-----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, P2yodkJdUsCJkKmY3VaSEzmQNZOUstBlUSXmv7za+FLtdVoEE0zKsYSbiMsMUt7T c8pTdZcrH2F/bNIO9k0hVQ== 0000930661-98-000678.txt : 19980401 0000930661-98-000678.hdr.sgml : 19980401 ACCESSION NUMBER: 0000930661-98-000678 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 333-39097 FILM NUMBER: 98579936 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-K405 1 FORM 10-K405 1997 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1997 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 1-10662 ------- CROSS TIMBERS OIL COMPANY (Exact name of registrant as specified in its charter) Delaware 75-2347769 -------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 810 Houston Street, Suite 2000, Fort Worth, Texas 76102 - ----------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (817) 870-2800 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - ---------------------------- --------------------------------------------- Common stock, $.01 par value New York Stock Exchange Series A convertible preferred New York Stock Exchange stock, $.01 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to be the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- Aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 2, 1998 was approximately $593 million Number of Shares of Common Stock outstanding as of March 2, 1998 - 38,972,860 ---------- DOCUMENTS INCORPORATED BY REFERENCE (To The Extent Indicated Herein) Part III of this Report is incorporated by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders, which will be filed with the Commission no later than April 30, 1998. ================================================================================ CROSS TIMBERS OIL COMPANY 1997 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS ITEM PAGE ---- ---- PART I 1. and 2. Business and Properties......................................... 1 3. Legal Proceedings............................................... 14 4. Submission of Matters to a Vote of Security Holders............. 14 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................... 15 6. Selected Financial Data......................................... 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 18 8. Financial Statements and Supplementary Data..................... 26 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................ 26 PART III 10. Directors and Executive Officers of the Registrant.............. 26 11. Executive Compensation.......................................... 26 12. Security Ownership of Certain Beneficial Owners and Management.. 26 13. Certain Relationships and Related Transactions.................. 26 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 27 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES General Cross Timbers Oil Company and its wholly owned subsidiaries ("the Company") are engaged in the acquisition, development, exploitation and exploration of producing oil and gas properties, and in the production, processing, marketing and transportation of oil and natural gas. The Company has grown primarily through acquisitions of proved oil and gas reserves, followed by development and exploitation activities and strategic acquisitions of additional interests in or near such acquired properties. The Company's proved reserves are principally located in relatively long-lived fields with well-established production histories concentrated in western Oklahoma, the Permian Basin of West Texas and New Mexico, the Hugoton Field of Oklahoma and Kansas, the San Juan Basin of northwestern New Mexico and the Green River Basin of Wyoming. The Company's estimated proved reserves at December 31, 1997 were 47.9 million barrels ("Bbls") of oil and 815.8 billion cubic feet ("Bcf") of natural gas and 13.8 million Bbls of natural gas liquids, as compared to December 31, 1996 proved reserves of 42.4 million Bbls of oil and 540.5 Bcf of natural gas. Increased proved reserves during 1997 are primarily the result of predominantly gas-producing property acquisitions and development and exploitation activities, partially offset by production. During 1997, the Company's daily oil and gas production averaged 10,905 Bbls and 135,855 Mcf. Fourth quarter 1997 daily oil and gas production averaged 11,378 Bbls and 150,907 Mcf. Following its December 1997 acquisition of gas-producing properties in the San Juan Basin, the Company began separate reporting of natural gas liquids production related to this acquisition. Natural gas liquids production for the month of December 1997 was 80,500 Bbls or 2,596 Bbls per day. The Company's properties are characterized by relatively long reserve life and highly predictable well production profiles. Based on December 31, 1997 proved reserves and projected 1998 production, the average reserve-to-production index of the Company's proved reserves is 13.3 years. In general, the Company's properties have extensive production histories and production enhancement opportunities. While the Company's properties are geographically diversified, the producing fields are concentrated within core areas, allowing for substantial economies of scale in production and cost-effective application of reservoir management techniques gained from prior operations. By operating the majority of its properties, the Company can control expenses, capital allocation and the timing of development and exploitation activities in its fields, thus allowing the Company to reduce production costs of acquired properties. The Company has generated a substantial inventory of approximately 950 potential development drilling locations within its existing properties (of which 486 have been attributed proved undeveloped reserves), to support future net reserve additions. Approximately 200 of these locations will require certain regulatory approvals and legislation in Oklahoma prior to drilling. The Company has recently begun to emphasize exploration of unproved reserves as part of its business strategy. During 1997, the Company expensed $2.1 million in connection with its exploration program, primarily including seismic and other geological and geophysical analysis costs. The Company has allocated 10% to 15% of its 1998 budget, or up to $13.5 million for exploration activities. The Company employs a disciplined acquisition program refined by senior management to augment its core properties and expand its reserve base. The Company's engineers and geologists use their expertise and experience gained through the management of existing core properties to target properties to be acquired with similar geological and reservoir characteristics. A subsidiary of the Company operates a gas gathering system in Major County, Oklahoma, where a significant portion of the Company's gas is produced. Since August 1, 1995, another subsidiary of the Company has operated a gas gathering system and a gas processing plant in the Hugoton Field of Kansas and Oklahoma. 1 Most of the Company's production is sold at market-responsive prices. The Company also markets its oil and gas, including sales of gas under forward sales contracts. The Company occasionally uses futures contracts and other price risk management instruments to hedge pricing risks. History of the Company Cross Timbers Oil Company was incorporated in Delaware in 1990 to act as the managing general partner of Cross Timbers Oil Company, L.P. ("Partnership"), and ultimately to acquire the business and properties of the Partnership. The Partnership was formed to combine in February 1991 the business and operations of six limited partnerships and two corporations that were founded between 1986 and 1989. On May 18, 1993, the Partnership exchanged its common units of ownership for an equal number of shares of common stock in Cross Timbers Oil Company and the Company sold 8.3 million shares of common stock (adjusted for subsequent stock splits) in its initial public offering. During 1991, the predecessors of the Company formed Cross Timbers Royalty Trust ("Royalty Trust") by carving net profits interests out of substantially all the royalty and overriding royalty interests that the Company's predecessors then owned in Texas, New Mexico and Oklahoma, and certain nonoperated working interest properties in Texas and Oklahoma. The Company makes monthly net profits payments to the Royalty Trust based on revenues received and costs disbursed for the properties from which the net profits interests were carved. Royalty Trust units of beneficial interest ("Units") are listed on the New York Stock Exchange under the symbol "CRT." During 1996 and 1997, the Company purchased 1,326,300, or 22%, of the outstanding Units. The Board of Directors has authorized the purchase of up to two million, or 33%, of the outstanding Units. Current Operating Environment The oil and gas industry is affected by many factors that the Company generally cannot control. Crude oil prices are generally determined by global supply and demand. After hitting a five-year low at the end of 1993, oil prices reached their highest levels since the Persian Gulf War in 1990 during fourth quarter 1996 and January 1997. Crude oil prices ranged from $17 to $20 during most of 1997, then declined to a $16 average in December and to the $14 to $15 level in first quarter 1998. The recent weakening in oil prices has generally been attributed to increased OPEC production following its November 1997 decision to increase quotas, increased non-OPEC production from the North Sea and Latin America, and the recent United Nations decision to allow increased Iraqi crude oil sales for humanitarian reasons. Also contributing to decline have been a mild 1997/1998 winter in the U.S. and Europe and the sudden drop in demand from depressed economies in the Far East. After hitting a decade low of $11.00, prices in late March 1998 began to increase upon news that some of the major oil exporting countries planned to meet regarding curtailment of production. Natural gas prices are influenced by national and regional supply and demand, which is often dependent upon weather conditions. Natural gas competes with alternative energy sources as a fuel for heating and the generation of electricity. Gas prices were adversely impacted in 1995 as a result of the winter of 1994/1995 being one of the warmest of the century. Prices increased in fourth quarter 1995 and continued their upward spiral through February 1996 because of low storage levels and colder than expected weather. Generally because of colder weather, storage concerns and U.S. economic growth, prices remained relatively high during most of 1996 and 1997, reaching their highest levels since 1985. Gas prices declined, however, in December 1997 and have remained lower in first quarter 1998, primarily because of an abnormally mild winter in the central and eastern U.S. and elevated storage levels. Business Strategy The primary components of the Company's business strategy are (i) acquiring long-lived, operated oil and gas properties, (ii) increasing production and reserves through aggressive management of operations and through development, exploitation and exploration activities, and (iii) retaining management and technical staff that have substantial experience in the Company's core areas. Acquiring Long-Lived, Operated Properties. The Company seeks to acquire long-lived, onshore operated producing properties that (i) contain complex multiple-producing horizons with the potential for increases in reserves and production, (ii) are in the Company's core operating areas or in areas with similar geologic and reservoir characteristics and (iii) present opportunities to reduce expenses through more efficient operations. The Company 2 believes that the properties it acquires provide opportunities to increase production and reserves through the implementation of mechanical and operational improvements, workovers, behind-pipe completions, secondary recovery operations, new development wells and other exploitation activities. The Company also seeks to acquire facilities related to gathering, processing, marketing and transporting oil and gas in areas where it owns reserves. Such facilities can enhance profitability, reduce gathering, processing, marketing and transportation costs, provide marketing flexibility and give the Company access to additional markets. The Company's ability to successfully purchase properties is dependent upon, among other things, competition for such purchases and the availability of cash resources. Increasing Production and Reserves. A principal component of the Company's strategy is to increase production and reserves through aggressive management of operations and through development, exploitation and exploration. The Company believes that its principal properties possess geologic and reservoir characteristics that make them well suited for production increases through low- risk exploitation and drilling programs. The Company has generated an inventory of approximately 950 potential drilling locations for this program. Additionally, the Company reviews operations and mechanical data on operated properties to determine if actions can be taken to reduce operating costs or increase production. Such actions include installing, repairing and upgrading lifting equipment, redesigning downhole equipment to improve production from different zones, modifying surface facilities and conducting restimulations and recompletions. The Company may also initiate, upgrade or revise existing secondary recovery operations and drill development wells. The Company attempts to select projects that it believes will have the potential to add substantially to proved reserves and cash flow. Although it has not historically engaged in significant exploratory activities, the Company believes that it can prudently and successfully add growth potential through exploratory activities given improved technology, its experienced technical staff and its expanded base of operations. Experienced Management and Technical Staff. Most of the Company's senior management and technical staff have worked together for over 20 years and have substantial experience in the Company's core operating areas. Bob R. Simpson and Steffen E. Palko, who were co-founders of the Company and its predecessors, were previously executive officers of Southland Royalty Company, one of the largest U.S. independent oil and gas producers prior to its acquisition by Burlington Northern, Inc. in 1985. Other Strategies. The Company may also acquire working interests in producing properties that do not include the right to operate such properties ("nonoperated interests") if such interests otherwise meet its acquisition criteria. The Company attempts to acquire nonoperated interests in fields that are operated by major or established independent oil companies, where such fields represent a significant investment to the operator and are therefore more likely to be carefully managed by it. The Company may also acquire nonoperated interests with the intent of ultimately aggregating, through future acquisitions, sufficient interests to obtain the right to operate the properties. The Company attempts to acquire nonoperated interests where geologic conditions indicate the potential for undeveloped reserves that the operator will exploit. The Company also attempts to acquire a portion of its oil and gas reserves in the form of royalty interests. Royalty interests offer less exposure to operational liabilities because they do not participate in operating activities and do not bear production or development costs. However, royalty interests typically allow only limited influence on the operation or development of properties. Business Goals. In May 1997, the Company announced strategic goals for 1998 and 1999, including 50% increases in cash flow per share and proved reserves per share. Specifically, the Company's goal is to increase cash flow per share to $2.97 in 1998 and to $3.67 in 1999, an aggregate increase of 50% from 1997's goal of $2.45 (all adjusted for the February 25, 1998 three-for-two stock split). Proved reserves at year-end 1999 are targeted at 5.4 barrels of oil equivalent ("BOE") per share, or 50% above the Company's year-end 1997 goal of 3.6 BOE per share. Debt per BOE in 1998 and 1999 is expected to be $2.40. These goals were based on May 1997 commodity prices which, net to the Company, were approximately $20 per Bbl of oil and $2.00 per Mcf of gas. The Company also announced its plans to make strategic acquisitions totaling $260 to $280 million from May 1997 through the end of 1999. After closing the Amoco Acquisition in December 1997 and the expected closing of the EEX Acquisition in April 1998, the Company has significantly exceeded this goal. 3 The Company has budgeted $70 to $90 million for its 1998 exploration and development program which is expected to be funded primarily by cash flow from operations. Exploration expenditures are expected to be 10% to 15% of the 1998 budget. The total capital budget, including acquisitions, will be adjusted throughout 1998 to capitalize on opportunities offering the highest rates of return after considering oil and gas price volatility. ACQUISITIONS During 1995, the Company acquired predominantly gas-producing properties for a total cost of $131 million, and a gas processing plant and gathering facility for $29 million. The Santa Fe Acquisition, the largest of these acquisitions, closed on August 1, 1995 and consisted of mostly operated properties, a gas processing plant and gathering system in the Hugoton Field of Kansas and Oklahoma. The 1995 acquisitions increased proved reserves by approximately 3 million Bbls and 171 Bcf. During 1996, the Company acquired predominantly gas-producing properties for a total cost of $106 million. The Enserch Acquisition, the largest of these acquisitions, closed in July 1996 at a cost of $39.4 million and primarily consisted of operated interests in the Green River Basin of southwestern Wyoming. In November 1996, the Company acquired additional interests in the Fontenelle Unit, the most significant property included in the Enserch Acquisition, at a cost of $12.5 million. In December 1996, the Company acquired primarily operated interests in gas-producing properties in the Ozona area of the Permian Basin of West Texas for $28.1 million. From July through December 1996, the Company acquired 16% of the publicly traded outstanding units of beneficial interest in Cross Timbers Royalty Trust ("Units"), at a total cost of $12.8 million. The 1996 acquisitions increased proved reserves by approximately 1.6 million Bbls and 153.4 Bcf. During 1997, the Company acquired predominantly gas-producing properties for a total cost of $256 million. The Amoco Acquisition, the largest of these acquisitions, closed December 1, 1997 at an estimated adjusted purchase price of $195 million, including five-year warrants to purchase 937,500 shares of the Company's common stock at a price of $15.31 per share. This acquisition consists primarily of operated properties in the San Juan Basin of New Mexico. In May 1997, the Company acquired primarily gas-producing properties in Oklahoma, Kansas and Texas for an estimated adjusted purchase price of $39 million. The Company also acquired an additional 6% of the Royalty Trust Units at a cost of $5.4 million. The 1997 acquisitions increased proved reserves by approximately 3.2 million Bbls of oil, 248 Bcf of natural gas and 13.9 million Bbls of natural gas liquids. On February 25, 1998, the Company announced it had entered into a definitive agreement with EEX Corporation to acquire producing properties and undeveloped acreage in East Texas. The transaction is expected to close in late April 1998 with an effective date of January 1, 1998. After purchase price adjustments, the preliminary purchase price of $265 million is expected to be reduced to $245 million. The Company's internal engineers estimate proved reserves attributable to the acquisition to be 250 Bcf and 1.6 million Bbls as of April 1998. 4 SIGNIFICANT PROPERTIES The following table summarizes proved reserves and discounted present value, before income tax, of proved reserves by the Company's major operating areas at December 31, 1997 (in thousands):
Proved Reserves -------------------------------------------- Discounted Natural Gas Present Value Liquids before Income Tax of Oil (Bbls) Gas (Mcf) (Bbls) Proved Reserves ------------- ------------ ------------- ----------------------- Permian Basin... 38,960 99,687 - $233,739 29.9% Mid-Continent... 5,721 167,563 - 175,605 22.4% San Juan Basin.. 1,228 221,986 13,810 168,787 21.6% Hugoton......... 260 161,299 - 111,468 14.3% Rocky Mountain.. 1,279 154,846 - 80,791 10.3% Other (a)....... 406 10,394 - 11,932 1.5% --------- --------- ------------ --------- -------- Total........... 47,854 815,775 13,810 $782,322 100.0% ========= ========= ============ ========= ========
(a) Includes 375,000 Bbls and 8,790,000 Mcf and discounted present value before income tax of $9,922,000 related to the Company's 22% ownership of Royalty Trust Units at December 31, 1997. PERMIAN BASIN AREA Prentice Field. The Prentice Field is located in Terry and Yoakum Counties, Texas. In 1993, the Company acquired its initial interest in the Prentice Northeast Unit in three separate transactions, accumulating a 62.1% interest. In January 1994, the Company purchased an additional 29.4% interest in the Prentice Northeast Unit, increasing the Company's total ownership to 91.5%. The Company assumed operations of the Unit effective March 1, 1994. Current net production from the 186-well Unit is approximately 3,350 Bbls of oil and 500 Mcf of gas per day. The Company also owns an interest in 80 gross (1.7 net) nonoperated wells. Discovered in 1950, the Prentice Field produces from carbonate reservoirs in the Clear Fork and Glorieta formations at depths ranging from 6,000 to 7,000 feet. The Prentice Field has been separated into several waterflood units for secondary recovery operations. The Prentice Northeast Unit was formed in 1964 with waterflood operations commencing a year later. Development potential exists through infill drilling and improvement of waterflood efficiency. Tertiary recovery potential also exists through carbon dioxide flooding. During 1997, the Company drilled 31 gross (28.4 net) development wells in the Prentice Northeast Unit. Twenty-four of these wells were 10-acre infill wells and the remaining seven wells were strategically located to extend the prospective area for infill development in the central and northern portion of the Unit. The Company plans to drill a total of up to 25 wells during 1998 depending upon oil prices. Russell Field. The Russell Field is located in Gaines County, Texas. The Company owns an interest in 25 gross (23.4 net) wells that it operates and 137 gross (42.6 net) wells operated by others. Current net daily oil and gas production is approximately 900 Bbls and 470 Mcf. The Russell Field, discovered in 1943, produces from the San Andres, Glorieta, Middle Clear Fork and Devonian formations at depths ranging from 4,800 to 10,800 feet. Exploitation potential exists through restimulations, recompletions, infill drilling, and the implementation of secondary recovery operations in the Middle Clear Fork and San Andres formations. Ozona Area. The Company acquired interests in 1996 in the Henderson, Ozona, and Davidson Ranch fields located in Crockett County, Texas. The Company has interests in 111 gross (64.9 net) wells that it operates and 133 gross (27.5 net) wells operated by others. Current net daily production is approximately 11.3 MMcf and 58 Bbls. Oil and gas were first discovered in the Ozona area in 1962. Production is from the Pennsylvanian Canyon sandstones and Strawn carbonates at depths ranging from 6,500 to 9,000 feet. Development potential for this area 5 includes infill drilling, field extension and delineation drilling, and the possibility of horizontal drilling in the Strawn Formation. During 1997, the Company drilled a total of 23 gross (15.4 net) operated wells and participated in 14 gross (2.3 net) wells operated by others, making it one of the Company's most active gas development areas. The Company plans to drill or participate in drilling a total of 34 wells during 1998. University Block 9. The University Block 9 Field is located in Andrews County, Texas. The Company owns a 100% working interest in 55 wells that it operates. Current net daily production is approximately 2,570 Bbls of oil and 2,160 Mcf of gas. The University Block 9 Field was discovered in 1953. Productive zones are of Wolfcamp, Pennsylvanian, and Devonian age at 8,400, 8,700 and 10,400 feet, respectively. The Company operates the Wolfcamp Unit, Penn Unit, and 23 of the 24 active Devonian wells. Development potential includes proper wellbore utilization, recompletions, infill drilling and improvement of waterflood efficiency. This field was one of the Company's most active oil development areas during 1997, where the Company drilled 16 wells, 6 of which were in the process of drilling at year-end. During 1998, the Company plans to drill up to 20 wells depending upon oil prices. MID-CONTINENT AREA Major County Area. The Company is one of the largest producers in the Ringwood, Northwest Okeene and Cheyenne Valley fields in Major County, Oklahoma. The Company operates 451 gross (389.4 net) wells and has an interest in 202 gross (45.8 net) wells operated by others. Current net daily oil and gas production is approximately 1,050 Bbls and 33,300 Mcf. Oil and gas were first discovered in the Major County area in 1945. The fields in the Major County area are located in the Anadarko Basin and are characterized by oil and gas production from a variety of structural and stratigraphic traps. Productive zones range from 6,500 to 9,400 feet and include the Oswego, Red Fork, Chester, Manning, Mississippian, Hunton and Arbuckle formations. The Company develops the Major County area primarily through mechanical improvements, restimulations, recompletions to shallower zones and development drilling. During 1997, the Company participated in the drilling of 32 gross (24.8 net) wells in the western portion of the County, targeted at the Mississippian and Chester formations. The Company has budgeted 24 wells in Major County for 1998. A subsidiary of the Company operates a gathering system and pipeline in the Major County area. The gathering system collects gas from 425 wells through 300 miles of pipeline in the Major County area. The gathering system has current throughput of approximately 28,500 Mcf per day, 70% of which is produced from Company-operated wells. Estimated capacity of the gathering system is 40,000 Mcf per day. Gas is delivered to a processing plant owned and operated by a third party, and then transmitted by a 26-mile Company-operated pipeline to connections with other pipelines. Since 1994, the Company has operated its Major County gathering system. Through its direct maintenance and management, the Company has achieved operating cost reductions and improved reliability. During 1994 and 1995, the gathering system was converted from centralized to field compression through the installation of four field compression stations. Field compression has allowed the system to operate more efficiently and to expand into previously inaccessible areas. Elk City Field. The Elk City Field is located in Beckham and Washita Counties of western Oklahoma. The Company operates the Elk City Unit with 35 gross (31.6 net) wells and owns an interest in 9 gross (1.5 net) wells operated by others. Current net production of the Elk City Field is approximately 160 Bbls of oil and 4,500 Mcf of gas per day. 6 The Elk City Field was discovered in 1947 and has been extensively developed. Production is from the Hoxbar (9,500 feet), Atoka (13,100 feet) and Morrow (15,500 feet) zones. The Company's primary development activities in this field have been to initiate mechanical efficiencies and to recomplete additional productive intervals. Recompletions and zone isolations have been successful and additional opportunities for these types of workovers remain in the field. Recent recompletions to the Atoka Formation have resulted in significant reserve additions. There are several other deep wellbores with similar recompletion potential. HUGOTON AREA The Hugoton Field, discovered in 1922, covers parts of Texas, Oklahoma and Kansas and is the largest gas field in the United States. It is estimated that 5 million productive acres exist in the entire field. The Company owns an interest in 390 gross (365.9 net) wells that it operates and 84 gross (18.8 net) wells operated by others. Current net production averages approximately 35,900 Mcf of gas per day and 125 Bbls of oil per day. Approximately 70% of the Company's Hugoton gas production is delivered to the Tyrone Plant, a gas processing plant operated by the Company. In May 1996, the Company completed the installation of a field compressor on the southern end of the Tyrone gathering system. This unit compresses gas from 45 wells, 39 of which are owned by the Company, and has resulted in a significant production increase. The Company also completed the installation and start-up of a residue compressor and 11.5 miles of high pressure residue pipeline during August 1996. The installation of these facilities allows the Company to operate the Tyrone Plant more efficiently and allows access to three additional interstate pipelines. While much of the Kansas portion of the Hugoton Field has been infill drilled on 320-acre spacing, the Company believes that there are up to 40 additional potential infill drilling locations. The Oklahoma portion is drilled on 640-acre spacing. The Company believes that there are approximately 200 potential infill drilling locations, subject to regulatory approval and possibly new legislation being enacted in Oklahoma. During 1997, the Company drilled 18 gross (12.1 net) wells to the Chester, Council Grove and Chase formations. The Company plans to drill 12 wells during 1998. ROCKY MOUNTAIN AREA San Juan Basin. The San Juan Basin of northwestern New Mexico and southwestern Colorado contains the largest reserves of natural gas in the Rocky Mountains and, within the United States, is second in size only to the Hugoton Field. The Company acquired most of its interests in the San Juan Basin in December 1997 from Amoco Corporation. The Company owns an interest in 616 gross (498 net) wells that it operates and 974 gross (177.2 net) wells operated by others. Of these wells, 60 gross (49.8 net) operated wells and 20 gross (3.6 net) non-operated wells are dual completions. Current net daily production averages approximately 39,000 Mcf of gas, 230 Bbls of oil and 2,500 Bbls of natural gas liquids. The Company has identified 139 infill wellsites, primarily in the Dakota and Fruitland Coal formations, relating to 8.6 million BOE of proved undeveloped reserves that the Company expects will require approximately $17.3 million to drill and complete. In addition, the Company plans to evaluate more than 150 potential infill wellsites over the next year. The Company plans to drill 20 operated wells during 1998. Green River Basin. The Green River Basin is located in southwestern Wyoming. The Company has interests in 147 gross (137.3 net) wells that it operates and 48 gross (8.2 net) wells operated by others in the Fontenelle, Nitchie Gulch and Pine Canyon fields. Current net daily production is approximately 28,100 Mcf of gas and 60 Bbls of oil. Gas production was discovered in the Fontenelle area in the early 1970's. The producing reservoirs are the Cretaceous Frontier and Dakota sandstones at depths ranging from 7,500 to 10,000 feet. Exploitation potential for the fields in this area include restimulations, recompletions and development drilling. During 1997, the Company drilled 32 gross (29 net) wells in the Fontenelle Unit. The Company plans to drill approximately 15 wells during 1998. 7 During 1997, the Company also installed additional field compression to lower overall field operating pressures and to improve overall field performance. The Company also completed an interconnect to another pipeline in the southeastern part of the Fontenelle field that added an additional market for the gas. RESERVES The following are estimated quantities of proved reserves and cash flows therefrom as of December 31, 1997, 1996 and 1995:
December 31 -------------------------------- 1997 1996 1995 ---------- --------- --------- (in thousands) Proved developed: Oil (Bbls).......................... 33,835 31,883 28,946 Gas (Mcf)........................... 677,710 466,412 320,230 Natural gas liquids (Bbls).......... 11,494 - - Proved undeveloped: Oil (Bbls).......................... 14,019 10,557 11,042 Gas (Mcf)........................... 138,065 74,126 37,840 Natural gas liquids (Bbls).......... 2,316 - - Total proved: Oil (Bbls).......................... 47,854 42,440 39,988 Gas (Mcf)........................... 815,775 540,538 358,070 Natural gas liquids (Bbls).......... 13,810 - - Estimated future net cash flows: Before income tax................ $1,484,542 $1,737,024 $712,907 After income tax................. $1,193,167 $1,286,037 $581,888 Present value of estimated future net cash flows, discounted at 10%: Before income tax................ $ 782,322 $ 946,150 $405,706 After income tax................. $ 642,109 $ 706,481 $335,156
Miller and Lents, Ltd. ("Miller and Lents"), an independent petroleum engineering firm, prepared the estimates of the Company's proved reserves and the future net cash flow (and present value thereof) attributable to proved reserves at December 31, 1997, 1996 and 1995. As prescribed by the Securities and Exchange Commission, such proved reserves were estimated using oil and gas prices and production and development costs as of December 31 of each such year, without escalation. See Note 12 to Consolidated Financial Statements for additional information regarding estimated proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation thereof. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as change in product prices, may justify revision of such estimates. Accordingly, oil and gas quantities ultimately recovered will vary from reserve estimates. During 1997, the Company filed estimates of oil and gas reserves as of December 31, 1996 with the U.S. Department of Energy on Form EIA-23. These estimates are consistent with the reserve data reported in Note 12 to Consolidated Financial Statements for the year ended December 31, 1996, with the exception that Form EIA-23 includes only reserves from properties operated by the Company. 8 EXPLORATION AND PRODUCTION DATA For the following data, "gross" refers to the total wells or acres in which the Company owns a working interest and "net" refers to gross wells or acres multiplied by the percentage working interest owned by the Company. Although many of the Company's wells produce both oil and gas, a well is categorized as an oil well or a gas well based upon the ratio of oil to gas production. Producing Wells The following table summarizes the Company's producing wells as of December 31, 1997, all of which are located in the United States:
Operated Wells Non-Operated Wells Total (a) -------------------- --------------------- -------------------- Gross Net Gross Net Gross Net ---------- --------- ---------- ---------- --------- --------- Oil................ 608 552.3 3,139 186.9 3,747 739.2 Gas................ 1,705 1,447.5 1,566 296.3 3,271 1,743.8 ----- ------- ----- ----- ----- ------- Total.............. 2,313 1,999.8 4,705 483.2 7,018 2,483.0 ===== ======= ===== ===== ===== =======
(a) One gross (1 net) oil well and 79 gross (52.4 net) gas wells are dual completions. Drilling Activity The following table summarizes the number of development wells drilled by the Company during the years indicated. As of December 31, 1997, the Company was in the process of drilling 29 gross (19.7 net) wells.
