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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 March 31, 1998
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 0-9204
EXCO RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-1492779
(State of incorporation) (I.R.S. Employer
Identification No.)
5735 Pineland Dr., Suite 235
Dallas, Texas 75231
(Address of principal executive offices) (Zip Code)
(214) 368-2084
(Registrant's telephone number, including area code)
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 last practicable date.
Class: Common Stock, par value $0.02 per share
Outstanding at April 30, 1998: 508,900 shares
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EXCO RESOURCES, INC.
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Condensed Balance Sheets - December 31, 1997
and March 31, 1998 (Unaudited) 2
Condensed Statements of Operations
Three Months Ended March 31, 1997 and 1998 (Unaudited) 3
Condensed Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1998 (Unaudited) 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCO RESOURCES, INC.
CONDENSED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
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<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
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ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 496 $ 52
Accounts receivable .................................................... 226 182
Other .................................................................. 5 22
---------- ----------
Total current assets .......................................... 727 256
Oil and natural gas properties (full cost accounting method):
Undeveloped oil and natural gas properties ............................. 36 32
Proved developed oil and natural gas properties ........................ 4,267 5,103
---------- ----------
4,303 5,135
Allowance for depreciation, depletion and amortization ................. (3,830) (3,860)
---------- ----------
Oil and natural gas properties, net .................................... 473 1,275
Office and field equipment, net ........................................... 70 134
Deferred financing costs .................................................. -- 89
---------- ----------
Total assets .................................................. $ 1,270 $ 1,754
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 262 $ 330
Revenues and royalties payable ......................................... 50 27
Current maturities of long-term debt ................................... 16 15
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Total current liabilities ..................................... 328 372
Long-term debt, less current maturities ................................... 15 612
Stockholders' equity:
Common Stock, $.02 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 502,650 and 508,900 at
December 31, 1997 and March 31, 1998, respectively ............... 10 10
Additional paid-in capital ............................................. 9,716 954
Deficit eliminated ..................................................... (8,799) --
Retained earnings (deficit), as adjusted for quasi-reorganization
at December 31, 1997 ............................................... -- (194)
---------- ----------
Total stockholder's equity .................................... 927 770
---------- ----------
Total liabilities and stockholders' equity .................... $ 1,270 $ 1,754
========== ==========
</TABLE>
See accompanying notes.
2
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EXCO RESOURCES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
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THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
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REVENUES:
Oil and natural gas ................................ $ 219 $ 173
Other income ....................................... 11 10
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Total revenues ............................ 230 183
COSTS AND EXPENSES:
Oil and natural gas production ..................... 99 95
Depreciation, depletion and amortization ........... 28 36
General and administrative ......................... 106 239
Interest ........................................... 5 7
---------- ----------
Total costs and expenses .................. 238 377
---------- ----------
Income (loss) before income taxes ..................... (8) (194)
Income tax expense (benefit) .......................... -- --
---------- ----------
Net loss .............................................. $ (8) $ (194)
========== ==========
Basic and diluted earnings per share .................. $ (.02) $ (.38)
========== ==========
Weighted average number of common and
common equivalent shares outstanding ............... 403 509
========== ==========
</TABLE>
See accompanying notes.
3
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EXCO RESOURCES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
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OPERATING ACTIVITIES:
Net loss ......................................................... $ (8) $ (194)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization .................. 28 36
Effect of changes in:
Accounts receivable .................................... 2 44
Other current assets ................................... 1 (17)
Accounts payable and other current liabilities ......... 53 45
---------- ----------
Net cash provided by (used in) operating activities ................. 76 (86)
INVESTING ACTIVITIES:
Additions to property and equipment ................................. (25) (869)
Proceeds from disposition of property and equipment ................. 35 4
---------- ----------
Net cash provided by (used in) investing activities ................. 10 (865)
FINANCING ACTIVITIES:
Proceeds from long-term debt ........................................ -- 600
Payments on long-term debt .......................................... (8) (4)
Payments on note payable ............................................ (25) --
Deferred financing costs ............................................ 0 (89)
---------- ----------
Net cash provided by (used in) financing activities ................. (33) 507
---------- ----------
Net increase (decrease) in cash ..................................... 53 (444)
Cash at beginning of period.......................................... 46 496
---------- ----------
Cash at end of period ............................................... $ 99 $ 52
========== ==========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid ....................................................... $ 5 $ 7
========== ==========
Income taxes paid ................................................... $ -- $ --
========== ==========
</TABLE>
See accompanying notes.
