<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10662
-------
Cross Timbers Oil Company
(Exact name of registrant as specified in its charter)
Delaware 75-2347769
----------------------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
810 Houston Street, Suite 2000, Fort Worth, Texas 76102
------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(817) 870-2800
-------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of August 1, 2000
---------------------------------------------- --------------------------------
Common stock, $.01 par value 46,316,163
================================================================================
<PAGE>
CROSS TIMBERS OIL COMPANY
Form 10-Q for the Quarterly Period Ended June 30, 2000
INDEX
Page
----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
at June 30, 2000 and December 31, 1999........................ 3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2000 and 1999..... 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999............... 5
Notes to Consolidated Financial Statements..................... 6
Report of Independent Public Accountants.......................12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................13
Item 3. Quantitative and Qualitative Disclosure about Market Risk......19
</TABLE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings..............................................20
Item 4. Submission of Matters to a Vote of Security Holders............20
Item 6. Exhibits and Reports on Form 8-K...............................21
Signatures.....................................................22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CROSS TIMBERS OIL COMPANY
Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except shares) June 30, December 31,
2000 1999
---------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents......... $ 4,626 $ 5,734
Accounts receivable, net.......... 98,047 68,998
Investment in equity securities... 1,378 29,052
Deferred income tax benefit....... 6,321 4,168
Other current assets.............. 5,783 5,540
---------- ----------
Total Current Assets............. 116,155 113,492
---------- ----------
Property and Equipment, at cost -
successful efforts method:
Producing properties.............. 1,626,474 1,635,883
Undeveloped properties............ 11,398 10,358
Gas gathering and other........... 35,271 32,902
---------- ----------
Total Property and Equipment..... 1,673,143 1,679,143
Accumulated depreciation,
depletion and amortization....... (364,980) (340,063)
---------- ----------
Net Property and Equipment..... 1,308,163 1,339,080
---------- ----------
Other Assets....................... 24,966 16,817
---------- ----------
Loans to Officers.................. 7,907 7,692
---------- ----------
TOTAL ASSETS....................... $1,457,191 $1,477,081
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities...................... $ 88,438 $ 68,937
Payable to royalty trusts......... 5,349 2,739
Other current liabilities......... 18,509 2,542
---------- ----------
Total Current Liabilities........ 112,296 74,218
---------- ----------
Long-term Debt..................... 992,000 991,100
---------- ----------
Deferred Income Taxes Payable...... 43,073 25,975
---------- ----------
Other Long-term Liabilities........ 28,210 7,959
---------- ----------
Commitments and Contingencies (Note 4)
Minority Interest in Consolidated
Subsidiary........................ - 100,012
---------- ----------
Stockholders' Equity:
Series A Convertible preferred stock
($.01 par value, 25,000,000 shares
authorized, 1,128,829 issued at
liquidation value of $25)....... 28,221 28,468
Common stock ($.01 par value,
100,000,000 shares authorized,
53,191,970 and 58,188,501 shares
issued)......................... 532 582
Additional paid-in capital........ 339,729 396,568
Treasury stock (7,023,566 and
9,299,382 shares)................ (91,591) (119,387)
Retained earnings (deficit)....... 4,721 (28,414)
---------- ----------
Total Stockholders' Equity...... 281,612 277,817
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............. $1,457,191 $1,477,081
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CROSS TIMBERS OIL COMPANY
Consolidated Statements of Operations (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Oil and condensate.......................... $ 27,134 $ 19,372 $ 58,217 $ 35,140
Gas and natural gas liquids................. 88,936 43,248 169,682 95,212
Gas gathering, processing and marketing..... 3,594 1,236 5,232 3,028
Other....................................... 1,986 1,694 1,845 1,585
-------- -------- -------- --------
Total Revenues.............................. 121,650 65,550 234,976 134,965
-------- -------- -------- --------
EXPENSES
Production.................................. 21,180 18,307 41,098 36,798
Taxes, transportation and other............. 12,813 8,129 23,648 15,337
Exploration................................. 340 320 702 529
Depreciation, depletion and amortization.... 31,249 23,154 63,186 49,330
Gas gathering and processing................ 2,194 2,039 4,427 4,216
General and administrative.................. 7,406 2,844 14,767 5,760
Loss in derivative fair value............... 23,780 - 26,824 -
-------- -------- -------- --------
Total Expenses.............................. 98,962 54,793 174,652 111,970
-------- -------- -------- --------
OPERATING INCOME............................. 22,688 10,757 60,324 22,995
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Gain on significant property divestitures... - 40,331 18,979 40,331
Gain on investment in equity securities..... 299 5,742 13,391 6,548
Interest expense, net....................... (21,025) (13,209) (39,662) (28,783)
-------- -------- -------- --------
Total Other Income (Expense)................ (20,726) 32,864 (7,292) 18,096
-------- -------- -------- --------
INCOME BEFORE INCOME TAX
AND MINORITY INTEREST....................... 1,962 43,621 53,032 41,091
-------- -------- -------- --------
INCOME TAX
Current..................................... 7 16 291 (14)
Deferred.................................... 712 14,819 17,727 13,965
-------- -------- -------- --------
Total Income Tax Expense.................... 719 14,835 18,018 13,951
-------- -------- -------- --------
MINORITY INTEREST
in Net Income of Consolidated Subsidiaries.. - - (59) -
-------- -------- -------- --------
NET INCOME................................... 1,243 28,786 34,955 27,140
Preferred Stock Dividends................... (445) (445) (890) (890)
-------- -------- -------- --------
EARNINGS AVAILABLE TO COMMON STOCK........... $ 798 $ 28,341 $ 34,065 $ 26,250
======== ======== ======== ========
EARNINGS PER COMMON SHARE
Basic....................................... $0.02 $0.63 $0.72 $0.59
======== ======== ======== ========
Diluted..................................... $0.02 $0.61 $0.70 $0.57
======== ======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE.......... $0.01 $0.01 $0.02 $0.02
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................. 45,945 44,733 47,119 44,730
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CROSS TIMBERS OIL COMPANY
Consolidated Statements of Cash Flows (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) Six Months Ended
June 30,
------------------------
2000 1999
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 34,955 $ 27,140
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization.......................................... 63,186 49,330
Stock incentive compensation...................................................... 4,360 96
Deferred income tax............................................................... 17,727 13,965
Gain on investment in equity securities and from sale of properties............... (36,287) (51,464)
Loss in derivative fair value..................................................... 26,824 -
Minority interest in net income of consolidated subsidiaries...................... 59 -
Other non-cash items.............................................................. 1,884 2,435
Changes in operating assets and liabilities (a).................................... 36,387 6,479
