<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________ to _____________
Commission File Number 0-9204
EXCO RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
Texas 74-1492779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5735 Pineland Drive, Suite 235
Dallas, Texas 75231
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (214) 368-2084
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
------------------------------
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 twelve (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 ninety (90) days. YES [X]NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding on March 6, 1998, was 1,017,800. The aggregate market
value of the voting stock held by nonaffiliates (all directors, officers and 5%
or more shareholders are presumed to be affiliates) of the Registrant on March
6, 1998, was $1,434,648 based on the average of the closing bid and asked prices
per share of the Common Stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Shareholders, expected to be filed prior to April 30, 1998, are
incorporated by reference into Part III.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I........................................................................................................... 1
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 22
Item 3. Legal Proceedings..................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................................... 23
PART II.......................................................................................................... 24
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters............. 24
Item 6. Selected Financial Data............................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 31
Item 8. Financial Statements and Supplementary Data........................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 59
PART III......................................................................................................... 60
Item 10. Directors and Executive Officers of the Registrant.................................... 60
Item 11. Executive Compensation................................................................ 60
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 60
Item 13. Certain Relationships and Related Transactions........................................ 60
PART IV.......................................................................................................... 61
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...................... 61
INDEX TO EXHIBITS................................................................................................ 64
</TABLE>
<PAGE> 3
EXCO RESOURCES, INC.
PART I
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K 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-K, INCLUDING WITHOUT
LIMITATION, THE STATEMENTS UNDER "BUSINESS," "PROPERTIES," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
LIQUIDITY AND CAPITAL RESOURCES" AND "MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS" LOCATED ELSEWHERE HEREIN REGARDING THE
FINANCIAL POSITION AND LIQUIDITY OF EXCO RESOURCES, INC. ("EXCO"), THE VOLUME OR
DISCOUNTED PRESENT VALUE OF ITS OIL AND NATURAL GAS RESERVES, ITS ABILITY TO
SERVICE ITS INDEBTEDNESS, ITS STRATEGIC PLANS INCLUDING ITS ABILITY TO LOCATE
AND COMPLETE ACQUISITIONS OF OIL AND NATURAL GAS ASSETS, ITS ABILITY TO LIST ITS
STOCK ON THE NASDAQ NATIONAL MARKET AND OTHER MATTERS, 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-K, INCLUDING, WITHOUT
LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
FORM 10-K. 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.
ITEM 1. BUSINESS
GENERAL
EXCO is an independent oil and natural gas company that has been
engaged in the oil and natural gas business since 1955. EXCO's activities are
currently conducted primarily in Texas and Louisiana. EXCO's business activity
has decreased in recent years due to limited capital resources and cash flow.
See "-- Glossary of Selected Oil and Natural Gas Terms" for a definition of
certain oil and gas industry terms used in this Form 10-K.
On December 19, 1997, Douglas H. Miller ("Mr. Miller") acquired
413,423 (approximately 51%) of EXCO's outstanding shares of common stock, par
value $.01 per share (the "Common Stock"), at $3.00 per share, from various
holders, including certain current and former officers and directors of EXCO. At
that time, 3 of EXCO's 5 directors resigned and Mr. Miller and T.W. Eubank ("Mr.
Eubank") were elected to the Board of Directors. In addition, Mr. Miller was
elected Chairman of the Board and Chief Executive Officer and Mr. Eubank was
elected President, Treasurer and Chief Financial Officer. On December 31, 1997,
Mr. Eubank and Earl E. Ellis ("Mr. Ellis") each acquired from EXCO 100,000
shares of Common Stock at $3.00 per share. Also, on December 31, 1997, Mr.
Eubank resigned as Chief Financial Officer and J. Douglas Ramsey ("Dr. Ramsey")
was appointed Chief Financial Officer and Vice President of EXCO. Mr. Miller was
formerly Chairman of the Board and Chief Executive Officer of Coda Energy, Inc.
("Coda"). Mr. Eubank was formerly President and a director of Coda and Mr. Ellis
was formerly a director of Coda. Dr. Ramsey was formerly Financial Planning
Manager of Coda. The new management team intends to commence an aggressive
acquisition, development and exploitation program. In
1
<PAGE> 4
executing this strategy, EXCO will focus on producing properties with
enhancement opportunities from activities such as infill drilling,
recompletions, repairs and equipment changes. EXCO will seek properties it can
operate, thus maintaining the maximum control of enhancement activities.
On February 11, 1998, EXCO acquired certain oil and natural gas
working interests from Osborne Oil Company, Gypsy Production Company and certain
other sellers (the "Maverick County Acquisition") in 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 Boe of proved reserves, 98% of which were natural gas. The
Maverick County Properties are comprised of oil and natural gas leasehold
interests in a total of 3,744 gross acres (3,123 net acres), 9.6% of gross acres
which were developed acres. See "-- Recent Developments."
INVESTMENT CONSIDERATIONS AND RISK FACTORS
Future Debt Service
EXCO has arranged a $50 million credit agreement (the "Credit
Facility") with NationsBank of Texas, N.A., as agent and lender, to provide an
additional source of capital to finance EXCO's acquisition, development and
exploitation strategy. EXCO's level of indebtedness in the future would have
certain effects on its future operations, including that (i) a substantial
portion of EXCO's cash flow from operations could be dedicated to the payment of
interest and principal on its indebtedness and will not be available for other
purposes, (ii) the covenants contained in the Credit Facility which require EXCO
to meet certain financial tests and other restrictions, will limit its ability
to borrow additional funds, to grant liens and to dispose of assets and will
affect EXCO's flexibility in planning for and reacting to changes in its
business, including possible acquisition activities, and (iii) EXCO's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired. The pledge of substantially all of EXCO's assets as collateral for the
Credit Facility will make it difficult for the foreseeable future for EXCO to
obtain financing on an unsecured basis or to obtain secured financing other than
certain "purchase money" indebtedness collateralized by the acquired assets.
See "-- Recent Developments -- Credit Facility."
EXCO's ability to meet any future debt service obligations will be
dependent upon EXCO's future performance, which will be subject to oil and
natural gas prices, EXCO's level of production, general economic conditions and
financial, business and other factors affecting the operations of EXCO, many of
which are beyond its control. There can be no assurance that EXCO's future
performance will not be adversely affected by such changes in oil and natural
gas prices and/or production nor by such economic conditions and/or financial,
business and other factors. In addition, there can be no assurance that EXCO's
business will generate sufficient cash flow from operations or that future bank
credit will be available in an amount sufficient to enable EXCO to service its
indebtedness or make necessary expenditures. In such event, EXCO would be
required to obtain such financing from the sale of equity securities or other
debt financing. There can be no assurance that any such financing will be
available on terms acceptable to EXCO. Should sufficient capital not be
available, EXCO may not be able to continue to implement its business strategy.
See "Management's Discussion and Analysis of Financial Position and Results of
Operations -- Liquidity and Capital Resources."
History of Losses
EXCO had net losses of $160,000, $326,000 and $205,000, for the
nine months ended December 31, 1995 and the years ended December 31, 1996 and
1997, respectively. EXCO may continue to incur net losses and, to the extent
that natural gas and crude oil prices are low, such losses may be substantial.
Need for Additional Financing for Growth
The growth of EXCO's business will require substantial capital on
a continuing basis. There is no assurance that any such required additional
funds would be available on satisfactory terms and conditions, if at all.
2
<PAGE> 5
There is also no assurance that EXCO will not pursue, from time to time,
opportunities to acquire oil and natural gas properties and businesses that may
utilize the capital currently expected to be available for its present
operations. The amount and timing of EXCO's future capital requirements, if any,
will depend upon a number of factors, including drilling costs, transportation
costs, equipment costs, marketing expenses, staffing levels and competitive
conditions, and any purchases or dispositions of assets, many of which are not
within EXCO's control. Failure to obtain any required additional financing could
materially adversely affect the growth, cash flow and earnings of EXCO. In
addition, EXCO's pursuit of additional capital could result in the incurrence of
additional indebtedness or potentially dilutive issuances of additional equity
securities. See "Management's Discussion and Analysis of Financial Position on
Results of Operations -- Liquidity and Capital Resources."
Concentration of Production
EXCO's existing proved oil and natural gas reserves and its
production therefrom are highly concentrated in a small number of wells.
Accordingly, to the extent that EXCO experiences any operating difficulties in
connection with such wells or that the estimated proved reserves attributable
thereto are less than those that are currently estimated to exist, EXCO could be
adversely affected.
Geographic Restrictions
Pursuant to the non-competition provisions of Mr. Miller's
employment agreement with Coda, Mr. Miller, and as a result EXCO, is prohibited
for a period of 1 year beginning November 26, 1997 from acquiring or seeking to
acquire any rights or interest in any of 16 properties in which Coda has an
existing interest or which it was studying on November 1997. This restriction
also extends to 2 oil and natural gas companies. Some of these locations are in
areas in which EXCO might have an interest and generally represent the types of
properties EXCO would be interested in acquiring. The non-competition
restrictions may adversely effect, at least in the short term, EXCO's ability to
execute its growth strategy.
Inability to Develop Additional Reserves
EXCO's future success as an oil and natural gas producer, as is
generally the case in the industry, depends upon its ability to find, develop
and acquire additional oil and natural gas reserves that are economically
recoverable. Except to the extent that EXCO conducts successful development
activities or acquires properties containing proved reserves, EXCO's proved
reserves will generally decline as reserves are produced. There can be no
assurance that EXCO will be able to locate additional reserves or that EXCO will
drill economically productive wells or acquire properties containing proved
reserves. See "-- Oil and Natural Gas Reserves."
Acquisition Risks
EXCO's business strategy includes focused acquisitions of
producing oil and natural gas properties. Any such future acquisitions will
require an assessment of the recoverable reserves, future oil and natural gas
prices, operating costs, potential environmental and other liabilities and other
similar factors. It generally is not feasible to review in detail every
individual property involved in an acquisition. Ordinarily, review efforts are
focused on the higher-valued properties. However, even a detailed review of all
properties and records may not reveal existing or potential problems; nor will
it permit EXCO to become sufficiently familiar with the properties to assess
fully their deficiencies and capabilities. Inspections are not always performed
on every well, and potential problems, such as mechanical integrity of equipment
and environmental conditions that may require significant remedial expenditures,
are not necessarily observable even when an inspection is undertaken. Even if
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of such problems. There can
be no assurance that oil and natural gas properties acquired by EXCO will be
successfully integrated into EXCO's operations or will achieve desired
profitability objectives.
3
<PAGE> 6
Drilling Risks
EXCO's drilling involves numerous risks, including the risk that
no commercially productive natural gas or oil reservoirs will be encountered.
EXCO must incur significant expenditures for the identification and acquisition
of properties and for the drilling and completion of wells. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, weather conditions and shortages or
delays in the delivery of equipment. In addition, any use by EXCO of
3-dimensional seismic and other advanced technology requires greater
pre-drilling expenditures than traditional drilling strategies. There can be no
assurance as to the success of EXCO's future drilling activities.