4
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EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
In management's opinion, the accompanying financial statements contain all
adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of EXCO Resources, Inc. ("EXCO") as of
December 31, 1997 and March 31, 1998, the results of operations for the three
month periods ended March 31, 1997 and 1998, and the cash flows for the three
month periods ended March 31, 1997 and 1998.
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in annual financial statements
prepared in accordance with generally accepted principles have been omitted
pursuant to those rules and regulations, although EXCO believes that the
disclosures made are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in EXCO's Annual Report on Form
10-K for the year ended December 31, 1997.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results expected for the full year.
2. QUASI-REORGANIZATION
Effective December 31, 1997, EXCO effected a quasi-reorganization through the
application of $8,799,000 of its additional paid-in capital account to eliminate
its accumulated deficit. EXCO's Board of Directors decided to effect a
quasi-reorganization given the change in management, the infusion of new equity
capital and an increase in activities. EXCO's accumulated deficit was primarily
related to past operations and properties that have been disposed of. The
historical carrying values of the assets and liabilities of EXCO did not need to
be adjusted in connection with the quasi-reorganization.
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated, to conform to the Statement No. 128
requirements. The effect of the adoption of Statement No. 128 did not have a
material impact.
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4. REVERSE STOCK SPLITS
At EXCO's 1998 Annual Meeting of Shareholders, the shareholders of EXCO approved
an amendment to EXCO's Restated Articles of Incorporation, authorizing a
one-for-two reverse stock split of EXCO's common stock, which became effective
March 31, 1998. At EXCO's 1996 Annual Meeting of Shareholders, the shareholders
of EXCO approved an amendment to EXCO's Articles of Incorporation (as then in
effect), authorizing a one-for-five reverse stock split of EXCO's common stock,
which became effective July 19, 1996. All share and per share numbers contained
herein have been retroactively adjusted to record the effects of the reverse
stock splits.
5. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, EXCO changed from the successful efforts method
to the full cost method of accounting for its oil and natural gas operations.
All prior year's financial statements presented herein have been restated to
reflect the change.
The financial statements have been restated to apply the new accounting method
retroactively. The effect of the accounting change on the results of operations
for the three months ended March 31, 1997 are as follows (in thousands except
per share amounts):
<TABLE>
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ADJUSTMENT FOR
EFFECT OF CHANGE IN
PREVIOUSLY ACCOUNTING AS
REPORTED PRINCIPAL ADJUSTED
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Net Loss......................................... $ (26) $ (18) $ (8)
Per Share Amounts................................ (.03) $ (.01) (.02)
</TABLE>
6. NATIONSBANK CREDIT AGREEMENT
On February 11, 1998, EXCO entered into a credit facility (the "Credit
Facility") with NationsBank of Texas, N.A. ("NationsBank"). The Credit Facility
provides for borrowings up to $50 million, subject to borrowing base
limitations.
The Credit Facility consists of a regular revolver which on May 15, 1998, had a
borrowing base of $3.5 million. On May 15, 1998, approximately $1,325,000 was
available to be borrowed under the Credit Facility. A portion of the borrowing
base is available for the issuance of letters of credit. All borrowings under
the Credit Facility are secured by a first lien deed of trust providing a
security interest in tangible and intangible assets representing at least 90% of
the assessed present value of EXCO's oil and natural gas properties.