Year Ended December 31 ---------------------------------------------------------- 1997 1996 1995 ----------------- ------------------- ------------------ Gross Net Gross Net Gross Net -------- -------- --------- -------- -------- -------- Development wells: Completed as- Oil wells........ 82 53.4 92 45.5 71 17.3 Gas wells........ 119 85.9 70 38.1 24 16.8 Non-productive..... 5 3.2 4 2.7 2 1.1 --- ----- ---- ---- -- ---- Total.............. 206 142.5 166 86.3 97 35.2 --- ----- ---- ---- -- ---- Exploratory wells: Completed as- Gas wells........ 2 0.6 - - - - Non-productive..... 1 0.1 - - - - --- ----- ---- ---- -- ---- Total.............. 3 0.7 - - - - --- ----- ---- ---- -- ---- Total (a)........... 209 143.2 166 86.3 97 35.2 === ===== ==== ==== == ====
(a) Included in totals are 57 gross (6.9 net), 85 gross (10.4 net) and 61 gross (3.2 net) wells drilled on nonoperated interests in 1997, 1996 and 1995, respectively. Excluded from above totals are 21 gross (0.4 net) and 31 gross (0.6 net) carbon dioxide wells drilled on non-operated interests in 1996 and 1995, respectively. 9 Acreage The following table summarizes developed and undeveloped leasehold acreage in which the Company owns a working interest as of December 31, 1997. Excluded from this summary is acreage in which the Company's interest is limited to royalty, overriding royalty and other similar interests.
Developed (a)(b) Undeveloped ------------------------ ----------------------- Gross Net Gross Net ----------- ----------- ---------- ----------- Oklahoma.... 334,973 278,713 934 753 Texas....... 98,143 60,997 23,834 12,917 Kansas...... 80,500 67,821 - - New Mexico.. 221,539 95,536 5,534 3,458 Wyoming..... 43,811 31,144 1,360 990 Other....... 8,929 6,493 7,072 4,644 ------- ------- ------ ------ Total....... 787,895 540,704 38,734 22,762 ======= ======= ====== ======
(a) "Developed acres" are acres spaced or assignable to productive wells. (b) Certain leasehold acreage in Oklahoma and Texas is subject to a 75% net profits interest conveyed to the Royalty Trust. Oil and Gas Sales Prices and Production Costs The following table shows the average sales prices per Bbl of oil (including condensate), Mcf of gas and per Bbl of natural gas liquids produced and the production costs and production and property taxes per barrel of oil equivalent ("BOE," computed on an energy equivalent basis of 6 Mcf to 1 Bbl):
Year Ended December 31 ---------------------- 1997 1996 1995 ------ ------ ------ Sales prices:.......................... Oil (per Bbl)........................ $18.90 $21.38 $17.09 Gas (per Mcf)........................ $ 2.20 $ 1.97 $ 1.42 Natural gas liquids (per Bbl)........ $ 9.66 - - Production costs per BOE............... $ 3.54 $ 4.05 $ 4.26 Production and property taxes per BOE.. $ 1.33 $ 1.23 $ 1.04
DELIVERY COMMITMENTS The Company sells to a single purchaser approximately 10,000 Mcf of gas per day through July 1998 and 11,650 Mcf of gas per day from August 1998 through July 2005. The Company has also entered contracts with two purchasers to sell a total of 30,000 Mcf per day in March 1998 and 10,000 Mcf per day in April, May and June 1998. Deliveries under these contracts are generally in Oklahoma, where the Company's production and reserves are adequate to meet these sales commitments. The Company has committed to sell up to 4,500 Mcf of gas per day to a cogeneration facility under a take-or-pay contract that expires in September 2004. The Company generally purchases gas at market prices to fill this commitment. COMPETITION AND MARKETS The Company faces competition from other oil and gas companies in all aspects of its business, including acquisition of producing properties and oil and gas leases, marketing of oil and gas, and obtaining goods, services and labor. Many of its competitors have substantially larger financial and other resources. Factors that affect the 10 Company's ability to acquire producing properties include available funds, available information about the property and the Company's standards established for minimum projected return on investment. Because gathering systems are the only practical method for the intermediate transportation of natural gas, competition for natural gas delivery is presented by other pipelines and gas gathering systems. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. Because of the long-lived nature of the Company's oil and gas reserves and management's expertise in exploiting these reserves, management believes that it is effective in competing in the market. The Company's ability to market oil and gas depends on many factors beyond its control, including the extent of domestic production and imports of oil and gas, the proximity of the Company's gas production to pipelines, the available capacity in such pipelines, the demand for oil and gas, the effects of weather, and the effects of state and federal regulation. The Company cannot assure that it will always be able to market all of its production or obtain favorable prices. The Company, however, does not currently believe that the loss of any of its oil or gas purchasers would have a material adverse effect on its operations. Decreases in oil and gas prices have had, and could have in the future, an adverse effect on the Company's acquisition and development programs, proved reserves, revenues, profitability, cash flow and dividends. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "General - Product Prices." FEDERAL AND STATE REGULATIONS There have been, and continue to be, numerous federal and state laws and regulations governing the oil and gas industry that are often changed in response to the current political or economic environment. Compliance with this regulatory burden is often difficult and costly and may carry substantial penalties for noncompliance. The following are some specific regulations that may affect the Company. The Company cannot predict the impact of these or future legislative or regulatory initiatives. Federal Regulation of Natural Gas The interstate transportation and sale for resale of natural gas is subject to federal regulation, including transportation rates charged and various other matters, by the Federal Energy Regulatory Commission ("FERC"). The Company's gathering system and 26-mile pipeline have been declared exempt from FERC jurisdiction, and therefore, the Company's gathering service is not regulated by FERC. Federal wellhead price controls on all domestic gas were terminated on January 1, 1993. The Company cannot predict the impact of government regulation on any natural gas facilities. In 1992, FERC issued Orders Nos. 636 and 636-A, requiring operators of pipelines to unbundle transportation services from sales services and allow customers to pay for only the services they require, regardless of whether the customer purchases gas from such pipelines or from other suppliers. The United States Court of Appeals upheld the unbundling provisions and other components of FERC's orders but remanded several issues to FERC for further explanation. On February 27, 1997, FERC issued Order No. 636-C, addressing the Court's concern. Petitions for rehearing on Order No. 636-C are pending. FERC's order remains subject to judicial review and may be changed as a result of that review. Although FERC's regulations should generally facilitate the transportation of gas produced from the Company's properties and the direct access to end-user markets, the impact of these regulations on marketing the Company's production or on its gas transportation business cannot be predicted. The Company, however, does not believe that it will be affected any differently than other natural gas producers and marketers with which it competes. Federal Regulation of Oil Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at market prices. The net price received from the sale of these products is affected by market transportation costs. A significant part of the Company's oil production is transported by pipeline. The Energy Policy Act of 1992 required the FERC to adopt a simplified ratemaking methodology for interstate oil pipelines. In 1993 and 1994, the FERC issued Order Nos. 561 and 561-A, adopting rules that establish new rate methods for such pipelines. Under the new rules, effective January 1, 1995, interstate oil pipelines can change rates based on an inflation index, though other rate mechanisms may be used 11 in specific circumstances. The United States Court of Appeals upheld FERC's orders in 1996. The Company cannot predict the effect these rules may have on the cost of moving oil to market. State Regulation The oil and gas operations of the Company are subject to various types of regulation at the state and local levels. Such regulation includes requirements for drilling permits, the method of developing new fields, the spacing and operations of wells and waste prevention. The production rate may be regulated and the maximum daily production allowable from oil and gas wells may be established on a market demand or conservation basis. These regulations may limit the Company's production from its wells and the number of wells or locations the Company can drill. The Company may become party to agreements relating to the construction or operations of pipeline systems for the transportation of natural gas. To the extent that such gas is produced, transported and consumed wholly within one state, such operations may, in certain instances, be subject to the state's administrative authority charged with regulating pipelines. The rates the Company could charge for gas, the transportation of gas, and the construction and operation of such pipelines would be subject to the regulations governing such matters. Certain states have recently adopted regulations with respect to gathering systems, and other states are considering regulations with respect to gathering systems. New regulations passed have not had a material effect on the operations of the Company's gathering systems, but the Company cannot predict whether any further rules will be adopted or, if adopted, the effect these rules may have on the Company's gathering systems. Federal, State or Indian Leases The Company's operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, including nondiscrimination statutes. Such operations must be conducted pursuant to certain on-site security regulations and other permits and authorizations issued by the Bureau of Land Management, Minerals Management Service and other agencies. ENVIRONMENTAL REGULATIONS Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact the Company's operations and costs. Management believes that the Company is in substantial compliance with applicable environmental laws and regulations. To date, the Company has not expended any material amounts to comply with such regulations, and management does not currently anticipate that future compliance will have a materially adverse effect on the consolidated financial position or results of operations of the Company. EMPLOYEES The Company had 349 and 306 employees as of December 31, 1997 and 1996, respectively. None of the Company's employees are represented by a union. The Company considers its relations with its employees to be good. 12 EXECUTIVE OFFICERS OF THE COMPANY The officers of the Company are elected by and serve until their successors are elected by the Board of Directors. BOB R. SIMPSON, 49, was a co-founder of the Company with Mr. Palko and has been Chairman and Chief Executive Officer of the Company since July 1, 1996. Prior thereto, Mr. Simpson served as Vice Chairman and Chief Executive Officer or held similar positions with the Company since 1986. Mr. Simpson was Vice President of Finance and Corporate Development (1979-1986) and Tax Manager (1976-1979) of Southland Royalty Company. STEFFEN E. PALKO, 47, was a co-founder of the Company with Mr. Simpson and has been Vice Chairman and President or held similar positions with the Company since 1986. Mr. Palko was Vice President - Reservoir Engineering (1984-1986) and Manager of Reservoir Engineering (1982-1984) of Southland Royalty Company. J. RICHARD SEEDS, 52, has been a director of the Company since July 1996 and has served as Executive Vice President since May 1997. Mr. Seeds previously was Career Guidance Counselor with the Springtown Independent School District (1993-1997) and an independent personal investment manager (1986-1993). Mr. Seeds was Vice President of Finance and Controller (1979-1986) and Controller (1977-1979) of Southland Royalty Company. LOUIS G. BALDWIN, 48, has been Senior Vice President and Chief Financial Officer or held similar positions with the Company since 1986. Mr. Baldwin was Assistant Treasurer (1979-1986) and Financial Analyst (1976-1979) at Southland Royalty Company. KEITH A. HUTTON, 39, has been Senior Vice President - Asset Development or held similar positions with the Company since 1987. From 1982 to 1987, Mr. Hutton was a Reservoir Engineer with Sun Exploration & Production Company. BENNIE G. KNIFFEN, 47, has been Senior Vice President and Controller or held similar positions with the Company since 1986. From 1976 to 1986, Mr. Kniffen held the position of Director of Auditing or similar positions with Southland Royalty Company. LARRY B. MCDONALD, 51, has been Senior Vice President - Operations or held similar positions with the Company since 1990. Prior to that time, Mr. McDonald owned and operated McDonald Energy, Inc. (1986-1990). TIMOTHY L. PETRUS, 43, has been Senior Vice President - Acquisitions or held similar positions with the Company since 1988. Prior to that time, Mr. Petrus was a Vice President with Texas American Bank (1980-1988) and was a Senior Project Engineer with Exxon (1976-1980). KENNETH F. STAAB, 41, has been Senior Vice President of Engineering or held similar positions with the Company since 1986. Prior to that time, Mr. Staab was a Reservoir Engineer with Southland Royalty Company (1982-1986). THOMAS L. VAUGHN, 51, has been Senior Vice President - Operations or held similar positions with the Company since 1988. From 1986 to 1988, Mr. Vaughn owned and operated Vista Operating Company. VAUGHN O. VENNERBERG II, 43, has been Senior Vice President - Land or held similar positions with the Company since 1987. Prior to that time, Mr. Vennerberg was Land Manager with Hutton Gas Operating Company (1986-1987). 13 ITEM 3. LEGAL PROCEEDINGS In June 1996, Holshouser v. Cross Timbers Oil Company, a class action lawsuit, was filed in the District Court of Major County, Oklahoma. The action was filed on behalf of all parties who, at any time since June 1991, have allegedly had production or other costs deducted by the Company from royalties paid on gas produced in Oklahoma when the royalty is based upon a specified percentage of the proceeds received from the gas sold. The plaintiff alleges that such deductions are a breach of the Company's contractual obligations to the class and is seeking to recover an unspecified amount of damages as a result of the alleged breach. The plaintiff is also seeking a determination of the Company's obligations to the plaintiff and the class regarding production or other costs. The Company has responded that it has complied with all of its contractual obligations and denied that the matter is appropriate for determination as a class action. The parties have conducted discovery on the class certification issues, but no further action has been taken in the case. Management believes it has strong defenses against this claim and intends to vigorously defend the action. Management's estimate of the potential liability from this claim has been accrued in the Company's financial statements. The Company and certain of its subsidiaries are involved in various other lawsuits and certain governmental proceedings arising in the ordinary course of business. Company management and legal counsel do not believe that the ultimate resolution of these claims, including the class action lawsuit described above, will have a material effect on the Company's financial position, liquidity or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted for a vote of security holders during the fourth quarter of 1997. 14 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange and trades under the symbol "XTO." The following table sets forth quarterly high and low sales prices and cash dividends declared for each quarter of 1997 and 1996 (as adjusted for the three-for-two stock splits effected on March 19, 1997 and February 25, 1998):
High Low Dividends ------- ------- --------- 1997 First Quarter... $13.719 $10.422 $.037 Second Quarter.. 13.750 9.828 .037 Third Quarter... 16.375 12.328 .037 Fourth Quarter.. 19.125 13.297 .037 1996 First Quarter... $ 8.328 $ 6.938 $.033 Second Quarter.. 11.438 7.563 .033 Third Quarter... 12.781 8.500 .033 Fourth Quarter.. 11.891 10.000 .033
The determination of the amount of future dividends, if any, to be declared and paid is in the sole discretion of the Company's Board of Directors and will depend on the Company's financial condition, earnings and funds from operations, the level of its capital expenditures, dividend restrictions in its financing agreements, its future business prospects and other matters as the Board of Directors deems relevant. Furthermore, the Company's Revolving Credit Agreement with banks restricts the amount of dividends to 25% of cash flow from operations for the latest four consecutive quarterly periods. The Company's 9 1/4% and 8 3/4% senior subordinated notes also place certain restrictions on distributions to common shareholders, including dividend payments. On February 17, 1998, the Board of Directors declared a dividend of $.04 per share payable on April 15, 1998 to shareholders of record on March 31, 1998. On March 2, 1998, the Company had 320 shareholders of record. 15 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial information for each of the years, and as of year-end, in the five-year period ended December 31, 1997. This information should be read in conjunction with Item 7, Management's Discussion and Analysis, and the Consolidated Financial Statements at Item 14(a).
1997 1996 1995 1994 1993 ------------ ----------- ------------- ---------- ------------ (in thousands except production, per share and per unit data) CONSOLIDATED STATEMENT OF OPERATIONS DATA (a) Revenues:....................................... Oil and condensate............................. $ 75,223 $ 75,013 $ 60,349 $ 53,324 $ 39,747 Gas and natural gas liquids.................... 110,104 73,402 40,543 38,389 34,649 Gas gathering, processing and marketing........ 9,851 12,032 7,091 4,274 3,717 Other.......................................... 5,494 944 4,922 288 69 --------- --------- --------- -------- --------- Total Revenues................................. $ 200,672 $ 161,391 $ 112,905 $ 96,275 $ 78,182 ========= ========= ========= ======== ========= Earnings (loss) available to common stock....... $ 23,905 $ 19,790 $(10,538)(b) $ 3,048 $(4,012)(c) ========= ========= =========== ======== ========== Per common share (d) Basic.......................................... $ 0.60 $ 0.50 $(0.28)(b) $ 0.09 $(0.12)(c) ========= ========= ========= ======== ========= Diluted........................................ $ 0.59 $ 0.48 (0.28)(b) $ 0.08 $(0.12)(c) ========= ========= ========= ======== ========= Pro forma earnings (loss) (e)................... - - - - $ (251) ========= ========= ========= ======== ========= Per common share/unit-basic and diluted (d)(e).. - - - - $ (0.01) ========= ========= ========= ======== ========= Weighted average common shares/ units outstanding.............................. 39,773 39,913 38,072 35,829 32,682 ========= ========= ========= ======== ========= Dividends/distributions declared per common share/unit (f)..................... $ 0.15 $ 0.13 $ 0.13 $ 0.13 $ 0.13 ========= ========= ========= ======== ========= CONSOLIDATED STATEMENT OF CASH FLOWS DATA (a) Operating cash flow (g)......................... $ 89,979 $ 68,263 $ 40,439 $ 37,816 $ 27,925 Cash provided (used) by: Operating activities........................... $ 98,006 $ 59,694 $ 32,938 $ 42,293 $ 32,209 Investing activities........................... $(311,322) $(124,871) $(160,416) $(62,745) $(104,789) Financing activities........................... $ 213,195 $ 66,902 $ 121,852 $ 26,232 $ 70,332 CONSOLIDATED BALANCE SHEET DATA (a) Property and equipment, net.................... $ 723,836 $ 450,561 $ 364,474 $244,555 $ 228,551 Total assets................................... $ 788,455 $ 523,070 $ 402,675 $292,451 $ 258,019 Long-term debt................................. $ 539,000 $ 314,757 $ 238,475 $142,750 $ 111,750 Owners' equity................................. $ 170,243 $ 142,668 $ 130,700 $113,333 $ 115,168 OPERATING DATA (a) Average daily production:....................... Oil (Bbls)..................................... 10,905 9,584 9,677 9,497 6,968 Gas (Mcf)...................................... 135,855 101,845 78,408 58,182 51,260 Natural gas liquids (Bbls)..................... 220 - - - - Barrels of oil equivalent (BOE)................ 33,768 26,558 22,745 19,194 15,511 Average sales price: Oil (per Bbl).................................. $ 18.90 $ 21.38 $ 17.09 $ 15.38 $ 15.63 Gas (per Mcf).................................. $ 2.20 $ 1.97 $ 1.42 $ 1.81 $ 1.85 Natural gas liquids (per Bbl).................. $ 9.66 - - - - Production costs (per BOE)...................... $ 3.54 $ 4.05 $ 4.26 $ 4.62 $ 5.16 Production and property taxes (per BOE)......... $ 1.33 $ 1.23 $ 1.04 $ 1.23 $ 1.19 Proved reserves: Oil (Bbls)..................................... 47,854 42,440 39,988 33,581 21,082 Gas (Mcf)...................................... 815,775 540,538 358,070 177,061 169,119 Natural gas liquids............................ 13,810 - - - - Barrels of oil equivalent (BOE)................ 197,627 132,530 99,666 63,091 49,269 OTHER DATA Ratio of earnings to fixed charges (h).......... 2.2 2.6 (0.2) (i) 1.5 0.9
16 (a) Significant producing property acquisitions in each of the years presented affect the comparability of year-to-year financial and operating data. (b) Includes effect of a $20.3 million pre-tax, non-cash impairment charge recorded upon adoption of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. (c) Includes effect of a one-time, non-cash accounting charge of $4 million for net deferred income tax liabilities recorded upon the merger of the Company with the former Partnership. (d) Adjusted for the three-for-two stock splits effected on March 19, 1997 and February 25, 1998. (e) As if all former Partnership income was subject to corporate income tax, exclusive of the charge in (c) above. (f) Excludes non-recurring distributions of the former Partnership. (g) Defined as cash provided by operating activities before changes in working capital. (h) For purposes of calculating this ratio, earnings include income (loss) from continuing operations before income tax and fixed charges. Fixed charges include interest expense, the portion of rentals (calculated as one-third) considered to be representative of the interest factor and preferred stock dividends. (i) Includes effect of the charge in (b) above. Excluding the effect of this charge, the ratio of earnings to fixed charges is 1.3. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Cross Timbers Oil Company ("the Company") was organized in October 1990 to ultimately acquire the business and properties of predecessor entities that were created from 1986 through 1989. The Company completed its initial public offering of common stock in May 1993. The Company follows the successful efforts method of accounting (see Note 1 to Consolidated Financial Statements). As of October 1, 1995, the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, recording a pre-tax, non-cash impairment charge of $20.3 million. The Company has implemented the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, but continues to record compensation of stock-based awards using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. As of December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share, which requires that basic and diluted earnings per share be reported for all periods. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting of Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company will be required to comply with the provisions of these statements in its 1998 financial statements. The Company has not assessed the effect that these new standards will have on its consolidated financial statements and/or disclosures. In addition to the adoption of accounting principles described above, the following events affect the comparative results of operations and/or financial condition for the years ended December 31, 1997, 1996 and 1995, and/or may impact future operations and financial condition. Throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, references to barrels of oil equivalent ("BOE") refer to quantities of production for the indicated period (with gas quantities converted to barrels on an energy equivalent ratio of six Mcf to one barrel). Three-for-Two Stock Splits. The Company effected a three-for-two stock split on March 19, 1997, and on February 25, 1998. All common stock shares, treasury stock shares and per share amounts have been retroactively restated to reflect both stock splits. 1998 Acquisition. On February 25, 1998, the Company announced it had entered into a definitive agreement with EEX Corporation to acquire producing properties and undeveloped acreage in East Texas. The transaction is expected to close in late April 1998 with an effective date of January 1, 1998 and to be financed through bank lines of credit. After purchase price adjustments, the preliminary purchase price of $265 million is expected to be reduced to $245 million. 1997 Acquisitions. During 1997, the Company acquired predominantly gas- producing properties for a total cost of $256 million. The Amoco Acquisition, the largest of these acquisitions, closed December 1, 1997 for an estimated adjusted purchase price of $195 million, including $5.7 million for five-year warrants to purchase 937,500 shares of the Company's common stock at $15.31 per share, and consisted of producing oil and gas properties in the San Juan Basin of New Mexico. On May 14, 1997, the Company acquired primarily gas-producing properties in Oklahoma, Kansas and Texas for an estimated adjusted purchase price of $39 million from a subsidiary of Burlington Resources, Inc. During 1997, the Company acquired an additional 6% of the publicly traded outstanding units of beneficial interest in Cross Timbers Royalty Trust, at a cost of $5.4 million. These 1997 acquisitions were primarily funded by bank borrowings and cash flow from operations (see "Liquidity and Capital Resources-Financing" below). See Note 10 to Consolidated Financial Statements. 1996 Acquisitions. In 1996, the Company acquired primarily gas-producing properties for a total cost of $106 million. The Enserch Acquisition, the largest of these acquisitions, closed in July 1996 at a cost of $39.4 million and primarily consisted of operated interests in the Green River Basin of southwestern Wyoming. In November 1996, the Company acquired additional interests in the Fontenelle Unit, the most significant property included in the Enserch Acquisition, at a cost of $12.5 million. In December 1996, the Company acquired primarily operated interests in gas-producing properties in the Ozona area of the Permian Basin of West Texas for $28.1 million. From July through December 1996, the Company acquired 16% of the publicly traded outstanding units of beneficial interest in Cross Timbers Royalty Trust at a total cost of $12.8 million. These 1996 acquisitions were primarily funded by bank borrowings. See Note 10 to Consolidated Financial Statements. 18 1995 Acquisitions. During 1995, the Company acquired predominantly gas- producing properties for a total cost of $131 million, and a gas processing plant and gathering facility for $29 million. The Santa Fe Acquisition, the largest of these acquisitions, closed on August 1, 1995 and consisted of mostly operated properties and related facilities in the Hugoton Field of Kansas and Oklahoma. The 1995 acquisitions were primarily funded by bank borrowings and proceeds from the 1995 common stock offering and asset sales. See Note 10 to Consolidated Financial Statements. 1997, 1996 and 1995 Development and Exploration Programs. During 1997, the Company drilled 60 oil and 109 gas wells and completed 100 recompletions and workovers. During 1996, the Company drilled 48 oil wells and 52 gas wells and completed 125 recompletions and workovers. In 1995, the Company drilled 40 wells and performed 61 recompletions and workovers. Oil development was concentrated in the Prentice Northeast Unit of West Texas during these three years, as well as the University Block 9 Field during 1997. Gas development focused on the Ozona Field of West Texas in the last half of 1997, the Fontenelle Unit of southwestern Wyoming during 1997 and 1996 and Major County, Oklahoma during 1996 and 1995. Exploration activity during 1997 was primarily geological and geophysical analysis, including seismic, of undeveloped properties at total cost of $2.1 million. Exploration activity was concentrated in Cleveland and Texas counties of Oklahoma, Henderson County, Texas, Lea County, New Mexico and the Illinois Basin. Exploratory expenditures were insignificant in 1996 and 1995. 1998 Development and Exploration Program. The Company has budgeted $70 to $90 million for its 1998 development and exploration program which is expected to be funded primarily by cash flow from operations. Exploration expenditures are expected to be 10% to 15% of the 1998 budget. The total capital budget, including acquisitions, will be adjusted throughout 1998 to capitalize on opportunities offering the highest rates of return. 1997 Senior Subordinated Notes. The Company sold $125 million of 9 1/4% senior subordinated notes on April 2, 1997 and $175 million of 8 3/4% senior subordinated notes on October 28, 1997. Net proceeds of $121.1 million and $169.9 million from the 9 1/4% Notes and 8 3/4% Notes, respectively, were used to reduce bank borrowings under the loan agreement. See Note 2 to Consolidated Financial Statements. 1997 and 1996 Conversion of Subordinated Notes. During November and December 1996, $27.7 million principal of the Company's 5 1/4% convertible subordinated notes was converted by noteholders into 2,696,521 shares of common stock. In January 1997, the remaining principal of $29.7 million was converted by noteholders into 2,892,363 shares of common stock and $29,000 was redeemed. 1996 Preferred Stock Exchange. In September 1996, pursuant to the Company's exchange offer, a total of 2,979,249 shares of common stock were exchanged for 1,138,729 shares of Series A convertible preferred stock. See Note 5 to Consolidated Financial Statements. 1995 Common Stock Offering. In August 1995, the Company sold 5,062,500 shares of common stock. The net proceeds of $29.5 million from this offering were used to partially fund the Santa Fe Acquisition. 1997 and 1996 Treasury Stock Purchases. As part of its 1997 and 1996 strategic acquisition plans, the Board of Directors has authorized the purchase of a total of 7.5 million shares of the Company's common stock. During 1997 and 1996, the Company purchased 2.4 million and 2.9 million shares of common stock on the open market at a total cost of $28 million and $30.7 million, respectively. An additional 484,000 shares have been purchased through March 20, 1998 at a cost of $7.5 million. These purchases were primarily funded by bank borrowings. As of March 20, 1998, 1.7 million treasury shares remain available to purchase. Investment in Equity Securities. During 1997 and 1996, the Company acquired less than 5% of two publicly traded independent oil and gas producers at a total cost of $6.5 million and $16.1 million, respectively. During 1997, the Company sold its investment in equity securities at a gain of $2.4 million. The Company realized a gain of $1.6 million upon the sale of an investment in equity securities during 1995. Property Sales. In 1997, 1996 and 1995, sales of producing properties resulted in net gains of $1.8 million, $500,000 and $3 million, respectively. 19 Stock Incentive Compensation. Stock incentive compensation includes stock appreciation right ("SAR") compensation and performance share compensation, and is the result of these stock awards and subsequent increases in the Company's stock price. See Note 9 to Consolidated Financial Statements. During 1997, stock incentive compensation totaled $3.7 million, which included SAR compensation of $400,000 (cash payments of $300,000) and non-cash performance share compensation of $3.3 million. In 1996, stock incentive compensation totaled $6.2 million, which included SAR compensation of $3.7 million (cash payments of $7.1 million, partially offset by prior accruals) and non-cash performance share compensation of $2.5 million. During 1995, stock incentive compensation totaled $5.1 million, which included SAR compensation of $2.3 million (cash payments of $800,000) and non-cash performance share compensation of $2.8 million. Exercises and forfeitures under the 1991 Stock Incentive Plan have reduced outstanding stock incentive units (including SARs) from 836,000 at year-end 1995 to 51,000 at year-end 1996, and 25,000 at year-end 1997. Extraordinary Item. During 1995, the Company recognized an extraordinary gain of $700,000 (net of income tax of $300,000) as a result of the purchase and early retirement of $8.3 million principal amount of the Company's 5 1/4% convertible subordinated notes. In 1996, the Company redeemed, purchased and retired a total of $9 million principal amount of the notes at a loss before income tax of $400,000. This loss was not presented as an extraordinary item because it was not material to 1996 earnings. Product Prices. Oil and gas prices are affected not only by supply and demand factors, but are also subject to substantial seasonal, political and other fluctuations that are generally beyond the ability of the Company to control or predict. Crude oil prices are generally affected by global politics and supply, particularly among OPEC members. The average posted per barrel price of West Texas Intermediate ("WTI") oil, a benchmark crude, was $18.63, $20.45 and $16.77 in 1997, 1996 and 1995, respectively. Despite the anticipation of and eventual resumption of Iraqi exports, oil prices reached their highest levels since the 1990 Persian Gulf War during fourth quarter 1996 and January 1997. After demand slightly outpaced supply in January 1997, the crude oil market remained in balance during most of the year, supporting prices in the range of $17 to $20 per barrel, before sliding to an average posted WTI price of $16.18 in December. Further declines in 1998 have resulted in an average posted WTI price of $14.22 for January and February. The recent weakening in oil prices is due to increased OPEC production following its November 1997 decision to increase quotas, as well as increased non-OPEC production from the North Sea and Latin America. The price decline has also been attributed to mild winters in the U.S. and Europe and the sudden drop in demand from depressed economies in the Far East. After hitting a decade low of $11.00, prices in late March 1998 began to increase upon news that some of the major oil exporting countries planned to meet regarding curtailment of production. Based on 1997 production, the Company estimates that a $1.00 per barrel increase or decrease in the average oil sales price would result in approximately a $3.8 million change in 1998 annual income before income tax. Natural gas prices are generally influenced by national and regional supply and demand, which is often dependent upon the weather. Specific gas prices are also based on the location of production, pipeline capacity, gathering charges and the energy content of the gas. Throughout most of 1995, gas prices were relatively weak, primarily because of unseasonably warm weather. Gas prices increased in fourth quarter 1995 and continued their upward spiral through February 1996 because of low storage levels and colder than expected weather. Generally because of colder weather, storage concerns and U.S. economic growth, prices remained relatively high during most of 1996 and 1997, reaching their highest levels since 1985. Gas prices declined, however, in December 1997 and have remained lower in first quarter 1998, primarily because of an abnormally mild winter in the central and eastern U.S. and elevated storage levels. Despite continued growth in domestic demand, 1998 gas prices will largely depend on the weather, gas storage levels, increased supplies resulting from domestic exploration and Canadian imports, and price competition from other energy sources. Based on 1997 production, the Company estimates that a $0.10 per Mcf increase or decrease in the average gas sales price would result in approximately a $4.5 million change in 1998 annual income before income tax. See Note 6 to Consolidated Financial Statements regarding commodity price hedging instruments the Company has entered to reduce its exposure to gas price fluctuations. 