Uncertainty of Estimates of Oil and Natural Gas Reserves
Numerous uncertainties are inherent in estimating quantities of
proved oil and natural gas reserves, including many factors beyond the control
of EXCO. This Form 10-K contains an estimate of EXCO's proved oil and natural
gas reserves and the estimated future net cash flows and revenue therefrom based
upon reports of EXCO's independent petroleum engineers. Such reports rely upon
various assumptions, including assumptions required by the Securities and
Exchange Commission (the "Commission"), as to constant oil and natural gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds and such reports should not be construed as the current
market value of the estimated proved reserves. The process of estimating oil and
natural gas reserves is complex, requiring significant decisions and assumptions
in the evaluation of available geological, engineering and economic data for
each reservoir. As a result, such estimates are inherently an imprecise
evaluation of reserve quantities and the future net revenue therefrom. Actual
future production, revenue, taxes, development expenditures, operating expenses
and quantities of recoverable oil and natural gas reserves may vary
substantially from those assumed in the estimate. Any significant variance in
these assumptions could materially affect the estimated quantity and value of
reserves set forth in this Form 10-K. In addition, EXCO's reserves may be
subject to downward or upward revision, based upon production history, results
of future exploitation and development, prevailing oil and natural gas prices
and other factors. See "-- Oil and Natural Gas Reserves."
Geographic Concentration of Operations
Virtually all of EXCO's current operations are located in Texas
and Louisiana. Because of this concentration, any regional events that increase
costs or competition, reduce availability of equipment or supplies, reduce
demand or limit production will impact EXCO more adversely than if EXCO were
geographically diversified.
Certain Industry and Marketing Risks
EXCO's operations are subject to the risks and uncertainties
associated with drilling for, producing and transporting of oil and natural gas.
EXCO's future ability to market its natural gas and oil production will depend
upon the availability and capacity of natural gas gathering systems and
pipelines and other transportation facilities. Federal and state regulation of
oil and natural gas production and transportation, general economic conditions,
changes in supply and in demand all could materially adversely affect EXCO's
ability to market its oil and natural gas production. See "Business -- Products,
Markets and Revenues" and "-- Regulation."
Effects of Changing Prices
The future financial condition and results of operations of EXCO
depend upon the prices it receives for its oil and natural gas and the costs of
acquiring, developing and producing oil and natural gas. Oil and natural gas
prices have historically been volatile and are subject to fluctuations in
response to changes in supply, market uncertainty and a variety of additional
factors that are also beyond EXCO's control. These factors include, without
limitation, the level of domestic production, the availability of imported oil
and natural gas, actions taken by foreign oil and natural gas producing nations,
the availability of transportation systems with adequate capacity, the
availability of competitive fuels, fluctuating and seasonal demand for natural
gas, conservation and the extent of
4
<PAGE> 7
governmental regulation of production, weather, foreign and domestic government
relations, the price of domestic and imported oil and natural gas, and the
overall economic environment. A substantial or extended decline in oil and/or
natural gas prices could have a material adverse effect on EXCO's estimated
value of its natural gas and oil reserves, and on its financial position,
results of operations and access to capital. EXCO's ability to maintain or
increase its borrowing capacity, to repay current or future indebtedness and to
obtain additional capital on attractive terms is substantially dependent upon
oil and natural gas prices. See "-- Products, Markets and Revenues."
EXCO uses the full cost method of accounting for its investment in
oil and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs (net of accumulated depreciation, depletion and amortization)
less deferred taxes exceed the SEC PV-10 of estimated future net cash flow from
proved reserves of oil and gas, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged against
earnings. Once incurred, a write-down of oil and gas properties is not
reversible at a later date even if oil or gas prices increase.
Operating Hazards and Uninsured Risks
EXCO's operations are subject to the risks inherent in the oil and
natural gas industry, including the risks of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental accidents such as oil
spills, gas leaks, ruptures or discharges of toxic gases, brine or well fluids
into the environment (including groundwater contamination). The occurrence of
any of these risks could result in substantial losses to EXCO due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. In
accordance with customary industry practice, EXCO maintains insurance against
some, but not all, of the risks described above. There can be no assurance that
any insurance maintained by EXCO will be adequate to cover any such losses or
liabilities. Further, EXCO cannot predict the continued availability of
insurance, or availability at commercially acceptable premium levels. EXCO does
not carry business interruption insurance. Losses and liabilities arising from
uninsured or under-insured events could have a material adverse effect on the
financial condition and operations of EXCO. From time to time, due primarily to
contract terms, pipeline interruptions or weather conditions, the producing
wells in which EXCO owns an interest have been subject to production
curtailments. The curtailments range from production being partially restricted
to wells being completely shut-in. The duration of curtailments varies from a
few days to several months. In most cases EXCO is provided only limited notice
as to when production will be curtailed and the duration of such curtailments.
EXCO is not currently experiencing any material curtailment on its production.
Substantial Competition
The oil and natural gas industry is highly competitive and there
are many other companies engaged in the oil and natural gas business. EXCO is
likely to encounter substantial competition from major oil companies, other
independent oil and natural gas concerns and individual producers and operators
in acquiring oil and natural gas properties suitable for exploitation and
development. Many of the companies with which EXCO competes have substantially
greater financial, technical and other resources and may have greater experience
in the oil and natural gas business than EXCO. Therefore, competitors may be
able to pay more for desirable leases and to evaluate, bid for and purchase a
greater number of properties or prospects than the financial or personnel
resources of EXCO will permit. See "-- Competition."
Volatility of Stock Price
The market price for shares of the Common Stock has varied
significantly and may be volatile depending on news announcements or changes in
general market conditions. In particular, news announcements, quarterly results
of operations, competitive developments, litigation or governmental regulatory
action impacting EXCO may adversely affect the Common Stock price. In addition,
because the number of shares of Common Stock
5
<PAGE> 8
held by the public is relatively small, the sale of a substantial number of
shares of the Common Stock in a short period of time could adversely affect the
market price of the Common Stock.
Dividend Policy
EXCO has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The Common Stock is not a suitable investment for persons requiring
current income.
Anti-Takeover Effect of Articles of Incorporation and Possible
Issuances of Preferred Stock
Certain provisions of EXCO's Restated Articles of Incorporation
effective September 11, 1996 (the "Articles of Incorporation") may delay, defer
or prevent a tender offer or takeover attempt that a shareholder might consider
to be in such shareholder's best interest, including attempts that might result
in a premium over the market price for the stock held by shareholders. The
Articles of Incorporation permit the Board to issue up to 10,000,000 shares of
preferred stock and to establish by resolution one or more series of preferred
stock and to establish the powers, designations, preferences and relative,
participating, optional or other special rights of each series of preferred
stock. The preferred stock could be issued on terms that are unfavorable to the
holders of Common Stock, including the grant of superior voting rights, the
grant of preferences in favor of preferred shareholders in the payment of
dividends and upon liquidation of EXCO and the designation of conversion rights
that entitle holders of preferred stock to convert their shares into Common
Stock on terms that are dilutive. The issuance of preferred stock could make a
takeover or change in control of EXCO more difficult. EXCO however does not
intend to use the provisions of the Articles of Incorporation to delay, defer or
prevent a tender offer or takeover attempt.
Dependence Upon Key Personnel
EXCO is substantially dependent upon 2 key individuals within its
management, Mr. Miller and Mr. Eubank. The loss of the services of either one of
these individuals could have a material adverse impact upon EXCO.
Regulation
General. EXCO's operations are affected from time to time in
varying degrees by political developments and federal and state laws and
regulations. In particular, oil and natural gas production, operations and
economics are or have been affected by price controls, taxes and other laws
relating to the oil and natural gas industry, by changes in such laws and by
changes in administrative regulations. EXCO cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings, whether
additional laws and regulations will be adopted, or the effect such changes may
have on its business or financial condition. Matters subject to regulation
include discharge permits for drilling operations, drilling and abandonment
bonds or other financial responsibility requirements, reports concerning
operations, the spacing of wells, unitization and pooling of properties, and
taxation. There can be no assurance that new laws or regulations, or
modifications of or new interpretations of existing laws and regulations, will
not increase substantially the cost of compliance or otherwise adversely affect
EXCO's oil and natural gas operations and financial condition or that material
indemnity claims will not arise against EXCO with respect to properties acquired
by or from EXCO. See "-- Regulation."
Environmental. EXCO's operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution which might result from EXCO's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue.
6
<PAGE> 9
For instance, legislation has been proposed in Congress from time to time that
would reclassify certain crude oil and natural gas exploitation and production
wastes as "hazardous wastes" which would make the reclassified wastes subject to
much more stringent handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on the
operating costs of EXCO, as well as the oil and natural gas industry in general.
Initiatives to further regulate the disposal of crude oil and natural gas wastes
are also pending in certain states, and these various initiatives could have a
similar impact on EXCO. EXCO could incur substantial costs to comply with
environmental laws and regulations. In addition to compliance costs, government
entities and other third parties may assert substantial liabilities against
owners and operators of oil and natural gas properties for oil spills, discharge
of hazardous materials, remediation and clean-up costs and other environmental
damages, including damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could reduce or eliminate the funds available for
project investment or result in loss of EXCO's properties. Although EXCO
maintains insurance coverage it considers to be customary in the industry, it is
not fully insured against certain of these risks, either because such insurance
is not available or because of high premium costs. Accordingly, EXCO may be
subject to liability or may lose substantial portions of properties due to
hazards that cannot be insured against or have not been insured against due to
prohibitive premium costs or for other reasons. The imposition of any such
liabilities on EXCO could have a material adverse effect on EXCO's financial
condition and results of operations.
The Oil Pollution Act of 1990 ("OPA") imposes a variety of
regulations on "responsible parties" related to the prevention of oil spills.
The implementation of new, or the modification of existing, environmental laws
or regulations, including regulations promulgated pursuant to the Oil Pollution
Act of 1990, could have a material adverse impact on EXCO. While EXCO does not
anticipate incurring material costs in connection with environmental compliance
and remediation, it cannot guarantee that material costs will not be incurred.
See "-- Regulation."
BUSINESS STRATEGY
EXCO intends to build itself as a leading independent oil and
natural gas exploitation and production company by implementing the following
business strategies:
o Growth. Achieve asset, revenue and cash flow growth
as a result of the acquisition and further
development of other producing oil and natural gas
properties. EXCO believes there are numerous
opportunities to acquire additional energy assets and
to enhance the value of such assets through improved
operating practices and by aggressively developing
reserve potential.
o Acquire and Enhance Producing Oil and Natural Gas
Properties. EXCO intends to take advantage of
opportunities that currently exist in the United
States to acquire producing oil and natural gas
properties. EXCO plans to continue to focus its
acquisition activities onshore in Texas, New Mexico,
Oklahoma and Louisiana in order to complement its
existing properties and operations; however, EXCO
plans to review potential acquisitions in other
regions of the United States if they represent a
significant concentration of energy-related assets.
o Emphasize Exploitation and Development Activities.
EXCO plans to exploit its existing oil and natural
gas properties and to conduct development evaluation
and drilling on its existing and future oil and
natural gas properties. EXCO intends to concentrate
on enhancement opportunities from activities such as
infill drilling, recompletions, repairs and equipment
changes.
o Corporate Efficiencies. Maximize corporate
efficiencies through the development and operation of
a larger asset base with the potential to limit
increases in overhead in the future.
7
<PAGE> 10
o Capital Management. Maintain financial strength and
flexibility through effective management of debt and
equity.
o Technology. EXCO intends to increase its exploitation
efforts, focusing on established geological trends
where EXCO can employ geological, geophysical and
engineering expertise. EXCO is considering the
application of 3-D seismic and advanced drilling
technologies.
