<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10662
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Cross Timbers Oil Company
(Exact name of registrant as specified in its charter)
Delaware 75-2347769
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
810 Houston Street, Suite 2000, Fort Worth, Texas 76102
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(817) 870-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
NONE
----------------------------------------------------
(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of November 1, 1999
- ---------------------------- ----------------------------------
Common stock, $.01 par value 48,776,119
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<PAGE>
CROSS TIMBERS OIL COMPANY
Form 10-Q for the Quarterly Period Ended September 30, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at September 30, 1999 and December 31, 1998.................... 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1999 and 1998.................................... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September
30, 1999 and 1998.............................................. 5
Notes to Consolidated Financial Statements...................... 6
Report of Independent Public Accountants........................ 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 17
Item 3. Quantitative and Qualitative Disclosure about Market Risk....... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 25
Item 6. Exhibits and Reports on Form 8-K................................ 25
Signatures...................................................... 27
2
<PAGE>
PART I. FINANCIAL INFORMATION
CROSS TIMBERS OIL COMPANY
Consolidated Balance Sheets
================================================================================
(in thousands)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 3,725 $ 12,333
Accounts receivable, net....................................... 51,016 50,607
Investment in equity securities (Note 2)....................... 38,404 44,386
Deferred income tax benefit.................................... 3,128 24,816
Other current assets........................................... 4,781 5,436
------------- ------------
Total Current Assets.......................................... 101,054 137,578
------------- ------------
Property and Equipment, at cost - successful efforts method:
Producing properties........................................... 1,634,654 1,335,844
Undeveloped properties......................................... 10,832 6,845
Gas gathering and other........................................ 33,417 27,829
------------- ------------
Total Property and Equipment.................................. 1,678,903 1,370,518
Accumulated depreciation, depletion and amortization........... (334,072) (319,507)
------------- ------------
Net Property and Equipment.................................. 1,344,831 1,051,011
------------- ------------
Other Assets.................................................... 17,810 13,210
------------- ------------
Loans to Officers (Note 3)...................................... 6,467 5,795
------------- ------------
TOTAL ASSETS.................................................... $ 1,470,162 $ 1,207,594
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities....................... $ 61,628 $ 93,583
Payable to royalty trusts...................................... 3,773 968
Short-term debt................................................ - 4,962
Other current liabilities...................................... 2,662 75
------------- ------------
Total Current Liabilities..................................... 68,063 99,588
------------- ------------
Long-term Debt (Note 4)......................................... 998,700 921,000
------------- ------------
Deferred Income Taxes Payable................................... 22,087 6,892
------------- ------------
Other Long-term Liabilities..................................... 8,420 2,663
------------- ------------
Commitments and Contingencies (Note 5)
Minority Interest in Consolidated Subsidiary.................... 99,470 -
------------- ------------
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,
58,070,501 and 54,048,227 shares issued)...................... 581 541
Additional paid-in capital..................................... 396,467 338,503
Treasury stock (9,294,382 and 9,320,971 shares)................ (119,334) (118,555)
Retained earnings.............................................. (32,760) (71,506)
------------- ------------
Total Stockholders' Equity................................... 273,422 177,451
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................... $ 1,470,162 $ 1,207,594
============= ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CROSS TIMBERS OIL COMPANY
Consolidated Statements of Operations (Unaudited)
================================================================================
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
REVENUES
Oil and condensate.......................................... $ 23,273 $ 12,602 $ 58,413 $ 41,338
Gas and natural gas liquids................................. 66,344 51,216 161,556 129,987
Gas gathering, processing and marketing..................... 1,763 2,950 4,791 6,736
Other....................................................... 4,489 276 6,120 603
-------- -------- -------- --------
Total Revenues.............................................. 95,869 67,044 230,880 178,664
-------- -------- -------- --------
EXPENSES
Production.................................................. 19,484 16,558 56,282 42,647
Exploration................................................. 275 1,208 804 6,297
Taxes, transportation and other............................. 8,634 8,123 23,971 20,490
Depreciation, depletion and amortization.................... 28,300 22,160 77,630 57,849
General and administrative.................................. 3,298 3,208 9,058 10,042
Gas gathering and processing................................ 2,213 2,016 6,429 6,251
Trust development costs..................................... - 411 - 1,045
-------- -------- -------- --------
Total Expenses.............................................. 62,204 53,684 174,174 144,621
-------- -------- -------- --------
OPERATING INCOME............................................. 33,665 13,360 56,706 34,043
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Gain on sale of Hugoton Royalty Trust units (Note 9)........ 235 - 40,566 -
Gain (loss) on investment in equity securities (Note 2)..... 2,391 (45,984) 8,939 (40,295)
Interest expense, net....................................... (16,384) (13,642) (44,591) (37,781)
-------- -------- -------- --------
Total Other Income (Expense)................................ (13,758) (59,626) 4,914 (78,076)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX
AND MINORITY INTEREST....................................... 19,907 (46,266) 61,620 (44,033)
-------- -------- -------- --------
INCOME TAX
Current..................................................... 8 42 (6) 62
Deferred.................................................... 6,634 (15,748) 20,809 (15,000)
-------- -------- -------- --------
Total Income Tax Expense (Benefit).......................... 6,642 (15,706) 20,803 (14,938)
-------- -------- -------- --------
MINORITY INTEREST
in Net Loss of Consolidated Subsidiaries (Notes 10 and 11).. 645 - 645 -
-------- -------- -------- --------
NET INCOME (LOSS)............................................ 13,910 (30,560) 41,462 (29,095)
Preferred Stock Dividends................................... (444) (444) (1,334) (1,334)
-------- -------- -------- --------
EARNINGS (LOSS) AVAILABLE TO COMMON STOCK.................... $ 13,466 $(31,004) $ 40,128 $(30,429)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE (Note 7)
Basic....................................................... $0.28 $(0.69) $0.87 $(0.71)
======== ======== ======== ========
Diluted..................................................... $0.27 $(0.69) $0.85 $(0.71)
======== ======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE.......................... $0.01 $0.04 $0.03 $0.12
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.......................................... 48,914 44,765 46,140 42,737
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CROSS TIMBERS OIL COMPANY
Consolidated Statements of Cash Flows (Unaudited)
================================================================================
(in thousands)
(Note 8)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 41,462 $ (29,095)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization.................. 77,630 57,849
Exploration............................................... 804 6,297
Stock incentive compensation.............................. 71 1,413
Deferred income tax....................................... 20,809 (15,000)
(Gain) loss on investment in equity securities and
from sale of property.................................... (60,193) 37,607
Minority interest......................................... (645) -
Other non-cash items...................................... 1,936 999
Changes in operating assets and liabilities (a)............. 17,180 (154,793)
--------- ---------
Cash Provided (Used) by Operating Activities................ 99,054 (94,723)
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of Hugoton Royalty Trust units (Note 9).. 148,570 -
Proceeds from sale of property and equipment................ 106,428 419
Property acquisitions....................................... (275,598) (262,464)
Purchase of Spring Holding Company (Note 10)................ (42,540) -
Loans to officers........................................... (732) -
Loan repayments from officers............................... 60 -
Exploration and development costs........................... (60,752) (41,487)
Gas plant, gathering and other additions.................... (8,154) (5,649)
--------- ---------
Cash Used by Investing Activities........................... (132,718) (309,181)
--------- ---------
FINANCING ACTIVITIES
Proceeds from short- and long-term debt..................... 220,000 785,700
Payments on short- and long-term debt....................... (295,262) (457,700)
Purchase of minority interest (Note 10)..................... (42,385) -
Contributions from minority interests (Notes 10 and 11)..... 142,500 -
Common stock offering....................................... 29,668 133,304
Dividends................................................... (4,017) (6,168)
Net proceeds (payments) related to stock option exercises... 71 (397)
Purchase of treasury stock.................................. (25,519) (48,958)
--------- ---------
Cash Provided by Financing Activities....................... 25,056 405,781
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (8,608) 1,877
Cash and Cash Equivalents, Beginning of Period............... 12,333 3,816
--------- ---------
Cash and Cash Equivalents, End of Period..................... $ 3,725 $ 5,693
========= =========
(a) Changes in Operating Assets and Liabilities
Accounts receivable.................................... $ 10,510 $ (62)
Investment in equity securities........................ 19,449 (150,342)
Other current assets................................... 804 (1,209)
Accounts payable, accrued liabilities and payable
to royalty trusts..................................... (20,782) (3,180)
Other current liabilities.............................. 1,188 -
Other long-term liabilities............................ 6,011 -
--------- ---------
(Increase) Decrease in Operating Assets and Liabilities.. $ 17,180 $(154,793)
========= =========
</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, 1998, 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 Company's financial
position at September 30, 1999, its results of operations for the three and
nine months ended September 30, 1999 and 1998, and its cash flows for the nine
months ended September 30, 1999 and 1998. 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
consolidated financial statements included in the Company's 1998 annual report
on Form 10-K.
Comprehensive Income
During the nine months ended September 30, 1999 and 1998, there were no
reportable elements of comprehensive income other than net income.
Royalty Trusts
The Company makes monthly net profits payments to Cross Timbers Royalty
Trust and Hugoton Royalty Trust (Note 9) based on revenues and costs related to
properties from which net profits interests were carved. Effective January 1,
1999, the Company changed its method of accounting for the trusts from the
royalty interest method to the working interest method. Under the working
interest method, amounts due the trusts are carved from the Company's revenues,
taxes, production expenses and development costs. The Company no longer records
the trust portion of development costs as an expense in the consolidated
statements of operations, and reported oil and gas production and revenues,
taxes and production expense are lower than reported under the royalty interest
method. There is no difference in operating income or net income under these two
methods of accounting. Pursuant to APB Opinion No. 20, Accounting Changes, this
change was considered as an initial adoption of an accounting principle in
recognition of events or transactions that previously were immaterial in their
effect.
Exploration Costs
All exploration costs incurred during the nine months ended September 30,
1999 and 1998 were geological and geophysical costs, with the exception of delay
rental costs of $132,000 in the 1999 period and $67,000 in the 1998 period.
2. Investment in Equity Securities
The Company occasionally purchases undervalued oil and gas reserves through
investments in publicly traded equity securities of select energy companies.
Equity securities were purchased in the summer of 1998 since, at that time, the
Company could purchase reserves underlying these securities at a lower price per
Mcfe than in the property acquisition market. See Note 3.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, equity
securities acquired since 1997 have been recorded as trading securities since
such securities were principally held for resale in the near future.
Accordingly, such investment has been recorded as a current asset at market
value, unrealized holding gains and losses have been recognized in the
consolidated statements of operations, and cash flows from purchases and sales
of equity securities have been included in cash provided (used) by
6
<PAGE>
operating activities in the consolidated statements of cash flows. Gains
(losses) on trading securities and interest related to the cost of these
investments have been classified as other income (expense).
The following are components of gain (loss) on investment in equity
securities (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Realized gains (losses) on sale of securities:
Gains......................................... $ 531 $ 125 $ 531 $ 886
Losses........................................ - (108) (23,047) (122)
------- -------- -------- --------
Net gains (losses)............................ 531 17 (22,516) 764
Changes in unrealized gains and losses.......... 3,288 (43,289) 35,983 (37,502)
Interest expense related to investment in
equity securities............................. (1,428) (2,712) (4,528) (3,557)
------- -------- -------- --------
Gain (loss) on investment in equity securities.. $ 2,391 $(45,984) $ 8,939 $(40,295)
======= ======== ======== ========
</TABLE>
On September 15, 1999, as a portion of its investment in Whitewine Holding
Company ("Whitewine") (Note 11), the Company contributed equity securities with
a value of $36.8 million on that date to Whitewine. The Company has a call
option to purchase these securities from Whitewine at this contributed value for
one year. As of September 30, 1999, the equity securities held by Whitewine had
a fair market value of $34.9 million.
As of September 30, 1999, the unrealized holding loss on investment in
equity securities was $36.6 million, as compared with an unrealized holding loss
of $44.2 million on November 5, 1999. In October 1999, the Company sold
marketable securities for proceeds of $543,000 and a gain of $213,000.
3. Related Party Transactions
Pursuant to margin support agreements with each of six officers, the
Company agreed to use the value of Cross Timbers Royalty Trust units owned by
the Company and investment in equity securities, other than those held by
Whitewine (Note 2), to provide margin support for the officers' broker accounts
where they hold Company common stock. The Company has also agreed to pay each
officer's margin debt to the extent unpaid by the officer. In connection with
these agreements, in December 1998 the Company loaned four officers a total of
$5,795,000 to reduce their margin debt. An additional $430,000 was loaned during
the first nine months of 1999. In October 1999, the Company loaned a fifth
officer $1,100,000. The loans are full recourse and due in December 2003, with
interest equal to the Company's bank debt rates. In June 1999, the Company
terminated its margin support agreements with two officers and, in September
1999, terminated the margin support agreements with the four remaining officers.