The Credit Facility provides that if EXCO's aggregate outstanding indebtedness
is less than $5,000,000, advances will bear interest at 1.5% over the
appropriate LIBOR rate. If the aggregate outstanding indebtedness is greater
than $5,000,000, then advances will bear interest at 1.0% over LIBOR if the
borrowing base usage is less than 50%; 1.25% over LIBOR if the borrowing base
usage is between 50-70%; 1.5% over LIBOR if the borrowing base usage is between
70-90%; and 1.75% over LIBOR if the borrowing base usage exceeds 90%. The Credit
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Facility also permits EXCO to repay and reborrow amounts under the Credit
Facility without any penalty, thereby allowing EXCO the flexibility to utilize
any available cash to reduce its outstanding indebtedness and thus, its costs of
borrowed funds.
Under the terms of the Credit Facility, EXCO must not permit its Current Ratio
(as defined) of Consolidated Current Assets (as defined) to its Consolidated
Current Liabilities (as defined) to be less than 1.0 to 1.0 at any time.
Furthermore, EXCO must not permit its Consolidated Tangible Net Worth (as
defined) to be less than $500,000 at any time between February 11, 1998 and
March 31, 1999. In addition, by March 31, 1999, EXCO's Consolidated Tangible Net
Worth must increase by 50% of EXCO's Consolidated Net Income (as defined) for
the fiscal quarter then ended and for every fiscal quarter thereafter must
increase by 50% of EXCO's Consolidated Net Income for the fiscal quarter then
ended. On December 31, 1997, if the Credit Facility had been outstanding at that
time, EXCO would have been in compliance with both the Current Ratio and the
Consolidated Tangible Net Worth covenants. On March 31, 1998, EXCO was in
compliance with the Consolidated Tangible Net Worth covenant, but was not in
compliance with the Current Ratio covenant. On May 15, 1998, NationsBank waived
EXCO's noncompliance with the Current Ratio at March 31, 1998. On May 15, 1998,
EXCO was in compliance with both the Current Ratio and the Consolidated Tangible
Net Worth covenants. EXCO believes, but cannot assure, that it will be able to
comply with all restrictive covenants in the future.
7. ACQUISITIONS
Maverick County Acquisition. On February 11, 1998, EXCO acquired certain
properties from Osborne Oil Company and Gypsy Production Company and certain
other sellers (the "Maverick County Acquisition") in the Chittim/Barclay Ranch
Properties located in Maverick County, Texas (the "Maverick County Properties").
As of December 31, 1997, the Maverick County Properties were estimated to
contain 415,975 barrels of oil equivalent (1 barrel to 6 thousand cubic feet) of
proved reserves, 98% of which were classified as natural gas, and owned
leasehold interests in a total of 3,744 gross acres (3,123 net acres) of oil and
natural gas properties, 9.6% of which were developed acres.
8. SUBSEQUENT EVENTS
Jacobi-Johnson Acquisition. On May 8, 1998, EXCO acquired all of the outstanding
common stock (the "Jacobi-Johnson Acquisition") of Jacobi-Johnson Energy, Inc.
("Jacobi-Johnson"). Jacobi-Johnson owns oil and natural gas working interests in
Polk, Nacogdoches, Navarro, Smith and Wood Counties, Texas (collectively, the
"Jacobi-Johnson Properties"). The Jacobi-Johnson Properties include 34 gross
producing (10.80 net producing) wells with current net production of
approximately 60.0 barrels ("Bbls") of oil and 171 thousand cubic feet ("Mcf")
of natural gas per day. In addition to the producing wells, the Jacobi-Johnson
Properties include working interests in two saltwater disposal wells. The
Jacobi-Johnson Properties are estimated to contain proved reserves of 234,985
Bbls of oil and 597,880 Mcf of natural gas. Approximately 100% of the estimated
proved reserves of the Jacobi-Johnson Properties are classified as developed.
