368
Accumulated depreciation, depletion and amortization................ (270,737) (237,532)
---------- ---------
Net Property and Equipment...................................... 943,362 723,836
---------- ---------
Other Assets........................................................ 13,351 12,457
---------- ---------
TOTAL ASSETS........................................................ $1,155,312 $ 788,455
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........................... $ 54,133 $ 52,266
Payable to Royalty Trust........................................... 1,036 2,073
Accrued stock incentive compensation............................... 491 554
Deferred income tax................................................ 1,418 -
---------- ---------
Total Current Liabilities......................................... 57,078 54,893
---------- ---------
Long-term Debt (Note 3)............................................. 804,850 539,000
---------- ---------
Deferred Income Tax................................................. 17,182 21,320
---------- ---------
Other Long-term Liabilities......................................... 2,833 2,999
---------- ---------
Commitments and Contingencies (Note 4)
Stockholders' Equity:
Series A Convertible preferred stock ($.01 par value, 25,000,000
shares authorized, 1,138,729 issued at liquidation value of $25).. 28,468 28,468
Common stock ($.01 par value, 100,000,000 shares authorized,
54,029,754 and 46,310,710 shares issued).......................... 540 463
Additional paid-in capital......................................... 348,512 210,954
Treasury stock (8,660,233 and 6,860,779 shares).................... (108,358) (76,656)
Retained earnings.................................................. 4,207 7,014
---------- ---------
Total Stockholders' Equity....................................... 273,369 170,243
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $1,155,312 $ 788,455
========== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Oil and condensate........................ $13,674 $18,669 $ 28,736 $38,583
Gas and natural gas liquids............... 45,779 21,897 78,771 51,421
Gas gathering, processing and marketing... 2,134 2,389 3,786 5,122
Other (Note 2)............................ 5,946 3,014 6,861 4,337
------- ------- -------- -------
Total Revenues............................ 67,533 45,969 118,154 99,463
------- ------- -------- -------
EXPENSES
Production................................ 13,581 10,787 26,089 21,130
Exploration............................... 3,721 575 5,089 575
Taxes, transportation and other........... 7,263 3,749 12,367 7,926
Depreciation, depletion and amortization.. 20,107 11,548 35,689 22,517
General and administrative................ 4,820 4,007 6,834 7,542
Gas gathering and processing.............. 2,103 2,059 4,235 4,157
Interest, net............................. 13,733 6,515 24,984 11,790
Trust development costs................... 367 207 634 281
------- ------- -------- -------
Total Expenses............................ 65,695 39,447 115,921 75,918
------- ------- -------- -------
INCOME BEFORE INCOME TAX................... 1,838 6,522 2,233 23,545
------- ------- -------- -------
INCOME TAX
Current................................... 20 (168) 20 88
Deferred.................................. 614 2,510 748 8,182
------- ------- -------- -------
Total Income Tax.......................... 634 2,342 768 8,270
------- ------- -------- -------
NET INCOME................................. 1,204 4,180 1,465 15,275
Preferred Stock Dividends................. 445 445 890 890
------- ------- -------- -------
EARNINGS AVAILABLE TO COMMON STOCK......... $ 759 $ 3,735 $ 575 $14,385
======= ======= ======== =======
EARNINGS PER COMMON SHARE (Note 6)
Basic..................................... $ 0.02 $ 0.09 $ 0.01 $ 0.36
======= ======= ======== =======
Diluted................................... $ 0.02 $ 0.09 $ 0.01 $ 0.36
======= ======= ======== =======
DIVIDENDS DECLARED PER COMMON SHARE........ $ 0.04 $ 0.037 $ 0.08 $ 0.073
======= ======= ======== =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING........................ 43,940 39,498 41,506 39,944
======= ======= ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
(in thousands)
(Note 8)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 1,465 $ 15,275
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............................ 35,689 22,517
Exploration......................................................... 5,089 575
Stock incentive compensation........................................ 1,317 1,396
Deferred income tax................................................. 748 8,182
(Gain) loss from sale of property and
long-term investment in equity securities.......................... 100 (3,167)
Unrealized gain on investment in equity securities.................. (5,787) -
Other non-cash items................................................ 675 1,177
Changes in working capital (a)........................................ (132,668) 6,774
--------- ---------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......................... (93,372) 52,729
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of long-term investment in equity securities....... - 17,405
Long-term investment in equity securities............................. - (6,479)
Proceeds from sale of property and equipment.......................... 417 17,077
Property acquisitions................................................. (235,812) (62,866)
Exploration and development costs..................................... (25,099) (30,999)
Gas plant, gathering and other additions.............................. (4,773) (6,796)
--------- ---------
CASH USED BY INVESTING ACTIVITIES..................................... (265,267) (72,658)
--------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt.......................................... 665,150 268,250
Payments on long-term debt............................................ (399,300) (214,780)
Common stock offering................................................. 133,304 -
Dividends............................................................. (3,907) (3,780)
Net proceeds (disbursements) related to stock option exercises........ (460) 280
Purchase of treasury stock............................................ (31,497) (26,983)
--------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES................................. 363,290 22,987
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.................................. 4,651 3,058
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 3,816 3,937
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 8,467 $ 6,995
========= =========
(a)CHANGES IN WORKING CAPITAL
Accounts receivable................................................ $ (4,625) $ 15,457
Investment in equity securities.................................... (130,421) -
Other current assets............................................... (929) (88)
Accounts payable, accrued liabilities and payable to Royalty Trust. 3,307 (8,595)
--------- ---------
(INCREASE) DECREASE IN WORKING CAPITAL.............................. $(132,668) $ 6,774
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CROSS TIMBERS OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Cross Timbers Oil
Company ("the Company"), with the exception of the consolidated balance sheet at
December 31, 1997, have not been audited by independent public accountants. In
the opinion of the Company's management, the accompanying financial statements
reflect all adjustments necessary to present fairly the financial position at
June 30, 1998 and the results of operations for the three and six-month periods
ended June 30, 1998 and 1997 and cash flows of the Company for the six-month
periods ended June 30, 1998 and 1997. All such adjustments are of a normal
recurring nature. Certain amounts presented in prior period financial
statements have been reclassified for consistency with current period
presentation. The results for interim periods are not necessarily indicative of
annual results.
Certain disclosures have been condensed or omitted from these financial
statements. Accordingly, these financial statements should be read with the
Company's consolidated financial statements included in the Company's 1997
annual report on Form 10-K.
2. INVESTMENT IN EQUITY SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, equity
securities acquired during 1998 have been recorded as trading securities since
such securities were principally held for resale in the near future.
Accordingly, such investments at June 30, 1998 have been recorded as a current
asset at market value, unrealized holding gains and losses have been recognized
in the consolidated statement of operations and cash flows from purchases and
sales of equity securities have been included in cash provided (used) by
operating activities.
Prior to 1998, the Company's investments in equity securities were recorded
as available-for-sale securities. As a result, such investments were recorded
as long-term assets at market value, unrealized holding gains and losses were
recorded as a separate component of stockholders' equity and cash flows from
purchases and sales of equity securities were included in cash provided (used)
by investing activities.
Net unrealized gains on investment in equity securities for the three and six
months ended June 30, 1998 were $5.2 million and $5.8 million, respectively.
See Note 7. Realized gains on the sale of equity securities were $698,000 and
$449,000 during the three months ended June 30, 1998 and 1997, respectively, and
$747,000 and $1,657,000 during the six months ended June 30, 1998 and 1997,
respectively. These investment gains are included in other revenues in the
accompanying statements of operations for the respective periods. As of August
13, 1998, the market value of investment in equity securities was $112.8
million, resulting in an unrealized holding loss of $34.9 million. These
investments are equity securities of select energy companies which the Company
believes are currently undervalued. The Company expects these securities to
appreciate as oil prices return to more normal levels over the next six months.
3. LONG-TERM DEBT
On April 17, 1998, the Company entered into a new Revolving Credit Agreement
with commercial banks ("loan agreement"), the borrowings under which mature on
June 30, 2003. After the closing of the East Texas Basin Acquisition on April
24, 1998 (Note 10), the borrowing base and commitment was $560 million. Other
provisions of the loan agreement are generally the same as the prior Revolving
Credit Agreement.
On June 30, 1998, outstanding bank borrowings and short-term borrowings were
$489 million and $15.9 million, respectively. Short-term borrowings at June 30,
1998 are classified as long-term debt because of the Company's ability and
intent to refinance this debt on a long-term basis. Unused borrowing capacity
at June 30, 1998 was $55.1 million.
6
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
Gas Sales Commitments
The Company has entered into futures contracts to sell 70,000 Mcf per day in
July at a weighted average price of $2.54 per Mcf, 90,000 Mcf per day in August
at $2.56 per Mcf, 80,000 Mcf per day in September at $2.56 per Mcf, 70,000 Mcf
per day in October at $2.55 per Mcf and 10,000 Mcf per day for February, March,
May and June 1999 at prices ranging from $2.30 to $2.50 per Mcf. The Company
has also effectively sold 20,000 Mcf per day from July through September 1998 of
its Wyoming production at $1.81 per Mcf.
Company production is also subject to ceiling prices per Mcf of $2.50 for
30,000 Mcf per day in July, $2.56 for 40,000 Mcf per day in August, $2.50 for
30,000 Mcf per day in September, $2.98 for 20,000 Mcf per day in October and
$2.99 for 32,000 Mcf per day in February 1999.
Prices to be realized by the Company for hedged production will be less than
these hedged prices because of location, quality and other adjustments. The
Company has entered into basis swap agreements that effectively fix the San Juan
Basin basis at $0.26 per Mcf for 30,000 Mcf per day in July through March 1999
and 20,000 Mcf per day for April and May 1999, and $0.28 per Mcf for 10,000
Mcf per day from June 1999 through December 2000. The Company has also entered
basis swap agreements that effectively fix the Wyoming basis at $0.26 per Mcf
for 30,000 Mcf per day from November 1998 through March 1999.