20 RESULTS OF OPERATIONS 1997 COMPARED TO 1996 Earnings available to common stock for 1997 were $23.9 million as compared with $19.8 million for 1996. This significant improvement in earnings was the result of higher gas prices and increased gas production from the 1996 and 1997 acquisitions and development programs. Results for 1997 and 1996 included the effects of stock incentive compensation of $3.7 million and $6.2 million, respectively. Also included in 1997 results were net gains on sale of properties and equity securities of $1.8 million and $2.4 million, respectively, and lawsuit settlement proceeds of $1.3 million. A $500,000 gain on sale of properties was included in 1996 results. Earnings for 1997 and 1996 were reduced by dividends of $1.8 million and $500,000, respectively, on preferred stock issued in September 1996. Revenues for 1997 were $200.7 million, or 24% above 1996 revenues of $161.4 million. Oil revenue remained constant as a 13% increase in oil production was offset by a 12% decrease in oil prices from an average of $21.38 in 1996 to $18.90 in 1997 (see "General-Product Prices" above). Increased production was primarily because of the 1997 acquisitions and development programs. Gas revenue increased $36.7 million or 50% because of a 33% increase in production combined with a 12% price increase (see "General-Product Prices" above). Increased gas production was attributable to the 1996 and 1997 acquisitions and development programs. Gas revenues for 1997 also included $800,000 from San Juan Basin natural gas liquids production attributable to the December 1997 Amoco Acquisition. Gas gathering, processing and marketing revenues decreased $2.2 million primarily because of a decrease in margin and gas volumes. Other revenues increased $4.6 million primarily because of increased net gains on sale of properties and equity securities and lawsuit settlement proceeds received in 1997. Expenses for 1997 totaled $161.5 million as compared with total 1996 expenses of $130.4 million. All expenses other than general and administrative expense increased in 1997 primarily because of the 1996 and 1997 acquisitions and exploration and development programs. Production expense increased $4.2 million or 11%. Per BOE, production expense decreased from $4.05 to $3.54. This decrease is primarily because of the lower operating costs of gas-producing properties acquired in 1996 and 1997, the timing of workovers, increasing production without comparable increases in lifting costs and other operating efficiencies initiated after acquiring operated properties. Exploration expense for 1997 totaled $2.1 million, and were predominantly geological and geophysical costs related to the 1997 exploration program. Exploration costs in 1996 and prior were included in production expense since not significant. Taxes on production and property increased 37% or $4.5 million because of increased oil and gas revenues, as well as increased property taxes related to the 1996 and 1997 acquisitions. Taxes on production and property per BOE increased 8% from $1.23 to $1.33 because of increased gas prices and higher property tax rates. Depreciation, depletion and amortization ("DD&A") increased $9.9 million, or 26%, primarily because of the 1996 and 1997 acquisitions and development programs. On a BOE basis, DD&A decreased slightly from $3.89 in 1996 to $3.87 in 1997. General and administrative expense decreased $602,000, or 4%, because of a $2.5 million decrease in stock incentive compensation, partially offset by increased expenses from Company growth. Excluding stock incentive compensation, general and administrative expense per BOE was $0.99 in 1997 as compared to $1.04 in 1996. Gas gathering and processing expense increased $1.6 million or 23%. This increase was primarily because of rental expense related to the Tyrone plant and gathering system lease that began in March 1996 and the Major County, Oklahoma gathering system lease that began in November 1996. This increase offsets related decreases in DD&A and interest. Interest expense increased $9.6 million or 56% because of a 36% increase in weighted average borrowings to partially fund the 1996 and 1997 acquisitions and purchases of treasury stock, combined with a 20% increase in the 21 weighted average interest rate. Weighted average principal outstanding during 1997 was $351 million at an average interest rate of 7.6% compared with weighted average principal of $259 million at 6.4% for 1996. Interest expense per BOE increased from $1.76 in 1996 to $2.16 in 1997 primarily as the result of an increase in the weighted average interest rate (primarily attributable to the senior subordinated notes sold in April and October 1997), as well as the result of financing expenditures for other than oil and gas producing properties (investment in equity securities and treasury stock purchases) with bank and other short-term borrowings. 1996 COMPARED TO 1995 Earnings available to common stock for 1996 were $19.8 million as compared to a net loss of $10.5 million for 1995. Significantly improved results were because of higher oil and gas prices and increased gas production from the 1995 and 1996 acquisitions and development programs. Additionally, 1995 results included a $20.3 million, pre-tax, non-cash impairment charge recorded upon adoption of SFAS 121. Results for 1996 and 1995 included the effects of stock incentive compensation of $6.2 million and $5.1 million, respectively. Also included in 1995 results were net gains on sale of properties and equity securities of $3 million and $1.6 million, respectively, and a $700,000 extraordinary gain on the Company's purchase and retirement of a portion of its convertible subordinated notes. Earnings for 1996 have been reduced by dividends of $500,000 on preferred stock that was issued in September 1996. Revenues for 1996 were $161.4 million, or 43% above 1995 revenues of $112.9 million. Oil revenue increased $14.7 million or 24% primarily because of a 25% increase in oil prices from an average of $17.09 in 1995 to $21.38 in 1996 (see "General- Product Prices" above). The Company's 1996 average oil price was above the average WTI price of $20.45 because of improved oil marketing margins. Oil production declined 1% from 1995 to 1996 primarily because of property sales and natural decline, largely offset by the effects of the 1995 and 1996 acquisitions and development programs. Gas revenue increased $32.9 million or 81% because of a 39% price increase (see "General- Product Prices" above) combined with a 30% increase in production. Increased gas production was attributable to the 1995 and 1996 acquisitions and development programs. Gas gathering, processing and marketing revenues increased $4.9 million primarily because of revenues from the gas processing plant and gathering facility acquired as part of the Santa Fe Acquisition on August 1, 1995. Other revenues decreased $4 million primarily because of net gains on sale of properties and equity securities in 1995. Expenses for 1996 totaled $130.4 million as compared with total 1995 expenses of $129.9 million. Expenses for 1995 included the $20.3 million impairment charge recorded upon adoption of SFAS No. 121 in October 1995. All expenses other than impairment increased in 1996 primarily because of the 1995 and 1996 acquisitions. Production expense increased $4 million or 11%. Per BOE, production expense decreased from $4.26 to $4.05. This decrease is primarily because the 1995 and 1996 acquisitions were predominantly gas-producing properties that generally have lower production costs per BOE. Taxes on production and property increased 38% or $3.3 million because of increased oil and gas revenues. Taxes on production and property per BOE increased 18% from $1.04 to $1.23 primarily because of higher oil and gas prices. Depreciation, depletion and amortization ("DD&A") increased $1 million, or 3%, primarily because of the 1995 and 1996 acquisitions and development programs. On a BOE basis, DD&A decreased from $4.44 in 1995 to $3.89 in 1996. Decreased DD&A per BOE is the result of increased proved reserve estimates at January 1, 1996, reduced depletable costs resulting from the SFAS 121 provision recorded in fourth quarter 1995, and the sale and operating leaseback of the Tyrone gas processing plant and related gathering system. General and administrative expense increased $3.3 million, or 25%, because of Company growth and increased stock incentive compensation. Excluding stock incentive compensation, general and administrative expense per BOE was $1.04 in 1996 as compared to $0.97 in 1995. 22 Gas gathering and processing expense increased from $2.5 million in 1995 to $6.9 million in 1996. This increase was primarily because of rental expense related to the Tyrone plant and gathering system lease that began in March 1996. This increase offsets related decreases in DD&A and interest. Interest expense increased $4.5 million or 36% primarily because of increased debt to partially fund the 1995 and 1996 acquisitions and purchases of treasury stock and equity securities. Weighted average principal outstanding during 1996 was $259 million at an average interest rate of 6.4% compared with weighted average principal of $195.1 million at 6.2% for 1995. Interest expense per BOE increased from $1.51 in 1995 to $1.76 in 1996 primarily because of financing expenditures for other than oil and gas producing properties with bank and other short-term borrowings. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flow from operating activities, public offerings of equity and debt, and bank debt. The Company's cash requirements, other than for operations, are generally for the acquisition, exploration and development of oil and gas properties, and debt and dividend payments. The Company believes that its sources of liquidity are adequate to fund its cash requirements during 1998. Cash provided by operating activities was $98 million in 1997, compared with $59.7 million in 1996 and $32.9 million in 1995. The fluctuation from 1996 to 1997 was primarily because of increased gas prices and production, combined with the timing of cash receipts. Before changes in working capital, cash flow from operations was $90 million, $68.3 million and $40.4 million in 1997, 1996 and 1995, respectively. The 1997, 1996 and 1995 acquisitions were primarily financed by proceeds from long-term debt borrowings. The 1995 acquisitions were also partially funded by proceeds from a public offering of common stock. Exploration and development expenditures and dividend payments have generally been funded by cash flow from operations. Financial Condition Total assets increased from $523 million at December 31, 1996 to $788 million at December 31, 1997, primarily because of the 1997 acquisitions. As of December 31, 1997, total capitalization of the Company was $709 million, of which 76% was long-term debt. This compares with capitalization of $457 million at December 31, 1996, of which 69% was long-term debt. The increase in the debt-to-capitalization ratio from year-end 1996 to 1997 is because of increased borrowings under the Company's loan agreement to fund the 1997 acquisitions and other capital expenditures (see "Financing" below). Working Capital The Company generally uses available cash to reduce bank debt and, therefore, does not maintain large cash and cash equivalent balances. Short- term liquidity needs are satisfied by bank commitments under the loan agreement (see "Financing" below). Because of this, and since the Company's principal source of operating cash flows (i.e., proved reserves to be produced in the following year) cannot be reported as working capital, the Company often has low or negative working capital. Financing On November 21, 1997, the Company entered into a new Revolving Credit Agreement with commercial banks ("loan agreement"). As of December 31, 1997, the loan agreement had a borrowing base and commitment of $365 million with resulting unused borrowing capacity of $136 million. The interest rate on borrowings at December 31, 1997 was 7.1%. The Company periodically renegotiates the loan agreement to increase the borrowing commitment and extend the revolving facility; however, there is no assurance that the Company will continue to do so in the future. After the anticipated closing of the EEX Acquisition in April 1998, the Company expects the borrowing base and commitment to be at least $560 million. The borrowing base is redetermined annually based on the value and expected cash flow of the Company's proved oil and gas reserves. If outstanding borrowings are greater than the redetermined borrowing base, outstanding borrowings must be reduced to the level of the redetermined borrowing base within a specified period. Otherwise, 23 borrowings under the loan agreement do not mature until December 31, 2002, but may be prepaid at any time without penalty. During 1995, the Company purchased and retired $8.3 million principal amount of its 5 1/4% convertible subordinated notes ("5 1/4% Notes"), resulting in an extraordinary gain of $700,000. During 1996, the Company redeemed, purchased and retired a total of $9 million principal amount of the notes at a loss of $400,000, and holders of the 5 1/4% Notes converted principal of $27.7 million into 2,696,521 shares of common stock. In January 1997, the remaining $29.7 million of the 5 1/4% Notes was converted by noteholders into 2,892,363 shares of common stock and $29,000 was redeemed. In August 1995, the Company sold 5.1 million shares of common stock for net proceeds of $29.5 million that were used to partially fund the Santa Fe Acquisition. In September 1996, pursuant to the Company's exchange offer, a total of 2,979,249 shares of common stock were exchanged for 1,138,729 shares of Series A convertible preferred stock. In April 1997, the Company sold $125 million of 9 1/4% senior subordinated notes ("9 1/4% Notes") and in October 1997, the Company sold $175 million of 8 3/4% senior subordinated notes ("8 3/4% Notes"). Net proceeds of $121.1 million and $169.9 million from the sale of 9 1/4% Notes and the 8 3/4% Notes, respectively, were used to reduce bank borrowings under the loan agreement. See Note 2 Consolidated Financial Statements. On February 25, 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission to potentially offer securities which may include debt securities, preferred stock, common stock or warrants to purchase debt securities, preferred stock or common stock. The securities will be offered at an aggregate offering price not to exceed $200 million, at prices and on terms to be determined at the time of the sale. Net proceeds from the sale will be used for general corporate purposes, including reduction of bank borrowings under the loan agreement. Capital Expenditures In May 1997, the Company announced its plan to make strategic acquisitions totaling $260 to $280 million from that date through the end of 1999. As a result of closing the Amoco Acquisition in December 1997 at an estimated cost of $195 million and the expected closing of the EEX Acquisition in April 1998 at an estimated cost of $245 million, the Company has significantly exceeded this goal. Acquisition costs totaled $255.6 million, $105.8 million and $131.3 million during 1997, 1996 and 1995, respectively. Producing property acquisitions include purchases of outstanding beneficial units ("Units") of Cross Timbers Royalty Trust at a cost of $5.4 million for 6% of the Units in 1997 and $12.8 million for 16% of the Units in 1996. As of December 31, 1997, the Company owned 1,326,300 Units; the Board of Directors has authorized a total purchase of up to two million Units. Acquisitions were primarily funded by bank debt. See Note 10 to Consolidated Financial Statements. The Company continues to pursue acquisitions that meet its criteria, although there are no assurances that such properties will be available. The Company plans to fund future acquisitions through a combination of cash flow from operations and bank borrowings; proceeds from public equity and debt transactions may also be utilized. In 1997, exploration and development cash expenditures totaled $90.5 million compared with the budget of $70 million. On an incurred basis, exploration and development costs for 1997 totaled $88.6 million. In 1996, exploration and development cash expenditures totaled $32.3 million, compared with the budget of $40 million. The Company has budgeted $70 to $90 million for the 1998 development program. As it has done historically, the Company expects to fund the 1998 development program from cash flow from operations. Since there are no material long-term commitments associated with this budget, the Company has the flexibility to adjust its actual development expenditures in response to changes in product prices, industry conditions, and the effects of the Company's acquisition and development programs. A minor portion of the Company's existing properties are operated by third parties which control the timing and amount of expenditures required to exploit the Company's interests in such properties. Therefore, the Company can give no assurances regarding the timing or amount of such expenditures. 24 To date, the Company's expenditures to comply with environmental or safety regulations have not been significant, and the Company currently does not expect such expenditures to be significant during 1998. However, developments such as new regulations, enforcement policies or claims for damages could result in significant future costs. Dividends The Board of Directors has declared quarterly dividends of $0.033 per common share since the Company's inception through 1996 and $0.037 per common share in 1997. In January 1998, the Board of Directors increased the quarterly dividend to $0.04 per share, or $6.2 million annually. Continued dividend payments are dependent upon available cash flow, as well as other factors. In addition, the Company's loan agreement restricts the amount of common stock dividends to 25% of operating cash flow for the last four quarters. Cumulative dividends on Series A convertible preferred stock are paid quarterly, when declared by the Board of Directors, based on an annual rate of $1.5625 per share, or $1.8 million annually. Year 2000 The Company is in the process of reviewing and making necessary modifications to its computer systems for year 2000 compliance. Costs incurred to date to modify the Company's computer systems have not been material, and future costs are not expected to be material. Timely completion of such modifications is not considered to be a material risk to the Company. The Company currently does not have information regarding the year 2000 compliance status of its major suppliers and customers. In the event that any of the Company's significant suppliers or customers does not timely achieve year 2000 compliance, the Company's operations could be adversely affected. PRODUCTION IMBALANCES The Company has gas production imbalance positions that are the result of partial interest owners selling more or less than their proportionate share of gas on jointly owned wells. Imbalances are generally settled by disproportionate gas sales over the remaining life of the well or by cash payment by the overproduced party to the underproduced party. The Company uses the entitlement method of accounting for natural gas sales. At December 31, 1997, the Company's consolidated balance sheet includes a net receivable of $5.1 million for a net underproduced balancing position of 1,114,000 Mcf of natural gas and 8,049,000 Mcf of carbon dioxide. Production imbalances do not have, and are not expected to have, a significant impact on the Company's liquidity or operations. DERIVATIVES The Company uses derivatives on a limited basis to hedge interest rate and product price risks, as opposed to their use for trading purposes. To reduce variable interest rate exposure on debt, the Company had entered into a series of interest rate swap agreements, the last of which expired September 1996. The Company had no other significant derivative transactions or balances from 1994 to 1997. During the first quarter of 1998, the Company entered into several derivative transactions to hedge its exposure to price fluctuations for gas production from January 1998 through December 2000. See Note 6 to Consolidated Financial Statements. FORWARD-LOOKING STATEMENTS Certain statements included in this Item 7, as well as statements included in Items 1 and 2 of this report, relating to future development expenditures, strategic acquisitions, proved reserves and other matters of anticipated financial and operating performance constitute forward-looking statements. These statements are based on assumptions concerning oil and gas prices, drilling results and production, and administrative and other costs that management believes are reasonable based on currently available information. However, management's assumptions and the Company's future performance are both subject to a wide range of risks, uncertainties and other factors that could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward- looking statements. Risks and uncertainties that may affect the operations and results of the Company's performance include, but are not limited to, commodity price fluctuations, competitive energy supplies, market demand, drilling risks, governmental regulations and uncertainties of proved reserve estimates. In 25 addition, potential producing property acquisitions that meet the Company's profitability, size, and geographic and other criteria may not be available on acceptable economic terms. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary information are included under Item 14(a):
Page ---- Consolidated Balance Sheets......................... 28 Consolidated Statements of Operations............... 29 Consolidated Statements of Cash Flows............... 30 Consolidated Statements of Stockholders' Equity..... 31 Notes to Consolidated Financial Statements.......... 32 Report of Independent Public Accountants............ 49 Selected Quarterly Financial Data (Note 11 to Consolidated Financial Statements)..... 45 Information about Oil and Gas Producing Activities (Note 12 to Consolidated Financial Statements)..... 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except for the portion of Item 10 relating to Executive Officers of the Registrant which is included in Part I of this Report, the information called for by Items 10 through 13 is incorporated by reference from the Company's Notice of Annual Meeting and Proxy Statement to be filed with the Securities and Exchange Commission no later than April 30, 1998. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: Page ---- 1. Financial Statements: Consolidated Balance Sheets at December 31, 1997 and 1996..........28 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.................................29 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.................................30 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.................................31 Report of Independent Public Accountants...........................49 2. Financial Statement Schedules: All financial schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes to financial statements. 3. Exhibits: See Index to Exhibits at page 51 for a description of the exhibits filed as a part of this report. (b) Reports on Form 8-K The Company filed the following reports on Form 8-K during the quarter ended December 31, 1997 and through March 27, 1998: On December 16, 1997, the Company filed a report on Form 8-K dated December 1, 1997 regarding its acquisition of certain producing oil and gas properties in the San Juan Basin of New Mexico from a subsidiary of Amoco Corporation. On February 17, 1998, the Company filed a report on Form 8-K/A (Amendment No. 1 to Form 8-K dated December 1, 1997) to file financial statements for the acquisition of certain producing oil and gas properties in the San Juan Basin of New Mexico from a subsidiary of Amoco Corporation. On February 23, 1998, the Company filed a report on Form 8-K dated February 18, 1998 regarding the issuance of news release number 98-04 announcing earnings for the quarter and year ended December 31, 1997. On February 25, 1998, the Company filed a report on Form 8-K dated February 25, 1998 regarding its intent to acquire producing properties and undeveloped acreage in the East Texas Basin from EEX Corporation. 27 CROSS TIMBERS OIL COMPANY CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
(in thousands) DECEMBER 31 ------------------------ 1997 1996 ------------ ---------- ASSETS Current Assets: Cash and cash equivalents............................................. $ 3,816 $ 3,937 Accounts receivable, net (Note 6)..................................... 43,996 44,320 Deferred income tax benefit (Note 3).................................. 445 558 Other current assets.................................................. 3,905 2,965 --------- --------- Total Current Assets................................................ 52,162 51,780 --------- --------- Property and Equipment, at cost -- successful efforts method (Notes 1 and 2): Producing properties.................................................. 931,259 639,990 Undeveloped properties................................................ 6,406 2,493 Other property and equipment.......................................... 23,703 16,470 --------- --------- Total Property and Equipment.......................................... 961,368 658,953 Accumulated depreciation, depletion and amortization.................. (237,532) (208,392) --------- --------- Net Property and Equipment.......................................... 723,836 450,561 --------- --------- Investment in Equity Securities, at market value........................ - 16,714 --------- --------- Other Assets............................................................ 12,457 4,015 --------- --------- TOTAL ASSETS............................................................ $ 788,455 $ 523,070 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities.............................. $ 52,266 $ 45,729 Payable to Royalty Trust.............................................. 2,073 2,770 Accrued stock incentive compensation (Note 9)......................... 554 483 Short-term debt (Note 2).............................................. - 3,000 --------- --------- Total Current Liabilities........................................... 54,893 51,982 --------- --------- Long-term Debt (Note 2)................................................. 539,000 314,757 --------- --------- Deferred Income Taxes Payable (Note 3).................................. 21,320 10,323 --------- --------- Other Long-term Liabilities (Note 4).................................... 2,999 3,340 --------- --------- Commitments and Contingencies (Note 4) Stockholders' Equity (Note 5): Series A convertible preferred stock ($.01 par value, 25,000,000 shares authorized, 1,138,729 issued, at liquidation value of $25).. 28,468 28,468 Common stock ($.01 par value, 100,000,000 shares authorized, 46,310,710 and 42,314,965 shares issued)........................... 463 423 Additional paid-in capital............................................ 210,954 164,436 Treasury stock (6,860,779 and 3,868,171 shares)....................... (76,656) (40,219) Unrealized gain on investment in equity securities.................... - 638 Retained earnings (deficit)........................................... 7,014 (11,078) --------- --------- Total Stockholders' Equity.......................................... 170,243 142,668 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 788,455 $ 523,070 ========= =========
See accompanying notes to consolidated financial statements. 28 CROSS TIMBERS OIL COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
(in thousands, except per share data) YEAR ENDED DECEMBER 31 ---------------------------- 1997 1996 1995 -------- -------- -------- REVENUES Oil and condensate................................... $ 75,223 $ 75,013 $ 60,349 Gas and natural gas liquids.......................... 110,104 73,402 40,543 Gas gathering, processing and marketing.............. 9,851 12,032 7,091 Other................................................ 5,494 944 4,922 -------- -------- -------- Total Revenues....................................... 200,672 161,391 112,905 -------- -------- -------- EXPENSES Production........................................... 43,580 39,365 35,338 Exploration.......................................... 2,088 - - Taxes on production and property..................... 16,405 11,944 8,646 Depreciation, depletion and amortization............. 47,721 37,858 36,892 Impairment (Note 1).................................. - - 20,280 General and administrative (Note 9).................. 15,818 16,420 13,156 Gas gathering and processing......................... 8,517 6,905 2,528 Interest, net........................................ 26,677 17,072 12,523 Trust development costs.............................. 665 854 561 -------- -------- -------- Total Expenses....................................... 161,471 130,418 129,924 -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM.............................. 39,201 30,973 (17,019) Income Tax Expense (Benefit) (Note 3)................ 13,517 10,669 (5,825) -------- -------- -------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......... 25,684 20,304 (11,194) EXTRAORDINARY ITEM (Note 1).......................... - - 656 -------- -------- -------- NET INCOME (LOSS).................................... 25,684 20,304 (10,538) Preferred stock dividends............................ 1,779 514 - -------- -------- -------- EARNINGS (LOSS) AVAILABLE TO COMMON STOCK............ $ 23,905 $ 19,790 $(10,538) ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE (Notes 1 and 7) Basic............................................... $0.60 $0.50 $(0.28) ======== ======== ======== Diluted............................................. $0.59 $0.48 $(0.28) ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 5).. 39,773 39,913 38,072 ======== ======== ========
See accompanying notes to consolidated financial statements. 29 CROSS TIMBERS OIL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
(in thousands) (Note 8) YEAR ENDED DECEMBER 31 --------------------------------- 1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES Net income (loss)...................................................... $ 25,684 $ 20,304 $ (10,538) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization............................. 47,721 37,858 36,892 Impairment........................................................... - - 20,280 Exploration.......................................................... 2,088 - - Performance share compensation....................................... 3,315 2,545 2,945 Accrued stock appreciation right compensation........................ 71 (3,398) 1,447 Deferred income tax.................................................. 13,393 10,213 (6,023) Gain from sale of properties and equity securities................... (4,157) (576) (4,520) Extraordinary item................................................... - - (656) Other non-cash items................................................. 1,864 1,317 612 Changes in working capital (a)....................................... 8,027 (8,569) (7,501) --------- --------- --------- CASH PROVIDED BY OPERATING ACTIVITIES.................................. 98,006 59,694 32,938 --------- --------- --------- INVESTING ACTIVITIES Sale of equity securities.............................................. 24,626 402 16,923 Investment in equity securities........................................ (6,479) (16,093) (123) Sale of property and equipment......................................... 17,972 37,388 13,095 Property acquisitions.................................................. (238,294) (109,535) (131,342) Exploration and development costs...................................... (90,470) (32,291) (19,296) Gas plant, gathering and other additions............................... (18,677) (4,742) (39,673) --------- --------- --------- CASH USED BY INVESTING ACTIVITIES...................................... (311,322) (124,871) (160,416) --------- --------- --------- FINANCING ACTIVITIES Proceeds from long-term debt........................................... 688,400 188,000 193,000 Payments on long-term debt............................................. (437,430) (81,200) (96,040) Proceeds from sale of common stock, net................................ - - 29,450 Dividends.............................................................. (7,571) (5,339) (4,951) Proceeds on exercise of stock options.................................. 750 904 744 Preferred stock exchange offer costs................................... - (540) - Purchase of treasury stock............................................. (30,954) (34,923) (351) --------- --------- --------- CASH PROVIDED BY FINANCING ACTIVITIES.................................. 213,195 66,902 121,852 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (121) 1,725 (5,626) CASH AND CASH EQUIVALENTS, JANUARY 1................................... 3,937 2,212 7,838 --------- --------- --------- CASH AND CASH EQUIVALENTS, DECEMBER 31................................. $ 3,816 $ 3,937 $ 2,212 ========= ========= ========= (a) CHANGES IN WORKING CAPITAL Accounts receivable................................................ $ 246 $ (16,999) $ (9,365) Other current assets............................................... (970) (1,683) 963 Accounts payable, accrued liabilities and payable to Royalty Trust. 8,751 10,113 901 --------- --------- --------- DECREASE (INCREASE) IN WORKING CAPITAL............................... $ 8,027 $ (8,569) $ (7,501) ========= ========= =========
See accompanying notes to consolidated financial statements. 30 CROSS TIMBERS OIL COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
(in thousands) (Note 5) SHARES STOCKHOLDERS' EQUITY ---------------------------------- ----------------------------------------------------------- COMMON STOCK ------------------- ADDITIONAL RETAINED PREFERRED IN PREFERRED COMMON PAID-IN TREASURY EARNINGS STOCK ISSUED TREASURY STOCK STOCK CAPITAL STOCK (DEFICIT) ---------- -------- --------- ------------ --------- ---------- -------- ---------- BALANCES, DECEMBER 31, 1994... - 35,833 2 $ - $ 358 $123,054 $ (11) $ (9,953) Sale of common stock.......... - 5,062 - - 50 29,400 - - Issuance of performance shares....................... - 369 - - 4 2,943 - - Stock option exercises........ - 170 67 - 2 1,043 (517) - Common stock dividends ($0.13 per share)............ - - - - - - - (5,135) Net loss...................... - - - - - - - (10,538) ---------- -------- --------- ------------ --------- ---------- -------- ---------- BALANCES, DECEMBER 31, 1995... - 41,434 69 - 414 156,440 (528) (25,626) Issuance/vesting of performance shares........... - 168 106 - 2 2,673 (1,038) - Stock option exercises........ - 996 768 - 10 7,189 (7,931) - Treasury stock purchases...... - - 2,925 - - - (30,722) - Exchange of Series A convertible preferred stock for common stock............ 1,139 (2,979) - 28,468 (30) (28,978) - - Conversion of subordinated convertible notes to common stock................ - 2,696 - - 27 27,112 - - Common stock dividends ($0.13 per share)............ - - - - - - - (5,242) Preferred stock dividends ($0.45 per share)............ - - - - - - - (514) Net income.................... - - - - - - - 20,304 ---------- -------- --------- ------------ --------- ---------- -------- ---------- BALANCES, DECEMBER 31, 1996... 1,139 42,315 3,868 28,468 423 164,436 (40,219) (11,078) Issuance/vesting of performance shares........... - 180 76 - 2 3,431 (1,098) - Stock option exercises........ - 924 566 - 9 8,183 (7,326) - Treasury stock purchases...... - - 2,351 - - - (28,013) - Conversion of subordinated convertible notes to common stock................ - 2,892 - - 29 29,179 - - Issuance of warrants.......... - - - - - 5,725 - - Common stock dividends ($0.15 per share)............ - - - - - - - (5,813) Preferred stock dividends ($1.56 per share)............ - - - - - - - (1,779) Net income.................... - - - - - - - 25,684 ---------- -------- --------- ------------ --------- ---------- -------- ---------- BALANCES, DECEMBER 31, 1997... 1,139 46,311 6,861 $28,468 $ 463 $ 210,954 $(76,656) $ 7,014 ========== ======== ========= ============ ========= ========== ======== ==========