RECENT DEVELOPMENTS
Change in Accounting Policy and Quasi-Reorganization
Effective December 31, 1997, the new EXCO management team adopted
a quasi-reorganization. During the fourth quarter of 1997, EXCO changed from the
successful efforts method to the full cost method of accounting for its oil and
gas operations. See "Management Discussion and Analysis of Financial Conditions
and Results of Operations -- Quasi-Reorganization" and "-- Change in Method of
Accounting for Oil and Gas Operations."
Maverick County Acquisition
On February 11, 1998, EXCO acquired from Osborne Oil Company and
other sellers (collectively, the "Sellers") certain oil and natural gas working
interests in the Chittim/Barclay Ranch Properties located in Maverick County,
Texas. The Maverick County Properties include 9 gross productive wells (7.0 net
productive wells) with current net daily production of approximately .7 Bbls of
oil and 333 Mcf of natural gas per day, and 2 gross (1.87 net) non-producing
wells which may require recompletions, workovers or abandonment. At the present
time, 2 gross (1.15 net) development wells are planned to be drilled on these
properties. The Maverick County Properties include 360 gross (280 net) developed
acres and 3,384 gross (2,843 net) undeveloped acres. Based on independent
engineer estimates as of January 1, 1998, the Maverick County Properties are
estimated to contain 8,011 Bbls of oil and 2,447,785 Mcf of natural gas of
proved reserves. Approximately 66% of the estimated proved reserves of the
Maverick County Properties are classified as developed. The acquisition also
includes an 86.9% interest in a gas gathering system and an 88% interest in a
gas treating facility, both of which were operated by Osborne Oil Company.
The aggregate purchase price paid for the Maverick County
Properties was $760,200. The amount of consideration was determined through
arm's length negotiations taking into account estimates of recoverable reserves,
further development of proved undeveloped reserves and current oil and natural
gas prices, and was calculated by multiplying each Seller's interest in the
acquired properties by the allocated value for the property. EXCO obtained a
portion of the cash for the purchase price from the Credit Facility and the
balance came from working capital. The Maverick County Properties have been
mortgaged under the Credit Facility. See "-- Credit Facility."
1998 Annual Shareholders Meeting
EXCO intends to hold its Annual Shareholders meeting (the
"Meeting") in late March or in April 1998. Several Board proposals, including 2
amendments to the Articles of Incorporation, will be presented to the
shareholders for approval at the Meeting. The shareholders will be asked (i) to
consider and act upon a proposal to effect a one for two reverse split of the
outstanding shares of Common Stock, increase the par value of the Common Stock
from $.01 per share to $.02 per share, but leave unchanged the number of
authorized shares of EXCO's Common Stock at 25,000,000 shares; (ii) to consider
and act upon a proposal to allow the number of directors on the Board of
Directors to be fixed and determined by the Board of Directors; (iii) to elect
seven directors to hold office until the next Annual Meeting of Shareholders or
until their successors have been duly qualified and elected; (iv) to consider
and act upon a proposal to approve the EXCO Resources, Inc. 1998 Stock Option
Plan; and (v) to consider and act upon a proposal to approve the appointment of
Ernst & Young LLP as the independent auditors of EXCO to audit the accounts of
EXCO for the fiscal year ending December 31, 1998.
8
<PAGE> 11
Credit Facility
On February 11, 1998, EXCO entered into the Credit Facility. The
Credit Facility provides for borrowings up to $50 million, subject to borrowing
base limitations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- New
Credit Facility."
EXPLOITATION AND DEVELOPMENT ACTIVITIES
Historically, EXCO has financed its exploitation and development
expenditures primarily through cash flow from operations, bank borrowings,
equity capital from private sales of stock and promoted funds from industry
partners. With respect to its acquisition activities, EXCO intends to shift its
emphasis to larger scale acquisitions of producing properties with additional
development and exploitation potential. Initially, EXCO plans to use a
combination of debt and equity financing to fund these larger acquisitions.
EXCO made exploitation and development expenditures of $108,000,
$17,000 and $74,000 during the nine month transition period ended December 31,
1995, the fiscal year ended December 31, 1996 and the fiscal year ended December
31, 1997, respectively. EXCO made net lease acquisition expenditures of $4,000,
$1,000 and $2,000 during the nine month transition period ended December 31,
1995, the fiscal year ended December 31, 1996 and the fiscal year ended December
31, 1997, respectively. EXCO's ability to continue to fund its exploitation and
development activities depends upon cash flow and its ability to secure the
necessary financing for such activities.
OPERATING ACTIVITIES
Where possible, EXCO prefers to act as operator of the oil and
natural gas properties and prospects in which it owns an interest. The operator
of an oil and natural gas property supervises production, maintains production
records, employs field personnel and performs other functions required in the
production and administration of such property. The fees for such services
customarily vary from well to well, depending on the nature, depth and location
of the well being operated. Generally, the operator of an oil and natural gas
prospect is determined by such factors as the size of the working interest held
by a participant in the prospect, a participant's knowledge and experience in
the geological area in which the prospect is located and geographical
considerations. On December 31, 1997, EXCO was the operator of 24 gross (7.92
net) wells, which represented approximately 51.1% of the gross wells and 81.1%
of the net wells in which EXCO had an interest at such date. The remainder of
the wells in which EXCO had an interest at such date are operated by third party
operators. The wells that EXCO operates are located in Texas and Louisiana.
Although EXCO elects to operate and manage most of its properties and drilling
activities, its wells are drilled by independent drilling contractors.
OIL AND GAS PROPERTIES
The following table sets forth the fields in which EXCO has its
principal oil and gas properties, and certain information as of December 31,
1997, with respect to each of such fields.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1997
WELLS PROVED RESERVES PERCENTAGE NET PRODUCTION
------------------- -------------------------- OF -------------------------
OIL GAS EQUIVALENT OIL GAS
GROSS NET (Bbls) (Mcf) RESERVES (Bbls) (Mcf)
--------- --------- ------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Logansport, Louisiana............... 2 .96 4,204 2,198,183 47.6% 211 26,316
Nine Mile Draw, Texas............... 1 .61 -- 1,714,619 36.7 -- 68,992
Southern Pine Field, Texas.......... 1 .12 -- 152,453 3.3 -- 15,165
Other............................... 43 8.07 53,912 260,950 12.4 14,242 70,618
--------- --------- ------------ ------------- ------------- ----------- ------------
Total................. 47 9.76 58,116 4,326,205 100.0% 14,453 181,091
========= ========= ============ ============= ============= =========== ============
</TABLE>
9
<PAGE> 12
Logansport Field
In 1995, EXCO acquired an additional 48% working interest in, and
became the operator of, an existing natural gas well (the "Acquired Well") in
the Logansport field located in DeSoto Parish, Louisiana. As a result of the
acquisition, EXCO owns a 51% working interest in the Acquired Well and related
acreage. The Logansport field produces from a series of low permeability
reservoirs with long life natural gas reserves. EXCO's reserves are produced in
the Hosston (Travis Peak) and Pettit formations from depths between 6,000 and
7,200 feet. The field is developed with 640 and 320 acre spacing, and wells in
the field are typically longer life properties.
Nine Mile Draw Field
The Nine Mile Draw field is located in Reeves County, Texas, and
production is derived from a low permeability fractured limestone formation.
Presently, EXCO operates 1 gross (.61 net) well in the Fusselman formation,
which produces from depths between 13,700 and 14,400 feet and is estimated to
have a remaining reserve life of approximately 20 years.
Southern Pine Field
EXCO owns a nonoperated interest in 1 gross (.12 net) well in
Cherokee County, Texas. Production is derived from the Travis Peak formation,
which has estimated net reserves of approximately 152,453 Mcf of natural gas.
Reserve estimates indicate that the present value of estimated future net
reserves, discounted at 10% per annum, attributable to EXCO's interest is
approximately $130,615.
TITLE TO PROPERTIES
As is common industry practice, little or no investigation of
title is made at the time of acquisition of undeveloped properties, other than a
preliminary review of local mineral records. Title investigations are made, and
in most cases, a title opinion of local counsel is obtained before commencement
of drilling operations. EXCO believes that the methods it utilizes for
investigating title prior to the acquisition of any properties are consistent
with practices customary in the oil and gas industry and that such practices are
adequately designed to enable EXCO to acquire good title to such properties.
Some title risks, however, cannot be avoided, despite the use of customary
industry practices.
EXCO's properties are generally subject to customary royalty and
overriding royalty interests, liens incident to operating agreements, liens for
current taxes and other burdens and minor encumbrances, easements and
restrictions, and may be mortgaged to secure indebtedness of EXCO. EXCO believes
that none of these burdens either materially detract from the value of such
properties or materially interfere with their use in the operation of EXCO's
business. Substantially all of EXCO's properties are pledged as collateral under
the Credit Facility.
OIL AND NATURAL GAS RESERVES
On December 31, 1997, EXCO's oil and natural gas reserves included
direct working interests in 47 wells in the states of Texas, Louisiana, North
Dakota, Kansas and Oklahoma, as well as overriding royalties in an additional 9
wells in Texas. EXCO has no reserves offshore or outside of the United States.
On December 31, 1997, approximately 61% of the present value of the estimated
future net revenues attributable to EXCO's properties were attributable to
proved developed reserves and approximately 39% was attributable to proved
undeveloped reserves. In addition, approximately 7.5% of the proved reserves
were attributable to oil and approximately 92.5% were attributable to natural
gas, on a Boe basis.
10
<PAGE> 13
The following table summarizes EXCO's proved reserves on December
31, 1997, and was prepared in accordance with the rules and regulations of the
Commission:
PROVED RESERVES
On December 31, 1997
<TABLE>
<S> <C>
Oil and Liquids (Bbls)
Proved Producing................................................................ 55,167
Proved Behind-Pipe.............................................................. 1,489
---------------
Total Proved Developed.................................................... 56,656
Proved Undeveloped.............................................................. 1,460
---------------
Total..................................................................... 58,116
===============
Natural Gas (Mcf)
Proved Producing................................................................ 1,241,054
Proved Behind-Pipe.............................................................. 1,099,730
---------------
Total Proved Developed.................................................... 2,340,784
Proved Undeveloped.............................................................. 1,985,421
---------------
Total..................................................................... 4,326,205
===============
</TABLE>
A significant portion of the value of the proved nonproducing reserves
are in the Logansport and the Nine Mile Draw fields. There are risks associated
with recovery of reserves in the nonproducing category. In addition, EXCO must
incur certain costs and undertake certain risks associated with drilling and
workover operations to recover these reserves.
The reserve estimates presented as of December 31, 1997 have been
prepared by Lee Keeling and Associates, Inc., independent petroleum engineers,
Tulsa, Oklahoma, and are a part of their report on EXCO's oil and natural gas
properties. Estimates of oil and natural gas reserves are, of necessity,
projections based on engineering data and, thus, are forward-looking in nature.
However, because of the uncertainties inherent in the interpretation of such
data, EXCO cannot ensure that the reserves set forth herein will ultimately be
realized and the actual results could differ materially. See "Supplementary
Financial Data" included with EXCO's financial statements included elsewhere in
this Form 10-K for additional information regarding EXCO's oil and natural gas
reserves, including the present value of future net revenues. Previous reserve
estimates as of March 31, 1995 reported herein were prepared by Milmac Operating
Company, independent petroleum engineers, Lubbock, Texas. Previous reserve
estimates as of December 31, 1995 and December 31, 1996 reported herein were
prepared by Lee Keeling and Associates, Inc.
RESERVES REPORTED TO OTHER AGENCIES
Estimates of oil and gas reserves have not been filed with or included
in reports to any federal authority or agency other than the Commission.