--------- ---------
Cash Provided by Operating Activities.............................................. 149,095 47,981
--------- ---------
INVESTING ACTIVITIES
Proceeds from sale of Hugoton Royalty Trust units.................................. - 148,570
Proceeds from sale of other property and equipment................................. 76,457 45,504
Property acquisitions.............................................................. (23,965) (35,742)
Development costs.................................................................. (58,131) (34,863)
Gas gathering and other additions.................................................. (7,357) (2,338)
(Loans to) repayments from officers................................................ 60 (569)
--------- ---------
Cash Provided (Used) by Investing Activities....................................... (12,936) 120,562
--------- ---------
FINANCING ACTIVITIES
Proceeds from short- and long-term debt............................................ 372,400 47,000
Payments on short- and long-term debt.............................................. (371,500) (222,962)
Dividends.......................................................................... (1,847) (3,125)
Purchase minority interest......................................................... (100,071) -
Net proceeds related to stock option exercises..................................... 7,482 28
Purchases of treasury stock........................................................ (43,731) (9)
--------- ---------
Cash Used by Financing Activities.................................................. (137,267) (179,068)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS............................................... (1,108) (10,525)
Cash and Cash Equivalents, Beginning of Period...................................... 5,734 12,333
--------- ---------
Cash and Cash Equivalents, End of Period............................................ $ 4,626 $ 1,808
========= =========
(a) Changes in Operating Assets and Liabilities
Accounts receivable............................................................ $(29,355) $ 3,227
Investment in equity securities................................................ 42,423 17,640
Other current assets........................................................... (243) (4,013)
Accounts payable, accrued liabilities and payable to royalty trusts............ 18,853 (20,682)
Other current liabilities...................................................... (474) 3,832
Other assets................................................................... (5,519) -
Other long-term liabilities.................................................... 10,702 6,475
--------- ---------
$ 36,387 $ 6,479
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CROSS TIMBERS OIL COMPANY
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Interim Financial Statements
The accompanying consolidated financial statements of Cross Timbers Oil
Company, with the exception of the consolidated balance sheet at December 31,
1999, have not been audited by independent public accountants. In the opinion
of the Company's management, the accompanying financial statements reflect all
adjustments necessary to present fairly the Company's financial position at June
30, 2000, its results of operations for the three and six months ended June 30,
2000 and 1999, and its cash flows for the six months ended June 30, 2000 and
1999. All such adjustments are of a normal recurring nature. Certain amounts
presented in prior period financial statements have been reclassified for
consistency with current period presentation. The results for interim periods
are not necessarily indicative of annual results.
Certain disclosures have been condensed or omitted from these financial
statements. Accordingly, these financial statements should be read with the
consolidated financial statements included in the Company's 1999 Annual Report
on Form 10-K.
Comprehensive Income
During the six months ended June 30, 2000 and 1999, there were no reportable
elements of comprehensive income other than net income.
2. Investment in Equity Securities
In 1998, the Company purchased what it believed to be undervalued oil and gas
reserves through investments in publicly traded equity securities of select
energy companies. A portion of these securities were sold in 1998 and 1999.
During the first six months of 2000, the Company sold most of its remaining
investment in equity securities for $42.4 million, resulting in a gain of $13.4
million.
The following are components of gain on investment in equity securities (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------- -------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------ ------ -------- --------
Realized gains (losses) on sale of securities:
Gains...................................................... $ - $ - $ 4,683 $ -
Losses..................................................... (866) (5) (31,285) (23,047)
------ ------ -------- --------
Net losses................................................. (866) (5) (26,602) (23,047)
Changes in unrealized gains and losses....................... 1,299 7,149 41,352 32,695
Interest expense related to investment in equity securities.. (134) (1,402) (1,359) (3,100)
------ ------ -------- --------
Gain on investment in equity securities...................... $ 299 $5,742 $ 13,391 $ 6,548
====== ====== ======== ========
</TABLE>
3. Long-term Debt
On May 12, 2000, the Company entered into a new revolving credit agreement
with commercial banks with a commitment of $800 million. Proceeds of this loan
agreement were used to refinance the Company's previous senior credit facility
and to fully repay a $25 million term loan and the separate bank debt of the
Company's subsidiaries, Spring Holding Company and Summer Acquisition Company.
Borrowings at June 30, 2000 under the loan agreement were $692 million with
unused borrowing capacity of $108 million. Borrowings under the loan agreement
are due May 12, 2005
6
<PAGE>
and the interest rate of 8.4% at June 30, 2000 was based on the London Interbank
Offered Rate plus 1 5/8%. The credit facility is secured by the Company's
producing properties. On June 20, 2000, the loan agreement was amended to
provide for the Company's issuance of letters of credit. There are no letters of
credit currently outstanding under this letter of credit facility. Other
significant provisions of the loan agreement remain unchanged from the previous
revolving credit agreement.
4. Commitments and Contingencies
Commodity Commitments
The Company has entered into natural gas futures contracts and swap
agreements that effectively fix prices, and natural gas call options that
provide ceiling prices, for the production and periods shown below. See Note 5.
Prices to be realized for hedged production will be less than these NYMEX prices
because of location, quality and other adjustments. See "Oil and Gas Production
and Prices" under Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<TABLE>
<CAPTION>
Future Contracts
and Swap Agreements Call Options
------------------------------ ---------------------------------
Fixed Price Ceiling Price
Production Period Mcf per Day per Mcf Mcf per Day per Mcf
---------------------- ----------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
2000 August 60,000 $ 2.46 - -
September 60,000 2.43 10,000 $ 4.00
October 60,000 2.48 - -
November 70,000 2.44 10,000 3.80
December 70,000 2.42 - -
2001 January 70,000 2.44 20,000 3.07 (a)
February 75,000 2.46 20,000 3.07 (a)
March 70,000 2.43 20,000 3.07 (a)
April to October 70,000 2.40 53,333 2.60 - 3.07 (a)
November 70,000 2.48 20,000 3.07 (a)
December 70,000 2.56 20,000 3.07 (a)
-----------------------
(a) Includes a natural gas call option to sell 20,000 Mcf per day in the San Juan Basin at an average ceiling index price of $2.70
per Mcf for the year 2001 which is exercisable in December 2001. Based on current San Juan Basin basis of approximately $0.32
per Mcf and including premium received of $0.05 per Mcf, this call option is reflected above at a NYMEX price of $3.07 per Mcf.