See accompanying notes to consolidated financial statements. 31 CROSS TIMBERS OIL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cross Timbers Oil Company, a Delaware corporation, was organized in October 1990 to ultimately acquire the business and properties of predecessor entities that were created from 1986 through 1989. Cross Timbers Oil Company completed its initial public offering of common stock in May 1993. The accompanying consolidated financial statements include the financial statements of Cross Timbers Oil Company and its wholly owned subsidiaries ("the Company"). All significant intercompany balances and transactions have been eliminated in the consolidation. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. All common stock shares and per share amounts in the accompanying financial statements have been adjusted for the three-for-two stock splits effected on March 19, 1997 and February 25, 1998 (Note 5). The Company is an independent oil and gas company with production and exploration concentrated in Texas, Oklahoma, Kansas, New Mexico and Wyoming. The Company also gathers, processes and markets gas, transports and markets oil and conducts other activities directly related to the oil and gas producing industry. Property and Equipment The Company follows the successful efforts method of accounting, capitalizing costs of successful exploratory wells and expensing costs of unsuccessful exploratory wells. Exploratory geological and geophysical costs are expensed as incurred. All developmental costs are capitalized. The Company generally pursues acquisition and development of proved reserves, although the Company increased its exploration activities in 1997. Most of the property costs reflected on the accompanying consolidated balance sheets are from acquisitions of producing properties from other oil and gas companies. As of December 31, 1997 and 1996, producing properties balances include costs of $26,570,000 and $6,115,000, respectively, related to wells in progress of drilling. Depreciation, depletion and amortization of producing properties is computed on the unit-of-production method based on estimated proved oil and gas reserves. Other property and equipment is generally depreciated using the straight-line method over estimated useful lives which range from 3 to 40 years. Repairs and maintenance are expensed, while renewals and betterments are generally capitalized. Effective October 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of. Based generally on a field-level assessment, producing properties were written down to estimated fair value when their net basis exceeded estimated direct future net cash flows from such properties. The Company's resulting impairment provision was $20,280,000 before income tax. After initial adoption of SFAS No. 121, the Company assesses impairment of long-lived assets whenever events or changes in circumstances indicate that the net basis of the asset may not be recoverable. No impairment was recorded in 1997 or 1996 and, prior to adoption of SFAS No. 121 in 1995, no impairment of producing properties was required, based on a total Company assessment using undiscounted estimated future net cash flows. Impairment of individually significant undeveloped properties is assessed on a property-by- property basis and impairment of other undeveloped properties is assessed and amortized on an aggregate basis. Cross Timbers Royalty Trust The Company makes monthly net profits payments to Cross Timbers Royalty Trust ("Royalty Trust") based on revenues and costs related to properties from which net profits interests were carved. Net profits payments to the Royalty Trust are generally based on revenues received and costs disbursed by the Company in the prior month. For financial reporting purposes, the Company reduces oil and gas revenues and taxes on production for amounts allocated to the Royalty Trust. The Royalty Trust's portion of development costs are expensed as trust development costs in the accompanying consolidated statements of operations. As of December 31, 1997 and 1996, the Company owned 22% and 16%, respectively, 32 of the Royalty Trust's publicly traded units of beneficial interest ("Units") (Note 10). Royalty Trust Units are traded on the New York Stock Exchange under the symbol "CRT". Cash and Cash Equivalents Cash equivalents are considered to be all highly liquid investments having an original maturity of three months or less. Investment in Equity Securities Investment in equity securities at December 31, 1996 is reported at market value and classified as available-for-sale securities, rather than trading securities, in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, the related unrealized gain on investment at December 31, 1996, net of deferred income taxes, is excluded from earnings and is reported as a separate component of stockholders' equity. There was no investment in equity securities at December 31, 1997. Other Assets Other assets primarily include deferred debt costs that are amortized over the term of the related debt (Note 2). Other assets are presented net of accumulated amortization of $2,860,000 and $2,628,000 at December 31, 1997 and 1996, respectively. Derivatives The Company uses derivatives on a limited basis to hedge interest rate and product price risks, as opposed to their use for trading purposes. Amounts receivable or payable under interest swap agreements are recorded as adjustments to interest expense. Gains and losses on commodity futures contracts and other price risk management instruments are recognized in oil and gas revenues when the hedged transaction occurs. Cash flows related to derivative transactions are included in operating activities. Production Imbalances The Company uses the entitlement method of accounting for gas sales, based on the Company's net revenue interest in production. Accordingly, revenue is deferred when gas deliveries exceed the Company's net revenue interest, while revenue is accrued for under-deliveries. Production imbalances are generally recorded at the estimated sales price in effect at the time of production. At December 31, 1997, the Company recorded a net receivable of $5,054,000 for a net underproduced balancing position of 1,114,000 Mcf of natural gas and 8,049,000 Mcf of carbon dioxide. At December 31, 1996, the Company recorded a net receivable of $3,964,000 for a net underproduced balancing position of 821,000 Mcf of natural gas and 6,824,000 Mcf of carbon dioxide. Gas Gathering, Processing and Marketing Revenues Gas produced by the Company and third parties is marketed by the Company to brokers, local distribution companies and end-users. Gas gathering and marketing revenues are recognized in the month of delivery based on customer nominations. Gas processing and marketing revenues are recorded net of cost of gas sold of $57.1 million, $56.4 million and $30 million for 1997, 1996 and 1995, respectively. These amounts are net of intercompany eliminations. Other Revenues Other revenues include gain/loss from sale of equity securities and from sale of property and equipment. During 1997 and 1996, the Company realized gains on sale of property and equipment of $1,757,000 and $520,000, respectively, and on sale of equity securities of $2,400,000 and $56,000, respectively. During 1995, the Company realized a gain on sales of properties of $2,960,000. Exploration Expense During 1997, the Company incurred $2.1 million of exploration costs, primarily composed of geological and geophysical costs related to the 1997 exploration program. Exploration costs were not significant prior to 1997. 33 Interest Expense Interest expense includes amortization of deferred debt costs and is presented net of interest income of $71,000, and capitalized interest of $1,185,000 for the year ended December 31, 1997 and net of interest income of $152,000 and $399,000 for the years ended December 31, 1996 and 1995, respectively. Stock-Based Compensation In accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, no compensation is recorded for stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the common stock price on the grant date. Compensation related to performance share grants is recognized from the grant date until the performance conditions are satisfied, based on the market price of the Company's common stock. The pro forma effect of recording stock-based compensation at the estimated fair value of awards on the grant date, as prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, is disclosed in Note 9. Extraordinary Item During 1995, the Company recognized an extraordinary gain of $656,000 (net of income tax of $338,000), or $0.01 per common share, upon the purchase and early retirement of a portion of the Company's 5 1/4% convertible subordinated notes. A loss of $430,000, before income tax, on purchases and redemption of the notes in 1996 was not presented as an extraordinary item because it was not material to 1996 earnings. Earnings per Common Share Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share, which changed the method of computing and disclosing earnings per share for all periods. Under SFAS No. 128, the Company must report basic earnings per share, which excludes the effect of potentially dilutive securities, and diluted earnings per share, which includes the effect of all potentially dilutive securities unless their impact is antidilutive. The Company previously only reported earnings per share excluding potentially dilutive securities because their effect was antidilutive or less than 3% dilutive, as prescribed by the accounting pronouncement superseded by SFAS No. 128. See Note 7. Earnings (loss) per common share for all periods presented is based on weighted average common shares outstanding as adjusted for the three-for-two stock splits on March 19, 1997 and February 25, 1998 (Note 5). Sales to Major Customers In 1997, gas sales to one purchaser were approximately 14% of total revenues. In 1996, gas sales to two purchasers were approximately 15% and 14% of total revenues. There were no sales to a single purchaser that exceeded 10% of total revenues in 1995. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting of Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company will be required to comply with the provisions of these statements in its 1998 financial statements. The Company has not assessed the effect that these new standards will have on its consolidated financial statements and/or disclosures. 34 2. DEBT The Company's outstanding debt consists of the following (in thousands):
December 31 -------------------- 1997 1996 --------- --------- SHORT-TERM DEBT: Short-term borrowings, 7.9% at December 31, 1997.............. $ 10,000 $ 13,000 Reclassified to long-term debt................................ (10,000) (10,000) -------- -------- Total short-term debt......................................... $ - $ 3,000 ======== ======== LONG-TERM DEBT: Senior debt- Bank debt under revolving credit agreements, 7.1% at December 31, 1997.................................. $229,000 $275,000 Subordinated debt- 5 1/4% convertible subordinated notes due November 1, 2003.. - 29,757 9 1/4% senior subordinated notes due April 1, 2007.......... 125,000 - 8 3/4% senior subordinated notes due November 1, 2009....... 175,000 - -------- -------- Sub-total long-term debt...................................... 529,000 304,757 Reclassified from short-term debt............................. 10,000 10,000 -------- -------- Total long-term debt.......................................... $539,000 $314,757 ======== ========
Senior Debt On November 21, 1997, the Company entered into a new Revolving Credit Agreement with commercial banks ("loan agreement"). As of December 31, 1997, the loan agreement had a borrowing base and commitment of $365 million with resulting unused borrowing capacity of $136 million. The borrowing base is redetermined annually based on the value and expected cash flow of the Company's proved oil and gas reserves. If outstanding borrowings are greater than the redetermined borrowing base, outstanding borrowings must be reduced to the level of the redetermined borrowing base within a specified period. Otherwise, borrowings under the loan agreement do not mature until December 31, 2002, but may be prepaid at any time without penalty. The Company periodically renegotiates the loan agreement to increase the borrowing commitment and extend the revolving facility. After the closing of the EEX Acquisition in April 1998 (Note 10), the Company expects the borrowing base and commitment to be at least $560 million. Reclassification of short-term to long-term debt represents unused capacity under the loan agreement based on outstanding debt balances at December 31, 1997 and expected borrowing commitments through December 31, 1998. The Company has both the intent and ability to refinance this debt on a long-term basis. Restrictions set forth in the loan agreement include limitations on the incurrence of additional indebtedness, the creation of certain liens, and the redemption or prepayment of subordinated indebtedness. The loan agreement also limits dividends to 25% of cash flow from operations for the latest four consecutive quarterly periods. The Company is also required to maintain a current ratio of not less than one (where unused borrowing commitments are included as a current asset). The loan agreement provides the option of borrowing at floating interest rates based on the prime rate or at fixed rates for periods of up to six months based on certificate of deposit rates or London Interbank Offered Rates ("LIBOR"). Borrowings under the loan agreement at December 31, 1997 were based on LIBOR rates with a maturity of 30 days and accrued at the applicable LIBOR rate plus 1%. Interest is paid at maturity, or quarterly if the term is for a period of 90 days or more. The Company also incurs a commitment fee of 3/8% on unused borrowing commitments. The weighted average interest rate on senior debt was 6.9%, 6.7% and 7.1% during 1997, 1996 and 1995, respectively. 35 Subordinated Debt During 1995, the Company purchased and retired $8.3 million principal amount of its 5 1/4% convertible subordinated notes ("5 1/4% Notes"), resulting in an extraordinary gain of $656,000 (Note 1). During 1996, the Company redeemed, purchased and retired a total of $9 million principal amount of the 5 1/4% Notes at a loss before income tax of $430,000, and holders of the 5 1/4% Notes converted principal of $27.7 million into common stock at a conversion price of $10.28 per share (Note 5). In January 1997, the remaining $29.7 million principal amount of the 5 1/4% Notes was converted by noteholders into common stock and $29,000 principal was redeemed. The Company sold $125 million of 9 1/4% senior subordinated notes ("9 1/4% Notes") on April 2, 1997, and $175 million of 8 3/4% senior subordinated notes ("8 3/4% Notes") on October 28, 1997 (the 9 1/4% Notes and the 8 3/4% Notes collectively referred to as "the Notes"). The Notes are general unsecured indebtedness that is subordinate to bank borrowings under the loan agreement. Net proceeds of $121.1 million and $169.9 million from the 9 1/4% Notes and 8 3/4% Notes, respectively, were used to reduce bank borrowings under the loan agreement. The 9 1/4% Notes mature on April 1, 2007 and interest is payable each April 1 and October 1, while the 8 3/4% Notes mature on November 1, 2009 with interest payable each May 1 and November 1. The Company has the option to redeem the 9 1/4% Notes on April 1, 2002 and the 8 3/4% Notes on November 1, 2002 at a price of approximately 105%, and thereafter at prices declining ratably at each anniversary to 100% in 2005. In addition, on or prior to April 1, 2000 and November 1, 2000 for the 9 1/4% Notes and 8 3/4% Notes, respectively, the Company may redeem up to one-third of the Notes with the net proceeds from one or more public equity offerings at a price of approximately 109% plus accrued interest, subject to certain requirements. Upon a change in control (as defined) of the Company, the holders of the Notes have the right to require the Company to purchase all or a portion of their Notes at 101% plus accrued interest. The Notes were issued under indentures that place certain restrictions on the Company, including limitations on additional indebtedness, liens, dividend payments, treasury stock purchases, disposition of proceeds from asset sales, transfers of assets and transactions with subsidiaries and affiliates. See also Note 5 "- Registration Statement." 3. INCOME TAX The effective income tax rate for the Company (before extraordinary item) was different than the statutory federal income tax rate for the following reasons (in thousands):
1997 1996 1995 ------- -------- ------- Income tax expense (benefit) at the federal statutory rate of 34%......................... $13,329 $10,531 $(5,786) State and local taxes and other......................... 188 138 (39) ------- ------- ------- Income tax expense (benefit)............................ $13,517 $10,669 $(5,825) ======= ======= =======
Components of income tax expense (benefit) before extraordinary item are as follows (in thousands):
1997 1996 1995 -------- -------- -------- Current income tax...................................... $ 124 $ 456 $ 198 Deferred income tax expense (benefit)................... 22,509 13,152 (3,221) Net operating loss carryforward......................... (9,116) (2,939) (2,802) ------- ------- ------- Income tax expense (benefit)............................ $13,517 $10,669 $(5,825) ======= ======= =======
36 Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and tax bases of assets and liabilities. The Company's net deferred tax liabilities are recorded as a current asset of $445,000 and a long-term liability of $21,320,000 at December 31, 1997, and a current asset of $558,000 and a long-term liability of $10,323,000 at December 31, 1996. Significant components of net deferred tax liabilities are (in thousands):
December 31 ---------------- 1997 1996 ------- ------- Deferred tax liabilities: Intangible development costs............................................. $37,856 $21,764 Tax depletion and depreciation in excess of financial statement amounts.. 8,008 3,298 Other.................................................................... 2,228 1,905 ------- ------- Total deferred tax liabilities.................................... 48,092 26,967 ------- ------- Deferred tax assets: Net operating loss carryforwards......................................... 20,926 11,810 Trust development expenses............................................... 3,959 3,733 Accrued stock appreciation right and performance share compensation...... 739 787 Other.................................................................... 1,593 872 ------- ------- Total deferred tax assets......................................... 27,217 17,202 ------- ------- Net deferred tax liabilities............................................... $20,875 $ 9,765 ======= =======
As of December 31, 1997, the Company has estimated tax loss carryforwards of approximately $62 million that are scheduled to expire in 2008 through 2012. 4. COMMITMENTS AND CONTINGENCIES Leases The Company leases offices, vehicles and certain other equipment in its primary locations under non-cancelable operating leases. As of December 31, 1997, minimum future lease payments for all non-cancelable lease agreements (including the sale and operating leaseback agreements described below) were as follows (in thousands):
1998................ $ 6,645 1999................ 6,445 2000................ 6,188 2001................ 6,102 2002................ 6,086 Remaining........... 8,707 ------- $40,173 =======
Amounts incurred by the Company under operating leases (including renewable monthly leases) were $9,132,000, $5,489,000, and $1,912,000 in 1997, 1996 and 1995, respectively. In March 1996, the Company sold its Tyrone gas processing plant and related gathering system for $28 million and entered an agreement to lease the facility from the buyers for an initial term of eight years at annual rentals of $4 million, and with fixed renewal options for an additional 13 years. The Company does not have the right or option to purchase, nor does the lessor have the obligation to sell the facility at any time. However, if the lessor decides to sell the facility at the end of the initial term or any renewal period, the lessor must first offer to sell it to the Company at its fair market value. Additionally, the Company has a right of first refusal of any third party offers to buy the facility after the initial term. This transaction has been recorded as a sale and operating leaseback, with no gain or loss on the sale. Proceeds of the sale were used to reduce borrowings under the loan agreement (Note 2). In November 1996, the Company sold its gathering system in Major County, Oklahoma for $8 million and entered an agreement to lease the facility from the buyers for an initial term of eight years, with fixed renewal options for an additional 10 years. Rentals are adjusted monthly based on the 30-day LIBOR rate (Note 2) and may be irrevocably fixed by the Company with 20 days advance notice. As of December 31, 1997, annual rentals were $1.7 million. The Company does not have the right or option to purchase, nor does the lessor have the obligation to sell the facility at any time. However, 37 if the lessor decides to sell the facility at the end of the initial term or any renewal period, the lessor must first offer to sell it to the Company at its fair market value. Additionally, the Company has a right of first refusal of any third party offers to buy the facility after the initial term. This transaction has been recorded as a sale and operating leaseback, with a deferred gain of $3.4 million on the sale. The deferred gain is amortized over the lease term based on pro rata rentals and is recorded in other long-term liabilities in the accompanying balance sheet. Proceeds of the sale were used to reduce borrowings under the loan agreement. Employment Agreements Two executive officers have entered into year-to-year employment agreements with the Company. The agreements are automatically renewed each year-end unless terminated by either party upon thirty days notice prior to each December 31. Under these agreements, each of the officers receives a minimum annual salary of $300,000 and is entitled to participate in any incentive compensation programs administered by the Board of Directors. The agreements also provide that, in the event the officer terminates his employment for good reason, as defined in the agreement, the officer will receive severance pay equal to the amount that would have been paid under the agreement had it not been terminated. If such termination follows a change in control of the Company, the officer is entitled to a lump-sum payment of three times his most recent annual compensation. Sales Contracts The Company sells gas to a single purchaser under a ten-year contract that began August 1, 1995. From August 1995 through July 1998 ("initial period"), 10,000 Mcf of gas per day is sold at a contract price equal to a monthly natural gas index for deliveries in Oklahoma plus $.35 per Mcf through December 1996, and plus $.30 per Mcf from January 1997 through July 1998. For December 1997, the initial period contract price was $2.65 per Mcf. From August 1998 through July 2005 ("final period"), 11,650 Mcf of gas per day will be sold at a contract price of approximately 10% of the month's average NYMEX futures contract for West Texas Intermediate crude oil, adjusted for the point of physical delivery. For December 1997, the final period contract price would have been $1.63 per Mcf, assuming delivery in Oklahoma. The Company's spot price for December 1997 deliveries in Oklahoma was $2.32 per Mcf. The Company has entered contracts with two purchasers to sell a total of 30,000 Mcf per day in March 1998 and 10,000 Mcf per day in April, May and June 1998. The production is to be delivered in Oklahoma at the NYMEX index price, as adjusted for Btu content and gathering charges, less a weighted average delivery point differential ("basis") of $.18 per Mcf. See Note 6. Since August 1991, the Company has sold gas to a cogeneration facility under a take-or-pay contract that expires in September 2004. The Company has committed to sell up to 4,500 Mcf of gas per day under this contract, subject to certain modifications, at a price based on a composite energy cost index. Since the Company generally purchases such gas at spot prices, there is exposure to loss during months of rapidly increasing gas prices. The Company recognized a net loss on this contract of $551,000 and $206,000 during 1997 and 1996, respectively, and a net profit of $453,000 during 1995. Section 29 Tax Credits In January 1998, the Company entered a contract to monetize Section 29 tax credits generated by production from qualified properties, most of which were acquired in December 1997. As a result, the Company anticipates receiving approximately $1.8 million annually from 1998 through 2002 which will be recorded as gas revenue. Litigation In June 1996, Holshouser v. Cross Timbers Oil Company, a class action lawsuit, was filed in the District Court of Major County, Oklahoma. The action was filed on behalf of all parties who, at any time since June 1991, have allegedly had production or other costs deducted by the Company from royalties paid on gas produced in Oklahoma when the royalty is based upon a specified percentage of the proceeds received from the gas sold. The plaintiff alleges that such deductions are a breach of the Company's contractual obligations to the class and is seeking to recover an unspecified amount of damages as a result of the alleged breach. The plaintiff is also seeking a determination of the Company's obligations to the plaintiff and the class regarding production or other costs. The Company has responded that it has complied with all of its contractual obligations and denied that the matter is appropriate for determination as a class action. The parties have conducted discovery on the class certification issues, but no further action has been taken in the case. Management believes it has strong defenses against this claim and intends to vigorously defend the action. Management's estimate of the potential liability from this claim has been accrued in the accompanying financial statements. 38 The Company and certain of its subsidiaries are involved in various other lawsuits and certain governmental proceedings arising in the ordinary course of business. Company management and legal counsel do not believe that the ultimate resolution of these claims, including the class action lawsuit described above, will have a material effect on the Company's financial position, liquidity or operations. Other To date, the Company's expenditures to comply with environmental or safety regulations have not been significant and are not expected to be significant in the future. However, developments such as new regulations, enforcement policies or claims for damages could result in significant future costs. 5. EQUITY Three-for-Two Stock Splits The Company effected a three-for-two common stock split on March 19, 1997 and on February 25, 1998. All common stock shares, treasury stock shares and per share amounts have been retroactively restated to reflect both stock splits. Public Offering of Common Stock In August 1995, the Company completed a public offering of 9,816,243 shares of common stock, of which 5,062,500 shares were sold by the Company and 4,753,743 shares were sold by stockholders. The Company's net proceeds from the offering of $29.5 million were used to partially fund a significant producing property acquisition. Performance Shares During 1997, 1996 and 1995, the Company issued 180,000, 167,625 and 369,562 performance shares (Note 8). Series A Convertible Preferred Stock In September 1996, pursuant to the Company's exchange offer, a total of 2,979,249 shares of common stock were exchanged for 1,138,729 shares of Series A convertible preferred stock ("Preferred Stock"). The Company incurred costs of $540,000 related to this exchange offer. All exchanged shares of common stock have been canceled and are authorized but unissued. Preferred Stock is recorded in the accompanying consolidated balance sheet at its liquidation preference of $25 per share. Cumulative dividends on Preferred Stock are payable quarterly in arrears, when declared by the Board of Directors, based on an annual rate of $1.5625 per share. The Preferred Stock has no stated maturity and no sinking fund, and is redeemable, in whole or in part, by the Company after October 15, 1999. Redemption is allowed only under certain circumstances on or before October 15, 2000 at $26.09 per share, and thereafter unconditionally at prices declining ratably annually to $25.00 per share after October 15, 2006, plus dividends accrued and unpaid to the redemption date. The Preferred Stock is convertible at the option of the holder at any time, unless previously redeemed, into shares of common stock at a rate of 2.16 shares of common stock for each share of Preferred Stock, subject to adjustment in certain events. Preferred Stock holders are allowed one vote for each common share into which their Preferred Stock may be converted. Treasury Stock During 1997, 1996 and 1995, the Company acquired 2,571,396, 3,341,515 and 45,490 shares of its common stock at an average cost per share of $12.06, $10.45 and $7.72, respectively. Additionally, the Company received 421,212, 457,994 and 21,465 shares in 1997, 1996 and 1995 that are held in treasury, as payment for the option price upon exercise of stock options. Convertible Debt During November and December 1996, $27.7 million principal of the Company's 5 1/4% convertible subordinated notes (Note 2) was converted by noteholders into 2,696,521 shares of common stock. In January 1997, principal of $29.7 million of the notes was converted by noteholders into 2,892,363 shares of common stock. 39 Common Stock Warrants As partial consideration for producing properties acquired in December 1997 (Note 10), the Company issued warrants to purchase 937,500 shares of common stock at a price of $15.31 per share for a period of five years. These warrants were valued at $5,725,000 and were recorded as additional paid-in capital. Common Stock Dividends Since the Company's inception, the Board of Directors has declared quarterly dividends of $0.033 per common share through 1996 and $0.037 per common shares in 1997. In January 1998, the Board of Directors increased its regular quarterly cash dividend to $0.04 per share payable April 15, 1998 to shareholders of record on March 31, 1998. See Note 2 regarding restrictions on dividends. Registration Statement On February 25, 1998, the Company filed a shelf registration statement with the Commission to potentially offer securities which may include debt securities, preferred stock, common stock or warrants to purchase debt securities, preferred stock or common stock. The securities will be offered at an aggregate offering price not to exceed $200 million, at prices and on terms to be determined at the time of sale. Net proceeds from the sale of such securities will be used for general corporate purposes, including reduction of bank borrowings under the loan agreement (Note 2). 6. FINANCIAL INSTRUMENTS Commodity Price Hedging Instruments The Company periodically enters into futures contracts, energy swaps, collars, basis swaps and option agreements to hedge its exposure to price fluctuations on crude oil and natural gas sales. The Company did not have any significant hedging activity from 1994 through 1997. See Note 4. In January 1998, the Company entered into gas price collars with floor and ceiling prices of $2.01 and $2.46 per Mcf for 30,000 Mcf per day from March through September 1998. In February and March 1998, the Company entered into futures contracts to sell 10,000 Mcf per day from May through August 1998 at a price of $2.35 per Mcf. Prices to be realized by the Company for hedged production will be less than these hedged prices because of location, quality and other adjustments. In January 1998, the Company entered into basis swap agreements with three financial institutions that effectively fix the delivery point differential ("basis") at $0.27 per Mcf on San Juan Basin gas production of 10,000 Mcf per day in January 1998, 20,000 Mcf per day from February 1998 through March 1999, and 10,000 Mcf per day from April 1999 through December 2000. Fair Value Because of their short-term maturity, the fair value of cash and cash equivalents, accounts receivable and accounts payable approximates their carrying values at December 31, 1997 and 1996. The following are estimated fair values and carrying values of the Company's other financial instruments (none of which are held or issued for trading purposes) at these dates (in thousands):
Asset (Liability) --------------------------------------------- December 31, 1997 December 31, 1996 ---------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- --------- Investment in equity securities.. $ - $ - $ 16,714 $ 16,714 Short-term debt.................. $ - $ - $ (3,000) $ (3,000) Long-term debt................... $(539,000) $(538,288) $(314,757) $(317,331)
The above fair values were estimated based on: investment in equity securities- quoted market price; short and long-term debt- short-term borrowings and bank borrowings approximate the carrying value because of short-term interest rate maturities, while the fair value of subordinated notes is estimated to be $299.3 million and $32.2 million at December 31, 1997 and 1996 based on a current market quote. 40 Concentrations of Credit Risk Although the Company's cash equivalents and derivative financial instruments are exposed to the risk of credit loss, the Company does not believe such risk to be significant. Cash equivalents are high-grade, short-term securities, placed with highly rated financial institutions. Most of the Company's receivables are from a broad and diverse group of energy companies and, accordingly, do not represent a significant credit risk. The Company's gas marketing activities generate receivables from customers including pipeline companies, local distribution companies and end-users in various industries. Letters of credit or other appropriate security are obtained as considered necessary to limit risk of loss. The Company recorded an allowance for collectibility of all accounts receivable of $911,000 at December 31, 1997 and 1996. 7. EARNINGS PER SHARE The following reconciles earnings (numerator) and shares (denominator) used in the computation of basic and diluted earnings per share (in thousands,except per share data):
Earnings Earnings Shares per Share --------- ------- ------------ 1997 - ------------------------------------------------------ Basic Net income..................................... $ 25,684 Preferred stock dividends...................... (1,779) -------- Earnings available to common stock - basic..... 23,905 39,773 (a) $ 0.60 ========= Diluted Effect of dilutive securities (b): Stock options.......................... - 451 Warrants..................................... - 3 5 1/4% convertible subordinated notes.. 46 115 -------- ------ Earnings available to common stock - diluted... $ 23,951 40,342 (a) $ 0.59 ======== ====== ========= 1996 - ------------------------------------------------------ Basic Net income..................................... $ 20,304 Preferred stock dividends...................... (514) -------- Earnings available to common stock - basic..... 19,790 39,913 $ 0.50 Diluted ========= Effect of dilutive securities: Stock options.......................... - 361 5 1/4% convertible subordinated notes........ 2,570 6,039 -------- ------ Earnings available to common stock - diluted... $ 22,360 46,313 $ 0.48 ======== ====== ========= 1995 - ------------------------------------------------------ Basic Net loss before extraordinary item - basic..... $(11,194) 38,072 $ (0.29) ====== ========= Extraordinary item............................. 656 -------- Net loss after extraordinary item - basic...... $(10,538) 38,072 $ (0.28) ======== ====== ========= Diluted Effect of dilutive securities.................. - (c) - (c) Net loss before extraordinary item - diluted... $(11,194) 38,072 $ (0.29) ======== ====== ========= Net loss after extraordinary item - diluted.... $(10,538) 38,072 $ (0.28) ======== ====== =========
(a) The Company acquired 484,000 treasury shares from January through March 1998. (b) Based on common shares outstanding at December 31, 1997, potential conversion of Series A convertible preferred stock becomes dilutive to earnings per share at annual and quarterly net income levels exceeding approximately $28.5 million and $7.1 million, respectively. (c) Because of the loss, convertible securities have an antidilutive effect on loss per share. 41 8. SUPPLEMENTAL CASH FLOW INFORMATION The consolidated statements of cash flows exclude the following non-cash transactions (Notes 5, 9 and 10): - Conversion of $29.7 million and $27.7 million principal amount of 5 1/4% Convertible subordinated notes into 2,892,363 and 2,696,521 shares of common stock in 1997 and 1996, respectively - Issuance of warrants in 1997 to purchase 937,500 shares of common stock and exchange of properties valued at $15.7 million, as partial consideration for producing properties acquired - Grants of 180,000, 167,625 and 369,562 performance shares to key employees and nonemployee directors in 1997, 1996 and 1995, respectively. - Receipt of 421,212, 457,994, and 21,465 shares of common stock for the option price of exercised stock options in 1997, 1996 and 1995 - Exchange of 2,979,249 shares of common stock for 1,138,729 shares of Series A convertible preferred stock in 1996 Interest payments during 1997 totaled $21,276,000, including $1,185,000 of capitalized interest. Interest payments during 1996 and 1995 totaled $16,369,000 and $12,202,000 respectively. Income tax payments during 1997, 1996 and 1995 totaled $941,000, $6,000 and $541,000, respectively. 9. EMPLOYEE BENEFIT PLANS 401(k) Plan The Company sponsors a 401(k) benefit plan that allows employees to contribute and defer a portion of their wages. The Company matches employee contributions of up to 8% of wages (10% of wages as of January 1, 1998). Employee contributions vest immediately while the Company's matching contributions vest 100% after three years of service. All employees over 21 years of age and with at least three months service with the Company may participate. Company contributions under the plan were $1,180,000, $979,000 and $814,000 in 1997, 1996 and 1995, respectively. 1991 Stock Incentive Plan A total of 1,012,500 incentive units ("Units"), have been granted to directors, officers and other key employees under the 1991 Stock Incentive Plan ("1991 Plan"). Units consist of a stock option ("Option") and a stock appreciation right ("SAR"). An Option provides the right to purchase one share of common stock at the exercise price, which generally is the market price at the date the Unit is granted. A SAR entitles the recipient to a payment equal to twice the excess of the market price of one share of common stock on the date the Option is exercised over the exercise price. As of December 31, 1997, 3,341 Units remain available for grant under the 1991 Plan. General and administrative expense includes stock incentive compensation related to SARs of $359,000, $3.7 million and $2.3 million for 1997, 1996 and 1995, respectively. SAR cash payments were $288,000, $7.1 million and $800,000 in 1997, 1996 and 1995, respectively. 1994 and 1997 Stock Incentive Plans Under the 1994 Stock Incentive Plan ("1994 Plan") and the 1997 Stock Incentive Plan ("1997 Plan"), a total of 2,250,000 shares of common stock may be issued under each plan to directors, officers and other key employees pursuant to grants of Options or performance shares of common stock ("performance shares"). At December 31, 1997, 25,177 and 320,625 shares remained available for grant under the 1994 Plan and the 1997 Plan, respectively. Options vest and become exercisable on terms specified when granted by the compensation committee ("the Committee") of the Board of Directors. Options granted under the 1994 Plan are not exercisable prior to six months and no Option is exercisable after ten years from its grant date. Options granted under the 1994 Plan and the 1997 Plan generally vest in equal amounts over five years, with provisions for earlier vesting if specified performance requirements are met. As of December 31, 1997, there are 878,625 outstanding stock options that vest when the common stock price reaches $20. Performance shares are subject to restrictions determined by the Committee and are subject to forfeiture if performance targets established by the Committee are not met. Otherwise, holders of performance shares generally have all the voting, dividend and other rights of other stockholders. The Company issued to key employees 169,875, 154,125 and 42 356,062 performance shares during 1997, 1996 and 1995, respectively, of which 243,000 and 356,062 vested in 1997 and 1996, respectively, when the common stock price reached specified levels. General and administrative expense includes compensation related to these performance share grants of $3.3 million, $2.5 million and $2.8 million in 1997, 1996 and 1995, respectively. As of December 31, 1997, there are 81,000 performance shares that vest when the common stock price reaches $20. The Company also issued to nonemployee directors a total of 10,125 performance shares in 1997 and 13,500 in each of 1996 and 1995. Unit/ Option Activity and Balances The following summarizes Unit and Option activity and balances from 1995 through 1997:
Weighted 1994 and Average 1991 Plan 1997 Plan Exercise Incentive Stock Price Units Options -------- ---------- ---------- 1995 ---------------------------------- Beginning of year........... $ 6.12 1,006,502 1,229,659 Grants................... 7.37 - 177,187 Exercises................ 5.36 (169,790) - Forfeitures.............. 6.55 (902) (7,596) --------- --------- End of year................. 6.27 835,810 1,399,250 ========= ========= Exercisable at end of year.. 5.70 783,689 212,256 ========= ========= 1996 ---------------------------------- Beginning of year........... $ 6.27 835,810 1,399,250 Grants................... 9.64 - 303,750 Exercises................ 5.70 (784,658) (211,079) Forfeitures.............. 6.61 (189) (4,925) --------- --------- End of year................. 7.32 50,963 1,486,996 ========= ========= Exercisable at end of year.. 6.66 50,963 1,006,146 ========= ========= 1997 ---------------------------------- Beginning of year........... $ 7.32 50,963 1,486,996 Grants................... 12.11 - 1,757,250 Exercises................ 6.75 (26,213) (897,229) Forfeitures.............. 8.79 - (18,315) --------- --------- End of year................. 11.11 24,750 2,328,702 ========= ========= Exercisable at end of year.. 10.96 24,750 1,119,044 ========= =========
The following summarizes information about Units/ Options at December 31, 1997:
Units/ Options Outstanding Units/ Options Exercisable ------------------------------ -------------------------- Weighted Weighted Weighted Average Average Average Average Range of Remaining Exercise Exercise Exercise Prices Number Term Price Number Price - --------------- --------- -------- ----------- --------- ---------- 1991 Plan $5.32 - $7.56.... 24,750 4.1 years $ 5.44 24,750 $ 5.44 1994 and 1997 Plans $6.61 - $7.89.... 305,580 7.3 years 7.11 198,467 6.90 $9.67 - $10.92... 272,622 8.4 years 9.68 48,702 9.68 $12.04 - $13.40.. 1,750,500 9.4 years 12.12 871,875 12.12 --------- --------- 2,353,452 9.0 years 11.11 1,143,794 10.96 ========== =========
43 Estimated Fair Value of Grants Using the Black-Scholes option-pricing model and the following assumptions, the weighted average fair value of option grants was estimated to be $5.05, $3.82 and $2.58 for options granted in 1997, 1996 and 1995, respectively.
