-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IBtBNh1nktPyboSK4fIOXU5Q7aadOU0SOG+d4WuPx8qY39AlIPvCWvait2c0p3OZ f3ZlugeEY31Nn/Q48GiKBA== 0000930661-00-000836.txt : 20000331 0000930661-00-000836.hdr.sgml : 20000331 ACCESSION NUMBER: 0000930661-00-000836 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROSS TIMBERS OIL CO CENTRAL INDEX KEY: 0000868809 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752347769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10662 FILM NUMBER: 588683 BUSINESS ADDRESS: STREET 1: 810 HOUSTON ST STREET 2: STE 2000 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8178702800 MAIL ADDRESS: STREET 1: 810 HOUSTON STREET STREET 2: STE 2000 CITY: FORT WORTH STATE: TX ZIP: 76102 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 1999 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ----------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 1-10662 ------- Cross Timbers Oil Company (Exact name of registrant as specified in its charter) Delaware 75-2347769 810 Houston Street, Suite 2000, Fort Worth, Texas 76102 ----------------------------- ---------------- ------------------------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer (Address of principal executive offices) (Zip Code) incorporation or organization) Identification No.)
Registrant's telephone number, including area code (817) 870-2800 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - --------------------------------- ----------------------------------------- Common stock, $.01 par value, New York Stock Exchange including preferred stock purchase rights Series A convertible preferred New York Stock Exchange stock, $.01 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to be the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ Aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 1, 2000 was approximately $381 million Number of Shares of Common Stock outstanding as of March 1, 2000 - 48,139,999 DOCUMENTS INCORPORATED BY REFERENCE (To The Extent Indicated Herein) Part III of this Report is incorporated by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the Commission no later than April 29, 2000. ================================================================================ CROSS TIMBERS OIL COMPANY 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Item Page ---- ---- Part I 1. and 2. Business and Properties................................................. 1 3. Legal Proceedings....................................................... 16 4. Submission of Matters to a Vote of Security Holders..................... 16 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters... 17 6. Selected Financial Data................................................. 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 20 7A. Quantitative and Qualitative Disclosures about Market Risk.............. 28 8. Financial Statements and Supplementary Data............................. 30 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 30 Part III 10. Directors and Executive Officers of the Registrant...................... 30 11. Executive Compensation.................................................. 30 12. Security Ownership of Certain Beneficial Owners and Management.......... 30 13. Certain Relationships and Related Transactions.......................... 30 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 31
PART I Items 1. and 2. Business and Properties General Cross Timbers Oil Company and its subsidiaries ("the Company") are engaged in the acquisition, development, exploitation and exploration of producing oil and gas properties, and in the production, processing, marketing and transportation of oil and natural gas. The Company has grown primarily through acquisitions of proved oil and gas reserves, followed by development and exploitation activities and strategic acquisitions of additional interests in or near such acquired properties. The Company's proved reserves are principally located in relatively long-lived fields with well-established production histories concentrated in western Oklahoma, the East Texas Basin, the Permian Basin of West Texas and New Mexico, the Arkoma Basin of Arkansas and Oklahoma, the Hugoton Field of Oklahoma and Kansas, the San Juan Basin of northwestern New Mexico, the Green River Basin of Wyoming and the Middle Ground Shoal Field of Alaska's Cook Inlet. The Company's estimated proved reserves at December 31, 1999 were 61.6 million barrels ("Bbls") of oil, 1.5 trillion cubic feet ("Tcf") of natural gas and 17.9 million Bbls of natural gas liquids, based on December 31, 1999 prices of $24.17 per Bbl for oil, $2.20 per thousand cubic feet ("Mcf") for gas and $13.83 per Bbl for natural gas liquids. Approximately 79% of December 31, 1999 proved reserves, computed on a gas energy equivalent ("Mcfe") basis, were proved developed reserves. Increased proved reserves during 1999 were primarily the result of predominantly gas-producing property acquisitions and development and exploitation activities, partially offset by production and property sales, including the sale of Hugoton Royalty Trust units. During 1999, the Company's daily average production was 14,006 Bbls of oil, 288,000 Mcf of gas and 3,631 Bbls of natural gas liquids. Fourth quarter 1999 daily average production was 13,238 Bbls of oil, 332,722 Mcf of gas and 4,382 Bbls of natural gas liquids. The Company's properties have relatively long reserve lives and highly predictable well production profiles. Based on December 31, 1999 proved reserves and projected 2000 production, the average reserve-to-production index of the Company's proved reserves is 13.6 years. In general, the Company's properties have extensive production histories and production enhancement opportunities. While the properties are geographically diversified, the major producing fields are concentrated within core areas, allowing for substantial economies of scale in production and cost-effective application of reservoir management techniques gained from prior operations. As of December 31, 1999, the Company owned interests in 7,209 gross (3,668.3 net) wells and operated wells representing 89% of the present value of cash flows before income taxes (discounted at 10%) from estimated proved reserves. The high proportion of operated properties allows the Company to control expenses, capital allocation and the timing of development and exploitation activities in its fields. This also allows the Company to reduce production costs on acquired properties. The Company has generated a substantial inventory of approximately 1,300 potential development drilling locations within its existing properties (of which 692 have been attributed proved undeveloped reserves), to support future net reserve additions. The Company's drilling plans are dependent upon product prices. The Company employs a disciplined acquisition program refined by senior management to augment its core properties and expand its reserve base. Its engineers and geologists use their expertise and experience gained through the management of existing core properties to target properties to be acquired with similar geological and reservoir characteristics. The Company operates gas gathering systems in Major County, Oklahoma, East Texas, the Arkoma Basin of Arkansas and Oklahoma and the Hugoton Field of Kansas and Oklahoma. The Company also operates a gas processing plant in the Hugoton Field. The Company's gas gathering and processing operations are only in areas where the Company has production and are considered activities which add value to the Company's natural gas production and sales operation. Most of the Company's production is sold at current market prices. The Company also markets its oil and gas, including sales of gas under forward sales contracts and use of futures contracts and other price risk management instruments to hedge pricing risks. See Part II, Item 7A. The Company markets its gas production and the gas output 1 of its gathering and processing systems. A large portion of natural gas is processed and the resultant natural gas liquids are marketed by unaffiliated third parties. History of the Company The Company was incorporated in Delaware in 1990 to ultimately acquire the business and properties of predecessor entities that were created from 1986 through 1989. Cross Timbers Oil Company completed its initial public offering of common stock in May 1993. During 1991, predecessors of the Company formed Cross Timbers Royalty Trust by conveying a 90% net profits interest in substantially all of the royalty and overriding royalty interests that the Company's predecessors then owned in Texas, New Mexico and Oklahoma, and a 75% net profits interests in seven nonoperated working interest properties in Texas and Oklahoma. Cross Timbers Royalty Trust units are listed on the New York Stock Exchange under the symbol "CRT." From 1996 to 1998, the Company purchased 1,360,000, or 22.7%, of the outstanding units. The Board of Directors has authorized the purchase of up to two million, or 33%, of the outstanding units. In June 1998, the Company and Cross Timbers Royalty Trust filed a registration statement with the Securities and Exchange Commission ("Commission") to register the Company's 1,360,000 units for sale in a public offering. The filing of the registration statement was made in anticipation of improving commodity prices and related market conditions for oil and gas equities. In December 1998, the Company formed the Hugoton Royalty Trust by conveying an 80% net profits interest in principally gas-producing operated working interests 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. The Company sold 17,004,000 units in 1999. Hugoton Royalty Trust units are listed on the New York Stock Exchange under the symbol "HGT." The Company planned 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 and filed a registration statement with the Commission in August 1999 to sell 40% of the trust units. In January 2000, the Company announced that due to the depressed market for oil and gas equities it no longer planned to pursue the trust offering and would instead sell related properties representing approximately 40% of the total value of the planned trust. As of March 31, 2000, the Company will have sold properties in Texas and New Mexico for a total sales price of $68.3 million. The Company may proceed with the trust offering containing the remaining properties at a later date, depending on market conditions. Current Operating Environment The oil and gas industry is affected by many factors that the Company generally cannot control. Crude oil prices are generally determined by global supply and demand. After sinking to a five-year low at the end of 1993, oil prices began a recovery and climbed to prices above $22 during fourth quarter 1996 and January 1997. Posted crude oil prices ranged from $17 to $20 during most of 1997, then declined to a $16 average in December 1997. Crude oil prices continued to decline throughout 1998, dropping to a West Texas Intermediate price of $8.00 per barrel in December 1998, the lowest level since 1978. After a weak first quarter, oil prices increased in 1999 because of production cuts by OPEC and other leading oil exporters, reduced inventories and anticipated increased demand. By November 1999, crude oil prices reached their highest levels since the 1990 Persian Gulf War and have remained at levels above $24 in first quarter 2000. Members of OPEC met on March 27, 2000 and agreed to increase production by 6.3%. Because of increased summer demand, increased production is not expected to substantially increase domestic inventories until fourth quarter 2000. Natural gas prices are influenced by North American supply and demand, which is often dependent upon weather conditions. Natural gas competes with alternative energy sources as a fuel for heating and the generation of electricity. Generally because of colder weather, storage concerns and U.S. economic growth, prices remained relatively high during most of 1996 and 1997, reaching their highest levels since 1985. Gas prices declined, however, in December 1997 and remained lower throughout 1998 and first quarter 1999, primarily because the winters of 1997-1998 and 1998-1999 were abnormally mild in the central and eastern U.S. Cooler spring weather and lower industry production levels strengthened gas prices in second quarter 1999. This trend continued into third quarter 1999 when 2 the NYMEX gas price rose above $3.00 per Mmbtu. Natural gas prices have remained volatile during the winter of 1999-2000 as a third consecutive warm winter reduced seasonal heating demand. In spite of a warm winter, natural gas inventories are expected to be substantially lower at the end of the 2000 withdrawal season than in 1999. Lower inventories of approximately 1 Tcf, compared with 1.3 Tcf in March 1999, are attributable to lower domestic productive capacity. Lower production, reduced inventories and increasing summer demand are expected to result in volatile natural gas prices averaging higher than 1999 levels. At March 15, 2000, the average NYMEX price for the following 12 months was $2.97 per Mmbtu. Business Strategy The primary components of the Company's business strategy are: - acquiring long-lived, operated oil and gas properties, - increasing production and reserves through aggressive management of operations and through development, exploitation and exploration activities, and - retaining management and technical staff that have substantial experience in the Company's core areas. Acquiring Long-Lived, Operated Properties. The Company seeks to acquire long-lived, operated producing properties that: - contain complex multiple-producing horizons with the potential for increases in reserves and production, - are in the Company's core operating areas or in areas with similar geologic and reservoir characteristics, and - present opportunities to reduce expenses, per Mcfe produced, through more efficient operations. The Company believes that the properties it acquires provide opportunities to increase production and reserves through the implementation of mechanical and operational improvements, workovers, behind-pipe completions, secondary recovery operations, new development wells and other development activities. The Company also seeks to acquire facilities related to gathering, processing, marketing and transporting oil and gas in areas where it owns reserves. Such facilities can enhance profitability, reduce gathering, processing, marketing and transportation costs, and provide marketing flexibility and access to additional markets. The Company's ability to successfully purchase properties is dependent upon, among other things, competition for such purchases and the availability of financing to supplement internally generated cash flow. Increasing Production and Reserves. A principal component of the Company's strategy is to increase production and reserves through aggressive management of operations and low-risk development. The Company believes that its principal properties possess geologic and reservoir characteristics that make them well suited for production increases through development and drilling programs. The Company has generated an inventory of approximately 1,300 potential drilling locations for this program. Additionally, the Company reviews operations and mechanical data on operated properties to determine if actions can be taken to reduce operating costs or increase production. Such actions include installing, repairing and upgrading lifting equipment, redesigning downhole equipment to improve production from different zones, modifying gathering and other surface facilities and conducting restimulations and recompletions. The Company may also initiate, upgrade or revise existing secondary recovery operations. Exploration Activities. During 2000, the Company plans to focus on exploration projects that are near currently owned productive fields and have the potential to add substantially to proved reserves and cash flow. The Company believes that it can prudently and successfully add growth potential through exploratory activities given improved technology, its experienced technical staff and its expanded base of operations. The Company has allocated approximately 5% of its $120 million 2000 development budget for exploration activities. 3 Experienced Management and Technical Staff. Most senior management and technical staff have worked together for over 20 years and have substantial experience in the Company's core operating areas. Bob R. Simpson and Steffen E. Palko, who were co-founders of the Company and its predecessors, were previously executive officers of Southland Royalty Company, one of the largest U.S. independent oil and gas producers prior to its acquisition by Burlington Northern, Inc. in 1985. Other Strategies. The Company may also acquire working interests in producing properties that it will not operate ("nonoperated interests") if such interests otherwise meet its acquisition criteria. The Company attempts to acquire nonoperated interests in fields operated by established oil companies if these fields represent a significant investment to the operator and are therefore more likely to be carefully managed by it. The Company may also acquire nonoperated interests with the intent of ultimately accumulating, through future acquisitions, sufficient interests to obtain the right to operate the properties. The Company attempts to acquire nonoperated interests where geologic conditions indicate the potential for undeveloped reserves that the operator will exploit. The Company also attempts to acquire a portion of its oil and gas reserves in the form of royalty interests. Royalty interests offer less exposure to operational liabilities because they do not participate in operating activities and do not bear production or development costs. However, royalty interests typically allow only limited influence on the operation or development of properties. Royalty Trusts. In December 1998, the Company created the Hugoton Royalty Trust and sold 42.5% of the trust to the public in April and May 1999. Sales of royalty trust units allow the Company to more efficiently capitalize its mature, lower growth properties. The Company's previously announced plans to create additional royalty trusts have been indefinitely postponed until the market for oil and gas equities improves. Business Goals. In August 1999, the Company announced strategic goals for 2000, including cash flow from operations of $4.00 per share, year-end proved reserves of 40 Mcfe per share and debt of 40 cents per Mcfe. These goals were based on NYMEX prices of $21 per Bbl of oil and $2.70 per Mcf of gas. For 1999, operating cash flow from operations before changes in operating assets and liabilities and exploration expense was $2.83 per share, while year-end proved reserves per share were 41 Mcfe and debt per Mcfe was $0.49. The Company plans to reduce debt with operating cash flow and proceeds from the sale of producing properties. The Company has budgeted $120 million for its 2000 development program, which is expected to be funded primarily by cash flow from operations. Exploration expenditures are expected to be approximately 5% of the 2000 budget. The total capital budget, including acquisitions, will be adjusted throughout 2000 depending on oil and gas prices to capitalize on opportunities offering the highest rates of return. In February 2000, the Board of Directors authorized the repurchase of 2.5 million shares of common stock, or approximately 5% of the Company's outstanding shares. These shares will be purchased from time to time in open market or negotiated transactions. As of March 27, 2000, 1.2 million shares remain to be purchased under this authorization. Acquisitions During 1995, the Company acquired predominantly gas-producing properties for a total cost of $131 million, and a gas processing plant and gathering facility for $29 million. The Santa Fe Acquisition, the largest of these acquisitions, closed in August 1995 and consisted of mostly operated producing properties, a gas processing plant and gathering system in the Hugoton Field of Kansas and Oklahoma. The 1995 acquisitions increased proved reserves by approximately 3 million Bbls of oil and 171 billion cubic feet ("Bcf") of natural gas. The gas gathering plant and gathering system was sold in March 1996 and is being leased by the Company. During 1996, the Company acquired predominantly gas-producing properties for a total cost of $106 million. The Enserch Acquisition, the largest of these acquisitions, closed in July 1996 at a cost of $39.4 million and primarily consisted of operated interests in the Green River Basin of southwestern Wyoming. In November 1996, the Company acquired additional interests in the Fontenelle Unit, the most significant property included in the Enserch Acquisition, at a cost of $12.5 million. In December 1996, the Company acquired primarily operated interests in gas-producing properties in the Ozona area of the Permian Basin of West Texas for $28.1 million. The Company sold these properties 4 for $43 million in March 2000. From July through December 1996, the Company acquired 955,800 units, or 16% of the publicly traded outstanding units, of Cross Timbers Royalty Trust, at a total cost of $12.8 million. The 1996 acquisitions increased proved reserves by approximately 1.6 million Bbls of oil and 153.4 Bcf of natural gas. During 1997, the Company acquired predominantly gas-producing properties for a total cost of $256 million. The Amoco Acquisition, the largest of these acquisitions, closed in December 1997 at an adjusted purchase price of $195 million, including five-year warrants to purchase 944,284 shares of the Company's common stock at a price of $15.20 per share. This acquisition consisted primarily of operated properties in the San Juan Basin of New Mexico. In May 1997, the Company acquired primarily gas-producing properties in Oklahoma, Kansas and Texas for an adjusted purchase price of $39 million. The Company also acquired an additional 370,500 units, or 6%, of the Cross Timbers Royalty Trust units at a cost of $5.4 million. The 1997 acquisitions increased proved reserves by approximately 3.2 million Bbls of oil, 248 Bcf of natural gas and 13.9 million Bbls of natural gas liquids. During 1998, the Company acquired oil and gas-producing properties for a total cost of $340 million. The East Texas Basin Acquisition was the largest of these acquisitions. The purchase closed in April 1998 at a price of $245 million which was reduced to $215 million by a $30 million production payment sold to EEX Corporation. In September 1998, the Company acquired oil-producing properties in the Middle Ground Shoal Field of Alaska's Cook Inlet in exchange for 1,921,850 shares of the Company's common stock along with certain price guarantees and a non-interest bearing note payable of $6 million, resulting in a total purchase price of $45 million. The Company also acquired primarily gas- producing properties in northwest Oklahoma and the San Juan Basin of New Mexico for an estimated purchase price of $31 million. The 1998 acquisitions increased reserves by approximately 16.3 million Bbls of oil and 311.3 Bcf of natural gas. In 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 a combination of cash and Cross Timbers' common stock totaling $85 million. The Company and Lehman each owned 50% of a limited liability company that acquired the common stock of Spring. In September 1999 the Company exercised its option to acquire Lehman's 50% interest in Spring for $44.3 million. This acquisition includes oil and gas properties located in the Arkoma Basin of Arkansas and Oklahoma with a purchase price of $235 million. After purchase accounting adjustments and other costs, the cost of the properties was $253 million. The Company also acquired, with Lehman as 50% owner, Arkoma Basin properties from affiliates of Ocean Energy, Inc. for $231 million. The Company plans to exercise its option to acquire Lehman's interest in the Ocean Energy Acquisition on March 31, 2000 for $111 million. The 1999 acquisitions, including Lehman's 50% interest in the Spring and Ocean Energy acquisitions, increased reserves by approximately 2.8 million Bbls of oil and 494.7 Bcf of natural gas. Many of the properties acquired from 1995 through 1998 in Kansas, Oklahoma and Wyoming are subject to the 80% net profits interest conveyed to Hugoton Royalty Trust. The Company sold 42.5% of its Hugoton Royalty Trust units in April and May 1999. 5 Significant Properties The following table summarizes proved reserves and discounted present value, before income tax, of proved reserves by the Company's major operating areas at December 31, 1999 (in thousands):
Proved Reserves ----------------------------------- Discounted Natural Gas Present Value Oil Gas Liquids before Income Tax of (Bbls) (Mcf) (Bbls) Proved Reserves ---------- --------- ----------- ---------------------- Permian Basin.................... 38,738 99,681 - $ 393,602 22.3% Arkoma Basin (a)................. 4 433,083 - 346,064 19.6% East Texas....................... 2,575 401,617 - 337,434 19.1% Hugoton Royalty Trust (b)........ 2,819 333,503 - 269,754 15.3% San Juan Basin................... 1,315 259,031 17,902 257,426 14.6% Alaska Cook Inlet................ 14,001 - - 126,309 7.1% Cross Timbers Royalty Trust (c).. 1,788 12,751 - 24,936 1.4% Other............................ 363 5,957 - 10,411 0.6% ---------- --------- ----------- ---------------------- Total............................ 61,603 1,545,623 17,902 $ 1,765,936 100.0% ========== ========= =========== ======================
(a) Includes 1,700 Bbls of oil and 111,814,000 Mcf of gas and discounted present value before income tax of $91,127,000 related to a 50% minority interest in the Ocean Energy Acquisition at December 31, 1999. The Company plans to purchase the 50% minority interest on March 31, 2000. (b) Includes 1,964,000 Bbls of oil and 232,429,000 Mcf of gas and discounted present value before income tax of $188,001,000 related to the Company's ownership of approximately 57% of Hugoton Royalty Trust units at December 31, 1999. (c) Includes 783,000 Bbls of oil and 8,162,000 Mcf of gas and discounted present value before income tax of $13,742,000 related to the Company's ownership of approximately 22% of Cross Timbers Royalty Trust units at December 31, 1999. Permian Basin Area Prentice Field. The Prentice Field is located in Terry and Yoakum Counties, Texas. In 1993 and 1994, the Company acquired its 91.5% working interest in the 178-well Prentice Northeast Unit in four separate transactions, resulting in the Company's assumption of operations of the unit effective March 1, 1994. The Company also owns an interest in 81 gross (2.0 net) nonoperated wells. Discovered in 1950, the Prentice Field produces from carbonate reservoirs in the Clear Fork and Glorieta formations at depths ranging from 6,000 to 7,000 feet. The Prentice Field has been separated into several waterflood units for secondary recovery operations. The Prentice Northeast Unit was formed in 1964 with waterflood operations commencing a year later. Development potential exists through infill drilling and improvement of waterflood efficiency. Tertiary recovery potential also exists through carbon dioxide flooding. During 1999, the Company drilled 8 gross (7.3 net) vertical wells and 1 gross (0.91 net) horizontal sidetrack in the Prentice Northeast Unit. At the end of 1999, four vertical wells were still being completed. During 2000, the Company may drill as many as 10 wells in this field. Ozona Area. The Company acquired interests in 1996 in the Henderson, Ozona, and Davidson Ranch fields located in Crockett County, Texas. The Company has interests in 125 gross (72.7 net) wells that it operates and 140 gross (28.5 net) wells operated by others. Most of these interests were sold in March 2000. University Block 9. The University Block 9 Field is located in Andrews County, Texas and was discovered in 1953. The Company owns interests in 60 gross (58.0 net) wells that it operates. Productive zones are of Wolfcamp, Pennsylvanian and Devonian age at 8,400, 8,700 and 10,400 feet, respectively. Development potential includes proper wellbore utilization, recompletions, infill drilling and improvement of waterflood efficiency. 6 This field was the Company's most active oil development area during 1999, where the Company drilled six wells, including three horizontal sidetrack wells. The Company also recompleted seven Devonian wells into the Pennsylvanian horizon. During 2000, the Company plans to drill up to 17 wells and to perform six recompletions. Arkoma Basin Area During 1999, the Company acquired interests in approximately 2,500 wells and a gas gathering system in the Arkoma Basin of Arkansas and Oklahoma. The Arkoma Basin, discovered in the 1920's, stretches from central Arkansas into eastern Oklahoma and is known for shallow production decline rates, multiple formations and complex geology. With these acquisitions, the Company controls 40% of Arkansas production from the Arkoma Basin. The acquired properties can be separated into three distinct areas, which are the Oklahoma Cromwell/Atoka trend, the Arkansas Fairway trend and the Arkansas Overthrust trend. The Oklahoma Cromwell/Atoka trend of eastern Oklahoma was originally developed in the 1970's targeting the Cromwell Sands and Atoka formations. The Arkansas Fairway trend is comprised of multiple sandstones at depths ranging from 2,500 to 7,500 feet in the Atoka and Morrow intervals. The Arkansas Overthrust trend is characterized by extremely complex geology and will require an ongoing process to develop the best exploitation opportunities. In the latter half of 1999, the Company drilled 14 wells (10 operated), completed 10 workovers and drilled a successful exploration well on the Fort Chaffe Prospect. The Company has identified 150 well locations and over 200 workover opportunities. The Company plans to drill 45 wells and perform 75 workovers in the Arkoma Basin during 2000. East Texas Area The Company acquired most of its producing properties in the East Texas area in April 1998. These properties are located in East Texas and northwestern Louisiana and produce primarily from the Travis Peak, Cotton Valley and Rodessa formations between 7,000 feet and 12,000 feet in eight major fields. Oil and gas were first discovered in the East Texas area in the 1930's. The Company owns an interest in 618 gross (594 net) wells which it operates and 39 gross (4.4 net) wells operated by others. The Company also owns the related gathering facilities. During 1999, the East Texas area was the Company's most active gas development area, where 31 gross (30.1 net) gas wells were drilled and 100 workovers were performed. The formations targeted were the Travis Peak, Cotton Valley and Bossier. The Company plans to continue to extensively develop this area, including drilling approximately 40 wells in 2000. Hugoton Royalty Trust A substantial portion of properties in the Mid-Continent area, the Hugoton area and the Green River Basin of the Rocky Mountain area are subject to an 80% net profits interest conveyed to the Hugoton Royalty Trust as of December 1998. The Company sold 42.5% of its Hugoton Royalty Trust units in April and May 1999. Mid-Continent Area The Company is one of the largest producers in the Ringwood, Northwest Okeene and Cheyenne Valley fields in Major County, Oklahoma. The Company operates 458 gross (400.9 net) wells and has an interest in 112 gross (31.3 net) wells operated by others. Oil and gas were first discovered in the Major County area in 1945. The fields in the Major County area are located in the Anadarko Basin and are characterized by oil and gas production from a variety of structural and stratigraphic traps. Productive zones range from 6,500 to 9,400 feet and include the Oswego, Red Fork, Inola, Chester, Manning, Mississippian, Hunton and Arbuckle formations. The Company develops the Major County area primarily through mechanical improvements, restimulations, recompletions to shallower zones and development drilling. During 1999, the Company participated in the drilling of 7 8 gross (6.1 net) wells in the northwestern portion of the County, targeting the Chester, Inola, Oswego and Red Fork formations. The Company has budgeted 13 drill wells in Major County for 2000. The Company operates a gathering system and pipeline in the Major County area. The gathering system collects gas from over 400 wells through 300 miles of pipeline in the Major County area. The gathering system has current throughput of approximately 20,000 Mcf per day, 70% of which is produced from Company-operated wells. Estimated capacity of the gathering system is 40,000 Mcf per day. Gas is delivered to a processing plant owned and operated by a third party, and then transmitted by a 26-mile Company-operated pipeline to connections with other pipelines. Hugoton Area The Hugoton Field, discovered in 1922, covers parts of Texas, Oklahoma and Kansas and is the largest gas field in North America. It is estimated that five million productive acres exist in the entire field. The Company owns an interest in 380 gross (356.5 net) wells that it operates and 76 gross (18.1 net) wells operated by others. Approximately 70% of the Company's Hugoton gas production is delivered to the Tyrone Plant, a gas processing plant operated by the Company. In May 1996, the Company completed the installation of a field compressor on the south end of the Tyrone gathering system. The Company also completed the installation and start-up of a residue compressor and 11.5 miles of high pressure residue pipeline during August 1996. The installation of these facilities allows the Company to operate the Tyrone Plant more efficiently and allows access to three additional interstate pipelines. During 1998, the Company completed the acquisition of approximately 70 miles of low pressure gathering lines, increasing production by 3,500 Mcf per day. During 1999, the Company installed three lateral compressors that lowered the wellhead pressure in various areas of the field. While much of the Kansas portion of the Hugoton Field has been infill drilled on 320-acre spacing, the Company believes that there are up to 35 additional potential infill drilling locations. In June 1999, Oklahoma regulations were amended to allow increased drilling density in the Oklahoma portion which was previously drilled on 640-acre spacing. The Company believes it has approximately 200 potential infill drilling locations in Oklahoma. During 1999, the Company drilled 5 gross (4.0 net) wells to the Chester, Council Grove and Oswego formations. The Company plans to drill three wells during 2000. Green River Basin The Green River Basin is located in southwestern Wyoming. The Company has interests in 175 gross (170.5 net) wells that it operates and 47 gross (5.2 net) wells operated by others in the Fontenelle field. Gas production began in the Fontenelle area in the early 1970's. The producing reservoirs are the Cretaceous Frontier and Dakota sandstones at depths ranging from 7,500 to 10,000 feet. Development potential for the fields in this area include deepening and opening new producing zones in existing wells, drilling new wells and adding compression to lower line pressures. During 1999, the Company drilled seven gross (6.9 net) wells in the Fontenelle Unit and plans to drill five wells during 2000. In 1997, the Company installed additional field compression to lower overall field operating pressures and to improve overall field performance. The Company also completed an interconnect to another pipeline in the southeastern part of the Fontenelle Field that added an additional market for the gas. San Juan Basin Area The San Juan Basin of northwestern New Mexico and southwestern Colorado contains the largest reserves of natural gas in the Rocky Mountains and, within North America, is second in size only to the Hugoton Field. The Company acquired most of its interests in the San Juan Basin in December 1997 from a subsidiary of Amoco Corporation. The Company owns an interest in 653 gross (521.8 net) wells that it operates and 338 gross (89.1 net) wells operated by others. Of these wells, 77 gross (67.2 net) operated wells and 4 gross (0.2 net) nonoperated wells are dual completions. 8 During 1999, the Company participated in the drilling of 19 gross (15.8 net) wells, completed 31 workovers and installed over 74 wellhead compressors. During 2000, the Company plans to drill 42 wells and perform 30 workovers. The Company also plans to continue to install wellhead compressors at approximately the same level as 1999. Alaska Cook Inlet Area In September 1998, the Company acquired a 100% working interest in two State of Alaska leases and the offshore installations located in the Middle Ground Shoal Field of the Cook Inlet. The properties include two operated production platforms set in 70 feet of water about seven miles offshore and a 50% interest in certain operated production pipelines and onshore processing facilities. Oil was discovered in the Cook Inlet in 1966. Production from the 29 operated wells is primarily from multiple zones within the Miocene-Oligocene- aged Tyonek formation between 7,300 feet and 10,000 feet subsea. Six workovers were performed in 1999 and drilling rigs on both platforms were refurbished in preparation for continued development in 2000. The Company also conducted engineering and geologic studies of the Cook Inlet during 1999 and plans to drill three wells in 2000. Reserves The following are definitions adopted by the Commission and the Financial Accounting Standards Board which are applicable to terms used in the following discussion of oil and natural gas reserves: Proved reserves- Estimated quantities of crude oil, natural gas and natural gas liquids which, upon analysis of geologic and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. Proved developed reserves- Proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves- Proved reserves which are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. Estimated future net revenues- Also referred to herein as "estimated future net cash flows." Computational result of applying current prices of oil and gas (with consideration of price changes only to the extent provided by existing contractual arrangements) to estimated future production from proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves. Present value of estimated future net cash flows- Also referred to herein as "standardized measure of discounted future net cash flows" or "standardized measure." Computational result of discounting estimated future net revenues at a rate of 10% annually. 9 The following are estimated quantities of proved reserves and cash flows therefrom as of December 31, 1999, 1998 and 1997:
December 31 ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- (in thousands) Proved developed: Oil (Bbls)......................... 48,010 42,876 33,835 Gas (Mcf).......................... 1,225,014 968,495 677,710 Natural gas liquids (Bbls)......... 13,781 14,000 11,494 Proved undeveloped: Oil (Bbls)......................... 13,593 11,634 14,019 Gas (Mcf).......................... 320,609 240,729 138,065 Natural gas liquids (Bbls)......... 4,121 3,174 2,316 Total proved: Oil (Bbls)......................... 61,603 54,510 47,854 Gas (Mcf).......................... 1,545,623 1,209,224 815,775 Natural gas liquids (Bbls)......... 17,902 17,174 13,810 Estimated future net cash flows: Before income tax.................. $3,269,443 $1,677,426 $1,484,542 After income tax................... $2,550,551 $1,446,177 $1,193,167 Present value of estimated future net cash flows, discounted at 10%: Before income tax.................. $1,765,936 $ 908,606 $ 782,322 After income tax................... $1,396,940 $ 808,403 $ 642,109
Miller and Lents, Ltd. ("Miller and Lents"), an independent petroleum engineering firm, prepared the estimates of the Company's proved reserves and the future net cash flow (and present value thereof) attributable to proved reserves at December 31, 1999, 1998 and 1997. As prescribed by the Commission, such proved reserves were estimated using oil and gas prices and production and development costs as of December 31 of each such year, without escalation. See Note 19 to Consolidated Financial Statements for additional information regarding estimated proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation thereof. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as change in product prices, may justify revision of such estimates. Accordingly, oil and gas quantities ultimately recovered will vary from reserve estimates. During 1999, the Company filed estimates of oil and gas reserves as of December 31, 1998 with the U.S. Department of Energy on Form EIA-23. These estimates are consistent with the reserve data reported for the year ended December 31, 1998 in Note 19 to Consolidated Financial Statements, with the exception that Form EIA-23 includes only reserves from properties operated by the Company. Exploration and Production Data For the following data, "gross" refers to the total wells or acres in which the Company owns a working interest and "net" refers to gross wells or acres multiplied by the percentage working interest owned by the Company. Although many of the Company's wells produce both oil and gas, a well is categorized as an oil well or a gas well based upon the ratio of oil to gas production. 10 Producing Wells The following table summarizes the Company's producing wells as of December 31, 1999, all of which are located in the United States:
Operated Wells Nonoperated Wells Total (a) ------------------------ ------------------------ ------------------------ Gross Net Gross Net Gross Net ----------- ----------- ----------- ----------- ----------- ----------- Oil.... 550 507.0 1,904 155.2 2,454 662.2 Gas.... 3,254 2,695.6 1,501 310.5 4,755 3,006.1 ----------- ----------- ----------- ----------- ----------- ----------- Total.. 3,804 3,202.6 3,405 465.7 7,209 3,668.3 =========== =========== =========== =========== =========== ===========
(a) One gross (0.5 net) oil wells and 334 gross (200.1 net) gas wells are dual completions. Drilling Activity The following table summarizes the number of development wells drilled by the Company during the years indicated. As of December 31, 1999, the Company was in the process of drilling 37 gross (22.2 net) wells.
Year Ended December 31 ---------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Gross Net Gross Net Gross Net ----- ----- ----- ----- ----- ----- Development wells: Completed as- Oil wells................. 18 6.7 53 14.1 82 53.4 Gas wells................. 128 91.2 139 63.4 119 85.9 Non-productive............. 7 3.5 1 - 5 3.2 --- ----- ---- ---- --- ----- Total...................... 153 101.4 193 77.5 206 142.5 --- ----- ---- ---- --- ----- Exploratory wells: Completed as- Gas wells................. 1 1.0 3 3.0 2 0.6 Non-productive............. - - 2 1.0 1 0.1 --- ----- ---- ---- --- ----- Total...................... 1 1.0 5 4.0 3 0.7 --- ----- ---- ---- --- ----- Total (a)................... 154 102.4 198 81.5 209 143.2 === ===== ==== ==== === =====
(a) Included in totals are 44 gross (4.1 net) wells in 1999, 118 gross (14.6 net) in 1998 and 57 gross (6.9 net) wells in 1997 drilled on nonoperated interests. 11 Acreage The following table summarizes developed and undeveloped leasehold acreage in which the Company owns a working interest as of December 31, 1999. Excluded from this summary is acreage in which the Company's interest is limited to royalty, overriding royalty and other similar interests.