</TABLE>
The Company has entered into basis swap agreements which effectively fix
basis for the following production and periods:
<TABLE>
<CAPTION>
Location Production Period Mcf per Day Basis per Mcf
------------------------- ------------------------------ ------------- -------------
<S> <C> <C> <C> <C>
Arkoma 2000 August to September 82,500 $0.10
October 62,500 0.11
November to December 42,500 0.13
2001 January 40,000 0.13
East Texas 2000 August to October 5,000 0.10
Houston Ship Channel 2000 August 10,000 0.02
September 30,000 0.02
October 20,000 0.02
Oklahoma 2000 August 40,000 0.10
September to October 20,000 0.10
San Juan Basin 2000 September to December 10,000 0.28
</TABLE>
7
<PAGE>
The Company's hedging activities related to July 2000 gas production, net of
the effects of basis swap agreements, resulted in a net reduction in gas revenue
of $3.1 million, or approximately $0.31 per Mcf. Net reduction in gas revenue
related to hedging was $16 million, or $0.26 per Mcf, for the six months ended
June 30, 2000.
From August 1995 through July 1998 the Company received an additional $0.30
to $0.35 per Mcf on 10,000 Mcf of gas per day. In exchange therefor, the Company
agreed to sell 11,650 Mcf of gas per day from August 1998 through May 2000 at
the index price and 21,650 Mcf per day from June 2000 through July 2005 at a
price of approximately 10% of the average NYMEX futures price for intermediate
crude oil. In May 2000, this contract was amended to sell 21,650 Mcf per day at
the index price through December 2000, and 34,343 Mcf per day in 2001 and 21,650
Mcf per day from 2002 through July 2005 at a price of approximately 10% of the
average NYMEX futures price for intermediate crude oil. See "Accounting
Pronouncements" under Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company hedged oil production through futures contracts which, as of June
30, 2000, have expired. The Company has crude oil differential swaps to sell
2,500 Bbls of oil per day through September 2000 at the posted price plus $3.18.
Net reduction in oil revenue related to hedging was $7.7 million, or $3.24 per
Bbl, for the six months ended June 30, 2000.
Litigation
On April 3, 1998, a class action lawsuit, styled Booth, et al. v. Cross
Timbers Oil Company, was filed against the Company in the District Court of
Dewey County, Oklahoma. The action was filed on behalf of all persons who, at
any time since June 1991, have been paid royalties on gas produced from any gas
well within the State of Oklahoma under which the Company has assumed the
obligation to pay royalties. The plaintiffs allege that the Company has reduced
royalty payments by post-production deductions and has entered into contracts
with subsidiaries that were not arm's-length transactions. The plaintiffs
further allege that these actions reduced the royalties paid to the plaintiffs
and those similarly situated, and that such actions are a breach of the leases
under which the royalties are paid. These deductions allegedly include
production and post-production costs, marketing costs, administration costs and
costs incurred by the Company in gathering, compressing, dehydrating,
processing, treating, blending and/or transporting the gas produced. The Company
contends that, to the extent any fees are proportionately borne by the
plaintiffs, these fees are established by arm's-length negotiations with third
parties or, if charged by affiliates, are comparable to fees charged by other
third party gatherers or processors. The Company further contends that any such
fees enhance the value of the gas or the products derived from the gas. The
plaintiffs are seeking an accounting and payment of the monies allegedly owed to
them. A hearing on the class certification issue has not been scheduled.
Management believes it has strong defenses against this claim and intends to
vigorously defend the action. Management's estimate of the potential liability
from this claim has been accrued in the Company's financial statements.
On October 17, 1997, an action, styled United States of America ex rel.
Grynberg v. Cross Timbers Oil Company, et al., was filed in the U. S. District
Court for the Western District of Oklahoma against the Company and certain of
its subsidiaries by Jack J. Grynberg on behalf of the United States under the
qui tam provisions of the False Claims Act. The plaintiff alleges that the
Company underpaid royalties on gas produced from federal leases and lands owned
by Native Americans by at least 20% during the past 10 years as a result of
mismeasuring the volume of gas and incorrectly analyzing its heating content.
The plaintiff has made similar allegations in over 70 actions filed against more
than 300 other companies. The plaintiff seeks to recover the amount of
royalties not paid, together with treble damages, a civil penalty of $5,000 to
$10,000 for each violation and attorney fees and expenses. After its review,
the Department of Justice decided in April 1999 not to intervene and asked the
court to unseal the case. The court unsealed the case in May 1999. A multi-
district litigation panel ordered that the lawsuits against the Company and
other companies filed by Grynberg be transferred and consolidated to the federal
district court in Wyoming. The Company and other defendants have filed a motion
to dismiss. The Company believes that the allegations of this lawsuit are
without merit and intends to vigorously defend the action.
A third lawsuit, Bishop, et al. v. Amoco Production Co., et al., was filed in
May 2000 in the Third Judicial District Court in Lincoln County, Wyoming by
owners of royalty and overriding royalty interests in wells located in Wyoming.
The plaintiffs allege that the Company and the other producer defendants have
deducted impermissible costs of
8
<PAGE>
production from royalty payments that have been made to the plaintiffs and other
similarly situated persons and have failed to properly inform the plaintiffs and
others of the deductions taken. The action is being brought as a class action on
behalf of all persons who own an interest in wells located in Wyoming as to
which the defendants pay royalties and overriding royalties. The plaintiffs seek
a declaratory judgment that the deductions made are impermissible and seek
damages in the amount of the deductions made together with interest and
attorneys' fees. The Company believes that the plaintiffs' interpretation of a
Wyoming statute that addresses this issue, which the plaintiffs based on a 1999
court decision, is erroneous, and that any deductions made from royalties by the
Company are permitted by the statute. The Company intends to vigorously defend
this action.
The Company is involved in various other lawsuits and certain governmental
proceedings arising in the ordinary course of business. Company management and
legal counsel do not believe that the ultimate resolution of these claims,
including the lawsuits described above, will have a material effect on the
Company's financial position or liquidity although an unfavorable outcome could
have a material adverse effect on the operations of a given interim period or
year.