1997 1996 1995 -------- -------- -------- Risk-free interest rates......... 6.4% 6.4% 5.8% Dividend yield................... 1.6% 1.4% 1.4% Weighted average expected lives.. 5 years 6 years 6 years Volatility....................... 47% 35% 31%
Pro Forma Effect of Recording Stock-Based Compensation at Estimated Fair Value The following are pro forma earnings (loss) available to common stock and earnings (loss) per common share for 1997 and 1996, as if stock-based compensation had been recorded at the estimated fair value of stock awards at the grant date, as prescribed by SFAS 123, Accounting for Stock-Based Compensation (Note 1):
(in thousands, except per share data) 1997 1996 1995 ------- --------- --------- Earnings (loss) available to common stock As reported...................................... $23,905 $ 19,790 $(10,538) Pro forma........................................ $21,646 $ 19,767 $(11,200) Earnings (loss) per common share: Basic As reported............................. $ 0.60 $ 0.50 $ (0.28) Pro forma............................... $ 0.54 $ 0.50 $ (0.29) Diluted As reported............................. $ 0.59 $ 0.48 $ (0.28) Pro forma............................... $ 0.54 $ 0.48 $ (0.29)
10. ACQUISITIONS From July 1996 through May 1997, the Company purchased 1,326,300, or 22%, of the outstanding Units in the Royalty Trust at a cost of $18.2 million, funded primarily with bank debt. The Company purchased an additional 33,700 Units in January 1998 at a cost of $500,000. The Board of Directors has authorized the purchase of up to two million, or 33%, of the outstanding Units. The Company considers its investment in Units as an acquisition of oil and gas properties; accordingly, the cost of these Units has been included in producing properties in the accompanying consolidated balance sheets. On July 19, 1996, the Company acquired primarily gas-producing properties in the Green River Basin of southwestern Wyoming from Enserch Exploration ("Enserch Acquisition") for an adjusted purchase price of $39.4 million. The properties primarily consist of operated interests in the Fontenelle, Nitchie Gulch and Pine Canyon fields. On November 21, 1996, the Company acquired additional interests in the Fontenelle Unit, the most significant property included in the Enserch Acquisition, for an adjusted purchase price of $12.5 million. These acquisitions were funded by bank debt and cash flow from operations. On December 2, 1996, the Company acquired primarily gas-producing properties in the Northern Val Verde area of the Permian Basin of West Texas. The properties are primarily operated interests in the Henderson, Ozona and Davidson Ranch fields. The adjusted purchase price of $28.1 million was funded by bank debt and cash flow from operations. On May 14, 1997, the Company acquired primarily gas-producing properties in Oklahoma, Kansas and Texas for an estimated adjusted purchase price of $39 million from a subsidiary of Burlington Resources Inc. The properties are primarily operated interests. The Company funded the acquisition with bank debt and cash flow from operations. On December 1, 1997, the Company acquired interests in certain producing oil and gas properties in the San Juan Basin of New Mexico from a subsidiary of Amoco Corporation ("Amoco Acquisition") for $252 million, including warrants to purchase 937,500 shares of the Company's common stock at a price of $15.31 per share for a period of five years. After 44 adjustments for other acquisition costs, estimated cash flows through date of closing and preferential purchase rights exercised by third parties, the properties were purchased for approximately $195 million, including approximately $5.7 million value for the warrants. Amoco elected to accept certain producing properties owned by the Company valued at $15.7 million in lieu of cash, reducing cash consideration to $173.6 million, which was funded through bank lines of credit. Additional purchase price revisions may result from customary post-closing adjustments. These acquisitions have been recorded using the purchase method of accounting. The following presents unaudited pro forma results of operations for the years ended December 31, 1997 and 1996 as if these acquisitions had been consummated as of January 1, 1996. These pro forma results are not necessarily indicative of future results.
(in thousands, except per share data) Pro Forma (Unaudited) ------------------------------- 1997 1996 -------- -------- Revenues.................................... $237,515 $216,915 ======== ======== Net income.................................. $ 26,469 $ 19,507 ======== ======== Earnings available to common stock.......... $ 24,690 $ 18,993 ======== ======== Earnings per common share: Basic.................................. $ 0.62 $ 0.48 ======== ======== Diluted................................ $ 0.61 $ 0.47 ======== ========
On February 25, 1998, the Company entered into an agreement with EEX Corporation to acquire producing properties and undeveloped acreage in the East Texas Basin for $265 million ("EEX Acquisition"). The transaction is anticipated to close in late April 1998 with an effective date of January 1, 1998. The preliminary purchase price of $265 million is expected to be reduced to $245 million by purchase price adjustments. The acquisition is also subject to third party consents and other typical purchase price adjustments. The Company plans to finance the acquisition through bank lines of credit. 11. QUARTERLY FINANCIAL DATA (Unaudited) The following are summarized quarterly financial data for the years ended December 31, 1997 and 1996 (in thousands, except per share data):
Quarter --------------------------------- 1st 2nd 3rd 4th ------- ------- ------- ------- 1997 - --------------------------------- Revenues.................... $53,494 $45,969 $44,086 $57,123 Gross profit (a)............ $25,833 $17,044 $14,594 $24,225 Earnings available to common stock.............. $10,650 $ 3,735 $ 2,779 $ 6,741 Earnings per common share Basic..................... $ 0.26 $ 0.09 $ 0.07 $ 0.17 Diluted................... $ 0.25 $ 0.09 $ 0.07 $ 0.17 Average shares outstanding.. 40,395 39,498 39,581 39,629 1996 - --------------------------------- Revenues.................... $36,081 $36,735 $39,201 $49,374 Gross profit (a)............ $13,482 $13,606 $14,240 $23,137 Earnings available to common stock.............. $ 4,671 $ 1,807 $ 4,647 $ 8,665 Earnings per common share Basic..................... $ 0.11 $ 0.04 $ 0.12 $ 0.23 Diluted................... $ 0.11 $ 0.04 $ 0.11 $ 0.22 Average shares outstanding.. 41,402 41,171 39,644 37,465
(a) Revenues less expenses, other than general and administrative, net interest expense and income tax. 45 12. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (Unaudited) All of the Company's operations are directly related to oil and gas producing activities located in the United States. Costs Incurred Related to Oil and Gas Producing Activities The following table summarizes costs incurred whether such costs are capitalized or expensed for financial reporting purposes (in thousands):
1997 1996 1995 -------- -------- -------- Acquisitions: Producing properties.... $251,663 $105,252 $130,929 Undeveloped properties.. 3,964 563 413 Development (a)............ 86,555 44,758 20,797 Exploration (b)............ 2,088 280 264 -------- -------- -------- Total...................... $344,270 $150,853 $152,403 ======== ======== ========
(a) Includes $800,000 of capitalized interest in 1997. No interest was capitalized in prior years. (b) Includes geological and geophysical costs of $1,672,000, $103,000 and $169,000 in 1997, 1996 and 1995, respectively. Proved Reserves Independent petroleum engineers have estimated the Company's proved oil and gas reserves, all of which are located in the United States. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history and from changes in economic factors. Standardized Measure The standardized measure of discounted future net cash flows ("standardized measure") and changes in such cash flows are prepared using assumptions required by the Financial Accounting Standards Board. Such assumptions include the use of year-end prices for oil and gas and year-end costs for estimated future development and production expenditures to produce year-end estimated proved reserves. Discounted future net cash flows are calculated using a 10% rate. Estimated future income taxes are calculated by applying year-end statutory rates to future pre-tax net cash flows, less the tax basis of related assets and applicable tax credits. The standardized measure does not represent management's estimate of the Company's future cash flows or the value of proved oil and gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, year-end prices used to determine the standardized measure of discounted cash flows, are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data. 46
Oil Gas Natural Gas (Bbls) (Mcf) Liquids (Bbls) (a) ---------------- ----------- ------------------ PROVED RESERVES (in thousands) December 31, 1994............................. 33,581 177,061 Revisions................................... 1,314 4,507 Extensions, additions and discoveries....... 6,378 41,899 Production.................................. (3,532) (28,619) Purchases in place.......................... 3,056 170,711 Sales in place.............................. (809) (7,489) ---------- ---------- December 31, 1995............................. 39,988 358,070 Revisions................................... 2,361 29,379 Extensions, additions and discoveries....... 2,220 37,480 Production.................................. (3,508) (37,275) Purchases in place.......................... 1,552 153,400 Sales in place.............................. (173) (516) ---------- ---------- December 31, 1996............................. 42,440 540,538 - Revisions................................... (989) (14,182) - Extensions, additions and discoveries....... 9,263 112,906 - Production.................................. (3,980) (49,587) (80) Purchases in place.......................... 3,195 248,040 13,890 Sales in place.............................. (2,075) (21,940) - ---------- ---------- ---------- December 31, 1997............................. 47,854 815,775 13,810 ========== ========== ========== PROVED DEVELOPED RESERVES December 31, 1994............................. 26,948 164,169 ========== ========== December 31, 1995............................. 28,946 320,230 ========== ========== December 31, 1996............................. 31,883 466,412 ========== ========== December 31, 1997............................. 33,835 677,710 11,494 ========== ========== ========== STANDARDIZED MEASURE OF DISCOUNTED FUTURE December 31 ------------------------------------- NET CASH FLOWS RELATING TO PROVED RESERVES 1997 1996 1995 ---------- ---------- ---------- (in thousands) Future cash inflows........................... $2,604,453 $2,634,641 $1,322,345 Future costs:................................. Production.................................. (979,317) (819,780) (536,831) Development................................. (140,594) (77,837) (72,607) ---------- ---------- ---------- Future net cash flows before income tax....... 1,484,542 1,737,024 712,907 Future income tax............................. (291,375) (450,987) (131,019) ---------- ---------- ---------- Future net cash flows......................... 1,193,167 1,286,037 581,888 10% annual discount........................... (551,058) (579,556) (246,732) ---------- ---------- ---------- Standardized measure (b)...................... $ 642,109 $ 706,481 $ 335,156 ========== ========== ==========
(a) Proved reserves attributable to natural gas liquids were not considered significant prior to the Amoco Acquisition in December 1997 (Note 10). Natural gas liquids proved reserves as disclosed include only San Juan Basin properties purchased in this acquisition. (b) Before income tax, the standardized measure (or discounted present value of future net cash flows) was $782,322,000 $946,150,000 and $405,706,000 at December 31, 1997, 1996 and 1995, respectively. 47
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS 1997 1996 1995 ---------- ---------- --------- (in thousands) Standardized measure, January 1........ $ 706,481 $ 335,156 $213,146 --------- --------- -------- Revisions: Prices and costs..................... (388,559) 360,053 67,528 Quantity estimates................... 55,497 34,099 8,709 Accretion of discount................ 86,845 37,291 22,242 Future development costs............. (120,073) (36,267) (41,416) Income tax........................... 99,455 (169,118) (36,109) Production rates and other........... (1,614) (155) (2,682) --------- --------- -------- Net revisions...................... (268,449) 225,903 18,272 Extensions, additions and discoveries.. 92,582 49,802 44,135 Production............................. (125,343) (97,106) (56,909) Development costs...................... 73,062 33,484 16,616 Purchases in place (a)................. 207,387 160,670 106,137 Sales in place......................... (43,611) (1,428) (6,241) --------- --------- -------- Net change......................... (64,372) 371,325 122,010 --------- --------- -------- Standardized measure, December 31...... $ 642,109 $ 706,481 $335,156 ========= ========= ========
(a) Based on the year-end present value (at year-end prices and costs) plus the cash flow received from such properties during the year, rather than the estimated present value at the date of acquisition. Year-end oil prices used in the estimation of proved reserves and calculation of the standardized measure were $15.50, $24.25, $18.00, and $16.00 per Bbl at December 31, 1997, 1996, 1995 and 1994, respectively. Year-end average gas prices were $2.20, $3.02, $1.68, and $1.66 per Mcf at December 31, 1997, 1996, 1995 and 1994. Year-end average natural gas liquids prices were $11.07 at December 31, 1997. Proved oil and gas reserves and the standardized measure at December 31, 1997 include 375,000 Bbls and 8,790,000 Mcf, and $9,286,000, respectively, attributable to the Company's 22% ownership of the Royalty Trust (Note 10). Price and cost revisions are primarily the net result of changes in year- end prices, based on beginning of year reserve estimates. Quantity estimate revisions during 1997 are primarily the result of proved undeveloped reserve additions attributable to increased development costs. Quantity estimate revisions during 1996 are primarily the effect of the extended economic life of proved reserves that resulted from development workovers and higher year-end oil and gas prices. 48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Cross Timbers Oil Company We have audited the accompanying consolidated balance sheets of Cross Timbers Oil Company and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As described in Note 1, effective October 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. ARTHUR ANDERSEN LLP Fort Worth, Texas March 18, 1998 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March 1998. CROSS TIMBERS OIL COMPANY By Bob R. Simpson -------------------------------------- Bob R. Simpson, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March 1998. PRINCIPAL EXECUTIVE OFFICERS (AND DIRECTORS) DIRECTORS Bob R. Simpson J. Luther King, Jr. - --------------------------------------- ----------------------------------- Bob R. Simpson, Chairman of the Board J. Luther King, Jr. and Chief Executive Officer Steffen E. Palko Jack P. Randall - --------------------------------------- ----------------------------------- Steffen E. Palko, Vice Chairman Jack P. Randall of the Board and President J. Richard Seeds Scott G. Sherman - --------------------------------------- ----------------------------------- J. Richard Seeds, Scott G. Sherman Executive Vice President PRINCIPAL FINANCIAL OFFICER PRINCIPAL ACCOUNTING OFFICER Louis G. Baldwin Bennie G. Kniffen - --------------------------------------- ----------------------------------- Louis G. Baldwin, Senior Vice President Bennie G. Kniffen, and Chief Financial Officer Senior Vice President and Controller 50 INDEX TO EXHIBITS Exhibit No. Description Page - -------- ----------------------------------------------------------- ------ 3.1 Certificate of Incorporation of Cross Timbers Oil Company, as amended through and restated on May 18, 1994 (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-81766) 3.2 Bylaws of Cross Timbers Oil Company (incorporated by reference to Exhibit 3.4 to Registration Statement on Form S-1, File No. 33-59820) 4.1 Form of Certificate of Designations of Series A Convertible Preferred Stock, par value $.01 per share (incorporated by reference to Exhibit 4 to Form 8-A/A, Amendment No. 1, dated September 3, 1996) 4.2 Indenture dated as of April 1, 1997, between Cross Timbers Oil Company and The Bank of New York, as Trustee for the 9 1/4% Senior Subordinated Notes due 2007 (incorporated by reference to Exhibit 4.1 to Registration Statement of Form S-4, File No. 333-26603). 4.3 Indenture, dated as of October 28, 1997, between Cross Timbers Oil Company and the Bank of New York, as Trustee for the 8 3/4% Senior Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-39097). 10.1 Revolving Credit Agreement dated November 21, 1997, between Cross Timbers Oil Company and certain commercial banks named therein (incorporated by reference to Exhibit 99.1 to Form 8-K dated December 1, 1997) 10.2 Employment Agreement between the Company and Bob R. Simpson, dated February 21, 1995 (incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended December 31, 1994) 10.3 Employment Agreement between the Company and Steffen E. Palko, dated February 21, 1995 (incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended December 31, 1994) 10.4 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1, File No. 33-59820) 10.5 Form of grant under 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1, File No. 33-59820) 10.6 1994 Stock Incentive Plan (incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-8, File No. 33-81766) 10.7 Form of grant under 1994 Stock Incentive Plan (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-8, File No. 33-81766) 10.8 1997 Stock Incentive Plan, as amended February 25, 1998 51 Exhibit No. Description Page - -------- ----------------------------------------------------------- ------ 10.9 Form of grant under 1997 Stock Incentive Plan, as amended February 25, 1998 a. Employee option grant b. Employee performance share grant c. Non-employee director option grant d. Non-employee director performance share grant e. Amendment to award agreements under the 1997 Stock Incentive Plan 10.10 Registration Rights Agreement among Cross Timbers Oil Company and partners of Cross Timbers Oil Company, L.P. (incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-1, File No. 33-59820) 10.11 Warrant Agreement dated December 1, 1997 by and between Cross Timbers Oil Company and Amoco Corporation 12.1 Computation of Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of Cross Timbers Oil Company 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Miller and Lents, Ltd. - -------------------------------- Copies of the above exhibits not contained herein are available, at the cost of reproduction, to any security holder upon written request to the Secretary, Cross Timbers Oil Company, 810 Houston St., Suite 2000, Fort Worth, Texas 76102. 52 EX-10.8 2 STOCK INCENTIVE PLAN EXHIBIT 10.8 CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN Amended as of February 25, 1998 CROSS TIMBERS OIL COMPANY STOCK INCENTIVE PLAN ARTICLE 1. GENERAL Section 1.1 Purpose. The purposes of this Stock Incentive Plan (the "Plan") are to: (1) associate the interests of the management of CROSS TIMBERS OIL COMPANY and its subsidiaries and affiliates (collectively referred to as the "Company") closely with the stockholders to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders; (2) provide management with a proprietary ownership interest in the Company commensurate with Company performance, as reflected in increased stockholder value; (3) maintain competitive compensation levels thereby attracting and retaining highly competent and talented directors and employees; and (4) provide an incentive to management for continuous employment with the Company. Certain capitalized terms are defined in Section 6.7. Section 1.2. Administration. (a) The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"), as constituted from time to time, consisting of two or more members who shall each be an Outside Director appointed by the Board of Directors. (b) The Committee shall have the authority in its sole discretion and from time to time to: (i) designate the executive employees (as defined in Section 1.3) of the Company eligible to participate in the Plan; (ii) grant Awards provided in the Plan in such form and amount as the Committee shall determine; (iii) impose such limitations, restrictions and conditions, not inconsistent with this Plan, upon any such Award as the Committee shall deem appropriate; and (iv) interpret the Plan and any agreement, instrument or other document executed in connection with the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be final, conclusive and binding upon all persons, including the Company, any participant, any stockholder of the Company and any employee. 1 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 during a period of ten years from the date of grant thereof (the "Option Term") and may be subject to such vesting scheduling as the Committee may provide in an Award Agreement. No Stock Option shall be exercisable after the expiration of its Option Term. Section 2.5. Manner of Payment. Each Award Agreement providing for Stock Options shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the option price for such shares with cash. The Optionee may also pay to the Company, in full, the option price with Common Stock owned by the Optionee on the date of exercise or Common Stock acquired pursuant to such exercise, provided that the Optionee provides satisfactory evidence, in the opinion of the Secretary or any Assistant Secretary of the Company, that the Optionee directly owns on the date of exercise shares of Common Stock sufficient to pay the option price, and that the Optionee has owned such shares for six months or more. Section 2.6. Restrictions on Certain Shares. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a stockholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a stockholder. Section 2.7. Death, Retirement and Termination of Employment of Optionee. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee: (a) Upon the death of the Optionee, any Stock Option to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) one year. The provisions of this Section shall apply notwithstanding that the Optionee's employment may have terminated prior to death, but only to the extent of any rights exercisable on the date of termination of the Optionee's employment. (b) Upon termination of the Optionee's employment by reason of retirement or permanent disability (as each is determined by the Committee), the Optionee may exercise any Stock Options, to the extent exercisable on the date of termination of the Optionee's employment, provided such option exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) six months (in the case of permanent disability) or three months (in the case of retirement). 4 (c) Upon termination of the Optionee's employment by reason other than death, disability or cause (as each is determined by the Committee), the Optionee may exercise any Stock Options, to the extent exercisable on the date of termination of the Optionee's employment, provided such option exercise occurs within both (i) the remaining Option Term of the Stock Option and (ii) 30 days of the date of termination. (d) Except as provided in Subsections (a), (b) and (c) of this Section 2.7, all Stock Options shall terminate immediately upon the termination of the Optionee's employment. Section 2.8. Transferability. The Committee may, in its discretion, authorize all or a portion of the Stock Options to be granted to an Optionee to be on terms which permit transfer by such Optionee to (i) the spouse, children or grandchildren of the Optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which (a) the Optionee, (b) such Immediate Family Members, (c) corporations, the only owners of which are such Immediate Family Members or the Optionee, or (d) trusts whose only beneficiaries are such Immediate Family Members or the Optionee, are the only partners, provided that (x) there may be no consideration for any such transfer, (y) the Award Agreement pursuant to which such Stock Options are granted must be approved by the Committee, and must expressly provide for the transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred Stock Options shall be prohibited except those in accordance with Section 6.2 hereof. Following transfer, such Stock Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Section 2.2 hereof the term "Optionee" shall be deemed to refer to the transferee. The events of termination of employment of Section 2.7 hereof shall continue to be applied with respect to the original Optionee, following which the Stock Options shall be exercisable by the transferee only to the extent, and for the periods specified in Section 2.4. ARTICLE III. INCENTIVE STOCK OPTIONS Section 3.1. Award of Incentive Stock Options. The Committee may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more "incentive stock options" (intended to qualify as such under the provisions of section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options")) to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not be granted to any owner of 10% or more of the total combined voting power of all classes of stock of the Company or its subsidiaries, unless the Incentive Stock Options (i) have an exercise price of 110% of the fair market value of the Common Stock on the date of grant, and (ii) may not be exercised more than five years from the date of grant thereof. Section 3.2. Incentive Stock Option Agreements. The grant of an Incentive Stock Option shall be evidenced by a written Award Agreement, executed by the Company and the holder of an incentive 5 Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby and in such form as the Committee may from time to time determine. Section 3.3. Incentive Stock Option Price. The option price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be 100% of the fair market value of a share of Common Stock on the date the Incentive Stock Option is granted. Section 3.4. Term and Exercise. Each Incentive Stock Option, unless a shorter period is provided by the Committee or another Section of this Plan, may be exercised during a period of ten years from the date of grant thereof (the "Option Term") and may be subject to such vesting scheduling as the Committee may provide in an Award Agreement. No Incentive Stock Option shall be exercisable after the expiration of its Option Term. Section 3.5. Maximum Amount of Incentive Stock Option Grant. The aggregate fair market value (determined on the date the Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options first become exercisable by an Optionee during any calendar year (under all plans of the Optionee's employer corporations and their parent and subsidiary corporations) shall not exceed $100,000. Section 3.6. Death of Optionee. (a) Upon the death of the Optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both the remaining Option Term of the Incentive Stock Option and one year after the Optionee's termination of employment. (b) The provisions of this Section shall apply notwithstanding that the Optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. Section 3.7. Retirement or Disability. Unless otherwise provided in an Award Agreement or otherwise agreed to by the Committee, upon the termination of the Optionee's employment by reason of permanent disability or retirement (as each is determined by the Committee), the Optionee may exercise any Incentive Stock Options, provided such option exercise occurs within both (i) the remaining Option Term of the Incentive Stock Option and (ii) six months (in the case of permanent disability) or three months (in the case of retirement). Notwithstanding the terms of an Award Agreement, the tax treatment available pursuant to Section 422 of the Internal Revenue Code of 1986 upon the exercise of an Incentive Stock Option shall not be available to an Optionee who exercises any Incentive Stock Options more than (i) six months after the date of termination of employment due to permanent disability or (ii) three months after the date of termination of employment due to retirement. 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 to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or Federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an Award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with the granting of such Award or the issue or purchase of shares of Common Stock thereunder, such Award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. Section 6.2. Non-Assignability. Except as permitted by Section 2.8 hereof, no Award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such Award shall be exercisable only by such person or by such person's guardian or legal representative. Section 6.3. Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the grantee to remit to the Company as amounts sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificates for such shares. Alternatively, the Company may issue, transfer or vest only such number of shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. Section 6.4. Right to Terminate Employment. Nothing in the Plan or in any Agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. Section 6.5. Non-Uniform Determinations. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. Section 6.6. Rights as a Stockholder. The recipient of any Award under the Plan shall have no rights as a stockholder with respect thereto unless and until certificates for shares of Common Stock are issued to him. Section 6.7. Definitions. In this Plan the following definitions shall apply: (a) "Award" shall mean a grant of Stock Options, Incentive Stock Options or Performance Shares under the Plan. 9 (b) "Fair market value" as of any date and in respect of any share of Common Stock means the average of the high and low sales price on such date or on the next business day, if such date is not a business day, of a share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the NYSE - Composite Transactions) or any other publication selected by the Committee, provided that, if shares of Common Stock shall not have been traded on the New York Stock Exchange or other public securities market for more than 10 days immediately preceding such date or if deemed appropriate by the Committee for any other reason, the fair market value of shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. (c) "Option" means a Stock Option or Incentive Stock Option. (d) "Option price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option or Incentive Stock Option. (e) "Outside Director" means a director of the Company who (i) is not a current employee of the Company; (ii) is not a former employee of the Company who receives compensation from the Company for prior services (other than benefits under a tax-qualified retirement plan); (iii) has not been an officer of the Company; (iv) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director; and (v) does not possess an interest in a transaction, or is engaged in a business relationship, that would require disclosure under Item 404(a) or (b) of Regulation S-K promulgated by the Securities and Exchange Commission. (f) "Performance Cycle" means the period of time, if any, as specified by the Committee over which Performance Shares are to be vested. Section 6.8. Leaves of Absence. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any Award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on Awards under the Plan theretofore made to any recipient who takes such leave of absence. Section 6.9. Newly Eligible Employees. The Committee shall be entitled to make such rules, regulations, determinations and Awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an Award or incentive period. Section 6.10. Adjustments. (a) In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, 10 exchange of shares or the like, the Committee may appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Option or Performance Shares theretofore granted under the Plan, and any and all other matters deemed appropriate by the Committee. (b) In the event of a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefor in money, services or property, then (a) in the event of an increase in the number of such shares outstanding, the number of shares of Common Stock purchasable pursuant to a Stock Option granted automatically pursuant to Section 5.1 after the date of increase, and the number of Performance Shares granted automatically pursuant to Section 5.1 after the date of such increase, shall be proportionately increased; and (b) in the event of a decrease in the number of such shares outstanding the number of shares of Common Stock purchasable pursuant to a Stock Option granted automatically pursuant to Section 5.1 after the date of decrease, and the number of Performance Shares granted automatically pursuant to Section 5.1 after the date of such decrease shall be proportionately decreased. Section 6.11. Changes in the Company's Capital Structure. (a) The existence of outstanding Options or Performance Shares shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) If, while there are outstanding Options or Performance Shares, the Company shall effect a subdivision or consolidation of shares or other increase or reduction in the number of shares of the Common Stock outstanding without receiving compensation therefor in money, services or property, then, subject to the provisions, if any, in the Award Agreement (a) in the event of an increase in the number of such shares outstanding, the number of shares of Common Stock then subject to Options hereunder or Performance Shares granted hereunder shall be proportionately increased; and (b) in the event of a decrease in the number of such shares outstanding the number of shares then available for Option hereunder or the number of Performance Shares granted hereunder shall be proportionately decreased. Any such adjustment in outstanding Options will be made without change to the total exercise price applicable to such Option and with a corresponding adjustment in the exercise price per share. (c) After a merger of one or more corporations into the Company, or after a consolidation of the Company and one or more corporations in which the Company shall be the surviving corporation, (i) each holder of an outstanding Option shall, at no additional cost, be entitled upon exercise of such Option to receive (subject to any required action by stockholders) in lieu of the number of shares as to which such Option shall then be so exercisable, the number and class of shares of stock, other securities or consideration to which 11 such holder would have been entitled to receive pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of the Company equal to the number of shares as to which such Option had been exercisable and (ii) unless otherwise provided by the Committee, the number of shares of Common Stock, other securities or consideration to be received with respect to unvested Performance Shares shall continue to be subject to the Award Agreement, including any vesting provisions thereof. (d) If the Company is about to be merged into or consolidated with another corporation or other entity under circumstances where the Company is not the surviving corporation, or if the Company is about to sell or otherwise dispose of substantially all of its assets to another corporation or other entity while unvested Performance Shares or unexercised Options remain outstanding, the Committee may direct that any of the following shall occur: (i) If the successor entity is willing to assume the obligation to deliver shares of stock or other securities after the effective date of the merger, consolidation or sale of assets, as the case may be, each holder of an outstanding Option shall be entitled to receive, upon the exercise of such Option and payment of the option price, in lieu of shares of Common Stock, such shares of stock or other securities as the holder of such option would have been entitled to receive had such Option been exercised immediately prior to the consummation of such merger, consolidation or sale, and the terms of such Option shall apply as nearly as practicable to the shares of stock or other securities purchasable upon exercise of the Option following such merger, consolidation or sale of assets; (ii) The Committee may waive any limitations set forth in or imposed pursuant to this Plan or any Award Agreement with respect to such Option or Performance Share such that (A) such Option shall become exercisable prior to the record or effective date of such merger, consolidation or sale of assets or (B) the vesting of such Performance Share shall occur upon such merger, consolidation or sale of asset; and/or (iii) The Committee may cancel all outstanding Options as of the effective date of any such merger, consolidation or sale of assets provided that prior notice of such cancellation shall be given to each holder of an Option at least 30 days prior to the effective date of such merger, consolidation or sale of assets, and each holder of an Option shall have the right to exercise such Option, to the extent exercisable, during a period of not less than 30 days prior to the effective date of such merger, consolidation or sale of assets. (e) Except as herein provided, the issuance by the Company of Common Stock or any other shares of capital stock or securities convertible into shares of capital stock, for cash, property, labor done or other consideration, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options. 