As of November 1, 1999, margin support agreements for four officers were
reinstated. At that date, total margin debt on the supported broker accounts for
these officers was $11.4 million. On November 5, 1999, the combined market value
of the Company's Cross Timbers Royalty Trust units and investment in equity
securities, other than those held by Whitewine, was approximately $18 million.
7
<PAGE>
4. Long-term Debt
The Company's outstanding debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Short-term Debt:
Short-term borrowings......... $ - $ 4,962
-------- --------
Total short-term debt.... $ - $ 4,962
======== ========
Long-term Debt:
Senior bank debt.............. $434,000 $615,000
Subordinated notes payable.... 300,000 300,000
Note payable to Shell......... - 6,000
Spring Holding Company:
Senior bank debt........... 120,700 -
Senior subordinated debt... 11,000 -
Summer Acquisition Company :
Senior bank debt........... 133,000 -
-------- --------
Total long-term debt..... $998,700 $921,000
======== ========
</TABLE>
The Company's senior bank debt was reduced primarily from proceeds from the
sale of Hugoton Royalty Trust units (Note 9) and non-operated producing
properties, net of payments to Shell for the Cook Inlet Acquisition (Note 12).
Bank debt was further reduced by approximately $18 million in July related to
the sale of common stock (Note 6).
The Company amended its revolving credit agreement with commercial banks on
August 15, 1999, resulting in a borrowing base and commitment of $468 million
and unused borrowing capacity of approximately $34 million at September 30,
1999. Other significant provisions of the revolving credit agreement remained
unchanged.
Spring Holding Company
Spring Holding Company ("Spring") (Note 10) has a $140 million revolving
credit facility with commercial banks which at September 30, 1999, had a
borrowing base of $130 million and unused borrowing capacity of $9.3 million.
The borrowing base is subject to semiannual redeterminations. The credit
facility is secured by properties owned by Spring and is non-recourse to the
Company. Borrowings under the credit facility mature on July 31, 2004.
Restrictions set forth in the credit facility include the maintenance of a
minimum consolidated net worth and minimum current and other ratios.
The credit facility provides the option of borrowing at floating interest
rates based on the prime rate or at fixed rates for periods of up to six months
based on London Interbank Offered Rates ("LIBOR"). Borrowings under the credit
facility at September 30, 1999 were based on LIBOR rates with a maturity of one
month and accrued at the applicable LIBOR rate plus 2.5%.
Spring also has a senior subordinated term loan outstanding, which had a
principal balance of $11 million at September 30, 1999. This loan has a
secondary lien on Spring's properties and at September 30, 1999 interest accrued
at a rate of LIBOR plus 6.5%. Other terms of the subordinated loan are
substantially the same as the Spring revolving credit facility. This spread
increases 0.5% quarterly and was last adjusted on November 1, 1999. The loan
matures on July 31, 2008.
Summer Acquisition Company
Summer Acquisition Company ("Summer") (Note 11) has a $140 million
revolving credit facility with commercial banks which at September 30, 1999, had
a borrowing base of $140 million and unused borrowing capacity of $7 million.
The borrowing base is subject to semiannual redeterminations. Borrowings under
the credit facility were used to partially fund properties acquired from Ocean
Energy. The credit facility is secured by the properties acquired and is
8
<PAGE>
non-recourse to the Company and Lehman Brothers Holdings, Inc. Borrowings under
the credit facility mature on September 15, 2001. Restrictions set forth in the
credit facility include limitations on the payment of dividends and general and
administrative expenses, and maintenance of a minimum consolidated net worth and
minimum current and other ratios.
The credit facility provides the option of borrowing at floating interest
rates based on the prime rate or at fixed rates for periods of up to six months
based on London Interbank Offered Rates ("LIBOR"). Borrowings under the credit
facility at September 30, 1999 were based on LIBOR rates with a maturity of one
month and accrued at the applicable LIBOR rate plus 2.5%.
5. Commitments and Contingencies
Commodity Commitments
The Company has entered into gas futures contracts that effectively fix
prices for the production and periods shown below. Prices to be realized for
hedged production will be less than these NYMEX prices because of location,
quality and other adjustments. See "Oil and Gas Production and Prices" under
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
<TABLE>
<CAPTION>
Production Month Mcf per Day Price per Mcf
---------------------------- ----------- -------------
<S> <C> <C>
1999 November to December 45,000 $2.37
2000 January 45,000 2.37
February to December 40,000 2.31
2001 January 40,000 2.31
February 45,000 2.36
March 40,000 2.29
April to October 40,000 2.24
November 40,000 2.38
December 40,000 2.52
</TABLE>
The Company has entered into basis swap agreements which effectively fix
basis for the following production and periods:
<TABLE>
<CAPTION>
Location Production Period Mcf per Day Basis per Mcf
-------------- ------------------------------- ----------- -------------
<S> <C> <C> <C>
Arkoma October 1999 to December 1999 55,000 $0.13
January 2000 82,500 0.13
February 2000 to December 2000 42,500 0.13
January 2001 40,000 0.13
Houston Ship October 1999 10,000 0.02
Channel November 1999 to September 2000 30,000 0.02
October 2000 20,000 0.02
Oklahoma October 1999 10,000 0.13
San Juan Basin October 1999 to December 1999 20,000 0.25
January 2000 to December 2000 10,000 0.28
</TABLE>
The Company also has gas price collars with floor and ceiling prices of
$2.14 and $2.76 per Mcf for 10,000 Mcf per day from October 1999 through January
2000. In October 1999, the Company entered into a natural gas option agreement
to sell 10,000 Mcf of gas per day with a ceiling price of $2.91 per Mcf for
April 2000 through October 2000.
The Company's termination of futures contracts related to October 1999 gas
production, net of the effects of basis swap agreements, resulted in a net loss
of $300,000. These losses will be recognized as decreases in gas revenue of
approximately $0.03 per Mcf in October 1999. Losses on other terminations of
futures contracts will reduce gas
9
<PAGE>
revenue by approximately $0.06 per Mcf in December 1999 and less than $0.02 per
Mcf from February through December 2000. Net gas hedging losses for the nine
months ended September 30, 1999 totaled $3.6 million.
The Company also terminated all of its outstanding futures contracts
related to October 1999 oil production with a net loss of $200,000. This loss
will be recognized as a decrease in oil revenue of approximately $0.34 per Bbl
in October 1999. Net oil hedging losses totaled $2.1 million for the nine
months ended September 30, 1999.
The Company has committed to pay a minimum price of $2.00 per Mcf for gas
sales related to Hugoton Royalty Trust distributions through March 2000, which
effectively represents production through January 2000. Underlying volumes
related to the trust units sold to the public (Note 9) are approximately 38,000
Mcf per day. Since the August 1999 distribution, gas prices related to Hugoton
Royalty Trust have exceeded $2.00 per Mcf.
Litigation
On April 3, 1998, a class action lawsuit, styled Booth, et al. v. Cross
Timbers Oil Company, was filed against the Company in the District Court of
Dewey County, Oklahoma. 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 arm's-length transactions, which actions 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. These
deductions allegedly include production and post-production costs, marketing
costs, administration costs and costs incurred by the Company in gathering,
compressing, dehydrating, processing, treating, blending and/or transporting the
gas produced. The Company contends that, to the extent any fees are
proportionately borne by the plaintiffs, these fees are established by arm's-
length negotiations with third parties or, if charged by affiliates, are
comparable to fees charged by other third party gatherers or processors. The
Company further contends that any such fees enhance the value of the gas or the
products derived from the gas. The plaintiffs are seeking an accounting and
payment of the monies allegedly owed to them. A hearing on the class
certification issue has not been scheduled. 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.
On October 17, 1997, an action, styled United States of America ex rel.
Grynberg v. Cross Timbers Oil Company, et al., was filed in the U. S. District
Court for the Western District of Oklahoma against the Company and certain of
its subsidiaries by Jack J. Grynberg on behalf of the United States under the
qui tam provisions of the False Claims Act. The plaintiff alleges that the
Company underpaid royalties on gas produced from federal leases and lands owned
by Native Americans by at least 20% during the past 10 years as a result of
mismeasuring the volume of gas and incorrectly analyzing its heating content.
The plaintiff has made similar allegations in over 70 actions filed against over
300 other companies. The plaintiff seeks to recover the amount of royalties not
paid, together with treble damages, a civil penalty of $5,000 to $10,000 for
each violation and attorney fees and expenses. After its review, the Department
of Justice decided in April 1999 not to intervene and asked the court to unseal
the case. The court unsealed the case in May 1999. A multi-district litigation
panel has ordered that the lawsuits against the Company and other companies
filed by Grynberg be transferred and consolidated to the federal district court
in Wyoming. The Company intends to file a motion to dismiss. The Company
believes that the allegations of this lawsuit are without merit and intends to
vigorously defend the action.
The Company is involved in various other lawsuits and certain governmental
proceedings arising in the ordinary course of business. Company management and
legal counsel do not believe that the ultimate resolution of these claims,
including the lawsuits described above, will have a material effect on the
Company's financial position, liquidity or operations.
Other
On September 30, 1999, the Company entered into a consulting contract with
a former officer for services to be provided through September 2000 for a
monthly fee of $40,000.
10
<PAGE>
6. Common Stock
On July 1, 1999, the Company issued 4,000,000 shares of common stock at an
agreed value of $11.425 per share in exchange for its 50% interest in Spring
Holding Company, Inc. and for cash proceeds of $3.2 million which was used to
reduce bank debt (Note 10).
On July 8, 1999, the Company sold 2,000,000 shares of common stock in an
underwritten public offering for net proceeds of approximately $26.5 million.
The proceeds were used to repurchase 1,921,850 shares of common stock issued to
Shell for the Cook Inlet Acquisition (Note 12). These proceeds exceeded the
amount due Shell by approximately $15 million which was refunded to the Company
and used to reduce bank debt.
On September 15, 1999, the Company issued from treasury 4,555,756 shares of
its common stock to Whitewine Holding Company ("Whitewine") at an agreed value
of $13.875 per share as part of its contribution for its 50% interest in
Whitewine (Note 11). These common shares are eliminated in the consolidated
financial statements.
7. Common Shares Outstanding and Earnings per Common Share
The following reconciles earnings (numerator) and shares (denominator) used
in the computation of basic and diluted earnings per share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------
1999 1998
-------------------------------- ----------------------------
Earnings Earnings
Earnings Shares (a) per Share Earnings Shares per Share
--------- ---------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income (loss)............... $13,910 $ (30,560)
Preferred stock dividends....... (444) (444)
------- ---------
Earnings (loss) available to
common stock - basic...... 13,466 48,914 $ 0.28 (31,004) 44,765 $ (0.69)
========= =========
Diluted:
Effect of dilutive securities:
Stock options................ - 234 - 401
Preferred stock (a).......... 444 2,460 - -
Warrants..................... - - - 17
------- ------ --------- ------
Earnings (loss) available to
common stock - diluted.... $13,910 51,608 $ 0.27 $ (31,004) 45,183 $ (0.69) (b)
======= ====== ========= ========= ====== =========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------------------------
1999 1998
-------------------------------- ----------------------------
Earnings Earnings
Earnings Shares (a) per Share Earnings Shares per Share
--------- ---------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income (loss)............... $41,462 $(29,095)
Preferred stock dividends....... (1,334) (1,334)
------- --------
Earnings (loss) available to
common stock - basic...... 40,128 46,140 $ 0.87 (30,429) 42,737 $ (0.71)
========= ==========
Diluted:
Effect of dilutive securities:
Stock options................ - 102 - 560
Preferred stock (a).......... 1,334 2,460 - -
Warrants..................... - - - 89
------- ------ -------- ------
Earnings (loss) available to
common stock - diluted.... $41,462 48,702 $ 0.85 $(30,429) 43,386 $ (0.71) (b)
======= ====== ========= ======== ====== ==========
</TABLE>
(a) Based on common shares outstanding at November 1, 1999, conversion of
Series A convertible preferred stock becomes dilutive to earnings per share
when annual earnings available to common stock exceeds approximately $35.3
million and when quarterly earnings available to common stock exceeds
approximately $8.8 million.
(b) Because of the antidilutive effect of dilutive securities on loss per
common share, diluted earnings (loss) available to common stock is the same
as basic.