The Company has committed to sell all gas production from certain properties
in the East Texas Basin Acquisition (Note 10) to EEX Corporation at market
prices through the earlier of December 31, 2001, or until a total of
approximately 34.3 billion cubic feet (27.8 billion cubic feet net to the
Company's interest) of gas has been delivered. Based on current production, this
sales commitment is approximately 24,700 Mcf (20,000 Mcf net to the Company's
interest) per day.
In exchange for $0.30 to $0.35 per Mcf higher gas prices received on 10,000
Mcf per day from August 1995 through July 1998, the Company has agreed to sell
11,650 Mcf per day from August 1998 through July 2005 at a contract price of
approximately 10% of the month's average NYMEX futures contract for West Texas
Intermediate crude oil, adjusted for point of physical delivery. Such contract
price for July 1998 would have been $1.34 per Mcf, assuming delivery in
Oklahoma.
Litigation
In June 1996, Holshouser v. Cross Timbers Oil Company, a class action
lawsuit, was filed in the District Court of Major County, Oklahoma. The action
was filed on behalf of all parties who, at any time since June 1991, have
allegedly had production or other costs deducted by the Company from royalties
paid on gas produced in Oklahoma when the royalty is based upon a specified
percentage of the proceeds received from the gas sold. On or about March 30,
1998, the plaintiffs dismissed the action without prejudice. On April 3, 1998,
the same plaintiffs, along with additional parties, filed a similar class action
lawsuit against the Company in the District Court of Dewey County, Oklahoma,
styled Booth, et al. v. Cross Timbers Oil Company. The action was filed on
behalf of all persons who, at any time since June 1991, have been paid royalties
on gas produced from any gas well within the State of Oklahoma under which the
Company has assumed the obligation to pay royalties. The plaintiffs allege that
the Company has reduced royalty payments by post-production deductions and has
entered into contracts with subsidiaries that were not arms-length transactions,
which reduced the royalties paid to the plaintiffs and those similarly situated,
and that such actions are a breach of the leases under which the royalties are
paid. The plaintiffs are seeking an accounting of the monies allegedly owed to
them. The Company filed a motion to dismiss the action due to lack of proper
venue, which was denied. This decision is currently being appealed. Management
believes it has strong defenses against this claim and intends to vigorously
defend the action. Management's estimate of the potential liability from this
claim has been accrued in the accompanying financial statements.
7
<PAGE>
5. COMMON STOCK OFFERING
On April 27, 1998, the Company completed a public offering of 7,500,000
shares of common stock, of which 7,203,450 shares were sold by the Company and
296,550 shares were sold by a stockholder. The Company's net proceeds from the
offering of $133.3 million were used to partially repay bank debt used to fund
the East Texas Basin Acquisition that closed on April 24, 1998 (Note 10). The
offering was made pursuant to a shelf registration statement filed with the
Securities and Exchange Commission on February 25, 1998. The shelf registration
statement was amended on April 8, 1998 to increase the maximum total price of
securities to be offered to $400 million.
6. COMMON SHARES OUTSTANDING AND EARNINGS PER COMMON SHARE
On February 25, 1998, the Company effected a three-for-two common stock
split. All share and per share amounts have been restated to reflect the stock
split on a retroactive basis.
The following reconciles earnings (numerator) and shares (denominator) used
in the computation of basic and diluted earnings per share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
Earnings Earnings
Earnings Shares per Share Earnings Shares per Share
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income...................... $1,204 $ 4,180
Preferred stock dividends....... (445) (445)
------ --------
Earnings available to
common stock - basic.......... 759 43,940 $ 0.02 3,735 39,498 $ 0.09
========= =========
Diluted:
Effect of dilutive securities:
Stock options.................. - 641 - 233
Preferred stock (a)............ - - - -
Warrants....................... - 174 - -
------ -------- -------- --------
Earnings available to
common stock - diluted........ $ 759 44,755 $ 0.02 $ 3,735 39,731 $ 0.09
====== ======== ========= ======== ======== =========
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
Earnings Earnings
Earnings Shares per Share Earnings Shares per Share
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income...................... $1,465 $ 15,275
Preferred stock dividends....... (890) (890)
------ --------
Earnings available to
common stock - basic.......... 575 41,506 $ 0.01 14,385 39,944 $ 0.36
========= =========
Diluted:
Effect of dilutive securities:
Stock options.................. - 718 - 253
Preferred stock (a)............ - - - -
Warrants....................... - 122 - -
5 1/4% convertible
subordinated notes............ - - 46 230
------ -------- -------- --------
Earnings available to
common stock - diluted........ $ 575 42,346 $ 0.01 $ 14,431 40,427 $ 0.36
====== ======== ========= ======== ======== =========
</TABLE>
(a) Based on common shares outstanding at August 1, 1998, potential conversion
of Series A convertible preferred stock becomes dilutive to earnings per
share at annual and quarterly earnings to common stock levels exceeding
approximately $32.5 million and $8.1 million, respectively.
8
<PAGE>
7. COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, the following are components of comprehensive
income (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income................................ $ 1,204 $4,180 $ 1,465 $15,275
------- ------ ------- -------
Other comprehensive income -
Unrealized gain on securities:
Unrealized holding gain............... 5,183 1,295 5,787 880
Less unrealized holding gain
included in net income.............. (5,183) - (5,787) -
------- ------ ------- -------
Total other comprehensive income
before tax............................ - 1,295 - 880
Income tax expense related to items of
other comprehensive income............ - (440) - (299)
------- ------ ------- -------
Total other comprehensive income.......... - 855 - 581
------- ------ ------- -------
Total comprehensive income................ $ 1,204 $5,035 $ 1,465 $15,856
======= ====== ======= =======
</TABLE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
The following are total interest and income tax payments (receipts) during
each of the periods (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1998 1997
------------- -----------
<S> <C> <C>
Interest.... $24,684 $9,010
Income tax.. (271) 686
</TABLE>
The accompanying consolidated statements of cash flows excludes the following
non-cash equity transactions during the six-month periods ended June 30, 1998
and 1997:
- Conversion of $29.7 million principal amount of 5 1/4% convertible
subordinated notes into 2,892,363 shares of common stock in January 1997
- Vesting of 81,000 and 154,125 performance shares in 1998 and 1997,
respectively, and issuance of 72,000 and 88,875 performance shares in 1998
and 1997, respectively (Note 9)
- Receipt of 10,393 shares (valued at $205,000) and 115,424 shares (valued at
$1,528,000 of common stock for the option price of exercised stock options
in 1998 and 1997, respectively
9. EMPLOYEE BENEFIT PLANS
Stock Incentive Plans
In February 1998, 216,000 stock options were granted under the 1997 Stock
Incentive Plan ("1997 Plan") that vest and become exercisable annually in equal
amounts over a five-year period, with provision for accelerated vesting of half
the options when the common stock price first closed above $20 on March 26, 1998
and of the remainder when the common stock price first closes above $25.
9
<PAGE>
In March 1998, 81,000 performance shares vested that were granted in 1997.
All compensation related to these performance shares was recorded as of December
31, 1997. In May 1998, 72,000 performance shares were granted under the 1997
Plan that vest when the common stock price first closes above $22.50. As of
June 30, 1998, compensation of $1.4 million has been recorded for these
performance shares. Upon vesting of these performance shares, 72,000 additional
performance shares will be granted that vest when the common stock price first
closes above $25.
In May 1998, the stockholders approved the 1998 Stock Incentive Plan ("1998
Plan") under which 6,000,000 shares of common stock are available for grant.
Grants under the 1998 Plan are subject to the provision that outstanding stock
options and performance shares under all the Company's stock incentive plan
cannot exceed 6% of the Company's outstanding common stock at the time such
grants are made. In May 1998, 1,103,125 stock options were granted under the
1998 Plan. Additionally, 810,375 stock options were designated to be granted to
specific optionees upon each of their exercises of all outstanding vested
options granted under the 1997 Plan. Stock options will vest and become
exercisable annually in equal amounts over a five-year period with provision for
accelerated vesting of half the options when the common stock price first closes
above $25, and of the remainder when the common stock price first closes above
$30.
Royalty Trust Option Plan
In May 1998, the stockholders approved the 1998 Royalty Trust Option Plan
("Option Plan"). Under the terms of the Option Plan, the Company may grant to
key employees options to purchase units of beneficial interest in the Cross
Timbers Royalty Trust or in one or more royalty trusts that may be established
by the Company. Such options will be to acquire such royalty trust units of
beneficial interest at fair market value on the date of grant in an aggregate
amount not to exceed $12 million. No options have been granted under the Option
Plan to date.
10. ACQUISITIONS
On May 14, 1997, the Company acquired primarily gas-producing properties in
Oklahoma, Kansas and Texas for an estimated adjusted purchase price of $39
million from a subsidiary of Burlington Resources Inc. The properties are
primarily operated interests. The Company funded the acquisition with bank debt
and cash flow from operations.
On December 1, 1997, the Company acquired interests in certain producing oil
and gas properties in the San Juan Basin of New Mexico ("San Juan Basin
Acquisition") from a subsidiary of Amoco Corporation ("Amoco") for $252 million,
including warrants to purchase 937,500 shares of the Company's common stock at a
price of $15.31 per share for a period of five years. After adjustments for
other acquisition costs, estimated cash flows through date of closing and
preferential purchase rights exercised by third parties, the properties were
purchased for approximately $195 million, including approximately $5.7 million
value for the warrants. Amoco elected to accept certain producing properties
owned by the Company valued at $15.7 million in lieu of cash, reducing cash
consideration to $173.6 million, which was funded through bank lines of credit.
Additional purchase price revisions may result from post-closing adjustments.