5. Derivatives
In conjunction with its hedging activities, the Company entered gas call
options (Note 4). Because these options are covered by Company production and
the strike prices are below current market gas prices, they have the same effect
on the Company as product hedges. However, because options do not provide
protection against declining prices, they do not qualify for hedge or loss
deferral accounting. The opportunity loss, related to gas prices exceeding the
fixed gas prices effectively provided by the call options, has been recognized
as a loss, rather than deferring the loss and recognizing it as reduced gas
revenue when the hedged production occurs, as prescribed by hedge accounting.
For the six months ended June 30, 2000, a fair value loss of $26.8 million has
been recorded in the consolidated statements of operations, with the offsetting
liability of $16.3 million recorded in other current liabilities and $10.5
million in other long-term liabilities based on the expiration date of the
options.
During July 2000, a portion of these call options were terminated and the
Company entered swap agreements that provide effective hedges (Note 4). Based
on the fair value of these call options at the date of their termination, the
Company recorded a derivative fair value gain of $2.4 million. Deferred revenue
of $10.3 million related to the swap agreements will be amortized over their
related term, resulting in realized NYMEX gas prices of $4.06 per Mcf for 10,000
Mcf per day from August through October 2000 and $3.46 per Mcf for 30,000 Mcf
per day in 2001.
See Item 3, Quantitative and Qualitative Disclosures about Market Risk.
6. Common Stock
In February 2000, the Board of Directors authorized the repurchase of 2.5
million shares of the Company's common stock. Upon completion of repurchases
under this authorization, the Board of Directors authorized the repurchase of an
additional 3.0 million shares in May. During the first six months of 2000, the
Company repurchased 3.5 million shares of its common stock at a cost of $41.4
million, including 889,000 shares repurchased under a prior Board authorization.
As of August 1, 2.9 million shares are available for repurchase under the May
2000 Board authorization.
In May 2000, in conjunction with the dissolution of Whitewine Holding
Company, the Company's wholly owned subsidiary, 5.9 million shares were canceled
from treasury stock. This transaction caused a $71.5 million reduction in
treasury stock with an offsetting reduction in additional paid-in capital,
resulting in no change to total stockholders' equity.
In June 2000, 9,900 shares of convertible preferred stock were converted by
stockholders into 21,384 shares of common stock.
9
<PAGE>
7. Common Shares Outstanding and Earnings per Common Share
The following reconciles earnings (numerator) and shares (denominator) used
in the computation of basic and diluted earnings per share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------------
2000 1999
--------------------------------- -------------------------------
Earnings Earnings
Earnings Shares per Share Earnings Shares per Share
---------- -------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income...................... $ 1,243 $28,786
Preferred stock dividends....... (445) (445)
------- -------
Earnings available to
common stock - basic.......... 798 45,945 $ 0.02 28,341 44,733 $0.63
======== =====
Diluted:
Effect of dilutive securities:
Stock options.................. - 550 - 127
Preferred stock (a)............ - - 445 2,460
Warrants....................... - 112 - -
------- ------ -------- ---------
Earnings available to
common stock - diluted........ $ 798 46,607 $ 0.02 $28,786 47,320 $0.61
======= ====== ======== ======= ========= =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------------
2000 1999
--------------------------------- -------------------------------
Earnings Earnings
Earnings Shares per Share Earnings Shares per Share
---------- -------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income...................... $34,955 $27,140
Preferred stock dividends....... (890) (890)
------- -------
Earnings available to
common stock - basic.......... 34,065 47,119 $ 0.72 26,250 44,730 $0.59
======== =====
Diluted:
Effect of dilutive securities:
Stock options.................. - 295 - 58
Preferred stock (a)............ 890 2,459 890 2,460
Warrants....................... - - - -
------- ------ -------- ---------
Earnings available to
common stock - diluted........ $34,955 49,873 $ 0.70 $27,140 47,248 $0.57
======= ====== ======== ======= ========= =====
-----------------------
</TABLE>
(a) Based on common shares outstanding at August 1, 2000, conversion of Series A
convertible preferred stock becomes dilutive to earnings per share when
annual earnings available to common stock exceeds approximately $33.5
million and when quarterly earnings available to common stock exceeds
approximately $8.4 million.
8. Supplemental Cash Flow Information
The following are total interest and income tax payments during each of the
periods (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
Interest.... $38,342 $32,254
Income tax.. 786 (294)
</TABLE>
10
<PAGE>
The accompanying consolidated statements of cash flows exclude the following
non-cash equity transactions during the six-month periods ended June 30, 2000
and 1999:
- Grants of 120,000 performance shares and vesting of 250,000 performance
shares in 2000 (Note 9)
- Cancellation of 5.9 million shares of treasury stock in 2000
- Conversion of 9,900 shares of preferred stock to common stock in 2000
9. Employee Benefit Plans
Stock Incentive Plans
During the first six months of 2000, a total of 902,000 stock options were
exercised with an exercise price of $9.3 million. As a result of these
exercises, outstanding common stock increased by 730,000 shares and
stockholders' equity increased by a net $9.5 million.
Performance Shares
In January 2000, 120,000 performance shares were issued to key employees.
These performance shares vested when the common stock price closed above $20.00
on May 31, 2000. On May 5, 2000, 130,000 performance shares issued in 1999
vested when the common stock price closed above $16.00. Performance share
compensation of $4.1 million was recorded during the six months ended June 30,
2000. On July 11, 2000, 60,000 outstanding performance shares vested when the
stock price closed above $22.50. On that date, 60,000 additional performance
shares were granted that will vest when the stock price closes above $25.00.
Additional performance share compensation recorded in July related to such
vesting and grants totaled $1 million.
10. Ocean Energy Acquisition
On September 15, 1999, the Company and Lehman Brothers Holdings, Inc.
acquired Arkoma Basin oil and gas properties from Ocean Energy, Inc. for $231
million. The original purchase price of $235.3 million was reduced by estimated
net revenue received between the July 1, 1999 effective date and the closing
date. Additional purchase price adjustments may result from post-closing
adjustments. All purchase costs will be allocated to oil and gas properties.
The Company and Lehman each owned 50% of Whitewine Holding Company, which was
formed to acquire the Arkoma Basin properties. Pursuant to a put and call
agreement, the Company purchased Lehman's 50% interest in the Ocean Energy
Acquisition on March 31, 2000 for $111 million, or $11 million in excess of the
recorded minority interest, which excess was recorded as producing property
cost. Although the Company and Lehman had equal board representation and
control of Whitewine, the Company's management controlled operations of the
properties since September 15, 1999 and had the right to purchase Lehman's
interest pursuant to the call agreement. Whitewine's financial results are
consolidated in the Company's financial statements, with recognition of Lehman's
50% interest as a minority interest through March 31, 2000.