8. Supplemental Cash Flow Information
The following are total interest and income tax payments (receipts) during
each of the periods (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Interest.... $39,573 $34,159
Income tax.. (282) (454)
</TABLE>
The accompanying consolidated statements of cash flows exclude the
following non-cash equity transactions during the nine-month periods ended
September 30, 1999 and 1998:
- Issuance of 3,720,000 shares of common stock, valued at $42.5 million, to
purchase a 50% interest in Spring Holding Company, Inc. (Notes 6 and 10)
- Sale of 73,684 Hugoton Royalty Trust units in exchange for 48,755 shares
of common stock valued at $700,000 (Note 9)
- Transfer of $11.1 million from accrued liabilities to additional paid-in
capital in 1999 related to the increase in the Company's common stock
price for shares issued to Shell for the Cook Inlet Acquisition (Note 12)
- Vesting of 81,000 performance shares and issuance of 82,125 performance
shares in 1998
- Receipt of 10,393 shares (valued at $205,000) of common stock for the
option price of exercised stock options in 1998
9. Sale of Hugoton Royalty Trust Units
In December 1998, the Company formed the Hugoton Royalty Trust by conveying
80% net profits interests in properties located in the Hugoton area of Kansas
and Oklahoma, the Anadarko Basin of Oklahoma and the Green River Basin of
Wyoming. These net profits interests were conveyed to the trust in exchange for
40,000,000 units of beneficial interest. On April 8, 1999, the Company sold
15,000,000, or 37.5%, of the trust units, in an initial public offering at a
price of $9.50 per unit, less underwriters' discount and expenses. Pursuant to
the underwriters' overallotment option, the Company sold an additional 2,004,000
trust units at $9.50 per unit less discount on May 7, 1999. Total net proceeds
12
<PAGE>
from the sale were $148.6 million, resulting in a gain of $40.3 million before
income tax. Proceeds from the sale were used to reduce bank debt. Proved
reserves related to trust units sold are approximately 183 billion cubic feet of
gas equivalent as of December 31, 1998.
On July 2, 1999, an officer exercised options to purchase 73,684 Hugoton
Royalty Trust units from the Company pursuant to the Royalty Trust Option Plan
in exchange for 48,755 shares of Company common stock. The Company recognized a
gain of $235,000 on this sale of trust units.
10. Spring Holding Company Acquisition
On July 1, 1999, the Company and Lehman Brothers Holdings, Inc. ("Lehman")
acquired the common stock of Spring Holding Company ("Spring"), a private oil
and gas company located in Tulsa, Oklahoma for $85 million. The Company issued
4,000,000 shares of common stock, less $3.2 million cash received, for its
ownership interest in Spring (Note 6) and Lehman contributed $42.5 million in
cash. The Company and Lehman each owned 50% of a limited liability company that
acquired the common stock of Spring. Pursuant to a put and call agreement, the
Company had the right to purchase Lehman's 50% interest in Spring for one year
after closing the Ocean Energy Acquisition (Note 11). If the Company did not
exercise its option on or before that date, Lehman had the right to sell its 50%
interest to the Company on the anniversary of closing the Ocean Energy
Acquisition. The option exercise price was $42.5 million plus an annualized
return of 20%. The parties agreed to the put and call agreement in order to
provide the Company a method to purchase the remainder of Spring, and to provide
Lehman a method to sell its interest, if either party determined it to be in its
best interest. On September 15, 1999, the Company exercised its option to buy
Lehman's interest for $44.3 million, or $1.8 million in excess of the recorded
minority interest, which excess was recorded as producing property cost.
The Company consolidates its investment in Spring using the purchase method
of accounting, with recognition of Lehman's investment as a minority interest
through September 14, 1999. The purchase of Spring, as reported in the
consolidated statement of cash flows, only reflects Lehman's investment in the
acquisition since the Company's portion of the purchase was a non-cash equity
transaction (Note 8).
Property cost associated with the Spring acquisition totaled approximately
$235 million, of which $20 million was attributed to other than producing
properties, including a gas gathering system, compressors, undeveloped leasehold
cost and other tangible property. Cost of these assets will be depreciated over
their useful lives, primarily using the unit-of-production method based on
proved reserves for properties served by these assets.
11. Ocean Energy Acquisition
On September 15, 1999, the Company and Lehman acquired Arkoma Basin oil and
gas properties from Ocean Energy, Inc. ("Ocean Energy Acquisition") for $231
million. The original purchase price of $235.3 million was reduced by estimated
net revenue received between the July 1, 1999 effective date and the closing
date. Additional purchase price adjustments may result from post-closing
adjustments. All purchase costs will be allocated to oil and gas properties.
The Company and Lehman each own 50% of Whitewine Holding Company
("Whitewine"), which was formed to acquire the Arkoma Basin properties. Lehman
contributed $100 million in cash to Whitewine and the Company contributed $100
million in securities, including its common stock (Notes 2 and 6). The purchase
price was funded with $100 million from the jointly owned company and $131
million financed through a revolving credit agreement between Whitewine's wholly
owned subsidiary, Summer Acquisition Company, and commercial banks (Note 4).
Although the Company and Lehman have equal board representation and control of
Whitewine, the Company's management controls operations of the properties.
Whitewine's financial results are consolidated in the Company's financial
statements, with recognition of Lehman's 50% interest as a minority interest.
13
<PAGE>
The Company entered into a put and call agreement with Lehman whereby the
Company has the right to purchase Lehman's 50% interest in the Ocean Energy
Acquisition from January 1, 2000 through September 15, 2000. If the Company
does not exercise its option on or before that date, Lehman has the right to
sell its 50% interest to the Company on September 15, 2000. The option exercise
price is Lehman's cost of $100 million plus an annualized return of 20%. The
parties agreed to the put and call agreement in order to provide the Company a
method of purchasing the remainder of the Ocean Energy Acquisition, and to
provide Lehman a method to sell its interest, if either party determined it to
be in its best interest.
12. Acquisitions and Dispositions
On April 24, 1998, the Company acquired producing properties in the East
Texas Basin from EEX Corporation ("EEX 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 $245 million. In connection with the acquisition, the Company
sold a production payment to EEX Corporation for $30 million. The cost of the
EEX 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.
On September 30, 1998, the Company acquired oil-producing properties in the
Middle Ground Shoal Field of Alaska's Cook Inlet ("Cook Inlet Acquisition") from
various Shell Oil Company affiliates ("Shell"). 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 Company acquired the properties in exchange
for 1,921,850 shares of the Company's common stock, subject to a $20 per share
price guarantee. The Company also executed a non-interest bearing promissory
note to Shell for $6 million. Payments under this note, which were due when
NYMEX crude oil prices increased to specified levels, were made in August and
September 1999. The total purchase price of the Cook Inlet Acquisition was $45
million.
On March 1, 1999, the Company and Shell entered into an amended agreement
to postpone Shell's resale of Company common stock to no later than August 16,
1999. As agreed in this amendment, and in anticipation of repurchasing the
common stock from Shell, the Company paid Shell $15 million and paid $5 million
into escrow. The Company also entered into gas sales and transportation
contracts that provide Shell purchase discounts with an estimated value of $7.5
million. These payments and contracts were recorded as reductions to the amounts
due Shell related to the $20 common stock price guarantee. Deferred gas contract
revenue of $7.5 million was also recorded which will be amortized to gas revenue
as the discounts are taken by Shell. On July 15, 1999, the Company used the
proceeds from a stock offering (Note 6) to repurchase the 1,921,850 shares of
the Company's common stock owned by Shell. Proceeds from the sale of common
stock exceeded the remaining amount due Shell under the $20 common stock price
guarantee by approximately $15 million which was refunded to the Company and
used to reduce bank debt.
On November 20, 1998, the Company acquired primarily gas-producing
properties in northwest Oklahoma and the San Juan Basin of New Mexico for $33.4
million from Seagull Energy Corp. After purchase price adjustments primarily
resulting from net revenues from the October 1, 1998 effective date through
November 20, 1998, the properties were purchased for an estimated price of $29.2
million. Additional purchase price revisions may result from post-closing
adjustments. The Company funded the acquisition with existing lines of credit.
On May 4, 1999, the Company sold non-operated producing properties in the
San Juan Basin of New Mexico to Vastar Resources, Inc. for $29.9 million. The
sale was effective March 1, 1999 and is subject to typical post-closing
adjustments. The Company sold other non-operated producing properties in June
1999 for approximately $15 million. Proceeds from the sales were used to reduce
bank debt.
On September 14, 1999, oil and gas producing properties were sold for
approximately $63.5 million before closing costs. In two transactions, Cross
Timbers sold a total of $41 million of primarily non-operated properties in
Oklahoma, the Permian Basin of West Texas and New Mexico and the Green River
Basin of Wyoming. Additionally, Spring (Note 10) sold $22.5 million of
properties in the Panhandle area of Texas and in Coal County, Oklahoma.
14
<PAGE>
Acquisitions have been recorded using the purchase method of accounting.
The following presents unaudited pro forma results of operations for the nine
months ended September 30, 1999 and 1998 and the year ended December 31, 1998,
as if these acquisitions, the Spring Acquisition (Note 10), the Ocean Energy
Acquisition (Note 11), and the sale of Hugoton Royalty Trust units (Note 9) and
other properties had been consummated on January 1, 1999 and immediately prior
to January 1, 1998. These pro forma results are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
-----------------------------------------
Nine Months Ended
(in thousands, except per share data) September 30, Year Ended
-------------------------- December 31,
1999 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................... $256,330 $227,105 $308,967
======== ======== ========
Net income (loss).......................... $ 41,693 $(24,109) $(62,741)
======== ======== ========
Earnings (loss) available to common stock.. $ 40,359 $(25,443) $(64,520)
======== ======== ========
Earnings (loss) per common share
Basic................................... $ 0.83 $ (0.49) $ (1.26)
======== ======== ========
Diluted................................. $ 0.81 $ (0.49) $ (1.26)
======== ======== ========
Weighted average shares outstanding........ 48,792 51,580 51,047
======== ======== ========
</TABLE>
Spring acquired a significant portion of its producing properties in July
1998. Pro forma results for the nine months ended September 30, 1998, as if
this acquisition closed on January 1, 1998, are estimated to be: revenues of
$244.5 million and loss available to common stock of $26.1 million. Pro forma
results for the year ended December 31, 1998, as if this acquisition closed on
January 1, 1998, are estimated to be: revenues of $326.3 million and loss
available to common stock of $65.2 million.
13. Texas Permian Trust
The Company plans to form the Texas Permian Trust by conveying an 80% net
profits interest in properties that are principally located in the Permian Basin
of West Texas and southeast New Mexico. The Company filed a registration
statement with the Securities and Exchange Commission in August 1999 and plans,
subject to market conditions, to offer approximately 40% of the trust units to
the public in early 2000. The trust units will be listed on the New York Stock
Exchange under the symbol "TPT." The Company intends to use proceeds from the
sale to reduce bank debt.
In August 1999, the Board of Directors approved the 1999 Royalty Trust
Option Plan ("Plan"). Under the terms of the Plan, the Company granted key
employees options to purchase units of beneficial interest in the Texas Permian
Trust in an aggregate amount not to exceed the greater of $12 million or 5% of
the total market value of the trust based on the initial public offering price.
The options will be priced at the initial public offering price and will not be
exercisable prior to the offering.
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have reviewed the accompanying consolidated balance sheet of Cross Timbers
Oil Company (a Delaware Corporation) as of September 30, 1999 and the related
consolidated statements of operations for the three and nine-month periods ended
September 30, 1999 and 1998, and the consolidated statements of cash flows for
the nine-month periods ended September 30, 1999 and 1998. 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, 1998 included in the Company's 1998 annual report on Form 10-K, and
in our report dated March 12, 1999, 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, 1998 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1998 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
October 28, 1999
16
<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 1998 annual report on Form
10-K, as well as with the consolidated financial statements and notes thereto
included in this quarterly report on Form 10-Q.
<TABLE>
<CAPTION>
Oil and Gas Production and Prices
- ---------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------------ -------------------------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total production
Oil (Bbls)........................ 1,207,012 1,026,528 18% 3,894,459 3,219,251 21%
Gas (Mcf)......................... 26,554,496 22,901,659 16% 74,509,784 59,402,221 25%
Natural gas liquids (Bbls)........ 343,155 339,639 1% 922,242 777,676 19%
Mcfe.............................. 35,855,498 31,098,661 15% 103,409,990 83,383,783 24%
Average daily production
Oil (Bbls)........................ 13,120 11,158 18% 14,265 11,792 21%
Gas (Mcf)......................... 288,636 248,931 16% 272,930 217,591 25%
Natural gas liquids (Bbls)........ 3,730 3,692 1% 3,378 2,849 19%
Mcfe.............................. 389,734 338,029 15% 378,791 305,435 24%
Average sales price
Oil per Bbl....................... $ 19.28 $ 12.28 57% $ 15.00 $ 12.84 17%
Gas per Mcf....................... $ 2.32 $ 2.10 10% $ 2.04 $ 2.07 (1%)
Natural gas liquids per Bbl....... $ 13.64 $ 9.22 48% $ 10.49 $ 9.33 12%
</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 primarily because of the Cook Inlet
Acquisition in 1998, partially offset by property sales and natural decline.
Increased gas production is primarily attributable to 1998 and 1999 producing
property acquisitions and development activity, partially offset by the sale of
Hugoton Royalty Trust units, other property sales and natural decline.