On April 24, 1998, the Company acquired producing properties in the East
Texas Basin from EEX Corporation ("East Texas Basin Acquisition") for $265
million. After purchase price adjustments primarily resulting from net revenues
from the January 1, 1998 effective date through April 24,1998, the properties
were purchased for an estimated price of $245 million. In connection with the
acquisition, the Company sold a production payment to EEX Corporation for $30
million. The production payment is payable from production from certain
properties acquired in the East Texas Basin Acquisition during the 10-year
period beginning January 1, 2002. EEX Corporation effectively pays all taxes,
royalties and production expenses related to such production. Each December,
beginning in 1998, the Company has the option to repurchase a portion of this
production payment. The cost of the East Texas Basin Acquisition (net of the
production payment sold) of $215 million was funded by borrowings under the loan
agreement (Note 3), which were partially repaid by proceeds from the sale of
common stock (Note 5).
These acquisitions have been recorded using the purchase method of
accounting. The following presents unaudited pro forma results of operations
for the six months ended June 30, 1998 and 1997 and the year ended December 31,
1997,
10
<PAGE>
as if these acquisitions and the April 1998 sale of common stock had been
consummated as of January 1, 1998 and 1997. These pro forma results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
----------------------------------
Six Months Ended Year Ended
(in thousands, except per share data) June 30, December 31,
----------------
1998 1997 1997
---------------- --------------
<S> <C> <C> <C>
Revenues............................ $141,362 $169,418 $331,560
======== ======== ========
Net Income.......................... $ 5,948 $ 28,803 $52,264
======== ======== ========
Earnings available to common stock... $ 5,058 $ 27,914 $ 50,485
======== ======== ========
Earnings per common share
Basic............................ $ 0.11 $ 0.59 $ 1.07
======== ======== ========
Diluted.......................... $ 0.11 $ 0.58 $ 1.05
======== ======== ========
Weighted average shares
outstanding....................... 46,123 47,148 46,976
======== ======== ========
</TABLE>
On August 13, 1998, the Company announced it has entered into a definitive
agreement with various Shell Oil Company affiliates ("Shell") to acquire their
interests in the Middle Ground Shoal Field located in Alaska's Cook Inlet. In
exchange therefor, Shell will receive two million shares of the Company's common
stock, subject to certain price guarantees regarding the share value in early
1999 and other considerations, including the Company's obligation to make
certain deferred payments, not to exceed $6 million, triggered by NYMEX West
Texas Intermediate crude oil prices of $18.50, $19.50 and $20.50. The Company
plans to register these shares with the Securities and Exchange Commission in
early 1999 for possible resale by Shell. The acquired interests include a 100%
working interest in two State of Alaska leases, two offshore production
platforms and a 50% interest in certain operated production pipelines and
onshore processing facilities. The acquisition is expected to close September
30, 1998 with an effective date of July 1, 1998, and is subject to third party
consents and other typical purchase price adjustments.
11. CROSS TIMBERS ROYALTY TRUST
On June 16, 1998, the Company and Cross Timbers Royalty Trust filed a
registration statement with the Securities and Exchange Commission to register
the Company's 1,360,000 Units for sale in a public offering. The filing of the
registration statement has been made in anticipation of improving commodity
prices and related market conditions for oil and gas equities. In accordance
with Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
discontinued depleting the Units in second quarter 1998. The Units are
classified as producing properties in the accompanying balance sheet at a net
cost of $16.3 million at June 30, 1998. The Units had an approximate market
value of $19.6 million on that date. For the six months ended June 30, 1998 and
1997, the Company's results of operations included net income from the Units of
$354,000 and $260,000 respectively.
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have reviewed the accompanying consolidated balance sheet of Cross Timbers
Oil Company (a Delaware Corporation) as of June 30, 1998 and the related
consolidated statements of operations for the three and six-month periods ended
June 30, 1998 and 1997, and the consolidated statements of cash flows for the
six-month periods ended June 30, 1998 and 1997. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Cross Timbers Oil Company as of
December 31, 1997 included in the Company's 1997 annual report on Form 10-K, and
in our report dated March 18, 1998, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1997 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
July 22, 1998
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with management's
discussion and analysis contained in the Company's 1997 annual report on Form
10-K, as well as with the consolidated financial statements and notes thereto
included in this quarterly report on Form 10-Q.
<TABLE>
<CAPTION>
OIL AND GAS PRODUCTION AND PRICES
- -----------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ------------------------------------
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
------------- ------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL PRODUCTION
Oil (Bbls)...................... 1,116,431 1,016,903 10% 2,192,723 1,949,226 12%
Gas (Mcf)....................... 20,599,847 11,919,809 73% 36,500,562 23,191,882 57%
Natural gas liquids (Bbls)...... 228,161 - - 438,037 - -
Mcfe............................ 28,667,399 18,021,227 59% 52,285,122 34,887,238 50%
AVERAGE DAILY PRODUCTION
Oil (Bbls)...................... 12,268 11,175 10% 12,114 10,769 12%
Gas (Mcf)....................... 226,372 130,987 73% 201,661 128,132 57%
Natural gas liquids (Bbls)...... 2,507 - - 2,420 - -
Mcfe............................ 315,026 198,035 59% 288,868 192,747 50%
AVERAGE SALES PRICE
Oil per Bbl..................... $ 12.25 $ 18.36 (33)% $ 13.10 $ 19.79 (34)%
Gas per Mcf..................... $ 2.11 $ 1.84 15% $ 2.05 $ 2.22 (8)%
Natural gas liquids per Bbl $ 10.30 - - $ 9.42 - -
</TABLE>
- ------------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
Mcfe- Thousand cubic feet of natural gas equivalent (computed on an energy
equivalent basis of one Bbl equals six Mcf)
Total oil production increased from comparable 1997 periods primarily because
of acquisitions, new drills and workovers, partially offset by natural decline.
Increased gas production is primarily attributable to acquisitions and new
drills, partially offset by natural decline.
The average posted price for West Texas Intermediate ("WTI"), a benchmark
crude, was $12.24 per barrel for second quarter 1998, compared to $18.09 for
second quarter 1997. The Company's average oil price includes oil marketing
margins, which are partially offset by lower priced sour crude sales and
transportation charges. During fourth quarter 1996 and first quarter 1997, oil
prices reached their highest levels since the 1990 Persian Gulf War. This is
contrasted against 1998 oil prices that have continued to decline following
OPEC's November 1997 agreement to increase production while Asian demand
weakened. Despite OPEC's decision in late June to curtail production to pre-
November 1997 levels, the July average WTI price of $11.51 was only slightly
higher than June prices.
During 1997, natural gas prices reached their highest levels since 1985 and
remained relatively high during most of 1997 until dropping in December. Prices
remained lower through most of first quarter 1998, primarily because of an
abnormally mild winter in the central and eastern U.S. and elevated storage
levels. During second quarter 1998, gas prices partially rebounded to levels
above second quarter 1997. The Company uses price-hedging arrangements to
reduce price-risk on a portion of its gas production; see Note 4 to Consolidated
Financial Statements.
13
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED JUNE 30, 1998 COMPARED WITH QUARTER ENDED JUNE 30, 1997
Second quarter 1998 earnings available to common stock were $800,000 compared
to the second quarter 1997 earnings of $3.7 million. Decreased earnings are
primarily the result of lower oil prices and higher expenses related to
acquisitions and exploration activities, partially offset by record oil and gas
production and a net $5.2 million unrealized gain on investment in equity
securities.
Total revenues for the 1998 quarter were $67.5 million, a $21.6 million (47%)
increase over second quarter 1997 revenues of $46 million. Oil revenue
decreased $5 million (27%) because of the 33% decrease in oil prices, partially
offset by the 10% increase in oil volumes. Gas revenue increased $23.9 million
(109%) as a result of the 73% increase in gas production and the 15% increase in
price.
Gas gathering, processing and marketing revenues from second quarter 1997 to
second quarter 1998 decreased 11% primarily because of reduced margins. Other
revenues of $5.9 million for second quarter 1998 include a $5.2 million
unrealized gain on trading securities and a $700,000 realized gain on sale of
securities. Other revenues of $3 million in second quarter 1997 include a $1.3
million gain on the sale of property, a $400,000 realized gain on sale of equity
securities, and lawsuit settlement proceeds of $1.3 million.
Expenses for second quarter 1998 totaled $65.7 million, a 67% increase from
second quarter 1997 expenses of $39.4 million. Production expense increased
$2.8 million (26%) and depreciation, depletion and amortization ("DD&A")
increased $8.6 million (74%) because of increased production related to
acquisitions and development. Taxes, transportation and other expense increased
$3.5 million (94%) over the second quarter of 1997 primarily because of gas
transportation and compression charges related to the 1997 and 1998
acquisitions. Exploration expense, which primarily includes geological and
geophysical costs, increased $3.1 million (547%) related to the 1998 exploration
program.
General and administrative expense ("G&A") increased $800,000 (20%) primarily
because of increased salaries and expenses caused by Company growth through
acquisitions and development activity. Included in G&A for the quarter is $1.3
million of stock incentive compensation primarily related to performance share
grants. G&A for the prior year quarter includes $1.4 million of stock incentive
compensation, $1.1 million of which was related to performance share grants.
Interest expense increased $7.2 million (111%) primarily because of a 105%
increase in weighted average borrowings to partially fund property acquisitions
and investment in equity securities. Increased interest is also because of an
increase in the weighted average interest rate from 7.7% in the second quarter
of 1997 to 7.9% in the second quarter of 1998 that is primarily attributable to
senior subordinated debt issued in April and October 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Earnings available to common stock for the six months ended June 30, 1998
were $600,000, compared to earnings of $14.4 million for the same 1997 period.
Decreased earnings were primarily the result of lower oil and gas prices and
higher expenses related to acquisitions and exploration activities, partially
offset by increased production and a $5.8 million net unrealized gain on
investment in equity securities.