12 Section 6.12. Amendment of the Plan. (a) The Committee may, without further action by the stockholders and without receiving further consideration from the participants, amend this Plan or condition or modify Awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without stockholder approval the committee may not (i) increase the maximum number of shares of Common Stock which may be issued under the Plan or to any individual (other than increases pursuant to Sections 6.10 and 6.11), or (ii) change the employees or class of employees eligible to participate in the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not, without the consent of a participant, affect his or her rights under an Award previously granted to him or her. The undersigned hereby certifies that this is a true and correct copy of the Cross Timbers Oil Company 1997 Stock Incentive Plan, as adopted by the Company's Board of Directors on February 18, 1997 and the Company's stockholders on May 20, 1997, as amended. By ----------------------------------- Virginia Anderson, Secretary 13 EX-10.9 3 AWARD AGREEMENT EXHIBIT 10.9 AWARD AGREEMENT UNDER CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN ------------------------- THIS AGREEMENT is entered into this _____ day of _________________, 1998, between Cross Timbers Oil Company, a Delaware corporation (herein called "Company"), and __________________________ (herein called "Grantee"), pursuant to the provisions of the Cross Timbers Oil Company 1997 Stock Incentive Plan, as amended (herein called the "Plan"). The Compensation Committee of the Board of Directors of the Company has determined that Grantee is eligible to participate as a Grantee under the Plan and, to carry out its purposes, has this day authorized the grant, pursuant to the Plan, of the options set forth below to Grantee. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties do hereby agree as follows: 1. GRANT OF OPTIONS. Subject to all of the terms, conditions, and provisions of the Plan and of this Agreement, the Company hereby grants to Grantee options under the Plan pursuant to which Grantee shall have the right and option under the Plan to purchase from the Company all or any part of an aggregate of ____________________ shares of the common stock of the Company, of the par value of one cent ($0.01) per share ("Common Stock"), which shares shall consist of authorized but unissued shares or issued shares reacquired by the Company. Such options are not intended to be Incentive Stock Options, as defined in the Plan. 2. OPTION PRICE. The option or purchase price payable by Grantee to the Company in exercise of this option shall be $__________________ per share, being the fair market value of the Common Stock of the Company on this date (the "Grant Date") as determined according to the Plan. Upon exercise of this option, Grantee must pay to the Company, in full, the option price for the shares of Common Stock issuable pursuant to such exercise with cash. Grantee may also pay to the Company, in full, the option price with Common Stock owned by Grantee on the date of exercise or Common Stock acquired pursuant to such exercise, provided that Grantee provides satisfactory evidence, in the opinion of the Secretary or any Assistant Secretary of the Company, that Grantee directly owns on the date of exercise shares of Common Stock sufficient to pay the option price, and that the Grantee has owned such shares for six months or more (such Common Stock being valued at fair market value on the date of such exercise). 3. EXERCISE PERIOD. (a) One-fifth of the options granted on a Grant Date will become exercisable on each of the first, second, third, fourth, and fifth anniversaries of such Grant Date. Alternatively, one-half of the total number of options granted will become exercisable when the Common Stock closes on the New York Stock Exchange at or above $______ per share. If the Common Stock closes on the New York Stock Exchange at or above $______ per share, then the remaining options granted will become exercisable. If the Common Stock is not listed on the New York Stock Exchange, then any reference in this -2- Agreement to the New York Stock Exchange will be deemed to be the principal securities exchange on which the Common Stock is traded. (b) The right to exercise options will be cumulative. An option must be exercised in multiples of 10% of the options then exercisable. (c) Any options which remain unexercised on the tenth anniversary of the Grant Date will expire. (d) Options may be exercised only if the Common Stock is duly registered under the Securities Act of 1933 and applicable state securities laws, or unless the issuance is exempt from such registrations. 4. NO EMPLOYMENT COMMITMENT. Grantee acknowledges that neither the grant of options nor the execution of this Agreement by the Company shall be interpreted or construed as imposing upon the Company an obligation to retain Grantee's services for any stated period of time, which employment shall continue to be at the pleasure of the Company at such compensation as it shall determine, unless otherwise provided in a written employment agreement. 5. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that: (a) With respect to the calendar year in which such options are exercised, Grantee shall include in his gross income for federal income tax purposes the amount, if any, by which the fair market value of the stock on the date of exercise as determined in Section 6.7(b) of the Plan exceeds the option price; -3- (b) The grant of options is special incentive compensation which shall not be taken into account as "wages" or "salary" in determining the amount of payment or benefit to Grantee under any pension, thrift, stock, or deferred compensation plan of the Company; and (c) In behalf of Grantee's beneficiary, such grant shall not affect the amount of any life insurance coverage available to such beneficiary under any life insurance plan covering employees of the Company or any subsidiary. 6. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the options herein granted by the Company to Grantee are granted subject to all of the terms, conditions, and provisions of the Plan. Grantee hereby acknowledges receipt of a copy of the Plan certified by the Secretary of the Company, and the parties agree that the entire text of such Plan be, and it is hereby incorporated herein by reference as fully as if copied herein in full. Reference to such Plan is therefore made for a full description of the rights and methods of exercise of the options, the effect of Grantee's termination of employment, the adjustments to be made in the event of changes in the capital structure of the Company, and of all of the other provisions, terms, and conditions of the Plan applicable to the options granted herein. If any of the provisions of this Agreement shall vary from or be in conflict with the Plan, the provisions of the Plan will be controlling. 7. TRANSFERABILITY. The options granted hereunder are transferable or assignable by Grantee in accordance with Section 2.8 of the Plan or by will or the laws of descent and distribution. -4- 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 --------------------------------------- ----------------------------- -5- AWARD AGREEMENT UNDER CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN ------------------------- THIS AGREEMENT is entered into this _____ day of _____________, 1998, between Cross Timbers Oil Company, a Delaware corporation (herein called "Company"), and _______________________ (herein called "Grantee"), pursuant to the provisions of the Cross Timbers Oil Company 1997 Stock Incentive Plan, as amended (the "Plan"). The Compensation Committee of the Board of Directors of the Company (the "Committee") has determined that Grantee is eligible to participate as a Grantee under the Plan and, to carry out its purposes, has this day authorized the grant, pursuant to the Plan, of the performance shares set forth below to Grantee. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties do hereby agree as follows: 1. GRANT OF PERFORMANCE SHARES. Subject to all of the terms, conditions, and provisions of the Plan and of this Agreement, the Company hereby grants to Grantee under Article IV of the Plan _______________ shares of the common stock of the Company, of the par value of one cent ($0.01) per share ("Common Stock"), which shares shall consist of authorized but unissued shares or issued shares reacquired by the Company. Such shares are being issued as performance shares under the Plan. 2. VESTING. The performance shares granted herein shall vest when the Common Stock closes on the New York Stock Exchange at or above $_____ per share. If the Common Stock is not listed on the New York Stock Exchange, then any reference in this Agreement to the New York Stock Exchange will be deemed to be the principal securities exchange on which the Common Stock is traded. 3. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that: (a) With respect to the calendar year in which such performance shares are vested, Grantee shall include in his gross income for federal income tax purposes the fair market value of the performance shares upon the vesting of the performance shares. (b) The grant of options is special incentive compensation which will not be taken into account as "wages" or "salary" in determining the amount of payment or benefit to Grantee under any pension, thrift, stock, or deferred compensation plan of the Company. (c) In behalf of Grantee's beneficiary, such grant shall not affect the amount of any life insurance coverage available to such beneficiary under any life insurance plan covering employees of the Company or any subsidiary. (d) The Company may hold unvested performance shares in escrow until the performance shares vest. 4. TERM. Any performance shares which remain unvested on the tenth anniversary of the date of this Agreement shall be canceled, shall not vest and shall be returned to the Company. 2 5. DEATH OR DISABILITY. Upon death of Grantee, or upon termination of Grantee's employment by reason of permanent disability (as determined by the Committee), all unvested performance shares granted herein shall immediately vest. 6. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the performance shares herein granted by the Company to Grantee are granted subject to all of the terms, conditions, and provisions of the Plan. Grantee hereby acknowledges receipt of a copy of the Plan certified by the Secretary of the Company, and the parties agree that the entire text of such Plan be, and it is hereby incorporated herein by reference as fully as if copied herein in full. Reference to such Plan is therefore made for a full description of the rights of Grantee and of all of the other provisions, terms, and conditions of the Plan applicable to the performance shares granted herein. If any of the provisions of this Agreement shall vary from or be in conflict with the Plan, the provisions of the Plan shall be controlling. 7. NON-TRANSFERABILITY. The performance shares granted hereunder are not transferable or assignable by Grantee. [THE PERFORMANCE SHARES GRANTED HEREUNDER SHALL NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, TRANSFERRED, OR OTHERWISE DISPOSED OF PRIOR TO SIX MONTHS AFTER THE DATE OF GRANT, EXCEPT BY WILL OR THE LAWS OF DESCENT AND DISTRIBUTION.] 8. NO EMPLOYMENT COMMITMENT. Grantee acknowledges that neither the grant of performance shares nor the execution of this Agreement by the Company will be interpreted or construed as imposing upon the Company an obligation to retain Grantee's services for any stated period of time, which employment shall continue to be at the 3 pleasure of the Company at such compensation as it shall determine, unless otherwise provided in a written employment agreement. IN WITNESS WHEREOF, this Agreement is executed and entered into effective on the day and year first above expressed. CROSS TIMBERS OIL COMPANY ATTEST: By: - -------------------------------------- ------------------------------------ Virginia Anderson, Name: Bob R. Simpson Secretary Title: Chairman of the Board and Chief Executive Officer --------------------------------------- ---------------------------------- 4 AWARD AGREEMENT UNDER CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN ------------------------- THIS AGREEMENT is entered into this _____ day of _____________, 1998, between Cross Timbers Oil Company, a Delaware corporation (herein called "Company"), and ___________________________, Director of the Company (herein called "Grantee"), pursuant to the provisions of the Cross Timbers Oil Company 1997 Stock Incentive Plan, as amended (herein called the "Plan"). The Compensation Committee of the Board of Directors of the Company has determined that Grantee is eligible to participate as a Grantee under the Plan and, to carry out its purposes, has this day authorized the grant, pursuant to the Plan, of the options set forth below to Grantee. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties do hereby agree as follows: 1. GRANT OF OPTIONS. Subject to all of the terms, conditions, and provisions of the Plan and of this Agreement, the Company hereby grants to Grantee options under Article V of the Plan pursuant to which Grantee shall have the right and option under the Plan to purchase from the Company all or any part of an aggregate of 2,250 shares of the common stock of the Company, of the par value of one cent ($0.01) per share ("Common Stock"), which shares shall consist of authorized but unissued shares or issued shares reacquired by the Company. Such options are not intended to be Incentive Stock Options, as defined in the Plan. 2. OPTION PRICE. The option or purchase price payable by Grantee to the Company in exercise of this option shall be $___________ per share, being the fair market value of the Common Stock of the Company on this date (the "Grant Date") as determined according to the Plan. Upon exercise of this option, Grantee must pay to the Company, in full, the option price for the shares of Common Stock issuable pursuant to such exercise with cash. Grantee may also pay to the Company, in full, the option price with Common Stock owned by Grantee on the date of exercise or Common Stock acquired pursuant to such exercise, provided that Grantee provides satisfactory evidence, in the opinion of the Secretary or any Assistant Secretary of the Company, that Grantee directly owns on the date of exercise shares of Common Stock sufficient to pay the option price, and that the Grantee has owned such shares for six months or more (such Common Stock being valued at fair market value on the date of such exercise). 3. EXERCISE PERIOD. Options may be exercised only upon the following terms and conditions: (a) One-fifth of the options granted on a Grant Date will become exercisable on each of the first, second, third, fourth, and fifth anniversaries of such Grant Date. [ALTERNATIVELY, ONE-HALF OF THE TOTAL NUMBER OF OPTIONS GRANTED WILL BECOME EXERCISABLE WHEN THE COMMON STOCK CLOSES ON THE NEW YORK STOCK EXCHANGE AT OR ABOVE $______ PER SHARE. IF THE COMMON STOCK CLOSES ON THE NEW YORK STOCK EXCHANGE AT OR ABOVE $______ PER SHARE, THEN THE REMAINING OPTIONS GRANTED WILL BECOME EXERCISABLE. IF THE COMMON STOCK IS NOT LISTED ON THE NEW YORK STOCK EXCHANGE, THEN ANY 2 REFERENCE IN THIS AGREEMENT TO THE NEW YORK STOCK EXCHANGE WILL BE DEEMED TO BE THE PRINCIPAL SECURITIES EXCHANGE ON WHICH THE COMMON STOCK IS TRADED.] (b) The right to exercise options will be cumulative. An option must be exercised in multiples of 10% of the options then exercisable. (c) Any options which remain unexercised on the tenth anniversary of the Grant Date will expire. (d) In the event that Grantee stands for reelection as a director of the Company but fails to be reelected, such failure shall not affect options granted hereunder. In all other events where Grantee does not continue as a director of the Company, Grantee may thereafter exercise only those options that were exercisable upon the date Grantee ceased to be a director and only during the period occurring within two years after Grantee ceased to be a director (but not after the expiration of the Option Period), and to the extent not exercised in such two-year period the options will expire; provided, that, in the event of the death of Grantee, the options may be exercised as provided in Section 2.7(a) of the Plan. Reference is made to the Plan for other terms and conditions upon which the options may be exercised or terminate. (e) Options may be exercised only if the Common Stock is duly registered under the Securities Act of 1933 and applicable state securities laws, or unless the issuance is exempt from such registrations. 3 4. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that with respect to the calendar year in which such options are exercised, Grantee shall include in his gross income for federal income tax purposes the amount, if any, by which the fair market value of the stock on the date of exercise as determined in Section 6.7(b) of the Plan exceeds the option price. 5. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the options herein granted by the Company to Grantee are granted subject to all of the terms, conditions, and provisions of the Plan. Grantee hereby acknowledges receipt of a copy of the Plan certified by the Secretary of the Company, and the parties agree that the entire text of such Plan be, and it is hereby incorporated herein by reference as fully as if copied herein in full. Reference to such Plan is therefore made for a full description of the rights and methods of exercise of the options, the adjustments to be made in the event of changes in the capital structure of the Company, and of all of the other provisions, terms, and conditions of the Plan applicable to the options granted herein. If any of the provisions of this Agreement shall vary from or be in conflict with the Plan, the provisions of the Plan shall be controlling. 6. TRANSFERABILITY. The options granted hereunder are transferable or assignable by Grantee in accordance with Section 2.8 of the Plan or by will or the laws of descent and distribution. IN WITNESS WHEREOF, this Agreement is executed and entered into effective on the day and year first above expressed. CROSS TIMBERS OIL COMPANY 4 ATTEST: By: - --------------------------------- ---------------------------------- Virginia Anderson, Name: Bob R. Simpson Secretary Title: Chairman of the Board and Chief Executive Officer ------------------------------------ ----------------------- 5 AWARD AGREEMENT UNDER CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN ------------------------- THIS AGREEMENT is entered into this _____ day of _____________, 1998, between Cross Timbers Oil Company, a Delaware corporation (herein called "Company"), and __________________________, Director of the Company (herein called "Grantee"), pursuant to the provisions of the Cross Timbers Oil Company 1997 Stock Incentive Plan, as amended (herein called the "Plan"). The Compensation Committee of the Board of Directors of the Company has determined that Grantee is eligible to participate as a Grantee under the Plan and, to carry out its purposes, has this day authorized the grant, pursuant to the Plan, of the performance shares set forth below to Grantee. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties do hereby agree as follows: 1. GRANT OF PERFORMANCE SHARES. Subject to all of the terms, conditions, and provisions of the Plan and of this Agreement, the Company hereby grants to Grantee under Article V of the Plan 3,375 shares of the common stock of the Company, of the par value of one cent ($0.01) per share ("Common Stock"), which shares shall consist of authorized but unissued shares or issued shares reacquired by the Company. Such shares are being issued as performance shares under the Plan. 2. VESTING. The performance shares granted herein shall vest six months after the date of grant. 3. GRANTEE'S AGREEMENT. Grantee expressly and specifically agrees that Grantee shall include in his gross income for federal income tax purposes the fair market value of the performance shares on the date of grant, which price per share is _____________. 4. OTHER TERMS, CONDITIONS, AND PROVISIONS. As previously provided, the performance shares herein granted by the Company to Grantee are granted subject to all of the terms, conditions, and provisions of the Plan. Grantee hereby acknowledges receipt of a copy of the Plan certified by the Secretary of the Company, and the parties agree that the entire text of such Plan be, and it is hereby incorporated herein by reference as fully as if copied herein in full. Reference to such Plan is therefore made for a full description of the rights of Grantee and of all of the other provisions, terms, and conditions of the Plan applicable to the performance shares granted herein. If any of the provisions of this Agreement shall vary from or be in conflict with the Plan, the provisions of the Plan shall be controlling. 5. NON-TRANSFERABILITY. The performance shares granted hereunder shall not be sold, assigned, pledged, hypothecated, transferred, or otherwise disposed of prior to six months after the date of grant, except by will or the laws of descent and distribution. 2 IN WITNESS WHEREOF, this Agreement is executed and entered into effective on the day and year first above expressed. CROSS TIMBERS OIL COMPANY ATTEST: By: - --------------------------------- ------------------------------------- Virginia Anderson, Name: Bob R. Simpson Secretary Title: Chairman of the Board and Chief Executive Officer --------------------------------------- -------------------------------- 3 AMENDMENT TO AWARD AGREEMENT(S) UNDER ------------------------------------- CROSS TIMBERS OIL COMPANY 1997 STOCK INCENTIVE PLAN --------------------------------------------------- This Amendment to Award Agreement(s) Under Cross Timbers Oil Company 1997 Stock Incentive Plan ("Amendment") is entered into this 25th day of February, 1998, between Cross Timbers Oil Company, a Delaware corporation (herein called "Company"), and Grantee (as hereinafter identified), pursuant to the provisions of the Cross Timbers Oil Company 1997 Stock Incentive Plan (herein called the "Plan"). RECITALS -------- A. The Company and Grantee have entered into one or more Award Agreements Under Cross Timbers Oil Company 1997 Stock Incentive Plan (herein called the "Agreement"), whereby Grantee was granted options to purchase shares of Common Stock of the Company. B. On January 29, 1998, the Board of Directors of the Company approved a three for two stock split to be effected as a stock dividend for shareholders of record at the close of business on February 12, 1998. Further, the Board of Directors of the Company approved the adjustment, pursuant to the Plan, of any options previously granted under the Plan to proportionately increase the number of shares of Common Stock then subject to options and to proportionately decrease the price per share of the options granted, so that the optionees under the Plan retain the same economic benefit as was previously granted. C. On February 17, 1998, the Board of Directors of the Company amended the early vesting provisions of the Agreement to reflect the three for two stock split to be effected as a stock dividend. D. On February 17, 1998, the Board of Directors of the Company amended Section 1.5(a) of the Plan to proportionately increase the number of shares that can be granted under the Plan and to any one individual, and amended Section 2.5 of the Plan to provide that an Optionee may pay for his or her options with Common Stock owned by the Optionee on the date of the exercise or with Common Stock acquired pursuant to the exercise, provided that the Optionee directly owns on the date of exercise shares of Common Stock sufficient to pay the option price and that the Optionee has owned such shares for six months or more. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties do hereby agree to the following: 1. Notwithstanding anything contained in the terms of the Agreement, the number of shares granted and the option price payable by Grantee to the Company in exercise of the option under the terms of the Agreement shall be adjusted as shown on the attached Exhibit A. 2. Paragraph 3(c) of the Agreement is amended as follows: "(c) One-half of the total number of options granted will become exercisable when the Common Stock closes on the New York Stock Exchange at or above $16.67 per share. If the Common Stock closes on the New York Stock Exchange at or above $20.00 per share, then the remaining options granted will become exercisable. If the Common Stock is not listed on the New York Stock Exchange, then any reference in this Agreement to the New York Stock Exchange will be deemed to be the principal securities exchange on which the Common Stock is traded." 3. The Company and Grantee agree that the terms of the Agreement will be governed by the Plan as amended, a copy of which is attached hereto. IN WITNESS WHEREOF, this Amendment is executed and entered into on the date and year first above stated. CROSS TIMBERS OIL COMPANY By: ---------------------------------------- Bob R. Simpson Chairman of the Board GRANTEE ------------------------------------------ EXHIBIT A Amendment to Award Agreement Under Cross Timbers Oil Company 1997 Stock ----------------------------------------------------------------------- Incentive Plan --------------
==================================================================================================== Grantee: Award Option Option Existing Option Amended Existing Amended Agreement Shares Granted Shares Exercised Option Shares Price Option Shares Option Price - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- ====================================================================================================
EX-10.11 4 WARRANT AGREEMENT EXHIBIT 10.11 WARRANT AGREEMENT dated as of December 1, 1997 by and between CROSS TIMBERS OIL COMPANY and AMOCO CORPORATION THIS WARRANT AGREEMENT is dated as of December 1, 1997, by and between CROSS TIMBERS OIL COMPANY, a Delaware corporation (the "Company"), and AMOCO CORPORATION, an Indiana corporation ("Amoco"). W I T N E S S E T H: -------------------- WHEREAS, the Company and Amoco Production Company, a wholly-owned indirect subsidiary of Amoco ("Amoco Production"), have entered into a Purchase and Sale Agreement dated as of September 29, 1997 (the "Acquisition Agreement"); WHEREAS, in partial consideration for Amoco Production's sale of certain properties under the Acquisition Agreement to the Company, the Company has agreed to issue warrants to Amoco to purchase shares of the Company's common stock, par value $0.01 per share (the "Common Stock"); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Grant. The Company hereby grants to Amoco the right to ----- purchase (the "Warrants"), at any time and from time to time until 5:00 p.m., Fort Worth, Texas time, on September 29, 2002 (the "Exercise Period"), up to 625,000 shares (the "Shares") of Common Stock (subject to adjustment as provided in Section 8 hereof) at an exercise price of $22.97 per Share (subject to adjustment as provided in Section 8 hereof), all subject to the terms and conditions of this Agreement. Section 2. Warrant Certificates. The warrant certificates (the -------------------- "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be substantially in the form set forth in Exhibit A attached hereto and made a part hereof, with such appropriate insertions and other variations as required or permitted by this Agreement. The Warrant Certificates shall further evidence the Warrants granted hereby. Section 3. Exercise of Warrants; Method of Exercise. The purchase ---------------------------------------- rights represented by the Warrant Certificates are exercisable at the option of the Holder (as defined herein) thereof, in whole or in part (but not for fewer than 200,000 Shares), at any time and from time to time during the Exercise Period. Upon surrender of a Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment to the Company of the Common Stock Exercise Price (as hereinafter defined) by federal wire transfer of immediately available funds for the Shares purchased, at the Company's principal offices in Fort Worth, Texas (currently located at 810 Houston Street, Suite 2000, Fort Worth, Texas 76102), the registered holder of the Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the Shares so purchased. In the case of the purchase of less than all the Shares purchasable under any Warrant Certificate, the Company, at its expense, shall cancel such Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares purchasable thereunder. The Holder shall identify the aggregate principal amount of Shares for which the Warrant is exercised on the Form of Election to Purchase. Section 4. Issuance of Certificates. Upon the exercise of Warrants, ------------------------ the issuance of certificates for the Shares and/or other securities, properties or rights underlying such Warrants shall be made forthwith (and in any event within five (5) business days thereafter) without charge to the Holder thereof including, without limitation, any tax or other governmental charge imposed in respect of the issuance thereof (other than state or federal income taxes), and such certificates shall (subject to the provisions of Section 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax or other governmental charge that may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder thereof and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or other governmental charge or shall have established to the satisfaction of the Company that such tax or charge has been paid or that no tax or other governmental charge is payable. The Warrant Certificates and the certificates representing the Shares shall be executed on behalf of the Company by the manual or facsimile signature of the then-serving Chairman or Vice Chairman of the Board of Directors or President or any Vice President of the Company under its corporate seal reproduced thereon and by the manual or facsimile signature of the then-serving Treasurer or any Assistant Treasurer or Secretary or any Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. Certificates representing the Shares issuable upon exercise of Warrants shall be dated the date on which the exercise is perfected by the Holder as provided in Section 3 hereof (the "Exercise Date") and any interest-bearing securities so issued shall accrue interest from the Exercise Date. Section 5. Transfers of Warrants. --------------------- Section 5.1. Investment Intent with respect to Warrants. The Warrants ------------------------------------------ have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or state securities laws. The Holder of a Warrant Certificate, by its acceptance thereof, represents and warrants that the Warrants are being acquired as an investment and not with a view to the distribution thereof, and understands and acknowledges that each Warrant Certificate shall bear a restrictive legend substantially as set forth below: "THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES) OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. "THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS FURTHER RESTRICTED BY THE TERMS OF THE WARRANT AGREEMENT REFERRED TO HEREIN." Section 5.2. Restrictions on Transferability of Warrants. Subject to ------------------------------------------- compliance with all applicable federal and state securities laws, the Warrants and this Agreement may be transferred only in accordance with the provisions of this Section 5. The Holder of a Warrant Certificate, by its acceptance thereof, agrees to comply in all respects with the provisions of this Agreement. Section 5.3. Notice of Proposed Transfer of Warrants. Prior to any --------------------------------------- proposed transfer of Warrants by an Affiliated Warrant Holder to any third party that is not an Amoco affiliate (a "Proposed Warrant Transfer"), such Affiliated Warrant Holder shall notify the Company of its intention to effect such Proposed Warrant Transfer and the intended manner and circumstances thereof in reasonable detail, specifying the number of Warrants to be sold, the prospective purchaser(s) thereof and the price (or the method or formula for determining the price) and terms and conditions of such sale, and offering to sell such Warrants to the Company or its designee (a "Warrant Purchase Offer") at such price and on like terms and conditions (a "Proposed Warrant Transfer Notice"). Section 5.4. Company's Right of Refusal with respect to Proposed Warrant ----------------------------------------------------------- Transfer. The Company shall have the right to accept (in whole but not in part) - -------- or reject a Warrant Purchase Offer within 24 hours (exclusive of weekends and holidays) following receipt of the Proposed Warrant Transfer Notice. If the Company shall accept such Warrant Purchase Offer within the applicable time period specified above, then the Company