The average posted price for West Texas Intermediate ("WTI"), a benchmark
crude, was $18.95 per barrel for third quarter 1999, compared to $11.59 for
third quarter 1998. The average NYMEX price for oil was $21.72 per barrel for
third quarter 1999, compared to $14.15 for third quarter 1998. The Company's
average oil price is generally higher than the WTI posted price because of
quality and location differentials. The WTI price was slightly above $15.00 at
the beginning of 1998, then slid throughout the year until dropping to $8.00 in
December 1998, the lowest level since 1978. After a weak first quarter, oil
prices have increased in 1999 because of production cuts by OPEC and other
leading oil exporters, reduced inventories and anticipated increased demand. As
of November 9, the WTI posted price was $21.25 and the NYMEX price was $24.00.
Gas prices during the first quarter of 1999 were relatively weak because of
abnormally mild winters in the central and eastern U.S. Cooler spring weather
and lower industry production levels strengthened gas prices in the second
quarter. The price strengthening trend continued in third quarter 1999, and by
late October, the NYMEX price rose above $3.00 per Mcf before settling to $2.64
per Mcf on November 9.
17
<PAGE>
The Company uses price-hedging arrangements to reduce price risk on a
portion of its oil and gas production; see Note 5 to Consolidated Financial
Statements. For the third quarter, the Company's net oil hedging losses totaled
$1.2 million or $0.97 per barrel and net gas hedging losses totaled $6.2 million
or $0.24 per Mcf. For the first nine months of 1999, the Company's net oil
hedging losses totaled $2.1 million or $0.54 per Bbl and net gas hedging losses
totaled $3.6 million, or $0.05 per Mcf.
Results of Operations
- ---------------------
Quarter Ended September 30, 1999 Compared with Quarter Ended September 30, 1998
Earnings available to common stock for third quarter 1999 were $13.5
million compared to a third quarter 1998 loss of $31 million. Third quarter 1999
earnings include a $3.1 million net after-tax gain on sale of properties and a
$1.6 million after-tax net unrealized gain on the Company's investment in equity
securities. Third quarter 1998 results include a $30.3 million after-tax
unrealized loss related to the Company's investment in equity securities.
Excluding gains and losses from investments and from sale of property, earnings
for the quarter were $8.8 million compared with a loss of $700,000 for third
quarter 1998.
Total revenues for the 1999 quarter were $95.9 million, a 43% increase over
third quarter 1998 revenues of $67 million. Operating income for the quarter
was $33.7 million, a 152% increase from 1998 operating income of $13.4 million.
Oil revenue increased $10.7 million (85%) because of the 57% increase in oil
prices and the 18% increase in oil volumes. Gas and natural gas liquids
revenues increased $15.1 million (30%) primarily because of the 10% increase in
gas prices and 48% increase in natural gas liquids prices as well as a 16%
increase in gas volumes. Third quarter gas gathering, processing and marketing
revenues decreased $1.2 million (40%) from 1998 to 1999 primarily because of
reduced margins. Other revenues increased $4.2 million because of gains from
property sales.
Expenses for third quarter 1999 totaled $62.2 million, a 16% increase from
third quarter 1998 expenses of $53.7 million. Production expense increased $2.9
million (18%) and depreciation, depletion and amortization ("DD&A") increased
$6.1 million (28%) because of increased production related to acquisitions and
development. Taxes, transportation and other increased $500,000 (6%) over the
third quarter of 1998 primarily because of increased oil and gas revenues,
partially offset by lower gas transportation and compression charges.
Exploration expense, which primarily includes geological and geophysical costs,
decreased $900,000 (77%) due to decreased exploratory activity. General and
administrative expense ("G&A") increased $100,000 (3%) primarily because of
Company growth.
Gain on investment in equity securities was $2.4 million for the quarter,
compared with a $46 million loss in third quarter 1998 that was caused by a
significant decline in the market value of securities held. Interest expense
increased $2.7 million (20%) primarily because of a 20% increase in weighted
average debt outstanding unrelated to investment in equity securities.
Nine Months Ended September 30, 1999 Compared with Nine Months Ended September
30, 1998
Earnings available to common stock for the nine months ended September 30,
1999 were $40.1 million, compared to a loss of $30.4 million for the same 1998
period. Year-to-date 1999 earnings include a $26.8 million after-tax gain from
the sale of Hugoton Royalty Trust units, a $5.9 million after-tax gain on
investment in equity securities and a $4 million after-tax gain on sale of
properties. The nine-month 1998 period includes a $26.6 million after-tax
unrealized loss on investment in equity securities. Excluding gains and losses
from investments and from sales of trust units and other property, earnings for
the first nine months of 1999 were $3.4 million compared to a loss of $3.8
million for the first nine months of 1998.
Total revenues for the first nine months of 1999 were $230.9 million, or
$52.2 million (29%) higher than revenues of $178.7 million for the first nine
months of 1998. Oil revenue increased $17.1 million (41%) because of the 21%
increase in production and the 17% price increase. Gas and natural gas liquids
revenues increased $31.6 million (24%) because of the 25% increase in gas
production along with the 12% price increase and 19% increase in production for
18
<PAGE>
natural gas liquids. Gas gathering, processing and marketing revenues decreased
$1.9 million (29%) primarily because of lower gas marketing margins. Other
revenues increased $5.5 million related to gains on property sales.
Expenses for the nine months ended September 30, 1999 totaled $174.2
million, or 20% above total expenses of $144.6 million for the first nine months
of 1998. Production expense increased $13.6 million (32%) and DD&A increased
$19.8 million (34%) primarily because of increased production related to
acquisitions and development. Taxes, transportation and other increased $3.5
million (17%) primarily because of increased oil and gas revenues and increased
gas transportation and compression charges. Exploration expense, which primarily
includes geological and geophysical costs, decreased $5.5 million (87%) because
of decreased exploration activity in 1999. G&A decreased $1 million (10%)
primarily because of decreased stock incentive compensation related to 1998
performance share grants.
Gain on investment in equity securities was $8.9 million for the first nine
months of 1999, compared with a $40.3 million loss for the same 1998 period that
was the result of a significant decline in the market value of securities during
1998. Interest expense increased $6.8 million (18%) because of an increase of
approximately 25% in weighted average borrowings unrelated to the investment in
equity securities, partially offset by a decrease in the weighted average
interest rate.
Comparative Expenses per Mcf Equivalent Production
The following are expenses on an Mcf equivalent (Mcfe) produced basis:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Production.............................. $ 0.54 $ 0.53 2% $ 0.54 $ 0.51 6%
Taxes, transportation and other......... 0.24 0.26 (8)% 0.23 0.25 (8)%
Depreciation, depletion and
amortization (DD&A) (a)................ 0.72 0.71 1% 0.71 0.67 6%
General and administrative (G&A) (b).... 0.09 0.10 (10)% 0.09 0.10 (10)%
Interest................................ 0.46 0.44 5% 0.43 0.45 (4)%
</TABLE>
(a) Includes only DD&A directly related to oil and gas production.
(b) Excludes stock incentive compensation.
The following are explanations of significant variances of expenses on an
Mcfe basis:
Production- Increased production expense per Mcfe is primarily because of
higher operating expenses of 1998 acquisitions as compared to operating expenses
of properties sold, as well as the timing of maintenance projects.
Taxes, transportation and other- Decreased taxes, transportation and
other expense is because of lower gas transportation and compression charges in
third quarter 1999 and lower property taxes in 1999.
DD&A- Increased DD&A per Mcfe is primarily related to increased 1998 and
1999 producing property acquisition costs and lower proved oil reserve
estimates, related to lower prices, as of December 31, 1998.
G&A- Decreased G&A per Mcfe is primarily the result of production growth
outpacing Company personnel requirements and other administrative expenses.
Interest- Increased interest expense per Mcfe for the quarter ended
September 30, 1999 is primarily the result of increased debt to fund the Spring
and Ocean Energy Acquisitions. Decreased interest per Mcfe for the nine months
ended September 30, 1999 is primarily the result of debt repayment from the sale
of Hugoton Royalty Trust units. Also, the weighted average interest rate
declined from 7.9% to 7.5%.
19
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Cash Flow and Working Capital
Cash provided by operating activities was $99.1 million for the first nine
months of 1999 compared to cash used by operating activities of $94.7 million
for the comparable 1998 period. This change was primarily because of equity
securities purchased during the first nine months of 1998. Operating cash flow
(defined as cash provided by operating activities before changes in operating
assets and liabilities) increased 36% from $60.1 million for the first nine
months of 1998 to $81.9 million for the same 1999 period, primarily because of
increased production from 1998 and 1999 acquisitions and development activity,
partially offset by reduced production from the sale of Hugoton Royalty Trust
units and other property.
During the nine months ended September 30, 1999, proceeds from operating
activities of $99.1 million, bank and short-term borrowings of $220 million,
contributions from minority interests of $142.5 million, common stock offering
of $29.7 million and sale of Hugoton Royalty Trust units and property and
equipment of $255 million were used to fund net property acquisitions,
development costs and other net capital additions of $387.7 million, debt
payments of $295.3 million, minority interest purchase of $42.4 million,
treasury stock purchase of $25.5 million and dividends of $4 million. The
resulting decrease in cash and cash equivalents for the period was $8.6 million.
Other significant changes in current assets during the first nine months of
1999 were a $6 million decrease in investment in equity securities and a $21.7
million decrease in current deferred income taxes primarily related to the sale
of securities, partially offset by an increase in the market value of the
remaining portfolio. Total current liabilities decreased $31.5 million during
the first nine months of 1999 because of a $32 million decrease in accounts
payable and accrued liabilities primarily related to payments to Shell for the
Cook Inlet Acquisition and the timing of other disbursements.
The Company occasionally purchases undervalued reserves through investments
in publicly traded equity securities of select energy companies. Equity
securities were purchased in the summer of 1998 since, at that time, the Company
could purchase reserves underlying these securities at a lower price per Mcfe
than in the property acquisition market. As of November 5, 1999, the Company's
investment in equity securities has a value of $30.5 million, of which equity
securities with a value of $28.4 million are owned by the Company's 50% owned
subsidiary, Whitewine Holding Company. The remaining equity securities, with a
November 5, 1999 value of $2.1 million, and the Company's investment in Cross
Timbers Royalty Trust units with a value at that date of approximately $15.9
million, are held in a broker account and provide support for officer margin
debt which totaled $11.4 million at November 1, 1999. See Notes 2 and 3 to the
Consolidated Financial Statements.
Acquisitions and Development
Exploration and development expenditures for the first nine months of 1999
were $60.8 million, compared with $41.5 million for the first nine months of
1998. The Company initially budgeted $60 million for 1999 exploration and
development. With increased oil prices, the Company currently anticipates its
1999 exploration and development will be $90 to $100 million. Actual costs may
vary significantly due to many factors, particularly changes in commodity
prices. Such expenditures are expected to be funded by cash flow from
operations.
Through the first nine months of 1999, the Company had participated in the
drilling of 66 gas wells and 11 oil wells and more than 200 workovers. Results
of these projects have met or exceeded management expectations. Workovers have
focused on recompletions, artificial lift, and wellhead compression. Wellhead
compressors were installed on 60 wells with average incremental rates exceeding
100 Mcf of gas per day per well.
Drilling activity during the first nine months of 1999 was focused on East
Texas properties where nine wells were completed and an additional 17 wells are
in progress. The Company expects to drill an additional 5 wells by year end.
The Company has also completed 57 workovers in East Texas.
20
<PAGE>
In the San Juan Basin, the Company's drilling has focused on Fruitland Coal
and Ute Dome Dakota/Paradox wells. Five wells were completed as of September
30, 1999 and 12 wells are in progress. The Company has completed 82 workovers
in the San Juan Basin which have primarily been installation of wellhead
compressors.
The Company has also been active in the Mid-Continent area where 23 wells
have been drilled. Fourteen of those wells have been completed.
With the improvement in oil prices, the Company began the development of
oil projects in the Permian Basin during the third quarter of 1999. Eleven wells
were drilled, four of which were completed.
On July 1, 1999, the Company and Lehman Brothers Holdings, Inc. ("Lehman")
acquired the common stock of Spring Holding Company ("Spring"), a private oil
and gas company, for cash and Cross Timbers' common stock, totaling $85 million.
On September 15, 1999, the Company exercised its option to acquire Lehman's 50%
interest in Spring for $44.3 million.
On September 15, 1999, the Company and Lehman acquired Arkoma Basin
properties located in Arkansas and Oklahoma for $231 million from Ocean Energy,
Inc. The purchase has an effective date of July 1, 1999 and is subject to
typical purchase price adjustments. The Company has the right to purchase
Lehman's 50% interest in the Ocean Energy Acquisition from January 1, 2000
through September 15, 2000. If the Company does not exercise its option on or
before that date, Lehman has the right to sell its 50% interest to the Company
on September 15, 2000. The option exercise price is $100 million plus an
annualized return of 20%.
The Company has unused borrowing capacity of $34 million at September 30,
1999 under its revolving credit agreement with commercial banks. This capacity
is available for purchases of producing properties.