The aggregate purchase price paid for the stock was $1,476,451, subject to
post-closing adjustments. The post-closing adjustments may include adjustments
if it is determined that the net working capital of Jacobi-Johnson as of January
1, 1998 is different than what was calculated at closing, if determined within
90 days of the closing and for any title problems if the problems are discovered
within 60 days of the closing. The Sellers have agreed to indemnify EXCO for
7
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amounts arising from any breach by Sellers, including environmental damages, to
the extent such amount exceeds $20,000. EXCO has agreed to indemnify the Sellers
for amounts arising from any breach by EXCO, to the extent such amount exceeds
$20,000. The acquisition was effective January 1, 1998. The amount of
consideration was determined through arm's length negotiations taking into
account estimates of recoverable reserves, current oil and natural gas prices,
the fair market value of other property and equipment, the amount of cash and
cash equivalents on hand, the collectibility and estimated payment timing of
accounts receivable and the amount of current and long-term liabilities. The
consideration consists of $703,035 cash, 85,436 shares of EXCO common stock and
EXCO will assume approximately $260,800 of Jacobi-Johnson's indebtedness. EXCO
obtained the cash for the purchase price under the Credit Facility with
NationsBank. The Jacobi-Johnson Properties have been mortgaged under the Credit
Facility.
Gladstone Merger. EXCO entered into an Agreement and Plan of Merger (the "Merger
Agreement") on May 1, 1998 with Gladstone Resources, Inc. ("Gladstone").
Gladstone is a Dallas, Texas based oil and natural gas production company with
properties in Kent, Stonewall, Schleicher, Pecos and Madison Counties, Texas,
and San Juan County, New Mexico. Under the terms of the Merger Agreement,
Gladstone stockholders will receive approximately $1.4 million, or $.33 per
share, in cash. It is currently anticipated that the transaction will close in
the third quarter of 1998, with EXCO being the surviving corporation. The
transaction is subject to customary conditions to closing including review by
the Securities and Exchange Commission of Gladstone's proxy materials, approval
by Gladstone's board of directors and stockholders, approval by EXCO's board of
directors and due diligence inspection by EXCO.
In addition to the Merger Agreement, on May 1, 1998, EXCO entered into a Stock
Option Agreement with one Gladstone stockholder, E.B. Brooks, Jr. ("Mr.
Brooks"), to acquire 1,910,000 shares, or approximately 44.8%, of Gladstone's
issued and outstanding common stock at a price of $.33 per share. Mr. Brooks is
Chairman and President of Gladstone. On May 1, 1998, EXCO also entered into a
Stockholder Agreement whereby three Gladstone stockholders, Deborah Brooks
Garrett, Rebecca B. Feldt and Carol Brady, have agreed to vote their shares in
favor of the merger with EXCO. These stockholders own 351,000 shares or
approximately 8.3% each of Gladstone's common stock.
Dawson County Asset Purchase. On May 13, 1998, EXCO reached an understanding
with four parties whereby EXCO has agreed to purchase certain properties in
Dawson County, Texas for an aggregate purchase price of $1,364,000 in cash and
approximately 12,900 shares of EXCO's common stock subject to Board of
Directors' approval, the negotiation of a definitive asset purchase agreement
and customary due diligence. EXCO expects to close this purchase on or around
June 1, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as, "may," "believe," "expect," "intend,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. All statements other than
statements of historical fact included in this Form 10-Q, are forward-looking
statements. Although EXCO believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors with respect to
any such forward-looking statements, including certain risks and uncertainties
that could cause actual results to differ materially from EXCO's expectations
("Cautionary Statements") are disclosed in this Form 10-Q, including, without
limitation, in conjunction with the forward-looking statements included in this
Form 10-Q, and in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include, but are
not limited to, the timing and extent of changes in commodity prices for oil and
natural gas, the need to develop and replace reserves, environmental risks,
drilling and operating risks, risks related to exploitation and development,
uncertainties about the estimates of reserves, competition, government
regulation and the ability of EXCO to meet its stated business goals. All
subsequent written and oral forward-looking statements attributable to EXCO or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
The following discussion of the results of operations and financial condition
should be read in conjunction with the Financial Statements and related Notes
thereto included herein.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 and 1998
Revenues. The Company's total revenues for the three month period ended
March 31, 1998 decreased $47,000, or 20%, to $183,000 versus $230,000 for the
corresponding period of 1997. The decrease in revenues was primarily due to
lower oil and gas prices in the current quarter and the fact that revenues from
newly acquired properties were partially offset by the absence of revenue from
properties that were sold after the first quarter of the prior year.