shall purchase the Warrants specified in the Proposed Warrant Transfer Notice within 10 business days thereafter on the same terms and conditions set forth therein; provided, however, that if the purchase price specified in the Proposed Warrant Transfer Notice is to be paid in cash, then the Company shall deliver the purchase price to the Holder in immediately available funds by federal wire transfer. Section 5.5. Company's Rejection of Warrant Purchase Offer. --------------------------------------------- (a) If the Company (i) rejects such Warrant Purchase Offer, or (ii) does not accept such Warrant Purchase Offer within the applicable time period set forth in Section 5.4, or (iii) accepts such Warrant Purchase Offer within the applicable time period set forth in Section 5.4 but thereafter fails to effect the purchase of all the Warrants within the applicable time period set forth in Section 5.4, then such Affiliated Warrant Holder shall be free to enter into an agreement to sell all (but not less than all) of such Warrants to the original prospective purchaser and on the terms and conditions specified in the Proposed Warrant Transfer Notice, except that the per-Warrant sale price may differ but shall be equal to or greater than the lesser of (i) the originally-proposed price and (ii) a price equal to (A) the then-current per-share Market Price (as hereinafter defined) of the Common Stock, less (B) 110% of the per-Warrant exercise price; provided, however, that, if the Company requests, such Affiliated Warrant Holder must provide, at its sole expense, (1) a written opinion of legal counsel who is, and whose legal opinion shall be, reasonably satisfactory to the Company, addressed to the Company, to the effect that the Proposed Warrant Transfer may be effected without registration of the applicable Warrants under the Securities Act, and (2) such certificates and other information as the Company reasonably 3 may require to confirm such opinion, whereupon such Affiliated Warrant Holder shall be entitled to transfer such Warrants in the manner contemplated by such opinion and by this Section 5; and provided further, however, that if the Company accepts such Warrant Purchase Offer within the applicable time period set forth in Section 5.4 but thereafter fails to effect the purchase of all the Warrants within the applicable time period set forth in Section 5.4, the ability of the Affiliated Warrant Holder to sell the Warrants to the original prospective purchaser as set forth above shall not limit other remedies, if any, that may be available to such Affiliated Warrant Holder as a result thereof. (b) Any sale of Warrants to the originally-proposed purchaser pursuant to this Section 5 must be consummated within 30 days after the expiration of the time period set forth in Section 5.4. Section 5.6. Limitation on Right of Refusal. The Company's right of ------------------------------ refusal set forth in this Section 5 shall not apply to subsequent transfers of Warrants by Holders (a) that are not Affiliated Warrant Holders and (b) that acquired Warrants in compliance with all applicable federal and state securities laws and with the other applicable transfer provisions of this Warrant Agreement. Section 5.7. Definition of "Affiliated Warrant Holder". For the purposes ----------------------------------------- of this Agreement, the term "Affiliated Warrant Holder" shall mean Amoco and any Amoco affiliate to whom Amoco or any Amoco affiliate has transferred Warrants. An Amoco affiliate is any person or entity controlled by, controlling or under common control with Amoco. Section 6. Transfers of Shares. ------------------- Section 6.1. Investment Intent with respect to Shares. The Holder of a ---------------------------------------- Warrant Certificate, by its acceptance thereof, represents and warrants that the Shares issuable upon exercise of Warrants shall be acquired as an investment and not with a view to the distribution thereof, and understands and acknowledges that each certificate representing Warrant Stock shall bear a restrictive legend substantially as set forth below: "THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES) OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. "THE TRANSFER OR EXCHANGE OF THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE IS FURTHER RESTRICTED BY THE TERMS OF THAT CERTAIN WARRANT AGREEMENT DATED AS OF DECEMBER 1, 1997, BY AND BETWEEN THE ISSUER AND AMOCO CORPORATION (THE "WARRANT AGREEMENT"). THE ISSUER WILL FURNISH A COPY OF THE WARRANT 4 AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST." Section 6.2. Restrictions on Transferability of Shares. Subject to ----------------------------------------- compliance with all applicable federal and state securities laws, Shares may be transferred only in accordance with the provisions of this Section 6. Each holder of Warrants and Shares, by its acceptance thereof, agrees to comply in all respects with the provisions of this Agreement. Section 6.3. Notice of Proposed Transfer of Shares. Prior to any ------------------------------------- proposed transfer of Shares by an Affiliated Warrant Stockholder to any third party that is not an Amoco affiliate (a "Proposed Warrant Stock Transfer"), such Affiliated Warrant Stockholder shall notify the Company of its intention to effect such Proposed Warrant Stock Transfer and the intended manner and circumstances thereof in reasonable detail, specifying the number of Shares to be sold, the prospective purchaser(s) thereof and the price and terms and conditions of such sale, and offering to sell such Shares to the Company or its designee (a "Warrant Stock Purchase Offer") at such price and on like terms and conditions (a "Proposed Warrant Stock Transfer Notice"). Section 6.4. Company's Right of Refusal with respect to Proposed Warrant ----------------------------------------------------------- Stock Transfer. The Company shall have the right to accept (in whole but not in - -------------- part) or reject a Warrant Stock Purchase Offer within 24 hours (exclusive of weekends and holidays) following receipt of the Proposed Warrant Stock Transfer Notice. If the Company shall accept such Warrant Stock Purchase Offer within the applicable time period specified above, then the Company shall purchase the Shares specified in the Proposed Warrant Stock Transfer within 10 business days thereafter on the same terms and conditions set forth therein; provided, however, that if the purchase price specified in the Proposed Warrant Stock Transfer Notice is to be paid in cash, then the Company shall deliver the purchase price to the Holder in immediately available funds by federal wire transfer. Section 6.5. Company's Rejection of Warrant Stock Purchase Offer. --------------------------------------------------- (a) If the Company (i) rejects such Warrant Stock Purchase Offer, or (ii) does not accept such Warrant Stock Purchase Offer within the applicable time period set forth in Section 6.4, or (iii) accepts such Warrant Stock Purchase Offer within the applicable time period set forth in Section 6.4 but thereafter fails to effect the purchase of all such Shares within the applicable time period set forth in Section 6.4, then such Affiliated Warrant Stockholder shall be free to enter into an agreement to sell all (but not less than all) of such Shares to the original prospective purchaser and on the terms and conditions specified in the Proposed Warrant Stock Transfer Notice, except that the per- share sale price may differ but shall not be less than the originally-proposed price less the amount, if any, by which the per share Market Price for Company Common Stock at the date of purchase is less than such Market Price on the date of notice of proposed sale; provided, however, that, if the Company requests, such Affiliated Warrant Holder must provide, at its sole expense, (i) a written opinion of legal counsel who is, and whose legal opinion shall be, reasonably satisfactory to the Company, addressed to the Company, to the effect that the Proposed Warrant Stock Transfer may be effected without registration of the applicable Shares under the Securities Act, and (ii) such certificates and other information as the 5 Company reasonably may require to confirm such opinion, whereupon such Affiliated Warrant Stockholder shall be entitled to transfer such Shares in the manner contemplated by such opinion and by this Section 6; and provided further, however, that if the Company accepts such Warrant Stock Purchase Offer within the applicable time period set forth in Section 6.4 but thereafter fails to effect the purchase of all such Shares within the applicable time period set forth in Section 6.4, the ability of the Affiliated Warrant Stockholder to sell such Shares to the original prospective purchaser as set forth above shall not limit other remedies, if any, that may be available to such Affiliated Warrant Stockholder as a result thereof. (b) Any sale of Shares to the originally-proposed purchaser pursuant to this Section 6 must be consummated within 30 days after the expiration of the time period set forth in Section 6.4. Section 6.6. Limitation on Right of Refusal. The Company's right of ------------------------------ refusal set forth in this Section 6 shall not apply to: (a) any sales, pursuant to Rule 144 under the Securities Act or otherwise, of a block of fewer than 150,000 Shares; (b) any sales pursuant to an offering that is registered under the Securities Act; or (c) subsequent transfers of Shares by holders (i) that are not Affiliated Warrant Holders or Affiliated Warrant Stockholders and (ii) that acquired Shares in compliance with all applicable federal and state securities laws and with the other applicable transfer provisions of this Warrant Agreement. Section 6.7. Definition of "Affiliated Warrant Stockholder". For the ---------------------------------------------- purposes of this Agreement, the term "Affiliated Warrant Stockholder" shall mean Amoco and any Amoco affiliate to whom Amoco or any Amoco affiliate has transferred (a) Warrants that such transferee exercised for Shares or (b) Shares. Section 7. Exercise Price. -------------- Section 7.1. Initial Exercise Price and Adjusted Exercise Price. The -------------------------------------------------- initial exercise price of each Warrant shall be $22.97 (the "Initial Exercise Price"). The adjusted exercise price for Common Stock shall be the price that shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Section 8 hereof (the "Adjusted Exercise Price"). Section 7.2. Common Stock Exercise Price. The term "Common Stock Exercise --------------------------- Price" herein shall mean the Initial Exercise Price or, if the Initial Exercise Price has been adjusted pursuant to the terms of Section 8 hereof, the Adjusted Exercise Price. Section 8. Adjustments to Exercise Price and Number of Securities. ------------------------------------------------------ Section 8.1. Computation of Adjusted Exercise Price. Except as -------------------------------------- hereinafter provided, in case the Company shall issue or sell, or any Company subsidiary shall sell, any shares of 6 Common Stock at any time after the date hereof (other than the issuances or sales referred to in Section 8.3 or 8.7 hereof), including shares held in the treasury of the Company or by any Company subsidiary (but excluding (i) shares issued upon the exercise of any options, rights or warrants and shares issued upon the direct or indirect conversion or exchange of securities and (ii) shares issued pursuant to employee or director benefit plans approved by a majority of the entire Board of Directors of the Company or any Company subsidiary, as the case may be), for consideration per share less than the Market Price per share of Common Stock on the date immediately prior to the issuance or sale of such shares, or without consideration, then forthwith upon such issuance or sale, the Common Stock Exercise Price shall (until another such issuance or sale or other event giving rise to an adjustment to the Common Stock Exercise Price pursuant to this Section 8) be adjusted (calculated to the nearest full cent) by multiplying the Common Stock Exercise Price in effect immediately prior to such issuance or sale by the quotient derived by dividing (a) an amount equal to the sum of (1) the total number of shares of Common Stock outstanding immediately prior to such issuance or sale plus (2) the number of shares of Common Stock that the aggregate consideration received by the Company in connection with such issuance or sale would purchase at such Market Price, by (b) the total number of shares of Common Stock outstanding immediately after such issuance or sale; provided, however, that in no event shall the Common Stock Exercise Price be adjusted pursuant to this computation to an amount in excess of the Common Stock Exercise Price in effect immediately prior to such computation, except in the case of a combination of outstanding shares of Common Stock as provided by Section 8.3 hereof. As used herein, the "Market Price" of Common Stock at any date shall be deemed to be the last reported sale price (expressed as a dollar value per share) or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or, if not so listed or admitted, by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System ("NASDAQ/NMS") or, if not approved for quotation on the NASDAQ/NMS, the average of the closing bid and asked prices as furnished by the National Association of Securities Dealers, Inc. (the "NASD") through NASDAQ or a similar organization if NASDAQ is no longer reporting such information or, if such security is not quoted on NASDAQ, as determined reasonably and in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. For the purposes of any computation to be made in accordance with this Section 8.1, the following provisions shall be applicable: (i) in case of the issuance or sale of shares of Common Stock for consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Company for such shares (or, if shares of Common Stock are offered by the Company for subscription, the subscription price, or, if shares of Common Stock shall be sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services or 7 any expenses incurred in connection therewith; (ii) in case of the issuance or sale of shares of Common Stock for consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Company and shall include any amounts payable to security holders or any affiliates thereof, including without limitation, pursuant to any employment agreement, royalty, consulting agreement, covenant not to compete, earned or contingent payment right or similar arrangement, agreement or understanding, whether oral or written, all such amounts being valued for the purposes hereof at the aggregate amount payable thereunder, whether such payments are absolute or contingent, and irrespective of the period or uncertainty of payment, the rate of interest, if any, or the contingent nature thereof; provided, however, that if any Holder does not agree with such valuation, a mutually acceptable independent appraiser shall make such valuation, the cost of which shall be borne 50% by the Company and 50% by the Holders; (iii) shares of Common Stock issuable by way of dividend or other distribution on any stock of the Company other than the Common Stock shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of stockholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration; (iv) The reclassification of securities of the Company (other than shares of Common Stock) into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined as provided in subsection (ii) of this Section 8.1; and (v) the number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable (subject to readjustment upon the actual issuance thereof), upon the exercise of options, rights and warrants and upon the conversion or exchange of convertible or exchangeable securities, but shall exclude the aggregate number of shares held by Company subsidiaries for the Company's benefit. Section 8.2. Options, Rights, Warrants and Convertible and Exchangeable ---------------------------------------------------------- Securities. In case the Company shall at any time after the date hereof (except - ---------- pursuant to an employee or director benefit plan approved by a majority of the Company's entire Board of Directors) issue options, rights or warrants to purchase or subscribe for, or exercisable for, shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock, for consideration per share less than the Market Price for Common Stock immediately prior to the issuance of such options, rights, warrants or convertible or exchangeable securities, or without consideration, the Common Stock Exercise Price in effect immediately prior to the issuance of such options, rights, warrants or convertible or exchangeable securities, as the case may be, shall 8 be reduced to a price determined by making a computation in accordance with the provisions of Section 8.1 hereof; provided, however, that: (a) the aggregate maximum number of shares of Common Stock, as the case may be, issuable under such options, rights or warrants shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, and for consideration equal to the minimum purchase or subscription price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of the Warrants), if any, received by the Company for such options, rights or warrants; (b) the aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of such convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such securities, and for consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of the Warrants) received by the Company for such securities, plus the minimum consideration, if any, receivable by the Company upon the conversion or exchange thereof; and (c) if any change shall occur in the purchase or subscription price per share provided for in any of such options, rights or warrants or in the conversion or exchange price per share of such securities, such options, rights, warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued pursuant to the exercise or conversion or exchange thereof, and the Company shall be deemed to have issued upon such date new options, rights, warrants or convertible or exchangeable securities at the new purchase, subscription, conversion or exchange price in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities. Section 8.3. Subdivision and Combination. In case the Company shall at --------------------------- any time (i) declare a dividend on the Common Stock payable in shares of its capital stock (including Common Stock), (ii) subdivide or combine the outstanding shares of Common Stock, or (iii) issue any class of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the Common Stock Exercise Price in effect immediately prior to the record date for such dividend or the effective date of such subdivision, combination or reclassification shall forthwith be proportionately adjusted so that the holder of any Warrant exercised after such date shall be entitled to receive the aggregate number and kind of capital stock that, if such Warrant had been exercised immediately prior to such date, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, division, subdivision, combination or reclassification. Section 8.4. Adjustment in Number of Securities. Upon each adjustment of ---------------------------------- the Common Stock Exercise Price pursuant to the provisions of this Section 8, the number of shares of Common Stock issuable upon exercise at the adjusted Common Stock Exercise Price of each 9 Warrant shall be adjusted to the nearest full share by multiplying a number equal to the Common Stock Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Common Stock Exercise Price. Section 8.5. Common Stock. If any class, classes and/or series of ------------ capital stock is issued in exchange for Common Stock upon conversion thereof or in lieu thereof in connection with any change in par or stated value, recapitalization, reorganization or other transaction, such class, classes and/or series of capital stock shall thereafter be the Common Stock referred to herein. Section 8.6. Merger or Consolidation. In case of any consolidation or ----------------------- merger of the Company with or into another corporation or other entity (other than a consolidation or merger in which the Company is the continuing corporation and that does not result in any reclassification or change of the outstanding Common Stock or other securities issuable upon exercise of Warrants) or in case of any sale or conveyance to another person, corporation or other entity of all or substantially of the assets and the property of the Company, then, as a condition of such consolidation, merger, sale or conveyance, the Company, or such successor or purchasing corporation, as the case may be, shall execute and deliver to the Holder of each Warrant then outstanding a supplemental warrant agreement providing that such Holder shall have the right thereafter to receive, upon exercise of such Warrant (until the expiration of such Warrant) the kind and amount of securities, rights and property receivable upon such consolidation, merger, sale or conveyance by a holder of the number of Shares issuable upon exercise of such Warrant immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments that shall be identical to the adjustments provided in this Section 8. The above provision of this subsection shall similarly apply to successive consolidations, mergers, conveyances and sales. Section 8.7. No Adjustment of Exercise Price in Certain Cases. No ------------------------------------------------ adjustment of the Common Stock Exercise Price shall be made: (a) upon the issuance or sale of the Warrants, upon exercise of the Warrants or the issuance of the shares of Common Stock issuable upon the exercise of the Warrants; or (b) if the amount of said adjustment shall be less than one cent ($0.01) per share; provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment that, together with any adjustment so carried forward, shall amount to at least one cent ($0.01) per share. Section 8.8. Certificate of Adjustment. After each adjustment of the ------------------------- Common Stock Exercise Price or the number of Shares purchasable upon exercise of Warrants pursuant to this Section 8, the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Common Stock Exercise Price, as so adjusted; (ii) the number of Shares purchasable upon exercise of each Warrant after such adjustment; 10 and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with its records and cause a brief summary thereof to be sent by first class mail to each Holder at his last address as it shall appear on the registry books of the Company. No failure to mail such summary nor any defect therein or in the mailing thereof shall affect the validity thereof. Section 8.9. Validity of Warrant Certificate. Irrespective of any ------------------------------- adjustments or changes in the Common Stock Exercise Price or the number of Shares purchasable upon exercise of Warrants, Warrant Certificates theretofore and thereafter issued shall continue to express the Common Stock Exercise Price per share and the number of Shares purchasable thereunder as of the date such Warrant Certificates were originally issued; provided, however, that the Holders shall be entitled to exercise Warrants represented by such Warrant Certificates after giving effect to each such adjustment and change, and such Warrant Certificate shall be deemed to incorporate each such adjustment and change as if new Warrant Certificates reflecting each such adjustment and change had been issued to the Holders. Section 8.10. Dividends and Other Distributions. In the event that the --------------------------------- Company shall at any time prior to the exercise of all Warrants declare a dividend (other than a dividend consisting solely of shares of Common Stock and other than a regularly scheduled dividend with respect to any calendar year declared within such calendar year or the following calendar year that does not exceed one hundred percent (100%) of net earnings (after taxes) for such calendar year) or otherwise distribute to all its stockholders any assets (including shares of any subsidiary), property, rights, evidences of indebtedness, securities (other than shares of Common Stock) then, forthwith upon such declaration, the Common Stock Exercise Price (until another such declaration or other event causing price adjustments to the Common Stock Exercise Price pursuant to this Section 8) whether issued by the Company or by another, or other thing of value, shall be adjusted (calculated to the nearest $0.0001) by multiplying the Common Stock Exercise Price in effect immediately prior to the record date for such dividend or other distribution by the quotient derived by dividing (i) the difference between (a) the product of the number of shares of Common Stock outstanding immediately prior to such declaration multiplied by the Market Price for Common Stock immediately prior to such declaration and (b) the aggregate fair market value amount of such dividend or distribution so declared by (ii) the product of the number of shares of Common Stock outstanding immediately prior to such declaration multiplied by the Market Price for Common Stock immediately prior to such declaration. Such adjustments shall be made on the record date for determination of stockholders entitled to receive such dividend or distribution. Section 9. Exchange and Replacement of Warrant Certificates. Each ------------------------------------------------ Warrant Certificate is exchangeable, without expense, upon the surrender thereof by the Holder at the principal executive office of the Company, for one or more new Warrant Certificates of like tenor and date representing in the aggregate the right to purchase the same number of Shares in such denominations as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all 11 reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant Certificates, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor in lieu thereof. Section 10. Elimination of Fractional Interests. The Company shall not ----------------------------------- be required to issue certificates representing fractions of shares of Common Stock upon the exercise of Warrants, nor shall it be required to issue scrip or pay cash in lieu of such fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights. Section 11. Reservation and Listing of Securities. The Company shall at ------------------------------------- all times reserve and keep available out of its authorized capital stock, solely for the purpose of issuance of Common Stock issuable upon exercise of Warrants, such number of shares of Common Stock as shall be issuable upon exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Common Stock Exercise Price, all Shares of Common Stock and other securities issuable upon such exercise when issued shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any security holder of the Company. As long as Warrants shall be outstanding, the Company shall use reasonable efforts to cause the Common Stock issuable upon the exercise of Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock may then be listed and/or quoted on NASDAQ/NMS. The Company represents and warrants that (a) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Delaware and has all requisite power, authority and legal right to enter into this Agreement; (b) this Agreement has been duly executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws now or hereafter in effect relating to or affecting creditors' rights generally and (ii) general principles of equity (regardless of whether considered in a proceeding at law or in equity); (c) the Warrants have been duly authorized, validly issued and are fully paid and non-assessable and are not subject to any preemptive rights; (d) the issuance of the Warrants does not violate or conflict with or result in a breach or default under (i) any material agreement or instrument by which the Company is bound or (ii) any judgment, decree, rule or regulation applicable to the Company; and (e) as of September 29, 1997, the Company had 26,393,032 shares of Common Stock issued and outstanding. Section 12. Notices to Warrant Holders. Nothing contained in this -------------------------- Agreement shall be construed as conferring upon the Holders of Warrants the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the earlier of the expiration of the Warrants or their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or 12 a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of shares of Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety or a capital reorganization, merger or share exchange involving the Company shall be proposed; then, in any one or more of said events, the Company shall give notice of such event to each Holder of Warrants at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution or offer. Such notice shall specify record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with such dividend, distribution, offer, dissolution, liquidation, winding up or sale. Section 13. Registration Rights. ------------------- Section 13.1. Registrable Securities. For the purposes of this Agreement, ---------------------- "Registrable Securities" shall mean (a) the Shares, (b) all securities issued as distributions or dividends on the Shares and (c), all securities into which (i) the Shares or (ii) any securities issued as distributions or dividends on the Shares are, in each case, changed, exchanged or converted pursuant to any reorganization, reclassification, consolidation, merger or share exchange, or to any sale, transfer or other disposition of Company assets. Section 13.2. Demand Registration. From the date on which the Company ------------------- issues any Shares until the expiration of the holding period that would permit a non-affiliate to sell Shares without restriction under Rule 144(k) (the "Registration Period"), Amoco and/or any holders of Registrable Securities that acquired such Registrable Securities in compliance with the transfer provisions of this Agreement (each a "Securityholder") and that are authorized by Amoco or any transferee will be entitled one time in the aggregate to require the Company, by delivery to the Company of a notice (the "Demand"), to cause Registrable Securities held by such Securityholder(s) to be registered for sale to the public under the Securities Act. Upon receipt of such a notice, the Company agrees to use reasonable commercial efforts to file a registration statement (on Form S-3 or a successor form or, if the Company is not then eligible to use Form S-3 or a successor form, then on a form appropriate for registration of the Registrable Securities) with the Securities and Exchange Commission (the "Commission") within 30 days after such request and to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations 13 under the Securities Act) as would permit or facilitate the sale and distribution of such Registrable Securities as are specified in the Demand in the manner of distribution specified therein, together with all Registrable Securities of any Securityholder(s) joining in such request as are specified in requests received by the Company within 15 days after receipt of such Demand; provided, however, that the Company shall not be obligated to take any action to effect such registration, qualification or compliance pursuant to this Section 13.2: (a) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance except as may be required by the Securities Act; (b) during the period starting with the date 45 days prior to the filing of, and ending on a date 90 days following the effective date of, a registration statement filed by the Company (other than with respect to a registration statement relating to a Rule 145 or other business combination transaction, an offering solely to employees and/or directors or any other registration that is not appropriate for the registration of Registrable Securities); (c) at any time when the Securityholders would be required to refrain from selling Registrable Securities pursuant to Section 13.9(f) hereof; (d) with respect to Registrable Securities that constitute less than twenty-four percent (24%) of all Registrable Securities originally outstanding; or (e) more than once in the aggregate for all Securityholders. In the event that any Securityholder seeks to require the Company to effect the registration of Registrable Securities at a time when the Company is not obligated to effect such registration pursuant to clause (b) or (c) of the immediately preceding sentence, such Securityholder shall be entitled to require the Company to effect the registration of Registrable Securities as soon as the conditions specified in such clauses (b) and (c) cease to apply. Notwithstanding anything herein to the contrary, however, no Demand shall be deemed to have been made if (i) the registration statement relating to the Demand does not become effective for any reason other than a withdrawal of the Demand, (ii) the registration statement relating to the Demand does not remain effective for the period required pursuant to this Agreement because the Company has failed to fulfill its obligations hereunder or (iii) the Securityholders who have requested that their Registrable Securities be included in such registration (A) withdraw their requests because the Company has exercised its right under this Agreement to delay registration, (B) withdraw their requests, or are unable to complete the sale of their Registrable Securities pursuant to the registration statement, because of the requirements of Section 13.10(b) hereof or (C) withdraw their requests for any reason other than a reason described in (A) or (B) above and reimburse the Company for all of its expenses incurred in connection with such registration; provided, however, that no more than two withdrawals may be made in the aggregate by all Securityholders pursuant to this clause (iii)(C). Section 13.3. Company's Purchase Option in lieu of Demand Registration. -------------------------------------------------------- 14 Notwithstanding Section 13.2 above, and in lieu of effecting registration pursuant to the Demand, the Company shall have the right to purchase all (but not less than all) of the Registrable Securities that Securityholders have requested be registered at a price equal to the average closing price of the Registrable Securities for the 15 trading days immediately succeeding the date on which the Demand is made as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or, if not so listed or admitted, on the NASDAQ/NMS or, if not approved for quotation on the NASDAQ/NMS, the average closing bid price as furnished by the NASD through NASDAQ or a similar organization if NASDAQ is no longer reporting such information or, if such security is not quoted on NASDAQ, the price established pursuant to an appraisal conducted by a third party selected by the Company who reasonably is acceptable to Securityholders holding a majority of the Registrable Securities to be included in such registration. The Company must notify such Securityholders whether or not it intends to exercise its purchase right by the later of (a) 30 days after the Demand is made and (b), if the Company exercises any right under this Agreement to delay filing the registration statement, the end of the delay period (but in any event not to exceed 90 days). The Company's failure to notify such Securityholders that the