11
<PAGE> 14
PRODUCTION
The following table summarizes for the periods indicated, EXCO's
revenues, net production of oil (including condensate) and natural gas sold, the
average sales price per unit of oil (Bbl) and natural gas (Mcf) and costs and
expenses associated with the production of oil and natural gas:
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Sales:
Oil and Condensate:
Revenue ................... $ 305,569 $ 452,229 $ 282,642
Production sold (Bbls) .... 18,526 22,150 14,453
Average sales price per Bbl 16.49 20.42 19.56
Natural Gas:
Revenue ................... 254,275 419,719 387,334
Production sold (Mcf) ..... 181,121 224,024 181,091
Average sales price per Mcf 1.40 1.87 2.14
Costs and Expenses:
Production costs per Boe .. 6.84 7.21 7.21
Depreciation, depletion and
amortization per Boe .... 1.54 1.46 1.41
</TABLE>
Total oil and gas natural revenues for the fiscal year ended December
31, 1997 decreased 23% from the prior fiscal year primarily due to decreases in
production volumes resulting from the sale in 1997 of certain properties and the
normal depletion of producing wells. The average sales price per barrel of oil
decreased $.86, or 4%, and the average sales price per Mcf of natural gas
increased $.27, or 14%, from such prices for fiscal year end December 31, 1996.
Total oil and natural gas revenues for the fiscal year ended December
31, 1996 increased 56% from the nine month transition period ended December 31,
1995 due to both an increase in oil and natural gas prices and an increase in
production volumes, resulting largely from the 3 month longer time period of
fiscal 1996. The average sales price per barrel of oil increased $3.93, or 24%
and the average sales price per Mcf of natural gas increased $.47, or 34%, from
such prices for the nine month transition period ended December 31, 1995.
EXCO's net production reported in the preceding table only includes
production that is owned by EXCO and produced to its oil and gas interest, less
royalties. Oil production for the fiscal year ended December 31, 1997 was 35%
lower and natural gas production was 19% lower than for the fiscal year ended
December 31, 1996. Oil production for the fiscal year ended December 31, 1996
was 16% higher and natural gas production was 24% higher than the nine month
transition period ended December 31, 1995. On a Boe basis total production for
the fiscal year ended December 31, 1997 decreased 25% from the fiscal year ended
December 31, 1996 and total production for the fiscal year ended December 31,
1996 increased 22% from the nine month transition period ended December 31,
1995.
12
<PAGE> 15
PRODUCTIVE WELLS
The following table sets forth EXCO's interest in productive wells
(producing wells and wells capable of production) on December 31, 1997. The
total gross oil and gas wells does not include any multiple completions. On
December 31, 1997, EXCO did not own an interest in any well that was being
completed.
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
------------------------------------ ------------------------------------
(OIL) (GAS) (TOTAL) (OIL) (GAS) (TOTAL)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kansas...................................... 0 1 1 0 .08 .08
Louisiana................................... 0 2 2 0 .96 .96
North Dakota................................ 2 0 2 .07 0 .07
Oklahoma.................................... 1 1 2 .02 .02 .04
Texas....................................... 25 15 40 3.16 5.45 8.61
----------- ----------- ----------- ----------- ----------- -----------
Total....................................... 28 19 47 3.25 6.51 9.76
</TABLE>
DRILLING ACTIVITIES
With respect to its drilling operations, EXCO plans to concentrate on
lower risk, development-type properties, generally consisting of drilling to
reservoirs from which production is, or formerly was, being obtained. The
drilling of development wells is subject to the normal risk of dry holes, or a
failure to produce oil and natural gas in commercial quantities. The degree of
risk varies depending, among other things, on the distance between the well and
the nearest producing well, other available geological information and the
geological features of the area. In the past, EXCO has drilled higher risk,
exploratory-type wells, primarily in geological basins with relatively high
levels of drilling density and where adequate subsurface information in the form
of well logs and seismic data was generally available to evaluate potential
hydrocarbon accumulations. All drilling activities are subject to the risk of
encountering unusual or unexpected formations and pressures and other conditions
that may result in financial losses or liabilities to third parties or
governmental entities, many of which may not be covered by insurance. The number
and type of wells drilled by EXCO will vary depending on the amount of funds
available for drilling, the cost of each well, the size of the fractional
working interests acquired by EXCO in each well and the estimated recoverable
reserves attributable to each well.
The following table summarizes EXCO's approximate gross and net
interests in the exploratory and development wells drilled during the periods
indicated which refers to the number of wells (holes) completed at any time
during a period, regardless of when drilling was initiated:
<TABLE>
<CAPTION>
EXPLORATORY WELLS
--------------------------------------------------------------------------------
GROSS NET
------------------------------------- -------------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nine Month Transition Period
Ended December 31, 1995................... -- 2 2 .00 .13 .13
Year ended December 31, 1996............... -- -- -- .00 .00 .00
Year Ended December 31, 1997............... -- -- -- .00 .00 .00
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
DEVELOPMENT WELLS
--------------------------------------------------------------------------------
GROSS NET
------------------------------------- -------------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nine Month Transition Period
Ended December 31, 1995................... 1 -- 1 .11 .00 .11
Year ended December 31, 1996............... -- -- -- .00 .00 .00
Year Ended December 31, 1997............... 1 -- 1 .12 .00 .12
</TABLE>
The number of wells drilled refers to the number of wells (holes)
completed at any time during the fiscal year, regardless of when drilling was
initiated. All drilling activities referenced in the above tables were conducted
in the State of Texas. As of March 9, 1998, EXCO has committed to participate in
the drilling of 1 development well in Maverick County, Texas. Drilling of this
well is expected to commence by April 15, 1998.
ACREAGE
The following table sets forth EXCO's interest in developed acreage and
undeveloped acreage on December 31, 1997:
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
---------------------------- --------------------------
GROSS NET GROSS NET
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Kansas..................................... 160 12 640 50
Louisiana.................................. 1,280 616 0 0
North Dakota............................... 472 15 320 8
Oklahoma................................... 320 5 0 0
Texas...................................... 5,535 2,169 7,061 869
------------- -------------- ------------ -------------
Total............................. 7,767 2,817 8,021 927
</TABLE>
The primary terms of the oil and gas leases covering the majority of
EXCO's undeveloped acreage expire at various dates, generally ranging from 1 to
5 years. EXCO can retain its interest in undeveloped acreage by drilling
activity that establishes commercial reserves sufficient to maintain the lease.
Certain of EXCO's undeveloped acreage in Texas is being "held by production,"
for which expiration will not occur until production ceases from all wells on
the particular leases.
SALES OF PRODUCING PROPERTIES AND UNDERDEVELOPED ACREAGE
EXCO evaluates properties on an ongoing basis to determine the economic
viability of the property and whether such property enhances the objectives of
EXCO. During the course of normal business, EXCO may dispose of producing
properties and undeveloped acreage if EXCO believes that such disposition is in
its best interests.
In the fiscal year ended December 31, 1997, EXCO sold its interest in 3
major groups of producing oil properties in Texas and Illinois for a total of
$270,000 which reduced the full cost pool accordingly. In the fiscal year ended
December 31, 1996, EXCO exchanged its interest in 4 non-operated producing wells
for an interest in each of 4 operated producing wells. In the nine month
transition period ended December 31, 1995, EXCO sold a portion of its interest
in an undeveloped lease, which reduced EXCO's basis in the lease by $28,000.
14
<PAGE> 17
PRODUCTS, MARKETS AND REVENUES
Oil and natural gas are the principal products currently produced by
EXCO. EXCO does not refine or process the oil and natural gas that it produces.
EXCO sells the oil it produces under short-term contracts at market prices in
the areas in which the producing properties are located, generally at F.O.B.
field prices posted by the principal purchaser of oil in such areas.
Natural gas produced from EXCO's properties is sold under both
short-term and long-term contracts to transmission and utility companies that
have pipelines in the vicinity of the producing properties or that will
construct pipelines to such properties. The contracts are of a type common
within the industry, and a separate contract is usually negotiated for each
property. Typically, EXCO's sales contracts are made for terms ranging from
day-to-day up to 6 months.
The availability of a ready market for oil and natural gas and the
prices of oil and natural gas are dependent upon a number of factors that are
beyond the control of EXCO. These factors include, among other things, the level
of domestic production and economic activity generally, the availability of
imported oil and natural gas, actions taken by foreign oil producing nations,
the availability of natural gas pipelines with adequate capacity and other
transportation facilities, the availability and marketing of other competitive
fuels, fluctuating and seasonal demand for oil, natural gas and refined products
and the extent of governmental regulation and taxation (under both present and
future legislation) of the production, refining, transportation, pricing, use
and allocation of oil, natural gas, refined products and substitute fuels.
Accordingly, in view of the many uncertainties affecting the supply and demand
for oil, natural gas and refined petroleum products, it is not possible to
predict accurately the prices or marketability of the oil and natural gas from
any producing well in which EXCO has or may acquire an interest.
Oil prices have been subject to significant fluctuations over the past
decade. Levels of production maintained by the Organization of Petroleum
Exporting Countries ("OPEC") member nations and other major oil producing
countries are expected to continue to be a major determinant of oil price
movements in the future. As a result, future oil price movements cannot be
predicted with any certainty. Similarly, during the past several years, the
market price for natural gas has been subject to significant fluctuations on a
monthly basis as well as from year to year. These frequent changes in the market
price make it impossible for EXCO to predict natural gas price movements with
any certainty.
EXCO cannot provide assurance that it will be able to market all oil or
natural gas that EXCO produces or, if such oil or natural gas can be marketed,
that favorable price and contractual terms can be negotiated. Changes in oil and
natural gas prices may significantly affect the revenues and cash flow of EXCO
and the value of its oil and natural gas properties. Further, significant
declines in the prices of oil and natural gas may have a material adverse effect
on the business and financial condition of EXCO. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations."
In certain areas in which EXCO engages in oil and natural gas
production activities, the supply of oil and natural gas available for delivery
from time to time exceeds the demand. During such times, companies purchasing
oil and natural gas in such areas reduce the amount of oil and natural gas that
they will purchase or "take." If buyers cannot be readily located for newly
discovered oil and natural gas reserves, newly completed oil and natural gas
wells may be shut-in for various periods of time. As a result, the over-supply
of oil and natural gas in certain areas may cause EXCO to experience "take"
problems or may adversely affect EXCO's ability to obtain contracts to market
oil and natural gas discovered in wells in which EXCO owns an interest.
15
<PAGE> 18
The following table sets forth the amount of EXCO's oil sales, natural
gas sales and the percent of oil and natural gas sales to total revenues for the
periods indicated:
<TABLE>
<CAPTION>
PERCENT OF
OIL AND GAS SALES TO
TOTAL REVENUES
-----------------------
NATURAL TOTAL OIL AND
PERIOD ENDED OIL SALES GAS SALES GAS SALES OIL GAS
- - --------------------------------------------------- -------------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nine Month Transition Period December 31, 1995.... $ 306,000 $ 254,000 $ 560,000 48% 40%
Year Ended December 31, 1996....................... 452,000 420,000 872,000 50% 46%
Year Ended December 31, 1997....................... 283,000 387,000 670,000 41% 55%
</TABLE>
In February 1996, EXCO changed its fiscal year from a March 31 year end
to a December 31 year end, resulting in a short year of 9 months for the
transition period ended December 31, 1995. The comparability of most of the year
to year comparisons in this report is affected by the fact that the nine month
transition period ended December 31, 1995 is 3 months shorter than the full
fiscal years ended December 31, 1996 and December 31, 1997.