Dispositions
In December 1998, the Company formed the Hugoton Royalty Trust by conveying
80% net profits interests in properties located in the Hugoton area of Kansas
and Oklahoma, the Anadarko Basin of Oklahoma and the Green River Basin of
Wyoming. These net profits interests were conveyed to the Trust in exchange for
40,000,000 units of beneficial interest. On April 8, 1999, the Company sold
15,000,000, or 37.5%, of the Trust units, in an initial public offering at a
price of $9.50 per unit, less underwriters' discount and expenses. Pursuant to
the underwriters' overallotment option, the Company sold an additional 2,004,000
units at $9.50 per unit less discount on May 7, 1999. Total net proceeds from
the sale were $148.6 million, resulting in a gain of $40.3 million before income
tax. Proceeds from the sale were used to reduce bank debt. Proved reserves
related to trust units sold are approximately 183 billion cubic feet of gas
equivalent as of December 31, 1998.
On May 4, 1999, the Company sold non-operated producing properties in the
San Juan Basin of New Mexico to Vastar Resources, Inc. for $29.9 million. The
sale was effective March 1, 1999 and is subject to typical post-closing
adjustments. The Company sold other non-operated producing properties in June
1999 for approximately $15 million. Proceeds were used to reduce bank debt.
On September 14, 1999, oil and gas producing properties were sold for
approximately $63.5 million before closing costs. In two transactions, Cross
Timbers sold a total of $41 million of primarily non-operated properties in
Oklahoma, the Permian Basin of West Texas and New Mexico and the Green River
Basin of Wyoming. Additionally, Spring sold $22.5 million of properties in the
Panhandle area of Texas and in Coal County, Oklahoma. Proceeds from these sales
were used to purchase Lehman's interest in Spring and to reduce Spring's bank
debt.
The Company plans to form the Texas Permian Trust by conveying an 80% net
profits interest in properties that are principally located in the Permian Basin
of West Texas and southeast New Mexico. The Company filed a registration
statement with the Securities and Exchange Commission in August 1999 and plans,
subject to market conditions, to offer approximately 40% of the trust units to
the public in early 2000. The trust units will be listed on the New York Stock
Exchange under the symbol "TPT." The Company intends to use proceeds from the
sale to reduce bank debt.
21
<PAGE>
Debt and Equity
As of September 30, 1999, long-term bank debt increased by $77.7 million
from balances at December 31, 1998. Debt was increased primarily as the result
of debt associated with the Spring and Ocean Energy Acquisitions, partially
offset by proceeds from the sale of Hugoton Royalty Trust units and non-operated
producing properties.
The Company amended its revolving credit agreement with commercial banks in
August 1999, resulting in a borrowing base and commitment of $468 million and
unused borrowing capacity of $34 million at September 30, 1999. Other
significant provisions of the revolving credit agreement remained unchanged.
Stockholders' equity at September 30, 1999 increased $96 million from year-
end because of earnings of $40.1 million for the nine months ended September 30,
1999 and a net increase in additional paid-in capital and treasury stock of
$57.2 million primarily related to the sale and issuance of common stock less
shares reacquired, as described below. These increases were partially offset by
dividends declared of $1.4 million.
On July 1, 1999, the Company issued 4,000,000 shares of common stock at an
agreed value of $11.425 per share in exchange for its 50% ownership of Spring
and for cash proceeds of $3.2 million which was used to reduce bank debt.
On July 8, 1999, the Company sold 2,000,000 shares of common stock in an
underwritten public offering for net proceeds of approximately $26.5 million.
The proceeds were used to repurchase 1,921,850 shares of common stock issued to
Shell for the Cook Inlet Acquisition. These proceeds exceeded the amount due
Shell by approximately $15 million which was refunded to the Company and used to
reduce bank debt.
On September 15, 1999, the Company issued from treasury 4,555,756 shares of
its common stock to its 50% owned subsidiary, Whitewine Holding Company, at an
agreed value of $13.875 per share as part of its contribution for its 50%
interest in Whitewine. These common shares are eliminated in the consolidated
financial statements.
Common Stock Dividends
In August 1999, the Board of Directors of the Company declared a second
quarter common stock dividend of $0.01 per share, or a total of $488,000, paid
in October 1999. The quarterly dividend was reduced from $0.04 per common
share paid in 1998.
Accounting Pronouncements
- -------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities which was required to be adopted for fiscal
years beginning after June 15, 1999. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 which delays the effective date of Statement
133 for one year, to fiscal years beginning after June 15, 2000. Adoption of
SFAS No. 133 should have no significant impact on the Company's reported
earnings, but could materially affect comprehensive income.
Year 2000
- ---------
"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations. Computer systems
that are not Year 2000 compliant by January 1, 2000 may cause material adverse
effects to companies and organizations that rely upon those systems. Continuity
of the Company's operations in January 2000 will not only depend upon Year 2000
compliance of the Company's computer systems and computer-controlled equipment,
but also compliance of computer systems and computer-controlled equipment of
third parties. These third parties include oil and natural gas purchasers and
significant service providers such as electric utility companies and natural gas
plant, pipeline and gathering system operators.
22
<PAGE>
The Company is in the process of reviewing its computer systems and
computer-controlled field equipment and making the necessary modifications for
Year 2000 compliance. The Company has completed modifications and testing of its
primary accounting and land computer programs. The remaining computer systems
have been inventoried and assessed. Some of the Company's critical field
equipment, such as natural gas compressors, are partially controlled or
regulated by embedded computer chips. As of April 1999, the types of field
equipment in all operated areas were inventoried. Remediation of these critical
components was completed in August 1999. Functional solutions and remediation of
less critical items is expected to be complete by the end of 1999. Less critical
items are components that are not critical for production, safety or sales.
Based on its review, remediation efforts and the results of testing to
date, the Company does not believe that timely modification of its computer
systems and computer-controlled equipment for Year 2000 compliance represents a
material risk to the Company. The Company estimates that total costs related to
Year 2000 compliance efforts will be less than $500,000 of which approximately
$155,000 has been incurred and expensed through September 1999.
The Company has identified significant third parties whose Year 2000
compliance could affect the Company and is in the process of formally inquiring
about their Year 2000 status. The Company has received responses to
approximately 58% of its inquiries. Approximately 99% of respondents have
indicated that they will be Year 2000 compliant by January 1, 2000. Despite its
efforts to assure that such third parties are Year 2000 compliant, the Company
cannot provide assurance that all significant third parties will achieve
compliance in a timely manner. A third party's failure to achieve Year 2000
compliance could have a material adverse effect on the Company's operations and
cash flow. The potential effect of Year 2000 non-compliance by third parties is
currently unknown.
The Company is currently identifying appropriate contingency plans in the
event of potential problems resulting from failure of the Company's or
significant third party computer systems on January 1, 2000. Year 2000
contingency plans will focus on computer, network and communications equipment,
electronic data interchange with business partners, and field operations
automated well control systems. Year 2000 testing of field equipment earlier in
1999 indicated other field operations may use existing emergency response plans
in the event of a Year 2000 failure. Detailed Year 2000 contingency plans will
be completed by the end of November 1999.
Forward-Looking Statements
- --------------------------
Certain information included in this quarterly report and other materials
filed by the Company with the Commission contain forward-looking statements
relating to the Company's operations and the oil and gas industry. Such forward-
looking statements are based on management's current projections and estimates
and are identified by words such as "expects," "intends," "plans," "projects,"
"anticipates," "believes," "estimates" and similar words. These statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to predict. Therefore, actual results may
differ materially from what is expressed or forecasted in such forward-looking
statements.
Among the factors that could cause actual results to differ materially are:
-crude oil and natural gas price fluctuations,
-the Company's ability to acquire oil and gas properties that meet its
objectives and to identify prospects for drilling,
-potential delays or failure to achieve expected production from
existing and future exploration and development projects,
-potential disruption of operations because of failure to achieve
timely Year 2000 compliance by the Company or other entities with
which it has material relationships, and
-potential liability resulting from pending or future litigation.
In addition, these forward-looking statements may be affected by general
domestic and international economic and political conditions.
23
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following market risk disclosures should be read in conjunction with
the quantitative and qualitative disclosures about market risk contained in the
Company's 1998 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.
Hypothetical changes in interest rates and prices chosen for the following
estimated sensitivity effects are considered to be reasonably possible near-term
changes generally based on consideration of past fluctuations for each risk
category. It is not possible to accurately predict future changes in interest
rates, product prices and investment market values. Accordingly, these
hypothetical changes may not necessarily be an indicator of probable future
fluctuations.
Interest Rate Risk
The Company is exposed to interest rate risk on short-term and long-term
debt carrying variable interest rates. At September 30, 1999, the Company's
variable rate debt had a carrying value of $698.7 million, which approximated
its fair value, and the Company's fixed rate debt had a carrying value of $300
million and an approximate fair value of $283.7 million. Assuming a 100-basis
point change in interest rates at September 30, 1999, the fair value of the
Company's fixed rate debt would change by approximately $16.5 million.
The Company also has an interest rate swap agreement which effectively
converts the interest rate from variable to fixed on a $50 million notional
amount through September 2005. The fair value of this swap at September 30,
1999 was $1.9 million. The fair value of the Company's interest rate swap would
change by approximately $2.5 million assuming a 100-basis point change in
interest rates at September 30, 1999.
Commodity Price Risk
The Company hedges a portion of the market risks associated with its crude
oil and natural gas sales. As of September 30, 1999, outstanding gas futures
contracts had a fair value loss of $9.4 million and outstanding gas basis swap
agreements had a fair value loss of $1.2 million. The aggregate effect of a
hypothetical 10% change in oil and gas prices and basis would result in a change
of up to $11.8 million in the fair value of these financial instruments at
September 30, 1999. See Note 5 to Consolidated Financial Statements.
Investment in Equity Securities
The Company is subject to price risk on its unhedged portfolio of publicly
traded investments in equity securities. The fair value of these securities at
September 30, 1999 was $38.4 million. At that time, a 25% appreciation or
depreciation in equity prices would increase or decrease portfolio fair value
and pre-tax earnings by approximately $9.6 million. See Note 2 to Consolidated
Financial Statements.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 17, 1997, an action, styled United States of America ex rel.
Grynberg v. Cross Timbers Oil Company, et al., was filed in the U. S. District
Court for the Western District of Oklahoma against the Company and certain of
its subsidiaries by Jack J. Grynberg on behalf of the United States under the
qui tam provisions of the False Claims Act. The plaintiff alleges that the
Company underpaid royalties on gas produced from federal leases and lands owned
by Native Americans by at least 20% during the past 10 years as a result of
mismeasuring the volume of gas and incorrectly analyzing its heating content.
The plaintiff has made similar allegations in over 70 actions filed against over
300 other companies. The plaintiff seeks to recover the amount of royalties not
paid, together with treble damages, a civil penalty of $5,000 to $10,000 for
each violation and attorney fees and expenses. After its review, the Department
of Justice decided in April 1999 not to intervene and asked the court to unseal
the case. The court unsealed the case in May 1999. A multi-district panel has
ordered that the lawsuits against the Company and other companies filed by
Grynberg be transferred and consolidated to the federal district court in
Wyoming. The Company intends to file a motion to dismiss. The Company believes
that the allegations of this lawsuit are without merit and intends to vigorously
defend the action.
Items 2. Through 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
and Description Page
--------------- ----
10.1 Fourth Amendment, dated August 15, 1999, to Amended and
Restated Revolving Credit Agreement dated November 16, 1998
11 Computation of per share earnings
(included in Note 7 to Consolidated Financial Statements)
15 Letter re unaudited interim financial information
15.1 Awareness letter of Arthur Andersen LLP
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended September 30, 1999 and through November 15, 1999:
On July 9, 1999, the Company filed a report of Form 8-K regarding
the completion on July 1, 1999 of the previously announced
acquisition of the common stock of Spring Holding Company with
Lehman Brothers Holdings, Inc.
On July 12, 1999, the Company filed a report of Form 8-K
regarding the sale of 2 million shares in a public offering on
July 8, 1999 and the planned repurchase of 1.92 million shares of
stock owned by Shell Oil Company.
25
<PAGE>
On September 7, 1999, the Company filed a report on Form 8-K
regarding its August 30, 1999 announcement of strategic goals for
2000.
On September 30, 1999, the Company filed a report on Form 8-K
regarding the September 14, 1999 sale of producing properties and
the September 15, 1999 acquisition of Lehman Brothers Holdings,
Inc.'s 50% interest in Spring Holding Company.