Developed (a)(b) Undeveloped ------------------ ------------------- Gross Net Gross Net --------- ------- --------- ------- Arkansas.... 517,680 224,338 20,495 15,678 Oklahoma.... 464,817 324,846 12,824 5,529 Texas....... 221,078 137,466 37,427 22,455 New Mexico.. 206,345 149,215 2,447 869 Kansas...... 66,670 58,169 - - Wyoming..... 54,974 35,090 2,211 1,531 Other....... 41,658 23,203 9,840 6,964 --------- ------- --------- ------- Total (c)... 1,573,222 952,327 85,244 53,026 ========= ======= ========= =======
(a) Developed acres are acres spaced or assignable to productive wells. (b) Certain leasehold acreage in Oklahoma and Texas is subject to a 75% net profits interest conveyed to the Cross Timbers Royalty Trust, and in Oklahoma, Kansas and Wyoming is subject to an 80% net profits interest conveyed to the Hugoton Royalty Trust. (c) Includes developed and undeveloped acreage in Arkansas and Oklahoma related to a 50% minority interest in the Ocean Energy Acquisition at December 31, 1999. The Company plans to acquire the 50% minority interest on March 31, 2000. Oil and Gas Sales Prices and Production Costs The following table shows the average sales prices per Bbl of oil (including condensate), Mcf of gas and per Bbl of natural gas liquids produced and the production costs and taxes, transportation and other per thousand cubic feet of gas equivalent ("Mcfe," computed on an energy equivalent basis of six Mcf to one Bbl):
Year Ended December 31 ---------------------- 1999 1998 1997 ------ ------ ------ Sales prices: Oil (per Bbl)........................... $16.94 $12.21 $18.90 Gas (per Mcf)........................... $ 2.13 $ 2.07 $ 2.20 Natural gas liquids (per Bbl)........... $11.80 $ 7.62 $ 9.66 Production costs per Mcfe................. $ 0.53 $ 0.53 $ 0.59 Taxes, transportation and other per Mcfe.. $ 0.23 $ 0.25 $ 0.22
Delivery Commitments The Company contracted to sell to a single purchaser approximately 11,650 Mcf of gas per day through May 2000 and 21,650 Mcf of gas per day from June 2000 through July 2005. Deliveries under this contract are generally in Oklahoma. The Company has committed to sell all gas production from certain properties in the East Texas Basin Acquisition to EEX Corporation at market prices through the earlier of December 31, 2001, or until a total of approximately 34.3 Bcf (27.8 Bcf net to the Company's interest) of gas has been delivered. Based on current production, this sales commitment is approximately 24,700 Mcf (20,000 Mcf net to the Company's interest) per day. 12 Under the terms of its amended purchase and sale agreement with affiliates of Shell Oil Company ("Shell") for the Cook Inlet Acquisition, the Company has committed to sell to Shell the following minimum daily natural gas volumes: 40,000 Mcf in 2000, 37,500 Mcf in 2001, 36,500 Mcf in 2002 and 35,000 Mcf in 2003. Delivery of 20,000 Mcf per day of committed sales volumes is in the San Juan Basin, and delivery of the remaining volumes is in the East Texas Basin. As a part of the Ocean Energy Acquisition, the Company assumed a commitment to sell 6,800 Mcf of gas per day through April 2003 at a price of $0.53 per Mcf. Delivery of the committed sales volumes is in Arkansas. The Company's production and reserves are adequate to meet the above sales commitments. Competition and Markets The Company faces competition from other oil and gas companies in all aspects of its business, including acquisition of producing properties and oil and gas leases, marketing of oil and gas, and obtaining goods, services and labor. Many of its competitors have substantially larger financial and other resources. Factors that affect the Company's ability to acquire producing properties include available funds, available information about the property and the Company's standards established for minimum projected return on investment. Gathering systems are the only practical method for the intermediate transportation of natural gas. Therefore, competition for natural gas delivery is presented by other pipelines and gas gathering systems. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. Because of the long-lived, high margin nature of the Company's oil and gas reserves and management's experience and expertise in exploiting these reserves, management believes that it is effective in competing in the market. The Company's ability to market oil and gas depends on many factors beyond its control, including the extent of domestic production and imports of oil and gas, the proximity of the Company's gas production to pipelines, the available capacity in such pipelines, the demand for oil and gas, the effects of weather, and the effects of state and federal regulation. The Company cannot assure that it will always be able to market all of its production or obtain favorable prices. The Company, however, does not currently believe that the loss of any of its oil or gas purchasers would have a material adverse effect on its operations. Decreases in oil and gas prices have had and could have in the future an adverse effect on the Company's acquisition and development programs, proved reserves, revenues, profitability, cash flow and dividends. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "General - Product Prices." Federal and State Regulations There have been, and continue to be, numerous federal and state laws and regulations governing the oil and gas industry that are often changed in response to the current political or economic environment. Compliance with this regulatory burden is often difficult and costly and may carry substantial penalties for noncompliance. The following are some specific regulations that may affect the Company. The Company cannot predict the impact of these or future legislative or regulatory initiatives. Federal Regulation of Natural Gas The interstate transportation and sale for resale of natural gas is subject to federal regulation, including transportation rates charged and various other matters, by the Federal Energy Regulatory Commission ("FERC"). The Company's gathering systems and 26-mile pipeline in Major County, Oklahoma have been declared exempt from FERC jurisdiction. Other gathering systems of the Company are not subject to regulation. Federal wellhead price controls on all domestic gas were terminated on January 1, 1993. The Company cannot predict the impact of government regulation on any natural gas facilities. In 1992, FERC issued Orders Nos. 636 and 636-A, requiring operators of pipelines to unbundle transportation services from sales services and allow customers to pay for only the services they require, regardless of whether the customer purchases gas from such pipelines or from other suppliers. The United States Court of Appeals upheld the unbundling provisions and other components of FERC's orders but remanded several issues to FERC for further 13 explanation. On February 27, 1997, FERC issued Order No. 636-C, addressing the court's concern. Petitions for rehearing on Order No. 636-C were denied on May 28, 1998. FERC's order remains subject to judicial review and may be changed as a result of that review. Although FERC's regulations should generally facilitate the transportation of gas produced from the Company's properties and the direct access to end-user markets, the impact of these regulations on marketing the Company's production or on its gas transportation business cannot be predicted. The Company, however, does not believe that it will be affected any differently than other natural gas producers and marketers with which it competes. Federal Regulation of Oil Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at market prices. The net price received from the sale of these products is affected by market transportation costs. A significant part of the Company's oil production is transported by pipeline. The Energy Policy Act of 1992 required FERC to adopt a simplified ratemaking methodology for interstate oil pipelines. In 1993 and 1994, FERC issued Orders Nos. 561 and 561- A, adopting rules that establish new rate methods for such pipelines. Under the new rules, effective January 1, 1995, interstate oil pipelines can change rates based on an inflation index, though other rate mechanisms may be used in specific circumstances. The United States Court of Appeals upheld FERC's orders in 1996. These rules have had little, if any, effect on the Company with respect to the cost of moving oil to market. State Regulation Oil and gas operations are subject to various types of regulation at the state and local levels. Such regulation includes requirements for drilling permits, the method of developing new fields, the spacing and operations of wells and waste prevention. The production rate may be regulated and the maximum daily production allowable from oil and gas wells may be established on a market demand or conservation basis. These regulations may limit production by well and the number of wells or locations that can be drilled. The Company may become a party to agreements relating to the construction or operations of pipeline systems for the transportation of natural gas. To the extent that such gas is produced, transported and consumed wholly within one state, such operations may, in certain instances, be subject to the state's administrative authority charged with regulating pipelines. The rates that can be charged for gas, the transportation of gas, and the construction and operation of such pipelines would be subject to the regulations governing such matters. Certain states have recently adopted regulations with respect to gathering systems, and other states are considering regulations with respect to gathering systems. New regulations passed have not had a material effect on the operations of the Company's gathering systems, but the Company cannot predict whether any further rules will be adopted or, if adopted, the effect these rules may have on its gathering systems. Federal, State or Indian Leases The Company's operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, including nondiscrimination statutes. Such operations must be conducted pursuant to certain on-site security regulations and other permits and authorizations issued by the Bureau of Land Management, Minerals Management Service and other agencies. Environmental Regulations Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact the Company's operations and costs. Management believes that the Company is in substantial compliance with applicable environmental laws and regulations. To date, the Company has not expended any material amounts to comply with such regulations, and management does not currently anticipate that future compliance will have a materially adverse effect on the consolidated financial position or results of operations of the Company. 14 Employees The Company had 600 employees as of December 31, 1999. None of the employees are represented by a union. The Company considers its relations with its employees to be good. Executive Officers of the Company The executive officers of the Company are elected by and serve until their successors are elected by the Board of Directors. Bob R. Simpson, 51, was a co-founder of the Company with Mr. Palko and has been Chairman and Chief Executive Officer of the Company since July 1, 1996. Prior thereto, Mr. Simpson served as Vice Chairman and Chief Executive Officer or held similar positions with the Company since 1986. Mr. Simpson was Vice President of Finance and Corporate Development (1979-1986) and Tax Manager (1976-1979) of Southland Royalty Company. Steffen E. Palko, 49, was a co-founder of the Company with Mr. Simpson and has been Vice Chairman and President or held similar positions with the Company since 1986. Mr. Palko was Vice President - Reservoir Engineering (1984-1986) and Manager of Reservoir Engineering (1982-1984) of Southland Royalty Company. Louis G. Baldwin, 50, has been Executive Vice President and Chief Financial Officer or held similar positions with the Company since 1986. Mr. Baldwin was Assistant Treasurer (1979-1986) and Financial Analyst (1976-1979) at Southland Royalty Company. Keith A. Hutton, 41, has been Executive Vice President - Operations or held similar positions with the Company since 1987. From 1982 to 1987, Mr. Hutton was a Reservoir Engineer with Sun Exploration & Production Company. Vaughn O. Vennerberg, II, 45, has been Executive Vice President - Administration or held similar positions with the Company since 1987. Prior to that time, Mr. Vennerberg was Land Manager with Hutton Gas Operating Company (1986-1987). Bennie G. Kniffen, 49, has been Senior Vice President and Controller or held similar positions with the Company since 1986. From 1976 to 1986, Mr. Kniffen held the position of Director of Auditing or similar positions with Southland Royalty Company. Larry B. McDonald, 53, has been Senior Vice President - Operations or held similar positions with the Company since 1990. Prior to that time, Mr. McDonald owned and operated McDonald Energy, Inc. (1986-1990). Timothy L. Petrus, 45, has been Senior Vice President - Acquisitions or held similar positions with the Company since 1988. Prior to that time, Mr. Petrus was a Vice President with Texas American Bank (1980-1988) and was a Senior Project Engineer with Exxon (1976-1980). Kenneth F. Staab, 43, has been Senior Vice President - Engineering or held similar positions with the Company since 1986. Prior to that time, Mr. Staab was a Reservoir Engineer with Southland Royalty Company (1982-1986). Thomas L. Vaughn, 53, has been Senior Vice President - Operations or held similar positions with the Company since 1988. From 1986 to 1988, Mr. Vaughn owned and operated Vista Operating Company. 15 Item 3. Legal Proceedings 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 arms-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 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. The plaintiff has made similar allegations in over 70 actions filed against over 300 other companies. After its review, the Department of Justice decided in April 1999 not to intervene, and the court unsealed the case in May 1999. A federal multi-district litigation panel has ordered that the lawsuits filed by Grynberg against the Company and other companies be transferred and consolidated to the federal district court in Wyoming. The Company and other defendants have filed a motion to dismiss the lawsuit. 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. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted for a vote of security holders during the fourth quarter of 1999. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is listed on the New York Stock Exchange and trades under the symbol "XTO." The following table sets forth quarterly high and low sales prices and cash dividends declared for each quarter of 1999 and 1998 (as adjusted for the three-for-two stock split effected on February 25, 1998):
High Low Dividend -------- ------- -------- 1999 First Quarter... $ 9.063 $ 4.563 $.01 Second Quarter.. 14.875 6.750 .01 Third Quarter... 15.125 11.000 .01 Fourth Quarter.. 13.313 8.188 .01 1998 First Quarter... $ 21.125 $ 14.672 $.04 Second Quarter.. 20.875 16.375 .04 Third Quarter... 19.313 11.375 .04 Fourth Quarter.. 16.813 5.063 .04
The determination of the amount of future dividends, if any, to be declared and paid is in the sole discretion of the Company's Board of Directors and will depend on the Company's financial condition, earnings and funds from operations, the level of its capital expenditures, dividend restrictions in its financing agreements, its future business prospects and other matters as the Board of Directors deems relevant. Furthermore, the Company's revolving credit agreement with banks restricts the amount of dividends to 25% of cash flow from operations, as defined, for the latest four consecutive quarterly periods. The Company's 9 1/4% and 8 3/4% senior subordinated notes also place certain restrictions on distributions to common shareholders, including dividend payments. On February 15, 2000, the Board of Directors declared a quarterly dividend of $.01 per share payable on April 14, 2000 to shareholders of record on March 31, 2000. On March 1, 2000, the Company had 622 shareholders of record. On July 1, 1999, the Company issued 4,000,000 shares of common stock at its fair value of $45,700,000 to the stockholders of Spring Holding Company in exchange for a 50% interest in Spring Holding Company and for cash proceeds of $3.2 million. See Note 13 of Consolidated Financial Statements. The sale of the common stock was deemed to be exempt from the registration requirements of the Securities Act, pursuant to Section 4(2) of the Securities Act, as a transaction by an issuer not involving a public offering. On September 15, 1999, the Company issued from treasury 4,555,756 shares of its common stock to Whitewine Holding Company ("Whitewine") at its fair value of $63,211,000 as part of its contribution for its 50% interest in Whitewine. See Note 14 of Consolidated Financial Statements. The sale of the common stock was deemed to be exempt from the registration requirements of the Securities Act, pursuant to Section 4(2) of the Securities Act, as a transaction by an issuer not involving a public offering. On July 2, 1999, a senior officer exercised options to purchase 73,684 Hugoton Royalty Trust units from the Company pursuant to the 1998 Royalty Trust Option Plan. The officer exchanged 48,755 shares of Company common stock with a fair value of $700,000 for the units. The issuance of the units to the officer was deemed to be exempt from the registration requirements of the Securities Act, pursuant to Section 4(2) of the Securities Act, as a transaction by an issuer not involving a public offering. 17 Item 6. Selected Financial Data The following table shows selected financial information for the five years ended December 31, 1999. Significant producing property acquisitions in each of the years presented affect the comparability of year-to-year financial and operating data. All weighted average shares and per share data have been adjusted for the three-for-two stock splits effected in March 1997 and February 1998. This information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements at Item 14(a).
1999 1998 1997 1996 1995 ---------- ---------- ---------- --------- --------- (in thousands except production, per share and per unit data) Consolidated Statement of Operations Data Revenues: Oil and condensate............................ $ 86,604 $ 56,164 $ 75,223 $ 75,013 $ 60,349 Gas and natural gas liquids................... 239,056 182,587 110,104 73,402 40,543 Gas gathering, processing and marketing....... 10,644 9,438 9,851 12,032 7,091 Other......................................... 4,991 1,297 3,094 888 3,362 ---------- ---------- ---------- --------- --------- Total Revenues................................ $ 341,295 $ 249,486 $ 198,272 $ 161,335 $ 111,345 ========== ========== ========== ========= ========= Earnings (loss) available to common stock...... $ 44,964(a) $ (71,498)(b) $ 23,905 $ 19,790 $ (10,538)(c) ========== ========== ========== ========= ========= Per common share Basic......................................... $ 0.96 $ (1.65) $ 0.60 $ 0.50 $ (0.28) ========== ========== ========== ========= ========= Diluted....................................... $ 0.95 $ (1.65) $ 0.59 $ 0.48 $ (0.28) ========== ========== ========== ========= ========= Weighted average common shares outstanding.. 46,818 43,396 39,773 39,913 38,072 ========== ========== ========== ========= ========= Dividends declared per common share............ $ 0.04 $ 0.16 $ 0.15 $ 0.13 $ 0.13 ========== ========== ========== ========= ========= Consolidated Statement of Cash Flows Data Cash provided (used) by: Operating activities.......................... $ 133,301 $ (53,876) $ 95,918 $ 59,694 $ 32,938 Investing activities.......................... $ (156,370) $ (376,564) $ (309,234) $(124,871) $(160,416) Financing activities.......................... $ 16,470 $ 438,957 $ 213,195 $ 66,902 $ 121,852 Consolidated Balance Sheet Data (Restated)(d) Property and equipment, net.................... $1,339,080 $1,050,422 $ 723,836 $ 450,561 $ 364,474 Total assets................................... $1,477,081 $1,207,005 $ 788,455 $ 523,070 $ 402,675 Long-term debt................................. $ 991,100 $ 920,411 $ 539,000 $ 314,757 $ 238,475 Stockholders' equity........................... $ 277,817 $ 201,474 $ 170,243 $ 142,668 $ 130,700 Operating Data Average daily production: Oil (Bbls).................................... 14,006 12,598 10,905 9,584 9,677 Gas (Mcf)..................................... 288,000 229,717 135,855 101,845 78,408 Natural gas liquids (Bbls).................... 3,631 3,347 220 - - Mcfe.......................................... 393,826 325,390 202,609 159,349 136,470 Average sales price: Oil (per Bbl)................................. $16.94 $12.21 $18.90 $21.38 $17.09 Gas (per Mcf)................................. $2.13 $2.07 $2.20 $1.97 $1.42 Natural gas liquids (per Bbl)................. $11.80 $7.62 $9.66 - - Production expense (per Mcfe).................. $0.53 $0.53 $0.59 $0.67 $0.71 Taxes, transportation and other (per Mcfe)..... $0.23 $0.25 $0.22 $0.20 $0.17 Proved reserves: Oil (Bbls).................................... 61,603 54,510 47,854 42,440 39,988 Gas (Mcf)..................................... 1,545,623 1,209,224 815,775 540,538 358,070 Natural gas liquids (Bbls).................... 17,902 17,174 13,810 - - Mcfe.......................................... 2,022,653 1,639,331 1,185,759 795,178 597,998 Other Data Operating cash flow (e)........................ $ 132,683 $ 78,480 $ 89,979 $ 68,263 $ 40,439 Ratio of earnings to fixed charges (f)......... 1.9 - (g) 2.1 2.6 - (h)
18 (a) Includes effect of a $40.6 million pre-tax gain on sale of Hugoton Royalty Trust units. (b) Includes effect of a $93.7 million pre-tax net loss on investment in equity securities and a $2 million pre-tax, non-cash impairment charge. (c) Includes effect of a $20.3 million pre-tax, non-cash impairment charge recorded upon adoption of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of. (d) Reflects restatement for a change in accounting for the acquisition of oil-producing properties in the Cook Inlet of Alaska from affiliates of Shell Oil Company. See Note 17 to Consolidated Financial Statements. (e) Defined as cash provided by operating activities before changes in operating assets and liabilities and exploration expense. Because of exclusion of changes in operating assets and liabilities and exploration expense, this cash flow statistic is different from cash provided (used) by operating activities, as is disclosed under generally accepted accounting principles. (f) For purposes of calculating this ratio, earnings include income (loss) from continuing operations before income tax and fixed charges. Fixed charges include interest costs, the portion of rentals (calculated as one-third) considered to be representative of the interest factor and preferred stock dividends. (g) Fixed charges exceeded earnings by $108.4 million. Excluding the effect of items in (b) above, fixed charges exceeded earnings by $19 million. (h) Fixed charges exceeded earnings by $16.4 million. Excluding the effect of the charge in (c) above, the ratio of earnings to fixed charges is 1.3. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with Item 6, "Selected Financial Data" and the Company's consolidated financial statements at Item 14 (a). General The following events affect the comparability of results of operations and financial condition for the years ended December 31, 1999, 1998 and 1997, and may impact future operations and financial condition. Throughout this discussion, the term "Mcfe" refers to thousands of cubic feet of gas equivalent quantities produced for the indicated period, with oil and natural gas liquid quantities converted to Mcf on an energy equivalent ratio of one barrel to six Mcf. Three-for-Two Stock Splits. The Company effected a three-for-two stock split on March 19, 1997 and on February 25, 1998. All common stock shares, treasury stock shares and per share amounts have been retroactively restated to reflect both stock splits. 1999 Acquisitions. During 1999, the company acquired predominantly gas- producing properties at a total cost of $510 million primarily funded by a combination of bank borrowings, proceeds from a public offering of common stock and the issuance of common stock. The acquisitions include: - Spring Holding Company Acquisition. In July 1999, the Company and Lehman Brothers Holdings, Inc. ("Lehman") each acquired 50% of the common stock of Spring Holding Company for a combination of cash and the Company's common stock totaling $85 million. In September 1999, the Company exercised its option to acquire Lehman's 50% interest in Spring for $44.3 million. The acquisition includes gas properties located in the Arkoma Basin of Arkansas and Oklahoma with a purchase price of $237 million. After purchase accounting adjustments and other costs, the cost of the properties was $253 million. - Ocean Energy Acquisition. In September 1999, the Company and Lehman acquired Arkoma Basin gas properties for $231 million. Lehman contributed $100 million in cash and the Company contributed $100 million in securities, including its common stock, to a jointly owned company. The acquisition was funded with cash of $100 million and bank borrowings of $131 million. The Company intends to acquire Lehman's interest in this acquisition on March 31, 2000 for $111 million. Hugoton Royalty Trust Sale. In April and May 1999, the Company sold 17,004,000 units, or 42.5%, of Hugoton Royalty Trust in its initial public offering. The Company created Hugoton Royalty Trust in December 1998 by conveying 80% net profits interests in producing properties in Kansas, Oklahoma and Wyoming. Total proceeds from this sale were $148.6 million, which were used to reduce bank debt. Total gain on sale, including the sale of units pursuant to exercise of royalty trust options, was $40.6 million before income tax. Other 1999 Dispositions. In May and June 1999, the Company sold primarily nonoperated gas-producing properties in New Mexico for $44.9 million. In September 1999, the Company sold primarily nonoperated oil and gas-producing properties in Oklahoma, Texas, New Mexico and Wyoming for $63.5 million, including sales of $22.5 million of properties acquired in the Spring Holding Company Acquisition. 1998 Acquisitions. During 1998, the Company acquired oil and gas-producing properties at a total cost of $340 million, including: - East Texas Basin Acquisition. The Company acquired these primarily gas- producing properties at a purchase price of $245 million, later reduced to $215 million by a $30 million production payment sold to EEX Corporation. This acquisition closed in April 1998 and was funded by bank debt, partially repaid from proceeds of the 1998 Common Stock Offering. - Cook Inlet Acquisition. In September 1998, the Company acquired these oil- producing properties in exchange for 1,921,850 shares of the Company's common stock along with certain price guarantees and a non-interest bearing note payable of $6 million, resulting in a purchase price of $45 million. 20 - Seagull Acquisition. This acquisition includes primarily gas-producing properties in northwest Oklahoma and the San Juan Basin of New Mexico. The Company acquired these properties in November 1998 for an estimated purchase price of $31 million, funded by bank borrowings. 1997 Acquisitions. During 1997, the Company acquired predominantly gas- producing properties at a total cost of $256 million, funded primarily by bank borrowings and cash flow from operations. The acquisitions include: - Amoco Acquisition. The Company purchased these properties in the San Juan Basin of New Mexico in December 1997 for an adjusted purchase price of $195 million. This purchase price includes $5.7 million for five-year warrants to purchase 944,284 shares of the Company's common stock at $15.20 per share. - Burlington Resources Acquisition. The Company purchased these properties in Oklahoma, Kansas and Texas for an adjusted purchase price of $39 million in May 1997. - 6% of the publicly traded outstanding units in Cross Timbers Royalty Trust, at a cost of $5.4 million. 1999, 1998 and 1997 Development and Exploration Programs. Oil development was concentrated in the University Block 9 Field during 1999, 1998 and 1997, as well as the Prentice Northeast Unit of West Texas during 1997. Gas development focused on the East Texas area in 1999, the Hugoton Area during 1998, the Ozona Area in 1998 and 1997 and the Fontenelle Unit during all three years. Exploration activity has been primarily geological and geophysical analysis, including seismic studies, of undeveloped properties. Exploratory expenditures were $900,000 in 1999, $8 million in 1998 and $2.1 million in 1997. 2000 Development and Exploration Program. The Company has budgeted $120 million for its 2000 development and exploration program, which is expected to be funded primarily by cash flow from operations. The Company anticipates exploration expenditures will be approximately 5% of the 2000 budget. The total capital budget, including acquisitions, will be adjusted throughout 2000 to capitalize on opportunities offering the highest rates of return. 1999 Sale and Repurchase of Common Stock. In July 1999, the Company sold 2,000,000 shares of common stock from treasury with net proceeds of approximately $26.5 million. The proceeds were used to repurchase 1,921,850 shares of common stock issued to affiliates of Shell Oil Company for the Cook Inlet Acquisition. 1999 Issuances of Common Shares. In July 1999, the Company issued 4,000,000 shares of common stock for its 50% interest in Spring Holding Company and for cash proceeds of $3.2 million which was used to reduce bank debt. In September 1999, the Company issued from treasury 4,555,756 shares of its common stock to Whitewine Holding Company ("Whitewine") as part of its contribution for its 50% interest in Whitewine. These common shares are eliminated in the consolidated financial statements. 1998 Common Stock Offering. In April 1998, the Company sold 7,203,450 shares of common stock. Net proceeds of $133.1 million were used to partially repay bank debt used to fund the East Texas Basin Acquisition. 1998 Issuance of Common Shares. In September 1998, the Company issued from treasury stock 1,921,850 common shares to affiliates of Shell for the Cook Inlet Acquisition. In July 1999, the Company repurchased these shares from Shell. 1997 Senior Subordinated Note Sales. The Company sold $125 million of 9 1/4% senior subordinated notes in April 1997 and $175 million of 8 3/4% senior subordinated notes in October 1997. Net proceeds of $121.1 million and $169.9 million, respectively, were used to reduce bank debt. 1997 Conversion of Subordinated Notes. In January 1997, noteholders converted the remaining $29.7 million of the Company's 5 1/4% convertible subordinated notes into 2,892,363 shares of common stock. Treasury Stock Purchases. From May 1996 to December 1999, the Company repurchased a total of 9.6 million shares of the Company's common stock as part of its strategic acquisition plans. The Company purchased on the open market 5,000 shares at a cost of $53,000 in 1999, 4.3 million shares at a cost of $65.6 million in 1998 and 2.4 million shares at a cost of $28 million in 1997. Through March 27, 2.2 million shares have been repurchased in 2000 at a cost of 21 $22.3 million, and 1.2 million shares remain under the February 2000 Board of Directors' authorization to repurchase 2.5 million shares. Investment in Equity Securities. The Company acquired common stock of publicly traded independent oil and gas producers at a total cost of $167.7 million in 1998 and $6.5 million in 1997. For accounting purposes, the Company considered equity securities purchased in 1998 to be trading securities since they were purchased with the intent to resell in the near future. Equity securities purchased prior to 1998 were considered to be available-for-sale securities. Accordingly, the Company recognized unrealized investment gains and losses in its 1998 and 1999 statements of operations, as opposed to recording as a component of stockholders' equity in prior years. During 1999, the Company recognized a $1.1 million loss on investment in equity securities, including a loss on sale of securities of $22.2 million, an unrealized gain of $27.1 million and interest expense of $6 million related to the investment. During 1998, the Company recognized a $93.7 million loss on investment in equity securities, including a loss on sale of securities of $14.8 million, an unrealized loss of $72.6 million and interest expense of $6.3 million related to the investment. During 1997, the Company recognized a gain of $1.7 million on its investment in equity securities including a gain on sale of securities of $2.4 million and interest expense of $700,000 related to the investment. Property Sales. Excluding the Hugoton Royalty Trust sale, the Company sold producing properties resulting in net gains of $6.4 million in 1999, $800,000 in 1998 and $1.8 million in 1997. Stock Incentive Compensation. Stock incentive compensation results from stock appreciation right ("SAR") and performance share awards, and subsequent changes in the Company's stock price. In 1999, stock incentive compensation totaled $100,000, which was primarily related to performance share grants. During 1998, stock incentive compensation totaled $1.3 million, which included non-cash performance share compensation of $1.6 million, partially offset by a reduction in SAR compensation of $300,000. In 1997, stock incentive compensation totaled $3.7 million, which included non-cash performance share compensation of $3.3 million and SAR compensation of $400,000. Exercises and forfeitures under the 1991 Stock Incentive Plan reduced outstanding stock incentive units (including SARs) from 51,000 at the beginning of 1997 to 9,000 at year-end 1999. As of December 31, 1999, there are 130,000 performance shares that vest when the common stock price reaches $16.00 and 60,000 performance shares that vest when the common stock price reaches $22.50. In January 2000, 120,000 performance shares were granted that vest when the common stock price reaches $20.00. Product Prices. In addition to supply and demand, oil and gas prices are affected by substantial seasonal, political and other fluctuations the Company generally cannot control or predict. Crude oil prices are generally determined by global supply and demand. Posted crude oil prices ranged from $17 to $20 during most of 1997, then declined to a $16 average in December 1997. Crude oil prices continued to decline throughout 1998, dropping to a West Texas Intermediate price of $8.00 per barrel in December 1998, the lowest level since 1978. After a weak first quarter, oil prices increased in 1999 because of production cuts by OPEC and other leading oil exporters, reduced inventories and anticipated increased demand. By November 1999, crude oil prices reached their highest levels since the 1990 Persian Gulf War and have remained at levels above $24 in first quarter 2000. Members of OPEC met on March 27, 2000 and agreed to increase production by 6.3%. Because of increased summer demand, increased production is not expected to substantially increase domestic inventories until fourth quarter 2000. The Company has entered oil futures contracts to sell 8,000 Bbls per day from April through June 2000 at prices ranging from $22.04 to $23.28 per Bbl. Based on 1999 production, the Company estimates that a $1.00 per barrel increase or decrease in the average oil sales price would result in approximately a $4.9 million change in 2000 annual operating cash flow. Natural gas prices are influenced by North American supply and demand, which is often dependent upon weather conditions. Natural gas competes with alternative energy sources as a fuel for heating and the generation of electricity. Generally because of colder weather, storage concerns and U.S. economic growth, prices remained relatively high during most of 1997, reaching their highest levels since 1985. Gas prices declined, however, in December 1997 and remained lower throughout 1998 and first quarter 1999, primarily because the winters of 1997-1998 and 1998-1999 were abnormally mild in the central and eastern U.S. Cooler spring weather and lower industry production levels strengthened gas prices in second quarter 1999. This trend continued into third quarter 1999 when the NYMEX gas price rose above $3.00. Natural gas prices have remained volatile during the winter of 1999-2000 as a third consecutive warm winter reduced seasonal heating demand. In spite of a warm winter, natural gas inventories are expected to be 22 substantially lower at the end of withdrawal season than in 1999. Lower inventories of approximately 1 Tcf, compared with 1.3 Tcf in March 1999, are attributable to lower domestic productive capacity. Lower production, reduced inventories and increasing summer demand are expected to result in volatile natural gas prices averaging higher than 1999 levels. At March 15, the average NYMEX price for the following 12 months was $2.97 per Mmbtu. The Company has entered commodity price hedging instruments to reduce its exposure to gas price fluctuations. As a result of these commodity hedging instruments, the Company's average gas price decreased from $2.18 to $2.13 in 1999 and increased from $1.97 to $2.07 in 1998. Largely influenced by crude oil prices, natural gas liquids prices were weak in 1998 and rose significantly in 1999. Based on 1999 production, the Company estimates that a $0.10 per Mcf increase or decrease in the average gas sales price would result in approximately a $10 million change in 2000 annual operating cash flow. Impairment Provision. During 1998, the Company recorded an impairment provision on producing properties of $2 million before income tax. This impairment provision was determined based on an assessment of recoverability of net property costs from estimated future net cash flows from those properties. Estimated future net cash flows are based on management's best estimate of projected oil and gas reserves and prices. If oil and gas prices decline, the Company may be required to record impairment provisions in the future, which may be material. Results of Operations 1999 Compared to 1998 For the year 1999, earnings available to common stock were $45 million compared with a loss available to common stock of $71.5 million for 1998. The 1999 earnings include a $26.8 million after-tax gain from the sale of Hugoton Royalty Trust units, a $4.2 million after-tax gain on sale of properties, and an $800,000 after-tax loss on investment in equity securities. The 1998 loss includes a $61.8 million after-tax loss related to the Company's investment in equity securities and a $1.3 million after-tax impairment write-off of producing properties. Excluding gains and losses from investments and from sales of trust units and other property, earnings for 1999 were $14.8 million. Excluding losses from investments and impairment write-off, the Company would have reported a loss of $8.3 million in 1998. Revenues for 1999 were $341.3 million, or 37% above 1998 revenues of $249.5 million. Oil revenue increased $30.4 million, or 54%, because of an 11% increase in oil production and a 39% increase in oil prices from an average of $12.21 per Bbl in 1998 to $16.94 in 1999 (see "General-Product Prices" above). Increased production was primarily because of the 1998 acquisitions. Gas revenue increased $56.5 million, or 31%, because of a 25% increase in production, a 3% increase in gas prices and a 55% increase in natural gas liquids prices from an average price of $7.62 per Bbl in 1998 to $11.80 in 1999 (see "General-Product Prices" above). Increased gas production was attributable to the 1998 and 1999 acquisitions and development programs. Gas gathering, processing and marketing revenues increased $1.2 million primarily because of higher gas and natural gas liquids prices, increased margin and increased volumes from the 1999 acquisitions. Other revenues were $3.7 million higher primarily because of increased net gains on sale of properties, partially offset by decreased lawsuit settlement receipts. Expenses for 1999 totaled $245.9 million as compared with total 1998 expenses of $209.2 million. Most expenses increased in 1999 primarily because of the 1998 and 1999 acquisitions and development programs. Production expense increased $13 million, or 21%, because of increased production. Production expense per Mcfe remained flat at $0.53. The Company lowered its exploration budget for 1999, resulting in a $7.1 million reduction in exploration expense, which is predominantly geological and geophysical costs. Taxes, transportation and other deductions increased 16% or $4.6 million because of increased oil and gas revenues, as well as increased transportation, compression and other charges related to the 1998 and 1999 acquisitions. Taxes, transportation and other per Mcfe decreased 8% from $0.25 to $0.23 because of decreased property taxes and a lower production tax rate associated with production from the 1999 acquisitions. 23 Depreciation, depletion and amortization ("DD&A") increased $28.8 million, or 34%, primarily because of the 1998 and 1999 acquisitions and development programs. On an Mcfe basis, DD&A increased from $0.70 in 1998 to $0.78 in 1999 primarily because of the higher cost per Mcfe of the 1998 and 1999 acquisitions. General and administrative expense increased $600,000, or 5%, because of increased expenses from Company growth related to the 1998 and 1999 acquisitions. Excluding stock incentive compensation, general and administrative expense per Mcfe remained at $0.10 in 1999. Interest expense increased $12.1 million, or 23%, primarily because of a comparable increase in weighted average borrowings to partially fund the 1998 and 1999 acquisitions. Interest related to investment in equity securities has been classified as part of the loss on investment in equity securities. Interest expense per Mcfe increased slightly from $0.44 in 1998 to $0.45 in 1999. 1998 Compared to 1997 For the year 1998, loss available to common stock was $71.5 million compared with earnings of $23.9 million for 1997. The 1998 loss includes a $61.8 million after-tax loss on investment in equity securities and a $1.3 million after-tax impairment write-down of producing properties. The remaining decline in earnings was primarily the result of lower product prices and increased interest expense related to the 1998 acquisitions and treasury stock purchases. Revenues for 1998 were $249.5 million, or 26% above 1997 revenues of $198.3 million. Although oil production increased 16%, oil revenue decreased $19.1 million or 25% because of a 35% decrease in oil prices from an average of $18.90 per Bbl in 1997 to $12.21 in 1998 (see "General-Product Prices" above). Increased production was primarily because of the 1998 acquisitions. Gas revenue increased $72.5 million or 66% because of a 69% increase in production partially offset by a 6% price decrease (see "General-Product Prices" above). Increased gas production was attributable to the 1997 and 1998 acquisitions and development programs. Gas revenues for 1998 also included $9.3 million from San Juan Basin natural gas liquids production attributable to the December 1997 Amoco Acquisition. Gas gathering, processing and marketing revenues decreased $400,000 primarily because of decreased wellhead volumes and lower gas and natural gas liquids prices, partially offset by increased margin. Other revenues were $1.8 million lower primarily because of decreased net gains on sale of properties and decreased lawsuit settlement receipts. Expenses for 1998 totaled $209.2 million as compared with total 1997 expenses of $134.8 million. Most expenses increased in 1998 primarily because of the 1997 and 1998 acquisitions and exploration and development programs. Production expense increased $19.6 million or 45%. Per Mcfe, production expense decreased from $0.59 to $0.53. This decrease is primarily because of the lower operating costs of gas-producing properties acquired in 1997 and 1998, the timing of workovers and operating efficiencies initiated after acquiring operated properties. Exploration expenses for 1998 totaled $8 million and were predominantly geological and geophysical costs, including seismic analysis, related to the 1998 exploration program. Exploration costs in 1997 totaled $2.1 million. Taxes, transportation and other deductions increased 77% or $12.7 million because of increased oil and gas revenues, as well as increased property taxes related to the 1997 and 1998 acquisitions. Taxes, transportation and other per Mcfe increased 14% from $0.22 to $0.25 because of increased transportation, compression and other charges related to acquisitions. DD&A increased $35.8 million, or 75%, primarily because of the 1997 and 1998 acquisitions and development programs. On an Mcfe basis, DD&A increased from $0.65 in 1997 to $0.70 in 1998 primarily because of the higher cost per Mcfe of the 1998 acquisitions. 24 General and administrative expense decreased $2.3 million, or 15%, because of a $2.4 million decrease in stock incentive compensation, partially offset by increased expenses from Company growth. Excluding stock incentive compensation, general and administrative expense per Mcfe decreased to $0.10 in 1998 from $0.16 in 1997. This reduction resulted from production growth outpacing Company personnel requirements and other administrative expenses. Interest expense increased $26.1 million or 100% primarily because of a comparable increase in weighted average borrowings to partially fund the 1997 and 1998 acquisitions and treasury stock purchases, combined with a 1% increase in the weighted average interest rate and amortization of loan fees. Interest related to investment in equity securities has been classified as part of the loss on investment in equity securities. Interest expense per Mcfe increased from $0.35 in 1997 to $0.44 in 1998 primarily as the result of an increase in the weighted average borrowings to fund treasury stock purchases. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flow from operating activities, producing property sales, including sales of royalty trust units, public offerings of equity and debt, and bank debt. Other than for operations, the Company's cash requirements are generally for the acquisition, exploration and development of oil and gas properties, and debt and dividend payments. Exploration and development expenditures and dividend payments have generally been funded by cash flow from operations. The Company believes that its sources of liquidity are adequate to fund its cash requirements in 2000. Cash provided by operating activities was $133.3 million in 1999, compared with cash used by operating activities of $53.9 million in 1998 and $95.9 million cash provided by operations in 1997. Fluctuations during this three- year period were primarily because of purchases of equity securities and lower product prices in 1998 and increased production from acquisitions and development activity in 1999. Before changes in operating assets and liabilities and exploration expense, cash flow from operations was $132.7 million in 1999, $78.5 million in 1998 and $90 million in 1997. Financial Condition Total assets increased 22% from $1.2 billion at December 31, 1998 to $1.5 billion at December 31, 1999, primarily because of the 1999 acquisitions. As of December 31, 1999, total capitalization of the Company was $1.3 billion, of which 78% was long-term debt. This compares with capitalization of $1.1 billion at December 31, 1998, of which 82% was long-term debt. The decrease in the debt- to-capitalization ratio from year-end 1998 to 1999 is because of funding a significant portion of the 1999 acquisitions from sources other than debt and repayment of debt from proceeds from the sale of Hugoton Royalty Trust units. Working Capital The Company generally uses available cash to reduce bank debt and, therefore, does not maintain large cash and cash equivalent balances. Short- term liquidity needs are satisfied by bank commitments under the loan agreement (see "Financing" below). Because of this, and since the Company's principal source of operating cash flows (i.e., proved reserves to be produced in the following year) cannot be reported as working capital, the Company often has low or negative working capital. Working capital of $39 million at December 31, 1999 and $62 million at December 31, 1998 was primarily attributable to the investment in equity securities and the deferred tax benefit related to the net unrealized loss on the investment. The decrease in the current deferred income tax benefit of $20.6 million from December 31, 1998 to December 31, 1999 is related to the decline in the unrealized loss on investment in equity securities, resulting from sale of securities and improvement in the market value of securities held. In 1998, the Company purchased what it believed to be undervalued oil and gas reserves through investments in publicly traded equity securities of select energy companies. After selling a portion of these securities in 1998 and 1999, the Company's investment in equity securities had a fair market value of $29.1 million at December 31, 1999. During the first quarter of 2000, the Company sold most of this investment for proceeds of $41.1 million, resulting in a gain of $14.4 million, of which $17.1 million was a decrease in unrealized loss. Equity securities held at 25 March 24, 2000 had a value of $1.7 million and are owned by the Company's 50% owned subsidiary, Whitewine Holding Company, which may sell the securities at any time. Prior to their sale, equity securities owned by the Company had been held in a PaineWebber broker account and provided support for officer margin debt. Currently, the Company's investment in Cross Timbers Royalty Trust units, with a March 1, 2000 value of $16 million, provides support for officer margin debt, which totaled $10.5 million at March 1, 2000. See Note 3 to Consolidated Financial Statements. Financing The Company amended its revolving credit agreement with commercial banks in August 1999, resulting in a borrowing base and commitment of $468 million and $29 million unused borrowing capacity under the loan agreement as of December 31, 1999. The interest rate on borrowings in December 1999 averaged 7.5%. The Company periodically renegotiates the loan agreement to increase the borrowing commitment and extend the revolving facility; however, the Company cannot assure that it can continue to do so in the future. The borrowing base is redetermined annually based on the value and expected cash flow of the Company's proved oil and gas reserves. If borrowings exceed the redetermined borrowing base, the banks may require that the excess be repaid within a year. Otherwise, borrowings under the loan agreement do not mature until June 30, 2003, but may be prepaid at any time without penalty. The borrowing base is expected to be redetermined in May 2000 in connection with consolidation of bank debt of the Company, Spring Holding Company and Summer Acquisition Company. Based on year-end proved reserves and relatively strong commodity prices, the Company expects a significant increase in the borrowing base upon its redetermination. Spring Holding Company, a wholly owned subsidiary of the Company, has a $140 million revolving credit facility with commercial banks which had a borrowing base of $130 million and unused borrowing capacity of $13.9 million at December 31, 1999. The borrowing base is subject to semiannual redeterminations. The credit facility is secured by properties owned by Spring and is nonrecourse to the Company. Borrowings under the credit facility mature on July 31, 2004. Summer Acquisition Company, a wholly owned subsidiary of Whitewine Holding Company, which is 50% owned by each of the Company and Lehman, has a $140 million revolving credit facility with commercial banks which had a borrowing base of $140 million and unused borrowing capacity of $11 million at December 31, 1999. The borrowing base is subject to semiannual redeterminations. Borrowings under the credit facility were used to partially fund the Ocean Energy Acquisition. The credit facility is secured by the properties acquired and is nonrecourse to the Company and Lehman. Borrowings under the credit facility mature on September 15, 2001. The 1999 and 1998 acquisitions were partially funded by the sale and issuance of common stock. The 1999 acquisitions were also partially funded by contributions from Lehman, the Company's equity partner. These transactions are described under "General" above. See also "Capital Expenditures" below. Capital Expenditures Because of their size, the 1999 acquisitions were made jointly with Lehman as a 50% equity partner. Pursuant to its call option, the Company acquired Lehman's interest in the Spring Holding Acquisition in September 1999. The Company plans to exercise its option to purchase Lehman's interest in the Ocean Energy Acquisition on March 31, 2000 for approximately $111 million, funded primarily by the proceeds from sales of property and equity securities. If the Company does not exercise its option to purchase Lehman's interest by September 15, 2000, Lehman will have the right to sell its interest to the Company on that date for $120 million. The Company plans to fund any future acquisitions through a combination of cash flow from operations and proceeds from asset sales, bank debt, public equity or debt transactions. There are no restrictions under the Company's revolving credit agreement that would affect the Company's ability to use its remaining borrowing capacity for acquisitions of producing properties. In February 2000, the Board of Directors authorized the repurchase of 2.5 million shares of Company's common stock, or approximately 5% of the shares outstanding. These shares will be purchased from time to time in 26 open market or negotiated transactions. Through March 27, 2000, 1.3 million shares have been purchased at a cost of $15 million. In 1999, exploration and development cash expenditures totaled $91.6 million compared with the budget of $90 to $100 million. In 1998, exploration and development cash expenditures totaled $77.4 million, compared with the budget of $90 million. The Company has budgeted $120 million for the 2000 development program. As it has done historically, the Company expects to fund the 2000 development program with cash flow from operations. Since there are no material long-term commitments associated with this budget, the Company has the flexibility to adjust its actual development expenditures in response to changes in product prices, industry conditions and the effects of the Company's acquisition and development programs. A minor portion of the Company's existing properties are operated by third parties which control the timing and amount of expenditures required to exploit the Company's interests in such properties. Therefore, the Company cannot assure the timing or amount of these expenditures. To date, the Company has not spent significant amounts to comply with environmental or safety regulations, and it does not expect to do so during 2000. However, developments such as new regulations, enforcement policies or claims for damages could result in significant future costs. Dividends The Board of Directors declared quarterly dividends of $0.037 per common share in 1997, $0.04 per common share in 1998 and $0.01 per common share in 1999. The Company's ability to pay dividends is dependent upon available cash flow, as well as other factors. In addition, the Company's bank loan agreement restricts the amount of common stock dividends to 25% of cash flow from operations, as defined, for the last four quarters. Cumulative dividends on Series A convertible preferred stock are paid quarterly, when declared by the Board of Directors, based on an annual rate of $1.5625 per share, or $1.8 million annually. Year 2000 "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 could have material adverse effects on companies and organizations that rely upon those systems. The transition to the year 2000 has had no significant impact on the Company's computer systems and computer-controlled equipment, and the Company does not foresee any material system failures in the coming months. The Company will continue to monitor its Year 2000 status throughout the year. The Company reviewed its computer systems and computer-controlled field equipment and made the necessary modifications for Year 2000 compliance by December 1999. The Company estimates that total costs related to Year 2000 compliance efforts will be less than $500,000 of which approximately $225,000 has been incurred and expensed through December 1999. The Company also identified significant third parties whose Year 2000 compliance could affect it and formally inquired about their Year 2000 status. The Company is not aware of any significant third parties who have experienced a material Year 2000 system failure. Despite its efforts to assure that significant third parties are Year 2000 compliant, the Company cannot provide assurance that third parties will not experience material system failures in the coming months. Although the potential effect of Year 2000 non-compliance by third parties is unknown, the Company has developed appropriate contingency plans in the event of related system failures. 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. 27 Production Imbalances The Company has gas production imbalance positions that are the result of partial interest owners selling more or less than their proportionate share of gas on jointly owned wells. Imbalances are generally settled by disproportionate gas sales over the remaining life of the well or by cash payment by the overproduced party to the underproduced party. The Company uses the entitlement method of accounting for natural gas sales. At December 31, 1999, the Company's consolidated balance sheet includes a net payable of $4.1 million for a net overproduced balancing position of 2,215,000 Mcf of natural gas, and a receivable of $3.9 million for an underproduced balancing position of 9,076,000 Mcf of carbon dioxide. Production imbalances do not have, and are not expected to have, a significant impact on the Company's liquidity or operations. Forward-Looking Statements Certain information included in this annual report on Form 10-K 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, 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company only uses derivative financial instruments for hedging purposes. These instruments principally include interest rate swap agreements and commodity futures, swaps and option agreements. These financial and commodity-based derivative contracts are used to limit the risks of interest rate fluctuations and natural gas and crude oil price changes. Gains and losses on these derivatives are offset by losses and gains on the respective hedged exposures. The Board of Directors has adopted a policy governing the use of derivative instruments, which requires that all derivatives used by the Company relate to an underlying, offsetting position, anticipated transaction or firm commitment, and prohibits the use of speculative, highly complex or leveraged derivatives. The policy also requires review and approval by the Executive Vice President of all risk management programs using derivatives and all derivative transactions. These programs are also periodically reviewed by the Board of Directors. Hypothetical changes in interest rates and prices chosen for the 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. 28 Interest Rate Risk The Company is exposed to interest rate risk on short-term and long-term debt carrying variable interest rates. The Company's variable rate debt was approximately $691.1 million at December 31, 1999. The Company attempts to balance the benefit of lower cost variable rate debt that has inherent increased risk with more expensive fixed rate debt that has less market risk. This is accomplished through a mix of bank debt with short-term variable rates and fixed rate subordinated debt, as well as the use of interest rate swaps. The following table shows the carrying amount and fair value of long-term debt and interest rate swaps, and the hypothetical change in fair value that would result from a 100-basis point change in interest rates. The hypothetical change in fair value could result in a gain or a loss depending on an increase or decrease in the interest rate.