Total revenues for the first half of 1998 were $118.2 million, or $18.7
million (19%) higher than revenues for the first half of 1997. Oil revenue
decreased $9.8 million (26%) as the result of the 34% decrease in oil prices,
partially offset by the 12% increase in production. Gas revenue increased $27.4
million (53%) because of the 57% increase in production, partially offset by the
8% price decrease.
Gas gathering, processing and marketing revenues decreased $1.3 million (26%)
because of lower gas marketing margins. Other revenues of $6.9 million for the
first half of 1998 include a $5.8 million unrealized gain on trading
14
<PAGE>
securities and a $700,000 realized gain on sale of securities. Other revenues of
$4.3 million in 1997 include a $1.6 million realized gain on sale of equity
securities, a $1.5 million gain on sale of property and $1.3 million from a
lawsuit settlement.
Expenses for the six months ended June 30, 1998 totaled $115.9 million, or
53% above total expenses of $75.9 million for the first half of 1997.
Production expense increased $5 million (23%) and DD&A increased $13.2 million
(58%) primarily because of increased production related to acquisitions and
development. Taxes, transportation and other expense increased $4.4 million
(56%) primarily because of gas transportation and compression charges related to
the 1997 and 1998 acquisitions. Exploration expense, which primarily includes
geological and geophysical costs, increased $4.5 million (785%) because of the
1998 exploration program.
G&A decreased $708,000 (9%) primarily because of an increase in overhead
charged to production expense, partially offset by increased salaries and
expenses due to Company growth through acquisitions and development activity.
Increased overhead charged to production expense is directly related to the
Company's increased operated well count.
Interest expense increased $13.2 million (112%) as a result of a 98% increase
in weighted average borrowings that were used to partially fund acquisitions and
an increase in the weighted average interest rate from 7.3% for the first half
of 1997 to 8.0% for the comparable 1998 period. The increased interest rate is
primarily attributable to senior subordinated debt issued in April and October
1997.
COMPARATIVE EXPENSES PER MCF EQUIVALENT PRODUCTION
The following are expenses on an Mcf equivalent (Mcfe) produced basis:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ -------------------------
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Production........................ $.47 $.60 (22)% $.50 $.61 (18)%
Taxes, transportation and other... .25 .21 19% .24 .23 4%
Depreciation, depletion and
amortization (DD&A) (a)........ .67 .60 12% .65 .61 7%
General and administrative (G&A).. .17 .22 (23)% .13 .22 (41)%
Interest.......................... .48 .36 33% .48 .34 41%
----------------------------------
</TABLE>
(a) Includes only DD&A directly related to oil and gas production.
The following are explanations of variances of expenses on an Mcfe basis:
Production- Decreased production expense per Mcfe is primarily because of
lower operating costs of gas-producing properties acquired in 1997 and 1998, the
timing of workovers, and operating efficiencies initiated after acquiring
operated properties.
Taxes, transportation and other- Increased taxes, transportation and other
expense per Mcfe is primarily because of increased gas transportation and
compression charges related to San Juan Basin properties acquired in December
1997, as well as increased property taxes related to acquisitions.
DD&A- Increased DD&A per Mcfe is primarily related to the increased cost
per Mcfe of properties acquired in the East Texas Basin Acquisition that closed
in April 1998.
15
<PAGE>
G&A- Decreased G&A per Mcfe is primarily the result of production growth
outpacing Company personnel requirements and other administrative expenses.
Interest- Increased interest per Mcfe is primarily the result of an increase
of approximately 100% in the weighted average principal outstanding to partially
finance the 1997 and 1998 acquisitions, as well as the investment in equity
securities and treasury stock purchases. Increased interest per Mcfe is also
because of a higher weighted average interest rate, primarily attributable to
senior debt issued in April and October 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOW AND WORKING CAPITAL
Cash used in operating activities was $93.4 million for the first half of
1998 compared to cash provided by operations of $52.7 million for the comparable
1997 period. The swing in cash flow from operating activities from positive to
negative was primarily the result of equity securities purchased during the
first six months of 1998. Operating cash flow (defined as cash provided by
operating activities before changes in working capital) decreased 14% from $46
million for the first six months of 1997 to $39.3 million for the same 1998
period, primarily because of the decline in oil and gas prices.
During the six months ended June 30, 1998, proceeds from bank and short-term
borrowings of $665.2 million and the offering of common stock of $133.3 million
were used to fund operating activities of $93.4 million, net property
acquisitions, development costs and other capital additions of $265.3 million,
debt payments of $399.3 million, treasury stock purchases of $31.5 million, net
disbursements related to stock option exercises of $500,000 and dividends of
$3.9 million. The resulting increase in cash and cash equivalents for the
period was $4.6 million.
Other significant changes in current assets during the first half of 1998
include a $136.2 million increase in investment in equity securities resulting
from purchases and market value appreciation, net of sales, and a $5 million
increase in accounts receivable related to the San Juan Basin and East Texas
Basin acquisitions.
Total current liabilities increased $2.2 million during the first half of
1998 primarily because of a $1.9 million increase in accounts payable and
accrued liabilities related to equity security purchases payable at June 30,
1998.
ACQUISITIONS AND DEVELOPMENT
Exploration and development costs incurred by the Company for the first six
months of 1998 totaled $21.9 million; cash expenditures for exploration and
development for this period totaled $25.1 million. This compares with
exploration and development expenditures of $31 million during the first half of
1997. Although actual exploration and development expenditures may vary
significantly due to many factors, the Company anticipates its 1998 expenditures
for exploration and development activities to be $70 to $90 million, as
budgeted, with exploration expenditures of 10% to 15% of the total. Such
expenditures are dependent upon drilling results, property acquisitions and
commodity prices, and are expected to be funded by cash flow from operations.
During the six months ended June 30, 1998, the Company's purchases of equity
securities totaled $144.7 million. Proceeds from sales of equity securities
totaled $15 million, resulting in a $700,000 net realized gain. The Company
recorded a net unrealized gain on investment in equity securities of $5.8
million for the first six months of 1998. As of August 13, 1998, the market
value of investment in equity securities was $112.8 million, resulting in an
unrealized holding loss of $34.9 million. These investments are equity
securities of select energy companies which the Company believes are currently
undervalued. The Company expects these securities to appreciate as oil prices
return to more normal levels over the next six months.
Since May 1996, the Board of Directors has authorized the purchase of 7.5
million shares of the Company's common stock on the open market. During the
first half of 1998, the Company purchased 1.7 million shares at a cost of $30.7
million, with 500,000 shares remaining available to purchase. As of August 6,
1998, these remaining shares
16
<PAGE>
were acquired at a cost of $8.2 million and the Board of Directors authorized
the purchase of an additional three million shares, or about 7% of shares
currently outstanding.
On April 24, 1998, the Company acquired producing properties in the East
Texas Basin from EEX Corporation ("East Texas Basin Acquisition") for $265
million. After purchase price adjustments primarily resulting from net revenues
from the January 1, 1998 effective date through April 24, 1998, the properties
were purchased for an estimated price of $245 million. In connection with the
acquisition, the Company sold a production payment to EEX Corporation for $30
million. The production payment is payable from production on certain
properties acquired in the East Texas Basin Acquisition during the 10-year
period beginning January 1, 2002. EEX Corporation effectively pays all taxes,
royalties and production expenses related to such production. Each December,
beginning in 1998, the Company has the option to repurchase a portion of this
production payment. The cost of the East Texas Basin Acquisition (net of the
production payment sold) of $215 million was funded by bank borrowings, which
were partially repaid by proceeds from the sale of common stock. See Note 5 to
Consolidated Financial Statements.
On August 13, 1998, the Company announced it has entered into a definitive
agreement with various Shell Oil Company affiliates ("Shell") to acquire their
interests in the Middle Ground Shoal Field located in Alaska's Cook Inlet. The
acquisition is expected to close September 30, 1998 with an effective date of
July 1, 1998, and is subject to third party consents and other typical purchase
price adjustments. See Note 10 to Consolidated Financial Statements.
On June 16, 1998, the Company and Cross Timbers Royalty Trust filed a
registration statement with the Securities and Exchange Commission to register
the Company's 1,360,000 Units for sale in a public offering. The filing of the
registration statement has been made in anticipation of improving commodity
prices and related market conditions for oil and gas equities.
As of the end of June, the Company had drilled 26 wells and participated in
the drilling of 24 non-operated wells. A total of 74 recompletions and workovers
were also completed in the first six months of 1998. Drilling has focused on
gas projects in the Ozona Area of West Texas and the Fontenelle Unit located in
the Green River Basin of Wyoming. Workovers have been concentrated in the San
Juan Basin properties acquired from Amoco in December 1997 and the East Texas
properties acquired in April 1998 from EEX Corporation. Drilling in these areas
is expected to begin in the second half of the year.
Six gas wells have been drilled in the Fontenelle Unit with an additional
nine to be drilled by year-end. Ten of the planned 34 gas wells have been
drilled in the Ozona area where a trend extension well is currently testing at
rates exceeding 1,000 Mcf per day. Additional wells will be drilled surrounding
this well during 1998.
Since assuming operations of the San Juan Basin properties, the Company has
participated in drilling 14 gas wells and has completed over 40 workovers in
this region. The majority of the workovers involved installation of wellhead
compressors or artificial lifts. The Company plans to continue this successful
workover program along with drilling an estimated 20 operated wells by year-end.
The Company assumed operations of the East Texas properties on April 24,
1998. An aggressive development schedule has been planned for these properties
including drilling 15 wells and completion of 40 workovers by year-end. Twenty
of the planned workovers are recompletions of current producing wells into
additional zones yet to be produced.
Exploration activity in 1998 has focused on the completion of 3-D seismic
surveys in Texas County, Oklahoma and the Illinois Basin. Results are currently
being evaluated to determine potential drilling locations.
DEBT AND EQUITY
During the first half of 1998, long-term debt increased $265.9 million
because of increased borrowings to partially fund property acquisitions,
treasury stock purchases and investment in equity securities. See Note 3 to
Consolidated Financial Statements.