DELIVERY COMMITMENTS
EXCO is not presently obligated to provide a fixed and determinable
quantity of oil or natural gas under any existing contract or agreement.
CUSTOMERS
During the fiscal year ended December 31, 1997, sales of oil and gas to
3 purchasers, Scurlock Permian Corporation, Delhi Gas Pipeline Corporation, and
Aurora Natural Gas, L.L.C., accounted for 22%, 19%, and 14%, respectively, of
EXCO's total revenues. During the fiscal year ended December 31, 1996, sales of
oil and gas to 2 purchasers, Scurlock Permian Corporation and Delhi Gas
Marketing Corp., accounted for 26% and 15%, respectfully, of EXCO's total
revenues. During the nine month period ended December 31, 1995, sales of oil and
natural gas to 3 purchasers, Scurlock Permian Corporation, Delhi Gas Marketing
Corp., and Pride Pipeline Company, accounted for 20%, 13%, and 10%,
respectively, of EXCO's total revenues. Although the loss of any one of EXCO's
oil and natural gas purchasers could temporarily cease or delay EXCO's
production and sale of its oil and natural gas in the purchasers' particular
service area, EXCO believes it would be able, under current economic
circumstances, to contract with other purchasers for its oil and natural gas
production.
COMPETITION
The oil and natural gas industry is highly competitive. EXCO encounters
strong competition from other independent operators and from major oil companies
in acquiring properties, in contracting for drilling equipment and in securing
trained personnel. Many of these competitors have financial resources and staffs
substantially larger than those available to EXCO.
Exploitation and production of oil and natural gas is also affected by
competition for drilling rigs and the availability of tubular goods and certain
other equipment. While the oil and natural gas industry has experienced
shortages of drilling rigs and equipment, pipe and personnel in the past, EXCO
is not presently experiencing any shortages and does not foresee any such
shortages in the near future. EXCO is unable to predict how long current market
conditions will continue.
Competition for attractive oil and natural gas producing properties,
undeveloped leases and drilling rights is also strong, and EXCO cannot provide
assurance that it will be able to compete satisfactorily in the acquisition of
such properties. Many major oil companies have publicly indicated their
decisions to concentrate on overseas activities and have been actively marketing
certain of their existing producing properties for sale to independent
producers. There can be no assurance that EXCO will be successful in acquiring
any such properties.
16
<PAGE> 19
REGULATION
General
EXCO's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and natural gas production operations and economics are or have
been affected by price control, tax and other laws relating to the oil and
natural gas industry, by changes in such laws and by changing administrative
regulations. There are currently no price controls on oil, condensate or NGLs.
To the extent price controls remain applicable after the enactment of the
Natural Gas Wellhead Decontrol Act of 1989, EXCO is of the opinion that such
controls will not have a significant impact on the prices received by EXCO for
natural gas produced in the near future.
Legislation affecting the oil and natural gas industry is under
constant review for amendment or expansion, frequently increasing the regulatory
burden. Also, numerous departments and agencies, both federal and state, are
authorized by statute to issue and have issued rules and regulations binding on
the oil and natural gas industry and its individual members, compliance with
which is often difficult and costly and certain of which carry substantial
penalties for the failure to comply. EXCO cannot predict how existing
regulations may be interpreted by enforcement agencies or the courts, nor
whether amendments or additional regulations will be adopted, nor what effect
such interpretations and changes may have on EXCO's business or financial
condition.
Natural Gas Regulation
Historically, interstate pipeline companies generally acted as
wholesale merchants by purchasing natural gas from producers and reselling the
natural gas to local distribution companies and large end users. Commencing in
late 1985, the Federal Energy Regulatory Commission (the "FERC") issued a series
of orders that have had a major impact on interstate natural gas pipeline
operations, services, and rates, and thus have significantly altered the
marketing and price of natural gas. The FERC's key rule making action, Order No.
636 ("Order 636"), issued in April 1992, required each interstate pipeline to,
among other things, "unbundle" its traditional bundled sales services and create
and make available on an open and nondiscriminatory basis numerous constituent
services (such as gathering services, storage services, firm and interruptible
transportation services, and standby sales and natural gas balancing services),
and to adopt a new rate making methodology to determine appropriate rates for
those services. To the extent the pipeline company or its sales affiliate makes
natural gas sales as a merchant in the future, it does so pursuant to private
contracts in direct competition with all other sellers, such as EXCO; however,
pipeline companies and their affiliates were not required to remain "merchants"
of natural gas, and most of the interstate pipeline companies have become
"transporters only." In subsequent orders, the FERC largely affirmed the major
features of Order 636 and denied a stay of the implementation of the new rules
pending judicial review. By the end of 1994, the FERC had concluded the Order
636 restructuring proceedings, and, in general, accepted rate filings
implementing Order 636 on every major interstate pipeline. However, even through
the implementation of Order 636 on individual interstate pipelines is
essentially complete, many of the individual pipeline restructuring proceedings,
as well as Order 636 itself and the regulations promulgated thereunder, are
subject to pending appellate review and could possibly be changed as a result of
future court orders. EXCO cannot predict whether the FERC's orders will be
affirmed on appeal or what the effects will be on its business.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate pipeline owned
gathering facilities by interstate pipelines to their affiliates (the so-called
"spin down" of previously regulated gathering facilities to the pipeline's
nonregulated affiliate), (ii) the completion of a rule making involving the
regulation of pipelines with marketing affiliates under Order No. 497, (iii) the
FERC's ongoing efforts to promulgate standards for pipeline electronic bulletin
boards and electronic data exchange, (iv) a generic inquiry into the pricing of
interstate pipeline capacity, (v) efforts to refine the FERC's regulations
controlling operation of the secondary market for released pipeline capacity,
and (vi) a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage capacity.
Several of these
17
<PAGE> 20
initiatives are intended to enhance competition in natural gas markets, although
some, such as "spin downs," may have the adverse effect of increasing the cost
of doing business on some in the industry as a result of the monopolization of
those facilities by their new, unregulated owners. The FERC has attempted to
address some of these concerns in its orders authorizing such "spin downs," but
it remains to be seen what effect these activities will have on access to
markets and the cost to do business. As to all of these recent FERC initiatives,
the ongoing, or in some instances, preliminary evolving nature of these
regulatory initiatives makes it impossible at this time to predict their
ultimate impact on EXCO's business.
EXCO owns, directly or indirectly, certain natural gas facilities that
it believes meet the traditional tests the FERC has used to establish a
company's status as a gatherer not subject to FERC jurisdiction under the
Natural Gas Act of 1938 (the "NGA"). Moreover, recent orders of the FERC have
been more liberal in their reliance upon or use of the traditional tests, such
that in many instances, what was once classified as "transmission" may now be
classified as "gathering." EXCO transports its own natural gas through these
facilities. EXCO also transports certain of its natural gas through gathering
facilities owned by others, including interstate pipelines. With respect to item
(i) in the preceding paragraph, on May 27, 1994, the FERC issued orders in the
context of the "spin off" or "spin down" of interstate pipeline owned gathering
facilities. A "spin off" is a FERC approved sale of such facilities to a
non-affiliate. A "spin down" is the transfer by the interstate pipeline of its
gathering facilities to an affiliate. A number of spin offs and spin downs have
been approved by the FERC and implemented. The FERC held that it retains
jurisdiction over gathering provided by interstate pipelines, but that it
generally does not have jurisdiction over pipeline gathering affiliates, except
in the event of affiliate abuse (such as actions by the affiliate undermining
open and nondiscriminatory access to the interstate pipeline). These orders
require nondiscriminatory access for all sources of supply, prohibit the tying
of pipeline transportation service to any service provided by the pipeline's
gathering affiliate, and require the new gathering company to submit a "default"
contract if a satisfactory contract cannot be mutually agreed upon by the
interstate pipeline and its existing customers. Several petitions for rehearing
of the FERC's May 27, 1994, orders were filed. On November 30, 1994, the FERC
issued a series of rehearing orders largely affirming the May 27, 1994, orders.
The FERC clarified that "default" contracts are intended to serve only as a
transition mechanism to prevent arbitrary termination of gathering service to
existing customers. Also, the FERC now requires interstate pipelines to not only
seek authority under Section 7(b) of the NGA to abandon certificated facilities,
but also to seek authority under Section 4 of the NGA to terminate service from
both certificated and uncertificated facilities. On December 31, 1994, an appeal
was filed with the U.S. Court of Appeals for the D.C. Circuit to overturn 3 of
the FERC's November 30, 1994, orders. EXCO cannot predict what the ultimate
effect of the FERC's orders pertaining to gathering will have on its production
and marketing, or whether the Appellate Court will affirm the FERC's orders on
these matters.
Federal Taxation
The federal government may propose tax initiatives that affect the oil
and natural gas industry, including EXCO. Due to the preliminary nature of these
proposals, EXCO is unable to determine what effect, if any, the proposals would
have on product demand or EXCO's results of operations.
State Regulation
The various states in which EXCO conducts activities regulate the
drilling, operation and production of oil and natural gas wells, such as the
method of developing new fields, spacing of wells, the prevention and clean-up
of pollution, and maximum daily production allowables based on market demand and
conservation considerations.
Environmental Regulation
EXCO's exploration, development and production of oil and gas,
including its operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. Such
laws and regulations can increase the costs of planning, designing, installing
and operating oil and gas wells. EXCO's domestic activities are subject to a
variety of environmental laws and regulations, including, but not limited to,
the Oil Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the
Comprehensive Environmental Response,
18
<PAGE> 21
Compensation and Liability Act ("CERCLA"), the Resource Conservation and
Recovery Act ("RCRA"), the Clean Air Act ("CAA") and the Safe Drinking Water Act
("SDWA"), as well as state regulations promulgated under comparable state
statutes. EXCO also is subject to regulations governing the handling,
transportation, storage and disposal of naturally occurring radioactive
materials that are found in its oil and gas operations. Civil and criminal fines
and penalties may be imposed for non-compliance with these environmental laws
and regulations. Additionally, these laws and regulations require the
acquisition of permits or other governmental authorizations before undertaking
certain activities, limit or prohibit other activities because of protected
areas or species and impose substantial liabilities for cleanup of pollution.
Under the OPA, a release of oil into water or other areas designated by
the statue could result in EXCO being held responsible for the costs of
remediating such a release, certain OPA specified damages and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in EXCO being held responsible under the CWA for the cost of remediation,
and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws,
can impose joint and several and retroactive liability, without regard to fault
or the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions and entities that arrange for the disposal or treatment of,
or transport hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including, but not limited to, crude oil,
gas and natural gas liquids from the definition of hazardous substance, EXCO's
operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, there can be no
assurance that the exemption will be preserved in future amendments of the act,
if any.
RCRA and comparable state and local requirements impose standards for
the management, including treatment, storage and disposal of both hazardous and
nonhazardous solid wastes. EXCO generates hazardous and nonhazardous solid waste
in connection with its routine operations. From time to time, proposals have
been made that would reclassify certain oil and gas wastes, including wastes
generated during pipeline, drilling and production operations, as "hazardous
wastes" under RCRA which would make such solid wastes subject to must more
stringent handling, transportation, storage, disposal and clean-up requirements.
This development could have a significant impact on EXCO's operating costs.
While state laws vary on this issue, state initiatives to further regulate oil
and gas wastes could have a similar impact.