Hypothetical Carrying Fair Change in (in thousands) Amount Value Fair Value ---------- --------- ------------ December 31, 1999 Long-term debt...................... $(991,100) $(981,540) $16,771 Interest rate swaps................. - 574 483 December 31, 1998 Long-term debt...................... $(920,411) $(894,750) $17,000 Interest rate swaps................. - (2,722) 8,655
Commodity Price Risk The Company hedges a portion of the market risks associated with its crude oil and natural gas sales. During 1998 and 1999, the Company primarily entered oil and gas futures contracts and gas basis swap agreements to reduce exposure to price volatility in the physical markets. As of December 31, 1999, outstanding futures contracts had a fair value loss of $2.7 million and outstanding basis swap agreements had a fair value loss of $1.1 million. These futures contracts and basis swap agreements are not recorded on the Company's balance sheet. As of December 31, 1998, outstanding futures contracts had a fair value gain of $3.5 million and outstanding basis swap agreements had a fair value loss of $0.7 million. At year-end 1999, the total effect of a hypothetical 10% change in natural gas prices, oil prices and gas basis would result in approximately a $16 million change in the fair value of these financial instruments. This sensitivity does not include the effects of commodity contracts that cannot be settled in cash or another financial instrument. See Note 6 to Consolidated Financial Statements. Investment in Equity Securities The Company is subject to price risk on its unhedged portfolio of publicly traded investment in equity securities of energy companies. The fair value of these securities at December 31, 1999 was $29.1 million. At year-end 1999, a 25% change in equity price would increase or decrease portfolio fair value and pre-tax earnings by approximately $7 million. During the first quarter of 2000, the Company sold most of this investment at a gain of $14.4 million. Equity securities held at March 24, 2000 had a fair value of $1.7 million. 29 Item 8. Financial Statements and Supplementary Data The following financial statements and supplementary information are included under Item 14(a):
Page ---- Consolidated Balance Sheets......................... 32 Consolidated Statements of Operations............... 33 Consolidated Statements of Comprehensive Income..... 34 Consolidated Statements of Cash Flows............... 35 Consolidated Statements of Stockholders' Equity..... 36 Notes to Consolidated Financial Statements.......... 37 Selected Quarterly Financial Data (Note 18 to Consolidated Financial Statements).... 62 Information about Oil and Gas Producing Activities (Note 19 to Consolidated Financial Statements).... 62 Report of Independent Public Accountants............ 66
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Except for the portion of Item 10 relating to Executive Officers of the Registrant which is included in Part I of this Report, the information called for by Items 10 through 13 is incorporated by reference from the Company's Notice of Annual Meeting and Proxy Statement to be filed with the Commission no later than April 29, 2000. 30 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report:
Page ---- 1. Financial Statements: Consolidated Balance Sheets at December 31, 1999 and 1998........ 32 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997............................... 33 Consolidated Statements of Comprehensive Income for the years ended December 31, 1999, 1998 and 1997......................... 34 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................... 35 Consolidated Statements of Stockholders' Equity for the years years December 31, 1999, 1998 and 1997......................... 36 Notes to Consolidated Financial Statements....................... 37 Report of Independent Public Accountants......................... 66 2. Financial Statement Schedules: Schedule I - Condensed Financial Information of Registrant....... 67 Report of Independent Public Accountants......................... 71 All other financial statement schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes to consolidated financial statements.
(b) Reports on Form 8-K The Company filed the following reports on Form 8-K during the quarter ended December 31, 1999 and through March 30, 2000: On November 29, 1999, the Company filed a report on Form 8-K/A (Amendment No. 1 to Form 8-K dated September 15, 1999) to file amended financial statements for the acquisition of certain producing oil and gas properties and undeveloped acreage in the Arkoma Basin from affiliates of Ocean Energy, Inc. with Lehman Brothers Holding, Inc. On March 9, 2000, the Company filed a report on Form 8-K to announce that it has entered into definitive agreements to sell oil and gas- producing properties in Crockett County, Texas and Lea County, New Mexico. The report also disclosed that the Company has received Board of Directors approval to repurchase up to 2.5 million shares of the Company's common stock. (c) Exhibits See Index to Exhibits at page 72 for a description of the exhibits filed as a part of this report. (d) Financial Statement Schedules Separate financial statements of subsidiary guarantors will be filed by amendment to this Form 10-K if determination is made by the Commission that such financial statements are required in lieu of condensed consolidating financial statements disclosed in Note 16 to Consolidated Financial Statements. 31 CROSS TIMBERS OIL COMPANY Consolidated Balance Sheets ===============================================================================
(in thousands, except shares) December 31 ------------------------ 1999 1998 ------------ ----------- ASSETS (Restated) Current Assets: Cash and cash equivalents........................................... $ 5,734 $ 12,333 Accounts receivable, net............................................ 68,998 50,607 Investment in equity securities..................................... 29,052 44,386 Deferred income tax benefit......................................... 4,168 24,816 Other current assets................................................ 5,540 5,436 ---------- ---------- Total Current Assets.............................................. 113,492 137,578 ---------- ---------- Property and Equipment, at cost -- successful efforts method: Producing properties................................................ 1,635,883 1,335,255 Undeveloped properties.............................................. 10,358 6,845 Gas gathering and other............................................. 32,902 27,829 ---------- ---------- Total Property and Equipment....................................... 1,679,143 1,369,929 Accumulated depreciation, depletion and amortization................ (340,063) (319,507) ---------- ---------- Net Property and Equipment........................................ 1,339,080 1,050,422 ---------- ---------- Other Assets......................................................... 16,817 13,210 ---------- ---------- Loans to Officers.................................................... 7,692 5,795 ---------- ---------- TOTAL ASSETS......................................................... $1,477,081 $1,207,005 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities............................ $ 68,937 $ 69,560 Payable to royalty trusts........................................... 2,739 968 Short-term debt..................................................... - 4,962 Other current liabilities........................................... 2,542 75 ---------- ---------- Total Current Liabilities......................................... 74,218 75,565 ---------- ---------- Long-term Debt....................................................... 991,100 920,411 ---------- ---------- Deferred Income Taxes Payable........................................ 25,975 6,892 ---------- ---------- Other Long-term Liabilities.......................................... 7,959 2,663 ---------- ---------- Commitments and Contingencies (Note 6) Minority Interest in Consolidated Subsidiary......................... 100,012 - ---------- ---------- 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, 58,188,501 and 54,048,227 shares issued)........................... 582 541 Additional paid-in capital.......................................... 396,568 362,526 Treasury stock (9,299,382 and 9,320,971 shares)..................... (119,387) (118,555) Retained earnings (deficit)......................................... (28,414) (71,506) ---------- ---------- Total Stockholders' Equity........................................ 277,817 201,474 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $1,477,081 $1,207,005 ========== ==========
See accompanying notes to consolidated financial statements. 32 CROSS TIMBERS OIL COMPANY Consolidated Statements of Operations ================================================================================
(in thousands, except per share data) Year Ended December 31 ------------------------------- 1999 1998 1997 ------------------------------- REVENUES Oil and condensate.......................................... $ 86,604 $ 56,164 $ 75,223 Gas and natural gas liquids................................. 239,056 182,587 110,104 Gas gathering, processing and marketing..................... 10,644 9,438 9,851 Other....................................................... 4,991 1,297 3,094 -------- --------- -------- Total Revenues.............................................. 341,295 249,486 198,272 -------- --------- -------- EXPENSES.................................................... Production.................................................. 76,110 63,148 43,580 Taxes, transportation and other............................. 33,681 29,105 16,405 Exploration................................................. 904 8,034 2,088 Depreciation, depletion and amortization.................... 112,364 83,560 47,721 Impairment.................................................. - 2,040 - Gas gathering and processing................................ 8,743 8,360 8,517 General and administrative.................................. 14,091 13,479 15,818 Trust development costs..................................... - 1,498 665 -------- --------- -------- Total Expenses.............................................. 245,893 209,224 134,794 -------- --------- -------- OPERATING INCOME............................................ 95,402 40,262 63,478 -------- --------- -------- OTHER INCOME (EXPENSE) Gain on sale of Hugoton Royalty Trust units................. 40,566 - - Gain (loss) on investment in equity securities.............. (1,149) (93,719) 1,735 Interest expense, net....................................... (64,214) (52,113) (26,012) -------- --------- -------- Total Other Income (Expense)................................ (24,797) (145,832) (24,277) -------- --------- -------- INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST...................................... 70,605 (105,570) 39,201 Income Tax Expense (Benefit)................................ 23,965 (35,851) 13,517 Minority Interest in Net Loss of Consolidated Subsidiaries.. 103 - - -------- --------- -------- NET INCOME (LOSS)........................................... 46,743 (69,719) 25,684 Preferred stock dividends................................... 1,779 1,779 1,779 -------- --------- -------- EARNINGS (LOSS) AVAILABLE TO COMMON STOCK................... $ 44,964 $ (71,498) $ 23,905 ======== ========= ======== EARNINGS (LOSS) PER COMMON SHARE Basic...................................................... $0.96 $(1.65) $0.60 ======== ========= ======== Diluted.................................................... $0.95 $(1.65) $0.59 ======== ========= ======== Weighted Average Common Shares Outstanding.................. 46,818 43,396 39,773 ======== ========= ========
See accompanying notes to consolidated financial statements. 33 CROSS TIMBERS OIL COMPANY Consolidated Statements of Comprehensive Income ================================================================================
(in thousands) Year Ended December 31 --------------------------- 1999 1998 1997 ------- -------- ------- NET INCOME (LOSS)................................... $46,743 $(69,719) $25,684 ------- -------- ------- OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gains on available-for-sale securities: Unrealized holding gains.......................... - - 1,434 Less realized gains included in net income........ - - (2,400) ------- -------- ------- Other Comprehensive Income (Loss) Before Tax........ - - (966) Income tax benefit (expense) related to other comprehensive income......................... - - 328 ------- -------- ------- Other Comprehensive Income (Loss)................... - - (638) ------- -------- ------- COMPREHENSIVE INCOME (LOSS)......................... $46,743 $(69,719) $25,046 ======= ======== =======
See accompanying notes to consolidated financial statements. 34 CROSS TIMBERS OIL COMPANY Consolidated Statements of Cash Flows ================================================================================
(in thousands) Year Ended December 31 ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- OPERATING ACTIVITIES Net income (loss)............................................................... $ 46,743 $ (69,719) $ 25,684 Adjustments to reconcile net income (loss) to net cash.......................... provided (used) by operating activities:...................................... Depreciation, depletion and amortization.................................... 112,364 83,560 47,721 Impairment.................................................................. - 2,040 - Stock incentive compensation................................................ 93 1,141 3,386 Deferred income tax......................................................... 23,657 (35,744) 13,393 (Gain) loss on investment in equity securities and from sale of properties.. (51,802) 86,628 (4,157) Minority interest in net loss of consolidated subsidiaries.................. (103) - - Other non-cash items........................................................ 827 2,540 1,864 Changes in operating assets and liabilities (a)............................. 1,522 (124,322) 8,027 --------- --------- --------- Cash Provided (Used) by Operating Activities.................................... 133,301 (53,876) 95,918 --------- --------- --------- INVESTING ACTIVITIES Proceeds from sale of Hugoton Royalty Trust units............................... 148,570 - - Proceeds from sale of long-term investment in equity securities................. - - 24,626 Long-term investment in equity securities....................................... - - (6,479) Proceeds from sale of property and equipment.................................... 110,500 2,494 17,972 Property acquisitions........................................................... (270,226) (296,390) (238,294) Purchase of Spring Holding Company.............................................. (42,540) - - Development costs............................................................... (90,725) (69,356) (88,382) Gas plant, gathering and other additions........................................ (10,479) (7,517) (18,677) Loans to officers............................................................... (1,470) (5,795) - --------- --------- --------- Cash Used by Investing Activities............................................... (156,370) (376,564) (309,234) --------- --------- --------- FINANCING ACTIVITIES Proceeds from short- and long-term debt......................................... 256,400 877,900 688,400 Payments on short- and long-term debt........................................... (339,262) (496,938) (437,430) Purchase of minority interest................................................... (42,385) - - Contributions from minority interests........................................... 142,500 - - Common stock offering........................................................... 29,668 133,113 - Dividends....................................................................... (4,950) (8,460) (7,571) Purchases of treasury stock and other........................................... (25,501) (66,658) (30,204) --------- --------- --------- Cash Provided by Financing Activities........................................... 16,470 438,957 213,195 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (6,599) 8,517 (121) Cash and Cash Equivalents, January 1............................................ 12,333 3,816 3,937 --------- --------- --------- Cash and Cash Equivalents, December 31.......................................... $ 5,734 $ 12,333 $ 3,816 ========= ========= ========= (a) Changes in Operating Assets and Liabilities Accounts receivable....................................................... $ (8,227) $ (7,022) $ 246 Investment in equity securities........................................... 20,180 (131,809) - Other current assets...................................................... (32) (1,513) (970) Current liabilities....................................................... (11,628) 16,022 8,751 Other long-term liabilities............................................... 1,229 - - --------- --------- --------- Decrease (Increase) in Operating Assets and Liabilities..................... $ 1,522 $(124,322) $ 8,027 ========= ========= =========
See accompanying notes to consolidated financial statements. 35 CROSS TIMBERS OIL COMPANY Consolidated Statements of Stockholders' Equity ================================================================================
(in thousands) Shares Stockholders' Equity -------------------------------- ---------------------------------------------------------------- Common Stock ----------------------- Additional Retained Preferred In Preferred Common Paid-in Treasury Earnings Stock Issued Treasury Stock Stock Capital Stock (Deficit) -------- -------- -------- --------- --------- ---------- ----------- ---------- Balances, December 31, 1996... 1,139 42,315 3,868 $ 28,468 $ 423 $ 164,436 $ (40,219) $ (11,078) Issuance/vesting of performance shares......... - 180 76 - 2 3,431 (1,098) - Stock option exercises........ - 924 566 - 9 8,183 (7,326) - Treasury stock purchases...... - - 2,351 - - - (28,013) - Conversion of subordinated.... convertible notes to common stock.............. - 2,892 - - 29 29,179 - - Issuance of warrants ......... - - - - - 5,725 - - Common stock dividends ($0.15 per share).......... - - - - - - - (5,813) Preferred stock dividends ($1.56 per share).......... - - - - - - - (1,779) Net income.................... - - - - - - - 25,684 ------- -------- -------- --------- --------- ---------- ---------- ---------- Balances, December 31, 1997... 1,139 46,311 6,861 28,468 463 210,954 (76,656) 7,014 Sale of common stock.......... - 7,203 - - 72 133,041 - - Issuance/vesting of performance shares........... - 82 27 - 1 1,804 (536) - Stock option exercises........ - 452 25 - 5 2,986 (483) - Treasury stock purchases...... - - 4,330 - - - (65,575) - Treasury stock issued (restated)................... - - (1,922) - - 13,741 24,695 - Common stock dividends ($0.16 per share).......... - - - - - - - (7,022) Preferred stock dividends ($1.56 per share).......... - - - - - - - (1,779) Net loss...................... - - - - - - - (69,719) ------- -------- -------- --------- --------- ---------- ---------- ---------- Balances, December 31, 1998 (restated).............. 1,139 54,048 9,321 28,468 541 362,526 (118,555) (71,506) Issuance/sale of common stock........................ - 4,000 - - 40 45,660 - - Issuance/vesting of performance shares........... - 130 - - 1 232 - - Stock option exercises........ - 11 51 - - 95 (755) - Treasury stock purchases...... - - 1,927 - - - (25,517) - Treasury stock issued......... - - (2,000) - - (11,945) 25,440 - Common stock dividends ($0.04 per share) ......... - - - - - - - (1,872) Preferred stock dividends ($1.56 per share).......... - - - - - - - (1,779) Net income.................... - - - - - - - 46,743 ------- -------- -------- --------- --------- ---------- ---------- ---------- Balances, December 31, 1999 1,139 58,189 9,299 $ 28,468 $ 582 $ 396,568 $ (119,387) $ (28,414) ======= ======== ========= ========= ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 36 CROSS TIMBERS OIL COMPANY Notes to Consolidated Financial Statements ================================================================================ 1. Organization and Summary of Significant Accounting Policies Cross Timbers Oil Company, a Delaware corporation, was organized in October 1990 to ultimately acquire the business and properties of predecessor entities that were created from 1986 through 1989. Cross Timbers Oil Company completed its initial public offering of common stock in May 1993. The accompanying consolidated financial statements include the financial statements of Cross Timbers Oil Company and its wholly owned subsidiaries ("the Company"), as well as the financial statements of 50% owned subsidiaries (Notes 13 and 14) with recognition of the minority stockholder's share of equity and income as minority interest in the balance sheet and income statements. All significant intercompany balances and transactions have been eliminated in the consolidation. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. Certain amounts presented in prior period financial statements have been reclassified for consistency with current period presentation. See Note 16 regarding restatement of financial statements. All common stock shares and per share amounts in the accompanying financial statements have been adjusted for the three-for-two stock splits effected on March 19, 1997 and February 25, 1998. The Company is an independent oil and gas company with production and exploration concentrated in Texas, Oklahoma, Arkansas, Kansas, New Mexico, Wyoming and Alaska. The Company also gathers, processes and markets gas, transports and markets oil and conducts other activities directly related to the oil and gas producing industry. Property and Equipment The Company follows the successful efforts method of accounting, capitalizing costs of successful exploratory wells and expensing costs of unsuccessful exploratory wells. Exploratory geological and geophysical costs are expensed as incurred. All developmental costs are capitalized. The Company generally pursues acquisition and development of proved reserves, although the Company increased its exploration activities in 1997 and 1998. Most of the property costs reflected in the accompanying consolidated balance sheets are from acquisitions of producing properties from other oil and gas companies. Producing properties balances include costs of $27,937,000 at December 31, 1999 and $15,859,000 at December 31, 1998, related to wells in process of drilling. Depreciation, depletion and amortization of producing properties is computed on the unit-of-production method based on estimated proved oil and gas reserves. Other property and equipment is generally depreciated using the straight-line method over estimated useful lives which range from 3 to 40 years. Repairs and maintenance are expensed, while renewals and betterments are generally capitalized. The estimated undiscounted cost, net of salvage value, of dismantling and removing major oil and gas production facilities, including necessary site restoration, are accrued using the unit-of-production method. If conditions indicate that long-term assets may be impaired, the carrying value of property, plant and equipment intended to be retained is compared to management's future estimated pretax cash flow. If impairment is necessary, the asset carrying value is adjusted to fair value. Cash flow pricing estimates are based on existing proved reserve and production information and pricing assumptions that management believes are reasonable. Impairment of individually significant undeveloped properties is assessed on a property-by-property basis, and impairment of other undeveloped properties is assessed and amortized on an aggregate basis. The Company recorded an impairment provision on producing properties of $2,040,000 before income tax in 1998. 37 Royalty Trusts The Company created Cross Timbers Royalty Trust in February 1991 and Hugoton Royalty Trust in December 1998 by conveying defined net profits interests in certain of the Company's properties. Units of both trusts are traded on the New York Stock Exchange. The Company makes monthly net profits payments to each trust based on revenues and costs from the related underlying properties. The Company owns 22.7% of Cross Timbers Royalty Trust units that it purchased on the open market in 1996 and 1997, and owns 57.3% of the Hugoton Royalty Trust following the sale of units in the trust's initial public offering (Note 12). The cost of the Company's interest in the trust is included in producing properties. Amounts due the trusts, net of amounts retained by the Company's ownership of trust units, are deducted from the Company's revenues, taxes, production expenses and development costs. As of January 1, 1999, the Company no longer records the trusts' portion of development costs as an expense in the consolidated statement of operations. The Company planned to create the Texas Permian Trust in 1999 and sell approximately 40% of the trust units in a public offering. However, because of the depressed market for oil and gas equities, the Company decided not to create the trust and to instead sell a portion of the related properties (Note 20). The Company may later create a trust with the remaining properties, depending on market conditions. Cash and Cash Equivalents Cash equivalents are considered to be all highly liquid investments having an original maturity of three months or less. Investment in Equity Securities In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, equity securities acquired since 1997 are recorded as trading securities since such securities were acquired principally for resale in the near future. Accordingly, this investment is recorded as a current asset at market value, unrealized holding gains and losses are recognized in the consolidated statements of operations, and cash flows from purchases and sales of equity securities are included in cash provided (used) by operating activities in the consolidated statements of cash flows. Gains (losses) on trading securities and interest expense related to the cost of these investments are classified as other income (expense) in the consolidated statements of operations. See Note 2. Other Assets Other assets primarily include deferred debt costs that are amortized over the term of the related debt (Note 4). Other assets are presented net of accumulated amortization of $7,224,000 at December 31, 1999 and $4,697,000 at December 31, 1998. Derivatives The Company uses derivatives on a limited basis to hedge interest rate and product price risks, as opposed to their use for trading purposes. Amounts receivable or payable under interest swap agreements are recorded as adjustments to interest expense. Gains and losses on commodity futures contracts and other price risk management instruments are recognized in oil and gas revenues when the hedged transaction occurs. Cash flows related to derivative transactions are included in operating activities. See Note 8. Revenue Recognition The Company uses the entitlement method of accounting for gas sales, based on the Company's net revenue interest in production. Accordingly, revenue is deferred when gas deliveries exceed the Company's net revenue interest, while revenue is accrued for under-deliveries. Production imbalances are generally recorded at the estimated sales price in effect at the time of production. At December 31, 1999, the Company recorded a payable of $4,109,000 for an overproduced balancing position of 2,215,000 Mcf of natural gas, and a receivable of $3,903,000 for an underproduced balancing position of 9,076,000 Mcf of carbon dioxide. At December 31, 1998, the Company recorded a net receivable 38 of $4,904,000 for a net underproduced balancing position of 885,000 Mcf of natural gas and 7,909,000 Mcf of carbon dioxide. Gas Gathering, Processing and Marketing Revenues Gas produced by the Company and third parties is marketed by the Company to brokers, local distribution companies and end-users. Gas gathering and marketing revenues are recognized in the month of delivery based on customer nominations. Gas processing and marketing revenues are recorded net of cost of gas sold of $66.2 million for 1999, $56.3 million for 1998 and $57.1 million for 1997. These amounts are net of intercompany eliminations. Other Revenues Other revenues include gains and losses from sale of property and equipment. Excluding the gain on sale of Hugoton Royalty Trust units (Note 12), the Company realized gains on sale of property and equipment of $6,390,000 in 1999, $795,000 in 1998 and $1,757,000 in 1997. Interest Expense Interest expense includes amortization of deferred debt costs and is presented net of interest income of $619,000 in 1999, $91,000 in 1998 and $71,000 in 1997, and net of capitalized interest of $1,353,000 in 1999, $1,070,000 in 1998 and $1,185,000 in 1997. Interest expense related to investment in equity securities has been classified as a component of gain (loss) on investment in equity securities. Stock-Based Compensation In accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, no compensation is recorded for stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the common stock price on the grant date. Compensation related to performance share grants is recognized from the grant date until the performance conditions are satisfied, based on the market price of the Company's common stock. The pro forma effect of recording stock-based compensation at the estimated fair value of awards on the grant date, as prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, is disclosed in Note 11. Earnings per Common Share Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share, which changed the method of computing and disclosing earnings per share for all periods. Under SFAS No. 128, the Company must report basic earnings per share, which excludes the effect of potentially dilutive securities, and diluted earnings per share, which includes the effect of all potentially dilutive securities unless their impact is antidilutive. The Company previously only reported earnings per share excluding potentially dilutive securities because their effect was antidilutive or less than 3% dilutive, as prescribed by the accounting pronouncement superseded by SFAS No. 128. See Note 9. Segment Reporting In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has identified only one operating segment, which is the exploration and production of oil and gas. All the Company's assets are located in the United States and all its revenues are attributable to United States customers. There were no sales to a single purchaser that exceeded 10% of total revenues in 1999 or 1998. In 1997, gas sales to one purchaser were approximately 14% of total revenues. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued 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 39 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. 2. Investment in Equity Securities In 1998, the Company purchased what it believed to be undervalued oil and gas reserves through investments in publicly traded equity securities of select energy companies. After selling a portion of these securities in 1998 and 1999, the Company's investment in equity securities had a fair market value of $29.1 million at December 31, 1999. Because classified as trading securities, this investment at December 31, 1999 is recorded as a current asset at market value. Realized gains and losses are computed based on a first-in, first-out determination of cost of securities sold. The following are components of gain (loss) on investment in equity securities (in thousands):
1999 1998 1997 --------- --------- ------- Realized gains (losses) on sale of securities: Gains............................................ $ 823 $ 887 $2,400 Losses........................................... (23,047) (15,706) - -------- -------- ------ Net gains (losses)............................... (22,224) (14,819) 2,400 Decrease (increase) in net unrealized losses (a)... 27,070 (72,605) - Interest expense related to investment in equity securities................................ (5,995) (6,295) (665) -------- -------- ------ Gains (losses) on investment in equity securities.. $ (1,149) $(93,719) $1,735 ======== ======== ======
(a) Because investments in equity securities were recorded as available-for-sale securities prior to 1998, unrealized gains and losses for 1997 are reported as a component of stockholders' equity, as shown in the Consolidated Statements of Comprehensive Income. On September 15, 1999, as a portion of its investment in Whitewine Holding Company ("Whitewine"), a consolidated subsidiary with a 50% minority interest (Note 14), 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 until September 14, 2000. As of December 31, 1999, the equity securities held by Whitewine had a fair market value of $27.1 million. During the first quarter of 2000, the Company sold most of its investment in equity securities for proceeds of $41.1 million, resulting in a gain of $14.4 million, of which $17.1 million was a decrease in unrealized loss. Remaining equity securities are held by Whitewine and had a March 24, 2000 value of $1.7 million. 3. Related Party Transactions Loans to Officers Pursuant to margin support agreements with each of six officers, the Company, with Board of Directors authorization, agreed to use up to $15 million of 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 in which they held Company common stock. The Company 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 $1,530,000 was loaned during 1999, including a new loan to a fifth officer. The loans are full recourse and due in December 2003, with an interest rate equal to the Company's bank debt rate. At each balance sheet date, the loans are reviewed to determine whether a reserve for collectibility should be booked as compensation expense. To date, no reserve for collectibility has been recorded. At March 1, 2000, total officer margin debt on their broker accounts was $10.5 million. At that date, the market value of the Company's Cross Timbers Royalty Trust units was approximately $16 million; all of the Company's 40 equity securities were sold during the first quarter of 2000 with the exception of securities with a value of $1.7 million on March 24, 2000 held by Whitewine. Other Transactions A company, partially owned by a director of the Company, is currently performing consulting services in connection with the Company's divestiture of oil and gas properties in West Texas and eastern New Mexico (Note 20). The Company expects to pay the director-related company a transaction fee of approximately $800,000 that will be due upon sale of the properties. The director-related company also represented the purchaser of properties sold by the Company during 1999 and invested in the purchase. The same director-related company performed consulting services in 1998 in connection with the Cook Inlet Acquisition (Note 15). After the Company recovers its acquisition costs, including interest and subsequent property development and operating costs, the director-related company will receive, at its election, either a 20% working interest or a 1% overriding interest conveyed from the Company's 100% working interest in these properties. In 1997, the Company paid fees of $1.6 million to this director-related company in connection with property sales and the Amoco Acquisition (Note 15). These fees have effectively been recorded as a property cost. 4. Debt The Company's outstanding debt consists of the following (in thousands):
December 31 ------------------ 1999 1998 -------- -------- Short-term Debt: Short-term borrowings................................................... $ - $ 4,962 ======== ======== Long-term Debt: Senior debt- Bank debt under revolving credit agreements due June 30, 2003, 7.4%. (a).................................................................. $439,000 $615,000 Subordinated debt- 9 1/4% senior subordinated notes due April 1, 2007.................... 125,000 125,000 8 3/4% senior subordinated notes due November 1, 2009................. 175,000 175,000 Spring Holding Company- Senior bank debt, 8.5%.(a)............................................ 116,100 - Senior subordinated debt, 12.9%.(a)................................... 7,000 - Summer Acquisition Company- Senior bank debt, 8.5%.(a)............................................ 129,000 - Other long-term debt (restated - Note 17)............................... - 5,411 -------- -------- Total long-term debt.................................................... $991,100 $920,411 ======== ======== (a) LIBOR-based rate at January 4, 2000.