17
<PAGE>
Stockholders' equity at June 30, 1998 increased $103.1 million from year-end
primarily because of increased capital of $137.6 million related to the common
stock offering, stock option exercises and performance share grants and first
six months earnings of $600,000, partially offset by treasury stock additions of
$31.7 million and common stock dividends of $3.4 million.
A three-for-two common stock split was effected on February 25, 1998. All
share and per share amounts have been restated for the effect of this stock
split.
On April 27, 1998, the Company completed a public offering of 7,500,000
shares of common stock, of which 7,203,450 shares were sold by the Company and
296,550 shares were sold by a stockholder. The Company's net proceeds from the
offering of $133.3 million were used to partially repay bank debt used to fund
the East Texas Basin Acquisition that closed on April 24, 1998. The offering
was made pursuant to a shelf registration statement filed with the Securities
and Exchange Commission on February 25, 1998. The shelf registration statement
was amended on April 8, 1998 to increase the maximum total price of securities
to be offered to $400 million.
COMMON STOCK DIVIDENDS
In May 1998, the Board of Directors of the Company declared a second quarter
common stock dividend of $0.04 per share, or a total of $1.8 million, paid in
July 1998. Common stock dividends paid by the Company or its predecessors were
at the rate of $0.033 per common share from September 1992 through 1996 and
$0.037 per common share in 1997.
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities which is required to be adopted for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that derivatives be
reported on the balance sheet at fair value and, if the derivative is not
designated as a hedging instrument, changes in fair value must be recognized in
earnings in the period of change. If the derivative is designated as a hedge
and to the extent such hedge is determined to be effective, changes in fair
value are either a) offset by the change in fair value of the hedged asset or
liability (if applicable) or b) reported as a component of other comprehensive
income in the period of change, and subsequently recognized in earnings when the
offsetting hedged transaction occurs. The definition of derivatives has also
been expanded to include contracts that require physical delivery of oil and gas
if the contract allows for net cash settlement. The Company primarily uses
derivatives to hedge product price risks. Such derivatives are reported at
cost, if any, and gains and losses on such derivatives are reported when the
hedged transaction occurs. Accordingly, the Company's adoption of SFAS No. 133
will have an impact on the reported financial position of the Company, and
although such impact has not been determined, it is currently not believed to be
material. Adoption of SFAS No. 133 should have no significant impact on
reported earnings, but could materially affect comprehensive income. See Note 7
to Consolidated Financial Statements.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1996, Holshouser v. Cross Timbers Oil Company, a class action lawsuit,
was filed in the District Court of Major County, Oklahoma. The action was filed
on behalf of all parties who, at any time since June 1991, have allegedly had
production or other costs deducted by the Company from royalties paid on gas
produced in Oklahoma when the royalty is based upon a specified percentage of
the proceeds received from the gas sold. On or about March 30, 1998, the
plaintiffs dismissed the action without prejudice. On April 3, 1998, the same
plaintiffs, along with additional parties, filed a similar class action lawsuit
against the Company in the District Court of Dewey County, Oklahoma, styled
Booth, et al. v. Cross Timbers Oil Company. The action was filed on behalf of
all persons who, at any time since June 1991, have been paid royalties on gas
produced from any gas well within the State of Oklahoma under which the Company
has assumed the obligation to pay royalties. The plaintiffs allege that the
Company has reduced royalty payments by post-production deductions and has
entered into contracts with subsidiaries that were not arms-length transactions,
which reduced the royalties paid to the plaintiffs and those similarly situated,
and that such actions are a breach of the leases under which the royalties are
paid. The plaintiffs are seeking an accounting of the monies allegedly owed to
them. The Company filed a motion to dismiss the action due to lack of proper
venue, which was denied. This decision is currently being appealed. Management
believes it has strong defenses against this claim and intends to vigorously
defend the action. Management's estimate of the potential liability from this
claim has been accrued in the Company's financial statements.
ITEMS 2. AND 3.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Stockholders at the Annual Meeting on May 19, 1998, and by proxy, elected
three incumbent directors, Bob R. Simpson, Scott G. Sherman and Jack P. Randall.
Of 34,844,244 shares represented at the meeting, 34,323,981 shares (98.5%) were
voted for Mr. Simpson, 34,521,026 shares (99.1%) were voted for Mr. Sherman and
34,289,476 shares (98.4%) were voted for Mr. Randall. Other directors
continuing in office are Steffen E. Palko, J. Richard Seeds and J. Luther King.
On May 19, 1998, the Board of Directors appointed Dr. Lane G. Collins, to serve
as an advisory director.
Two proposals by the Board of Directors were approved by stockholders at the
Annual Meeting, with the following vote tabulation:
Approval of the 1998 Stock Incentive Plan
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Shares Shares Shares Broker
For Against Abstained Non-Votes
- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
24,871,687 71.4% 4,308,292 12.4% 145,585 0.4% 5,518,680 15.8%
</TABLE>
Approval of the Royalty Trust Option Plan
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Shares Shares Shares Broker
For Against Abstained Non-Votes
- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
27,831,730 79.9% 1,333,093 3.8% 160,738 0.5% 5,518,683 15.8%
</TABLE>
19
<PAGE>
ITEM 5. OTHER INFORMATION
On August 6, 1998, the Company announced that its Board of Directors
authorized the purchase of up to three million shares of the Company's common
stock, or about 7% of shares outstanding. These shares are in addition to the
three million share program (adjusted for the February 1998 three-for-two stock
split) announced in April 1997, which was completed in August 1998.
On August 13, 1998, the Company announced it has entered into a definitive
agreement with various Shell Oil Company affiliates ("Shell") to acquire their
interests in the Middle Ground Shoal Field located in Alaska's Cook Inlet. In
exchange therefor, Shell will receive two million shares of the Company's common
stock, subject to certain price guarantees regarding the share value in early
1999 and other considerations, including the Company's obligation to make
certain deferred payments, not to exceed $6 million, triggered by NYMEX West
Texas Intermediate crude oil prices of $18.50, $19.50 and $20.50. The Company
plans to register these shares with the Securities and Exchange Commission in
early 1999 for possible resale by Shell. The acquired interests include a 100%
working interest in two State of Alaska leases, two offshore production
platforms and a 50% interest in certain operated production pipelines and
onshore processing facilities. The acquisition is expected to close September
30, 1998 with an effective date of July 1, 1998, and is subject to third party
consents and other typical purchase price adjustments. The Company's internal
engineers estimate proved reserves attributable to the acquisition to be 12
million barrels of oil. Current net daily production is approximately 3,600
barrels per day from 31 producing wells with a reserve-to-production index of
nine years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
and Description
---------------
10.1 First Amendment to Revolving Credit Agreement, dated
June 1, 1998
10.2 Second Amendment to Revolving Credit Agreement, dated
June 17, 1998
10.3 Third Amendment to Revolving Credit Agreement, dated
June 18, 1998
11 Computation of per share earnings (included in Note 6
to Consolidated Financial Statements)
15 Letter re unaudited interim financial information
15.1 Awareness letter of Arthur Andersen LLP
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended June 30, 1998 and through August 13, 1998:
On April 14, 1998, the Company filed a report on Form 8-K dated
April 13, 1998 to file, as Exhibit 5.2 to Registration Statement
No. 333-46909, an opinion of counsel as to the legality of
securities being offered for sale pursuant to the Prospectus
Supplement dated April 13, 1998.
20
<PAGE>
On April 20, 1998, the Company filed a report on Form 8-K dated
April 17, 1998 regarding the issuance of news release number
98-08 announcing earnings for the quarter ended March 31, 1998.
On April 21, 1998, the Company filed a report on Form 8-K dated
February 12, 1998 to file financial statements for the
acquisition of producing properties and undeveloped acreage in
the East Texas Basin from EEX Corporation, anticipated to close
on April 24, 1998.
On April 23, 1998, the Company filed a report on Form 8-K dated
April 21, 1998 to file, as Exhibit 1.1 to Registration Statement
No. 333-46909, the U.S. and International Purchase Agreements and
related Term Sheets entered into as of April 21, 1998 in
connection with securities being offered for sale pursuant to the
Prospectus Supplement dated April 21, 1998.
On April 27, 1998, the Company filed a report on Form 8-K dated
April 24, 1998 regarding its acquisition of producing properties
and undeveloped acreage in the East Texas Basin from EEX
Corporation (including financial statements).
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS OIL COMPANY
Date: August 14, 1998 By BENNIE G. KNIFFEN
--------------------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer and
Duly Authorized Officer)
22
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO
REVOLVING CREDIT AGREEMENT
--------------------------
THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "Amendment") is
made and entered into as of the 1st day of June, 1998, by and among CROSS
TIMBERS OIL COMPANY, a Delaware corporation ("Company"), and the Banks that are
signatories hereto (collectively, the "Banks").
RECITALS.
---------
A. Company, Morgan Guaranty Trust Company of New York, as Administrative
Agent for Banks, NationsBank, N.A., successor in interest by merger to
NationsBank of Texas, N.A., as Syndication Agent for Banks, Chase Bank of Texas,
N.A., as Documentation Agent for Banks, and Banks have entered into that certain
Revolving Credit Agreement, dated as of April 17, 1998 (the "Loan Agreement").
B. Company and Banks desire to amend the Loan Agreement as hereinafter
set forth in order to, among other things, (i) amend the definition of Permitted
Margin Debt and (ii) amend Section 9.04 of the Loan Agreement.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
ARTICLE I
Definitions
-----------
Capitalized terms used in this Amendment are defined in the Loan Agreement,
as amended hereby, unless otherwise stated.