11. Dispositions
In March 2000, the Company sold primarily gas producing properties in
Crockett County, Texas for gross proceeds of $43 million and sold oil and gas
producing properties in Lea County, New Mexico for gross proceeds of $25.3
million. Both sales are subject to post-closing adjustments. The Company used
the proceeds from these sales to partially fund the purchase of Lehman's
interest in Whitewine from Lehman on March 31, 2000. See Note 10.
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have reviewed the accompanying consolidated balance sheet of Cross Timbers
Oil Company (a Delaware corporation) and its subsidiaries as of June 30, 2000
and the related consolidated statements of operations for the three- and six-
month periods ended June 30, 2000 and 1999, and the consolidated statements of
cash flows for the six-month periods ended June 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards generally accepted in the
United States. A review of interim financial information consists principally
of applying analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with auditing standards
generally accepted in the United States, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Cross Timbers
Oil Company as of December 31, 1999 included in the Company's 1999 Annual Report
on Form 10-K, and in our report dated March 17, 2000, we expressed an
unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet included in the Company's 1999 Annual Report on Form 10-K from which it
has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
July 21, 2000
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with management's
discussion and analysis contained in the Company's 1999 Annual Report on Form
10-K, as well as with the consolidated financial statements and notes thereto
included in this quarterly report on Form 10-Q.
Oil and Gas Production and Prices
---------------------------------
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total production
Oil (Bbls)................... 1,152,587 1,289,942 (11%) 2,390,179 2,687,447 (11%)
Gas (Mcf).................... 30,151,667 21,986,655 37% 60,719,770 47,955,288 27%
Natural gas liquids (Bbls)... 394,876 360,240 10% 781,490 579,087 35%
Mcfe......................... 39,436,445 31,887,747 24% 79,749,784 67,554,492 18%
Average daily production
Oil (Bbls)................... 12,666 14,175 (11%) 13,133 14,848 (12%)
Gas (Mcf).................... 331,337 241,612 37% 333,625 264,946 26%
Natural gas liquids (Bbls)... 4,339 3,959 10% 4,294 3,199 34%
Mcfe......................... 433,368 350,415 24% 438,186 373,229 17%
Average sales price
Oil per Bbl.................. $23.54 $15.02 57% $24.36 $13.08 86%
Gas per Mcf.................. $ 2.72 $ 1.81 50% $ 2.56 $ 1.88 36%
Natural gas liquids per Bbl.. $17.25 $ 9.77 77% $17.89 $ 8.62 108%
</TABLE>
----------------------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
Mcfe - Thousand cubic feet of natural gas equivalent (computed on an energy
equivalent basis of one Bbl equals six Mcf)
Total oil production decreased primarily because of property sales, natural
decline and developmental downtime, partially offset by acquisitions and
development. Increased gas production is primarily attributable to 1999
acquisitions and development activity, partially offset by property sales and
natural decline. Increased natural gas liquids production is related to 1999
development activity and lower first quarter 1999 production because of low
ethane prices.
The average posted price for West Texas Intermediate ("WTI"), a benchmark
crude, was $25.95 per barrel for second quarter 2000, compared to $15.10 for
second quarter 1999. The average NYMEX price for oil was $28.68 per barrel for
second quarter 2000, compared to $17.65 for second quarter 1999. The Company's
average oil price, before consideration of hedging, is generally higher than the
WTI posted price because of quality and location differentials. Average prices
during 1999 reflect abnormally low prices resulting from excess global supply.
After OPEC members and other oil producers agreed to production cuts in March
1999, oil prices climbed through the remainder of 1999 and first quarter 2000.
Increased demand in 2000 has more than offset OPEC production increases in March
and June, sustaining higher prices through June 2000. Saudi Arabia reportedly
increased production in July to reduce prices, and OPEC has recently announced
an informal agreement to control output so that the OPEC reference price for
crude oil is maintained within a range of $22 to $28. The OPEC reference price
has been within this range since July 19. The average West Texas Intermediate
posted price for July 2000 was $27.18 per Bbl.
Lower 1999 gas prices reflect high levels of gas in storage remaining from
the abnormally warm winter of 1998-1999. Gas prices began to increase in May
1999 and, after declining briefly at year end, have continued to strengthen in
2000,
13
<PAGE>
as gas storage remains lower than prior year levels. At August 4, 2000, the
average NYMEX price for the following twelve months was $4.12 per MMBtu.
The Company uses price-hedging arrangements to reduce price risk on a portion
of its oil and gas production; see Note 4 to Consolidated Financial Statements.
During second quarter 2000, the Company's hedging activities reduced gas revenue
by $15.2 million, or $0.51 per Mcf, and reduced oil revenue by $4.4 million, or
$3.83 per Bbl. For the first half of 2000, the Company's hedging activities
reduced gas revenue by $16 million, or $0.26 per Mcf, and reduced oil revenue
by $7.7 million, or $3.24 per Bbl. During second quarter 1999, hedging
activities decreased gas revenue by $3.8 million, or $0.17 per Mcf, and oil
revenue by $900,000, or $0.72 per Bbl. For the first six months of 1999,
hedging activities increased gas revenue by $2.6 million, or $0.05 per Mcf, and
decreased oil revenue by $900,000, or $0.35 per Bbl.
Results of Operations
---------------------
Quarter Ended June 30, 2000 Compared with Quarter Ended June 30, 1999
Earnings available to common stock for second quarter 2000 were $800,000
compared to second quarter 1999 earnings of $28.3 million. Second quarter 2000
earnings include a $200,000 after-tax gain on the Company's investment in equity
securities and a $15.7 million after-tax loss in derivative fair value.
Excluding this gain and loss, earnings for the quarter were $16.3 million.
Earnings for the 1999 quarter include a $26.6 million after-tax gain from the
sale of 42.5% of Hugoton Royalty Trust in its initial public offering and a $3.8
million gain from sale of equity securities. Excluding these gains, loss
available to common stock for the quarter was $2.1 million.