Senior Debt On November 16, 1998, the Company entered a new revolving credit agreement with commercial banks ("loan agreement"). The Company amended the loan agreement on August 15, 1999, and as of December 31, 1999, the loan agreement had a borrowing base and commitment of $468 million and $29 million unused borrowing capacity. Other significant provisions of the revolving credit agreement remained unchanged. The borrowing base is redetermined annually based on the value and expected cash flow of the Company's proved oil and gas reserves. If borrowings exceed the redetermined borrowing base, the banks may require that the excess be repaid within a year. Otherwise, borrowings under the loan agreement do not mature until June 30, 2003, but may be prepaid at any time without penalty. The Company periodically renegotiates the loan agreement to increase the borrowing commitment and extend the 41 revolving facility. The borrowing base is expected to be redetermined in May 2000 in connection with the consolidation of bank debt of the Company, Spring Holding Company and Summer Acquisition Company. Based on year-end proved reserves and relatively strong commodity prices, the Company expects a significant increase in the borrowing base upon its redetermination. Restrictions set forth in the loan agreement include limitations on the incurrence of additional indebtedness, the creation of certain liens, and the redemption or prepayment of subordinated indebtedness. The loan agreement also limits dividends to 25% of cash flow from operations, as defined, for the latest four consecutive quarterly periods. The Company is also required to maintain a current ratio of not less than one (where unused borrowing commitments are included as a current asset). The loan agreement provides the option of borrowing at floating interest rates based on the prime rate or at fixed rates for periods of up to six months based on certificate of deposit rates or LIBOR. Borrowings under the loan agreement at December 31, 1999 were based on the prime rate in anticipation of potential interest rate increases due to Year 2000 concerns. On January 4, 2000, the borrowings reverted to LIBOR rates with a maturity of one to six months and accrued at the applicable LIBOR rate plus 1 3/8%. Interest is paid at maturity, or quarterly if the term is for a period of 90 days or more. The Company also incurs a commitment fee of 3/8% on unused borrowing commitments. The weighted average interest rate on senior debt was 6.7% during 1999, and 6.9% during 1998 and 1997. See Note 8 regarding interest rate swap agreements. Subordinated Debt The Company sold $125 million of 9 1/4% senior subordinated notes ("9 1/4% Notes") on April 2, 1997, and $175 million of 8 3/4% senior subordinated notes ("8 3/4% Notes") on October 28, 1997 (the 9 1/4% Notes and the 8 3/4% Notes are collectively referred to as "the Notes"). The Notes are general unsecured indebtedness that is subordinate to bank borrowings under the loan agreement. Net proceeds of $121.1 million from the 9 1/4% Notes and $169.9 million from the 8 3/4% Notes were used to reduce bank borrowings under the loan agreement. The 9 1/4% Notes mature on April 1, 2007 and interest is payable each April 1 and October 1, while the 8 3/4% Notes mature on November 1, 2009 with interest payable each May 1 and November 1. The Company has the option to redeem the 9 1/4% Notes on April 1, 2002 and the 8 3/4% Notes on November 1, 2002 at a price of approximately 105%, and thereafter at prices declining ratably at each anniversary to 100% in 2005. In addition, on or prior to April 1, 2000 for the 9 1/4% Notes and November 1, 2000 for the 8 3/4% Notes, the Company may redeem up to one-third of the Notes with the net proceeds from one or more public equity offerings at a price of approximately 109% plus accrued interest, subject to certain requirements. Upon a change in control of the Company, the holders of the Notes have the right to require the Company to purchase all or a portion of their Notes at 101% plus accrued interest. The Notes were issued under indentures that place certain restrictions on the Company, including limitations on additional indebtedness, liens, dividend payments, treasury stock purchases, disposition of proceeds from asset sales, transfers of assets and transactions with subsidiaries and affiliates. To reduce the interest rate on a portion of its subordinated debt, the Company entered an agreement with a bank that has purchased on the market Notes with a face value of $21.6 million. The Company pays the bank a variable interest rate based on three-month LIBOR rates, and receives semiannually from the bank the fixed interest rate on the Notes. The term of the agreement for approximately half the Notes is through April 2002, and for the remaining half is through November 2002. Any change in market value of the Notes from the date purchased by the bank is payable to or receivable from the bank. The Company has funded market value depreciation of $169,000 through December 31, 1999. The Company has the option of repurchasing the Notes from the bank at any time at market value. Spring Holding Company Spring Holding Company ("Spring") (Note 13) has a $140 million revolving credit facility with commercial banks which had a borrowing base of $130 million and unused borrowing capacity of $13.9 million at December 31, 1999. The borrowing base is subject to semiannual redetermination. The credit facility is secured by properties owned by Spring and is nonrecourse to the Company. Borrowings under the credit facility mature on July 31, 2004. 42 Restrictions set forth in the credit facility include the maintenance of a minimum consolidated net worth of $35 million 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 LIBOR. Borrowings under the credit facility at December 31, 1999 were based on the prime rate plus 1%. On January 4, 2000, the borrowings reverted to 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 $7 million at December 31, 1999. This loan has a secondary lien on Spring's properties and matures on July 31, 2008. On December 31, 1999, interest accrued at a rate of LIBOR plus 7%. This spread increases 0.5% quarterly. Other terms of the subordinated loan are substantially the same as the Spring revolving credit facility. Summer Acquisition Company Summer Acquisition Company ("Summer") (Note 14) has a $140 million revolving credit facility with commercial banks which had a borrowing base of $140 million and unused borrowing capacity of $11 million at December 31, 1999. The borrowing base is subject to semiannual redetermination. Borrowings under the credit facility were used to partially fund properties acquired from affiliates of Ocean Energy, Inc. The credit facility is secured by the properties acquired and is nonrecourse 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 of $85 million 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 LIBOR. Borrowings under the credit facility at December 31, 1999 were based on the prime rate plus 1.5%. On January 4, 2000, the borrowings reverted to LIBOR rates with a maturity of one month and accrued at the applicable LIBOR rate plus 2.5%. Other Debt As part of the Cook Inlet Acquisition, the Company executed a $6 million non-interest bearing promissory note payable to Shell. This note was due when NYMEX crude oil prices increased to specified levels, and was paid in August and September 1999. See also Note 7 "-Registration Statement." 5. Income Tax The effective income tax rate for the Company was different than the statutory federal income tax rate for the following reasons (in thousands):
1999 1998 1997 ------- -------- ------- Income tax expense (benefit) at the federal statutory rate of 34%.......................................... $24,006 $(35,893) $13,329 State and local taxes and other......................................... (41) 42 188 ------- -------- ------- Income tax expense (benefit)............................................ $23,965 $(35,851) $13,517 ======= ======== =======
Components of income tax expense (benefit) are as follows (in thousands):
1999 1998 1997 ------- -------- ------- Current income tax...................................................... $ 308 $ (107) $ 124 Deferred income tax expense (benefit)................................... 28,697 (2,626) 22,509 Net operating loss carryforward......................................... (5,040) (33,118) (9,116) ------- -------- ------- Income tax expense (benefit)............................................ $23,965 $(35,851) $13,517 ======= ======== =======
43 Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and tax bases of assets and liabilities. The Company's net deferred tax liabilities are recorded as a current asset of $4,168,000 and a long-term liability of $25,975,000 at December 31, 1999, and a current asset of $24,816,000 and a long-term liability of $6,892,000 at December 31, 1998. Significant components of net deferred tax assets and liabilities are (in thousands):
December 31 ------------------ 1999 1998 -------- ------- Deferred tax assets: Net operating loss carryforwards......................................... $ 64,118 $54,044 Accrued stock appreciation right and performance share compensation...... 985 576 Unrealized loss on trading securities.................................... 6,103 24,686 Other.................................................................... 2,891 2,626 -------- ------- Total deferred tax assets......................................... 74,097 81,932 -------- ------- Deferred tax liabilities: Property and equipment................................................... 92,115 61,689 Other.................................................................... 3,789 2,319 -------- ------- Total deferred tax liabilities.................................... 95,904 64,008 -------- ------- Net deferred tax assets (liabilities)...................................... $(21,807) $17,924 ======== =======
As of December 31, 1999, the Company has estimated tax loss carryforwards of approximately $190 million, of which $23 million are related to capital losses. The capital loss tax carryforwards expire in 2004 while the remaining $167 million are scheduled to expire in 2008 through 2014. Approximately $15 million of the tax loss carryforwards are the result of the Spring Acquisition. 6. Commitments and Contingencies Leases The Company leases offices, vehicles and certain other equipment in its primary locations under noncancelable operating leases. As of December 31, 1999, minimum future lease payments for all noncancelable lease agreements (including the sale and operating leaseback agreements described below) were as follows (in thousands):
2000..................... $ 9,244 2001..................... 9,020 2002..................... 8,867 2003..................... 8,683 2004..................... 4,559 Remaining................ 14,531 ------- Total.................... $54,904 =======
Amounts incurred by the Company under operating leases (including renewable monthly leases) were $14,093,000 in 1999, $11,180,000 in 1998 and $9,132,000 in 1997. In March 1996, the Company sold its Tyrone gas processing plant and related gathering system for $28 million and entered an agreement to lease the facility from the buyers for an initial term of eight years at annual rentals of $4 million, and with fixed renewal options for an additional 13 years. This transaction was recorded as a sale and operating leaseback, with no gain or loss on the sale. In November 1996, the Company sold its gathering system in Major County, Oklahoma for $8 million and entered an agreement to lease the facility from the buyers for an initial term of eight years, with fixed renewal options for an additional 10 years. Rentals are adjusted monthly based on the 30-day LIBOR rate and may be irrevocably fixed 44 by the Company with 20 days advance notice. As of December 31, 1999, annual rentals were $1.6 million. This transaction was recorded as a sale and operating leaseback, with a deferred gain of $3.4 million on the sale. The deferred gain is amortized over the lease term based on pro rata rentals and is recorded in other long-term liabilities in the accompanying consolidated balance sheets. Under each of the above sale and leaseback transactions, the Company does not have the right or option to purchase, nor does the lessor have the obligation to sell the facility at any time. However, if the lessor decides to sell the facility at the end of the initial term or any renewal period, the lessor must first offer to sell it to the Company at its fair market value. Additionally, the Company has a right of first refusal of any third party offers to buy the facility after the initial term. Employment Agreements Two executive officers have year-to-year employment agreements with the Company. The agreements are automatically renewed each year-end unless terminated by either party upon thirty days notice prior to each December 31. Under these agreements, each officer receives a minimum annual salary of $300,000 and is entitled to participate in any incentive compensation programs administered by the Board of Directors. The agreements also provide that, in the event the officer terminates his employment for good reason, as defined in the agreement, the officer will receive severance pay equal to the amount that would have been paid under the agreement had it not been terminated. If such termination follows a change in control of the Company, the officer is entitled to a lump-sum payment of three times his most recent annual compensation. Commodity Commitments The Company has entered gas futures contracts to sell 50,000 Mcf of gas per day from April through October 2000 at prices ranging from $2.32 to $2.41 per Mcf and 70,000 Mcf of gas per day from November 2000 to December 2001 at prices ranging from $2.41 to $2.57 per Mcf. In conjunction with these futures contracts, the Company has entered into natural gas call options to sell 10,000 Mcf of gas per day from April through October 2000 at a ceiling price of $2.91 per Mcf, to sell 10,000 Mcf per day from January through December 2001 at a ceiling price of $2.63 per Mcf and to sell 20,000 Mcf of gas per day in the San Juan Basin at an average ceiling index price of $2.75 per Mcf for the year 2001. Prices to be realized for hedged production will be less than these NYMEX prices because of location, quality and other adjustments. The Company has entered gas basis swap agreements which effectively fix Arkoma Basin basis at $0.11 per Mcf for 40,000 to 72,500 Mcf per day from April 2000 to January 2001, East Texas basis at $0.10 for 5,000 Mcf per day through September 2000, Oklahoma basis at $0.10 per Mcf for 30,000 Mcf per day through August and 20,000 Mcf per day for September and October 2000, Houston ship channel basis at $0.02 per Mcf for 40,000 Mcf per day through October 2000, and San Juan Basin basis at $0.28 per Mcf for 10,000 Mcf per day through December 2000. The Company's termination of futures contracts related to first quarter 2000 gas production, including the effects of basis swap agreements, resulted in a net loss of $1.3 million. This loss will be recognized as a decrease in gas revenue of approximately $0.04 per Mcf in the first quarter of 2000. The Company has entered oil futures contracts to sell 8,000 Bbls per day from April through June 2000 at prices ranging from $22.04 to $23.28 per Bbl. Prices to be realized for hedged production will be less than these NYMEX prices because of location, quality and other adjustments. The Company has crude oil differential swaps to sell 8,000 Bbls of oil per day through June 2000 at the posted price plus an average of $3.38 per Bbl and 2,500 Bbls of oil per day from July through September 2000 at the posted price plus $3.18. The Company also has a sweet sour differential swap to sell 2,000 Bbls of oil per day through June 2000 at the posted price plus $1.25 per Bbl. The Company's termination of futures contracts related to first quarter 2000 oil production resulted in a net loss of $3.3 million. This loss will be recognized as a decrease in oil revenue of approximately $2.68 per Bbl in first quarter 2000. 45 As partial consideration for the Cook Inlet Acquisition (Note 15), the Company agreed to sell to Shell gas volumes ranging from 40,000 Mcf in 2000 to 35,000 Mcf in 2003 at specified discounts from index prices. This commitment was recorded at its total value of $7.5 million in March 1999 in other current and long-term liabilities. The discounts are charged to the liability as taken. As of December 31, 1999, $1.6 million is recorded in other current liabilities and $4.4 million is recorded in other long-term liabilities related to this commitment. The Company has committed to sell all gas production from certain properties in the East Texas Basin Acquisition (Note 15) to EEX Corporation at market prices through the earlier of December 31, 2001, or until a total of approximately 34.3 billion cubic feet (27.8 billion cubic feet net to the Company's interest) of gas has been delivered. Based on current production, this sales commitment is approximately 24,700 Mcf (20,000 Mcf net to the Company's interest) per day. As a part of the Ocean Energy Acquisition, the Company assumed a commitment to sell 6,800 Mcf of gas per day through April 2003 at a price of $0.53 per Mcf. Delivery of the committed volumes is in Arkansas. From August 1995 through July 1998 the Company received an additional $0.30 to $0.35 per Mcf on 10,000 Mcf of gas per day. In exchange therefor, the Company agreed to sell 11,650 Mcf per day from August 1998 through May 2000 at the index price and 21,650 Mcf per day from June 2000 through July 2005 at a price of approximately 10% of the average NYMEX futures price for intermediate crude oil. 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 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. The plaintiff has made similar allegations in over 70 actions filed against over 300 other companies. After its review, the Department of Justice decided in April 1999 not to intervene, and the court unsealed the case in May 1999. A federal multi-district litigation panel has ordered that the lawsuits filed by Grynberg against the Company and other companies be transferred and consolidated to the federal district court in Wyoming. The Company and other defendants have filed a motion to dismiss the lawsuit. The Company believes that the allegations of this lawsuit are without merit and intends to vigorously defend the action. 46 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 To date, the Company's expenditures to comply with environmental or safety regulations have not been significant and are not expected to be significant in the future. However, developments such as new regulations, enforcement policies or claims for damages could result in significant future costs. On September 30, 1999, the Company entered a consulting contract with a former officer for services to be provided through September 2000 for a monthly fee of $40,000. See also Note 3. 7. Equity Three-for-Two Stock Splits The Company effected a three-for-two common stock split on February 25, 1998 and March 19, 1997. All common stock shares, treasury stock shares and per share amounts have been retroactively restated to reflect these stock splits. Common Stock On April 27, 1998, the Company completed a public offering of 7,500,000 shares of common stock, of which 7,203,450 shares were sold by the Company and 296,550 shares were sold by a stockholder. The Company's net proceeds from the offering of $133.1 million were used to partially repay bank debt used to fund the East Texas Basin Acquisition (Note 15). The offering was made pursuant to the shelf registration statement filed with the Commission in February 1998. See "Registration Statement" below. On September 30, 1998, the Company issued from treasury 1,921,850 shares to Shell Western E&P, Inc., Shell Deepwater Development Holdings, Inc., and Shell Offshore Inc. ("Shell") for the Cook Inlet Acquisition (Note 15). The Company effectively guaranteed Shell a $20 per share value. As of December 31, 1998, as restated, these shares were valued at $20.00 per share, or a total of $38.4 million (Note 17). The $20 guarantee was effectively settled in July 1999 upon the Company's repurchase of these shares from Shell at $13.25 per share, or $25.5 million, and net additional payments to Shell of $13 million which was charged to equity at that date. On July 1, 1999, the Company issued 4,000,000 shares of common stock at its fair value of $11.425 per share in exchange for its 50% interest in Spring Holding Company and for cash proceeds of $3.2 million which were used to reduce bank debt (Note 13). On July 8, 1999, the Company sold from treasury 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 the 1,921,850 shares of common stock issued to Shell for the Cook Inlet Acquisition. The offering was made pursuant to the shelf registration statement filed with the Commission in February 1998. On September 15, 1999, the Company issued from treasury 4,555,756 shares of its common stock to Whitewine Holding Company ("Whitewine") at its fair value of $13.875 per share as part of its contribution for its 50% interest in Whitewine (Note 14). These common shares are eliminated in the consolidated financial statements. 47 Performance Shares The Company issued performance shares totaling 141,813 shares in 1999, 82,125 shares in 1998 and 180,000 shares in 1997 (Note 11). In October 1999, 12,000 performance shares were forfeited from the shares issued in 1998. In January 2000, an additional 120,000 performance shares were issued. Treasury Stock The Company's open market treasury share acquisitions totaled 5,000 shares in 1999 at an average price of $10.60, 4.3 million shares in 1998 at an average price of $15.26 per share and 2.4 million shares in 1997 at an average price of $11.67 per share. Through March 27, 2.2 million shares have been repurchased in 2000 at a cost of $22.3 million, and 1.2 million shares remain under the February 2000 Board of Directors' authorization to repurchase 2.5 million shares of the Company's common stock. Stockholder Rights Plan On August 25, 1998, the Board of Directors adopted a stockholder rights plan that is designed to assure that all stockholders receive fair and equal treatment in the event of any proposed takeover of the Company. Under this plan, a dividend of one preferred share purchase right was declared for each outstanding share of common stock, par value $.01 per share, payable on September 15, 1998 to stockholders of record on that date. Each right entitles stockholders to buy one one-thousandth of a share of newly created Series A Junior Participating Preferred Stock at an exercise price of $80, subject to adjustment in the event a person acquires or makes a tender or exchange offer for 15% or more of the outstanding common stock. In such event, each right entitles the holder (other than the person acquiring 15% or more of the outstanding common stock) to purchase shares of common stock with a market value of twice the right's exercise price. At any time prior to such event, the Board of Directors may redeem the rights at one cent per right. The rights can be transferred only with common stock and expire in ten years. Registration Statement In February 1998, the Company filed a shelf registration statement with the Commission to potentially offer securities which may include debt securities, preferred stock, common stock or warrants to purchase debt securities, preferred stock or common stock. The shelf registration statement was amended on April 8, 1998 to increase the maximum total price of securities to be offered to $400 million, at prices and on terms to be determined at the time of sale. Net proceeds from the sale of such securities will be used for general corporate purposes, including reduction of bank debt. After the April 1998 and July 1999 common stock offerings, $227.3 million remains available under the shelf registration statement for future sales of securities. Common Stock Warrants As partial consideration for producing properties acquired in December 1997, the Company issued warrants to purchase 944,284 shares of common stock at a price of $15.20 per share for a period of five years. These warrants were valued at $5,725,000 and recorded as additional paid-in capital. Common Stock Dividends The Board of Directors declared quarterly dividends of $0.037 per common share in 1997, $0.04 per common share in 1998 and $0.01 per common share in 1999. See Note 4 regarding restrictions on dividends. Series A Convertible Preferred Stock Series A convertible preferred stock is recorded in the accompanying consolidated balance sheets at its liquidation preference of $25 per share. Cumulative dividends on preferred stock are payable quarterly in arrears, when declared by the Board of Directors, based on an annual rate of $1.5625 per share. The preferred stock has no stated maturity and no sinking fund, and is redeemable, in whole or in part, by the Company. Redemption is allowed only under certain circumstances on or before October 15, 2000 at $26.09 per share, and thereafter unconditionally at prices 48 declining ratably annually to $25.00 per share after October 15, 2006, plus dividends accrued and unpaid to the redemption date. The preferred stock is convertible at the option of the holder at any time, unless previously redeemed, into shares of common stock at a rate of 2.16 shares of common stock for each share of preferred stock, subject to adjustment in certain events. Preferred stock holders are allowed one vote for each common share into which their preferred stock may be converted. Convertible Debt In January 1997, $29.7 million principal of the Company's 5 1/4% convertible subordinated notes was converted by noteholders into 2,892,363 shares of common stock. 8. Financial Instruments The Company uses financial and commodity-based derivative contracts to manage exposures to interest rate and commodity price fluctuations. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. Commodity Price Hedging Instruments The Company periodically enters into futures contracts, energy swaps, collars, basis swaps and option agreements to hedge its exposure to price fluctuations on crude oil and natural gas sales. In 1999, the Company recognized net losses on futures contracts and basis swap transactions of $5.7 million related to gas hedging and $2.2 million related to oil hedging. During 1998, the Company recognized net gains of $7.7 million related to gas hedging. These gains and losses are recorded as a component of oil and natural gas sales. The Company did not have significant commodity hedging activity during 1997. See Note 6. Interest Rate Swap Agreements In September 1998, to reduce variable interest rate exposure on debt, the Company entered into a series of interest rate swap agreements, effectively fixing its interest rate at an average of 6.9% on a total notional balance of $150 million until September 2005. Settlements of net amounts due are made quarterly, based on LIBOR rates, which is the same interest rate basis as the Company's senior debt borrowings. In 1999, the Company terminated its interest rate swaps on notional balances totaling $100 million, resulting in proceeds received and a gain of $1.1 million. This gain has been deferred and is being amortized against interest expense through September 2005. The Company sold a call option for $880,000 that allows the counterparty to terminate the interest rate swap on the remaining $50 million notional balance in November 2000. The call option proceeds have been recorded as deferred revenue until November 2000 when they will be amortized against interest expense through September 2005. 49 Fair Value Because of their short-term maturity, the fair value of cash and cash equivalents, accounts receivable and accounts payable approximates their carrying values at December 31, 1999 and 1998. The following are estimated fair values and carrying values of the Company's other financial instruments at each of these dates (in thousands):
Asset (Liability) ------------------------------------------------------ December 31, 1999 December 31, 1998 ---------------------- ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ------------------ (Restated) Investment in equity securities.. $ 29,052 $ 29,052 $ 44,386 $ 44,386 Short-term debt.................. - - (4,962) (4,962) Long-term debt................... (991,100) (981,540) (920,411) (894,750) Futures contracts................ - (2,676) - 3,525 Basis swap agreements............ - (1,113) - (690) Interest rate swap agreements.... - 574 - (2,722)
The fair value of short-term borrowings and bank borrowings approximates the carrying value because of short-term interest rate maturities. The fair value of investment in equity securities and subordinated long-term debt is based on current market quotes. The fair value of futures contracts and swap agreements is estimated based on current commodity prices and interest rates. Concentrations of Credit Risk Although the Company's cash equivalents and derivative financial instruments are exposed to the risk of credit loss, the Company does not believe such risk to be significant. Cash equivalents are high-grade, short-term securities, placed with highly rated financial institutions. Most of the Company's receivables are from a broad and diverse group of energy companies and, accordingly, do not represent a significant credit risk. The Company's gas marketing activities generate receivables from customers including pipeline companies, local distribution companies and end-users in various industries. Letters of credit or other appropriate security are obtained as considered necessary to limit risk of loss. The Company recorded an allowance for collectibility of all accounts receivable of $2,150,000 at December 31, 1999 and $375,000 at December 31, 1998. The Company's bad debt expense was $1,347,000 in 1999, $411,000 in 1998 and $79,000 in 1997. Financial and commodity-based swap contracts expose the Company to the credit risk of non-performance by the counterparty to the contracts. The Company does not believe this risk is significant since these contracts are placed with major banks and financial institutions. 9. Earnings Per Share The following reconciles earnings (numerator) and shares (denominator) used in the computation of basic and diluted earnings per share (in thousands, except per share data):
Earnings Earnings Shares per Share --------- -------- ---------- 1999 - ------------------------------------------------ Basic Net income.................................... $ 46,743 Preferred stock dividends..................... (1,779) -------- Earnings available to common stock - basic.... 44,964 46,818 $ 0.96 ========= Diluted Effect of dilutive securities (a): Stock options................................ - 108 Preferred stock dividends.................... 1,779 2,460 Warrants..................................... - - -------- ------ Earnings available to common stock - diluted.. $ 46,743 49,386 $ 0.95 ======== ====== =========
50
Earnings Earnings Shares per Share -------- -------- --------- 1998 - ------------------------------------------------- Basic Net loss..................................... $(69,719) Preferred stock dividends.................... (1,779) -------- Loss available to common stock - basic....... (71,498) 43,396 $ (1.65) ========= Diluted Effect of dilutive securities: Stock options............................... - 338 Warrants.................................... - 23 -------- ------ Loss available to common stock - diluted..... $(71,498) 43,757 $ (1.65)(b) ======== ====== ========= 1997 - ------------------------------------------------- Basic Net income................................... $ 25,684 Preferred stock dividends.................... (1,779) -------- Earnings available to common stock - basic... 23,905 39,773 $ 0.60 ========= Diluted Effect of dilutive securities: Stock options.............................. - 451 Warrants.................................... - 3 5 1/4% convertible subordinated notes...... 46 115 -------- ------ Earnings available to common stock - diluted. $ 23,951 40,342 $ 0.59 ======== ====== =========
(a) Based on common shares outstanding at December 31, 1999, potential conversion of Series A convertible preferred stock becomes dilutive to earnings per share when annual earnings available to common stock exceeds approximately $35.4 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 loss available to common stock is the same as basic. 10. Supplemental Cash Flow Information The consolidated statements of cash flows exclude the following non-cash transactions : - Issuance of warrants in 1997 to purchase 944,284 shares of common stock and exchange of properties valued at $14.3 million, as partial consideration for producing properties acquired - Conversion of $29.7 million principal amount of 5 1/4% convertible subordinated notes into 2,892,363 shares of common stock in 1997 - The Cook Inlet Acquisition on September 30, 1998, a purchase of oil- producing properties for 1,921,850 shares of common stock, a related effective guarantee of $20 per share value and a $6 million note payable - Purchase of a 50% interest in Spring Holding Company, Inc. on July 1, 1999 in exchange for 3,720,000 shares of common stock, valued at $42.5 million - Performance shares activity including: - Grants of 141,813 shares in 1999, 82,125 shares in 1998 and 180,000 shares in 1997 to key employees and nonemployee directors - Vesting of 81,000 shares in 1998 and 243,000 shares in 1997 51 - Forfeiture of 12,000 shares in 1999 - Receipt of common stock of 49,122 shares (valued at $721,000) in 1999, 8,904 shares (valued at $181,000) in 1998 and 421,212 shares (valued at $5,430,000) in 1997 for the option price of exercised stock options and royalty trust options Interest payments in 1999 totaled $70,500,000 (including $1,353,000 of capitalized interest), $57,200,000 in 1998 (including $1,070,000 of capitalized interest) and $21,276,000 in 1997 (including $1,185,000 of capitalized interest). Income tax payments were $941,000 in 1997; net income tax refunds were $322,000 during 1999 and $454,000 during 1998. 11. Employee Benefit Plans 401(k) Plan The Company sponsors a 401(k) benefit plan that allows employees to contribute and defer a portion of their wages. The Company matches employee contributions of up to 10% of wages (8% of wages prior to January 1, 1998). Employee contributions vest immediately while the Company's matching contributions vest 100% upon the earlier of three consecutive years of participation in the plan or five years of service. All employees over 21 years of age may participate. Company contributions under the plan were $2,514,000 in 1999, $1,766,000 in 1998 and $1,180,000 in 1997. 1991 Stock Incentive Plan A total of 1,012,500 incentive units ("units") have been granted to directors, officers and other key employees under the 1991 Stock Incentive Plan ("1991 Plan"). Units consist of a stock option and a stock appreciation right ("SAR"). An option provides the right to purchase one share of common stock at the exercise price, which generally is the market price at the date the unit is granted. A SAR entitles the recipient to a payment equal to twice the excess of the market price of one share of common stock on the date the option is exercised over the exercise price. As of December 31, 1999, there are 3,341 units available for grant under the 1991 Plan. General and administrative expense includes a reduction of stock incentive compensation related to SARs of $9,000 in 1999, $299,000 in 1998, and stock incentive compensation expense of $359,000 in 1997. SAR cash payments were $180,000 in 1998 and $288,000 in 1997. 1994 and 1997 Stock Incentive Plans Under the 1994 Stock Incentive Plan ("1994 Plan") and the 1997 Stock Incentive Plan ("1997 Plan"), a total of 2,250,000 shares of common stock may be issued under each plan to directors, officers and other key employees pursuant to grants of stock options or performance shares of common stock ("performance shares"). At December 31, 1999, there are 27,878 shares available for grant under the 1994 Plan and 53,124 shares available for grant under the 1997 Plan. Options vest and become exercisable on terms specified when granted by the compensation committee ("the Committee") of the Board of Directors. Options granted under the 1994 Plan are not exercisable six months before or ten years after its grant date. Options granted under the 1994 Plan and the 1997 Plan generally vest in equal amounts over five years, with provisions for earlier vesting if specified performance requirements are met. In May 1998, all options under the 1994 Plan vested by resolution of the Board of Directors. As of December 31, 1999, there are 382,875 outstanding stock options under the 1997 Plan that vest when the common stock price reaches $25. 1998 Stock Incentive Plan In May 1998, the stockholders approved the 1998 Stock Incentive Plan ("1998 Plan") under which 6,000,000 shares of common stock are available for grant. Grants under the 1998 Plan are subject to the provision that outstanding stock options and performance shares under all the Company's stock incentive plans cannot exceed 6% of the Company's outstanding common stock at the time such grants are made. During 1999, there were 349,125 stock options granted under the 1998 Plan. During 1998, 810,375 stock options were designated to be granted to specific optionees upon each of their exercises of all outstanding vested options granted under the 1997 Plan. Stock options generally vest and become exercisable annually in equal amounts over a five-year period, with provision for accelerated vesting when the common stock price reaches specified levels. 52 Performance Shares Performance shares granted under the 1994, 1997 and 1998 Plans are subject to restrictions determined by the Committee and are subject to forfeiture if performance targets are not met. Otherwise, holders of performance shares generally have all the voting, dividend and other rights of other stockholders. The Company issued performance shares to key employees totaling 130,000 in 1999, 72,000 in 1998 and 169,875 in 1997, of which 81,000 vested in 1998 and 243,000 vested in 1997 when the common stock price reached specified levels. In 1999, 12,000 performance shares issued in 1998 were forfeited. General and administrative expense includes compensation related to these performance share grants of $102,000 in 1999, $1.6 million in 1998 and $3.3 million in 1997. As of December 31, 1999, there are 130,000 performance shares that vest when the common stock price reaches $16.00 and 60,000 performance shares that vest when the common stock price reaches $22.50. In January 2000, 120,000 performance shares were granted that vest when the common stock price reaches $20.00. The Company also issued to nonemployee directors a total of 11,813 performance shares in 1999 and 10,125 performance shares in each of 1998 and 1997, which vested upon grant. Royalty Trust Option Plans In May 1998, the stockholders approved the 1998 Royalty Trust Option Plan ("Option Plan"). Under the terms of the Option Plan, the Company may grant to key employees options to purchase units of beneficial interest in one or more royalty trusts that may be established by the Company. Such options will allow the purchase of royalty trust units at fair market value on the date of grant in an aggregate amount not to exceed $12 million. In December 1998, the Company granted options to purchase 1,263,000 Hugoton Royalty Trust units at a price of $9.50 per unit, or a total of $12 million. During 1999, an option to purchase 73,684 units was exercised, resulting in compensation expense of $60,000 (Note 12). Upon forfeiture of an option to purchase 147,000 units in January 2000, 174,000 options to purchase units were granted at a price of $8.03 per unit. The Company formed the 1999 Royalty Trust Option Plan in anticipation of creating a new royalty trust in 1999. To date, the new trust has not been created and there are no outstanding grants under the 1999 Royalty Trust Option Plan. Unit/Option Activity and Balances The following summarizes unit and option activity and balances from 1997 through 1999:
1994, 1997 Weighted and 1998 Average 1991 Plan Plans Exercise Incentive Stock Price Units Options ---------- --------- ----------- 1997 ------------------------------------------ Beginning of year..................... $ 7.32 50,963 1,486,996 Grants.............................. 12.11 - 1,757,250 Exercises........................... 6.75 (26,213) (897,234) Forfeitures......................... 8.79 - (18,315) --------- ----------- End of year........................... 11.11 24,750 2,328,697 ========= =========== Exercisable at end of year............ 10.96 24,750 1,119,044 ========= =========== 1998 ------------------------------------------ Beginning of year..................... $ 11.11 24,750 2,328,697 Grants.............................. 17.52 - 1,395,750 Exercises........................... 11.64 (6,750) (1,081,711) Forfeitures......................... 17.19 - (21,750) --------- ----------- End of year........................... 14.23 18,000 2,620,986 ========= =========== Exercisable at end of year............ 11.03 18,000 1,351,236 ========= =========== 1999 ------------------------------------------ Beginning of year..................... $ 14.23 18,000 2,620,986 Grants.............................. 10.67 - 409,875 Exercises........................... 6.86 - (10,462) Forfeitures......................... 11.63 (9,000) (19,575) --------- ----------- End of year........................... 13.80 9,000 3,000,824 ========= =========== Exercisable at end of year............ 11.09 9,000 1,330,574 ========= ===========
53 The following summarizes information about outstanding units and options at December 31, 1999:
Units/Options Outstanding Units/Options Exercisable ------------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Range of Remaining Exercise Exercise Exercise Prices Number Term Price Number Price --------------- --------- --------- -------- --------- --------- 1991 Plan $5.32 - $7.58 9,000 2.1 years $ 5.43 9,000 $ 5.43 1994, 1997 and 1998 Plans $6.61 - $7.89 283,053 6.3 years 7.24 222,303 7.25 $9.67 - $10.92 264,521 6.4 years 9.68 264,521 9.68 $11.15 - $13.40 1,107,875 8.2 years 11.94 743,250 12.21 $15.53 - $18.22 1,345,375 8.4 years 17.59 100,500 15.54 --------- --------- 3,009,824 1,339,574 ========= =========
Estimated Fair Value of Grants Using the Black-Scholes option-pricing model and the following assumptions, the weighted average fair value of option grants was estimated to be $6.40 in 1999, $6.82 in 1998 and $5.05 in 1997.
1999 1998 1997 -------- -------- -------- Risk-free interest rates......... 5.8% 5.6% 6.4% Dividend yield................... 3.0% 3.2% 1.6% Weighted average expected lives.. 5 years 5 years 5 years Volatility....................... 91% 52% 47%
Pro Forma Effect of Recording Stock-Based Compensation at Estimated Fair Value The following are pro forma earnings (loss) available to common stock and earnings (loss) per common share for 1999, 1998 and 1997, as if stock-based compensation had been recorded at the estimated fair value of stock awards at the grant date, as prescribed by SFAS 123, Accounting for Stock-Based Compensation:
(in thousands, except per share data) 1999 1998 1997 -------- --------- -------- Earnings (loss) available to common stock: As reported............................... $ 44,964 $ (71,498) $ 23,905 Pro forma................................. $ 40,373 $ (75,785) $ 21,646 Earnings (loss) per common share: Basic As reported...................... $ 0.96 $ (1.65) $ 0.60 Pro forma........................ $ 0.86 $ (1.75) $ 0.54 Diluted As reported...................... $ 0.95 $ (1.65) $ 0.59 Pro forma........................ $ 0.85 $ (1.75) $ 0.54
54 12. 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 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. In July 1999, an officer exercised options to purchase 73,684 Hugoton Royalty Trust units from the Company pursuant to the 1998 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. 13. Spring Holding Company Acquisition On July 1, 1999, the Company and Lehman Brothers Holdings, Inc. ("Lehman") acquired predominantly gas-producing properties in the Arkoma Basin through the purchase of the common stock of Spring Holding Company ("Spring"), a private oil and gas company located in Tulsa, Oklahoma for $85 million. The Company issued 3,720,000 shares of common stock for its ownership interest in Spring 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 purchased Lehman's interest on September 15, 1999 for $44.3 million, or $1.8 million in excess of the recorded minority interest, which excess was recorded as producing property cost. Property cost associated with the Spring acquisition totaled approximately $235 million, a portion of which was attributed to other than producing properties, including a gas gathering system, compressors, undeveloped leasehold cost and other tangible property. Cost of these other assets are depreciated over their useful lives, primarily using the unit-of-production method based on proved reserves for properties served by these assets. After purchase accounting adjustments, including a $14.1 million step-up adjustment for deferred income taxes, the cost of the properties was $257 million. Although the Company and Lehman had equal board representation and control of Spring, the Company's management controlled operations of the properties since July 1, 1999 and had the right to purchase Lehman's interest pursuant to the call agreement. The Company accordingly has consolidated its investment in Spring since July 1, 1999 using the purchase method of accounting, with recognition of Lehman's investment as a minority interest through September 14, 1999. 14. Ocean Energy Acquisition On September 15, 1999, the Company and Lehman acquired predominantly gas- producing properties in the Arkoma Basin from affiliates of 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 (Note 2). 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. Although the Company and Lehman have equal board representation and control of Whitewine, the Company's management controls operations of the properties and the Company has the right to purchase Lehman's interest pursuant to the call agreement described below. Whitewine's financial results are consolidated in the Company's financial statements, with recognition of Lehman's 50% interest as a minority interest. The Company entered 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 55 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. The Company plans to exercise its option to purchase Lehman's interest on March 31, 2000 for $111 million. 15. Acquisitions and Dispositions On April 24, 1998, the Company acquired producing properties in the East Texas Basin from EEX Corporation ("East Texas Basin Acquisition") for $265 million. After purchase price adjustments primarily resulting from net revenues from the January 1, 1998 effective date through April 24, 1998, the properties were purchased for $245 million. In connection with the acquisition, the Company sold a production payment to EEX Corporation for $30 million. The production payment is payable from production from certain properties acquired in the East Texas Basin Acquisition during the 10-year period beginning January 1, 2002. EEX Corporation effectively pays all taxes, royalties and production expenses related to such production. The Company has the option to repurchase a portion of this production payment each December, beginning in 1998; this option was not exercised in December 1998 or 1999. The cost of the East Texas Basin Acquisition (net of the production payment sold) of $215 million was funded by bank borrowings which were partially repaid by proceeds from the sale of common stock. 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 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 equity. Deferred gas contract revenue of $7.5 million was also recorded which is being amortized to gas revenue as the discounts are taken by Shell. On July 15, 1999, the Company used the proceeds from a stock offering 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 $31 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 nonoperated 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 nonoperated producing properties in June 1999 for approximately $15 million. Proceeds from the sales were used to reduce bank debt. On September 14, 1999, producing properties were sold for approximately $63.5 million before closing costs in two transactions. Cross Timbers sold primarily nonoperated properties in Oklahoma, the Permian Basin of West Texas and New Mexico and the Green River Basin of Wyoming for a total of $41 million, and Spring sold properties in the Panhandle area of Texas and in Coal County, Oklahoma for $22.5 million. 56 Acquisitions have been recorded using the purchase method of accounting. The following presents unaudited pro forma results of operations for the years ended December 31, 1999 and 1998 as if these acquisitions, the Spring Acquisition (Note 13), the Ocean Energy Acquisition (Note 14), and the sale of Hugoton Royalty Trust units (Note 12) 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.