Because oil and gas exploration and production, and possibly other
activities, have been conducted at some of EXCO's properties by previous owners
and operators, materials from these operations remain on some of the properties
and in some instances require remediation. In addition, EXCO has agreed to
indemnify Sellers of producing properties from whom EXCO has acquired reserves
against certain liabilities for environmental claims associated with such
properties. While EXCO does not believe the costs to be incurred by EXCO for
compliance and remediating previously or currently owned or operated properties
will be material, there can be no guarantee that such costs will not result in
material expenditures.
Additionally, in the course of EXCO's routine oil and gas operations,
surface spills and leaks, including casing leaks, of oil or other materials
occur, and EXCO incurs costs for waste handling and environmental compliance.
Moreover, EXCO is able to control directly the operations of only those wells
for which it acts as the operator. Notwithstanding EXCO's lack of control over
wells owned by EXCO but operated by others, the failure of the operator to
comply with applicable environmental regulations may, in certain circumstances,
be attributable to EXCO.
It is not anticipated that EXCO will be required in the near future to
expend amounts that are material in relation to its total capital expenditures
program by reason of environmental laws and regulations, but inasmuch as such
laws and regulations are frequently changed, EXCO is unable to predict the
ultimate cost of compliance. There
19
<PAGE> 22
can be no assurance that more stringent laws and regulations protecting the
environment will not be adopted or that EXCO will not otherwise incur material
expenses in connection with environmental laws and regulations in the future.
Other Proposed Legislation
In the past, Congress has been very active in the area of natural gas
regulation. Legislative proposals are pending in various states which, if
enacted, could significantly affect the petroleum industry. EXCO cannot predict
which proposals, if any, may actually be enacted by Congress or any of the state
legislatures, and what impact, if any, such proposals may have on EXCO's
operations.
EMPLOYEES
As of December 31, 1997, EXCO employed 7 persons of which 1 was
involved in field operations and 6 were engaged in office and administrative
activities. None of EXCO's employees are represented by unions or covered by
collective bargaining agreements. To date, EXCO has not experienced any strikes
or work stoppages due to labor problems and considers its relations with its
employees to be good. EXCO also utilizes the services of independent consultants
on a contract basis.
EXECUTIVE OFFICERS
Douglas H. Miller, 50, was elected Chairman and Chief Executive Officer
of EXCO in December 1997. Mr. Miller was Chairman of the Board and Chief
Executive Officer of Coda Energy, Inc. ("Coda") from October 1989 until November
1997 and served as a director of Coda from 1987 until November 1997. Mr. Miller
also served as president of a securities broker-dealer which Mr. Miller sold in
1993.
T.W. Eubank, 55, was elected President, Chief Financial Officer (he
resigned as Chief Financial Officer on December 31, 1997), treasurer and a
director of EXCO in December 1997. Mr. Eubank was a consultant to various
private companies from February 1996 to December 1997. Mr. Eubank was elected
President and Chief Operating Officer of Coda in March 1985, Chief Executive
Officer in July 1987 (and resigned as Chief Operating Officer at the same time)
and Chief Financial Officer in September 1989. He became Chief Operating Officer
of Coda in October 1989 and resigned from his position as Chief Executive
Officer at the same time. In October 1993, he resigned from his position as
Chief Financial Officer. Mr. Eubank served as President of Coda until February
1996. He was a director of Coda from 1981 until February 1996 and served as Vice
President and Chief Financial Officer of Coda from 1981 to March 1985.
J. Douglas Ramsey, 37, was elected Vice President and Chief Financial
Officer of EXCO on December 31, 1997. Dr. Ramsey most recently was Financial
Planning Manager of Coda and has worked in various capacities for Coda from 1992
until 1997. Dr. Ramsey served as Chief Executive Officer of an auto parts
distributor from May 1994 to February 1996. Currently, Dr. Ramsey teaches
finance at Southern Methodist University. He has taught as an adjunct professor
at various universities over the past 14 years.
Richard E. Miller, 43, became General Counsel and General Land Manager
and was elected Secretary of EXCO in December 1997. Richard E. Miller was a
senior partner and head of the Energy Section of Gardere & Wynne, L.L.P. from
December 1991 to September 1994. Richard E. Miller practiced law as a sole
practitioner from September 1994 to December 1997.
GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms
commonly used in the oil and natural gas industry and this Prospectus.
20
<PAGE> 23
"Bbl." One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
"Boe." Barrel oil equivalents.
"COMPLETED WELL." The completion of a well or a completed well refers
to the installation of permanent equipment for the production of oil or natural
gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
"DEVELOPED ACREAGE." Acreage spaced or assignable to productive wells.
"DEVELOPMENT WELL." A well drilled within the proven boundaries of an
oil or natural gas reservoir with the intention of completing the stratigraphic
horizon known to be productive.
"DRY HOLE." An exploratory or development well found to be incapable of
producing either oil and natural gas in sufficient economic quantities to
justify completion of a well.
"EXPLORATORY WELL." A well drilled within no proven boundaries of an
oil or natural gas reservoir.
"GROSS ACRE." An acre in which a working interest is owned.
"GROSS WELL(S)." A gross well is a well in which a working interest is
owned. The number of gross wells is the total number of wells in which working
interests are owned.
"INFILL DRILLING." Drilling of a well between known producing wells to
better exploit the reservoir.
"Mcf." One thousand cubic feet of natural gas.
"NET ACRE(S)." A net acre is deemed to exist when the sum of fractional
ownership working interests in gross acres equals one. The total of net acres is
the sum of the fractional working interests owned in gross acres expressed as
whole numbers and percentages thereof.
"NET WELL(S)." A net well is deemed to exist when the sum of the
fractional ownership working interests in gross wells equals one. The number of
net wells is the sum of the fractional working interests owned in gross wells
expressed as whole numbers and percentages thereof.
"OVERRIDING ROYALTY INTEREST." An interest in an oil and/or natural gas
property entitling the owner to a share of oil and natural gas production free
of costs of production.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES." The present value of
estimated future net revenues is an estimate of future net revenues from a
property at its acquisition date, at December 31, 1997, or as otherwise
indicated, after deducting production and ad valorem taxes, future capital costs
and operating expenses, but before deducting federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the net revenue stream and should not be construed as being the
fair market value of the properties. Estimates have been made using constant oil
and natural gas prices and operating costs at the acquisition date, at December
31, 1997, or as otherwise indicated. EXCO believes that the present value of
estimated future net revenues before income taxes, while not in accordance with
generally accepted accounting principles, is an important financial measure used
by investors and independent oil and natural gas producers for evaluating the
relative significance of oil and natural gas properties and acquisitions.
"PRODUCING WELL," "PRODUCTION WELL" OR "PRODUCTIVE WELL." A well that
is producing oil or natural gas or that is capable of production.
21
<PAGE> 24
"PROVED BEHIND-PIPE." Proved reserves that are currently behind the
pipe of an existing well that are expected to be productive due to the wells log
characteristics and the analogous production of other wells in the immediate
vicinity.
"PROVED DEVELOPED RESERVES." Proved developed reserves are those
quantities of oil, natural gas and NGLs that, upon analysis of geological and
engineering data, are expected with reasonable certainty to be recoverable in
the future from known oil and natural gas reservoirs under existing economic and
operating conditions. This classification includes: (a) proved developed
producing reserves, which are those expected to be recovered from currently
producing zones under continuation of present operating methods; and (b) proved
developed nonproducing reserves, which consist of (i) reserves from wells that
have been completed and tested but are not yet producing due to lack of market
or minor completion problems that are expected to be corrected, and (ii)
reserves currently behind the pipe in existing wells which are expected to be
productive due to both the well log characteristics and analogous production in
the immediate vicinity of the well.
"PROVED NONPRODUCING RESERVES." Proved nonproducing reserves include
proved behind-pipe reserves and proved undeveloped reserves.
"PROVED RESERVES." The estimated quantities of crude oil, natural gas
and NGLs which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
"PROVED UNDEVELOPED RESERVES." Proved reserves that may be expected to
be recovered from existing wells that will require a relatively major
expenditure to develop or from undrilled acreage adjacent to productive units
that are reasonably certain of production when drilled.
"UNDEVELOPED ACREAGE." As defined by the Commission, undeveloped
acreage is considered to be lease acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage contains
proved reserves.
"WORKING INTEREST." The operating interest that gives the owner the
right to drill, produce and conduct operating activities on the property and to
a share of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploitation, development and operations and all
risks in connection herewith.
ITEM 2. PROPERTIES
GENERAL
EXCO leases approximately 5,620 square feet of office space in Dallas,
Texas, for its corporate offices. The lease is for 2 years and requires a
monthly rental payment of approximately $6,440. EXCO considers this space
adequate for its present needs. EXCO also has a small field office and yard in
Pecos County, Texas.
OTHER
For a description of EXCO's oil and natural gas properties, oil and gas
reserves, acreage, wells, production and drilling activity, see "Business."
ITEM 3. LEGAL PROCEEDINGS
EXCO is not presently party to, nor is any of its property the subject
of, any material pending legal proceedings other than routine litigation
incidental to EXCO's business.
22
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last 3 months of the fiscal year ended December 31, 1997, no
matter was submitted by EXCO to a vote of its shareholders through the
solicitation of proxies or otherwise.
23
<PAGE> 26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
MARKET INFORMATION
EXCO's Common Stock is currently quoted on the OTC under the symbol
"EXCO," but there is limited trading in the Common Stock. The following table
sets forth the high and low bid prices from January 1, 1996 through December 31,
1997, based upon quotations periodically published on the OTC. The price
quotations below have been adjusted to estimate the effect of the one-for-five
reverse stock split of the Common Stock in the case of quotations for periods
prior to July 19, 1996, the effective date of the stock split. All price
quotations represent prices between dealers, without retail mark-ups, mark-downs
or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Calendar Year ended December 31, 1996
First Quarter..................................................... $ 2.50 $ 1.56
Second Quarter.................................................... 2.50 1.56
Third Quarter..................................................... 2.75 2.00
Fourth Quarter.................................................... 2.75 2.75
Calendar Year Ended December 31, 1997
First Quarter..................................................... $ 3.50 $ 2.75
Second Quarter.................................................... 2.88 2.75
Third Quarter..................................................... 2.88 2.75
Fourth Quarter.................................................... 3.13 2.75
</TABLE>
The bid price for the Common Stock was $3.25 on March 6, 1998. The
above quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily represent actual transactions.
EXCO is attempting to comply with certain listing criteria, including
minimum equity, share price, public float and market maker requirements and
intends to apply for inclusion of its Common Stock on The Nasdaq Stock Market
National Market ("Nasdaq National Market") or Small Cap Market when EXCO is able
to satisfy such requirements. EXCO cannot insure that it will be successful in
any application to have the Common Stock quoted on The Nasdaq National Market or
Small Cap Market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
SHAREHOLDERS
According to the records of EXCO's transfer agent, there were 1,699
holders of record of the Common Stock on March 6, 1998 (including nominee
holders such as banks and brokerage firms who hold shares for beneficial
holders).
DIVIDENDS
EXCO has not paid any cash dividends on its Common Stock, and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
In addition, EXCO's Credit Facility currently prohibits it from paying
dividends. EXCO anticipates that any income generated in the foreseeable future
will be retained for the development and expansion of its business. Future
dividend policy is subject to the discretion of the Board of Directors and will
depend upon a number of factors, including future earnings, debt service,
capital requirements, restrictions in EXCO's Credit Facility, business
conditions, the financial condition of EXCO and other factors that the Board of
Directors deems relevant.