Operating income for second quarter 2000 was $22.7 million, a 111% increase
from 1999 operating income of $10.8 million. Total revenues for the quarter
were $121.7 million, an 86% increase over second quarter 1999 revenues of $65.6
million. Oil revenue increased $7.8 million (40%) because of the 57% increase
in oil prices, partially offset by the 11% decrease in oil volumes. Gas and
natural gas liquids revenues increased $45.7 million (106%) because of the 50%
increase in gas prices and 77% increase in natural gas liquids prices, as well
as the 37% increase in gas volumes and 10% increase in natural gas liquids
volumes. Second quarter gas gathering, processing and marketing revenues
increased $2.4 million (191%) from 1999 to 2000 primarily because of increased
marketing margins.
Expenses for second quarter 2000, before the loss in derivative fair value,
totaled $75.2 million, a 37% increase from second quarter 1999 expenses of $54.8
million. Production expense increased $2.9 million (16%) and depreciation,
depletion and amortization ("DD&A") increased $8.1 million (35%) because of
increased production related to acquisitions and development. Taxes,
transportation and other increased $4.7 million (58%) over the second quarter of
1999 primarily because of higher oil and gas revenues. General and
administrative expense ("G&A") increased $4.6 million (160%) primarily because
of Company growth and non-cash compensation of $2 million related to performance
share awards and other stock incentive compensation. Second quarter 2000
expenses also include a $23.8 million non-cash loss in fair value of certain
derivatives entered in conjunction with the Company's hedging activities. These
derivatives do not qualify for hedge, or loss deferral, accounting. See Note 5
to Consolidated Financial Statements.
Gain on investment in equity securities was $300,000 for the quarter,
compared with a $5.7 million gain in second quarter 1999. Interest expense
increased $7.8 million (59%) primarily because of a 29% increase in weighted
average debt outstanding, and a 13% increase in the weighted average interest
rate.
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999
Earnings available to common stock for the six months ended June 30, 2000
were $34.1 million, compared to earnings of $26.3 million for the same 1999
period. Excluding the after-tax loss in derivative fair value of $17.7 million
and an after-tax gain of $21.4 million on significant property divestitures and
investment in equity securities, earnings available to common stock were $30.4
million for the first half of 2000. Earnings for the first half of 1999 include
a $26.6 million after-tax gain on sale of Hugoton Royalty Trust units and net
after-tax gains of $4.3 million on investment in equity securities. Excluding
these gains, loss available to common stock for the first half of 1999 was $4.7
million.
14
<PAGE>
Operating income for the first half of 2000 was $60.3 million, a 162%
increase from operating income of $23 million for the comparable 1999 period.
Total revenues for the first half of 2000 were $235 million, or $100 million
(74%) higher than revenues of $135 million for the first half of 1999. Oil
revenue increased $23.1 million (66%) because of the 86% increase in oil prices,
partially offset by an 11% production decrease. Gas and natural gas liquids
revenues increased $74.5 million (78%) because of the 36% increase in gas prices
and 108% increase in natural gas liquids prices, as well as the 27% increase in
gas volumes and 35% increase in natural gas liquids volumes. Gas gathering,
processing and marketing revenues increased $2.2 million (73%) primarily because
of higher processing margins.
Expenses for the six months ended June 30, 2000, before the loss in
derivative fair value, totaled $147.8 million, or 32% above total expenses of
$112 million for the first half of 1999. Production expense increased $4.3
million (12%) and DD&A increased $13.9 million (28%) primarily because of
increased production related to acquisitions and development. Taxes,
transportation and other increased $8.3 million (54%) primarily because of
higher oil and gas revenues. G&A increased $9 million (156%) primarily because
of Company growth and non-cash compensation of $4.4 million related to
performance share awards and other stock incentive compensation. Expenses for
the first half of 2000 also include a $26.8 million non-cash loss in fair value
of derivatives entered in conjunction with the Company's hedging activities and
that do not qualify for hedge accounting. See Note 5 to Consolidated Financial
Statements.
Gain on investment in equity securities was $13.4 million for the first six
months of 2000, compared with a $6.5 million gain for the same 1999 period.
Interest expense increased $10.9 million (38%) primarily because of a 17%
increase in weighted average borrowings and an 11% increase in the weighted
average interest rate.
Comparative Expenses per Mcf Equivalent Production
--------------------------------------------------
The following are expenses on an Mcf equivalent (Mcfe) produced basis:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Production........................................... $0.54 $0.57 (5%) $0.52 $0.54 (4%)
Taxes, transportation and other...................... 0.32 0.25 28% 0.30 0.23 30%
Depreciation, depletion and
amortization (DD&A)................................. 0.79 0.73 8% 0.79 0.73 8%
General and administrative (G&A) (a)................. 0.14 0.09 56% 0.13 0.08 63%
Interest............................................. 0.53 0.41 29% 0.50 0.43 16%
</TABLE>
-----------------------
(a) Excludes stock incentive compensation.
The following are explanations of variances of expenses on an Mcfe basis:
Production- Decreased production expense per Mcfe is primarily because of
an increase in proportionate gas production, which costs less to produce than
oil.
Taxes, transportation and other- Increased taxes, transportation and other
expense per Mcfe is primarily because of higher product prices.
DD&A- Increased DD&A per Mcfe is primarily related to the higher cost per
Mcfe of 1999 producing property acquisitions.
G&A- Increased G&A per Mcfe is primarily the result of increased personnel
costs related to Company growth.
Interest- Increased interest expense per Mcfe is primarily because of an
increase in the weighted average interest rate from 7.4% to 8.3% and decreased
allocation of interest to investment in equity securities resulting from equity
security sales.
15
<PAGE>
Liquidity and Capital Resources
-------------------------------
Cash Flow and Working Capital
Cash provided by operating activities was $149.1 million for the first six
months of 2000 compared with $48 million for the same 1999 period. This change
was primarily because of increased production and prices, equity security sales
and timing of cash receipts and disbursements. Operating cash flow (defined as
cash provided by operating activities before changes in operating assets and
liabilities and exploration expense) increased 170% from $42 million for the
first six months of 1999 to $113.4 million for the same 2000 period, primarily
because of increased production and prices.
During the six months ended June 30, 2000, cash provided by operating
activities of $149.1 million, bank borrowings of $372.4 million, net proceeds
related to stock option exercises of $7.5 million and sale of property and
equipment of $76.5 million were used to fund net property acquisitions,
development costs and other net capital additions of $89.5 million, debt
payments of $371.5 million, minority interest purchase of $100.1 million,
treasury stock purchases of $43.7 million and dividends of $1.8 million. The
resulting decrease in cash and cash equivalents for the period was $1.1 million.