The Company sold 2,816 Bbls of crude oil during the quarter ended
March 31, 1998 versus 4,972 Bbls in the corresponding quarter of 1997, a 43%
decrease. The Company sold 72,525 Mcf of natural gas during the current quarter
versus 43,120 Mcf in the first quarter of 1997, a 68% increase. The decrease in
oil volume was attributable to the sale in mid-1997 of several non-strategic oil
properties. The increase in gas volume was due to the acquisition of the
Maverick County properties effective January 1, 1998.
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The average oil price received during the three months ended March 31,
1998 was $13.66 versus $21.50 for the three months ended March 31, 1997, a $7.84
per barrel or 36% decrease. The average gas price received during the current
quarter was $1.86 versus $2.60 for the corresponding quarter of the prior year,
a $0.74 per Mcf or 28% decrease.
Costs and Expenses. Costs and expenses for the three month period ended
March 31, 1998 increased by $139,000, or 58%, to $377,000 as compared to
$238,000 for the corresponding period of 1997. This was primarily due to a
$133,000 increase in general and administrative costs in the current quarter.
This increase reflects the Company's increased staffing and new focus on reserve
acquisitions. Other variances between the costs and expenses for the first
quarters of 1998 and 1997 are minimal.
Net Loss. The Company had a net loss for the quarter ended March 31,
1998 of $194,000 compared to a net loss of $8,000 for the corresponding quarter
of 1997, representing $(.38) and $(.02) per share, respectively. Earnings per
share figures are based on restated weighted average shares outstanding after
the retroactive effect of the one-for-two reverse stock split approved at the
Company's shareholders' meeting held on March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
EXCO's general financial strategy is to use cash from operations to
service interest on EXCO's indebtedness, to pay ongoing operating expenses, and
to contribute limited amounts toward further development of EXCO's existing
proved reserves as well as additional acquisitions. There can be no assurance
that cash from operations will be sufficient in the future to cover all of those
purposes.
EXCO will continue to be dependent on external funding sources to carry
out its planned development and acquisition program. If such additional funds
are not available, EXCO will be required to delay or reduce substantially both
of such activities.
Credit Facility
On February 11, 1998, EXCO entered into the Credit Facility with
NationsBank. The Credit Facility provides for borrowings up to $50 million,
subject to borrowing base limitations.
The Credit Facility consists of a regular revolver which on May 15,
1998, had a borrowing base of $3.5 million. On May 15, 1998, approximately
$1,325,000 was available to be borrowed under the Credit Facility. A portion of
the borrowing base is available for the issuance of letters of credit. All
borrowings under the Credit Facility are secured by a first lien deed of trust
providing a security interest in tangible and intangible assets representing at
least 90% of the assessed present value of EXCO's oil and natural gas
properties.
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The Credit Facility provides that if EXCO's aggregate outstanding
indebtedness is less than $5,000,000, advances will bear interest at 1.5% over
the appropriate LIBOR rate. If the aggregate outstanding indebtedness is greater
than $5,000,000, then advances will bear interest at 1.0% over LIBOR if the
borrowing base usage is less than 50%; 1.25% over LIBOR if the borrowing base
usage is between 50-70%; 1.5% over LIBOR if the borrowing base usage is between
70-90%; and 1.75% over LIBOR if the borrowing base usage exceeds 90%. The Credit
Facility also permits EXCO to repay and reborrow amounts under the Credit
Facility without any penalty, thereby allowing EXCO the flexibility to utilize
any available cash to reduce its outstanding indebtedness and thus, its costs of
borrowed funds.