(in thousands, except per share data) Pro Forma (Unaudited) -------------------------------- 1999 1998 ---------- ---------- Revenues................................... $ 368,313 $ 308,967 ========== ========== Net income (loss).......................... $ 46,823 $ (62,741) ========== ========== Earnings (loss) available to common stock.. $ 45,195 $ (64,520) ========== ========== Earnings (loss) per common share: Basic................................ $ 0.93 $ (1.26) ========== ========== Diluted.............................. $ 0.91 $ (1.26) ========== ==========
Spring acquired a significant portion of its producing properties in July 1998. 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. See Note 20. 16. Supplemental Guarantor Information Redwine Holdings, LLC ("Redwine"), a wholly owned subsidiary of the Company, has signed a supplemental indenture, fully and unconditionally guaranteeing the Company's subordinated notes (Note 4) including interest. Redwine is not restricted from making distributions to the Company. Separate financial statements for Redwine have not been prepared because the Company has determined that information provided by such financial statements is not material to investors. In accordance with practices accepted by the Commission, and in order to provide meaningful financial data relating to Redwine, the guarantor, the following condensed consolidating financial statements are presented. The consolidating balance sheet, statement of operations and statement of cash flows present financial information for: - Cross Timbers Oil Company as the parent on a stand-alone basis (carrying any investments in subsidiaries under the equity method), - Redwine as the guarantor, as consolidated with its wholly owned subsidiary, Spring Holding Company, on a stand-alone basis, - Non-guarantor subsidiaries of the Company on a consolidated basis, - Consolidation and elimination entries necessary to derive the information for the Company on a consolidated basis, and - The Company on a consolidated basis. Redwine was formed in June 1999 by Lehman Brothers Holdings, Inc. to acquire the common stock of Spring Holding Company (Note 13). Upon Redwine's acquisition of Spring Holding Company in July 1999, the Company acquired a 50% interest in Redwine. Redwine's execution of the supplemental indenture related to the Company's debt securities was a result of the Company's acquisition of the remaining 50% in September 1999. Therefore, consolidating financial statements are presented for 1999 only. 57 Supplemental Condensed Consolidating Balance Sheet
(in thousands) December 31, 1999 --------------------------------------------------------------------- Cross Timbers Oil Company Guarantor Non-Guarantor (Parent) Subsidiary Subsidiaries Eliminations Consolidated ------------ ---------- ------------ ------------ ------------ ASSETS Current Assets: Cash and cash equivalents.................................... $ 11 $ 1,557 $ 4,166 $ - $ 5,734 Accounts receivable, net..................................... - 759 68,239 - 68,998 Investment in equity securities.............................. 582 - 28,470 - 29,052 Deferred income tax benefit.................................. 1,763 34 2,371 - 4,168 Other current assets......................................... 4,654 239 647 - 5,540 ---------- -------- --------- --------- ---------- Total Current Assets........................................ 7,010 2,589 103,893 - 113,492 ---------- -------- --------- --------- ---------- Property and Equipment, at cost - successful efforts method: Producing properties......................................... 1,176,420 229,494 229,969 - 1,635,883 Undeveloped properties....................................... 6,508 3,850 - - 10,358 Gas gathering and other...................................... 17,876 4,140 10,886 - 32,902 Accumulated depreciation, depletion and amortization......... (326,615) (4,823) (8,625) - (340,063) ---------- -------- --------- --------- ---------- Net Property and Equipment.................................. 874,189 232,661 232,230 - 1,339,080 ---------- -------- --------- --------- ---------- Other Assets.................................................. 19,683 1,798 3,028 - 24,509 ---------- -------- --------- --------- ---------- Intercompany Receivable (Payable)............................. 167,109 (1,238) (165,871) - - ---------- -------- --------- --------- ---------- Investment in Parent.......................................... - - 63,211 (63,211) - ---------- -------- --------- --------- ---------- Investment in Subsidiaries.................................... 48,916 - - (48,916) - ---------- -------- --------- --------- ---------- TOTAL ASSETS.................................................. $1,116,907 $235,810 $ 236,491 $(112,127) $1,477,081 ========== ======== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities..................... $ 1,130 $ 15,225 $ 52,582 $ - $ 68,937 Other current liabilities.................................... 2,542 - 2,739 - 5,281 ---------- -------- --------- --------- ---------- Total Current Liabilities................................... 3,672 15,225 55,321 - 74,218 ---------- -------- --------- --------- ---------- Long-term Debt................................................ 739,000 123,100 129,000 - 991,100 ---------- -------- --------- --------- ---------- Deferred Income Taxes Payable (Receivable).................... 27,573 14,711 (16,309) - 25,975 ---------- -------- --------- --------- ---------- Other Long-term Liabilities................................... 5,634 - 2,325 - 7,959 ---------- -------- --------- --------- ---------- Minority Interest in Consolidated Subsidiary.................. - - 100,012 - 100,012 ---------- -------- --------- --------- ---------- Stockholders' Equity: Preferred stock.............................................. 28,468 - - - 28,468 Common stock................................................. 628 - - (46) 582 Additional paid-in capital................................... 459,733 85,040 4,460 (152,665) 396,568 Treasury stock............................................... (119,387) - - - (119,387) Retained earnings (deficit).................................. (28,414) (2,266) (38,318) 40,584 (28,414) ---------- -------- --------- --------- ---------- Total Stockholders' Equity.................................. 341,028 82,774 (33,858) (112,127) 277,817 ---------- -------- --------- --------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY...................... $1,116,907 $235,810 $ 236,491 $(112,127) $1,477,081 ========== ======== ========= ========= ==========
58 Supplemental Consolidating Statement of Income (in thousands)
Year Ended December 31, 1999 ---------------------------------------------------------------------- Cross Timbers Oil Company Guarantor Non-Guarantor (Parent) Subsidiary Subsidiaries Eliminations Consolidated ----------- ---------- ------------ ------------ ------------ REVENUES Oil and condensate.............................. $ 85,839 $ 141 $ 624 $ - $ 86,604 Gas and natural gas liquids..................... 207,364 19,161 12,531 - 239,056 Gas gathering, processing and marketing......... - 569 10,075 - 10,644 Other........................................... 5,283 (80) (212) - 4,991 ---------- --------- ---------- --------- ---------- Total Revenues.................................. 298,486 19,791 23,018 - 341,295 ---------- --------- ---------- --------- ---------- EXPENSES Production...................................... 70,637 3,654 1,819 - 76,110 Taxes, transportation and other................. 31,940 675 1,066 - 33,681 Exploration..................................... 887 14 3 - 904 Depreciation, depletion and amortization........ 94,227 11,731 6,406 - 112,364 Gas gathering and processing.................... - 186 8,557 - 8,743 General and administrative...................... 9,490 1,103 3,498 - 14,091 ---------- --------- ---------- --------- ---------- Total Expenses.................................. 207,181 17,363 21,349 - 245,893 ---------- --------- ---------- --------- ---------- OPERATING INCOME................................ 91,305 2,428 1,669 - 95,402 ---------- --------- ---------- --------- ---------- OTHER INCOME (EXPENSE) Gain on sale of Hugoton Royalty Trust units..... 40,566 - - - 40,566 Gain (loss) on investment in equity securities.. 426 - (1,575) - (1,149) Interest expense, net........................... (55,679) (6,184) (2,351) - (64,214) Equity in loss from subsidiaries................ (3,875) - - 3,875 - ---------- --------- ---------- --------- ---------- Total Other Income (Expense).................... (18,562) (6,184) ( 3,926) 3,875 (24,797) ---------- --------- ---------- --------- ---------- INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST.......................... 72,743 (3,756) (2,257) 3,875 70,605 Income Tax Expense (Benefit).................... 26,000 (1,375) (660) - 23,965 Minority interest in net loss (income) of consolidated subsidiaries................... - 115 (12) - 103 ---------- --------- ---------- --------- ---------- NET INCOME (LOSS)............................... 46,743 (2,266) (1,609) 3,875 46,743 Preferred stock dividends....................... 1,779 - - - 1,779 ---------- --------- ---------- --------- ---------- EARNINGS (LOSS) AVAILABLE TO COMMON STOCK................................ $ 44,964 $ (2,266) $ (1,609) $ 3,875 $ 44,964 ========== ========= ========== ========= ==========
59 Supplemental Condensed Consolidating Statement of Cash Flows (in thousands)
Year Ended December 31, 1999 ------------------------------------------------------- Cross Timbers Oil Company Guarantor Non-Guarantor (Parent) Subsidiary Subsidiaries Total ------------- ---------- ------------- ---------- Cash Provided by Operating Activities..................... $ 97,812 $ 11,859 $ 23,630 $ 133,301 ------------ --------- ------------ --------- Investing Activities Proceeds from sale of Hugoton Royalty Trust units...... 148,570 - - 148,570 Proceeds from sale of property and equipment........... 87,647 21,769 1,084 110,500 Property acquisitions.................................. (12,503) (261) (257,462) (270,226) Purchase of Spring Holding Company..................... - (42,540) - (42,540) Development costs...................................... (85,294) (5,271) (160) (90,725) Gas plant, gathering and other additions............... (5,300) (1,599) (3,580) (10,479) Loans to officers...................................... (1,470) - - (1,470) ------------ --------- ------------ --------- Cash Used by Investing Activities......................... 131,650 (27,902) (260,118) (156,370) ------------ --------- ------------ --------- Financing Activities Proceeds from short- and long-term debt................ 103,000 17,400 136,000 256,400 Payments on short- and long-term debt.................. (289,962) (42,300) (7,000) (339,262) Purchase of minority interest.......................... (42,385) - - (42,385) Contributions from minority interests.................. - 42,500 100,000 142,500 Common stock offering.................................. 29,668 - - 29,668 Dividends.............................................. (4,950) - - (4,950) Purchases of treasury stock and other.................. (25,501) - - (25,501) ------------ --------- ------------ --------- Cash Provided by Financing Activities..................... (230,130) 17,600 229,000 16,470 ------------ --------- ------------ --------- Increase (Decrease) in Cash and Cash Equivalents..................................... (668) 1,557 (7,488) (6,599) Cash and Cash Equivalents, January 1...................... 679 - 11,654 12,333 ------------ --------- ------------ --------- Cash and Cash Equivalents, December 31.................... $ 11 $ 1,557 $ 4,166 $ 5,734 ============ ========= ============ =========
60 17. Restatement of Financial Statements Pursuant to completion of a review of the Company's financial statements by the Securities and Exchange Commission in March 2000, the Company has restated its consolidated balance sheet as of December 31, 1998, its consolidated statement of stockholders' equity for the year ended December 31, 1998 and its interim 1999 income statements. These restatements were made to reflect a change in accounting for the Cook Inlet Acquisition for technical compliance with business combination accounting prescribed by Accounting Principles Board Opinion No. 16. As disclosed in Note 15, the Company issued common stock to Shell subject to a $20 per share price guarantee, and by July 1999, the Company had repurchased the common shares and made other payments to Shell to satisfy its obligation under the guarantee. The Company also issued a $6 million non- interest bearing note payable to Shell, payments under which were contingent upon oil prices reaching specified levels. This note was fully paid by September 1999. The Company originally recorded the common stock issued to Shell as equity only to the extent of its current value at the balance sheet date. The difference between the current value of the common stock and the $20 price guarantee was conservatively recorded as an accrued current liability, which was $24 million at December 31, 1998. The note payable was recorded at its face value of $6 million. As restated, the common shares issued to Shell are recorded in additional paid-in capital at $20 per share until cash and gas contract settlements were made with Shell. This change in accounting resulted in an increase to stockholders' equity of $24 million at December 31, 1998 and no change to equity after the guarantee was settled in July 1999. Also, the note payable is restated at its fair value, based on oil prices at the balance sheet date, with the difference recorded as an adjustment to property. The interim 1999 income statements are restated to include changes in the note value in income and to expense interest paid to Shell upon settlement which originally had been capitalized. Because these adjustments were previously recorded in fourth quarter 1999 results, there is no change to 1999 annual results of operations that the Company announced on February 3, 2000. The following are the effects of the restatement (in thousands):
As Previously Reported As Restated -------------- ----------- Balance Sheet at December 31,1998 Producing property........................... $1,335,844 $1,335,255 Accounts payable and accrued liabilities..... 93,583 69,560 Long-term debt............................... 921,000 920,411 Additional paid-in capital................... 338,503 362,526
1999 Interim Income Statements (Unaudited) ------------------------------------------------------------------------------------------ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------------- -------------------- ---------------------- ---------------------- As As As As Previously As Previously As Previously As Previously As Reported Restated Reported Restated Reported Restated Reported Restated --------- --------- -------- --------- -------- ---------- ---------- -------- Revenues............................ $ 69,507 $ 69,415 $ 65,504 $ 65,550 $ 95,869 $ 95,326 $110,415 $111,004 Operating income.................... 12,330 12,238 10,711 10,757 33,665 33,122 38,696 39,285 Interest expense.................... (15,390) (15,574) (12,817) (13,209) (16,384) (16,440) (19,623) (18,991) Income before income tax............ (2,254) (2,530) 43,967 43,621 19,907 19,308 8,985 10,206 Income tax expense (benefit)........ (792) (884) 14,953 14,835 6,642 6,438 3,162 3,576 Earnings (loss) available to common stock................... (1,907) (2,091) 28,569 28,341 13,466 13,071 4,836 5,643 Earnings (loss) per common share: Basic............................. $ (0.04) $ (0.05) $ 0.64 $ 0.63 $ 0.28 $ 0.27 $ 0.10 $ 0.12 Diluted............................ (0.04) (0.05) 0.61 0.61 0.27 0.26 0.10 0.12
61 18. Quarterly Financial Data (Unaudited) The following are summarized quarterly financial data for the years ended December 31, 1999 and 1998 (in thousands, except per share data):
Quarter --------------------------------------- 1st 2nd 3rd 4th -------- -------- --------- -------- 1999 (Restated - Note 17) - --------------------------------------- Revenues.......................... $ 69,415 $ 65,550 $ 95,326 $111,004 Gross profit (a).................. $ 15,154 $ 13,601 $ 36,420 $ 44,318 Earnings (loss) available to common stock.................... $ (2,091) $ 28,341 $ 13,071 $ 5,643 Earnings (loss) per common share Basic........................... $ (0.05) $ 0.63 $ 0.27 $ 0.12 Diluted......................... $ (0.05) $ 0.61 $ 0.26 $ 0.12 Average shares outstanding........ 44,727 44,733 48,914 48,831 1998 - --------------------------------------- Revenues.......................... $ 49,968 $ 61,652 $ 67,044 $ 70,822 Gross profit (a).................. $ 13,007 $ 14,510 $ 16,568 $ 9,656 Earnings (loss) available to common stock.................... $ (184) $ 759 $(31,004) $(41,069) Earnings (loss) per common share Basic........................... $ 0.00 $ 0.02 $ (0.69) $ (0.90) Diluted......................... $ 0.00 $ 0.02 $ (0.69) $ (0.90) Average shares outstanding........ 39,046 43,940 44,765 45,440
(a) Operating income before general and administrative expense. 19. Supplementary Financial Information for Oil and Gas Producing Activities (Unaudited) All of the Company's operations are directly related to oil and gas producing activities located in the United States. Costs Incurred Related to Oil and Gas Producing Activities The following table summarizes costs incurred whether such costs are capitalized or expensed for financial reporting purposes (in thousands):
1999 1998 1997 -------- -------- -------- Acquisitions: Producing properties................ $505,912 $339,889 $251,663 Undeveloped properties.............. 4,182 514 3,964 Development (a)........................ 89,306 69,367 86,555 Exploration: Geological and geophysical studies.. 872 7,943 1,672 Dry hole expense.................... - - 316 Rental expense and other............ 32 91 100 -------- -------- -------- Total.................................. $600,304 $417,804 $344,270 ======== ======== ========
(a) Includes capitalized interest of $1,353,000 in 1999, $1,070,000 in 1998 and $800,000 in 1997. Proved Reserves Independent petroleum engineers have estimated the Company's proved oil and gas reserves, all of which are located in the United States. Proved reserves are the estimated quantities that geologic and engineering data demonstrate 62 with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history and from changes in economic factors. Standardized Measure The standardized measure of discounted future net cash flows ("standardized measure") and changes in such cash flows are prepared using assumptions required by the Financial Accounting Standards Board. Such assumptions include the use of year-end prices for oil and gas and year-end costs for estimated future development and production expenditures to produce year-end estimated proved reserves. Discounted future net cash flows are calculated using a 10% rate. Estimated future income taxes are calculated by applying year-end statutory rates to future pre-tax net cash flows, less the tax basis of related assets and applicable tax credits. The standardized measure does not represent management's estimate of the Company's future cash flows or the value of proved oil and gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, year-end prices used to determine the standardized measure of discounted cash flows, are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data.
Oil Gas Natural Gas (Bbls) (Mcf) Liquids (Bbls)(a) ----------- --------- ----------------- Proved Reserves (in thousands) December 31, 1996........................ 42,440 540,538 Revisions.............................. (989) (14,182) - Extensions, additions and discoveries.. 9,263 112,906 - Production............................. (3,980) (49,587) (80) Purchases in place..................... 3,195 248,040 13,890 Sales in place......................... (2,075) (21,940) - ------ --------- ------ December 31, 1997........................ 47,854 815,775 13,810 Revisions.............................. (5,893) (5,429) 2,631 Extensions, additions and discoveries.. 821 172,059 1,875 Production............................. (4,598) (83,847) (1,222) Purchases in place..................... 16,331 311,260 80 Sales in place......................... (5) (594) - ------ --------- ------ December 31, 1998........................ 54,510 1,209,224 17,174 Revisions.............................. 10,792 60,011 1,838 Extensions, additions and discoveries.. 3,003 166,669 3,357 Production............................. (5,112) (105,120) (1,325) Purchases in place..................... 2,790 494,666 20 Sales in place......................... (4,380) (279,827) (3,162) ------ --------- ------ December 31, 1999........................ 61,603 1,545,623 17,902 ====== ========= ====== Proved Developed Reserves December 31, 1996........................ 31,883 466,412 ====== ========= December 31, 1997........................ 33,835 677,710 11,494 ====== ========= ====== December 31, 1998........................ 42,876 968,495 14,000 ====== ========= ====== December 31, 1999........................ 48,010 1,225,014 13,781 ====== ========= ======
(a) Proved reserves attributable to natural gas liquids were not considered significant prior to the Amoco Acquisition in December 1997 (Note 15). Natural gas liquids proved reserves as disclosed include only San Juan Basin properties purchased in this acquisition. 63
Standardized Measure of Discounted Future December 31 -------------------------------------- Net Cash Flows Relating to Proved Reserves 1999 1998 1997 ----------- ----------- ---------- (in thousands) Future cash inflows...................... $ 5,113,094 $ 3,041,776 $2,604,453 Future costs:............................ Production............................ (1,549,401) (1,135,789) (979,317) Development........................... (294,250) (228,561) (140,594) ----------- ----------- ---------- Future net cash flows before income tax.. 3,269,443 1,677,426 1,484,542 Future income tax........................ (718,892) (231,249) (291,375) ----------- ----------- ---------- Future net cash flows.................... 2,550,551 1,446,177 1,193,167 10% annual discount...................... (1,153,611) (637,774) (551,058) ----------- ----------- ---------- Standardized measure (a)................. $ 1,396,940 $ 808,403 $ 642,109 =========== =========== ==========
(a) Before income tax, the year-end standardized measure (or discounted present value of future net cash flows) was $1,765,936,000 in 1999, $908,606,000 in 1998 and $782,322,000 in 1997.
Changes in Standardized Measure of Discounted Future Net Cash Flows 1999 1998 1997 ---------- --------- --------- (in thousands) Standardized measure, January 1........ $ 808,403 $ 642,109 $ 706,481 ---------- --------- --------- Revisions:............................. Prices and costs..................... 608,123 (184,568) (388,559) Quantity estimates................... 62,033 65,600 55,497 Accretion of discount................ 79,647 71,942 86,845 Future development costs............. (113,110) (104,636) (120,073) Income tax........................... (268,794) 40,011 99,455 Production rates and other........... (137) (296) (1,614) ---------- --------- --------- Net revisions.................... 367,762 (111,947) (268,449) Extensions, additions and discoveries.. 125,209 96,829 92,582 Production............................. (215,869) (146,498) (125,343) Development costs...................... 70,275 56,904 73,062 Purchases in place (a)................. 414,759 271,806 207,387 Sales in place (b)..................... (173,599) (800) (43,611) ---------- --------- --------- Net change....................... 588,537 166,294 (64,372) ---------- --------- --------- Standardized measure, December 31...... $1,396,940 $ 808,403 $ 642,109 ========== ========= =========
(a) Generally based on the year-end present value (at year-end prices and costs) plus the cash flow received from such properties during the year, rather than the estimated present value at the date of acquisition. (b) Generally based on beginning of the year present value (at beginning of year prices and costs) less the cash flow received from such properties during the year, rather than the estimated present value at the date of sale. Year-end oil prices used in the estimation of proved reserves and calculation of the standardized measure were $24.17 for 1999, $9.50 for 1998 and $15.50 for 1997. Year-end average gas prices were $2.20 for 1999, $2.01 for 1998 and $2.20 for 1997. Year-end average natural gas liquids prices were $13.83 for 1999, $3.99 for 1998 and $11.07 for 1997. Proved oil and gas reserves at December 31, 1999 include: . 1,700 Bbls of oil and 111,814,000 Mcf of gas and discounted present value before income tax of $91,127,000 related to a 50% minority interest in the Ocean Energy Acquisition at December 31, 1999. The Company plans to purchase the 50% minority interest on March 31, 2000. . 1,964,000 Bbls of oil and 232,429,000 Mcf of gas and discounted present value before income tax of $188,001,000 related to the Company's ownership of approximately 57% of Hugoton Royalty Trust units at December 31, 1999. 64 . 783,000 Bbls of oil and 8,162,000 Mcf of gas and discounted present value before income tax of $13,742,000 related to the Company's ownership of approximately 22% of Cross Timbers Royalty Trust units at December 31, 1999. Price and cost revisions are primarily the net result of changes in year- end prices, based on beginning of year reserve estimates. Quantity estimate revisions are primarily the result of the extended economic life of proved reserves and proved undeveloped reserve additions attributable to increased development activity. See Note 20. 20. Subsequent Events On March 30, 2000, the Company sold primarily gas producing properties in Crockett County, Texas for $43 million. The Company has agreed to sell oil and gas producing properties in Lea County, New Mexico for $25.3 million on March 31, 2000. Sales prices are subject to post-closing adjustments. The Company plans to use the proceeds from these sales, sales of equity securities (Note 2) and a $25 million short-term bank loan to purchase Lehman's interest in Whitewine from Lehman on March 31, 2000. 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Cross Timbers Oil Company We have audited the accompanying consolidated balance sheets of Cross Timbers Oil Company and its subsidiaries as of December 31, 1999 and 1998 (as restated, as described in Note 17), and the related consolidated statements of operations, comprehensive income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Fort Worth, Texas March 17, 2000 66 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CROSS TIMBERS OIL COMPANY (PARENT COMPANY) BALANCE SHEETS
(in thousands) December 31 ------------------------ 1999 1998 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents.................................... $ 11 $ 679 Investment in equity securities.............................. 582 14,434 Deferred income tax benefit.................................. 1,763 7,589 Other current assets......................................... 4,654 5,208 ---------- ---------- Total Current Assets....................................... 7,010 27,910 ---------- ---------- Property and Equipment, at cost - successful efforts method: Producing properties......................................... 1,176,420 1,335,255 Undeveloped properties....................................... 6,508 6,845 Gas gathering and other...................................... 17,876 18,333 Accumulated depreciation, depletion and amortization......... (326,615) (317,093) ---------- ---------- Net Property and Equipment................................. 874,189 1,043,340 ---------- ---------- Other Assets.................................................. 19,683 17,656 ---------- ---------- Intercompany Receivable (Payable)............................. 167,109 80,161 ---------- ---------- Investment in Subsidiaries.................................... 48,916 (32,340) ---------- ---------- TOTAL ASSETS.................................................. $1,116,907 $1,136,727 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities..................... $ 1,130 $ 7,120 Other current liabilities.................................... 2,542 75 ---------- ---------- Total Current Liabilities.................................. 3,672 7,195 ---------- ---------- Long-term Debt................................................ 739,000 920,411 ---------- ---------- Deferred Income Taxes Payable (Receivable).................... 27,573 7,647 ---------- ---------- Other Long-term Liabilities................................... 5,634 - ---------- ---------- Stockholders' Equity: Preferred stock.............................................. 28,468 28,468 Common stock................................................. 628 541 Additional paid-in capital................................... 459,733 362,526 Treasury stock............................................... (119,387) (118,555) Retained earnings (deficit).................................. (28,414) (71,506) ---------- ---------- Total Stockholders' Equity................................. 341,028 201,474 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $1,116,907 $1,136,727 ========== ==========
The Notes to Consolidated Financial Statements of Cross Timbers Oil Company are an integral part of these Statements. See accompanying Note to Condensed Financial Information of the Registrant. 67 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CROSS TIMBERS OIL COMPANY (PARENT COMPANY) STATEMENTS OF OPERATIONS
(in thousands, except per share data) Year Ended December 31 --------------------------------- 1999 1998 1997 ----------- ---------- --------- REVENUES Oil and condensate.............................. $ 85,839 $ 55,610 $ 73,954 Gas and natural gas liquids..................... 207,364 182,587 110,104 Other........................................... 5,283 3 1,410 -------- --------- -------- Total Revenues.................................. 298,486 238,200 185,468 -------- --------- -------- EXPENSES........................................ Production...................................... 70,637 63,148 43,580 Taxes, transportation and other................. 31,940 29,105 16,405 Exploration..................................... 887 8,034 2,088 Depreciation, depletion and amortization........ 94,227 83,040 47,201 Impairment...................................... - 2,040 - General and administrative...................... 9,490 10,295 12,716 Trust development costs......................... - 1,498 665 -------- --------- -------- Total Expenses.................................. 207,181 197,160 122,655 -------- --------- -------- OPERATING INCOME................................ 91,305 41,040 62,813 -------- --------- -------- OTHER INCOME (EXPENSE) Gain on sale of Hugoton Royalty Trust units..... 40,566 - - Gain (loss) on investment in equity securities.. 426 (36,802) 1,735 Interest expense, net........................... (55,679) (53,273) (26,554) Equity in income (loss) from subsidiaries....... (3,875) (37,423) 608 -------- --------- -------- Total Other Income (Expense).................... (18,562) (127,498) (24,211) -------- --------- -------- INCOME (LOSS) BEFORE INCOME TAX................. 72,743 (86,458) 38,602 Income Tax Expense (Benefit).................... 26,000 (16,739) 12,918 -------- --------- -------- NET INCOME (LOSS)............................... 46,743 (69,719) 25,684 Preferred stock dividends....................... 1,779 1,779 1,779 -------- --------- -------- EARNINGS (LOSS) AVAILABLE TO COMMON STOCK....... $ 44,964 $ (71,498) $ 23,905 ======== ========= ========
The Notes to Consolidated Financial Statements of Cross Timbers Oil Company are an integral part of these Statements. See accompanying Note to Condensed Financial Information of the Registrant. 68 SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CROSS TIMBERS OIL COMPANY (PARENT COMPANY) STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31 ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Cash Provided (Used) by Operating Activities........ $ 97,812 $ (63,391) $ 93,808 --------- --------- --------- Investing Activities Proceeds from sale of Hugoton Royalty Trust units.. 148,570 - - Proceeds from sale of equity securities............ - - 24,626 Investment in equity securities.................... - - (6,479) Proceeds from sale of property and equipment....... 87,647 2,494 16,246 Property acquisitions.............................. (12,503) (296,390) (238,294) Development costs.................................. (85,294) (69,356) (88,382) Gas plant, gathering and other additions........... (5,300) (5,851) (14,799) Loans to officers.................................. (1,470) (5,795) - --------- --------- --------- Cash Used by Investing Activities................... 131,650 (374,898) (307,082) --------- --------- --------- Financing Activities Proceeds from short- and long-term debt............ 103,000 877,900 688,400 Payments on short- and long-term debt.............. (289,962) (496,938) (437,430) Purchase of minority interest...................... (42,385) - - Common stock offering.............................. 29,668 133,113 - Dividends.......................................... (4,950) (8,460) (7,571) Purchases of treasury stock and other.............. (25,501) (66,658) (30,204) --------- --------- --------- Cash Provided by Financing Activities............... (230,130) 438,957 213,195 --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents.... (668) 668 (79) Cash and Cash Equivalents, January 1................ 679 11 90 --------- --------- --------- Cash and Cash Equivalents, December 31.............. $ 11 $ 679 $ 11 ========= ========= =========
The Notes to Consolidated Financial Statements of Cross Timbers Oil Company are an integral part of these Statements. See accompanying Note to Condensed Financial Information of the Registrant. 69 SCHEDULE I CROSS TIMBERS OIL COMPANY NOTE TO CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT 1. Basis of Presentation Pursuant to the rules and regulations of the Securities and Exchange Commission, these Condensed Financial Statements of Cross Timbers Oil Company, the Registrant, do not include all of the information and notes normally included with financial statements prepared in accordance with generally accepted accounting principles. These Condensed Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Part IV of this Form 10-K. Litigation contingencies disclosed in Note 6 of the Consolidated Financial Statements are contingencies of the Registrant, and debt of the Registrant is separately disclosed in Note 4 of the Consolidated Financial Statements. The Registrant has not received cash dividends from its subsidiaries during the three-year period ended December 31, 1999. 70 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Cross Timbers Oil Company Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The information contained in Schedule I is not a required part of the basic financial statements but is supplementary information required by the Securities and Exchange Commission. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Forth Worth, Texas March 17, 2000 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March 2000. CROSS TIMBERS OIL COMPANY By /s/ Bob R. Simpson -------------------------------------- Bob R. Simpson, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March 2000. PRINCIPAL EXECUTIVE OFFICERS (AND DIRECTORS) DIRECTORS /s/ Bob R. Simpson /s/ J. Luther King, Jr. - -------------------------------------- ---------------------------------- Bob R. Simpson, Chairman of the Board J. Luther King, Jr. and Chief Executive Officer /s/ Steffen E. Palko /s/ Jack P. Randall - -------------------------------------- ---------------------------------- Steffen E. Palko, Vice Chairman of Jack P. Randall the Board and President /s/ Scott G. Sherman ---------------------------------- Scott G. Sherman PRINCIPAL FINANCIAL OFFICER PRINCIPAL ACCOUNTING OFFICER /s/ Louis G. Baldwin /s/ Bennie G. Kniffen - ------------------------------------------ ------------------------------------ Louis G. Baldwin, Executive Vice President Bennie G. Kniffen, and Chief Financial Officer Senior Vice President and Controller 72 INDEX TO EXHIBITS
Exhibit No. Description Page -------- ------------------------------------------------------------ ------ 3.1 Certificate of Incorporation of Cross Timbers Oil Company, as amended through and restated on May 18, 1994 (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-81766) 3.2 Bylaws of Cross Timbers Oil Company (incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-1, File No. 33-59820) 4.1 Form of Certificate of Designations of Series A Convertible Preferred Stock, par value $.01 per share (incorporated by reference to Exhibit 4 to Form 8-A/A, Amendment No. 1, dated September 3, 1996) 4.2 Indenture dated as of April 1, 1997, between Cross Timbers Oil Company and The Bank of New York, as Trustee for the 9 1/4% Senior Subordinated Notes due 2007 (incorporated by reference to Exhibit 4.1 to Registration Statement of Form S-4, File No. 333- 26603) 4.3 Indenture dated as of October 28, 1997, between Cross Timbers Oil Company and the Bank of New York, as Trustee for the 8 3/4% Senior Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-4, File No. 333- 39097) 4.4 Preferred Stock Purchase Rights Agreement between Cross Timbers Oil Company and ChaseMellon Shareholder Services, LLC (incorporated by reference to Exhibit 4.1 to Form 8-A dated September 8, 1998) 10.1* Employment Agreement between the Company and Bob R. Simpson, dated February 21, 1995 (incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended December 31, 1994) 10.2* Employment Agreement between the Company and Steffen E. Palko, dated February 21, 1995 (incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended December 31, 1994) 10.3* 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1, File No. 33-59820) 10.4* Form of grant under 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1, File No. 33-59820) 10.5* Amended and Restated 1994 Stock Incentive Plan 10.6* Form of grant under 1994 Stock Incentive Plan (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-8, File No. 33-81766) 10.7* 1997 Stock Incentive Plan, as amended February 15, 2000 10.8* Form of grant under 1997 Stock Incentive Plan, as amended February 25, 1998 (incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended December 31, 1997)
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Exhibit No. Description Page -------- ------------------------------------------------------------ ------ 10.9* 1998 Stock Incentive Plan, as amended February 15, 2000 10.10* Form of grant under 1998 Stock Incentive Plan (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-8, File No. 333-69977) 10.11* 1998 Royalty Trust Option Plan (incorporated by reference to Exhibit B to the 1998 Proxy Statement filed on April 24, 1998) 10.12* Form of grant under 1998 Royalty Trust Option Plan 10.13* Management Group Employee Severance Protection Plan, as amended February 15, 2000 10.14* Employee Severance Protection Plan, as amended February 15, 2000 10.15 Registration Rights Agreement among Cross Timbers Oil Company and partners of Cross Timbers Oil Company, L.P. (incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-1, File No. 33-59820) 10.16 Warrant Agreement dated December 1, 1997 by and between Cross Timbers Oil Company and Amoco Corporation (incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended December 31, 1997) 10.17 Amended and Restated revolving credit agreement, dated November 16, 1998, between the Company and certain commercial banks named therein (incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1, File No. 333-68441) 10.18 First Amendment, dated May 17, 1999, to Amended and Restated revolving credit agreement dated November 16, 1998 between the Company and certain commercial banks names therein (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999) 10.19 Second Amendment, dated June 9, 1999, to Amended and Restated revolving credit agreement dated November 16, 1998 between the Company and certain commercial banks names therein (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999) 10.20 Third Amendment, dated June 17, 1999, to Amended and Restated revolving credit agreement dated November 16, 1998 between the Company and certain commercial banks names therein (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999) 10.21 Fourth Amendment, dated August 15, 1999, to Amended and Restated revolving credit agreement dated November 16, 1998 between the Company and certain commercial banks names therein (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1999) 10.22 Revolving credit agreement, dated September 15, 1999, between Summer Acquisition Company and certain commercial banks named therein (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K/A filed on November 29, 1999)
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Exhibit No. Description Page -------- ------------------------------------------------------------ ------ 10.23 Stockholders Agreement, dated September 15, 1999, among Whitewine Holding Company, LBI Group Inc. and Cross Timbers Trading Company (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K/A filed on November 29, 1999) 10.24 Put and Call Agreement, dated September 15, 1999, by and between Cross Timbers Oil Company and LBI Group Inc. (incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K/A filed on November 29, 1999) 10.25 Registration Rights Agreement, dated September 15, 1999, by and between Cross Timbers Oil Company and Whitewine Holding Company (incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K/A filed on November 29, 1999) 12.1 Computation of Ratio of Earnings to Fixed Charges (incorporated by reference to Exhibit 12.1 to Form 10-K for the year ended December 31, 1999) 21.1 Subsidiaries of Cross Timbers Oil Company (incorporated by reference to Exhibit 21.1 to Form 10-K for the year ended December 31, 1999) 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Miller and Lents, Ltd. * Management contract or compensatory plan
- -------------------------------- Copies of the above exhibits not contained herein are available, at the cost of reproduction, to any security holder upon written request to the Secretary, Cross Timbers Oil Company, 810 Houston St., Suite 2000, Fort Worth, Texas 76102. 75 EX-10.5 2 AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN EXHIBIT 10.5 CROSS TIMBERS OIL COMPANY AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN Amended as of February 15, 2000 TABLE OF CONTENTS
Page ---- ARTICLE I. GENERAL..................................................... 1 Section 1.1. Purpose.............................................. 1 Section 1.2. Administration....................................... 1 Section 1.3. Eligibility for Participation........................ 2 Section 1.4. Types of Awards Under Plan........................... 2 Section 1.5. Aggregate Limitation on Awards....................... 3 Section 1.6. Effective Date and Term of Plan...................... 3 ARTICLE II. STOCK OPTIONS.............................................. 4 Section 2.1. Award of Stock Options............................... 4 Section 2.2. Stock Option Agreements.............................. 4 Section 2.3. Stock Option Price................................... 4 Section 2.4. Term and Exercise.................................... 4 Section 2.5. Manner of Payment.................................... 4 Section 2.6. Restrictions on Certain Shares....................... 4 Section 2.7. Death, Retirement and Termination of Employment of Optionee............................................. 4 ARTICLE III. INCENTIVE STOCK OPTIONS................................... 5 Section 3.1. Award of Incentive Stock Options..................... 5 Section 3.2. Incentive Stock Option Agreements.................... 5 Section 3.3. Incentive Stock Option Price......................... 5 Section 3.4. Term and Exercise.................................... 5 Section 3.5. Maximum Amount of Incentive Stock Option Grant....... 6 Section 3.6. Death of Optionee.................................... 6 Section 3.7. Retirement or Disability............................. 6 Section 3.8. Termination for Other Reasons........................ 6 Section 3.9. Applicability of Stock Options Sections.............. 6 ARTICLE IV. PERFORMANCE SHARE AWARDS................................... 7 Section 4.1. Awards Granted by Committee.......................... 7 Section 4.2. Amount of Award...................................... 7 Section 4.3. Communication of Award............................... 7 Section 4.4. Amount of Award Payable.............................. 7 Section 4.5. Adjustments.......................................... 7 Section 4.6. Payments of Awards................................... 8 Section 4.7. Termination of Employment............................ 8 Section 4.8. Transfer Restriction................................. 8 ARTICLE V. AUTOMATIC GRANTS............................................ 8 Section 5.1. Grant................................................ 8 Section 5.2. Applicable Provisions................................ 8 ARTICLE VI. MISCELLANEOUS.............................................. 9 Section 6.1. General Restriction.................................. 9 Section 6.2. Non-Assignability.................................... 9
Section 6.3. Withholding Taxes.................................... 9 Section 6.4. Right to Terminate Employment........................ 9 Section 6.5. Non-Uniform Determinations........................... 9 Section 6.6. Rights as a Stockholder.............................. 9 Section 6.7. Definitions.......................................... 10 Section 6.8. Leaves of Absence.................................... 11 Section 6.9. Newly Eligible Employees............................. 11 Section 6.10. Adjustments.......................................... 11 Section 6.11. Changes in the Company's Capital Structure........... 11 Section 6.12. Change in Control.................................... 12 Section 6.13. Amendment of the Plan................................ 12