Other significant changes in current assets during the first half of 2000
were a $29 million increase in accounts receivable related to increased product
prices and the timing of cash receipts, a $27.7 million decrease in investment
in equity securities primarily related to sale of securities and a $2.2 million
increase in current deferred income tax benefit primarily related to the current
portion of the derivative fair value loss. Total current liabilities increased
$38.1 million during the first six months of 2000, primarily because of a $22.1
million increase in accounts payable and accrued liabilities related to
increased product prices and the timing of disbursements and a $16 million
increase in other current liabilities primarily related to the current portion
of derivative fair value loss.
Acquisitions and Development
Exploration and development expenditures for the first six months of 2000
were $58.8 million, compared with $35.4 million for the first six months of
1999. The Company has budgeted $120 million for exploration and development in
2000. Actual costs may vary significantly due to many factors, particularly
changes in drilling, completion and material costs, as well as changes in
commodity prices. Such expenditures are expected to be funded by cash flow from
operations.
Through the first six months of 2000, the Company participated in the
drilling of 79 gas wells and 13 oil wells and more than 200 workovers. Results
of these projects have met or exceeded management expectations. Workovers were
focused on recompletions, artificial lift, and wellhead compression.
During the first six months of 2000, 20 wells were drilled in East Texas,
nine of which were completed. The Company expects to drill an additional 23
wells by year-end. The Company also completed 37 workovers in East Texas. In the
Arkoma Basin, the Company has drilled 16 wells, five of which were completed by
June 30, 2000.
In the San Juan Basin, the Company's drilling has targeted the Fruitland Coal
formation. Nine wells and 66 workovers were completed in this area as of June
30, 2000. The Company has also been active in the Mid-Continent area where 26
wells have been drilled, eleven of which have been completed.
The Company continued the development of oil projects in the Permian Basin
during the first half of 2000. Eleven wells were drilled, five of which were
completed.
On March 31, 2000, the Company exercised its option to purchase Lehman's 50%
interest in the Ocean Energy Acquisition for $111 million. See Note 10 to
Consolidated Financial Statements.
In February 2000, the Board of Directors authorized the repurchase of 2.5
million shares of the Company's common stock. Upon completion of repurchases
under this authorization, the Board of Directors authorized the repurchase of an
additional 3.0 million shares in May. During the first six months of 2000, the
Company repurchased 3.5 million shares of its common stock on the open market at
a cost of $41.4 million, including 889,000 shares repurchased under a prior
Board authorization. As of August 1, 2.9 million shares remain under the May
2000 Board authorization.
16
<PAGE>
Purchases of the Company's common stock and Lehman's interest in the Ocean
Energy Acquisition were funded with proceeds from the sale of most of the
Company's investment in equity securities for $42.4 million, sale of producing
properties for $68.3 million, borrowings from commercial banks under a $25
million term loan and cash flow from operations.
The Company has unused borrowing capacity of $108 million at August 1, 2000
under its new revolving credit agreement with commercial banks. This capacity
is available for acquisitions and development.
Debt and Equity
As of June 30, 2000, long-term bank debt increased by $900,000 from the
balance at December 31, 1999. Debt was increased by borrowings to partially
fund the purchase of Lehman's interest in the Ocean Energy Acquisition, which
was largely repaid by operating cash flow.
On May 12, 2000, the Company entered into a new revolving credit agreement
with commercial banks with a commitment of $800 million. Proceeds of this loan
agreement were used to fully repay a $25 million term loan, as well as separate
bank debt of the Company's subsidiaries. Borrowings at June 30, 2000 under the
loan agreement were $692 million.
Stockholders' equity at June 30, 2000 increased $3.8 million from year-end
because of earnings of $34.1 million for the six months ended June 30, 2000 and
an increase in additional paid-in capital of $14.3 million related to stock
option exercises and performance shares, partially offset by treasury stock
purchases of $43.7 million and common stock dividends declared of $900,000.
Common Stock Dividends
In May 2000, the Board of Directors of the Company declared a second quarter
common stock dividend of $0.01 per share that was paid in July.
Accounting Pronouncements
-------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities which was required to be adopted for fiscal
years beginning after June 15, 1999. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 which delayed the effective date of
Statement No. 133 for one year, to fiscal years beginning after June 15, 2000.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138 which
amends SFAS No. 133.
SFAS No. 138 provides that contracts that have a price based on an
element that is not clearly and closely related to the asset being sold are not
considered a normal sale. Such a contract is therefore a derivative that must
be marked to market upon adoption of SFAS No. 133. The Company has a contract
to sell natural gas from January 2001 through July 2005 at a price based on the
NYMEX futures price for intermediate crude oil. See Note 4 to Consolidated
Financial Statements. If these pricing provisions are not amended prior to the
Company's anticipated adoption of SFAS No. 133 as of January 1, 2001, the
Company expects to record a derivative fair value loss on this contract. The
amount of such loss will be determined by the relationship between the
intermediate crude oil price and natural gas price on the futures market for the
contract period. Based on these prices on August 11, 2000, the after-tax loss on
the contract would be $23.7 million. This represents recognition of an
opportunity loss that, if the contract were considered a normal sale, would be
recognized as reduced gas revenue over the contract term.
Other than the effect of this contract, the Company does not expect adoption
of SFAS No. 133, as amended by SFAS No. 138, to significantly affect reported
earnings since the Company's derivatives are expected to provide effective
hedges. However, comprehensive income could be materially affected.
17
<PAGE>
Forward-Looking Statements
--------------------------
Certain information included in this quarterly report and other materials
filed by the Company with the Commission contain forward-looking statements
relating to the Company's operations and the oil and gas industry. Such
forward-looking statements are based on management's current projections and
estimates and are identified by words such as "expects," "intends," "plans,"
"projects," "anticipates," "believes," "estimates" and similar words. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
results may differ materially from what is expressed or forecasted in such
forward-looking statements.
Among the factors that could cause actual results to differ materially are:
- crude oil and natural gas price fluctuations,
- changes in interest rates,
- the Company's ability to acquire oil and gas properties that meet its
objectives and to identify prospects for drilling,
- potential delays or failure to achieve expected production from existing
and future exploration and development projects,
- potential liability resulting from pending or future litigation.
In addition, these forward-looking statements may be affected by general
domestic and international economic and political conditions.