Under the terms of the Credit Facility, EXCO must not permit its
Current Ratio (as defined) of Consolidated Current Assets (as defined) to its
Consolidated Current Liabilities (as defined) to be less than 1.0 to 1.0 at any
time. Furthermore, EXCO must not permit its Consolidated Tangible Net Worth (as
defined) to be less than $500,000 at any time between February 11, 1998 and
March 31, 1999. In addition, by March 31, 1999, EXCO's Consolidated Tangible Net
Worth must increase by 50% of EXCO's Consolidated Net Income (as defined) for
the fiscal quarter then ended and for every fiscal quarter thereafter must
increase by 50% of EXCO's Consolidated Net Income for the fiscal quarter then
ended. On December 31, 1997, if the Credit Facility had been outstanding at that
time, EXCO would have been in compliance with both the Current Ratio and the
Consolidated Tangible Net Worth covenants. On March 31, 1998, EXCO was in
compliance with the Consolidated Tangible Net Worth covenant, but was not in
compliance with the Current Ratio covenant. On May 15, 1998, NationsBank waived
EXCO's noncompliance with the Current Ratio at March 31, 1998. On May 15, 1998,
EXCO was in compliance with both the Current Ratio and the Consolidated
Tangible Net Worth covenants. EXCO believes, but cannot assure, that it will be
able to comply with all restrictive covenants in the future.
The Rights Offering
On April 1, 1998, EXCO filed a registration statement with the
Securities and Exchange Commission to register the issuance of transferrable
rights (the "Rights") and 5,089,000 shares of common stock underlying such
Rights to EXCO's existing shareholders to purchase such shares of common stock
(the "Rights Offering"). The exercise price will be based upon the current
trading price at the time of the commencement of the Rights Offering. EXCO is
currently negotiating arrangements with a standby purchaser to acquire a portion
of the shares of common stock not purchased by EXCO's shareholders pursuant to
the Rights Offering. The proceeds of the Rights Offering will be applied to
repay the then outstanding indebtedness under EXCO's Credit Facility, the
expenses of the Gladstone Merger and future acquisitions and capital
expenditures. EXCO currently anticipates that the Rights Offering will commence
in June 1998.
YEAR 2000 COMPLIANCE
EXCO's management has conducted a review of its information systems and
related data-processing activities to assess its exposure to the Year 2000
issue. As a result, EXCO purchased an oil and gas based software system which is
Year 2000 compliant. The Year 2000 compliant version of this software is in use
at other oil and gas companies currently. EXCO expects this software to be
operational on or before May 31, 1998.
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EXCO currently uses Year 2000 compliant engineering evaluation software
for acquisition analysis, as well as internal engineering applications. EXCO's
spreadsheet and word processing software is also Year 2000 compliant.
EXCO has potential Year 2000 exposure with regard to its third party
relationships and services including its bank and bank accounts, payroll
processing which is outsourced, and other vendor and/or service providers who
utilize computers. Though EXCO has no control over Year 2000 compliance
implementation by these parties, EXCO has inquired and been assured that all of
EXCO's service providers are currently or will be Year 2000 compliant.
EXCO does not currently anticipate that it will incur material
expenditures, if any at all, to complete modifications for the year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
At EXCO's 1998 Annual Meeting of Shareholders (the "1998 Annual
Meeting"), the shareholders of EXCO approved an amendment to EXCO's Restated
Articles of Incorporation, authorizing a one-for-two reverse stock split of
EXCO's common stock, which became effective March 31, 1998. At EXCO's 1996
Annual Meeting of Shareholders, the shareholders of EXCO approved an amendment
to EXCO's Articles of Incorporation, authorizing a one-for-five reverse stock
split of EXCO's common stock, which became effective July 19, 1996. All share
and per share numbers contained herein have been retroactively adjusted to
record the effects of the reverse stock splits.