On September 30, 1999, the Company filed a report on Form 8-K
regarding the September 15, 1999 completion of the previously
announced acquisition of Arkoma Basin properties from Ocean
Energy with Lehman Brothers Holding, Inc.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS OIL COMPANY
Date: November 15, 1999 By /s/ LOUIS G. BALDWIN
-------------------------------------------
Louis G. Baldwin
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
By /s/ BENNIE G. KNIFFEN
-------------------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer)
27
<PAGE>
FOURTH AMENDMENT TO
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
--------------------------
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
(the "Amendment") is made and entered into as of the 15th day of August, 1999
(the "Effective Date"), by and among CROSS TIMBERS OIL COMPANY, a Delaware
corporation ("Company"), the Banks that are signatories hereto (collectively,
the "Banks"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent
for Banks, BANK OF AMERICA, N.A., (formerly NationsBank, N.A. and surviving bank
by merger with and into Bank of America National Trust and Savings Association)
as Syndication Agent for Banks and CHASE BANK OF TEXAS, N.A., as Documentation
Agent for Banks.
W I T N E S S E T H:
-------------------
WHEREAS, Company, Morgan Guaranty Trust Company of New York, as
Administrative Agent for Banks, NationsBank, N.A. d/b/a Bank of America 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 Amended and Restated
Revolving Credit Agreement dated as of November 16, 1998, which amends and
restates in its entirety that certain Revolving Credit Agreement dated August
28, 1998, which amends and restates in its entirety that certain Revolving
Credit Agreement dated as of April 17, 1998, as amended (as amended by the
foregoing, as amended by that certain First Amendment to Amended and Restated
Revolving Credit Agreement dated as of May 17, 1999 among Company and Banks, as
amended by that certain Second Amendment to Amended and Restated Revolving
Credit Agreement dated as of June 7, 1999 among Company and Banks, as amended by
that certain Third Amendment to Amended and Restated Revolving Credit Agreement
dated as of June 17, 1999 among Company and Banks and as in effect as of the
Effective Date, as amended hereby and as amended from time to time hereafter,
the "Loan Agreement").
WHEREAS, the parties hereto desire to amend the Loan Agreement as set forth
herein.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
ARTICLE I
Definitions and References
--------------------------
1.01 Unless otherwise specifically defined herein, each term used herein
which is defined in the Loan Agreement as in effect immediately prior to the
Effective Date shall have the meaning assigned to such term in the Loan
Agreement as so in effect. Each reference to "hereof," "hereunder," "herein"
and "hereby" and each other similar reference and each reference
<PAGE>
to "this Loan Agreement" and each other similar reference contained in the Loan
Agreement shall from and after the Effective Date refer to the Loan Agreement as
amended hereby.
ARTICLE II
Amendments
----------
2.01. Amendments to Article I; Additional Defined Terms. Effective as of
-------------------------------------------------
the Effective Date, Article I of the Loan Agreement is amended by including the
following defined terms:
(i) "Arkoma Holding" shall mean Arkoma Holding Corporation, a Delaware
--------------
corporation that owns oil and gas properties located in the Arkoma
Basin area of Arkansas and Oklahoma.
(ii) "Arkoma Acquisition Agreement" shall mean that certain Purchase and
----------------------------
Sale Agreement dated as of July 30, 1999 between Seagull Energy E&P,
Inc. and Company, pursuant to which Company has agreed to acquire
all of the Capital Stock of Arkoma Holding. Pursuant to the terms of
the Lehman Agreement, Company's rights and interests in the Arkoma
Acquisition Agreement shall be assigned and transferred to Summer
Holding.
(iii) "Hugoton Royalty Trust" shall mean that certain royalty trust
---------------------
created and evidenced by that certain Royalty Trust Indenture dated
December 1, 1998 between Company, as Grantor, and NationsBank, N.A.,
as Trustee, pursuant to which Company has conveyed to the Hugoton
Royalty Trust an overriding royalty interest of 80% of the net
proceeds attributable to Company's leasehold working interest in
certain Mineral Properties located in the Hugoton area in Kansas and
Oklahoma, the Anadarko Basin area in Oklahoma and the Green River
Basin area in Wyoming.
(iv) "HGT Units" shall mean units of beneficial interest in the Hugoton
---------
Royalty Trust.
(v) "Lehman" shall mean Lehman Brothers, Inc. and any Subsidiary or
------
Affiliate thereof that owns an equity interest in Redwine Holdings,
Spring Holdings, Arkoma Holding or Summer Holding.
(vi) "Redwine Holdings" shall mean Redwine Holdings LLC, a Delaware
----------------
limited liability company that was formed pursuant to the terms of
the Lehman Agreement, the members of which are Cross Timbers Trading
Company, to the extent of a 50% equity interest, and LBI Group,
Inc., a Subsidiary of Lehman Brothers, Inc., to the extent of a 50%
equity interest. The assets and properties of Redwine Holdings shall
consist of all the Capital Stock of Spring Holding that was acquired
pursuant to the Spring Holding Acquisition Agreement and all of the
Capital Stock of Summer Holding.
2
<PAGE>
"Summer Holding" shall mean Summer Holding Company, a limited liability
--------------
company or corporation to be formed pursuant to the terms of the Lehman
Agreement as a wholly owned subsidiary of Redwine Holdings. The assets and
properties of Summer Holding shall consist of all of the Capital Stock of Arkoma
Holding that is to be acquired pursuant to the Arkoma Acquisition Agreement.
(vii) "Texas Permian Royalty Trust" shall mean that certain royalty trust
---------------------------
to be formed by Company, pursuant to which Company shall assign and
convey to such royalty trust an 80% net profits overriding royalty
interest in primarily leasehold Mineral Properties owned by Company
in the Permian Basin area of Texas and New Mexico and the Ozona area
in Texas. The Texas Permian Royalty Trust is further described in
Section 5.05(b)(iii).
(viii) "TPT Units" shall mean units of beneficial interest in the Texas
---------
Permian Royalty Trust.
2.02. Amendment to Article I; Amendment to Certain Defined Terms.
----------------------------------------------------------
A. Effective as of the Effective Date, the defined term
"Dividends" as it appears in Article I of the Loan Agreement is amended by
including the following provision at the conclusion of such defined term:
"Notwithstanding the foregoing, Dividends of Company shall not
include any of the following:
(a) the transaction pursuant to which the proceeds used by
Company from the sale of its Capital Stock under Prospectus
Supplement to Prospectus dated April 10, 1998 to redeem or
repurchase 1,920,000 shares of Company's Capital Stock issued to
Shell Oil Company in connection with Company's acquisition of
certain Mineral Properties from Shell Oil Company located in the
Cook Inlet of Alaska; or
(b) any transaction in which any member of Company's management
exchanges shares of Company's Capital Stock for options to acquire
HGT Units or TPT Units."
B. Effective as of the Effective Date, the defined term "Lehman
Agreement" as it appears in Article I of the Loan Agreement is deleted and
the following is substituted therefor:
"(i) "Lehman Agreement" shall mean collectively that certain
----------------
Commitment Letter dated May 17, 1999 between Company and Lehman
Brothers, Inc. and that certain Equity Commitment Letter dated
July 29, 1999 among Company, Lehman Brothers, Inc. and Redwine
Holdings, pursuant to which, among other things, Cross Timbers
Trading Company and Lehman Brothers, Inc. or an Affiliate thereof
have each acquired a 50% equity
3
<PAGE>
interest in Redwine Holdings and thereby each funded 50% of the
costs required to acquire the Capital Stock of Spring Holding
pursuant to the terms of the Spring Holding Acquisition Agreement,
and each will fund 50% of the costs required to acquire the
Capital Stock of Arkoma Holding pursuant to the terms of the
Arkoma Acquisition Agreement, together with (i) the definitive
agreement that is to be entered into between Company and Lehman
Brothers, Inc. as contemplated in such Commitment Letter and (ii)
that certain Put and Call Agreement dated as of July 1, 1999
Company and LB I Group Inc."
C. Effective as of the Effective Date, the third sentence in the
definition of "Mineral Properties" (which sentence begins with the phrase
"Upon formation of the Proposed Royalty Trust") as it appears in Article I
of the Loan Agreement is hereby deleted and the following sentences are
substituted therefor:
"Mineral Properties shall include the HGT Units and TPT Units owned
and held by Company."
D. Effective as of the Effective Date, subclause (f) in the
definition of "Net Revenue" as it appears in Article I of the Loan
Agreement is deleted and the following is substituted therefor:
"(f) the cash dividends and distributions projected to be paid to
Company or any subsidiary during such Reference Period on account of
its CRT Units, HGT Units and TPT Units"
E. Effective as of the Effective Date, the defined term "Non-CT
Royalty Trust Units" as it appears in Article I of the Loan Agreement is
deleted and the following definition is substituted therefor:
"Non-CT Royalty Trust Units" shall mean any units of beneficial or
--------------------------
direct ownership in any royalty trust other than CRT Units, HGT Units
or TPT Units."
F. Effective as of the Effective Date, the last sentence of the
defined term "Subsidiary" or Subsidiaries" as it appears in Article I of
the Loan Agreement is deleted and the following sentence is substituted
therefor:
"Notwithstanding the foregoing, so long as (a) none of the assets or
properties of the Spring Companies and/or Arkoma Holding are included
in the Borrowing Base and (b) neither Company nor any Subsidiary is
obligated to pay any of the Indebtedness of Redwine Holdings, Spring
Holding, Summer Holding, Arkoma Holding or any of the Spring
Companies, neither Redwine Holdings, Summer Holding nor any of their
subsidiaries shall be deemed a Subsidiary, either at the formation of
such entities or if Company or any Subsidiary should acquire any
additional equity interests in any of such entities or the Capital
Stock of Spring Holding or Arkoma Holding."
4
<PAGE>
2.03. Deletion of Certain Definitions. Effective as of the Effective
-------------------------------
Date, the defined terms "Proposed Royalty Trust," "Spring Acquisition Company"
and "Spring Subsidiary" as they appear in Article I of the Loan Agreement are
deleted from the Loan Agreement.
2.04. Amendment to Section 4.02(b). Effective as of the Effective Date,
----------------------------
the last sentence of Section 4.02(b) of the Loan Agreement is deleted and the
following sentence is substituted therefor:
"In addition, if Company should make a public offering of any of its
Capital Stock, HGT Units or TPT Units or sells any of its Mineral
Properties, then Company shall make a mandatory prepayment on the Notes to
the extent required according to Section 8.23."
2.05 Amendment to Section 5.05(a). Effective as of the Effective Date,
----------------------------
the phrase "or the transfer of Mineral Properties to the Proposed Royalty Trust"
as it appears in the parenthetical of the first sentence of Section 5.05(a) of
the Loan Agreement is deleted and the phrase "or the transfer of Mineral
Properties to the Hugoton Royalty Trust or the Permian Texas Royalty Trust or
the sale or transfer of any HGT Units or TPT Units" is substituted therefor.
2.06 Amendment of Section 5.05(b). Effective as of the Effective Date,
----------------------------
Section 5.05(b) of the Loan Agreement is deleted and the following is
substituted therefor:
"(b) Borrowing Base Matters Concerning Royalty Trusts.
------------------------------------------------
(i) The Hugoton Royalty Trust. The Borrowing Base currently includes
-------------------------
an amount that is the product of (a) the entire Borrowing Base value of the
undivided interest in the Mineral Properties that were assigned and
conveyed by Company to the Hugoton Royalty Trust times (b) a percentage,
-----
(i) the numerator of which is the number of HGT Units owned or held by
Company and any Subsidiary and (ii) the denominator of which is the number
of all issued and outstanding HGT Units. If Company should sale or
transfer any additional HGT Units (by public offering or otherwise), the
Borrowing Base shall be further reduced by an amount that is the product of
(a) the entire Borrowing Base value assigned to the Mineral Properties that
were assigned and conveyed to the Hugoton Royalty Trust times (b) a
-----
percentage, (i) the numerator of which is the number of such additional HGT
Units sold or transferred by Company and (ii) the denominator of which is
the number of all issued and outstanding HGT Units.
(ii) Texas Permian Royalty Trust. Upon formation of the Texas Permian
---------------------------
Royalty Trust, the Borrowing Base shall include the entire Borrowing Base
value of the undivided interest in the Mineral Properties that are assigned
and conveyed (or are to be assigned and conveyed) by Company to the Texas
Permian Royalty Trust for so long as Company owns all of the issued and
outstanding TPT Units. Company has advised Banks that Company intends to
make a public offering of some or all of the TPT Units. If a public
offering is made of the TPT Units, the Borrowing Base shall be reduced as
of the closing date of such public offering (or, if applicable, at such
later date as provided below) by an amount that is the product of (a) the
entire Borrowing Base value assigned
5
<PAGE>
to the Mineral Properties assigned and conveyed (or to be assigned and
conveyed) to the Texas Permian Royalty Trust times (b) a percentage, (i)
-----
the numerator of which is the number of TPT Units that are acquired by
Persons other than Company and any Subsidiary pursuant to such public
offering and (ii) the denominator of which is the number of all issued and
outstanding TPT Units. Company has also advised Banks that Company intends
to use all or a portion of the proceeds derived from the public offering of
TPT Units to fund Company's purchase of Lehman's equity interest in Arkoma
Holding (either directly or indirectly by acquiring Lehman's equity
interest in Redwine Holdings or Summer Holding) pursuant to a tax-free
exchange (of TPT Units for Lehman's equity interest in Arkoma Holding). If
Company acquires Lehman's equity interest in Arkoma Holding pursuant to a
tax-free exchange utilizing proceeds derived from a public offering of TPT
Units, the reduction in the Borrowing Base to occur on account of such
public offering of TPT Units as provided in this Section 5.05(b)(ii) shall
be deferred until the date that Company acquires Lehman's equity interest
in Arkoma Holding if (i) the proceeds derived from the public offering of
the TPT Units are deposited in an account maintained by (and in the name
of) a financial intermediary for the purpose of carrying-out the tax-free
exchange and (ii) the account and the proceeds deposited therein are
subject to an arrangement approved by Agents that assures that the proceeds
deposited in such account are restricted from transfer or withdrawal
without prior consent of Administrative Bank except to purchase Lehman's
equity interest in Arkoma Holding or otherwise applied as permitted
according to Section 8.23.