18
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following market risk disclosures should be read in conjunction with the
quantitative and qualitative disclosures about market risk contained in the
Company's 1999 Annual Report on Form 10-K, as well as with the consolidated
financial statements and notes thereto included in this quarterly report on Form
10-Q.
Hypothetical changes in interest rates and prices chosen for the following
estimated sensitivity effects are considered to be reasonably possible near-term
changes generally based on consideration of past fluctuations for each risk
category. It is not possible to accurately predict future changes in interest
rates, product prices and investment market values. Accordingly, these
hypothetical changes may not necessarily be an indicator of probable future
fluctuations.
Interest Rate Risk
The Company is exposed to interest rate risk on short-term and long-term debt
carrying variable interest rates. At June 30, 2000, the Company's variable rate
debt had a carrying value of $692 million, which approximated its fair value,
and the Company's fixed rate debt had a carrying value of $300 million and an
approximate fair value of $287.2 million. Assuming a 100-basis point change in
interest rates at June 30, 2000, the fair value of the Company's fixed rate debt
would change by approximately $15.9 million.
The Company also has an interest rate swap agreement which effectively
converts the interest rate from variable to fixed on a $50 million notional
amount through September 2005. The Company sold a call option that allows the
counterparty to terminate the interest rate swap in November 2000. The fair
value of this swap and call at June 30, 2000 was $300,000. The fair value of
the swap and call would change by approximately $200,000 assuming a 100-basis
point change in interest rates at June 30, 2000.
Commodity Price Risk
The Company hedges a portion of the market risks associated with its crude
oil and natural gas sales. As of June 30, 2000, the Company had outstanding gas
futures contracts and gas basis swap agreements. After termination of a portion
of its call options in July 2000, the Company also entered swap agreements that
provide effective hedges. These gas futures contracts, swap agreements and basis
swap agreements would have had a total fair value loss of approximately $52.5
million at June 30, 2000. The aggregate effect of a hypothetical 10% change in
gas prices and basis would result in a change of approximately $13.6 million in
the fair value of these financial instruments at June 30, 2000.
In conjunction with its hedging activities, the Company has entered call
options to sell future gas production at certain ceiling prices. As of June 30,
2000, these options had a fair value loss of $26.8 million. During July 2000, a
portion of these call options were terminated, resulting in a derivative fair
value gain of $2.4 million. Remaining call options had a fair value loss of $14
million at June 30, 2000. The aggregate effect of a hypothetical 10% change in
gas prices and basis would result in a change of approximately $4.7 million in
the fair value of these options at June 30, 2000. A 30% decrease in gas prices
would result in approximately a $12.1 million reduction of the fair value loss.
Change in the fair value of these options are recognized in the consolidated
statements of operations since they do not qualify for hedge accounting. See
Note 5 to Consolidated Financial Statements.
Investment in Equity Securities
The Company is subject to price risk on its unhedged portfolio of publicly
traded investments in equity securities. The fair value of these securities at
June 30, 2000 was $1.4 million. At that time, a 25% appreciation or
depreciation in equity prices would increase or decrease portfolio fair value
and pre-tax earnings by approximately $340,000. See Note 2 to Consolidated
Financial Statements.
19
<PAGE>
PART II. OTHER INFORMATION
Items 1. Legal Proceedings
A class action lawsuit, styled Bishop, et al. v. Amoco Production Co., et
al., was filed in May 2000 in the Third Judicial District Court in Lincoln
County, Wyoming by owners of royalty and overriding royalty interests in wells
located in Wyoming. The plaintiffs allege that the Company and the other
producer defendants have deducted impermissible costs of production from royalty
payments that have been made to the plaintiffs and other similarly situated
persons and have failed to properly inform the plaintiffs and others of the
deductions taken. The action is being brought as a class action on behalf of
all persons who own an interest in wells located in Wyoming as to which the
defendants pay royalties and overriding royalties. The plaintiffs seek a
declaratory judgment that the deductions made are impermissible and seek damages
in the amount of the deductions made together with interest and attorneys' fees.
The Company believes that the plaintiffs' interpretation of a Wyoming statute
that addresses this issue, which the plaintiffs based on a 1999 court decision,
is erroneous, and that any deductions made from royalties by the Company are
permitted by the statute. The Company intends to vigorously defend this action.
Items 2. and 3.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Stockholders at the Annual Meeting on May 16, 2000, and by proxy, elected
two incumbent directors, Steffen E. Palko and J. Luther King, Jr., and one new
director, Herbert D. Simons. Of 45,294,974 shares represented at the meeting,
44,629,418 shares (98.5%) were voted for Mr. Palko, 44,780,089 shares (98.9%)
were voted for Mr. King and 44,781,072 shares (98.9%) were voted for Mr. Simons.
Other directors continuing in office are Bob R. Simpson, Scott G. Sherman and
Jack P. Randall. Dr. Lane G. Collins continues to serve as an advisory
director.
A proposal by the Board of Directors was approved by stockholders at the
Annual Meeting, with the following vote tabulation:
Approval of the 1999 Royalty Trust Option Plan
-----------------------------------------------------------------------
Shares For Shares Against Shares Abstained Broker Non-Votes
---------------- -------------- ----------------- ----------------
35,162,454 77.6% 640,781 1.4% 82,778 0.2% 9,408,961 20.8%
Item 5.
Not applicable.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number
and Description Page
--------------- ------
<S> <C>
10.1 First Amendment to Revolving Credit Agreement dated June 20,
2000, between Cross Timbers Oil Company and certain commercial
banks named therein
10.2* Amended and Restated Employment Agreement between the Company
and Bob R. Simpson, dated May 16, 2000
10.3* Amended and Restated Employment Agreement between the Company
and Steffen E. Palko, dated May 16, 2000
11 Computation of per share earnings
(included in Note 7 to Consolidated Financial Statements)
15 Letter re unaudited interim financial information
15.1 Awareness letter of Arthur Andersen LLP
* Management contract or compensatory plan
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended
June 30, 2000 and through August 14, 2000:
On May 19, 2000, the Company filed a report on Form 8-K regarding
completion of the repurchase of 2.5 million shares of the Company's common
stock under the Board of Directors' February 29, 2000 authorization and the
Board of Directors' May 16, 2000 authorization to repurchase up to three
million additional shares.
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS OIL COMPANY
Date: August 14, 2000 By LOUIS G. BALDWIN
------------------------------
Louis G. Baldwin
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
By BENNIE G. KNIFFEN
------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer)
22