During the fiscal year ended December 31, 1997, J. Michael Muckleroy
("Mr. Muckleroy"), now a director of EXCO, owned the following working interests
in the following wells operated by EXCO: the Wilbanks #1 (4.18%); the McGarraugh
1-139 (2%); the Perkins #4 (6%); the Mitchell #1 (11.7%); the Mitchell #2 (18%);
and the Coats #5 (11%). Mr. Muckleroy received approximately $2,700 per month as
a result of his working interests in wells operated by EXCO. On March 5, 1998
the Board of Directors issued 12,500 shares of common stock to Mr. Muckleroy in
exchange for his working interest in the aforementioned wells. The issuance to
Mr. Muckleroy was made pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of EXCO was held on March 31, 1998,
at which (1) the election of seven directors to hold office until the next
Annual Meeting of Shareholders or until their successors have been duly
qualified and elected, (2) an amendment to the restated articles of
incorporation of EXCO to effect a one-for-two reverse stock split, to maintain
the number of authorized shares of common stock at 25,000,000 and to double the
par value of the common stock from $0.01 to $0.02 per share effective March 31,
1998, (3) a proposal to allow the number of directors on the Board of Directors
to be fixed and determined by the Board of Directors, (4) the adoption of EXCO's
1998 Stock Option Plan, and (5) the appointment of Ernst & Young LLP as EXCO's
independent public accountants for 1998 were considered.
Douglas H. Miller was elected as a director and received 782,717 votes
for his election, with 600 votes withheld. T.W. Eubank was elected as a director
and received 782,717 votes for his election, with 600 votes withheld. J. Douglas
Ramsey was elected as a director and received 782,717 votes for his election,
with 600 votes withheld. T. Boone Pickens was elected as a director and received
782,717 votes for his election, with 600 votes withheld. Stephen F. Smith was
elected as a director and received 782,717 votes for his election, with 600
votes withheld. Earl E. Ellis was elected as a director and received 782,717
votes for his election, with 600 votes withheld. J. Michael Muckleroy was
elected as a director and received 782,717 votes for his election, with 600
votes withheld. The proposal to amend the Restated Articles of Incorporation of
EXCO to effect a one-for-two reverse stock split, to maintain the number of
authorized shares of common stock at 25,000,000 and to double the par value of
the common stock from $0.01 to $0.02 per share effective March 31, 1998 was
approved with 769,754 votes in favor of approval, 13,375 votes against and 188
votes abstaining. The adoption of the proposal to allow the number
13
<PAGE> 15
of directors on the Board of Directors to be fixed and determined by the Board
of Directors was approved with 782,651 votes in favor of approval, 666 votes
against and 0 votes abstaining. The adoption of EXCO's 1998 Stock Option Plan
was approved with 772,154 votes in favor of approval, 11,123 votes against and
40 votes abstaining. Ernst & Young LLP was ratified as independent public
accountants for EXCO for the fiscal year ending December 31, 1998 and received
746,017 votes for their ratification, 0 votes against and 37,300 votes
abstaining.
ITEM 5. OTHER INFORMATION
On April 1, 1998, EXCO filed a registration statement with the
Securities and Exchange Commission to register the Rights and 5,089,000 shares
of common stock underlying such Rights to EXCO's existing shareholders to
purchase such shares of common stock. The exercise price will be based upon the
current trading price at the time of the commencement of the Rights Offering.
EXCO is currently negotiating arrangements with a standby purchaser to acquire a
portion of the shares of common stock not purchased by EXCO's shareholders
pursuant to the Rights Offering. The proceeds of the Rights Offering will be
applied to repay the then-outstanding indebtedness under EXCO's Credit Facility,
fund the Gladstone Merger and other general corporate purposes. EXCO currently
anticipates that the Rights Offering will commence in June 1998.
See Part I - Financial Information - Item. 1 Financial Statements, Note
7 for a description of recently completed or pending acquisitions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.1 Stock Option Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Mr. E.B.