CROSS TIMBERS OIL COMPANY STOCK INCENTIVE PLAN ARTICLE I. GENERAL Section 1.1. Purpose. The purposes of this Stock Incentive Plan (the "Plan") are to: (1) associate the interests of the management of CROSS TIMBERS OIL COMPANY and its subsidiaries and affiliates (collectively referred to as the "Company") closely with the stockholders to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders; (2) provide management with a proprietary ownership interest in the Company commensurate with Company performance, as reflected in increased stockholder value; (3) maintain competitive compensation levels thereby attracting and retaining highly competent and talented directors and employees; and (4) provide an incentive to management for continuous employment with the Company. Certain capitalized terms are defined in Section 6.7. Section 1.2. Administration. (a) The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"), as constituted from time to time, each member of which shall be a disinterested person appointed by the Board of Directors. The Committee shall consist of at least two members of the Board of Directors. During the one year prior to commencement of service on the Committee, the Committee members shall not have participated in, and while serving on the Committee, such members shall not be eligible for selection as, persons to whom stock may be allocated or to whom Options or Performance Shares may be granted under the Plan or any other discretionary plan of the Company under which participants are entitled to acquire stock, stock options or stock appreciation rights of the Company other than the automatic grant of non- discretionary Awards as provided in Article V. (b) The Committee shall have the authority, in its sole discretion and from time to time to: (i) designate the executive employees (as defined in Section 1.3) of the Company eligible to participate in the Plan; (ii) grant Awards provided in the Plan in such form and amount as the Committee shall determine; (iii) impose such limitations, restrictions and conditions, not inconsistent with this Plan, upon any such Award as the Committee shall deem appropriate; and 1 (iv) interpret the Plan and any agreement, instrument or other document executed in connection with the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be final, conclusive and binding upon all persons, including the Company, any participant, any stockholder of the Company and any employee. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. No member of the Committee shall be liable for any action taken or decision made relating to the Plan or any Award thereunder. Section 1.3. Eligibility for Participation. Participants in the Plan shall be selected by the Committee from the executive employees of the Company or its Subsidiaries. For the purposes of this Plan, (i) the term "executive employee" shall include only employees who are officers, or who are determined by the Committee, in its discretion, to be key professional, managerial, administrative, or technical employees or supervisors, and (ii) the term "Subsidiary" means any corporation or other entity of which at least 50% of the voting securities are owned by the Company directly or through one or more other corporations, each of which is also a Subsidiary. With respect to non-corporate entities, Subsidiary shall mean an entity managed or controlled by the Company or any Subsidiary and with respect to which the Company or any Subsidiary is allocated more than half of the profits and losses thereof. Section 1.4. Types of Awards Under Plan. Awards under the Plan may be in the form of any or more of the following: (i) Stock Options, as described in Article II; (ii) Incentive Stock Options, as described in Article III; and/or (iii) Performance Shares, as described in Article IV. Awards under the Plan shall be evidenced by an Award Agreement between the Company and the recipient of the Award, in form and substance satisfactory to the Committee, and not inconsistent with this Plan. Award Agreements may provide such vesting schedules for Stock Options and Incentive Stock Options, and such other terms, conditions and provisions as are not inconsistent with the terms of this Plan. Subject to the express provisions of the Plan, and within the limitations of the Plan, the Committee may modify, extend or renew outstanding Award Agreements, or accept the surrender of outstanding Awards and authorize the granting of new Awards in substitution therefor. However, except as provided in this Plan, no modification of an Award shall impair the rights of the holder thereof without his consent. 2 Section 1.5. Aggregate Limitation on Awards. (a) Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of the Company ("Common Stock''). The maximum number of shares of Common Stock which may be issued pursuant to Awards issued under the Plan shall be 2,250,000*, of which 350,000 may be issued as Performance Shares. In addition, the maximum number of shares that may be issued to any individual hereunder pursuant to Options or Performance Shares issued hereunder shall be 120,000 and 100,000, respectively. (b) For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan at any time: (i) all the shares issued (including the shares, if any, withheld for tax withholding requirements) under the Plan shall be counted when issued upon exercise of a Stock Option or Incentive Stock Option; and (ii) only the net shares issued as Performance Shares shall be counted (shares reacquired by the Company because of failure to achieve a performance target or failure to become fully vested for any other reason shall again be available for issuance under the Plan). (c) Shares tendered by a participant as payment for shares issued upon exercise of a Stock Option or Incentive Stock Option shall be available for issuance under the Plan. Any shares of Common Stock subject to a Stock Option or Incentive Stock Option which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan. * Reflects 3 for 2 splits. Section 1.6. Effective Date and Term of Plan. (a) The Plan shall become effective on the date adopted by the Board of Directors, subject to approval by the holders of a majority of the shares of Common Stock present in person or by proxy and entitled to vote at the Annual Meeting of stockholders of the Company held in 1994. (b) No Awards shall be made under the Plan after the tenth anniversary of the effective date of this Plan; provided, however, that the Plan and all Awards made under the Plan prior to such date shall remain in effect until such Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards. 3 ARTICLE II. STOCK OPTIONS Section 2.1. Award of Stock Options. The Committee may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Section 2.2. Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the holder of a Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. Section 2.3. Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of a Stock Option shall be 100% of the fair market value of a share of Common Stock on the date the Stock Option is granted. Section 2.4. Term and Exercise. A Stock Option shall not be exercisable prior to six months from the date of its grant and unless a shorter period is provided by the Committee or by another Section of this Plan, may be exercised during a period of ten years from the date of grant thereof (the "Option Term") and may be subject to such vesting scheduling as the Company may provide in an Award Agreement. No Stock Option shall be exercisable after the expiration of its Option Term. Section 2.5. Manner of Payment. Each Award Agreement providing for Stock Options shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the option price for such shares with cash or Common Stock. Section 2.6. Restrictions on Certain Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a stockholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a stockholder. Section 2.7. Death, Retirement and Termination of Employment of Optionee. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee: (a) Upon the death of the Optionee, any rights to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) one year. The provisions of this Section shall apply 4 notwithstanding the fact that the Optionee's employment may have terminated prior to death, but only to the extent of any rights exercisable on the date of death. (b) Upon termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may exercise any Stock Options, provided such option exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) six months (in the case of permanent disability) or three months (in the case of retirement). (c) On termination of the Optionee's employment by reason other than death, disability or cause (as each is determined by the Committee), the Optionee may exercise any Stock Options, provided such option exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) 30 days of the date of termination. (d) Except as provided in Subsections (a), (b) and (c) of this Section 2.7, all Stock Options shall terminate immediately upon the termination of the Optionee's employment. ARTICLE III. INCENTIVE STOCK OPTIONS Section 3.1. Award of Incentive Stock Options. The Committee may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more "incentive stock options" (intended to qualify as such under the provisions of section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options")) to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of 10% or more of the total combined voting power of the Company and its subsidiaries. Section 3.2. Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the holder of an Incentive Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. Section 3.3. Incentive Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted. Section 3.4. Term and Exercise. Each Incentive Stock Option shall not be exercisable prior to six months from the date of its grant and unless a shorter period is provided by the Committee or another Section of this Plan, may be exercised during a period of ten years from the date of grant 5 thereof (the "Option Term") and may be subject to such vesting scheduling as the Committee may provide in an Award Agreement. No Incentive Stock Option shall be exercisable after the expiration of its Option Term. Section 3.5. Maximum Amount of Incentive Stock Option Grant. The aggregate fair market value (determined on the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options first become exercisable by an Optionee during in any calendar year (under all plans of the Optionee's employer corporations and their parent and subsidiary corporations) shall not exceed $100,000. Section 3.6. Death of Optionee. (a) Upon the death of the Optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both the remaining Option Term of the Incentive Stock Option and one year after the Optionee's death. (b) The provisions of this Section shall apply notwithstanding the fact that the Optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. Section 3.7. Retirement or Disability. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee, upon the termination of the Optionee's employment by reason of permanent disability or retirement (as each is determined by the Committee), the Optionee may exercise any Incentive Stock Options, provided such option exercise occurs within both (i) the remaining Option Term of the Incentive Stock Option and (ii) one year (in the case of permanent disability) or three months (in the case of retirement). Notwithstanding the terms of an Award Agreement, the tax treatment available pursuant to Section 422 of the Internal Revenue Code of 1986 upon the exercise of an Incentive Stock Option shall not be available to an Optionee who exercises any Incentive Stock Options more than (i) one year after the date of termination of employment due to permanent disability or (ii) three months after the date of termination of employment due to retirement. Section 3.8. Termination for Other Reasons. Except as provided in Sections 3.6 and 3.7 or except as otherwise determined by the Committee in an Award Agreement, all Incentive Stock Options shall terminate immediately upon the termination of the Optionee's employment. Section 3.9. Applicability of Stock Options Sections. Sections 2.5, Manner of Payment; and 2.6, Restrictions on Certain Shares, applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated by reference in this Article III as though fully set forth herein. 6 ARTICLE IV. PERFORMANCE SHARE AWARDS Section 4.1. Awards Granted by Committee. Coincident with or following designation for participation in the Plan, a participant may be granted Performance Shares. Certificates representing Performance Shares shall be issued to the participant effective as of the date of the Award. Holders of Performance Shares shall have all of the voting, dividend and other rights of stockholders of the Company, subject to the terms of any Award Agreement. Section 4.2. Amount of Award. The Committee shall establish a maximum amount of a participant's Award, which amount shall be denominated in shares of Common Stock. Section 4.3. Communication of Award. Written notice of the maximum amount of a participant's Award and the Performance Cycle determined by the Committee, if any, shall be given to a participant as soon as practicable after approval of the Award by the Committee. The grant of Performance Shares shall be evidenced by a written Award Agreement, executed by the Company and the recipient of Performance Shares, in such form as the Committee may from time to time determine, providing for the terms of such grant. Section 4.4. Amount of Award Payable. Performance Shares may be granted based upon past performance or future performance. In addition to any other restrictions the Committee may place on Performance Shares, the Committee may, in its discretion, provide that Performance Shares shall vest upon the satisfaction of performance targets to be achieved during an applicable "Performance Cycle.'' Failure to satisfy the performance targets may result, in the Committee's discretion as set forth in an Award Agreement, in the forfeiture of the Performance Shares by the participant and the return of such shares to the Company, or have any other consequence as determined by the Committee. Performance targets established by the Committee may relate to corporate, group, unit or individual performance and may be established in terms of market price of common stock, cash flow or cash flow per share, reserve value or reserve value per share, net asset value or net asset value per share, earnings, or such other measures or standards determined by the Committee. Multiple performance targets may be used and the components of multiple performance targets may be given the same or different weighting in determining the amount of an Award earned, and may relate to absolute performance or relative performance measured against other groups, units, individuals or entities. Certificates representing Performance Shares shall bear a legend restricting their transfer and requiring the forfeiture of the shares to the Company if any performance targets or other conditions to vesting are not met. The Committee may also require a participant to deliver certificates representing unvested Performance Shares to the Company in escrow until the Performance Shares vest. Section 4.5. Adjustments. At any time prior to vesting of a Performance Share, the Committee may adjust previously established performance targets or other terms and conditions to reflect events such as changes in laws, regulations, or accounting practice, or mergers, acquisitions, divestitures or any other event determined by the Committee. 7 Section 4.6. Payments of Awards. Following the conclusion of each Performance Cycle, the Committee shall determine the extent to which performance targets have been attained, and the satisfaction of any other terms and conditions with respect to vesting an Award relating to such Performance Cycle. Subject to the provisions of Section 6.3, to the extent the Committee determines Performance Shares have vested, the Company shall issue to the participant certificates representing vested shares free of any legend regarding performance targets or forfeiture in exchange for such participant's legended certificates. Section 4.7. Termination of Employment. Unless the Award Agreement provides for vesting upon death, disability, retirement or termination of employment, upon any such termination of employment of a participant prior to vesting of Performance Shares, all outstanding and unvested Awards of Performance Shares to such participant shall be cancelled, shall not vest and shall be returned to the Company. Section 4.8. Transfer Restriction. Any Award Agreement providing for the issuance of Performance Shares to any person who, at the time of grant, is subject to the restrictions of Section 16(b) of the Exchange Act, shall provide that such Common Stock cannot be resold for a period of six months following the grant of such Performance Shares. ARTICLE V. AUTOMATIC GRANTS Section 5.1. Grant. Each director who is not an employee of the Company, its subsidiaries, affiliates and managers ("Non-Employee Director") shall on the date on which he or she is initially elected or appointed a director of the Company, be granted a Stock Option to purchase 1,000 shares of Common Stock for the fair market price on the date of such grant, for an Option Term of ten years. Thereafter, on the first business day following the Annual Meeting of Stockholders of each subsequent year in which the Non-Employee Director is still serving as a director (whether or not such Non-Employee Director's term has been continuous), he or she shall automatically be granted a Stock Option to purchase an additional 1,000 shares of Common Stock for the fair market price on the date of such grant for an Option Term of ten years, and shall automatically be granted, in lieu of a cash fee for serving as a director of the Company, 1,500 Performance Shares, which shall vest immediately upon grant and shall not be subject to forfeiture, provided, however, that such Performance Shares shall not be sold, assigned, pledged, hypothecated, transferred or otherwise disposed of prior to six months after the date of grant, except by will or the laws of descent and distribution. The Company shall deliver a certificate to the director with a proper legend subscribed thereon giving notice of such restriction on transferability. Section 5.2. Applicable Provisions. The provisions of Section 2.7(a) relating to the death of the Non-Employee Director shall apply to options granted under Section 5.1 and the Committee may not agree to the contrary in an Award Agreement or otherwise. The provisions of Subsections 2.7(b), (c) and (d) relating to disability and other termination of employment shall not apply to options granted under Section 5.1, and the failure of a Non-Employee Director to be re-elected as a director of the Company shall not effect the Stock Options granted under this Section. 8 ARTICLE VI. MISCELLANEOUS Section 6.1. General Restriction. Each Award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an Award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such Award or the issue or purchase of shares of Common Stock thereunder, such Award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. Section 6.2. Non-Assignability. No Award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such Award shall be exercisable only by such person or by such person's guardian or legal representative. Section 6.3. Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company an amount sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Company may issue, transfer or vest only such number of shares of the Company net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. Section 6.4. Right to Terminate Employment. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. Section 6.5. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. Section 6.6. Rights as a Stockholder. The recipient of any Award under the Plan shall have no rights as a stockholder with respect thereto unless and until certificates for shares of Common Stock are issued to him. 9 Section 6.7. Definitions. In this Plan the following definitions shall apply: (a) "Award" shall mean a grant of Stock Options, Incentive Stock Options or Performance Shares under the Plan. (b) "Change in Control" means any one of the following: (i) "Continuing Directors" no longer constitute a majority of the Board of Directors of the Company; the term "Continuing Director" means any individual who is a member of the Board of Directors of the Company on the date hereof or was nominated for election as a director by, or whose nomination as a director was approved by, the Board of Directors of the Company with the affirmative vote of a majority of the Continuing Directors; (ii) any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) together with his or its affiliates, becomes the beneficial owner, directly or indirectly, of 25% or more of the voting power of the Company's then outstanding securities entitled generally to vote for the election of the Company's directors; (iii) the merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of less than 50% of the combined voting power to vote for the election of directors of the surviving corporation or other entity following the effective date of such merger or consolidation; or (iv) the sale of all or substantially all of the assets of the Company or the liquidation or dissolution of the Company. (c) "Fair market value" as of any date and in respect or any share of Common Stock means the average of the high and low sales price on such date or on the next business day, if such date is not a business day, of a share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the NYSE - Composite Transactions) or any other publication selected by the Committee, provided that, if shares of Common Stock shall not have been traded on the New York Stock Exchange or other public securities market for more than 10 days immediately preceding such date or if deemed appropriate by the Committee for any other reason, the fair market value of shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. 10 (d) "Option" means a Stock Option or Incentive Stock Option. (e) "Option price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. (f) "Performance Cycle" means the period of time, if any, as specified by the Committee over which Performance Share are to be vested. Section 6.8. Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on Awards under the Plan theretofore made to any recipient who takes such leave of absence. Section 6.9. Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and Awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an Award or incentive period. Section 6.10. Adjustments. In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options or Performance Shares theretofore granted under the Plan, and any and all other matters deemed appropriate by the Committee. Section 6.11. Changes in the Company's Capital Structure. (a) The existence of outstanding Options or Performance Shares shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) If, while there are outstanding Options, the Company shall effect a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefor in money, services or property, then, subject to the provisions, if any, in the Award Agreement (a) in the event of an increase in the number of such shares outstanding, the number of shares of 11 Common Stock then subject to Options hereunder shall be proportionately increased; and (b) in the event of a decrease in the number of such shares outstanding the number of shares then available for Option hereunder shall be proportionately decreased. (c) After a merger of one or more corporations into the Company, or after a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, (i) each holder of an outstanding Option shall, at no additional cost, be entitled upon exercise of such Option to receive (subject to any required action by stockholders) in lieu of the number of shares as to which such Option shall then be so exercisable, the number and class of shares of stock, other securities or consideration to which such holder would have been entitled to receive pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of the Company equal to the number of shares as to which such Option had been exercisable and (ii) unless otherwise provided by the Committee, the number of shares of Common Stock, other securities or consideration to be received with respect to unvested Performance Shares shall continue to be subject to the Award Agreement, including any vesting provisions thereof. (d) Except as herein provided, the issuance by the Company of Common Stock or any other shares of capital stock or securities convertible into shares of capital stock, for cash, property, labor done or other consideration, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. Section 6.12. Change in Control. If a Change in Control occurs while unvested Performance Shares or unexercised Options remain outstanding, the Committee shall waive any limitations set forth in this Plan or any Award Agreement with respect to such Option or Performance Share such that such Option shall become fully exercisable and such Performance Share shall vest upon a Change in Control. Section 6.13. Amendment of the Plan. (a) The Committee may, without further action by the stockholders and without receiving further consideration from the participants, amend this Plan or condition or modify Awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without stockholder approval the Committee may not (i) increase the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 6.10), (ii) extend the period during which any Award may be granted or exercised, (iii) extend the term of the Plan or (iv) change the employees or class of employees eligible to participate in the Plan. The termination or 12 any modification or amendment of the Plan, except as provided in subsection (a), shall not, without the consent of a participant, affect his or her rights under an Award previously granted to him or her. (c) Notwithstanding Sections 6.12(a) and (b), the provisions of Article V of the Plan may not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. The undersigned hereby certifies that this is a true and correct copy of the Cross Timbers Oil Company 1994 Stock Incentive Plan, as adopted by the Company's Board of Directors on February 17, 1994 and the Company's stockholders on May 17, 1994, as amended. By Virginia Anderson --------------------------------------- Virginia Anderson, Secretary 13 EX-10.7 3 1997 STOCK INCENTIVE PLAN, AS AMENDED FEB. 15,2000 EXHIBIT 10.7 CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN Amended as of February 15, 2000 CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN ARTICLE 1. GENERAL Section 1.1 Purpose. The purposes of this Stock Incentive Plan (the "Plan") are to: (1) associate the interests of the management of CROSS TIMBERS OIL COMPANY and its subsidiaries and affiliates (collectively referred to as the "Company") closely with the stockholders to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders; (2) provide management with a proprietary ownership interest in the Company commensurate with Company performance, as reflected in increased stockholder value; (3) maintain competitive compensation levels thereby attracting and retaining highly competent and talented directors and employees; and (4) provide an incentive to management for continuous employment with the Company. Certain capitalized terms are defined in Section 6.7. Section 1.2. Administration. (a) The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"), as constituted from time to time, consisting of two or more members who shall each be an Outside Director appointed by the Board of Directors. (b) The Committee shall have the authority in its sole discretion and from time to time to: (i) designate the executive employees (as defined in Section 1.3) of the Company eligible to participate in the Plan; (ii) grant Awards provided in the Plan in such form and amount as the Committee shall determine; (iii) impose such limitations, restrictions and conditions, not inconsistent with this Plan, upon any such Award as the Committee shall deem appropriate; and (iv) interpret the Plan and any agreement, instrument or other document executed in connection with the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be final, conclusive and binding upon all persons, including the Company, any participant, any stockholder of the Company and any employee. 1 A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any Award thereunder. Section 1.3. Eligibility for Participation. Participants in the Plan shall be selected by the Committee from the executive employees of the Company or its Subsidiaries. For the purposes of this Plan, (i) the term "executive employee" shall include only employees who are officers, or who are determined by the Committee, in its discretion, to be key professional, managerial, administrative, or technical employees or supervisors, and (ii) the term "Subsidiary" means any corporation or other entity of which at least 50% of the voting securities are owned by the Company directly or through one or more other corporations, each of which is also a Subsidiary. With respect to non-corporate entities, Subsidiary shall mean an entity managed or controlled by the Company or any Subsidiary and with respect to which the Company or any Subsidiary is allocated more than half of the profits and losses thereof. Section 1.4. Types of Awards Under Plan. Awards under the Plan may be in the form of any one or more of the following: (i) Stock Options, as described in Article II; (ii) Incentive Stock Options, as described in Article III; and/or (iii) Performance Shares, as described in Article IV. Awards under the Plan shall be evidenced by an Award Agreement between the Company and the recipient of the Award, in form and substance satisfactory to the Committee, and not inconsistent with this Plan. Award Agreements may provide such vesting schedules for Stock Options and Incentive Stock Options, and such other terms, conditions and provisions as are not inconsistent with the terms of this Plan. Subject to the express provisions of the Plan, and within the limitations of the Plan, the Committee may modify, extend or renew outstanding Award Agreements, or accept the surrender of outstanding Awards and authorize the granting of new Awards in substitution therefor. However, except as provided in this Plan, no modification of an Award shall impair the rights of the holder thereof without his consent. Section 1.5. Aggregate Limitation on Awards. (a) Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of the Company ("Common Stock"). The maximum number of shares of Common Stock which may be issued pursuant to Awards issued under the Plan shall be 2,250,000, of which 1,125,000 may be issued as Performance Shares. In addition, the maximum number of shares that may be issued to any individual hereunder pursuant to Options or Performance Shares issued hereunder during any one year shall be 225,000 and 112,500, respectively, and the maximum number that may be issued to any individual pursuant to Options or Performance Shares issued hereunder during the life of the Plan shall be 450,000 and 225,000, respectively. 2 (b) For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan at any time: (i) all the shares issued (including the shares, if any, withheld for tax withholding requirements) under the Plan shall be counted when issued upon exercise of a Stock Option or Incentive Stock Option; and (ii) only the net shares issued as Performance Shares shall be counted (shares reacquired by the Company because of failure to achieve a performance target or failure to become fully vested for any other reason shall again be available for issuance under the Plan). (c) Shares tendered by a participant as payment for shares issued upon exercise of a Stock Option or Incentive Stock Option may be made available for issuance under the Plan. Any shares of Common Stock subject to a Stock Option or Incentive Stock Option which for any reason is terminated, unexercised or expires shall again be available for issuance under the Plan. Section 1.6. Effective Date and Term of Plan. (a) The Plan shall become effective on the date adopted by the Board of Directors, subject to approval by the holders of a majority of the votes of shares of Common Stock and Preferred Stock present in person or by proxy and entitled to vote at the Annual Meeting of stockholders of the Company held in 1997. (b) No Awards shall be made under the Plan after the tenth anniversary of the effective date of this Plan; provided, however, that the Plan and all Awards made under the Plan prior to such date shall remain in effect until such Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards. ARTICLE II. STOCK OPTIONS Section 2.1. Award of Stock Options. The Committee may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more options to purchase for cash or shares the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Section 2.2. Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the holder of Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 3 Section 2.3. Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of a Stock Option shall be 100% of the fair market value of a share of Common Stock on the date the Stock Option is granted. Section 2.4. Term and Exercise. A Stock Option, unless a shorter period is provided by the Committee or by another Section of this Plan, may be exercised a period of ten years from the date of grant thereof (the "Option Term") and may be subject to such vesting scheduling as the Committee may provide in an Award Agreement. No Stock Option shall be exercisable after the expiration of its Option Term. Section 2.5. Manner of Payment. Each Award Agreement providing for Stock Options shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the option price for such shares with cash. The Optionee may also pay to the Company, in full, the option price with Common Stock owned by the Optionee on the date of exercise or Common Stock acquired pursuant to such exercise, provided that the Optionee provides satisfactory evidence, in the opinion of the Secretary or any Assistant Secretary of the Company, that the Optionee directly owns on the date of exercise shares of Common Stock sufficient to pay the option price, and that the Optionee has owned such shares for six months or more. Section 2.6. Restrictions on Certain Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a stockholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a stockholder. Section 2.7. Death, Retirement and Termination of Employment of Optionee. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee: (a) Upon the death of the Optionee, any Stock Option to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) one year. The provisions of this Section shall apply notwithstanding that the Optionee's employment may have terminated prior to death, but only to the extent of any rights exercisable on the date of termination of the Optionee's employment. (b) Upon termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may exercise any Stock Options, to the extent exercisable on the date of termination of the Optionee's employment, provided such option exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) six months (in the case of permanent disability) or three months (in the case of retirement). 4 (c) Upon termination of the Optionee's employment by reason other than death, disability or cause (as each is determined by the Committee), the Optionee may exercise any Stock Options, to the extent exercisable on the date of termination of the Optionee's employment, provided such option exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) 30 days of the date of termination. (d) Except as provided in Subsections (a), (b) and (c) of this Section 2.7, all Stock Options shall terminate immediately upon the termination of the Optionee's employment. Section 2.8. Transferability. The Committee may, in its discretion, authorize all or a portion of the Stock Options to be granted to an Optionee to be on terms which permit transfer by such Optionee to (i) the spouse, children or grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which (a) the Optionee, (b) such Immediate Family Members, (c) corporations, the only owners of which are such Immediate Family Members or the Optionee, or (d) trusts whose only beneficiaries are such Immediate Family Members or the Optionee, are the only partners, provided that (x) there may be no consideration for any such transfer, (y) the Award Agreement pursuant to which such Stock Options are granted must be approved by the Committee, and must expressly provide for the transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred Stock Options shall be prohibited except those in accordance with Section 6.2 hereof. Following transfer, such Stock Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Section 2.2 hereof the term "Optionee" shall be deemed to refer to the transferee. The events of termination of employment of Section 2.7 hereof shall continue to be applied with respect to the original Optionee, following which the Stock Options shall be exercisable by the transferee only to the extent, and for the periods specified in Section 2.4. ARTICLE III. INCENTIVE STOCK OPTIONS Section 3.1. Award of Incentive Stock Options. The Committee may, from time to time and subject to the provisions of the Plan and such other terms and as the Committee may prescribe, grant to any participant in the Plan one or more "incentive stock options" (intended to qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options")) to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of 10% or more of the total combined voting power of all classes of stock of the Company or its subsidiaries, unless the Incentive Stock Options (i) have an exercise price of 110% of the fair market value of the Common Stock on the date of grant, and (ii) may not be exercised more than five years from the date of grant thereof. Section 3.2. Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the holder of an Incentive Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to 5 the Incentive Stock Option evidenced thereby and in such form as the Committee may from time to time determine. Section 3.3. Incentive Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted. Section 3.4. Term and Exercise. Each Incentive Stock Option, unless a shorter period is provided by the Committee or another Section of this Plan, may be exercised during a period of ten years from the date of grant thereof (the "Option Term") and may be subject to such vesting scheduling as the Committee may provide in an Award Agreement. No Incentive Stock Option shall be exercisable after the expiration of its Option Term. Section 3.5. Maximum Amount of Incentive Stock Option Grant. The aggregate fair market value (determined on the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options first become exercisable by an Optionee during any calendar year (under all plans of the Optionee's employer corporations and their parent and subsidiary corporations) shall not exceed $100,000. Section 3.6. Death of Optionee. (a) Upon the death of the Optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both the remaining Option Term of the Incentive Stock Option and one year after the Optionee's termination of employment. (b) The provisions of this Section shall apply notwithstanding that the Optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. Section 3.7. Retirement or Disability. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee, upon the termination of the Optionee's employment by reason of permanent disability or retirement (as each is determined by the Committee), the Optionee may exercise any Incentive Stock Options, provided such option exercise occurs within both (i) the remaining Option Term of the Incentive Stock Option and (ii) six months (in the case of permanent disability) or three months (in the case of retirement). Notwithstanding the terms of an Award Agreement, the tax treatment available pursuant to Section 422 of the Internal Revenue Code of 1986 upon the exercise of an Incentive Stock Option shall not be available to an Optionee who exercises any Incentive Stock Options more than (i) six months after the date of termination of employment due to permanent disability or (ii) three months after the date of termination of employment due to retirement. 6 Section 3.8. Termination for Other Reasons. Except as provided in Sections 3.6 and 3.7 or except as otherwise determined by the Committee in an Award Agreement, all Incentive Stock Options shall terminate immediately upon the termination of the Optionee's employment. Section 3.9. Applicability of Stock Options Section. Sections 2.5, Manner of Payment; and 2.6, Restrictions on Certain Shares, applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated by reference in this Article III, as though fully set forth herein. ARTICLE IV. PERFORMANCE SHARE AWARDS Section 4.1. Awards Granted by Committee. Coincident with or following designation for participation in the Plan, a participant may be granted Performance Shares. Certificates representing Performance Shares shall be issued to the participant effective as of the date of the Award. Holders of Performance Shares shall have all of the voting, dividend and other rights of stockholders of the Company, subject to the terms of any Award Agreement. Section 4.2. Amount of Award. The Committee shall establish a maximum amount of a participant's Award, which amount shall be denominated in shares of Common Stock. Section 4.3. Communication of Award. Written notice of the maximum amount of a participant's Award and the Performance Cycle determined by the Committee, if any, shall be given to a participant as soon as practicable after approval of the Award by the Committee. The grant of Performance Shares shall be evidenced by a written Award Agreement, executed by the Company and the recipient of Performance Shares, in such form as the Committee may from time to time determine, providing for the terms of such grant. Section 4.4. Amount of Award Payable. Performance Shares may be granted based upon past performance or future performance. In addition to any other restrictions the Committee may place on Performance Shares, the Committee may, in its discretion, provide that Performance Shares shall vest upon the satisfaction of performance targets to be achieved during an applicable "Performance Cycle." Failure to satisfy the performance targets may result, in the Committee's discretion as set forth in an Award Agreement, in the forfeiture of the Performance Shares by the participant and the return of such shares to the Company or have any other consequence as determined by the Committee. Performance targets established by the Committee may relate to corporate, group, unit or individual performance and may be established in terms of market price of Common Stock, cash flow or cash flow per share, reserve value or reserve value per share, net asset value or net asset value per share, earnings, or such other measures or standards determined by the Committee. Multiple performance targets may be used and the components of multiple performance targets may be given the same or different weight in determining the amount of an Award earned, and may relate to absolute performance or relative performance measured against other groups, units, individuals or entities. Certificates representing Performance Shares shall bear a legend restricting their transfer and requiring the forfeiture of the shares to the Company if any performance targets or other conditions to vesting are not met. The Committee may also require a participant to deliver certificates representing unvested Performance Shares to the Company in escrow until the Performance Shares vest. 7 Section 4.5. Adjustments. At any time prior to vesting of a Performance Share, the Committee may adjust previously established performance targets or other terms and conditions to reflect events such as changes in laws, regulations or accounting practice, or mergers, acquisitions, divestitures or any other event determined by the Committee. Section 4.6. Payments of Awards. Following the conclusion of each Performance Cycle, the Committee shall determine the extent to which performance targets have been attained and the satisfaction of any other terms and conditions with respect to vesting an Award relating to such Performance Cycle. Subject to the provisions of Section 6.3, to the extent the Committee determines Performance Shares have vested, the Company shall issue to the participant certificates representing vested shares free of any legend regarding performance targets or forfeiture in exchange for such participant's legended certificates. Section 4.7. Termination of Employment. Unless the Award Agreement provides for vesting upon death, disability, retirement or other termination of employment, upon any such termination of employment of a participant prior to vesting of Performance Shares, all outstanding and unvested Awards of Performance Shares to such participant shall be cancelled, shall not vest and shall be returned to the Company. Section 4.8. Transfer Restriction. Any Award Agreement providing for the issuance of Performance Shares to any person who at the time of grant is subject to the restrictions of Section 16(b) of the Exchange Act, shall provide that such Common Stock cannot be resold for a period of six months following the grant of such Performance Shares. ARTICLE V. AUTOMATIC GRANTS Section 5.1. Grant. Each director who is not an employee of the Company, its subsidiaries, affiliates and managers ("Non-Employee Director") shall on the date on which he or she is initially elected or appointed a director of the Company be granted a Stock Option to purchase 2,250 shares of Common Stock for the fair market price on the date of such grant, for an Option Term of ten years. Thereafter, on the first business day following the Annual Meeting of Stockholders of each subsequent year in which the Non-Employee Director is still serving as a director (whether or not such Non-Employee Director's term has been continuous), he or she shall automatically be granted a Stock Option to purchase an additional 2,250 shares of Common Stock for the fair market price on the date of such grant for an Option Term of ten years, and shall automatically be granted, in lieu of a cash fee for serving as a director of the Company, 3,375 Performance Shares, which shall vest six months after the date of grant, except in the case of the death of the director, in which case they shall vest upon the death of such director. Section 5.2. Applicable Provisions. The provisions of Section 2.7(a) relating to the death of an Optionee shall apply to options granted to Non- Employee Directors under Section 5.1, and the Committee may not agree to the contrary in an Award Agreement or otherwise. The provisions of Subsections 2.7(b), (c) and (d) relating to disability and other termination of employment shall not apply to options granted under Section 5.1, and the failure of a Non- Employee Director to be re-elected as a director of the Company shall not affect the Stock Options granted under this Article V. 8 ARTICLE VI. MISCELLANEOUS Section 6.1. General Restriction. Each Award under the Plan shall be subject the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an Award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with the granting of such Award or the issue or purchase of shares of Common Stock thereunder, such Award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. Section 6.2. Non-Assignability. Except as permitted by Section 2.8 hereof, no Award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such Award shall be exercisable only by such person or by such person's guardian or legal representative. Section 6.3. Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company as amounts sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificates for such shares. Alternatively, the Company may issue, transfer or vest only such number of shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. Section 6.4. Right to Terminate Employment. Nothing in the Plan or in any Agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. Section 6.5. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. Section 6.6. Rights as a Stockholder. The recipient of any Award under the Plan shall have no rights as a stockholder with respect thereto unless and until certificates for shares of Common Stock are issued to him. Section 6.7. Definitions. In this Plan the following definitions shall apply: (a) "Award" shall mean a grant of Stock Options, Incentive Stock Options or Performance Shares under the Plan. 9 (b) "Change in Control" means any one of the following: (i) "Continuing Directors" no longer constitute a majority of the Board of Directors of the Company; the term "Continuing Director" means any individual who is a member of the Board of Directors of the Company on the date hereof or was nominated for election as a director by, or whose nomination as a director was approved by, the Board of Directors of the Company with the affirmative vote of a majority of the Continuing Directors; (ii) any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) together with his or its affiliates, becomes the beneficial owner, directly or indirectly, of 25% or more of the voting power of the Company's then outstanding securities entitled generally to vote for the election of the Company's directors; (iii) the merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of less than 50% of the combined voting power to vote for the election of directors of the surviving corporation or other entity following the effective date of such merger or consolidation; or (iv) the sale of all or substantially all of the assets of the Company or the liquidation or dissolution of the Company. (c) "Fair market value" as of any date and in respect of any share of Common Stock means the average of the high and low sales price on such date or on the next business day, if such date is not a business day, of a share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the NYSE - Composite Transactions) or any other publication selected by the Committee, provided that, if shares of Common Stock shall not have been traded on the New York Stock Exchange or other public securities market for more than 10 days immediately preceding such date or if deemed appropriate by the Committee for any other reason, the fair market value of shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. (d) "Option" means a Stock Option or Incentive Stock Option. (e) "Option price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. 10 (f) "Outside Director" means a director of the Company who (i) is not a current employee of the Company; (ii) is not a former employee of the Company who receives compensation from the Company for prior services (other than benefits under a tax-qualified retirement plan); (iii) has not been an officer of the Company; (iv) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director; and (v) does not possess an interest in a transaction, or is engaged in a business relationship, that would require disclosure under Item 404(a) or (b) of Regulation S-K promulgated by the Securities and Exchange Commission. (g) "Performance Cycle" means the period of time, if any, as specified by the Committee over which Performance Shares are to be vested. Section 6.8. Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on Awards under the Plan theretofore made to any recipient who takes such leave of absence. Section 6.9. Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and Awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an Award or incentive period. Section 6.10. Adjustments. (a) In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Option or Performance Shares theretofore granted under the Plan, and any and all other matters deemed appropriate by the Committee. (b) In the event of a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefor in money, services or property, then (a) in the event of an increase in the number of such shares outstanding, the number of shares of Common Stock purchasable pursuant to a Stock Option granted automatically pursuant to Section 5.1 after the date of increase, and the number of Performance Shares granted automatically pursuant to Section 5.1 after the date of such increase, shall be proportionately increased; and (b) in the event of a decrease in the number of such shares outstanding the number of shares of Common Stock purchasable pursuant to a Stock Option granted automatically pursuant to Section 5.1 after the date of decrease, and the number of Performance Shares granted automatically pursuant to Section 5.1 after the date of such decrease shall be proportionately decreased. 11 Section 6.11. Changes in the Company's Capital Structure. (a) The existence of outstanding Options or Performance Shares shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) If, while there are outstanding Options or Performance Shares, the Company shall effect a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefor in money, services or property, then, subject to the provisions, if any, in the Award Agreement (a) in the event of an increase in the number of such shares outstanding, the number of shares of Common Stock then subject to Options hereunder or Performance Shares granted hereunder shall be proportionately increased; and (b) in the event of a decrease in the number of such shares outstanding the number of shares then available for Option hereunder or the number of Performance Shares granted hereunder shall be proportionately decreased. Any such adjustment in outstanding Options will be made without change to the total exercise price applicable to such Option and with a corresponding adjustment in the exercise price per share. (c) After a merger of one or more corporations into the Company, or after a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, (i) each holder of an outstanding Option shall, at no additional cost, be entitled upon exercise of such Option to receive (subject to any required action by stockholders) in lieu of the number of shares as to which such Option shall then be so exercisable, the number and class of shares of stock, other securities or consideration to which such holder would have been entitled to receive pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of the Company equal to the number of shares as to which such Option had been exercisable and (ii) unless otherwise provided by the Committee, the number of shares of Common Stock, other securities or consideration to be received with respect to unvested Performance Shares shall continue to be subject to the Award Agreement, including any vesting provisions thereof. (d) Except as herein provided, the issuance by the Company of Common Stock or any other shares of capital stock or securities convertible into shares of capital stock, for cash, property, labor done or other consideration, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. Section 6.12. Change in Control. If a Change in Control occurs while unvested Performance Shares or unexercised Options remain outstanding, the Committee shall waive any limitations set 12 forth in this Plan or any Award Agreement with respect to such Option or Performance Share such that such Option shall become fully exercisable and such Performance Share shall vest upon a Change in Control. Section 6.13. Amendment of the Plan. (a) The Committee may, without further action by the stockholders and without receiving further consideration from the participants, amend this Plan or condition or modify Awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without stockholder approval the committee may not (i) increase the maximum number of shares of Common Stock which may be issued under the Plan or to any individual (other than increases pursuant to Sections 6.10 and 6.11), or (ii) change the employees or class of employees eligible to participate in the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not, without the consent of a participant, affect his or her rights under an Award previously granted to him or her. The undersigned hereby certifies that this is a true and correct copy of the Timbers Oil Company 1997 Stock Incentive Plan, as adopted by the Company's Board of Directors on February 18, 1997 and the Company's stockholders on May 20, 1997, as amended. By Virginia Anderson ------------------------------------- Virginia Anderson, Secretary 13 EX-10.9 4 1998 STOCK INCENTIVE PLAN, AS AMENDED FEB. 15,2000 EXHIBIT 10.9 CROSS TIMBERS OIL COMPANY 1998 STOCK INCENTIVE PLAN Amended as of February 15, 2000 CROSS TIMBERS OIL COMPANY 1998 STOCK INCENTIVE PLAN ARTICLE 1. GENERAL Section 1.1 Purpose. The purposes of this 1998 Stock Incentive Plan (the "Plan") are to: (1) associate the interests of the management of CROSS TIMBERS OIL COMPANY and its subsidiaries and affiliates (collectively referred to as the "Company") closely with the stockholders to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders; (2) provide management with a proprietary ownership interest in the Company commensurate with Company performance, as reflected in increased stockholder value; (3) maintain competitive compensation levels thereby attracting and retaining highly competent and talented directors and employees; and (4) provide an incentive to management for continuous employment with the Company. Certain capitalized terms are defined in Section 6.7. Section 1.2. Administration. (a) The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"), as constituted from time to time, consisting of two or more members who shall each be an Outside Director appointed by the Board of Directors. (b) The Committee shall have the authority in its sole discretion and from time to time to: (i) designate the executive employees (as defined in Section 1.3) of the Company eligible to participate in the Plan; (ii) grant Awards provided in the Plan in such form and amount as the Committee shall determine; (iii) impose such limitations, restrictions and conditions, not inconsistent with this Plan, upon any such Award as the Committee shall deem appropriate; and (iv) interpret the Plan and any agreement, instrument or other document executed in connection with the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. 1 (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be final, conclusive and binding upon all persons, including the Company, any participant, any stockholder of the Company and any employee. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any Award thereunder. Section 1.3. Eligibility for Participation. Participants in the Plan shall be selected by the Committee from the executive employees of the Company or its Subsidiaries. For the purposes of this Plan, (i) the term "executive employee" shall include only employees who are officers, or who are determined by the Committee, in its discretion, to be key professional, managerial, administrative, or technical employees or supervisors, and (ii) the term "Subsidiary" means any corporation or other entity of which at least 50% of the voting securities are owned by the Company directly or through one or more other corporations, each of which is also a Subsidiary. With respect to non-corporate entities, Subsidiary shall mean an entity managed or controlled by the Company or any Subsidiary and with respect to which the Company or any Subsidiary is allocated more than half of the profits and losses thereof. Section 1.4. Types of Awards Under the Plan. Awards under the Plan may be in the form of any one or more of the following: (i) Stock Options, as described in Article II; (ii) Incentive Stock Options, as described in Article III; and/or (iii) Performance Shares, as described in Article IV. Awards under the Plan shall be evidenced by an Award Agreement between the Company and the recipient of the Award, in form and substance satisfactory to the Committee, and not inconsistent with this Plan. Award Agreements may provide such vesting schedules for Stock Options and Incentive Stock Options, performance targets for Performance Shares, and such other terms, conditions and provisions as are not inconsistent with the terms of this Plan. Subject to the express provisions of the Plan, and within the limitations of the Plan, the Committee may modify, extend or renew outstanding Award Agreements, or accept the surrender of outstanding Awards and authorize the granting of new Awards in substitution therefor. However, except as provided in this Plan, no modification of an Award shall impair the rights of the holder thereof without his consent. Section 1.5. Aggregate Limitation on Awards. (a) The maximum number of shares of Common Stock which may be issued pursuant to Awards issued under the Plan shall be 6,000,000, of which 3,000,000 may be issued as Performance Shares. In the aggregate with any other stock incentive plan of the Company, the Company may not grant Options or Performance Shares such that the total 2 number of shares of Common Stock subject to outstanding Options and unvested Performance Shares exceeds 6% of the total number of shares of Common Stock that the Company has issued and are outstanding at the time any grants are made. In addition, the maximum number of shares that may be issued to any individual hereunder pursuant to Options or Performance Shares issued hereunder during any one year shall be 600,000 and 300,000, respectively, and the maximum number that may be issued to any individual pursuant to Options or Performance Shares issued hereunder during the life of the Plan shall be 1,200,000 and 600,000, respectively. (b) For purposes of calculating the maximum number of shares of Common Stock which may be issued under the Plan in total or to any individual: (i) only the net shares issued (e.g., excluding shares delivered or withheld for payment of an Option exercise or for tax withholding requirements) under the Plan shall be counted when issued upon exercise of a Stock Option or Incentive Stock Option or vesting of Performance Shares; (ii) only the net shares issued as Performance Shares shall be counted as issued (shares reacquired by the Company because of failure to achieve a performance target or failure to become fully vested for any other reason shall again be available for issuance under the Plan); and (iii) any shares of Common Stock subject to a Stock Option or Incentive Stock Option which for any reason is terminated, unexercised or expires shall again be available for issuance under the Plan. Section 1.6. Effective Date and Term of Plan. (a) The Plan shall become effective on the date adopted by the Board of Directors, subject to approval by the holders of a majority of the votes of shares of Common Stock and Preferred Stock present in person or represented by proxy and entitled to vote at the Annual Meeting of stockholders of the Company held in 1998. (b) No Awards shall be made under the Plan after the tenth anniversary of the effective date of this Plan; provided, however, that the Plan and all Awards made under the Plan prior to such date shall remain in effect until such Awards have been satisfied or terminated in accordance with the Plan and the terms of such Awards. Section 1.7. Transferability. The Committee may, in its discretion, authorize all or a portion of the Stock Options to be granted under Article II or the Performance Shares to be granted under Article IV to be on terms which permit transfer by the recipient of such a grant to (i) the spouse, children or grandchildren of the recipient ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which (a) the 3 recipient, (b) such Immediate Family Members, (c) corporations, the only owners of which are such Immediate Family Members or the recipient, or (d) trusts whose only beneficiaries are such Immediate Family Members or the recipient, are the only partners, provided that (x) there may be no consideration for any such transfer, (y) the Award Agreement pursuant to which such Stock Options or Performance Shares are granted must be approved by the Committee, and must expressly provide for the transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred Stock Options or Performance Shares shall be prohibited except by will or by the law of descent and distribution. Following transfer, such Stock Options or Performance Shares shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Sections 2.2 and 4.1 hereof, the terms "Optionee" and "participant," respectively, shall be deemed to refer to the transferee. The events of termination of employment of Sections 2.7 and 4.7 hereof shall continue to be applied with respect to the original Optionee and participant, respectively, following which the Stock Options shall be exercisable by the transferee only to the extent and for the periods specified in Section 2.7, and Performance Shares shall vest only to the extent provided in the Award Agreement. ARTICLE II. STOCK OPTIONS Section 2.1. Award of Stock Options. The Committee may from time to time, and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more options to purchase the number of shares of Common Stock ("Stock Options") allotted by the Committee. The date a Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Section 2.2. Stock Option Agreements. The grant of a Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the Optionee, stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. Section 2.3. Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of a Stock Option shall be not less than 100% of the fair market value of a share of Common Stock on the date the Stock Option is granted. Section 2.4. Term and Exercise. A Stock Option may be exercised during the Option Term and may be subject to such vesting schedule as the Committee may provide in an Award Agreement. No Stock Option shall be exercisable after the expiration of its Option Term. Section 2.5. Manner of Payment. Each Award Agreement providing for a Stock Option shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the option price for such shares with cash. Unless otherwise provided in the Award Agreement, the Optionee may also pay to the Company, in full, the 4 option price with Common Stock owned by the Optionee on the date of exercise or Common Stock acquired pursuant to such exercise, valued at the fair market value of a share of Common Stock on the date the Stock Option is exercised, provided that the Optionee provides satisfactory evidence, in the opinion of the Secretary or any Assistant Secretary of the Company, that the Optionee directly owns on the date of exercise shares of Common Stock sufficient to pay the option price, and that the Optionee has owned such shares for at least six months. Section 2.6. Delivery of Certificates. As soon as practicable after exercise of the Stock Option and receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a stockholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a stockholder. Section 2.7. Death, Retirement and Termination of Employment of Optionee. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee: (a) Upon the death of the Optionee, any Stock Option to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both (i) the remaining Option Term and (ii) one year after such death. The provisions of this Section shall apply notwithstanding that the Optionee's employment may have terminated prior to death, but only to the extent of any rights exercisable on the date of termination of the Optionee's employment. (b) Upon termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may exercise any Stock Option to the extent exercisable on the date of termination of the Optionee's employment, provided such option exercise occurs within both (i) the remaining Option Term and (ii) one year (in the case of permanent disability) or three months (in the case of retirement) after such termination. (c) In the event of the termination of the Optionee's employment for cause (as determined by the Committee), all Stock Options shall terminate immediately upon the termination of the Optionee's employment. (d) Upon termination of the Optionee's employment by reason other than death, disability or cause (as each is determined by the Committee), the Optionee may exercise any Stock Option, to the extent exercisable on the date of termination of the Optionee's employment, provided such option exercise occurs within both (i) the remaining Option Term and (ii) 30 days of the date of termination. 5 ARTICLE III. INCENTIVE STOCK OPTIONS Section 3.1. Award of Incentive Stock Options. The Committee may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more "incentive stock options" (intended to qualify as such under the provisions of Section 422 of the Code) ("Incentive Stock Options") to purchase the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of 10% or more of the total combined voting power of all classes of stock of the Company or its subsidiaries, unless the Incentive Stock Options (i) have an exercise price of 110% of the fair market value of the Common Stock on the date of grant, and (ii) the Option Term may not be longer than five years. Section 3.2. Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the Optionee, stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby and in such form as the Committee may from time to time determine. Section 3.3. Incentive Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be not less than 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted. Section 3.4. Term and Exercise. Each Incentive Stock Option may be exercised during the Option Term and may be subject to such vesting schedule as the Committee may provide in an Award Agreement. No Incentive Stock Option shall be exercisable after the expiration of its Option Term. Section 3.5. Maximum Amount of Incentive Stock Option Grant. The aggregate fair market value (determined on the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options first become exercisable by an Optionee during any calendar year (under all plans of the Optionee's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. Section 3.6. Death of Optionee. (a) Upon the death of the Optionee, any Incentive Stock Option to the extent exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both (i) the remaining Option Term and (ii) one year after the Optionee's death. 6 (b) The provisions of this Section shall apply notwithstanding that the Optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of termination of the Optionee's employment. Section 3.7. Retirement or Disability. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee, upon the termination of the Optionee's employment by reason of permanent disability or retirement (as each is determined by the Committee), the Optionee may exercise any Incentive Stock Option, to the extent exercisable on the date of termination of the Optionee's employment, provided such option exercise occurs within both (i) the remaining Option Term and (ii) one year (in the case of permanent disability) or three months (in the case of retirement) after such termination. Notwithstanding the terms of an Award Agreement, the tax treatment available pursuant to Section 422 of the Code upon the exercise of an Incentive Stock Option shall not be available to an Optionee who exercises any Incentive Stock Options more than (i) one year after the date of termination of employment due to permanent disability or (ii) three months after the date of termination of employment due to retirement. Section 3.8. Termination for Other Reasons. Except as provided in Sections 3.6 and 3.7 or except as otherwise determined by the Committee in an Award Agreement, all Incentive Stock Options shall terminate immediately upon the termination of the Optionee's employment. Section 3.9. Applicability of Stock Options Section. Sections 2.5, Manner of Payment, and 2.6, Delivery of Share Certificates, applicable to Stock Options, shall apply equally to Incentive Stock Options. Said Sections are incorporated by reference in this Article III, as though fully set forth herein. ARTICLE IV. PERFORMANCE SHARE AWARDS Section 4.1. Awards Granted by Committee. Coincident with or following designation for participation in the Plan, a participant may be granted Performance Shares. Certificates representing Performance Shares shall be issued to the participant effective as of the date of the Award. A holder of Performance Shares shall have such voting, dividend and other rights of stockholders of the Company as shall be provided in the Award Agreement. Section 4.2. Amount of Award. The Committee shall establish a maximum amount of a participant's Award, which amount shall be denominated in shares of Common Stock. Section 4.3. Communication of Award. Written notice of the maximum amount of a participant's Award and the Performance Cycle determined by the Committee, if any, shall be given to a participant as soon as practicable after approval of the Award by the Committee. The grant of Performance Shares shall be evidenced by a written Award Agreement, executed by the Company and the recipient of Performance Shares, in such form as the Committee may from time to time determine, providing for the terms of such grant. 7 Section 4.4. Amount of Award Payable. Performance Shares may be granted based upon past performance or future performance. In addition to any other restrictions the Committee may place on Performance Shares, the Committee may, in its discretion, provide that Performance Shares shall vest upon the satisfaction of performance targets to be achieved during an applicable Performance Cycle. Failure to satisfy the performance targets may result, in the Committee's discretion as set forth in an Award Agreement, in the forfeiture of the Performance Shares by the participant and the return of such shares to the Company or have any other consequence as determined by the Committee. Performance targets established by the Committee may relate to corporate, group, unit or individual performance and may be established in terms of market price of Common Stock, cash flow or cash flow per share, reserve value or reserve value per share, net asset value or net asset value per share, earnings, or such other measures or standards determined by the Committee. Multiple performance targets may be used and the components of multiple performance targets may be given the same or different weight in determining the amount of an Award earned, and may relate to absolute performance or relative performance measured against other groups, units, individuals or entities. Certificates representing Performance Shares shall bear a legend restricting their transfer and requiring the forfeiture of the shares to the Company if any performance targets or other conditions to vesting are not met. The Committee may also require a participant to deliver certificates representing unvested Performance Shares to the Company in escrow until the Performance Shares vest. Notwithstanding the discretion allocated to the Committee under this Section 4.4, any award of Performance Shares to the Chief Executive Officer or any other named executive officer, as listed in the prior year's proxy statement, will comply with the requirements for qualified performance-based compensation under Section 162(m) of the Code and the Treasury regulations promulgated thereunder. Section 4.5. Adjustments. At any time prior to vesting of a Performance Share, the Committee may adjust previously established performance targets or other terms and conditions to reflect events such as changes in laws, regulations or accounting practice, or mergers, acquisitions, divestitures or any other event determined by the Committee. Section 4.6. Payments of Awards. Following the conclusion of each Performance Cycle, the Committee shall determine the extent to which performance targets have been attained and the satisfaction of any other terms and conditions with respect to vesting an Award relating to such Performance Cycle. Subject to the provisions of Section 6.3, to the extent the Committee determines Performance Shares have vested, the Company shall issue to the participant certificates representing vested shares free of any legend regarding performance targets or forfeiture in exchange for such participant's legended certificates. Upon election of the participant on the date of vesting, and upon approval by the Committee, the Company may purchase some or all of the participant's vested Performance Shares at the fair market value on the date the Committee determines that the Performance Shares have vested. Within seven business days after receipt of the participant's election, the Committee will inform the participant of its decision whether to approve the purchase of such Performance Shares. 8 Section 4.7. Termination of Employment. Unless the Award Agreement provides for vesting upon death, disability, retirement or other termination of employment, upon any such termination of employment of a participant prior to vesting of Performance Shares, all outstanding and unvested Awards of Performance Shares to such participant shall be canceled, shall not vest and shall be returned to the Company. ARTICLE V. AUTOMATIC GRANTS Section 5.1. Grant. Each director who is not an employee of the Company, its subsidiaries, affiliates and managers ("Non-Employee Director") shall be granted, on the date on which he or she is initially elected or appointed a director of the Company, a Stock Option to purchase 2,700 shares of Common Stock for the fair market price on the date of such grant, for an Option Term of ten years. Thereafter, on the first business day following the Annual Meeting of Stockholders of each subsequent year in which the Non-Employee Director is still serving as a director (whether or not such Non-Employee Director's term has been continuous), he or she shall automatically be granted a Stock Option to purchase an additional 2,700 shares of Common Stock for the fair market price on the date of such grant for an Option Term of ten years. In lieu of the above grants, any Non-Employee Director that is an advisory director appointed by the Board of Directors shall be granted Stock Options to purchase 1,350 shares of Common Stock at the same time, and upon the same terms and conditions as would be granted to the other Non-Employee Directors under this Section 5.1. Section 5.2. Applicable Provisions. The provisions of Section 2.7(a) relating to the death of an Optionee shall apply to options granted to Non- Employee Directors under Section 5.1, and the Committee may not agree to the contrary in an Award Agreement or otherwise. The provisions of Subsections 2.7(b), (c) and (d) relating to disability and other termination of employment shall not apply to options granted under Section 5.1. Section 5.3. Continuation as Director. In the event a Non-Employee Director stands for re-election as a director of the Company but fails to be re-elected, such failure shall not affect the Stock Options granted under this Article V. In all other events where a Non-Employee Director does not continue as a director of the Company (except for death), the Non-Employee Director may thereafter exercise only those Stock Options that were exercisable upon the date that he or she ceased to be a director and only during the period occurring within two years after such date (but not after the expiration of the Option Term). Section 5.4. Effect of Prior Plans. Prior stock incentive plans of the Company have provided for similar automatic grants to the Non-Employee Directors, but it is the intent of the Company that duplicate automatic grants shall not be made. 9 ARTICLE VI. MISCELLANEOUS Section 6.1. General Restriction. Each Award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an Award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with the granting of such Award or the issue or purchase of shares of Common Stock thereunder, such Award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. Section 6.2. Non-Assignability. Except as permitted by Section 1.7 hereof, no Award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution, and during the life of the recipient, such Award shall be exercisable only by such person or by such person's guardian or legal representative. Section 6.3. Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company in cash amounts sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificates for such shares. Alternatively, the Company may allow the participant to submit shares of Common Stock to satisfy the withholding requirement or may issue, transfer or vest only such number of shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. Section 6.4. Right to Terminate Employment. Nothing in the Plan or in any Agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. Section 6.5. Non-Uniform Determinations. The Committee's determinations under the Plan (including, without limitation, determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. Section 6.6. Rights as a Stockholder. The recipient of any Award under the Plan shall have no rights as a stockholder with respect thereto unless and until certificates for shares of Common Stock are issued to him (except as to Performance Shares as provided under Section 4.1). 10 Section 6.7. Definitions. In this Plan the following definitions shall apply: (a) "Award" shall mean a grant of Stock Options, Incentive Stock Options or Performance Shares under the Plan. (b) "Change in Control" means any one of the following: (i) "Continuing Directors" no longer constitute a majority of the Board of Directors of the Company; the term "Continuing Director" means any individual who is a member of the Board of Directors of the Company on the date hereof or was nominated for election as a director by, or whose nomination as a director was approved by, the Board of Directors of the Company with the affirmative vote of a majority of the Continuing Directors; (ii) any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) together with his or its affiliates, becomes the beneficial owner, directly or indirectly, of 25% or more of the voting power of the Company's then outstanding securities entitled generally to vote for the election of the Company's directors; (iii) the merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of less than 50% of the combined voting power to vote for the election of directors of the surviving corporation or other entity following the effective date of such merger or consolidation; or (iv) the sale of all or substantially all of the assets of the Company or the liquidation or dissolution of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Common Stock" shall mean shares of stock which may be issued under the Plan that are authorized and unissued or treasury shares of common stock, par value of one cent, of the Company. (e) "Fair market value" as of any date and in respect of any share of Common Stock means the average of the high and low sales price on such date or on the next business day, if such day is not a business day, or if no trading occurred on such day, then on the first day preceding such day on which trading occurred, of a share of Common Stock traded on 11 the New York Stock Exchange or any other public securities market selected by the Committee, provided that, if shares of Common Stock shall not have been traded on the New York Stock Exchange or other public securities market for more than 10 days immediately preceding such date or if deemed appropriate by the Committee for any other reason, the fair market value of shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. (f) "Option" means a Stock Option or Incentive Stock Option. (g) "Optionee" shall mean the holder of a Stock Option or an Incentive Stock Option. (h) "Option price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. (I) "Option Term" shall mean a period of ten years from the date of grant thereof in which an Option may be exercised, unless a shorter period is provided by the Committee or by another Section of this Plan. (j) "Outside Director" means a director of the Company who (i) is not a current employee of the Company; (ii) is not a former employee of the Company who receives compensation from the Company for prior services (other than benefits under a tax-qualified retirement plan); (iii) has not been an officer of the Company; (iv) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director; and (v) does not possess an interest in a transaction, or is engaged in a business relationship, that would require disclosure under Item 404(a) or (b) of Regulation S-K promulgated by the Securities and Exchange Commission. (k) "Performance Cycle" means the period of time, if any, as specified by the Committee over which Performance Shares are vested. Section 6.8. Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on Awards under the Plan theretofore made to any recipient who takes such leave of absence. Section 6.9. Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and Awards as it deems appropriate in respect of any employee who 12 becomes eligible to participate in the Plan or any portion thereof after the commencement of an Award or incentive period. Section 6.10. Adjustments. (a) In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan as Options or Performance Shares and the limitations on the maximum number that may be issued to any individual during any one year or the life of the Plan, the number of shares of Common Stock subject to Options or Performance Shares theretofore granted under the Plan, and any and all other matters deemed appropriate by the Committee. (b) In the event of a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefor in money, services or property, then (i) in the event of an increase in the number of such shares outstanding, the number of shares of Common Stock purchasable pursuant to a Stock Option granted automatically pursuant to Section 5.1 after the date of increase, and the number of Performance Shares granted automatically pursuant to Section 5.1 after the date of such increase, shall be proportionately increased; and (ii) in the event of a decrease in the number of such shares outstanding, the number of shares of Common Stock purchasable pursuant to a Stock Option granted automatically pursuant to Section 5.1 after the date of decrease, and the number of Performance Shares granted automatically pursuant to Section 5.1 after the date of such decrease, shall be proportionately decreased. (c) Any such adjustment in outstanding Options will be made with a corresponding adjustment in the exercise price per share so that the total exercise price applicable to such Options will not change. Section 6.11. Changes in the Company's Capital Structure. (a) The existence of outstanding Options or Performance Shares shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) After a merger of one or more corporations into the Company, or after a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, (i) each holder of an outstanding Option shall, at no additional cost, be entitled upon exercise of such Option to receive (subject to any required action by 13 stockholders) in lieu of the number of shares as to which such Option shall then be so exercisable, the number and class of shares of stock, other securities or consideration to which such holder would have been entitled to receive pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of the Company equal to the number of shares as to which such Option had been exercisable and (ii) unless otherwise provided by the Committee, the number of shares of Common Stock, other securities or consideration to be received with respect to unvested Performance Shares shall continue to be subject to the Award Agreement, including any vesting provisions thereof. (c) Except as herein provided, the issuance by the Company of Common Stock or any other shares of capital stock or securities convertible into shares of capital stock, for cash, property, services performed or other consideration, shall not adversely affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. Section 6.12. Change in Control. If a Change in Control occurs while unvested Performance Shares or unexercised Options remain outstanding, the Committee shall waive any limitations set forth in this Plan or any Award Agreement with respect to such Option or Performance Share such that such Option shall become fully exercisable and such Performance Share shall vest upon a Change in Control. Section 6.13. Amendment of the Plan. (a) The Committee may, without further action by the stockholders and without receiving further consideration from the participants, amend this Plan or condition or modify Awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without stockholder approval the Committee may not (i) increase the maximum number of shares of Common Stock which may be issued under the Plan or to any individual (other than increases pursuant to Sections 6.10 and 6.11), or (ii) change the employees or class of employees eligible to participate in the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not, without the consent of a participant, adversely affect his or her rights under an Award previously granted to him or her. The undersigned hereby certifies that this is a true and correct copy of the Cross Timbers Oil Company 1998 Stock Incentive Plan, as adopted by the Company's Board of Directors on April 13, 1998, and the Company's stockholders on May 19, 1997, as amended. By: Virginia Anderson --------------------------------- Virginia Anderson, Secretary 14 EX-10.12 5 FORM OF GRANT UNDER 1998 ROYALTY TRUST OPTION PLAN EXHIBIT 10.12 AWARD AGREEMENT UNDER CROSS TIMBERS OIL COMPANY 1998 ROYALTY TRUST OPTION PLAN ------------------------------ THIS AGREEMENT is entered into this ___ day of ________, ____ (the "Agreement Date"), between Cross Timbers Oil Company, a Delaware corporation (the "Company"), and _____ ("Grantee"), pursuant to the provisions of the Cross Timbers Oil Company 1998 Royalty Trust Option Plan (the "Plan"). The Compensation Committee of the Board of Directors of the Company has determined that Grantee is eligible to be a participant in the Plan and, to carry out its purposes, has this day authorized the conditional grant, pursuant to the Plan, of the options set forth below to Grantee. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties do hereby agree as follows: 1. Conditional Grant of Options. Subject to all of the terms, conditions, and provisions of the Plan and of this Agreement, the Company hereby conditionally grants to Grantee options pursuant to which Grantee shall have the right and option under the Plan to purchase from the Company all or any part of an aggregate of _____ of the units of beneficial interest (the "Units") of the Hugoton Royalty Trust (the "Trust"). The actual number of Units to be granted will be determined by dividing the aggregate dollar amount of Units set forth above by the option price (defined below). Any resulting fractional Units will not be granted and the number of Units to be granted will be rounded down to the nearest whole Unit. The condition to the grant of these options shall be satisfied, and this grant shall become effective, only if the initial public offering of Units of the Hugoton Royalty Trust shall be completed within six months after the Agreement Date, and the grant of these options shall become effective on the date of the first sale in such initial public offering. This conditional option grant will become void if the above condition shall not have been satisfied within six months after the Agreement Date. Grantee will not have any rights under this Agreement until the option grant is no longer conditional. 2. Option Price. The option or purchase price per Unit payable by Grantee to the Company in exercise of these options shall be the initial public offering price of the Units. Upon exercise of any option granted hereunder, Grantee must pay to the Company, in full, the option price for the Units issuable pursuant to such exercise. Grantee may pay the option price in whole or in part in cash or in common stock of the Company owned by Grantee, valued at Fair Market Value (as defined in Section 9(a) of the Plan) on the date of the option exercise. 3. Exercise Period. (a) The options will be exercisable immediately upon the satisfaction of the condition contained in paragraph 1. (b) No option may be exercised for fewer than 100 Units unless the remaining Units purchasable are fewer than 100 Units. (c) Any options that remain unexercised on the third anniversary of the Agreement Date will expire and no longer be exercisable. (d) Options may be exercised only if the Units are duly registered under the Securities Act of 1933 and applicable state securities laws, or unless the issuance is exempt from such registrations. 4. No Employment Commitment. Grantee acknowledges that neither the grant of options nor the execution of this Agreement by the Company shall be interpreted or construed as imposing upon the Company an obligation to retain Grantee's services for any stated period of time, which employment shall continue to be at the pleasure of the Company at such compensation as it shall determine, unless otherwise provided in a written employment agreement. 5. Additional Agreements. Grantee expressly and specifically agrees that: (a) With respect to the calendar year in which such options are exercised, Grantee shall include in his gross income for federal income tax purposes the amount, if any, by which the Fair Market Value of the Units on the date of exercise, as determined in Section 9(a) of the Plan, exceeds the option price; (b) The grant of options is special incentive compensation which shall not be taken into account as "wages" or "salary" in determining the amount of payment or benefit to Grantee under any pension, thrift, stock, or deferred compensation plan of the Company; and (c) Such grant shall not affect the amount of any life insurance coverage available to any beneficiary of Grantee under any life insurance plan covering employees of the Company or any subsidiary. 6. Other Terms, Conditions, and Provisions. As previously provided, the options herein granted by the Company to Grantee are granted subject to all of the terms, conditions, and provisions of the Plan. Grantee hereby acknowledges receipt of a copy of the Plan certified by the Secretary of the Company, and the parties agree that the entire text of such Plan be, and it is hereby incorporated herein by reference as fully as if copied herein in full. Reference to such Plan is therefore made for a full description of the rights and methods of exercise of the options, the effect of Grantee's termination of employment, the adjustments to be made in the event of changes in the capital structure of the Company, and of all of the other provisions, terms, and conditions of the Plan applicable to the options granted herein. If any of the provisions of this Agreement shall vary from or be in conflict with the Plan, the provisions of the Plan will be controlling. 7. Transferability. The options granted hereunder are not transferable or assignable by Grantee except by will or the laws of descent and distribution. IN WITNESS WHEREOF, this Agreement is executed and entered into effective on the day and year first above expressed. ATTEST: CROSS TIMBERS OIL COMPANY _________________________ By:_________________________________ Virginia Anderson, Name: Bob R. Simpson Secretary Title: Chairman of the Board and Chief Executive Officer EX-10.13 6 MANAGEMENT GROUP EMPLOYEE SEVERANCE PROTECTIONPLAN EXHIBIT 10.13 AMENDED AND RESTATED CROSS TIMBERS OIL COMPANY MANAGEMENT GROUP EMPLOYEE SEVERANCE PROTECTION PLAN --------------------------------------------------- WHEREAS, the Board of Directors of Cross Timbers Oil Company, a Delaware corporation ("the Company") recognizes that the current business environment makes it difficult to attract and retain highly qualified employees unless a certain degree of security can be offered to such individuals against organizational and personnel changes which frequently follow a Change in Control (as defined below) of a corporation; and WHEREAS, even rumors of acquisitions or mergers may cause employees to consider major career changes in an effort to ensure financial security for themselves and their families; and WHEREAS, the Company desires to ensure fair treatment of its employees, and employees of certain subsidiaries of the Company which adopt this Plan as Participating Employers in the event of a Change in Control and to allow them to make critical career decisions without undue time pressure and financial uncertainty, thereby increasing their willingness to remain with their Employer notwithstanding the outcome of a possible Change in Control transaction; and WHEREAS, the Company recognizes that its employees and employees of Participating Employers will be involved in evaluating or negotiating any offers, proposals or other transactions which could result in a Change in Control of the Company and believes that it is in the best interest of the Company and its stockholders for such employees to be in a position, free from personal financial and employment considerations, to assess objectively and pursue aggressively the interests of the Company and its stockholders in making these evaluations and carrying on such negotiations; and WHEREAS, the Board of Directors of the Company believes it is essential to provide such employees with compensation arrangements upon a Change in Control of the Company which provide such employees with individual financial security and which are competitive with those of other corporations, and in order to accomplish these objectives, the Board caused the Company to adopt the Cross Timbers Oil Company Management Group Employee Severance Protection Plan on June 10, 1997; and WHEREAS, the Board of Directors desires to amend and restate this Plan to provide for additional protection for the employees to assure fair treatment of the employees in the event of a Change in Control. NOW, THEREFORE, in order to fulfill the above purposes, the following plan has been developed and is hereby adopted. 1 ARTICLE I ESTABLISHMENT OF PLAN As of the Effective Date, the Company hereby establishes a severance compensation plan known as the Amended and Restated Cross Timbers Oil Company Management Group Employee Severance Protection Plan, as set forth in this document. ARTICLE II DEFINITIONS As used herein, the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise. 2.1 Base Salary. The amount a Participant is entitled to receive as wages ----------- or salary on an annualized basis, calculated immediately prior to a Change in Control. 2.2 Board. The Board of Directors of the Company. ----- 2.3 Bonus Amount. An amount equal to (i) the greater of a Participant's ------------ ---------- two most recent bonuses awarded on or prior to the date of the Change in Control under the Key Management Incentive Bonus Plan adopted by the Company (or any other bonus plan or program then in effect), multiplied by two, plus (ii) the ------------- amount, if any, of the Participant's monthly car allowance on the date of the Change in Control, multiplied by twelve. ---------- 2.4 Cause. An Employer shall have "Cause" to terminate a Participant if ----- the Participant (i) willfully and continually fails to substantially perform his duties with the Employer (other than a failure resulting from the Participant's incapacity due to physical or mental illness) which failure continues for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Participant specifying the manner in which the Participant has failed to substantially perform, or (ii) willfully engages in conduct which is demonstrably and materially injurious to the Employer, monetarily or otherwise; provided, however, that no termination of ----------------- the Participant's employment shall be for Cause until (x) there shall have been delivered to the Participant a copy of a written notice specifying in detail the particulars of the Participant's conduct which violates either (i) or (ii) above, (y) the Participant shall have been provided an opportunity to be heard by the Board (with the assistance of the Participant's counsel if the Participant so desires), and (z) a resolution is adopted in good faith by two- thirds (2/3) of the Board confirming said violation. No act, nor failure to act, on the Participant's part, shall be considered "willful" unless he has acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Employer. Notwithstanding anything contained in this Plan to the contrary, no failure to perform by the Participant after Notice of Termination is given by or to the Participant shall constitute Cause. 2 2.5 Change in Control. A "Change in Control" shall mean any one of the ----------------- following: (a) "Continuing Directors" no longer constitute a majority of the Board; the term "Continuing Director" means any individual who is a member of the Board on the date hereof or was nominated for election as a director by, or whose nomination as a director was approved by, the Board with the affirmative vote of a majority of the Continuing Directors; (b) any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended ("Exchange Act")) together with his or its affiliates, becomes the beneficial owner, directly or indirectly, of 25% or more of the voting power of the Company's then outstanding securities entitled generally to vote for the election of the Company's directors; (c) the merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of less than 50% of the combined voting power to vote for the election of directors of the surviving corporation or other entity following the effective date of such merger or consolidation; or (d) the sale of all or substantially all of the assets of the Company or the liquidation or dissolution of the Company. Notwithstanding the foregoing provisions of this Section 2.5, if a ----------- Participant's employment with the Employer is terminated by the Employer other than for "Cause" prior to the date on which a Change in Control occurs, and it is reasonably demonstrated that such termination (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with a Change in Control, then for all purposes hereof, such termination shall be deemed to have occurred immediately following a Change in Control. Notwithstanding anything herein to the contrary, under no circumstances will a change in the constitution of the board of directors of any Subsidiary, a change in the beneficial ownership of any Subsidiary, the merger or consolidation of a Subsidiary with any other entity, the sale of all or substantially all of the assets of any Subsidiary or the liquidation or dissolution of any Subsidiary constitute a "Change in Control" under this Plan. 2.6 Company. Cross Timbers Oil Company, a Delaware corporation. ------- 2.7 Effective Date. The date the Plan is approved by the Board of -------------- Directors of the Company, or such other date as the Board shall designate in its resolution approving the Plan. 2.8 Employer. The Company and any Subsidiary of the Company which adopts -------- this Plan as a Participating Employer. With respect to a Participant who is not an employee of the Company, 3 any reference under this Plan to such Participant's "Employer" shall refer only to the employer of the Participant, and in no event shall be construed to refer to the Company as well. 2.9 Good Reason. "Good Reason" shall mean the occurrence of any of the ----------- following events or conditions: (a) a change in the Participant's status, title, position or responsibilities (including reporting responsibilities) which, in the Participant's reasonable judgment, represents a substantial reduction of the status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Participant of any duties or responsibilities which, in the Participant's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Participant from, or failure to reappoint or reelect him to, any of such positions, except in connection with the termination of his employment for Cause or by the Participant other than for Good Reason; (b) a reduction in the Participant's Base Salary or as the same may be increased from time to time thereafter; (c) the Employer's requiring the Participant (without the consent of the Participant) to be based at any place outside a twenty-five (25) mile radius of his place of employment immediately prior to a Change in Control, except for reasonably required travel on the Employer's business which is not materially greater than such travel requirements prior to the Change in Control, or, in the event the Participant consents to any relocation beyond such 25-mile radius, the failure by the Employer to pay (or reimburse the Participant) for all reasonable moving expenses incurred by him relating to a change of his principal residence in connection with such relocation and to indemnify the Participant against any loss (defined as the difference between the actual sale price of such residence and the higher of (a) his aggregate investment in such residence or (b) the fair market value of such residence as determined by a real estate appraiser designated by the Participant and reasonably satisfactory to the Employer) realized on the sale of the Participant's principal residence in connection with any such change of residence; (d) the failure by the Employer to provide the Participant with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to the Change in Control (or as in effect following the Change in Control, if greater), including, but not limited to, the Company's 1991 Stock Incentive Plan, the 1994 Stock Incentive Plan, the 1997 Stock Incentive Plan, the 1998 Stock Incentive Plan, the 1998 Royalty Trust Option Plan, the 1999 Royalty Trust Option Plan, the Key Management Incentive Bonus Plan, the Cross Timbers Oil Company Employees' 401(k) Plan, and any other stock option plan, pension plan, life insurance plan, health and accident plan or disability plan; 4 (e) any material breach by the Employer of any provision of this Plan; (f) any purported termination of the Participant's employment for Cause by the Employer which does not otherwise comply with the terms of this Plan; (g) Any failure of the Company to obtain the assumption of, or the agreement to perform, this Agreement by any successor as contemplated in Article VII; or ----------- (h) Any termination of employment by the Participant after his Payment Date (as defined in Section 2.14 below). ------------ 2.10 Management Group Employee. Each employee of the Employer who has ------------------------- been designated by his Employer as member of the Management Group or the Management Group II. 2.11 Notice of Termination. A notice which indicates the specific --------------------- provisions in this Plan relied upon as the basis for any termination of employment which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated; no purported termination of employment shall be effective without such Notice of Termination. 2.12 Participant. A Participant who meets the eligibility requirements of ----------- Article III. - ----------- 2.13 Participating Employer. A Subsidiary of the Company which adopts ---------------------- this Plan in accordance with Section 8.4 below. ----------- 2.14 Payment Date. For a Participant, the date on which he or she is ------------ entitled to a Severance Benefit after a Change in Control pursuant to Section ------- 4.2; the Payment Date for Participants are as follows: for the Chief Executive - --- Officer, President, Executive and Senior Vice Presidents of the Company, 45 days after the date of the Change in Control; for all other officers of the Company, 90 days after the date of the Change in Control; and for all other Participants, 180 days after the date of the Change in Control. 2.15 Severance Benefit. The benefits payable in accordance with Article ----------------- ------- IV of the Plan. - -- 2.16 Subsidiary. Any subsidiary of the Company, and any wholly or ---------- partially owned partnership, joint venture, limited liability company, corporation and other form of investment by the Company. A pronoun or adjective in the masculine gender includes the feminine gender, and the singular includes the plural, unless the context clearly indicates otherwise. 5 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Participation. Each Management Group Employee shall automatically ------------- become a Participant in the Plan as of the Effective Date, or the date he satisfies the definition of a Management Group Employee, whichever occurs later. 3.2 Duration of Participation. A Participant shall cease to be a ------------------------- Participant in the Plan upon the first to occur of: (i) the date he ceases to be a Management Group Employee of the Employer at any time prior to a Change in Control, (ii) the date his employment is terminated following a Change in Control under circumstances where he is not entitled to a Severance Benefit under the terms of this Plan, or (iii) the date on which he has received all of the benefits to which he is entitled under this Plan. ARTICLE IV SEVERANCE BENEFITS 4.1 Right to Severance Benefit. -------------------------- (a) After a Change in Control has occurred, a Participant shall be entitled to receive from the Employer a Severance Benefit in the amount provided in Section 4.2 if he (i) remains employed by the Employer on the ----------- Payment Date or (ii) if his employment is terminated prior to such Participant's Payment Date for any reason other than (A) termination by the Employer for Cause or (B) termination by the Participant for other than Good Reason. A Participant shall also be entitled to receive from the Employer a Severance Benefit in the amount provided in Section 4.3 if, ----------- within two years after a Change in Control, the Participant's employment with the Employer terminates for any reason other than (A) termination by the Employer for Cause or (B) termination by the Participant other than for Good Reason. (b) Notwithstanding any other provision of the Plan, the sale, divestiture or other disposition of a Subsidiary, shall not be deemed to be a termination of employment of employees employed by such Subsidiary, and such employees shall not be entitled to benefits from the Company or any Participating Employer under this Plan as a result of such sale, divestiture, or other disposition, or as a result of any subsequent termination of employment. 4.2 Amount of Severance Benefit. If a Participant is entitled to a --------------------------- Severance Benefit under this Section 4.2, such Participant shall be entitled to ----------- the following benefits: (a) The Employer shall pay to the Participant an amount in cash equal to: 6 (i) for the Company's Chief Executive Officer and President, three (3) times the sum of (A) the Participant's Base Salary and (B) the Bonus Amount, to be paid on or before ten (10) days after the Payment Date; (ii) for the Company's Executive Vice Presidents and Senior Vice Presidents, two and one-half (2-1/2) times the sum of (A) the Participant's Base Salary and (B) the Bonus Amount, to be paid on or before ten (10) days after the Payment Date; (iii) for all other officers of Company, two (2) times the sum of (A) the Participant's Base Salary and (B) the Bonus Amount, to be paid on or before ten (10) days after the Payment Date; and (iv) for all other Management Group Employees, one and one-half (1.5) times the sum of (A) the Participant's Base Salary and (B) the Bonus Amount, to be paid on or before ten (10) days after the Payment Date. 4.3 Amount of Severance Benefit. If a Participant is entitled to a --------------------------- Severance Benefit under this Section 4.3, such Participant shall be entitled to ----------- the following benefits: (a) For a period of eighteen (18) months subsequent to the Participant's termination of employment, the Employer shall at its expense continue on behalf of the Participant and his dependents and beneficiaries, all medical, dental, vision, and health benefits and insurance coverage which were being provided to the Participant at the time of termination of employment. The benefits provided in this Section 4.3(a) shall be no less -------------- favorable to the Participant, in terms of amounts and deductibles and costs to him, than the coverage provided the Participant under the plans providing such benefits at the time Notice of Termination is given. The Employer's obligation hereunder to provide a benefit shall terminate if the Participant obtains comparable coverage under a subsequent employer's benefit plan. For purposes of the preceding sentence, benefits will not be comparable during any waiting period for eligibility for such benefits or during any period during which there is a preexisting condition limitation on such benefits. The Employer also shall pay a lump sum equal to the amount of any additional income tax payable by the Participant and attributable to the benefits provided under this subparagraph (a) at the time such tax is imposed upon the Participant. In the event that the Participant's participation in any such coverage is barred under the general terms and provisions of the plans and programs under which such coverage is provided, or any such coverage is discontinued or the benefits thereunder are materially reduced, the Employer shall provide or arrange to provide the Participant with benefits substantially similar to those which the Participant was entitled to receive under such coverage immediately prior to the Termination Notice. At the end of the period of coverage set forth above, the Participant shall have the option to have assigned to him at no cost to the Participant and with no apportionment of prepaid premiums, any assignable insurance owned by the Employer and relating specifically to the Participant, and the Participant shall be 7 entitled to all health and similar benefits that are or would have been made available to the Participant under law. (b) The Employer shall transfer to the Participant all right, title or other ownership interest it may have in any automobile then being provided by the Employer for use by the Participant. (c) The Employer shall transfer to the Participant any right, title or ownership in any club memberships provided by the Employer for use by the Participant. (d) The Employer shall transfer to the Participant any right, title or ownership in any life insurance owned by the Employer on the Participant's life. 4.4 Vesting of Stock Plans. In the event of a Change in Control, ---------------------- each Participant shall be entitled to the following benefits: (a) Notwithstanding any provision to the contrary in any stock option agreement, restricted stock agreement, or other agreement relating to equity-type compensation that may be outstanding between the Participant and the Employer, all units, stock options, incentive stock options, performance shares, and stock appreciation rights (under the 1991 Stock Incentive Plan, the 1994 Stock Incentive Plan, the 1997 Stock Incentive Plan, the 1998 Stock Incentive Plan, the 1998 Royalty Trust Option Plan, the 1999 Royalty Trust Option Plan, or any other plan or arrangement) held by the Participant immediately prior to the Change in Control, and any such units, options, shares or rights received by the Participant in exchange for or in substitution for existing units, options, shares, or rights, shall immediately become 100% vested and exercisable, and the Participant shall become 100% vested in all shares of restricted stock held by or for the benefit of the Participant; provided, however, that to the extent the Employer is unable to provide for such acceleration of vesting, the Employer shall provide in lieu thereof a lump-sum cash payment equal to the difference between the total value of such units, stock options, incentive stock options, performance shares, stock appreciation rights and shares of restricted stock (the "stock rights") as of the date of the Participant's termination of employment and the total value of the stock rights in which the Participant is vested as of the date of his termination of employment. The value of such accelerated vesting in the Participant's stock rights shall be determined by the Board in good faith based on a valuation performed by an independent consultant selected by the Board; any such stock rights which are not in existence at the time of the Participant's termination of employment shall be valued as of the date of the Change in Control. (b) Notwithstanding any provision to the contrary in any stock option agreement that may be outstanding between the Participant and the Employer, the Participant's right to exercise any previously unexercised options under any such stock option agreement shall not terminate until the latest date on which the option granted under such agreement would expire under the terms of such agreement but for the Participant's termination of employment; 8 provided, however, that to the extent the Employer is unable to provide for the extension of the expiration date of such options, the Employer shall provide in lieu thereof a lump-sum cash payment equal to the value of such extension the Employer is unable to provide. Such values of such accelerated vesting and exercisability shall be determined by the Board in good faith based on a valuation performed by an independent consultant selected by the Board. 