ARTICLE II
Amendments
----------
2.01. Amendment to Article I. Effective as of the date hereof, the
defined term Permitted Margin Debt as set forth in Article I of the Loan
Agreement is amended in its entirety and the following shall be substituted
therefor:
" 'Permitted Margin Debt' shall mean Indebtedness of Company and
its Subsidiaries that is secured by Capital Stock in publicly
traded companies engaged primarily in the oil and gas industry,
CRT Units and Non-CT Royalty Trust Units that are owned by
Company and its Subsidiaries up to an aggregate amount at any one
time outstanding of (i) $40,000,000 plus (ii) that unused or
available portion of the Indebtedness permitted by subclause (xi)
of Section 9.01 hereof that is secured by Capital Stock in
publicly traded companies engaged
<PAGE>
primarily in the oil and gas industry, CRT Units and Non-CT
Royalty Trust Units that are owned by Company and its
Subsidiaries."
2.02. Amendment to Section 9.04. Effective as of the date hereof,
Section 9.04 of the Loan Agreement is amended in its entirety and the following
shall be substituted therefor:
"9.04. Limitation on Investments. Company will not, and will
not permit any Subsidiary to, make or have outstanding any Investments in any
Person, except for (i) Investments in (a) Capital Stock of publicly traded
companies engaged primarily in the oil and gas industry and (b) Non-CT Royalty
Trust Units, provided that the aggregate cost of all Investments which are
outstanding pursuant to this subclause (i) at any time shall not exceed
$75,000,000; (ii) Investments in CRT Units; (iii) Company's stock ownership in
the Subsidiaries and, if formed, Company's units in the Proposed Royalty Trust,
(iv) Temporary Cash Investments, and (v) such other "cash equivalent"
investments as Majority Banks may from time to time approve; provided, further,
that Company will not, and will not permit any Subsidiary to, make any
Investments if (i) an Event of Default exists hereunder or, with the lapse of
time and the giving of notice or both, an Event of Default would exist
hereunder, (ii) the making of such Investment would cause an Event of Default
hereunder, or (iii) a Borrowing Base Deficiency exists hereunder."
ARTICLE III
Condition Precedent
-------------------
The effectiveness of this Amendment is subject to the condition precedent
that Company and Majority Banks shall have duly and validly executed and
delivered a counterpart of this Amendment to Administrative Agent.
ARTICLE IV
No Waiver
---------
Except as specifically provided in this Amendment, nothing contained in
this Amendment shall be construed as a waiver by Banks of any covenant or
provision of the Loan Agreement, the other Loan Papers, or of any other contract
or instrument between Company and Banks, and the failure of Banks at any time or
times hereafter to require strict performance by Borrower of any provision
thereof shall not waive, affect or diminish any right of Banks to thereafter
demand strict compliance therewith. Banks hereby reserve all rights granted
under the Loan Agreement, the other Loan Papers, this Amendment and any other
contract or instrument between Company and Banks.
2
<PAGE>
ARTICLE IV
Ratifications, Representations and Warranties
---------------------------------------------
4.01. Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Loan Agreement and the other Loan Papers, and, except as expressly
modified and superseded by this Amendment, the terms and provisions of the Loan
Agreement and the other Loan Papers are ratified and confirmed and shall
continue in full force and effect. Company and Banks agree that the Loan
Agreement and the other Loan Papers, as amended hereby, shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
4.02. Representations, Warranties and Agreements. Company hereby
represents and warrants to Banks that (a) the execution, delivery and
performance of this Amendment has been authorized by all requisite corporate
action on the part of Company and will not violate the Articles/Certificate of
Incorporation or Bylaws of Company; (b) the representations and warranties
contained in the Loan Agreement, as amended hereby, and any other Loan Papers
are true and correct on and as of the date hereof and on and as of the date of
execution hereof as though made on and as of each such date; (c) no Default or
Event of Default under the Loan Agreement, as amended hereby, has occurred and
is continuing; and (d) Company is in full compliance with all covenants and
agreements contained in the Loan Agreement and the other Loan Papers, as amended
hereby.
ARTICLE V
Miscellaneous Provisions
------------------------
5.01. Survival of Representations and Warranties. All representations
and warranties made in the Loan Agreement or any other Loan Papers, including,
without limitation, any document furnished in connection with this Amendment,
shall survive the execution and delivery of this Amendment and the other Loan
Papers, and no investigation by Agents or any Bank or any closing shall affect
the representations and warranties or the right of Agents or any Bank to rely
upon them.
5.02. Reference to Loan Agreement. Each of the Loan Agreement and the
other Loan Papers, and any and all other agreements, documents or instruments
now or hereafter executed and delivered pursuant to the terms hereof or pursuant
to the terms of the Loan Agreement, as amended hereby, are hereby amended so
that any reference in the Loan Agreement and such other Loan Papers to the Loan
Agreement shall mean a reference to the Loan Agreement as amended hereby.
5.03. Expenses of Agents. As provided in the Loan Agreement, Company
agrees to pay on demand all reasonable costs and expenses incurred by Agents in
connection with the preparation, negotiation and execution of this Amendment,
including, without limitation, the costs and fees of Agent's legal counsel, and
all reasonable costs and expenses incurred by Banks in connection with the
enforcement or preservation of any rights under the Loan Agreement, as
3
<PAGE>
amended hereby, or any other Loan Papers, including, without, limitation, the
reasonable costs and fees of Agents' legal counsel. Company shall not be
responsible for the cost or expense of legal counsel of any other Bank in
connection with the preparation, execution and delivery of this Amendment.
5.04. Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
5.05. Successors and Assigns. This Amendment is binding upon and shall
inure to the benefit of Banks and Company and their respective successors and
assigns.
5.06. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
5.07. Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
5.08. Applicable Law. THIS AMENDMENT AND ALL OTHER LOAN PAPERS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS UNLESS THE LAWS GOVERNING NATIONAL BANKS SHALL HAVE APPLICATION.
5.09. Final Agreement. THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS,
EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED.
THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS, AS AMENDED HEREBY, MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO
MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS
AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY COMPANY AND
BANKS.
IN WITNESS WHEREOF, this Amendment has been executed in multiple originals
and is effective as of the date first above-written.
[SIGNATURE PAGES TO FOLLOW]
4
<PAGE>
COMPANY:
-------
CROSS TIMBERS OIL COMPANY,
a Delaware corporation
By: JOHN O'REAR
-----------------------------------------
John O'Rear, Vice President and Treasurer
5
<PAGE>
BANKS:
-----
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: JOHN G. KOWALCZUK
----------------------------------
John G. Kowalczuk, Vice President
NATIONSBANK, N.A.
By: J. SCOTT FOWLER
----------------------------------
J. Scott Fowler, Vice President
CHASE BANK OF TEXAS, N.A.
By: DALE S. HURD
----------------------------------
Dale S. Hurd, Senior Vice President
BANKBOSTON, N.A.
By: R. STEPHEN SCHAUER
----------------------------------
Name: R. Stephen Schauer
----------------------------------
Title: Vice President
----------------------------------
WELLS FARGO BANK (TEXAS), N.A.
By: CHARLES D. KIRKHAM
----------------------------------
Charles D. Kirkham, Vice President
6
<PAGE>
FROST NATIONAL BANK, as the surviving
bank by merger of Overton Bank and Trust, N.A.,
effective May 29, 1998
By: W.H. ADAMS
----------------------------------
W.H. (Bill) Adams, III, Senior Vice
President
ABN-AMRO BANK N.V.
HOUSTON AGENCY
By: W. BRYAN CHAPMAN
----------------------------------
Name: W. Bryan Chapman
----------------------------------
Title: Group Vice President
----------------------------------
By: STUART MURRAY
----------------------------------
Name: Stuart Murray
----------------------------------
Title: Vice President
----------------------------------
BANK OF MONTREAL
By: J. B. WHITMORE
----------------------------------
Name: J. B. Whitmore
----------------------------------
Title: Director
----------------------------------
THE BANK OF NEW YORK
By: RAYMOND J. PALMER
----------------------------------
Name: Raymond J. Palmer
----------------------------------
Title: Vice President
----------------------------------
7
<PAGE>
BANQUE PARIBAS
By: MIKE FIUZAT
----------------------------------
Mike Fiuzat, Vice President
By: BRIAN M. MALONE
----------------------------------
Name: Brian M. Malone
----------------------------------
Title: Director
----------------------------------
CREDIT LYONNAIS NEW YORK BRANCH
By: PHILIPPE SOUSTRA
----------------------------------
Philippe Soustra, Senior Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: RONALD E. McKAIG
----------------------------------
Name: Ronald E. McKaig
----------------------------------
Title: Vice President
----------------------------------
FIRST UNION NATIONAL BANK
By: ROBERT R. WETTEROFF
----------------------------------
Robert R. Wetteroff
Senior Vice President
BANK ONE, TEXAS, N.A.
By: JOHN S. WARREN
----------------------------------
John S. Warren, Vice President
8
<PAGE>
NATEXIS Banque
By: TIMOTHY L. POLVADO
----------------------------------
Timothy L. Polvado, Vice President
By: ERIC DITGES
----------------------------------
Eric Ditges, Assistant Vice President
THE BANK OF NOVA SCOTIA
By: F. C. H. ASHBY
----------------------------------
Name: F. C. H. Ashby
----------------------------------
Title: Senior Manager, Loan Operations
----------------------------------
COMERICA BANK-TEXAS
By: DAVID L. MONTGOMERY
----------------------------------
David L. Montgomery, Vice President
9
<PAGE>
EXHIBIT 10.2
SECOND AMENDMENT TO
REVOLVING CREDIT AGREEMENT
--------------------------
THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "Amendment") is
made and entered into as of the 17th day of June, 1998, by and among CROSS
TIMBERS OIL COMPANY, a Delaware corporation ("Company"), and the Banks that are
signatories hereto (collectively, the "Banks").
RECITALS.