(iii) Management Options. Company has granted options to certain
------------------
members of Company's management to acquire HGT Units and TPT Units. The
Borrowing Base shall not be reduced upon the issuance of options to members
of Company's management to acquire HGT Units and/or TPT Units. If members
of Company's management exercise their options to acquire HGT Units and/or
TPT Units (such units acquired by Company's management upon exercising such
options are herein called "Option Units"), the Borrowing Base shall be
reduced by an amount that is the product of (a) the entire Borrowing Base
value assigned to the Mineral Properties respecting the Hugoton Royalty
Trust or The Texas Permian Royalty Trust for which the Option Units were
exercised (as the case may be) times (b) a percentage, (i) the numerator of
-----
which is the number Option Units respecting the Hugoton Royalty Trust or
the Texas Permian Royalty Trust for which the Option Units were exercised
by Company's management (as the case may be) and (ii) the denominator of
which is the number of all issued and outstanding units respecting the
Hugoton Royalty Trust or the Texas Permian Royalty Trust for which the
Option Units were exercised (as the case may be); provided, however, that
there shall be no such reduction to the Borrowing Base on account of the
issuance of Option Units during any 12-month period for the initial
$3,000,000 in Borrowing Base value for such Option Units issued during such
12-month period (as determined by the calculation set forth above).
6
<PAGE>
(iv) Borrowing Base Certificates. Company shall submit a certificate
---------------------------
to Banks setting forth its proposed reduction to the Borrowing Base that is
required under this Section 5.05(b) not later than ten (10) Business Days
after the consummation of a public offering of the HGT Units or TPT Units
or (ii) as to the transfer of Option Units to Company's management, not
later than ten (10) Business Days after Company has transferred Option
Units that have a Borrowing Base value of $3,000,000 in the aggregate and
thereafter not later than ten (10) Business Days after Company has
transferred such additional Option Units that have a Borrowing Base value
of $1,000,000 in the aggregate; provided, however, that if Majority Banks,
for any reason, disapprove of the proposed Borrowing Base value certified
by Company, then Majority Banks shall determine the Borrowing Base."
2.07 Amendment to Article 6.
----------------------
A. Effective as of the Effective Date, the term "Spring Subsidiary"
wherever such term appears throughout Article 6 of the Loan Agreement is
deleted.
B. Effective as of the Effective Date, the phrase "CT Operating and
each Gas Marketing Subsidiary" wherever such phrase appears throughout
Article 6 of the Loan Agreement is deleted and the phrase "CT Operating,
Cross Timbers Trading Company and each Gas Marketing Subsidiary" is
substituted therefor.
2.08 Amendment to Section 6.24. Effective as of the Effective Date, the
-------------------------
term "Proposed Royalty Trust" as it appears in Section 6.24 of the Loan
Agreement is deleted and the term "Texas Permian Royalty Trust" is substituted
therefor.
2.09 Amendment to Sections 8.01(c). Effective as of the Effective Date,
-----------------------------
the last sentence of Section 8.01(c) of the Loan Agreement is deleted and the
following sentence is substituted therefor:
"contemporaneous with the delivery to each of the respective lenders to the
Spring Companies and Summer Holding (and/or Arkoma Holding), Company shall
deliver to Banks each reserve report evaluating the oil and gas reserves of
the Spring Companies and Arkoma Holding that is required to be delivered to
such lenders pursuant to any of the respective credit agreements among the
Spring Companies and Summer Holding (and/or Arkoma Holding) and such
lenders, provided, however, if any such credit agreement is no longer in
effect, Company shall deliver to Banks a reserve report evaluating the oil
and gas reserves of the Spring Companies and/or Arkoma Holding (as the case
may be) in the same manner and at such times as a Reserve Report is
required to be delivered to Banks according to Section 5.03 hereof;"
2.10. Amendment to Section 8.01(l). Effective as of the Effective Date,
----------------------------
the phrase "If Company forms the Proposed Royalty Trust" as it appears at the
beginning of Section 8.01(1) of the Loan Agreement is deleted and, thereafter,
the term "Proposed
7
<PAGE>
Royalty Trust" as it appears in Section 8.01(l) of the Loan Agreement is deleted
and the term "Texas Permian Royalty Trust" is substituted therefor.
2.11. Amendment to Section 8.01(m). Effective as of the Effective Date,
----------------------------
the term "Proposed Royalty Trust" as it appears in Section 8.01(m) of the Loan
Agreement is deleted and the phrase "Hugoton Royalty Trust and Texas Permian
Royalty Trust" is substituted therefor.
2.12. Amendment to Sections 8.01(n). Effective as of the Effective Date,
-----------------------------
Section 8.01(n) of the Loan Agreement is deleted and the following is
substituted therefor:
"(n) Financial Information Concerning the Redwine Holdings, Spring
-------------------------------------------------------------
Companies and Arkoma Holding. Contemporaneous with the delivery to each of
----------------------------
the respective lenders to the Spring Companies and Summer Holding (and/or
Arkoma Holding), Company shall provide to Banks copies of all financial
statements of the Redwine Holdings, Spring Companies, Summer Holding and
Arkoma Holding that are required to be delivered to such lenders pursuant
to any of the respective credit agreements among the Spring Companies,
Summer Holding (and/or Arkoma Holding) and such lenders, provided, however,
if any such credit agreement is no longer in effect, Company shall deliver
to Banks such financial statements of the Redwine Holdings, Spring
Companies, Summer Holding and Arkoma Holding (as the case may be) in the
same manner and at such times as the financial statements are required to
be delivered to Banks according to Section 8.01(a) and (b) hereof."
2.13. Amendment to Section 8.01(o). Effective as of the Effective Date,
----------------------------
Section 8.01(o) of the Loan Agreement is deleted and the following is
substituted therefor:
"(o) Other Information. All information concerning the April 1997
-----------------
Indenture, the October 1997 Indenture, the Subordinated Indebtedness and
such other information concerning the business, properties or financial
condition of Company, any Subsidiary, the Hugoton Royalty Trust, the Texas
Permian Royalty Trust, Arkoma Holding, Summer Holding, Redwine Holdings or
any of the Spring Companies as Administrative Agent or any Bank shall
reasonably request."
2.14. Amendment to Sections 8.19.
--------------------------
A. Effective as of the Effective Date, sub-clause (iii) of Section
8.19 of the Loan Agreement is deleted and the following is substituted
therefor:
"(iii) Company and any Subsidiary to grant to Banks as security for
the performance by Company of the Notes and the Obligation of Company
hereunder, a valid, enforceable, perfected, first priority and the
only Lien in the HGT Units and the TPT Units of Company and any
Subsidiary, and"
8
<PAGE>
B. Effective as of the Effective Date, subclause (iv) of Section 8.19
of the Loan Agreement is deleted and the following is substituted therefor:
"(iv) Company and any Subsidiary to grant to Banks as security for the
performance by Company of the Notes and the Obligation of Company
hereunder, a valid, enforceable, perfected, first priority and the
only Lien in its equity interests in Redwine Holdings and Summer
Holdings."
2.15. Amendment to Section 8.22. Effective as of the Effective Date, the
-------------------------
term "Proposed Royalty Trust" as it appears in Section 8.22 of the Loan
Agreement is deleted and the term "Texas Permian Royalty Trust" is substituted
therefor.
2.16 Inclusion of Section 8.23. Effective as of the Effective Date,
-------------------------
Article 8 of the Loan Agreement is amended by including the following Section
8.23 at the conclusion of Article 8:
"8.23 Proceeds from Public Offerings and Sale of Mineral Properties.
-------------------------------------------------------------
If Company makes a public offering of any of its Capital Stock, HGT Units
and/or TPT Units or sells any of its Mineral Properties as permitted under
Section 9.07, the net proceeds derived from such public offerings and sales
of Mineral Properties shall be utilized and applied by Company in the
following manner:
(a) first, all of such proceeds shall be applied as a mandatory
prepayment of the Notes if, at the time such proceeds are
received, (i) an Event of Default exists hereunder or, with the
lapse of time or the giving of notice or both, an Event of
Default would exist hereunder or (ii) a Borrowing Base Deficiency
exists hereunder;
(b) second, if subpart (a) above is inapplicable, such portion of
such proceeds shall be applied as a mandatory prepayment of the
Notes in such amount that will cause the then Total Outstandings
to not exceed the Borrowing Base then in effect after giving
effect to any applicable redetermination of the Borrowing Base
under Section 5.05 on account of a public offering of HGT Units
or TPT Units or a sale of Mineral Properties;
(c) third, if subpart (a) above is inapplicable and after
satisfying subpart (b) above if applicable, Company may use such
proceeds in its discretion to (i) acquire any Investments
permitted under Section 9.04(vii), and/or (ii) if and only if
Redwine Holdings, Summer Holding, Spring Holding and/or Arkoma
Holding (as the case may be) are wholly-owned by Company or a
Subsidiary, to pay the Indebtedness owed to the bank lenders of
such Person or Persons that are wholly-owned by Company or a
Subsidiary; and
9
<PAGE>
(d) if subpart (a) above is not applicable, after satisfying
subpart (b) above if applicable and to the extent not used
according to subpart (c), any remaining proceeds shall be applied
as a mandatory prepayment of the Notes."
2.17. Amendment to Section 9.04.
-------------------------
A. Effective as of the Effective Date, sub-clause (iii) of Section 9.04 of
the Loan Agreement is deleted and the following is substituted therefor:
"(iii) Company's ownership of HGT Units and TPT Units,"
B. Effective as of the Effective Date, sub-clause (iv) of Section 9.04 of
the Loan Agreement is deleted and the following is substituted therefor:
"(iv) (a) Cross Timbers Trading Company's 50% equity ownership interest in
Redwine Holdings to the extent that it is acquired pursuant to the Lehman
Agreement and (b) Cross Timbers Trading Company's and/or Redwine Holdings
50% equity interest in Summer Holding to the extent that it is acquired
pursuant to the Lehman Agreement,"
C. Effective as of the Effective Date, sub-clause (vii) of Section 9.04 of
the Loan Agreement is deleted and the following is substituted therefor:
"(vii) Investments consisting of the loans and advances permitted under
Section 9.16(e) and Investments consisting of additional equity interests
in Redwine Holdings and/or the Capital Stock of Spring Holding and/or
Arkoma Holding (either directly or indirectly through Investments in equity
interests in Redwine Holdings and/or Summer Holding) if (1) such
Investments are made pursuant to the terms of the Lehman Agreement
(proceeds from the Loan may be used to acquire such Investments consisting
of additional equity interests in Redwine Holdings and/or the Capital Stock
of Spring Holding and/or Arkoma Holding to the extent that proceeds
directly derived from (a) a public offering of the Capital Stock of
Company, the CRT Units, HGT Units or the TPT Units, (b) sale of Mineral
Properties and/or (c) the sale of Energy Stocks are not then available to
use as consideration to acquire such Investments) or (2) Majority Banks
consent to such Investments to the extent that such Investments are not
acquired by the manner specified in sub-clause (1) immediately above;"
2.18. Amendment to Section 9.06. Effective as of the Effective Date, the
-------------------------
term "Proposed Royalty Trust" as it appears in Section 9.06 of the Loan
Agreement is deleted and the term "Texas Permian Royalty Trust" is substituted
therefor.
2.19. Amendment to Section 9.07.
-------------------------
10
<PAGE>
A. Effective as of the Effective Date, the amount "$35,000,000" as
set forth in sub-part (ii) of sub-clause (a) in the first sentence of
Section 9.07 of the Loan Agreement is deleted and the amount "$60,000,000"
is substituted therefor.
B. Effective as of the Effective Date, the phrase "and Company shall
pay to Banks as a mandatory principal payment on the Loan such portion of
the net proceeds derived from such sales as is necessary to cause the then
Total Outstandings to not exceed the Borrowing Base then in effect after
redetermination under Section 5.05 on account of such sales" as it appears
in sub-part (ii) of sub-clause (b) in the first sentence of Section 9.07 of
the Loan Agreement is deleted and the phrase "and Company shall use and
apply the net proceeds derived from such sales in the manner provided in
Section 8.23." is substituted therefor.