Brooks, Jr., on the other, incorporated by reference
from the Schedule 13D dated May 8, 1998, filed by
EXCO in respect of EXCO's acquisition of beneficial
ownership of shares of common stock of Gladstone
Resources, Inc.
10.2 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Rebecca B.
Feldt, on the other, incorporated by reference from
the Schedule 13D dated May 8, 1998, filed by EXCO in
respect of EXCO's acquisition of beneficial ownership
of shares of common stock of Gladstone Resources, Inc.
10.3 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Carol
Brady, on the other, incorporated by reference from
the Schedule 13D dated May 8, 1998, filed by EXCO in
respect of EXCO's acquisition of beneficial ownership
of shares of common stock of Gladstone Resources, Inc.
14
<PAGE> 16
10.4 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Deborah
Brooks Garrett, on the other, incorporated by
reference from the Schedule 13D dated May 8, 1998,
filed by EXCO in respect of EXCO's acquisition of
beneficial ownership of shares of Common Stock of
Gladstone Resources, Inc.
10.5 Agreement and Plan of Merger dated May 1, 1998,
between EXCO Resources, Inc., and Gladstone
Resources, Inc., incorporated by reference from the
Schedule 13D dated May 8, 1998, filed by EXCO in
respect of EXCO's acquisition of beneficial ownership
of shares of Common Stock of Gladstone Resources,
Inc.
(b) Current Reports on Form 8-K:
1. Current Report on Form 8-K dated January 14, 1998
pursuant to Item 4.
2. Current Report on Form 8-K dated February 11, 1998
pursuant to Item 2, as amended by Form 8-K/A-1 filed
April 8, 1998.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
EXCO RESOURCES, INC.
(Registrant)
Date: May 15, 1998 By: /s/ J. DOUGLAS RAMSEY
------------------------------------------
J. Douglas Ramsey
Chief Financial Officer and Vice President
16
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.1 Stock Option Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Mr. E.B.
Brooks, Jr., on the other, incorporated by reference
from the Schedule 13D dated May 8, 1998, filed by
EXCO in respect of EXCO's acquisition of beneficial
ownership of shares of Common Stock of Gladstone
Resources, Inc.
10.2 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Rebecca B.
Feldt, on the other, incorporated by reference from
the Schedule 13D dated May 8, 1998, filed by EXCO in
respect of EXCO's acquisition of beneficial ownership
of shares of Common Stock of Gladstone Resources, Inc.
10.3 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Carol
Brady, on the other, incorporated by reference from
the Schedule 13D dated May 8, 1998, filed by EXCO in
respect of EXCO's acquisition of beneficial ownership
of shares of Common Stock of Gladstone Resources, Inc.
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.4 Shareholder Agreement dated May 1, 1998, among EXCO
Resources, Inc., on the one hand, and Ms. Deborah
Brooks Garrett, on the other, incorporated by
reference from the Schedule 13D dated May 8, 1998,
filed by EXCO in respect of EXCO's acquisition of
beneficial ownership of shares of common stock of
Gladstone Resources, Inc.
10.5 Agreement and Plan of Merger dated May 1, 1998,
between EXCO Resources, Inc., and Gladstone
Resources, Inc., incorporated by reference from the
Schedule 13D dated May 8, 1998, filed by EXCO in
respect of EXCO's acquisition of beneficial ownership
of shares of common stock of Gladstone Resources, Inc.
27 Financial Data Schedule, filed herewith.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 52,000
<SECURITIES> 0
<RECEIVABLES> 182,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 256,000
<PP&E> 5,135,000
<DEPRECIATION> 3,860,000
<TOTAL-ASSETS> 1,754,000
<CURRENT-LIABILITIES> 372,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 760,000
<TOTAL-LIABILITY-AND-EQUITY> 1,754,000
<SALES> 173,000
<TOTAL-REVENUES> 183,000
<CGS> 0
<TOTAL-COSTS> 377,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,000
<INCOME-PRETAX> (194,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (194,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (194,000)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