4.5 Mitigation or Set-off of Amounts Payable Hereunder. The Participant -------------------------------------------------- shall not be required to mitigate the amount of any payment provided for in this Article IV by seeking other employment or otherwise, nor shall the amount of any - ---------- payment provided for in this Article IV be reduced by any compensation earned by ---------- the Participant as the result of employment by the Company or any successor after the Payment Date or by another employer after the Termination Date, or otherwise. The Employer's obligations hereunder also shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Employer may have against the Participant. 4.6 Company Guarantee of Severance Benefit. In the event a Participant -------------------------------------- becomes entitled to receive from the Employer a Severance Benefit under this Article IV above and such Employer fails to pay such Severance Benefit, the - ---------- Company shall assume the obligation of such Employer to pay such Severance Benefit. In consideration of the Company's assumption of the obligation to pay such Severance Benefit provided under this Plan, the Company (as the source of payment of benefits under the Plan) shall be subrogated to any recovery (irrespective of whether there is recovery from the third party of the full amount of all claims against the third party) or right to recovery of either a Participant or his legal representative against the Employer or any person or entity. The Participant or his legal representative shall cooperate in doing what is reasonably necessary to assist the Company in exercising such rights, including but not limited to notifying the Company of the institution of any claim against a third party and notifying the third party and the third party's insurer, if any, of the Company's subrogation rights. Neither the Participant nor his legal representative shall do anything after a loss to prejudice such rights. In its sole discretion, the Company reserves the right to prosecute an action in the name of the Participant or his legal representative against any third parties potentially liable to the Participant. The Company shall have the absolute discretion to settle subrogation claims on any basis it deems warranted and appropriate under the circumstances. If a Participant or his legal representative initiates a lawsuit against any third parties potentially liable to the Participant, the Company shall not be responsible for any attorney's fees or court costs that may be incurred in such liability claim. The Company shall be entitled, to the extent of any payments made to or on behalf of a Participant or a dependent of the Participant, to be paid first from the proceeds of any settlement or judgment that may result from the exercise of any rights of recovery asserted by or on behalf of a Participant or his legal representative against any person or entity legally responsible for the injury for which such payment was made. The Company shall be reimbursed by the Participant or his legal representative an amount of money equal to all sums paid by the Employer under the Plan to or on behalf of the Participant and all expenses, costs and attorney's fees incurred by the Company in 9 connection with the prosecution and collection of the Company's subrogation interest. The right is also hereby given the Company to receive directly from the Employer or any third party(ies), attorney(s) or insurance company(ies) an amount equal to the amount paid to or on behalf of the Participant. 4.7 Election of Severance Benefits. A Participant who is entitled to ---------------------- severance benefits under an employment agreement with the Employer may elect, in writing within ten (10) days after his Termination Date, to receive the severance benefits provided under this Plan in lieu of, but not in addition to, such other severance benefits as may be provided by such other agreement. In the event that no election is made, the Participant shall forego his right to receive the severance benefits provided under this Plan. ARTICLE V TERMINATION OF EMPLOYMENT 5.1 Written Notice Required. Any purported termination of employment, ----------------------- either by the Employer or by the Participant, shall be communicated by written Notice of Termination to the other. 5.2 Termination Date. In the case of the Participant's death, the ---------------- Participant's Termination Date shall be his date of death. In all other cases, the Participant's Termination Date shall be the date specified in the Notice of Termination subject to the following: (a) If the Participant's employment is terminated by the Employer for Cause, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Participant; and (b) If the Participant terminates his employment for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Employer. ARTICLE VI ADDITIONAL PAYMENTS BY THE COMPANY 6.1 Gross-Up Payment. In the event it shall be determined that any ---------------- payment or distribution of any type by the Employer to or for the benefit of the Participant, whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise (the "Total Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax", then the Participant shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that at the time of payment by the Participant of all taxes (including additional excise taxes under said Section 4999 and any interest, and penalties imposed with respect to any taxes) imposed upon the Gross-Up Payment, the Participant shall have an amount of the 10 Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. The Company shall pay the Gross-Up Payment to the Participant within twenty (20) business days after the Payment Date or the Termination Date, whichever is applicable. 6.2 Determination By Accountant. All determinations required to be made --------------------------- under this Article VI, including whether a Gross-Up Payment is required and the ---------- amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Company on the date of Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Participant within fifteen (15) business days of the Payment Date or Termination Date, whichever is applicable, or such earlier time as is requested by the Company. If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the Participant with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and the Participant. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6.3 and the Participant ----------- thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant. 6.3 Notification Required. The Participant shall notify the Company in --------------------- writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Participant knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Participant shall not pay such claim prior to the expiration of the thirty- (30) day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Participant in writing prior to the expiration of such period that it desires to contest such claim, the Participant shall: (a) give the Company any information reasonably requested by the Company relating to such claim, (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (c) cooperate with the Company in good faith in order to effectively contest such claim, 11 (d) permit the Company to participate in any proceedings relating to such claim, provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Participant harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6.3, the Company ----------- shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Participant to pay the tax claimed and sue for a refund, or contest the claim in any permissible manner, and the Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Participant to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Participant, on an interest-free basis and shall indemnify and hold the Participant harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Participant with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6.4 Repayment. If, after the receipt by the Participant of an amount --------- advanced by the Company pursuant to Section 6.3, the Participant becomes ----------- entitled to receive any refund with respect to such claim, the Participant shall (subject to the Company's complying with the requirements of Section 6.3) ----------- promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Participant of an amount advanced by the Company pursuant to Section 6.3, a determination is made that the Participant shall not be entitled - ----------- to any refund with respect to such claim and the Company does not notify the Participant in writing of its intent to contest such denial of refund prior to the expiration of thirty days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. ARTICLE VII SUCCESSORS TO COMPANY 7.1 Successors. This Plan shall bind any successor (whether direct or ---------- indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets 12 of the Company, in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not, by the foregoing provision or by operation of law, be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach hereof and shall entitle the Participant to compensation from the Company in the same amount and on the same terms as the Participant would be entitled hereunder if the Participant terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used herein, "the Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7.1 or which otherwise becomes bound by all the terms and ----------- provisions hereof by operation of law. ARTICLE VIII DURATION, AMENDMENT, PLAN TERMINATION AND ADOPTION BY SUBSIDIARIES 8.1 Duration. This Plan shall continue in effect until terminated in -------- accordance with Section 8.2. If a Change in Control occurs, this Plan shall ----------- continue in full force and effect, and shall not terminate or expire, until after all Participants who have become entitled to a Severance Benefit hereunder shall have received all of such benefits in full. 8.2 Amendment and Termination. The Plan may be terminated or amended in ------------------------- any respect by resolution adopted by two-thirds of the Board; provided, however, that no such amendment or termination of the Plan may be made if such amendment or termination would adversely affect any right of a Participant who became a Participant prior to the later of (a) the date of adoption of any such amendment or termination, or (b) the effective date of any such amendment or termination; and, provided further, that the Plan no longer shall be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever following a Change in Control. 8.3 Form of Amendment. The form of any amendment or termination of the ----------------- Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board. 8.4 Adoption by Subsidiaries. Any Subsidiary of the Company may, with the ------------------------ approval of the Board of Directors of the Company, adopt and become an Employer under this Plan by executing and delivering to the Company an appropriate instrument agreeing to be bound as an Employer by all of the terms of the Plan with respect to its eligible employees. The adoptive instrument may contain such changes and amendments in the terms and provisions of the Plan as adopted by such Subsidiary as may be desired by such Subsidiary and acceptable to the Company. 13 The adoptive instrument shall specify the effective date of such adoption of the Plan and shall become as to such adopting Subsidiary a part of this Plan. ARTICLE IX MISCELLANEOUS 9.1 Participant's Legal Expenses. The Company agrees to pay, upon written ---------------------------- demand therefor by the Participant, all legal fees and expenses which the Participant may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision hereof (including as a result of any contest about the amount of any payment pursuant to Article IV), plus in each case interest at the "applicable Federal rate" (as ---------- defined in Section 1274(d) of the Code). In any such action brought by a Participant for damages or to enforce any provisions hereof, he shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in his sole discretion. 9.2 Employment Status. This Plan does not constitute a contract of ----------------- employment or impose on the Employer any obligation to retain a Participant as an employee, to change the status of a Participant's employment as a Management Group Employee, or to change any employment policies of the Employer. 9.3 Validity and Severability. The invalidity or unenforceability of any ------------------------- provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.4 The Participant's Heirs, etc. This Agreement shall inure to the ---------------------------- benefit of and be enforceable by the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Participant should die while any amounts would still be payable to him hereunder as if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms hereof to his designee or, if there be no such designee, to his estate. 9.5 Governing Law. The validity, interpretation, construction and ------------- performance of the Plan shall in all respects be governed by the laws of the State of Texas. 9.6 Choice of Forum. A Participant shall be entitled to enforce the --------------- provisions of this Plan in any state or federal court located in the State of Texas, in addition to any other appropriate forum. 9.7 Notice. For the purposes hereof, notices and all other communications ------ provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at its principal place of business and to the Participant at his address as shown on the 14 records of the Employer, provided that all notices to the Company shall be directed to the attention of the Chief Executive Officer of the Company with a copy to the Secretary of the Company, or to such other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. IN WITNESS WHEREOF, Cross Timbers Oil Company has caused these presents to be executed by its duly authorized officer on the 15th day of February, 2000. CROSS TIMBERS OIL COMPANY By: /s/ Robert C. Myers ---------------------------------- Name: Robert C. Myers Title: Vice President - Human Resources 15 EX-10.14 7 EMP. SEV. PROTECTION PLAN, AS AMENDED FEB. 15,2000 EXHIBIT 10.14 AMENDED AND RESTATED CROSS TIMBERS OIL COMPANY EMPLOYEE SEVERANCE PROTECTION PLAN ---------------------------------- WHEREAS, the Board of Directors of Cross Timbers Oil Company, a Delaware corporation ("the Company") recognizes that the current business environment makes it difficult to attract and retain highly qualified employees unless a certain degree of security can be offered to such individuals against organizational and personnel changes which frequently follow a Change in Control (as defined below) of a corporation; and WHEREAS, even rumors of acquisitions or mergers may cause employees to consider major career changes in an effort to ensure financial security for themselves and their families; and WHEREAS, the Company desires to ensure fair treatment of its employees in the event of a Change in Control and to allow them to make critical career decisions without undue time pressure and financial uncertainty, thereby increasing their willingness to remain with the Company notwithstanding the outcome of a possible Change in Control transaction; and WHEREAS, the Board of Directors of the Company believes it is essential to provide such employees with compensation arrangements upon a Change in Control which provide the employees with individual financial security and which are competitive with those of other corporations, and in order to accomplish these objectives, the Board has caused the Company to adopt the Cross Timbers Oil Company Employee Severance Protection Plan on June 10, 1997; and WHEREAS, the Board of Directors desires to amend and restate this Plan to provide for additional protection for the employees to assure fair treatment of the employees in the event of a Change in Control. NOW, THEREFORE, in order to fulfill the above purposes, the following plan has been developed and is hereby adopted. ARTICLE I ESTABLISHMENT OF PLAN As of the Effective Date, the Company hereby establishes a severance compensation plan known as the Amended and Restated Cross Timbers Oil Company Employee Severance Protection Plan, as set forth in this document. 1 ARTICLE II DEFINITIONS As used herein, the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise. 2.1 Base Salary. The amount a Participant is entitled to receive as wages ----------- or salary on an annualized basis, calculated immediately prior to a Change in Control. 2.2 Board. The Board of Directors of the Company. ----- 2.3 Bonus Amount. An amount equal to the most recent bonus awarded prior ------------ to a Change in Control under the Non-Exempt Employee Bonus Plan and the Exempt Employee Bonus Plan adopted by the Company (or any other bonus plan or program then in effect). 2.4 Cause. The Employer shall have "Cause" to terminate a Participant if ----- the Participant (i) willfully and continually fails to substantially perform his duties with the Employer (other than a failure resulting from the Participant's incapacity due to physical or mental illness) which failure continues for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Participant specifying the manner in which the Participant has failed to substantially perform, or (ii) willfully engages in conduct which is demonstrably and materially injurious to the Employer, monetarily or otherwise. 2.5 Change in Control. A "Change in Control" shall mean any one of the ----------------- following: (a) "Continuing Directors" no longer constitute a majority of the Board; the term "Continuing Director" means any individual who is a member of the Board on the date hereof or was nominated for election as a director by, or whose nomination as a director was approved by, the Board with the affirmative vote of a majority of the Continuing Directors; (b) any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended ("Exchange Act")) together with his or its affiliates, becomes the beneficial owner, directly or indirectly, of 25% or more of the voting power of the Company's then outstanding securities entitled generally to vote for the election of the Company's directors; (c) the merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of less than 50% of the combined voting power to vote for the election of directors of the surviving corporation or other entity following the effective date of such merger or consolidation; or 2 (d) the sale of all or substantially all of the assets of the Company or the liquidation or dissolution of the Company. Notwithstanding the foregoing provisions of this Section 2.5, if a ----------- Participant's employment with the Employer is terminated by the Employer other than for "Cause" prior to the date on which a Change in Control occurs, and it is reasonably demonstrated that such termination (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with a Change in Control, then for all purposes hereof, such termination shall be deemed to have occurred immediately following a Change in Control. Notwithstanding anything herein to the contrary, under no circumstances will a change in the constitution of the board of directors of any Subsidiary, a change in the beneficial ownership of any Subsidiary, the merger or consolidation of a Subsidiary with any other entity, the sale of all or substantially all of the assets of any Subsidiary or the liquidation or dissolution of any Subsidiary constitute a "Change in Control" under this Plan. 2.6 Company. Cross Timbers Oil Company, a Delaware corporation. ------- 2.7 Effective Date. The date the Plan is approved by the Board of -------------- Directors of the Company, or such other date as the Board shall designate in its resolution approving the Plan. 2.8 Employee. Each employee of the Employer who has not been designated -------- as a "Management Group Employee" under the Cross Timbers Oil Company Management Group Employee Severance Protection Plan. 2.9 Employer. The Company and any Subsidiary of the Company which adopts -------- this Plan as a Participating Employer. With respect to a Participant who is not an employee of the Company, any reference under this Plan to such Participant's "Employer" shall refer only to the employer of the Participant, and in no event shall be construed to refer to the Company as well. 2.10 Good Reason. "Good Reason" shall mean the occurrence of any of the ----------- following events or conditions: (a) a change in the Participant's status, title, position or responsibilities (including reporting responsibilities) which, in the Participant's reasonable judgment, represents a substantial reduction of the status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Participant of any duties or responsibilities which, in the Participant's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Participant from, or failure to reappoint or reelect him to, any of such positions, except in connection with the termination of his employment for Cause or by the Participant other than for Good Reason; 3 (b) a reduction in the Participant's Base Salary or as the same may be increased from time to time thereafter; (c) the Employer's requiring the Participant (without the consent of the Participant) to be based at any place outside a twenty-five (25) mile radius of his place of employment immediately prior to a Change in Control, except for reasonably required travel on the Employer's business which is not materially greater than such travel requirements prior to the Change in Control, or, in the event the Participant consents to any relocation beyond such 25-mile radius, the failure by the Employer to pay (or reimburse the Participant) for all reasonable moving expenses incurred by him relating to a change of his principal residence in connection with such relocation and to indemnify the Participant against any loss (defined as the difference between the actual sale price of such residence and the higher of (a) his aggregate investment in such residence or (b) the fair market value of such residence as determined by a real estate appraiser designated by the Participant and reasonably satisfactory to the Employer) realized on the sale of the Participant's principal residence in connection with any such change of residence; (d) the failure by the Employer to provide the Participant with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to the Change in Control (or as in effect following the Change in Control, if greater), including, but not limited to, the Company's 1991 Stock Incentive Plan, the 1994 Stock Incentive Plan, the 1997 Stock Incentive Plan, the 1998 Stock Incentive Plan, the 1998 Royalty Trust Option Plan, the 1999 Royalty Trust Option Plan, the Cross Timbers Oil Company Employees' 401(k) Plan, the Non- Exempt Employee Bonus Plan, the Exempt Employee Bonus Plan, and any other stock option plan, pension plan, life insurance plan, health and accident plan or disability plan; (e) any material breach by the Employer of any provision of this Plan; (f) any purported termination of the Participant's employment for Cause by the Employer which does not otherwise comply with the terms of this Plan; or (g) any failure of the Company to obtain the assumption of, or the agreement to perform, this Agreement by any successor as contemplated in Article VI. ---------- 2.11 Notice of Termination. A notice which indicates the specific --------------------- provisions in this Plan relied upon as the basis for any termination of employment which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provision so indicated; no purported termination of employment shall be effective without such Notice of Termination. 2.12 Participant. A Participant who meets the eligibility requirements of - ---- ----------- Article III. - ----------- 4 2.13 Participating Employer. A Subsidiary of the Company which adopts ---------------------- this Plan in accordance with Section 7.4 below. ----------- 2.14 Severance Benefit. The benefits payable in accordance with Article ----------------- ------- IV of the Plan. - -- 2.15 Severance Units. A Participant shall receive one (1) Severance --------------- Units, to be used in calculating his Severance Benefit, for (i) each $7,000 of his Base Salary plus Bonus Amount, and (ii) each twelve months of employment by the Company or an Employer; the sum of any partial Severance Units under (i) and (ii) shall be rounded to one. However, the maximum number of Severance Units that may be granted to a Participant is 18, and each Participant shall be granted at least 3 Severance Units. For example, if a Participant's Base Salary ----------- is $52,000, his Bonus Amount is $5,000, and he has been employed by the Company or an Employer for 57 months, he would have 8.14 Severance Units for his compensation and 4.75 Severance Units for his service, for a total of 13. 2.16 Subsidiary. Any subsidiary of the Company, and any wholly or ---------- partially owned partnership, joint venture, limited liability company, corporation and other form of investment by the Company. A pronoun or adjective in the masculine gender includes the feminine gender, and the singular includes the plural, unless the context clearly indicates otherwise. ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Participation. Each Employee shall automatically become a Participant ------------- in the Plan as of the Effective Date, or the date he satisfies the definition of an Employee, whichever occurs later. 3.2 Duration of Participation. A Participant shall cease to be a ------------------------- Participant in the Plan upon the first to occur of: (i) the date he ceases to be an Employee of the Employer at any time prior to a Change in Control, (ii) the date his employment is terminated following a Change in Control under circumstances where he is not entitled to a Severance Benefit under the terms of this Plan, or (iii) the date on which he has received all of the benefits to which he is entitled under this Plan. ARTICLE IV SEVERANCE BENEFITS 4.1 Right to Severance Benefit. -------------------------- (a) A Participant shall be entitled to receive from the Employer a Severance Benefit in the amount provided in Section 4.2 if (i) a Change in ----------- Control has occurred and (ii) within two years thereafter, the Participant's employment with the Employer terminates for any reason other than (A) termination by the Employer for Cause, or (B) termination by the Participant for other than Good Reason. 5 (b) Notwithstanding any other provision of the Plan, the sale, divestiture or other disposition of a Subsidiary shall not be deemed to be a termination of employment of employees employed by such Subsidiary, and such employees shall not be entitled to benefits from the Company or any Participating Employer under this Plan as a result of such sale, divestiture, or other disposition, or as a result of any subsequent termination of employment. 4.2 Amount of Severance Benefit. If a Participant's employment is --------------------------- terminated in circumstances entitling him to a Severance Benefit as provided in Section 4.1, such Participant shall be entitled to the following benefits: - ----------- (a) The Employer shall pay to the Participant, as severance pay and in lieu of any further salary for periods subsequent to the Termination Date (as specified in Section 5.2), in a single payment within ten (10) days ----------- after his Termination Date (without any discount for accelerated payment), an amount in cash equal to: one-twelfth (1/12) of the sum of the Participant's Base Salary and Bonus Amount, multiplied by the Participant's Severance Units. (b) For a period of twelve (12) months subsequent to the Participant's termination of employment, the Employer shall at its expense continue on behalf of the Participant and his dependents and beneficiaries, all medical, dental, vision, and health benefits and insurance coverage which were being provided to the Participant at the time of termination of employment. The benefits provided in this Section 4.2(b) shall be no less -------------- favorable to the Participant, in terms of amounts and deductibles and costs to him, than the coverage provided the Participant under the plans providing such benefits at the time Notice of Termination is given. The Employer's obligation hereunder to provide a benefit shall terminate if the Participant obtains comparable coverage under a subsequent employer's benefit plan. For purposes of the preceding sentence, benefits will not be comparable during any waiting period for eligibility for such benefits or during any period during which there is a preexisting condition limitation on such benefits. The Employer also shall pay a lump sum equal to the amount of any additional income tax payable by the Participant and attributable to the benefits provided under this subparagraph (b) at the time such tax is imposed upon the Participant. In the event that the Participant's participation in any such coverage is barred under the general terms and provisions of the plans and programs under which such coverage is provided, or any such coverage is discontinued or the benefits thereunder are materially reduced, the Employer shall provide or arrange to provide the Participant with benefits substantially similar to those which the Participant was entitled to receive under such coverage immediately prior to the Termination Notice. At the end of the period of coverage set forth above, the Participant shall have the option to have assigned to him at no cost to the Participant and with no apportionment of prepaid premiums, any assignable insurance owned by the Employer and relating specifically to the Participant, and the Participant shall be entitled to all health and similar benefits that are or would have been made available to the Participant under law. 6 (c) Notwithstanding any provision to the contrary in any stock option agreement, restricted stock agreement, or other agreement relating to equity-type compensation that may be outstanding between the Participant and the Employer, all units, stock options, incentive stock options, performance shares, and stock appreciation rights (under the 1991 Stock Incentive Plan, the 1994 Stock Incentive Plan, the 1997 Stock Incentive Plan, the 1998 Stock Incentive Plan, the 1998 Royalty Trust Option Plan, the 1999 Royalty Trust Option Plan, or any other plan or arrangement) held by the Participant immediately prior to the Change in Control, and any such units, options, shares or rights received by the Participant in exchange for or in substitution for existing units, options, shares, or rights, shall immediately become 100% vested and exercisable, and the Participant shall become 100% vested in all shares of restricted stock held by or for the benefit of the Participant; provided, however, that to the extent the Employer is unable to provide for such acceleration of vesting, the Employer shall provide in lieu thereof a lump-sum cash payment equal to the difference between the total value of such units, stock options, incentive stock options, performance shares, stock appreciation rights and shares of restricted stock (the "stock rights") as of the date of the Participant's termination of employment and the total value of the stock rights in which the Participant is vested as of the date of his termination of employment. The value of such accelerated vesting in the Participant's stock rights shall be determined by the Board in good faith based on a valuation performed by an independent consultant selected by the Board; any such stock rights which are not in existence at the time of the Participant's termination of employment shall be valued as of the date of the Change in Control. (d) Notwithstanding any provision to the contrary in any stock option agreement that may be outstanding between the Participant and the Employer, the Participant's right to exercise any previously unexercised options under any such stock option agreement shall not terminate until the latest date on which the option granted under such agreement would expire under the terms of such agreement but for the Participant's termination of employment; provided, however, that to the extent the Employer is unable to provide for the extension of the expiration date of such options, the Employer shall provide in lieu thereof a lump-sum cash payment equal to the value of such extension the Employer is unable to provide. Such values of such accelerated vesting and exercisability shall be determined by the Board in good faith based on a valuation performed by an independent consultant selected by the Board. (e) A Participant who is entitled to severance benefits under an employment agreement with the Employer may elect, in writing within ten (10) days after his Termination Date, to receive the severance benefits provided under this Section 4.2 in lieu of, but not in addition to, such ----------- other severance benefits as may be provided by such other agreement. In the event that no election is made, the Participant shall forego his right to receive the severance benefits provided under this Section 4.2. ----------- 7 4.3 Limitations on Payments. ----------------------- (a) Anything in this Article IV to the contrary notwithstanding, in ---------- the event it shall be determined that any payment or distribution made, or benefit provided, by the Company to or for the benefit of the Participant (whether paid or payable or distributed or distributable or provided pursuant to the terms hereof or otherwise) would constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the lump sum severance payment payable pursuant to Section 4.2(a) shall be reduced so that the aggregate present -------------- value of all payments in the nature of compensation to (or for the benefit of) the Participant which are contingent on a change of control (as defined in Code Section 280G(b)(2)(A)) is One Dollar ($1.00) less than the amount which the Participant could receive without being considered to have received any parachute payment (the amount of this reduction in the lump sum severance payment is referred to herein as the "Excess Amount"). The determination of the amount of any reduction required by this Section 4.3 ----------- shall be made by an independent accounting firm (other than the Company's independent accounting firm) selected by the Company and acceptable to the Participant, and such determination shall be conclusive and binding on the parties hereto. (b) Notwithstanding the provisions of Section 4.3(a), if it is -------------- established, pursuant to a final determination of a court or an Internal Revenue Service proceeding which has been finally and conclusively resolved, that an Excess Amount was received by the Participant from the Company, then such Excess Amount shall be deemed for all purposes to be a loan to the Participant made on the date the Participant received the Excess Amount and the Participant shall repay the Excess Amount to the Company on demand (but no less than ten (10) days after written demand is received by the Participant) together with interest on the Excess Amount at the "applicable Federal rate" (as defined in Section 1274(d) of the Code) from the date of the Participant's receipt of such Excess Amount until the date of such repayment. 4.4 Mitigation or Set-off of Amounts Payable Hereunder. The Participant -------------------------------------------------- shall not be required to mitigate the amount of any payment provided for in this Article IV by seeking other employment or otherwise, nor shall the amount of any - ---------- payment provided for in this Article IV be reduced by any compensation earned by ---------- the Participant as the result of employment by another employer after the Termination Date, or otherwise. The Employer's obligations hereunder also shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Employer may have against the Participant. 4.5 Company Guarantee of Severance Benefit. In the event a Participant -------------------------------------- becomes entitled to receive from the Employer a Severance Benefit under Section ------- 4.1 above and such Employer fails to pay such Severance Benefit, the Company - --- shall assume the obligation of such Employer to pay such Severance Benefit. In consideration of the Company's assumption of the obligation to pay such Severance Benefit provided under this Plan, the Company (as the source of payment of benefits under the Plan) shall be subrogated to any recovery (irrespective of whether there is recovery from the third party of the full amount of all claims against the third party) or right to recovery of either a Participant 8 or his legal representative against the Employer or any person or entity. The Participant or his legal representative shall cooperate in doing what is reasonably necessary to assist the Company in exercising such rights, including but not limited to notifying the Company of the institution of any claim against a third party and notifying the third party and the third party's insurer, if any, of the Company's subrogation rights. Neither the Participant nor his legal representative shall do anything after a loss to prejudice such rights. In its sole discretion, the Company reserves the right to prosecute an action in the name of the Participant or his legal representative against any third parties potentially liable to the Participant. The Company shall have the absolute discretion to settle subrogation claims on any basis it deems warranted and appropriate under the circumstances. If a Participant or his legal representative initiates a lawsuit against any third parties potentially liable to the Participant, the Company shall not be responsible for any attorney's fees or court costs that may be incurred in such liability claim. The Company shall be entitled, to the extent of any payments made to or on behalf of a Participant or a dependent of the Participant, to be paid first from the proceeds of any settlement or judgment that may result from the exercise of any rights of recovery asserted by or on behalf of a Participant or his legal representative against any person or entity legally responsible for the injury for which such payment was made. The Company shall be reimbursed by the Participant or his legal representative an amount of money equal to all sums paid by the Employer under the Plan to or on behalf of the Participant and all expenses, costs and attorney's fees incurred by the Company in connection with the prosecution and collection of the Company's subrogation interest. The right is also hereby given the Company to receive directly from the Employer or any third party(ies), attorney(s) or insurance company(ies) an amount equal to the amount paid to or on behalf of the Participant. ARTICLE V TERMINATION OF EMPLOYMENT 5.1 Written Notice Required. Any purported termination of employment, ----------------------- either by the Employer or by the Participant, shall be communicated by written Notice of Termination to the other. 5.2 Termination Date. In the case of the Participant's death, the ---------------- Participant's Termination Date shall be his date of death. In all other cases, the Participant's Termination Date shall be the date specified in the Notice of Termination subject to the following: (a) If the Participant's employment is terminated by the Employer for Cause, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Participant; and (b) If the Participant terminates his employment for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Employer. 9 ARTICLE VI SUCCESSORS TO COMPANY 6.1 Successors. This Plan shall bind any successor (whether direct or ---------- indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not, by the foregoing provision or by operation of law, be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach hereof and shall entitle the Participant to compensation from the Company in the same amount and on the same terms as the Participant would be entitled hereunder if the Participant terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used herein, "the Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 6.1 or which otherwise becomes bound by all the terms and provisions - ----------- hereof by operation of law. ARTICLE VII DURATION, AMENDMENT AND PLAN TERMINATION 7.1 Duration. This Plan shall continue in effect until terminated in -------- accordance with Section 7.2. If a Change in Control occurs, this Plan shall ----------- continue in full force and effect, and shall not terminate or expire, until after all Participants who have become entitled to a Severance Benefit hereunder shall have received all of such benefits in full. 7.2 Amendment and Termination. The Plan may be terminated or amended in ------------------------- any respect by resolution adopted by two-thirds of the Board; provided, however, that no such amendment or termination of the Plan may be made if such amendment or termination would adversely affect any right of a Participant who became a Participant prior to the later of (a) the date of adoption of any such amendment or termination, or (b) the effective date of any such amendment or termination; and, provided further, that the Plan no longer shall be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever following a Change in Control. 7.3 Form of Amendment. The form of any amendment or termination of the ----------------- Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board. 7.4 Adoption by Subsidiaries. Any Subsidiary of the Company may, with the ------------------------ approval of the Board of Directors of the Company, adopt and become an Employer under this Plan by executing and delivering to the Company an appropriate instrument agreeing to be bound as an 10 Employer by all of the terms of the Plan with respect to its eligible employees. The adoptive instrument may contain such changes and amendments in the terms and provisions of the Plan as adopted by such Subsidiary as may be desired by such Subsidiary and acceptable to the Company. The adoptive instrument shall specify the effective date of such adoption of the Plan and shall become as to such adopting Subsidiary a part of this Plan. ARTICLE VIII MISCELLANEOUS 8.1 Participant's Legal Expenses. The Company agrees to pay, upon written ---------------------------- demand therefor by the Participant, all legal fees and expenses which the Participant may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision hereof (including as a result of any contest about the amount of any payment pursuant to Article IV), plus in each case interest at the "applicable Federal rate" (as ---------- defined in Section 1274(d) of the Code). In any such action brought by a Participant for damages or to enforce any provisions hereof, he shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in his sole discretion. 8.2 Employment Status. This Plan does not constitute a contract of ----------------- employment or impose on the Employer any obligation to retain a Participant as an employee, to change the status of a Participant's employment as an Employee, or to change any employment policies of the Employer. 8.3 Validity and Severability. The invalidity or unenforceability of any ------------------------- provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.4 The Participant's Heirs, etc. This Agreement shall inure to the ---------------------------- benefit of and be enforceable by the Participant's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Participant should die while any amounts would still be payable to him hereunder as if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms hereof to his designee or, if there be no such designee, to his estate. 8.5 Governing Law. The validity, interpretation, construction and ------------- performance of the Plan shall in all respects be governed by the laws of the State of Texas. 8.6 Choice of Forum. A Participant shall be entitled to enforce the --------------- provisions of this Plan in any state or federal court located in the State of Texas, in addition to any other appropriate forum. 11 8.7 Notice. For the purposes hereof, notices and all other communications ------ provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at its principal place of business and to the Participant at his address as shown on the records of the Company, provided that all notices to the Company shall be directed to the attention of the Chief Executive Officer of the Company with a copy to the Secretary of the Company, or to such other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. IN WITNESS WHEREOF, Cross Timbers Oil Company has caused these presents to be executed by its duly authorized officer on the 15th day of February, 2000. CROSS TIMBERS OIL COMPANY By: /s/ Robert C. Myers ----------------------------------------- Name: Robert C. Myers Title: Vice President - Human Resources 12 EX-12.1 8 COMPUTATION OF RATION OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 CROSS TIMBERS OIL COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands) Year Ended December 31, ------------------------------------------------ 1999 1998 1997 1996 1995 -------- --------- ------- ------- --------- Earnings (loss) available to common stock.. $ 44,964 $(71,498) $23,905 $19,790 $(10,538) Income tax expense (benefit)............... 23,965 (35,851) 13,517 10,669 (5,825) Interest and debt expense.................. 70,828 58,499 26,747 17,224 12,922 Interest portion of rentals (a)............ 4,698 3,727 3,044 1,830 637 Preferred stock dividends.................. 1,779 1,779 1,779 514 - -------- -------- ------- ------- -------- Earnings (loss) before provision for taxes and fixed charges................... $146,234 $(43,344) $68,992 $50,027 $ (2,804) ======== ======== ======= ======= ======== Interest and debt expense.................. $ 70,828 $ 58,499 $26,747 $17,224 $ 12,922 Capitalized interest....................... 1,353 1,070 1,185 - - Interest portion of rentals (a)............ 4,698 3,727 3,044 1,830 637 Preferred stock dividends.................. 1,779 1,779 1,779 514 - -------- -------- ------- ------- -------- Total Fixed Charges........................ $ 78,658 $ 65,075 $32,755 $19,568 $ 13,559 ======== ======== ======= ======= ======== Ratio of Earnings to Fixed Charges 1.9 - (b) 2.1 2.6 - (c) Excess of Fixed Charges over Earnings (Loss) $ - $108,419 $ - $ - $ 16,363
(a) Calculated as one-third of rentals. (b) Negative ratio is the result of a $87.4 million pre-tax net loss on investment in equity securities (excluding related interest expense) and a $2 million pre-tax, non-cash impairment charge. Excluding the effects of these charges, fixed charges exceeded earnings by $19 million. (c) Negative ratio is the result of a $20.3 million pre-tax, non-cash charge recorded upon adoption of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of. Excluding the effect of this charge, the ratio of earnings to fixed charges is 1.3. EX-21.1 9 SUBSIDIARIES OF CROSS TIMBERS OIL COMPANY EXHIBIT 21.1 SUBSIDIARIES OF CROSS TIMBERS OIL COMPANY
Jurisdiction of Incorporation ------------- Cross Timbers Operating Company Texas Cross Timbers Energy Services, Inc. Texas Cross Timbers Trading Company Texas Mega Natural Gas Company, LLC Oklahoma Redwine Holding, LLC Delaware Ringwood Gathering Company Delaware Spring Holding Company Delaware Spring Resources, Inc. Oklahoma Timberland Gathering & Processing Company, Inc. Texas WTW Properties, Inc. Texas Whitewine Holding Company Texas
EX-23.1 10 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT Cross Timbers Oil Company Fort Worth, Texas As independent public accountants, we hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-65238, 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) of our report dated March 17, 2000, included in the Annual Report on Form 10-K of Cross Timbers Oil Company for the year ended December 31, 1999. ARTHUR ANDERSEN LLP Fort Worth, Texas March 30, 2000 EX-23.2 11 CONSENT OF MILLER AND LENTS, LTD. EXHIBIT 23.2 [LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE] March 30, 2000 Cross Timbers Oil Company 810 Houston Street, Suite 2000 Fort Worth, TX 76102 Re: Cross Timbers Oil Company 1999 Annual Report on Form 10-K Gentlemen: The firm of Miller and Lents, Ltd., consents to the use of its name and to the use of its report dated March __, 2000, regarding the Cross Timbers Oil Company Proved Reserves and Future Net Revenue as of January 1, 2000, in the 1999 Annual Report on Form 10-K. Miller and Lents, Ltd., has no interests in Cross Timbers Oil Company or in any affiliated companies or subsidiaries and is not to receive any such interest as payment for such reports and has no director, officer, or employee otherwise connected with Cross Timbers Oil Company. We are not employed by Cross Timbers Oil Company on a contingent basis. Yours very truly, MILLER AND LENTS, LTD. By /s/ James C. Pearson ------------------------------ James C. Pearson President EX-27.1 12 FINANCIAL DATA SCHEDULE FOR YEAR ENDED 12/31/1999
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 5,734 29,052 68,998 0 0 113,492 1,679,143 340,063 1,477,081 74,218 991,100 0 28,468 582 248,767 1,477,081 341,295 380,712 0 245,893 0 0 (64,214) 70,605 23,965 46,743 0 0 0 44,964 0.96 0.95
EX-27.2 13 RESTATED FDS FOR THE QUARTER ENDED 9/30/1999
5 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 3,725 0 38,404 0 51,016 0 0 0 0 0 101,054 0 1,677,682 0 334,072 0 1,468,941 0 68,063 0 998,700 0 0 0 28,468 0 581 0 243,566 0 1,468,941 0 95,326 230,291 97,952 279,796 0 0 62,204 174,174 0 0 0 0 16,440 45,223 19,308 60,399 6,438 20,389 13,515 40,655 0 0 0 0 0 0 13,071 39,321 0.27 0.85 0.26 0.83
EX-27.3 14 RESTATED FDS FOR THE QUARTER ENDED 6/30/1999
5 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 1,808 0 36,393 0 61,397 0 0 0 0 0 123,351 0 1,220,167 0 325,453 0 1,037,562 0 56,709 0 744,457 0 0 0 28,468 0 541 0 188,131 0 1,037,562 0 65,550 134,965 111,623 181,844 0 0 54,793 111,970 0 0 0 0 13,209 28,783 43,621 41,091 14,835 13,951 28,786 27,140 0 0 0 0 0 0 28,341 26,250 0.63 0.59 0.61 0.57
EX-27.4 15 RESTATED FDS FOR THE QUARTER ENDED 3/31/1999
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 9,958 28,657 42,970 0 0 104,860 1,394,232 344,851 1,176,178 59,819 920,503 0 28,468 541 157,427 1,176,178 69,415 70,221 0 57,177 0 0 15,574 (2,530) (884) (1,646) 0 0 0 (2,091) (0.05) (0.05)
EX-27.5 16 RESTATED FDS FOR THE YEAR ENDED 12/31/1998
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 12,333 44,386 50,607 0 0 137,578 1,369,929 319,507 1,207,005 75,565 920,411 0 28,468 541 172,465 1,207,005 249,486 249,486 0 209,224 93,719 0 52,113 (105,570) (35,851) (69,719) 0 0 0 (71,498) (1.65) (1.65)
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