Company intends to exercise its purchase right within the time period specified in the immediately-preceding sentence shall constitute the Company's election to proceed with registration in accordance with the Demand and the other provisions of this Agreement. If the Company exercises its purchase right as outlined above, the closing of the purchase will occur within five business days following the date on which the Company has notified such Securityholders that it intends to exercise its purchase right in accordance with this Section 13.3, with the purchase price payable in immediately available funds by federal wire transfer. Section 13.4. Incidental Registration. ----------------------- (a) If, at any time or from time to time, the Company shall determine to register any of its Common Stock, either for its own account or for the account of a security holder or holders exercising their respective demand registration rights (other than any such registration relating to a Rule 145 or other business combination transaction, an offering solely to employees and/or directors or any other registration that is not appropriate for the registration of Registrable Securities), the Company will (i) promptly give to each Securityholder holding at least twenty-four percent (24%) of all Registrable Securities originally outstanding notice thereof, and (ii) include in such registration (and any related qualification under the blue sky laws or other compliance), subject to Section 13.4(b) hereof, all the Registrable Securities specified in a request made by any such Securityholder within ten (10) days after its receipt of such notice from the Company. Such registration shall not constitute a demand registration described under Section 13.2 hereof. (b) If the registration pursuant to this Section 13.4 hereof is an underwritten offering, the right of any Securityholder to such registration shall be conditioned upon such Securityholder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Securityholders proposing to distribute all or a portion of their Registrable Securities through such underwriting shall (together with the Company and the other holders distributing securities through such underwriting) enter into an 15 underwriting agreement in customary form with the managing underwriter that the Company selects for such underwriting, and shall provide to the Company upon request such information as may be specified in such request. Notwithstanding any other provision of this Section 13.4, if the managing underwriter in its sole discretion determines that marketing factors require a limitation of the number or type of securities to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration to the extent that such managing underwriter in its sole discretion may deem necessary or appropriate (the "Maximum Offering Amount"). The Company shall so advise all Securityholders and the other holders distributing their Company securities through such underwriting pursuant to piggyback or incidental registration rights similar to the rights of the Securityholders under this Section 13.4. The Maximum Offering Amount shall be allocated in the following order: (i) first, to the Company and to all holders of Company securities having the right to include such securities in such registration (other than the Securityholders and those whose right to include Company securities is expressly pari passu with, or is expressly subordinated to, that of the Securityholders), who shall be entitled to participate in such offering in accordance with the relative priorities, if any, as shall exist among them; (ii) second, if and to the extent that the total number of Company securities that the Company and such holders of Company securities collectively wish to register is less than the Maximum Offering Amount, then the Securityholders and all holders of Company securities whose right to include such securities in such registration is expressly pari passu with the right of the Securityholders shall be entitled to participate in the registration pro rata in accordance with the number of Registrable Securities and other Company securities held by each such Securityholder and other holders, respectively, as to the remainder, with a further pro rata allocation to the extent any such person has requested registration of fewer Registrable Securities or other Company securities, as applicable, than such person is entitled to have registered; and (iii) third, if and to the extent that the total number of Company securities to be included in the offering following the allocations set forth in the two immediately-preceding sentences is less than the Maximum Offering Amount, then the holders of other Company securities whose right to include such securities in such registration is expressly subordinated to that of the Securityholders shall be entitled to participate in such offering in accordance with the relative priorities, if any, as shall exist among them. If any Securityholder disapproves of the terms of any such underwriting, it may elect to withdraw therefrom by notice to the Company and the managing underwriter. (c) The Company shall have the right to terminate or withdraw any registration under this Section 13.4 prior to the effectiveness of such registration whether or not any Securityholder has elected to include Registrable Securities in such registration. (d) A Securityholder may withdraw from participation in any incidental registration for any reason and at any time prior to the execution and delivery of the underwriting agreement, if any, relating to the registration. 16 (e) The Company agrees that any incidental registration rights that the Company may grant after the date of this Agreement that are exercisable during the Exercise Period shall be either pari passu with, or subordinated to, the incidental registration rights granted under this Agreement. Section 13.5. Company's Purchase Option in lieu of Incidental ----------------------------------------------- Registration. Notwithstanding Section 13.4 above, and in lieu of effecting the - ------------ incidental registration of Registrable Securities as set forth therein, the Company shall have the right to purchase the Registrable Securities that Securityholders have requested be included in such Company registration at a price equal to the price at which the securities in such registration are to be offered to the public. The Company must notify such Securityholders whether or not it intends to exercise its purchase right by the date on which the Commission declares the Company's registration effective. If the Company exercises its purchase right as outlined above, the closing of the purchase will occur within five business days following the date on which the Company has notified such Secuirtyholders that it intends to exercise its purchase right in accordance with this Section 13.5. Section 13.6. Expenses of Registration. The Company shall bear all ------------------------ registration, qualification and filing fees (including NASD filing fees), fees and disbursements of Company counsel and accountants and blue sky fees and expenses incurred in connection with any registration pursuant to Sections 13.2 or 13.4 hereof. All other fees and expenses incurred in connection with a registration (including, without limitation, underwriting discounts, selling commissions and stock transfer taxes applicable to the Company securities included in the registration) shall be borne by the Company, the Securityholders and other selling stockholders, as applicable, pro rata on the basis of the number of Company securities included in such registration. Section 13.7. Plan of Distribution. -------------------- (a) The distribution of Registrable Securities pursuant to a registration under Section 13.2 shall be effected only by or through such investment banking firm or firms as may be designated by the Securityholders and as are reasonably satisfactory to the Company in connection with the filing of the applicable registration statement, acting in such capacity (as broker, dealer, principal or otherwise), and receiving such compensation, as may be agreed by the Securityholders of the Registrable Securities to be distributed and such investment banking firm or firms. (b) The Company shall give the Securityholder(s) of Registrable Securities to be included in any registration statement at least ten (10) days' notice prior to the filing of a registration statement pursuant to Section 13.2 hereof. Such Securityholder(s) shall advise the Company within five (5) days of receipt of such notice of the terms of its or their compensation arrangements with the designated investment banking firm or firms, the capacity in which such firm or firms will act, the distribution proposed by such Securityholder(s) and such information regarding such Securityholder(s) and the Registrable Securities that they hold as the Company 17 may reasonably request and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. (c) The Securityholders shall be entitled to exclude from any registration effected pursuant to Section 13.2 hereof any shares of Common Stock other than Registrable Securities if the investment banking firm or firms designated under subsection (a) hereof determines that marketing factors require a limitation of the number of shares to be included in such registration. Section 13.8. Indemnification. --------------- (a) The Company will indemnify each Securityholder, each of its officers, directors, partners, employees and agents and each person controlling such Securityholder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any other federal, state or common law rule or regulation applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Securityholder, each of its officers, directors, employees and agents and each person controlling such Securityholder for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any written information furnished to the Company pursuant to an instrument duly executed by such Securityholder or controlling person and stated to be specifically for use therein. (b) Each Securityholder will, if Registrable Securities held by such Securityholder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Securityholder, each of its officers and directors and each person controlling such Securityholder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Securityholders, such directors, officers, persons, underwriters or control persons for any legal or any other expense reasonably 18 incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with any written information furnished to the Company pursuant to an instrument duly executed by such Securityholder and stated to be specifically for use therein; provided, however, that the obligations of each Securityholder shall be limited to an amount equal to the net proceeds that such Securityholder received upon the sale of its Registrable Securities. (c) Each party entitled to indemnification under this Section 13.8 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, but the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless, but only to the extent that, the failure to give such notice is actually prejudicial to an Indemnifying Party's ability to defend such action, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; provided, however, that if the Indemnified Party determines in good faith that a conflict of interest exists and that therefore it is advisable for such Indemnified Party or parties to be represented by separate counsel or that, upon written advice and legal opinion of counsel, there may be sound legal defenses available to it or them that are different from or in addition to those available to the Indemnifying Party, then the Indemnifying Party shall not be entitled to assume such defense and the Indemnified Parties shall be entitled to counsel at the Indemnifying Party's expense. If an Indemnifying Party is not so entitled to assume the defense of such action or does not assume such defense, after having received the notice referred to in the first sentence of this paragraph, the Indemnifying Party will pay the reasonable fees and expenses of counsel of the Indemnified Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which any Securityholder of Registrable Securities exercising rights under this Agreement, or any controlling person of any such Securityholder, makes a claim for indemnification pursuant to this Section 13.8 but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 13.8 provides for indemnification in such case, the Company and such Securityholder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Securityholder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by the registration statement bears to the 19 public offering price of all securities offered by such registration statement; and the Company is responsible for the remaining portion not payable by any Securityholder or other holder; provided, however, that, in any such case, (A) no such Securityholder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered by it pursuant to such registration statement, and (B) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 13.9. Obligations of the Company. Whenever required under this -------------------------- Agreement to use its best efforts to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) prepare and file with the Commission a registration statement with respect to such Registrable Securities, and use its best efforts to cause such registration statement to become effective and to keep such registration statement effective until the closing of the offering to which the registration statement relates, but in no event longer than 90 days; (b) prepare and file with the Commission such amendments and supplements to such registration statement as may be necessary (i) to update and keep such registration statement effective as provided in Section 13.9(a) hereof, (ii) to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement and (iii) to reflect a modification in the manner of distribution of such Registrable Securities. Notwithstanding anything else to the contrary contained herein, the Company shall not be required to disclose in any amendment or supplement to a registration statement or otherwise (A) any confidential information concerning any matter that is the subject of a notice given under Section 13.9(f) hereof as to which the Company has a bona fide interest in withholding disclosure, or (B) historical financial statements or pro forma financial information required by Regulation S-X of the Commission in connection with a business acquisition or disposition prior to the date when such information would otherwise be required to be filed with the Commission (including extensions pursuant to Item 7(a)(4) of Form 8-K); (c) furnish to the Securityholders such numbers of copies of any prospectus included in such registration statement, including any preliminary prospectus, in conformity with the requirements of the Securities Act, and such other customary agreements and documents (including attorney opinion letters) as they may reasonably request in order to facilitate the disposition of such Registrable Securities owned by them; (d) use its best efforts to register and qualify the Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Securityholders whose Registrable Securities have been included in such registration statement (provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions) and to maintain the effectiveness of such registration and qualification until the closing of the offering to which the registration statement relates, but in no event longer than 90 days; 20 (e) in the event of any underwritten public offering contemplated by Section 13.2 hereof, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Securityholder participating in such underwriting shall also enter into and perform its obligations under such an agreement; (f) notify each Securityholder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, or upon the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which the prospectus is used, and, except for periods (not to exceed 90 days per calendar year in the aggregate) during which the Company has a bona fide corporate interest in withholding disclosure or the time period for filing with the Commission information referred to in Section 13.9(b)(B) hereof has not expired, promptly prepare and furnish to such Securityholders a supplement or amendment to such prospectus, or otherwise update such prospectus through the filing of a Current Report on Form 8-K or otherwise, so that such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (g) upon reasonable request, de-register promptly any Registrable Securities held by a Securityholder not sold during the period that a registration statement relating to such Registrable Securities was effective; (h) appoint a transfer agent and registrar for Registrable Securities that are registered pursuant to this Agreement and use reasonable efforts to ensure that the Common Stock CUSIP will apply to the registered Registrable Securities; and (i) upon reasonable request, obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters that are customarily covered by such cold comfort letters. Section 13.10. Securities Law Compliance. ------------------------- (a) The Securityholders of Registrable Securities included in any registration effected pursuant to this Agreement covenant that they will comply with the Securities Act and with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to any such registration, recognizing that the Company may notify such Securityholders in accordance with Section 13.9(f) hereof that the registration statement is not then current. (b) The Securityholders of Registrable Securities included in any registration effected pursuant to this Agreement agree that, immediately upon receipt of a notification pursuant to Section 13.9(f) hereof, they will refrain from selling Registrable Securities until subsequently notified by the Company that the registration statement is current. 21 (c) The Company shall file such reports with the Commission as will enable Securityholders to sell Registrable Securities pursuant to Rule 144 under the Securities Act; provided, however, that nothing in this Agreement shall be construed to require the Company to subject itself to the registration requirements of the Securities Act if the Company is not subject to such requirements immediately prior to the making of such request. Section 13.11. Standoff Agreement. Upon request of the underwriters ------------------ managing any underwritten offering of the Company's securities (including, without limitation, any underwritten offering of Registrable Securities), the Securityholders agree not to sell, make any short sale of, lend, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in such registration), without the prior consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters. Section 13.12. Duty of Cooperation. It shall be a condition to the ------------------- obligations of the Company under this Agreement that each Securityholder participating in a registration pursuant to this Agreement: (a) cooperate with the Company in the preparation and filing of the documents constituting such Registration Statement (including any post-effective amendment or supplement thereto) in such manner not inconsistent with the provisions hereof as the Company may reasonably request, including (without limitation) furnishing information regarding such Securityholder and the distribution of securities; (b) enter into such undertakings with the Company relating to the conduct of the offering of securities pursuant to such Registration Statement and not inconsistent with the provisions hereof as the Company may reasonably request in order to assure compliance with applicable laws; and (c) upon receipt of any notice from the Company that the Registration Statement or prospectus is required to be amended or supplemented, comply promptly and fully with any directive contained therein with respect to the discontinuance of the offer and sale of such securities. Section 14. Notices. All notices, requests, consents and other ------- communications hereunder shall be in writing and shall be deemed to have been duly made and given: (a) when mailed by overnight delivery service: (i) if to Amoco, to William R. Hutchinson, Vice President, Financial Operations, Amoco Corporation, 200 East Randolph Drive, Mail Code 3205, Chicago IL 60601; (ii) if to any Holder or Securityholder other than Amoco, to the address of such person as shown on the books of the Company; or 22 (iii) if to the Company, to the Company's General Counsel at the Company's address set forth in Section 3 hereof or to such other address as the Company may designate by notice to the Holders and/or Securityholders; or (b) when sent by facsimile transmission (with telephonic confirmation of receipt): (i) if to Amoco, to William R. Hutchinson, Vice President, Financial Operations, Amoco Corporation, at 312/856-4346 (confirming telephone number 312/856-5737) or to such other individual addressee, facsimile number and/or confirming telephone number as Amoco may designate by notice to the Holders and/or Securityholders; (ii) if to any Holder or Securityholder other than Amoco, to the facsimile and confirming telephone numbers, if any, of such person as shown on the books of the Company; or (iii) if to the Company, to the Company's General Counsel at 817/870- 1671 (confirming telephone number 817/870-2800) or to such other facsimile and confirming telephone numbers as the Company may designate by notice to the Holders and/or Securityholders. Section 15. Supplements and Amendments. The Company and Amoco may from -------------------------- time to time supplement or amend this Agreement without the approval of any Holders or Securityholders (other than Amoco) in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and Amoco may deem necessary or desirable and that the Company and Amoco deem shall not adversely affect the interests of the Holders. Section 16. Successors. All the covenants and provisions of this ---------- Agreement shall be binding upon and inure to the benefit of the Company and Amoco and their respective successors and assigns hereunder to the extent set forth herein. Section 17. Termination. Except for the covenant of the Company ----------- contained herein that all Shares shall be validly issued, fully paid and non- assessable, this Agreement, and all provisions hereof, shall terminate at 5:00 p.m., Fort Worth, Texas time on September 29, 2002. Section 18. Governing Law; Submission to Jurisdiction. This Agreement ----------------------------------------- and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be in accordance with the laws of such State without giving effect to the rules of such State governing conflicts of laws. The Company, Amoco, the Holders and the Securityholders hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to, this Agreement shall be 23 brought and enforced in the courts of the State of Texas or of the United States of America for the Northern District of Texas (Fort Worth Division), and irrevocably submit to such jurisdiction, which jurisdiction shall be exclusive. The Company, Amoco, the Holders and the Securityholders hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum and also hereby irrevocably waive any right or claim to trial by jury in connection with any such action, proceeding or claim. Any such process or summons to be served upon any of the Company, Amoco, the Holders or the Securityholders (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address referred to in Section 14 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any action, proceeding or claim. The Company, Amoco, the Holders and the Securityholders agree that the prevailing party(ies) in any such action or proceeding shall be entitled to recover from the other party(ies) all of its(their) reasonable legal costs and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. Section 19. Entire Agreement; Modification or Amendment. This Agreement ------------------------------------------- contains the entire understanding between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. Section 20. Severability. If any provision of this Agreement shall be ------------ held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. Section 21. Captions. The caption headings of the Sections of this -------- Agreement are for convenience of reference only, are not intended as, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. Section 22. Counterparts. This Agreement may be executed in any number ------------ of counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. [The remainder of this page has intentionally been left blank] 24 IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be duly executed as of the day and year first above written. CROSS TIMBERS OIL COMPANY [SEAL] By: /s/ VAUGHN O. VENNERBERG II ---------------------------------- Vaughn O. Vennerberg II, Senior Vice President--Land Attest: By: /s/ FRANK G. MCDONALD -------------------------------------- Frank G. McDonald, Assistant Secretary AMOCO CORPORATION [SEAL] By: /s/ LON O. BUEHNER ---------------------------------- Printed Name: Lon O. Buehner ------------------------ Title: Attorney-In-Fact ------------------------------- Attest: By: -------------------------------------- Printed Name: ---------------------------- Title: ----------------------------------- 25 EXHIBIT A (FORM OF WARRANT CERTIFICATE) THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES) OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS FURTHER RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., FORT WORTH, TEXAS TIME, SEPTEMBER 29, 2002. WARRANT NO. 00 ___,000 WARRANTS This Warrant Certificate certifies that __________________, or its registered assigns ("Holder"), is the holder of Warrants to purchase, in whole or in part, at any time from the date of this Warrant Certificate until 5:00 p.m. Fort Worth, Texas time on September 29, 2002 (the "Expiration Date"), ____________________ THOUSAND (___,000) fully paid and non-assessable shares of Common Stock, par value $0.01 per share (the "Common Stock"), of CROSS TIMBERS OIL COMPANY, a Delaware corporation (the "Company"), at the initial exercise price, subject to adjustment in certain events (the "Common Stock Exercise Price"), of $22.97 per share, upon surrender of this Warrant Certificate and payment of the Common Stock Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Warrant Agreement of even date herewith between the Company and Amoco Corporation (the "Warrant Agreement"). Each Warrant initially entitles the Holder to purchase one (1) share of Common Stock. Payment of the Common Stock Exercise Price shall be made by federal wire transfer of immediately available funds payable to the order of the Company. No Warrant may be exercised after 5:00 p.m., Fort Worth, Texas time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. A-1 The Warrants evidenced by this Warrant Certificate are issued pursuant to the Warrant Agreement, which is hereby incorporated by reference in, and made a part of, this instrument and which is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the Holder. The Warrant Agreement provides that, upon the occurrence of certain events and subject to certain conditions, the Common Stock Exercise Price and the number and/or kind of securities issuable upon exercise of Warrants may be adjusted. In such event, at the written request of the Holder and in exchange for the old Warrant Certificate, the Company will issue a new Warrant Certificate evidencing the adjustment in the Common Stock Exercise Price and the number and/or kind of securities issuable upon the exercise of Warrants; provided, however, that the failure of the Company to issue any such new Warrant Certificate shall not in any way adversely change, alter or otherwise impair the rights of the Holder pursuant to the Warrant Agreement. Upon due presentment for registration of assignment of this Warrant Certificate at an office or agency of the Company, and subject to the limitations provided herein and in the Warrant Agreement, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the assignee(s) in exchange for this Warrant Certificate without charge except for taxes or other governmental charges that are imposed in connection with such transfer. Notwithstanding any notation of ownership or other writing hereon made by anyone, the Company may deem and treat the Holder as the absolute owner(s) of this Warrant Certificate for the purpose of any exercise of Warrants or of any distribution to the Holder and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate that are defined in the Warrant Agreement shall have the meanings respectively ascribed to them in the Warrant Agreement. [The remainder of this page is intentionally left blank] A-2 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated as of , . --------------------- ------ CROSS TIMBERS OIL COMPANY [SEAL] By: ------------------------------------- Printed Name: --------------------------- Title: ------------------------------- Attest: By: -------------------------------- Printed Name: ------------------- Title: ----------------------------- A-3 FORM OF ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase ________________________ (_______) shares of Common Stock and herewith tenders in payment for such securities by federal wire transfer of immediately available funds payable to the order of CROSS TIMBERS OIL COMPANY the amount of $_____________, all in accordance with the terms of that certain Warrant Agreement dated as of December 1, 1997 by and between CROSS TIMBERS OIL COMPANY and AMOCO CORPORATION. The undersigned requests that a certificate for such securities be registered to the following person at the following address: Printed Name: ------------------------------ SSN or TIN: ----------------------------------- Address: ----------------------------------- and that such certificate be delivered to the following person at the following address: Printed Name: ------------------------------ Address: ----------------------------------- Date: Signature: ---------------- ------------------------------------------- (Signature must conform in all respects to name of Holder as it appears on the face of the Warrant Certificate) Holder's Social Security Number or Taxpayer Identification Number: ------------------ A-4 FORM OF ASSIGNMENT (To be executed by the Holder to transfer the Warrant Certificate) FOR VALUE RECEIVED, _________________________ hereby sells, assigns and transfers to the following person at the following address: Printed Name: ----------------------------- SSN or TIN: ----------------------------------- Address: ----------------------------------- ___________________ Warrants represented by this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________________ attorney to transfer this Warrant Certificate on the books of Cross Timbers Oil Company, with full power of substitution. Date: Signature: ---------------- ----------------------------------------- (Signature must conform in all respects to name of Holder as it appears on the face of the Warrant Certificate) A-5 EX-12.1 5 COMPUTATION OF RATIO EXHIBIT 12.1 CROSS TIMBERS OIL COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (in thousands)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- -------- --------- ------- -------- Earnings (loss) available to common stock.. $23,905 $19,790 $(10,538) $ 3,048 $(4,012) Income Tax Expense......................... 13,517 10,669 (5,825) 1,730 3,643 Interest and Debt Expense.................. 26,747 17,224 12,922 8,289 5,612 Interest Portion of Rentals (a)............ 3,044 1,830 637 519 463 Preferred stock dividends.................. 1,779 514 - - - ------- ------- -------- ------- ------- Earnings (loss) before Provision for Taxes and Fixed Charges.................. $68,992 $50,027 $ (2,804) $13,586 $ 5,706 ======= ======= ======== ======= ======= Interest and Debt Expense.................. $26,747 $17,224 $ 12,922 $ 8,289 $ 5,612 Interest Portion of Rentals (a)............ 3,044 1,830 637 519 463 Preferred stock dividends.................. 1,779 514 - - - ------- ------- -------- ------- ------- Total Fixed Charges........................ $31,570 $19,568 $ 13,559 $ 8,808 $ 6,075 ======= ======= ======== ======= ======= Ratio of Earnings to Fixed Charges......... 2.2 2.6 (0.2)(b) 1.5 0.9 Excess of Fixed Charges over Earnings (Loss)................................. $ - $ - $ 16,363 (b)$ - $ 369
(a) Calculated as one-third of rentals. (b) Negative ratio is the result of a $20,280,000 pre-tax, non-cash charge recorded upon adoption of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of. Excluding the effect of this charge, the ratio of earnings to fixed charges is 1.3. EX-21.1 6 SUBSIDIARIES OF CROSS TIMBERS EXHIBIT 21.1 SUBSIDIARIES OF CROSS TIMBERS OIL COMPANY JURISDICTION OF INCORPORATION -------------- Cross Timbers Operating Company Texas Cross Timbers Energy Services, Inc. Texas Cross Timbers Trading Company Texas Ringwood Gathering Company Delaware Timberland Gathering & Processing Company, Inc. Texas WTW Properties, Inc. Texas EX-23.1 7 ARTHUR ANDERSEN CONSENT EXHIBIT 23.1 INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT Cross Timbers Oil Company Fort Worth, Texas As independent public accountants, we hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-64274, 33-65238, 33-81766, 333-35229 and 333-36569) and on Form S-3 (No. 333-46909) of Cross Timbers Oil Company of our report dated March 18, 1998, included in the Annual Report on Form 10-K of Cross Timbers Oil Company for the year ended December 31, 1997. ARTHUR ANDERSEN LLP Fort Worth, Texas March 30, 1998 EX-23.2 8 MILLER AND LENTS CONSENT EXHIBIT 23.2 [LETTERHEAD OF MILLER AND LENTS, LTD. APPEARS HERE] March 30, 1998 Cross Timbers Oil Company 810 Houston Street, Suite 2000 Fort Worth, TX 76102 Re: Cross Timbers Oil Company 1997 Annual Report on Form 10-K Gentlemen: The firm of Miller and Lents, Ltd., consents to the use of its name and to the use of its report dated March 30, 1998, regarding the Cross Timbers Oil Company Proved Reserves and Future Net Revenue as of January 1, 1998, in the 1997 Annual Report on Form 10-K. Miller and Lents, Ltd., has no interests in Cross Timbers Oil Company or in any affiliated companies or subsidiaries and is not to receive any such interest as payment for such reports and has no director, officer, or employee otherwise connected with Cross Timbers Oil Company. We are not employed by Cross Timbers Oil Company on a contingent basis. Yours very truly, MILLER AND LENTS, LTD. By /s/ P.G. Von Tungeln ---------------------- P.G. Von Tungeln Chairman EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,816 0 43,996 0 0 52,162 961,368 237,532 788,455 54,893 539,000 0 28,468 463 141,312 788,455 0 200,672 0 134,794 0 0 26,677 39,201 13,517 25,684 0 0 0 23,905 0.60 0.59
EX-27.2 10 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.07 0.07
EX-27.3 11 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.09 0.09
EX-27.4 12 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.26 0.25
EX-27.5 13 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.50 0.48
EX-27.6 14 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.12 0.11
EX-27.7 15 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 APR-01-1996 JUN-30-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.04 0.04
EX-27.8 16 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.11 0.11
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