24
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for
EXCO. The financial data should be read in conjunction with EXCO's financial
statements, the notes thereto and the other financial information, including pro
forma information, included elsewhere herein. In the opinion of management of
EXCO, the data presented reflect all adjustments considered necessary for a fair
presentation of the results for such periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTH
TRANSITION
FISCAL YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
----------------------- -------------- ------------------------
1994 (1) 1995 (1) 1995 (1) 1996 (1) 1997
-------- -------- -------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas ...................... $ 715 $ 626 $ 560 $ 872 $ 670
Other .................................... 127 105 76 39 28
------- ------- ------- ------- -------
Total revenues ...................... 842 731 636 911 698
Costs and expenses:
Oil and natural gas production ........... 459 403 333 429 322
General and administrative ............... 208 371 366 373 486
Depreciation, depletion and amortization . 80 81 92 114 84
Interest expense ......................... 5 4 5 18 11
Other (2) ................................ -- -- -- 303 --
------- ------- ------- ------- -------
Total expenses ...................... 752 859 796 1,237 903
------- ------- ------- ------- -------
Income (loss) before income taxes ........... 90 (128) (160) (326) (205)
Income taxes ................................ -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) ........................... $ 90 $ (128) $ (160) $ (326) $ (205)
======= ======= ======= ======= =======
Net income (loss) per share (3)(4) .......... $ .15 $ (.20) $ (.24) $ (.43) $ (.25)
======= ======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding ....................... 585 655 675 765 806
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- --------------------------------------
1994 1995 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets ............ $ 456 $ 577 $ 582 $ 373 $ 727
Oil and gas properties, net 669 785 820 749 473
Total assets .............. 1,210 1,439 1,511 1,226 1,270
Current liabilities ....... 418 653 861 658 328
Long-term debt ............ 19 16 40 36 15
Stockholders' equity ...... 773 770 610 532 927
</TABLE>
- - ------------------
(1) The data for all prior years has been restated to reflect the change
in EXCO's method of accounting for oil and gas operations to the full
cost method of accounting. See Note 2 to the Company's Financial
Statements. As a result of the change in the accounting method, net
income has been increased by $44,000 ($0.07 per share) for the year
ended March 31, 1994; the net loss for the year ended March 31, 1995,
the nine month period ended December 31, 1995, and the year ended
December 31, 1996, has been decreased $40,000 ($0.06 per share),
$184,000 ($0.27 per share) and by $3,000 ($0.00 per share),
respectively.
(2) The $303,000 expense in fiscal 1996 represents the legal, accounting
and other expenses associated with the attempted acquisition by EXCO of
Taurus Energy Corp.
(3) Per share data has been restated to reflect the one-for-five reverse
stock split effective July 19, 1996. The adoption of Financial
Accounting Standards Board No. 128, Earnings per Share, did not have a
material impact on Earnings per Share amounts.
(4) EXCO has not declared nor paid any dividends during any of the periods
presented.
25
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1996 and December 31, 1997
Revenues. Oil and gas sales decreased $202,000, or 23%, to $670,000 for
the fiscal year ended December 31, 1997 from $872,000 for the fiscal year ended
December 31, 1996. The decrease was due primarily to the sale during 1997 of
certain non-strategic oil and gas properties which lead to decreased production
volumes. Oil and gas prices for 1997 were 4% lower and 14% higher, respectively,
than such prices in 1996. Oil and gas sales volumes for 1997 decreased 35% and
19%, respectively, from 1996 as a result of property sales and the continued
depletion of existing properties.
Other income for the fiscal year ended December 31, 1997 was $38,000 as
compared to $39,000 for the fiscal year ended December 31, 1996. This income
primarily includes well supervision fees and interest income. Prior years have
been restated to reflect a change in classification of fees from overhead
charges billed to working interest owners, including EXCO. These overhead
charges have previously been recorded as management fee revenue and are now
recorded as a reduction in general and administrative expenses.
Costs and Expenses. EXCO's costs and expenses decreased $334,000, or
27%, to $903,000 for the fiscal year ended December 31, 1997 from $1,237,000 for
the fiscal year ended December 31, 1996. This decrease was due primarily to
expenses of $303,000 incurred in 1996 in connection with EXCO's attempted
acquisition of Taurus Energy Corp. Oil and gas production costs decreased
$107,000 to $322,000 for 1997 from $429,000 in 1996 as a result of the property
sales, and general and administrative expenses increased $113,000 to $486,000 in
1997 from $373,000 in 1996 due to various increases in office expenses and a
reduction in billed salary reimbursement as a result of the disposition of a
certain oil property.
In 1997, EXCO changed its method of accounting for oil and gas
properties from successful efforts to the full cost method of accounting. Prior
years have been restated to reflect this change in accounting method as though
EXCO had been using the full cost method for all periods being compared.
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.
Net Income (Loss). Net loss for the fiscal year ended December 31, 1997
was $205,000, or $.25 per share, compared to a loss of $326,000, or $.43 per
share, for the fiscal year ended December 31, 1996. This $121,000 decrease was
primarily the result of a decrease in revenues being partially offset by a
decrease in expenses as more fully described above.
Comparison of Nine Month Transition Period Ended December 31, 1995 and
the Fiscal Year Ended December 31, 1996
Comparative Periods. On February 13, 1996, EXCO changed its fiscal year
end from March 31 to December 31. As a result, the following comparison is
between the fiscal year ended December 31, 1996 and the nine month transition
period ended December 31, 1995.
Revenues. Oil and natural gas sales increased $312,000, or 56%, to
$872,000 for the fiscal year ended December 31, 1996 from $560,000 for the nine
month transition period ended December 31, 1995. The increase in oil and natural
gas sales was primarily attributable to higher oil and natural gas prices in
fiscal 1996 as well as increased production volumes. Oil and natural gas prices
for the fiscal year ended December 31, 1996, were 24% higher and 34% higher,
respectively, than such prices in the nine month transition period ended
December 31, 1995. Oil and natural gas production for the fiscal year ended
December 31, 1996, increased 16% and 24%, respectively, from the nine month
transition period ended December 31, 1995. These increases were primarily
attributable to the
26
<PAGE> 29
production from several successful workovers and newly completed wells
overshadowing the continued depletion of existing properties.
Management fees and other income decreased $37,000, or 49%, to $39,000
for the fiscal year ended December 31, 1996 from $76,000 in the nine month
transition period ended December 31, 1995. Management fees and other income
primarily include well supervision fees and interest income. The decrease was
due primarily to a lower level of operated drilling and maintenance activities.
Costs and Expenses. EXCO's costs and expenses increased $441,000, or
55%, to $1,237,000 for the fiscal year ended December 31, 1996 from $796,000 for
the nine month transition period ended December 31, 1995. This increase was due
primarily to the costs, including financing and acquisition costs, incurred in
connection with the abandonment of EXCO's proposed acquisition of Taurus Energy
Corp.
Net Income (Loss). Net loss for the fiscal year ended December 31, 1996
was $326,000, or $.43 per share, compared to a loss of $160,000, or $0.24 per
share, for the nine month transition period ended December 31, 1995. This
$166,000 decrease was primarily the result of an increase in revenues being
partially offset by an increase in expenses as more fully described above.
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 in December 1997,
the infusion of new equity capital in December 1997 and an expected increase in
acquisition, exploitation and development activities. Based on these factors and
establishment of a strategic growth plan, EXCO's Board of Directors and
management felt that the reflection of prior losses on EXCO's balance sheet
would not be meaningful in presenting the financial position of EXCO. EXCO's
accumulated deficit was primarily related to past operations and properties that
have been disposed of. The historical carrying values of EXCO's assets and
liabilities of the Company were not adjusted in connection with the
quasi-reorganization.
CHANGE IN METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, the Company changed from the successful efforts
method to the full cost method of accounting for its oil and gas operations. All
prior year's financial statements presented herein have been restated to reflect
the change.
During the past ten years, the Company has incurred minimal exploration and
acquisition costs, has liquidated substantially all its properties and completed
"out of court" debt restructurings. Recently there was a change in control of
ownership of the Company and new management was appointed. New management views
the Company as a new company and believes the past operations are insignificant
and not relevant to the Company's future plans.
New management believes that the change in accounting for oil and gas properties
is to a preferable method because the full cost method will more appropriately
reflect the Company's future operations which will result from the significant
management changes at the Company. Further, new management does not believe that
the use of the successful efforts method of accounting is appropriate for a
small to medium size acquisition, development and exploitation company.
27
<PAGE> 30
and natural gas reserves are capitalized into a "full cost pool" as incurred,
and properties in the pool are depleted and charged to operations using the
unit-of-production method based on the ratio of current production to total
proved oil and natural gas reserves. To the extent that such capitalized costs
(net of accumulated depreciation, depletion and amortization) less deferred
taxes exceed the SEC PV-10 of estimated future net cash flow from proved
reserves of oil and natural gas, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged against
earnings. Once incurred, a write-down of oil and natural gas properties is not
reversible at a later date even if oil or gas prices increase.
LIQUIDITY AND CAPITAL RESOURCES
General
EXCO's working capital on December 31, 1997 was $399,000 compared to a
negative $285,000 on December 31, 1996. This $684,000 increase in working
capital resulted primarily from the sale of Common Stock to 2 individuals in
1997 for net proceeds of $600,000. In addition, EXCO sold certain non-strategic
oil and natural gas properties in 1997 in order to generate working capital.
EXCO's working capital on December 31, 1996 was a negative $285,000 compared to
a negative $279,000 on December 31, 1995. This $6,000 decrease in working
capital resulted from the utilization of Company funds for the costs associated
with the attempted acquisition of Taurus Energy Corp. being partially offset by
the capital received upon the exercise of a stock option to purchase 120,000
shares of Common Stock by a director of EXCO during the first quarter of 1996.
The option exercise resulted in $225,000 in cash for EXCO. This addition to
working capital was utilized primarily to pay off EXCO's short-term note payable
in the second quarter of 1996.
Long-Term Debt
On December 31, 1997, EXCO had long-term debt (excluding current
maturities) of $15,000. EXCO's $150,000 note payable on December 31, 1996 was
paid in full in the second quarter of 1997 through the proceeds received from
the sale of an oil and natural gas property. This note payable amount had been
borrowed from a bank to fund the costs associated with the attempted acquisition
of Taurus Energy Corp.
Sale of Equity
On December 31, 1997, Messrs. Eubank and Ellis, purchased 200,000
shares (100,000 shares each) of EXCO's Common Stock at $3.00 per share, thus
generating $600,000 in cash for EXCO. These proceeds will be primarily used for
working capital and general corporate purposes.
New Credit Facility
On February 11, 1998, EXCO entered into the Credit Facility. 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 February
13, 1998, had a borrowing base of $2.2 million. On February 13, 1998,
approximately $1.6 million 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
Facility also permits EXCO to repay and reborrow amounts under the Credit
Facility without any penalty, thereby
28
<PAGE> 31
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.