---------
A. Company, Morgan Guaranty Trust Company of New York, as
Administrative Agent for Banks, NationsBank, N.A., successor in interest by
merger to NationsBank of Texas, N.A., as Syndication Agent for Banks, Chase Bank
of Texas, N.A., as Documentation Agent for Banks, and Banks have entered into
that certain Revolving Credit Agreement, dated as of April 17, 1998, which was
amended by that certain First Amendment to Revolving Credit Agreement dated as
of June 1, 1998 among Company and Banks (the "Loan Agreement").
B. Company and Banks desire to amend the Loan Agreement as hereinafter
set forth in order to amend subclause (i) of Section 9.04 of the Loan Agreement.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
ARTICLE I
Definitions
-----------
Capitalized terms used in this Amendment are defined in the Loan Agreement,
as amended hereby, unless otherwise stated.
ARTICLE II
Amendments
----------
2.01. Amendment to Section 9.04. Effective as of the date hereof,
subclause (i) of Section 9.04 of the Loan Agreement is amended in its entirety
and the following shall be substituted therefor:
"(i) Investments in (a) Capital Stock of publicly traded companies
engaged primarily in the oil and gas industry and (b) Non-CT Royalty Trust
Units, provided that the aggregate cost of all Investments which are outstanding
pursuant to this subclause (i) at any time shall not exceed $125,000,000;"
<PAGE>
ARTICLE III
Condition Precedent
-------------------
The effectiveness of this Amendment is subject to the condition precedent
that Company and Majority Banks shall have duly and validly executed and
delivered a counterpart of this Amendment to Administrative Agent.
ARTICLE IV
No Waiver
---------
Except as specifically provided in this Amendment, nothing contained in
this Amendment shall be construed as a waiver by Banks of any covenant or
provision of the Loan Agreement, the other Loan Papers, or of any other contract
or instrument between Company and Banks, and the failure of Banks at any time or
times hereafter to require strict performance by Borrower of any provision
thereof shall not waive, affect or diminish any right of Banks to thereafter
demand strict compliance therewith. Banks hereby reserve all rights granted
under the Loan Agreement, the other Loan Papers, this Amendment and any other
contract or instrument between Company and Banks.
ARTICLE IV
Ratifications, Representations and Warranties
---------------------------------------------
4.01. Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Loan Agreement and the other Loan Papers, and, except as expressly
modified and superseded by this Amendment, the terms and provisions of the Loan
Agreement and the other Loan Papers are ratified and confirmed and shall
continue in full force and effect. Company and Banks agree that the Loan
Agreement and the other Loan Papers, as amended hereby, shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
4.02. Representations, Warranties and Agreements. Company hereby
represents and warrants to Banks that (a) the execution, delivery and
performance of this Amendment has been authorized by all requisite corporate
action on the part of Company and will not violate the Articles/Certificate of
Incorporation or Bylaws of Company; (b) the representations and warranties
contained in the Loan Agreement, as amended hereby, and any other Loan Papers
are true and correct on and as of the date hereof and on and as of the date of
execution hereof as though made on and as of each such date; (c) no Default or
Event of Default under the Loan Agreement, as amended hereby, has occurred and
is continuing; and (d) Company is in full compliance with all covenants and
agreements contained in the Loan Agreement and the other Loan Papers, as amended
hereby.
2
<PAGE>
ARTICLE V
Miscellaneous Provisions
------------------------
5.01. Survival of Representations and Warranties. All representations
and warranties made in the Loan Agreement or any other Loan Papers, including,
without limitation, any document furnished in connection with this Amendment,
shall survive the execution and delivery of this Amendment and the other Loan
Papers, and no investigation by Agents or any Bank or any closing shall affect
the representations and warranties or the right of Agents or any Bank to rely
upon them.
5.02. Reference to Loan Agreement. Each of the Loan Agreement and the
other Loan Papers, and any and all other agreements, documents or instruments
now or hereafter executed and delivered pursuant to the terms hereof or pursuant
to the terms of the Loan Agreement, as amended hereby, are hereby amended so
that any reference in the Loan Agreement and such other Loan Papers to the Loan
Agreement shall mean a reference to the Loan Agreement as amended hereby.
5.03. Expenses of Agents. As provided in the Loan Agreement, Company
agrees to pay on demand all reasonable costs and expenses incurred by Agents in
connection with the preparation, negotiation and execution of this Amendment,
including, without limitation, the costs and fees of Agent's legal counsel, and
all reasonable costs and expenses incurred by Banks in connection with the
enforcement or preservation of any rights under the Loan Agreement, as amended
hereby, or any other Loan Papers, including, without, limitation, the reasonable
costs and fees of Agents' legal counsel. Company shall not be responsible for
the cost or expense of legal counsel of any other Bank in connection with the
preparation, execution and delivery of this Amendment.
5.04. Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
5.05. Successors and Assigns. This Amendment is binding upon and shall
inure to the benefit of Banks and Company and their respective successors and
assigns.
5.06. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
5.07. Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
3
<PAGE>
5.08. Applicable Law. THIS AMENDMENT AND ALL OTHER LOAN PAPERS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS UNLESS THE LAWS GOVERNING NATIONAL BANKS SHALL HAVE APPLICATION.
5.09. Final Agreement. THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS,
EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED.
THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS, AS AMENDED HEREBY, MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO
MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS
AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY COMPANY AND
BANKS.
IN WITNESS WHEREOF, this Amendment has been executed in multiple originals
and is effective as of the date first above-written.
[SIGNATURE PAGES TO FOLLOW]
4
<PAGE>
COMPANY:
-------
CROSS TIMBERS OIL COMPANY,
a Delaware corporation
By: JOHN O'REAR
-----------------------------------------
John O'Rear, Vice President and Treasurer
5
<PAGE>
BANKS:
-----
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: JOHN G. KOWALCZUK
---------------------------------
John G. Kowalczuk, Vice President
NATIONSBANK, N.A.
By: J. SCOTT FOWLER
---------------------------------
J. Scott Fowler, Vice President
CHASE BANK OF TEXAS, N.A.
By: LEE E. BECKELMAN
---------------------------------
Lee E. Beckelman, Vice President
BANKBOSTON, N.A.
By: GEORGE W. PASSELA
---------------------------------
Name: George W. Passela
---------------------------------
Title: Managing Director
---------------------------------
WELLS FARGO BANK (TEXAS), N.A.
By: CHARLES D. KIRKHAM
---------------------------------
Charles D. Kirkham, Vice President
6
<PAGE>
FROST NATIONAL BANK, as the surviving
bank by merger of Overton Bank and Trust, N.A.,
effective May 29, 1998
By: W. H. ADAMS
------------------------------------
W. H. (Bill) Adams, III, Senior Vice
President
ABN-AMRO BANK N.V.
By: CHARLES W. RANDALL
------------------------------------
Name: Charles W. Randall
------------------------------------
Title: Senior Vice President
------------------------------------
By: BELINDA ROWELL
------------------------------------
Name: Belinda Rowell
------------------------------------
Title: Assistant Vice President
------------------------------------
BANK OF MONTREAL
By: J. B. WHITMORE
------------------------------------
Name: J. B. Whitmore
------------------------------------
Title: Director
------------------------------------
THE BANK OF NEW YORK
By: RAYMOND J. PALMER
------------------------------------
Name: Raymond J. Palmer
------------------------------------
Title: Vice President
------------------------------------
7
<PAGE>
BANQUE PARIBAS
By: MIKE FIUZAT
------------------------------------
Mike Fiuzat, Vice President
By: BRIAN M. MALONE
------------------------------------
Name: Brian M. Malone
------------------------------------
Title: Director
------------------------------------
CREDIT LYONNAIS NEW YORK BRANCH
By: PHILIPPE SOUSTRA
------------------------------------
Philippe Soustra, Senior Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: JOHN ROBINSON
------------------------------------
Name: John Robinson
------------------------------------
Title: Managing Director
------------------------------------
FIRST UNION NATIONAL BANK
By: PAUL N. RIDDLE
------------------------------------
Name: Paul N. Riddle
------------------------------------
Title: Senior Vice President
------------------------------------
BANK ONE, TEXAS, N.A.
By: JOHN S. WARREN
------------------------------------
John S. Warren, Vice President
8
<PAGE>
NATEXIS Banque
By: TIMOTHY L. POLVADO
------------------------------------
Timothy L. Polvado, Vice President
By: ERIC DITGES
------------------------------------
Eric Ditges, Assistant Vice President
THE BANK OF NOVA SCOTIA
By: F. C. H. ASHBY
------------------------------------
Name: F. C. H. Ashby
------------------------------------
Title: Senior Manager, Loan Operations
------------------------------------
COMERICA BANK-TEXAS
By: DAVID L. MONTGOMERY
------------------------------------
David L. Montgomery, Vice President
9
<PAGE>
EXHIBIT 10.3
THIRD AMENDMENT TO
REVOLVING CREDIT AGREEMENT
--------------------------
THIS THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "Amendment") is
made and entered into as of the 18th day of June, 1998, by and among CROSS
TIMBERS OIL COMPANY, a Delaware corporation ("Company"), and the Banks that are
signatories hereto (collectively, the "Banks").
RECITALS.
---------
A. Company, Morgan Guaranty Trust Company of New York, as Administrative
Agent for Banks, NationsBank, N.A., successor in interest by merger to
NationsBank of Texas, N.A., as Syndication Agent for Banks, Chase Bank of Texas,
N.A., as Documentation Agent for Banks, and Banks have entered into that certain
Revolving Credit Agreement, dated as of April 17, 1998, which was amended by (i)
that certain First Amendment to Revolving Credit Agreement dated as of June 1,
1998 among Company and Banks and (ii) that certain Second Amendment to Revolving
Credit Agreement dated as of June 17, 1998 among Company and Banks (as amended,
the "Loan Agreement").
B. Company and Banks desire to amend subclause (i) of Section 9.04 of
the Loan Agreement to permit an interim increase in the Investments in Capital
Stock of publicly traded companies engaged primarily in the oil and gas industry
and Non-CT Royalty Trust Units.