C. Effective as of the Effective Date, the last sentence of Section
9.07 is deleted and the following sentence is substituted therefor:
"The provisions of this Section 9.07 shall not apply to Company's
transfer or assignment of Mineral Properties to the Texas Permian Royalty
Trust upon formation of the Texas Permian Royalty Trust or Company's
transfer or sale of any of its HGT Units or TPT Units; provided, however,
that Section 5.05(b) and Section 8.23 shall apply upon Company's transfer
or sale of any of its HGT Units or TPT Units."
2.20. Amendment to Section 9.14.
-------------------------
A. Effective as of the Effective Date, sub-clause (iii) of Section
9.14 of the Loan Agreement is deleted and the following is substituted
therefor.
"(iii) the Guaranty by Company of the trade payables (including letters of
credit) of the Subsidiaries, Spring Holding and/or Arkoma Holding which are
incurred in the ordinary course of such Persons' business, provided
however, that the total Indebtedness guarantied by such Guaranty shall not
exceed $20,000,000 in the aggregate at any one time outstanding,"
B. Effective as of the Effective Date, the phrase "provided that the
Indebtedness respecting such other equipment leases is permitted under
Section 9.01 hereof" as it appears in sub-clause (vi) of Section 9.14 of
the Loan Agreement is deleted.
2.21. Amendment to Section 9.16.
-------------------------
A. Effective as of the Effective Date, sub-clause (a) of Section 9.16
of the Loan Agreement is deleted and the following is substituted therefor:
"(a) may make loans or advances to any Person other than Summer Holding,
Arkoma Holding, Redwine Holdings, any of the Spring Companies or any
11
<PAGE>
Person who is an officer or director of Company if such loans or advances
are in the ordinary course of Company's business,"
B. Effective as of the Effective Date, sub-clause (c) of Section 9.16
of the Loan Agreement is deleted and the following is substituted therefor:
"(c) Company or a Subsidiary may make loans or advances to any of the
Spring Companies (either directly or indirectly through Redwine Holdings)
up to an aggregate amount of $5,000,000 for all of such loans or advances,"
C. Effective as of the Effective Date, Section 9.16 is amended by
including the following sub-clauses (d) and (e) at the conclusion of such
section:
"(d) Company or any Subsidiary may make loans or advances to Arkoma Holding
or Summer Holding (either directly or indirectly through Redwine Holdings)
up to an aggregate amount of $5,000,000 for all of such loans or advances,
and (e) in addition to the loans and advances permitted in sub-clauses (c)
and (d) above, but if and only to the extent that Redwine Holdings, Summer
Holding, Spring Holding and/or Arkoma Holding is then wholly-owned by
Company or a Subsidiary, Company or a Subsidiary may make loans or advances
to either of such Persons that is so wholly-owned if (i) the proceeds of
such loans or advances are used by such Persons to repay Indebtedness of
such Persons to its bank lenders, (ii) the source of such proceeds loaned
or advanced derive from Company's public offering of its Capital Stock, HGT
Units and/or TPT Units or the sale of Mineral Properties and (iii) such
proceeds may be used to make such loans or advances to such Persons
according to Section 8.23."
2.22. Amendment to Section 9.21.
-------------------------
A. Effective as of the Effective Date, the term "Proposed Royalty
Trust" as it appears in Section 9.21 of the Loan Agreement is deleted and
the term "Texas Permian Royalty Trust" is substituted therefor.
B. Effective as of the Effective Date, the date "December 31, 1998"
as it appears in sub-clause (iii) of Section 9.21 of the Loan Agreement is
deleted and the date "June 30, 2000" is substituted therefor.
2.23. Amendment to Section 10.04. Effective as of the Effective Date, the
--------------------------
phrase "Proposed Royalty Trust" as it appears in Section 10.04 of the Loan
Agreement is deleted and the phrase "Texas Permian Royalty Trust" is substituted
therefor.
ARTICLE III
Condition Precedent
-------------------
3.01. Counterparts; Conditions to Effectiveness. This instrument shall
-----------------------------------------
become effective (and the Loan Agreement shall be amended with the amendments
referred to herein) as
12
<PAGE>
of the Effective Date when Administrative Agent shall have received a duly
executed counterpart hereof signed by Company and Majority Banks (or, in the
case of any Bank included within Majority Banks as to which an executed
counterpart shall not have been received, Administrative Agent shall have
received telegraphic, telex or other written confirmation from such party of
execution of a counterpart hereof by such Bank).
3.02. Amendment Fee. Upon Administrative Agent's receipt of duly executed
-------------
counterparts hereof signed by Company and Majority Banks, Company shall pay to
Administrative Agent a fee in the amount derived by multiplying (i) an amount
that is equal to 0.125%) of the Commitment amount in effect as of the Effective
Date by (ii) the cumulative Percentage of all Banks that sign a counterpart of
this Amendment. Administrative Agent shall distribute such fee to only those
Banks that sign a counterpart of this Amendment, with each such Bank's pro rata
share of such fee being its Percentage of the fee as determined according to
this Section 3.02. The fee payable under this Section 3.02 shall be paid by
Company to Administrative Agent within three (3) Business Days after Company's
receipt of Administrative Agent's written request or invoice for same.
ARTICLE IV
Ratifications, Representations and Warranties
---------------------------------------------
4.01. Ratifications. The terms and provisions set forth herein shall
-------------
modify and supersede all inconsistent terms and provisions set forth in the Loan
Agreement immediately before giving effect hereto and the other Loan Papers,
and, except as expressly modified, amended, and superseded herein, the terms and
provisions of the Loan Agreement and the other Loan Papers are ratified and
confirmed and shall continue in full force and effect. Company and Banks agree
that the Loan Agreement, as amended hereby, and the other Loan Papers shall
continue to be legal, valid, binding and enforceable in accordance with their
respective terms.
4.02. Representations, Warranties and Agreements. Company hereby
------------------------------------------
represents and warrants to Banks that (a) the execution, delivery and
performance of the Loan Agreement as amended hereby has been authorized by all
requisite corporate action on the part of Company and will not violate the
Articles/Certificate of Incorporation or Bylaws of Company; (b) the
representations and warranties contained in the Loan Agreement, as amended
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.
4.03. Representations and Warranties Concerning Investments in Arkoma
---------------------------------------------------------------
Holding and Spring Holding. Company hereby represents and warrants to Banks
- ---------------------------
that neither Summer Holding's acquisition of the Capital Stock of Arkoma Holding
nor Company's nor any Subsidiary's subsequent acquisition of any additional
equity interests in Summer Holding or Redwine Holdings or the Capital Stock of
Spring Holding or Arkoma Holding will cause Company or any Subsidiary (a) to
incur, assume or otherwise become liable for any Indebtedness of Summer
Holding, Arkoma Holding, Redwine Holdings, any of the Spring
13
<PAGE>
Companies or any other Person or (b) to become responsible or liable for any
presently existing breach or violation, in any material respect, of any
Environmental Laws applicable to the assets of any of the Spring Companies or
Arkoma Holding.
ARTICLE V
Miscellaneous Provisions
------------------------
5.01. Reference to Loan Agreement. The other Loan Papers, and any
---------------------------
and all other agreements, documents or instruments now or hereafter executed and
delivered pursuant to the terms hereof or pursuant to the terms of the Loan
Agreement, as amended 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.
5.02. Expenses of Agents. As provided in the Loan Agreement, Company
------------------
agrees to pay on demand all reasonable costs and expenses incurred by Agents in
connection with the preparation, negotiation and execution of this 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.
5.03. Counterparts. This instrument may be executed in one or more
------------
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
5.04. Headings. The headings, captions, and arrangements used herein
--------
are for convenience only and shall not affect the interpretation of this
instrument.
5.05. Applicable Law. THE LOAN AGREEMENT AS AMENDED HEREBY 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.
5.06. Final Agreement. THE LOAN AGREEMENT AS AMENDED HEREBY AND THE
---------------
OTHER LOAN PAPERS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF
THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE EFFECTIVE DATE THIS
AMENDMENT IS EXECUTED. THE LOAN AGREEMENT AS AMENDED HEREBY AND THE OTHER LOAN
PAPERS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION,
WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THE LOAN AGREEMENT OR THE OTHER
LOANS PAPERS SHALL BE
14
<PAGE>
MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY COMPANY AND EITHER BANKS OR
MAJORITY BANKS, AS PROVIDED IN THE LOAN AGREEMENT.
IN WITNESS WHEREOF, this Amendment has been executed in multiple
originals and is effective as of the date first above-written.
[SIGNATURE PAGES TO FOLLOW]
15
<PAGE>
COMPANY:
-------
CROSS TIMBERS OIL COMPANY,
a Delaware corporation
By: /S/ JOHN O'REAR
-----------------------------------------
John O'Rear, Vice President and Treasurer
BANKS:
-----
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /S/ JOHN KOWALCZUK
-----------------------------------------
Name: John Kowalczuk
-----------------------------------------
Title: Vice President
-----------------------------------------
BANK OF AMERICA, N.A.
By: /S/ J. SCOTT FOWLER
----------------------------------------
J. Scott Fowler, Managing Director
CHASE BANK OF TEXAS, N.A.
By: /S/ DALE HURD
-----------------------------------------
Dale Hurd, Managing Director
BANKBOSTON, N.A.
By: /S/ GEORGE W. PASSELA
-----------------------------------------
Name: George W. Passela
-----------------------------------------
Title: Managing Director
-----------------------------------------
WELLS FARGO BANK (TEXAS), N.A.
By: /S/ CHARLES D. KIRKHAM
---------------------------------------
Charles D. Kirkham, Vice President
16
<PAGE>
FROST NATIONAL BANK, as the surviving
bank by merger of Overton Bank and Trust, N.A.,
effective May 29, 1998
By: /S/ W.H. ADAMS, III
--------------------------------------
W.H. (Bill) Adams, III, Senior Vice
President
ABN-AMRO BANK N.V.
By: /S/ JAMIE A. CONN
--------------------------------------
Name: Jamie A. Conn
--------------------------------------
Title: Vice President
--------------------------------------
By: /S/ ROBERT J. CUNNINGHAM
--------------------------------------
Name: Robert J. Cunningham
--------------------------------------
Title: Group Vice President
--------------------------------------
BANK OF MONTREAL
By: /S/ MELISSA A. BAUMAN
--------------------------------------
Name: Melissa A. Bauman
--------------------------------------
Title: Director, U.S., Corporate Banking
--------------------------------------
THE BANK OF NEW YORK
By: /S/ RAYMOND J. PALMER
--------------------------------------
Name: Raymond J. Palmer
--------------------------------------
Title: Vice President
--------------------------------------
PARIBAS
By: /S/ DOUG LIFTMAN
--------------------------------------
Name: Doug Liftman
--------------------------------------
Title: Director
--------------------------------------
By: /S/ BRIAN MALONE
--------------------------------------
Name: Brian Malone
--------------------------------------
Title: Director
--------------------------------------
17
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By: /S/ PHILIPPE SOUSTRA
--------------------------------------
Name: Philippe Soustra
--------------------------------------
Title: Senior Vice President
--------------------------------------
FIRST UNION NATIONAL BANK
By: /S/ ROBERT R. WETTEROFF
--------------------------------------
Name: Robert R. Wetteroff
--------------------------------------
Title: Senior Vice President
--------------------------------------
BANK ONE, TEXAS, N.A.
By: /S/ W. MARK CRANMER
--------------------------------------
Name: W. Mark Cranmer
--------------------------------------
Title: Vice President
--------------------------------------
NATEXIS Banque
By: /S/ TIMOTHY L. POLVADO
--------------------------------------
Timothy L. Polvado, Vice President
By: /S/ ERIC DITGES
--------------------------------------
Eric Ditges, Assistant Vice President
THE BANK OF NOVA SCOTIA
By: /S/ F.C.H. ASHBY
--------------------------------------
Name: F.C. H. Ashby
--------------------------------------
Title: Senior Manager Loan Operations
--------------------------------------
COMERICA BANK-TEXAS
By: /S/ DAIVD L. MONTGOMERY
--------------------------------------
David L. Montgomery, Vice President
18
<PAGE>
EXHIBIT 15.1
Cross Timbers Oil Company:
We are aware that Cross Timbers Oil Company has incorporated by reference in its
Registration Statements on Form S-8 (Nos. 33-64274, 33-65238, 33-81766, 333-
35229, 333-36569, 333-68775, 333-69977 and 333-81849), on Form S-3 (No. 333-
46909) of Cross Timbers Oil Company, on Form S-3 (No. 333-56983) of Cross
Timbers Oil Company and Cross Timbers Royalty Trust, and on Form S-3 of Cross
Timbers Oil Company and Form S-1 of Texas Permian Trust (No. 333-85777) its Form
10-Q for the quarter ended September 30, 1999, which includes our report dated
October 28, 1999, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
November 15, 1999
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