C. Company and Banks desire to amend Sections 9.01 and 10.01(d) of the
Loan Agreement to clarify the existence and effect of Indebtedness of any
Subsidiary to Company and to another Subsidiary and the Indebtedness of Company
to any Subsidiary.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
ARTICLE I
Definitions
-----------
Capitalized terms used in this Amendment are defined in the Loan Agreement,
as amended hereby, unless otherwise stated.
ARTICLE II
Amendments
----------
2.01. Amendment to Section 9.01. Effective as of the date hereof, Section
9.01 of the Loan Agreement is amended by including the following sub-clause
(xii) thereto:
<PAGE>
"and (xii) Indebtedness of any Subsidiary to Company, Indebtedness of
any Subsidiary to another Subsidiary, and Indebtedness of Company to
any Subsidiary."
2.02. Amendment to Section 9.04. Effective as of the date hereof,
subclause (i) of Section 9.04 of the Loan Agreement is amended in its entirety
and the following shall be substituted therefor:
"(i) Investments in (a) Capital Stock of publicly traded companies
engaged primarily in the oil and gas industry and (b) Non-CT Royalty Trust
Units, provided that the aggregate cost of all Investments which are outstanding
pursuant to this subclause (i) at any time shall not exceed (A) $150,000,000
until January 8, 1999 and (B) $125,000,000 after January 8, 1999;"
2.03. Amendment to Section 10.01(d). Effective as of the date hereof,
Section 10.01(d) of the Loan Agreement is amended by including the following
proviso at the conclusion of such section:
"; provided, however, that this Section 10.01(d) shall not apply to
any Indebtedness of any Subsidiary to Company or to any Indebtedness
of any Subsidiary to another Subsidiary or to any Indebtedness of
Company to any Subsidiary."
ARTICLE III
Condition Precedent
-------------------
The effectiveness of this Amendment is subject to the condition precedent
that Company and Majority Banks shall have duly and validly executed and
delivered a counterpart of this Amendment to Administrative Agent.
ARTICLE IV
No Waiver
---------
Except as specifically provided in this Amendment, nothing contained in
this Amendment shall be construed as a waiver by Banks of any covenant or
provision of the Loan Agreement, the other Loan Papers, or of any other contract
or instrument between Company and Banks, and the failure of Banks at any time or
times hereafter to require strict performance by Borrower of any provision
thereof shall not waive, affect or diminish any right of Banks to thereafter
demand strict compliance therewith. Banks hereby reserve all rights granted
under the Loan Agreement, the other Loan Papers, this Amendment and any other
contract or instrument between Company and Banks.
2
<PAGE>
ARTICLE V
Ratifications, Representations and Warranties
---------------------------------------------
5.01. Ratifications. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in
the Loan Agreement and the other Loan Papers, and, except as expressly modified
and superseded by this Amendment, the terms and provisions of the Loan Agreement
and the other Loan Papers are ratified and confirmed and shall continue in full
force and effect. Company and Banks agree that the Loan Agreement and the other
Loan Papers, as amended hereby, shall continue to be legal, valid, binding and
enforceable in accordance with their respective terms.
5.02. Representations, Warranties and Agreements. Company hereby represents
and warrants to Banks that (a) the execution, delivery and performance of this
Amendment has been authorized by all requisite corporate action on the part of
Company and will not violate the Articles/Certificate of Incorporation or Bylaws
of Company; (b) the representations and warranties contained in the Loan
Agreement, as amended hereby, and any other Loan Papers are true and correct on
and as of the date hereof and on and as of the date of execution hereof as
though made on and as of each such date; (c) no Default or Event of Default
under the Loan Agreement, as amended hereby, has occurred and is continuing; and
(d) Company is in full compliance with all covenants and agreements contained in
the Loan Agreement and the other Loan Papers, as amended hereby.
ARTICLE VI
Miscellaneous Provisions
------------------------
6.01. Survival of Representations and Warranties. All representations and
warranties made in the Loan Agreement or any other Loan Papers, including,
without limitation, any document furnished in connection with this Amendment,
shall survive the execution and delivery of this Amendment and the other Loan
Papers, and no investigation by Agents or any Bank or any closing shall affect
the representations and warranties or the right of Agents or any Bank to rely
upon them.
6.02. Reference to Loan Agreement. Each of the Loan Agreement and the other
Loan Papers, and any and all other agreements, documents or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Loan Agreement, as amended hereby, are hereby amended so that any
reference in the Loan Agreement and such other Loan Papers to the Loan Agreement
shall mean a reference to the Loan Agreement as amended hereby.
6.03. Expenses of Agents. As provided in the Loan Agreement, Company agrees
to pay on demand all reasonable costs and expenses incurred by Agents in
connection with the preparation, negotiation and execution of this Amendment,
including, without limitation, the costs and fees of Agent's legal counsel, and
all reasonable costs and expenses incurred by Banks in connection with the
enforcement or preservation of any rights under the Loan Agreement, as amended
hereby, or any other Loan Papers, including, without, limitation, the reasonable
costs
3
<PAGE>
and fees of Agents' legal counsel. Company shall not be responsible for the
cost or expense of legal counsel of any other Bank in connection with the
preparation, execution and delivery of this Amendment.
6.04. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
6.05. Successors and Assigns. This Amendment is binding upon and shall
inure to the benefit of Banks and Company and their respective successors and
assigns.
6.06. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
6.07. Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
6.08. Applicable Law. THIS AMENDMENT AND ALL OTHER LOAN PAPERS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS UNLESS THE LAWS GOVERNING NATIONAL BANKS SHALL HAVE APPLICATION.
6.09. Final Agreement. THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS, EACH
AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT
TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE LOAN
AGREEMENT AND THE OTHER LOAN PAPERS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO
MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS
AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY COMPANY AND
BANKS.
IN WITNESS WHEREOF, this Amendment has been executed in multiple originals
and is effective as of the date first above-written.
[SIGNATURE PAGES TO FOLLOW]
4
<PAGE>
COMPANY:
-------
CROSS TIMBERS OIL COMPANY,
a Delaware corporation
By: JOHN O'REAR
------------------------------------
John O'Rear, Vice President and Treasurer
5
<PAGE>
BANKS:
-----
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: JOHN G. KOWALCZUK
------------------------------------
John G. Kowalczuk, Vice President
NATIONSBANK, N.A.
By: J. SCOTT FOWLER
------------------------------------
J. Scott Fowler, Vice President
CHASE BANK OF TEXAS, N.A.
By: LEE E. BECKELMAN
------------------------------------
Lee E. Beckelman, Vice President
BANKBOSTON, N.A.
By: THOMAS O'LEARY
------------------------------------
Name: Thomas O'Leary
------------------------------------
Title: Division Executive
------------------------------------
WELLS FARGO BANK (TEXAS), N.A.
By: CHARLES D. KIRKHAM
------------------------------------
Charles D. Kirkham, Vice President
6
<PAGE>
FROST NATIONAL BANK, as the surviving
bank by merger of Overton Bank and Trust, N.A.,
effective May 29, 1998
By: W. H. ADAMS
------------------------------------
W. H. (Bill) Adams, III, Senior Vice
President
ABN-AMRO BANK N.V.
By: W. BRYAN CHAPMAN
------------------------------------
Name: W. Bryan Chapman
------------------------------------
Title: Group Vice President
------------------------------------
By: STUART MURRAY
------------------------------------
Name: Stuart Murray
------------------------------------
Title Vice President
------------------------------------
BANK OF MONTREAL
By: J. B. WHITMORE
------------------------------------
Name: J. B. Whitmore
------------------------------------
Title: Director
------------------------------------
THE BANK OF NEW YORK
By: RAYMOND J. PALMER
------------------------------------
Name: Raymond J. Palmer
------------------------------------
Title: Vice President
------------------------------------
7
<PAGE>
BANQUE PARIBAS
By: MIKE FIUZAT
------------------------------------
Mike Fiuzat, Vice President
By: BRIAN M. MALONE
------------------------------------
Name: Brian M. Malone
------------------------------------
Title: Director
------------------------------------
CREDIT LYONNAIS NEW YORK BRANCH
By: PHILIPPE SOUSTRA
------------------------------------
Philippe Soustra, Senior Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: RONALD E. McKAIG
------------------------------------
Name: Ronald E. McKaig
------------------------------------
Title: Vice President
------------------------------------
FIRST UNION NATIONAL BANK
By: ROBERT R. WETTEROFF
------------------------------------
Name: Robert R. Wetteroff
------------------------------------
Title: Senior Vice President
------------------------------------
BANK ONE, TEXAS, N.A.
By: JOHN S. WARREN
------------------------------------
John S. Warren, Vice President
8
<PAGE>
NATEXIS Banque
By: TIMOTHY L. POLVADO
------------------------------------
Timothy L. Polvado, Vice President
By: ERIC DITGES
------------------------------------
Eric Ditges, Assistant Vice President
THE BANK OF NOVA SCOTIA
By: F. C. H. ASHBY
------------------------------------
Name: F. C. H. Ashby
------------------------------------
Title: Senior Manager, Loan Operations
------------------------------------
COMERICA BANK-TEXAS
By: DAVID L. MONTGOMERY
------------------------------------
David L. Montgomery, Vice President
9
<PAGE>
EXHIBIT 15.1
Cross Timbers Oil Company:
We are aware that Cross Timbers Oil Company and Cross Timbers Royalty Trust have
incorporated by reference in their Registration Statement on Form S-3 (No. 333-
56983) and that Cross Timbers Oil Company has incorporated by reference in its
Registration Statement on Form S-3 (No. 333-46909) and in its Registration
Statements on Form S-8 (No. 33-64274, No. 33-65238 and No. 33-81766) its Form
10-Q for the quarter ended June 30, 1998, which includes our report dated July
22, 1998, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
August 14, 1998
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