No principal amortization shall be required during the Credit Facility
period as long as the aggregate principal balance does not exceed the borrowing
base then in effect. However, if a borrowing base deficiency exists after giving
effect to the redetermination, then EXCO must either (a) eliminate such
borrowing base deficiency by making a single mandatory prepayment of principal
on the revolving loan in an amount equal to the entire amount of such borrowing
base deficiency on the first monthly date following the date on which such
borrowing base deficiency is determined to exist, (b) eliminate such deficiency
by making 6 consecutive mandatory prepayments of principal on the revolving loan
each of which shall be in the amount of one sixth (1/6th) of the amount of such
borrowing base deficiency commencing on the first monthly date following the
date on which such borrowing base deficiency is determined to exist and
continuing on each monthly date thereafter, or (c) eliminate such borrowing base
deficiency by submitting additional mineral interests to banks on the first
monthly date following the date on which such borrowing base deficiency is
determined to exist for evaluation as borrowing base properties which banks, in
their sole discretion, determine have a value sufficient to increase the
borrowing base by at least the amount of the borrowing base deficiency. If by
the first scheduled borrowing base redetermination EXCO has not raised a minimum
of $10.0 million in additional cash equity, then, beginning July 20, 1998 and on
the twentieth day of each month thereafter, EXCO will be required to amortize
the then outstanding debt balance by applying 75% of the previous month's net
revenues to the Credit Facility. The Credit Facility matures on February 11,
2000.
EXCO's next borrowing base redetermination is scheduled for no later
than July 1, 1998, and semi-annually thereafter. EXCO may seek additional
borrowing capacity at that time for its development drilling program. However,
there is no assurance that the current development program will result in
increased collateral values or that such values will enable EXCO to borrow the
funds needed to continue the program.
The Credit Facility contains a number of covenants affecting EXCO's
liquidity and capital resources, including restrictions on EXCO's ability to
incur indebtedness at any time in an amount exceeding $100,000 or to pledge
assets outside of the Credit Facility, EXCO's maintenance of a minimum net worth
and restrictions on the payment of dividends on EXCO's capital stock.
Need to Raise Additional Capital
The growth of EXCO's business will require substantial capital on a
continuing basis. There is no assurance that any such required additional funds
would be available on satisfactory terms and conditions, if at all. There is
also no assurance that EXCO will not pursue, from time to time, opportunities to
acquire oil and natural gas properties and businesses that may utilize the
capital currently expected to be available for its present operations. The
amount and timing of EXCO's future capital requirements, if any, will depend
upon a number of factors, including drilling costs, transportation costs,
equipment costs, marketing expenses, staffing levels and competitive conditions,
and any purchases or dispositions of assets, many of which are not within EXCO's
control. Failure to obtain any required additional financing could materially
adversely affect the growth, cash flow and earnings of EXCO. In addition, EXCO's
pursuit of additional capital could result in the incurrence of additional debt
or potentially dilutive issuances of additional equity securities.
29
<PAGE> 32
INFLATION AND CHANGING PRICES
The impact of inflation, as always, is difficult to assess. In 1997 and
through the first quarter of 1998, EXCO has experienced a weakness in prices
received for its oil and natural gas production. EXCO cannot anticipate whether
the present level of inflation will remain, however, a sudden increase in
inflation and/or an increase in operating costs or drilling costs coupled with a
continuation of low oil prices could have an adverse effect on the operations of
EXCO.
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 recently 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 installed and operational on or before May 31, 1998.
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.
30
<PAGE> 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
31
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXCO RESOURCES, INC.
FINANCIAL STATEMENTS
Nine Months Ended December 31, 1995
and Years Ended December 31, 1996 and 1997
CONTENTS
<TABLE>
<S> <C>
Audited Financial Statements
Report of Independent Auditors....................................................................... 33
Balance Sheets....................................................................................... 35
Statements of Operations............................................................................. 36
Statements of Cash Flows............................................................................. 37
Statements of Changes in Stockholders' Equity........................................................ 38
Notes to Financial Statements........................................................................ 39
Pro Forma Combined Condensed Financial Statements (unaudited)
Pro Forma Combined Condensed Balance Sheets.......................................................... 50
Pro Forma Combined Condensed Statement of Operations................................................. 51
Notes to Unaudited Pro Forma Combined Condensed Financial Statements................................. 52
Financial Statements of Business Acquired
Maverick County Properties:
Report of Independent Auditors....................................................................... 55
Statements of Operating Revenues and Direct Operating Expenses....................................... 56
Notes to Statements of Operating Revenues and Direct Operating Expenses.............................. 57
</TABLE>
32
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EXCO Resources, Inc.
We have audited the accompanying balance sheet of EXCO Resources, Inc., as of
December 31, 1997, and the related statements of operations, cash flows, and
changes in stockholders' equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EXCO Resources, Inc., at
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, EXCO Resources, Inc. has
given retroactive effect to the change in accounting for oil and gas properties
from the successful efforts method to the full cost method.
/s/ ERNST & YOUNG LLP
-----------------------
ERNST & YOUNG LLP
Dallas, Texas
February 11, 1998
33
<PAGE> 36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EXCO Resources, Inc.
We have audited the accompanying balance sheet of EXCO Resources, Inc. as of
December 31, 1996, and the related statements of operations, cash flows and
changes in stockholders' equity for the nine months ended December 31, 1995 and
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EXCO Resources, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
nine months ended December 31, 1995 and year ended December 31, 1996, in
conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, EXCO Resources, Inc. has
given retroactive effect to the change in accounting for all oil and gas
properties from the successful efforts method to the full cost method.
/s/ BELEW AVERITT LLP
----------------------
BELEW AVERITT LLP
Dallas, Texas
March 13, 1997, except Note 2, as to
which the date is February 11, 1998
34
<PAGE> 37
EXCO RESOURCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
------- ------
(In thousands, except per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................ $ 46 $ 496
Accounts receivables:
Oil and gas sales ........................................... 155 71
Joint interest .............................................. 171 155
Other ....................................................... 1 5
------- -------
Total current assets ................................... 373 727
Oil and gas properties (full cost accounting method):
Undeveloped oil and gas properties .............................. 55 36
Proved developed oil and gas properties ......................... 5,997 4,267
------- -------
6,052 4,303
Allowance for depreciation, depletion, and amortization ......... (5,303) (3,830)
------- -------
Oil and gas properties, net ..................................... 749 473
Office and field equipment, net ................................. 104 70
------- -------
Total assets ........................................... $ 1,226 $ 1,270
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 352 $ 262
Joint interest prepayments ...................................... 31 0
Revenues and royalties payable .................................. 95 50
Note payable .................................................... 150 0
Current maturities of long-term debt ............................ 30 16
------- -------
Total current liabilities .............................. 658 328
Long-term debt, less current maturities .............................. 36 15
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Outstanding shares - None ................................... -- --
Common stock, $.01 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 805,300 and 1,005,300,
at December 31, 1996 and 1997, respectively ................. 8 10
Additional paid-in capital ...................................... 9,118 917
Retained earnings (deficit), as adjusted for quasi-reorganization
at December 31, 1997 ........................................ (8,594) 0
------- -------
Total stockholders' equity ........................................... 532 927
------- -------
Total liabilities and stockholders' equity ........................... $ 1,226 $ 1,270
======= =======
</TABLE>
See accompanying notes.
35
<PAGE> 38
\
EXCO RESOURCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-----------------------------------------
1995 1996 1997
------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES:
Oil and natural gas ................................... $ 560 $ 872 $ 670
Other income .......................................... 76 39 38
Gain (loss) on disposition of property and equipment... -- -- (10)
------- ------- -------
Total revenues ............................... 636 911 698
COST AND EXPENSES:
Oil and gas production ................................ 333 429 322
Depreciation, depletion and amortization .............. 92 114 84
General and administrative ............................ 366 373 486
Abandoned acquisition ................................. -- 303 --
Interest .............................................. 5 18 11
------- ------- -------
Total cost and expenses ...................... 796 1,237 903
------- ------- -------
Income (loss) before income taxes .......................... (160) (326) (205)
Income tax expense (benefit) ............................... -- -- --
Net income (loss) .......................................... $ (160) $ (326) $ (205)
======= ======= =======
Basic and diluted earnings per share ....................... $ (.24) $ (.43) $ (.25)
======= ======= =======
Weighted average number of common and
common equivalent shares outstanding ..................... 675 765 806
======= ======= =======
</TABLE>
See accompanying notes.
36
<PAGE> 39
EXCO RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------------
1995 1996 1997
------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................. $(160) $(326) $(205)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amortization ................. 92 114 84
Stock compensation expense ............................... -- 23 --
Loss (gain) on disposition and abandonment of
property and equipment ................................. 36 2 10
Effect of changes in:
Accounts receivable .................................. 71 34 100
Other current assets ................................. -- -- (4)
Accounts payable and other current liabilities: ...... (1) (155) (166)
----- ----- -----
Net cash provided by (used in) operating activities ........... 38 (308) (181)
INVESTING ACTIVITIES:
Additions to property and equipment ........................... (183) (27) (100)
Proceeds from disposition of property and equipment ........... 39 3 304
----- ----- -----
Net cash providied by (used in) investing activities .......... (144) (24) 204
FINANCING ACTIVITIES:
Proceeds from note payable and long-term debt ................. 300 150 --
Payments on long-term debt .................................... (119) (18) (23)
Payments on note payable ...................................... -- (200) (150)
Proceeds from issuance of common stock ........................ -- 225 600
----- ----- -----
Net cash provided by financing activities ..................... 181 157 427
----- ----- -----
Net increase (decrease) in cash ............................... 75 (175) 450
Cash at beginning of year ..................................... 146 221 46
----- ----- -----
Cash at end of year ........................................... $ 221 $ 46 $ 496
===== ===== =====
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid ................................................. $ 5 $ 18 $ 11
===== ===== =====
Income taxes paid ............................................. $ -- $ -- $ --
===== ===== =====
</TABLE>
See accompanying notes.
37
<PAGE> 40
EXCO RESOURCES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
ADDITIONAL RETAINED TOTAL
NUMBER OF PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------------ ------------- ------------ ----------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance on March 31, 1995 .............. 675 $ 7 $ 8,871 $(8,108) $ 770
Net loss .......................... -- -- -- (160) (160)
------- ------- ------- ------- -------
Balance on December 31, 1995 ........... 675 7 8,871 (8,268) 610
Shares issued upon exercise
of stock options ................ 120 1 224 -- 225
Common stock issued ............... 10 -- 23 -- 23
Net loss .......................... -- -- -- (326) (326)
------- ------- ------- ------- -------
Balance on December 31, 1996 ........... 805 8 9,118 (8,594) 532
Common stock issued ............... 200 2 598 -- 600
Net loss .......................... -- -- -- (205) (205)
Adjustment for quasi-reorganization
as of December 31, 1997 ......... -- -- (8,799) 8,799 --
------- ------- ------- ------- -------
Balance on December 31, 1997 ........... 1,005 $ 10 $ 917 $ -- $ 927
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
38
<PAGE> 41
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
EXCO Resources, Inc., (the "Company"), a Texas corporation, was formed in 1955.
The Company's operations consist primarily of acquiring interests in producing
oil and gas properties located in the continental United States. The Company
also acts as the operator on certain of these properties and receives overhead
reimbursement fees as a result.
On December 19, 1997, a new stockholder (the "Buyer") took control of the
Company and its management under an option agreement, and a separate stock
purchase agreement between the Buyer and certain shareholders of the Company
(the "Sellers"), whereby the Buyer purchased certain outstanding common stock
from the Sellers.
QUASI-REORGANIZATION
Effective December 31, 1997, the Company effected a quasi-reorganization through
the application of $8,799,000 of its additional paid-in capital account to
eliminate its accumulated deficit. The Company'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. The Company'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
the Company were not adjusted in connection with the quasi-reorganization.
YEAR-END CHANGE
On February 13, 1996, the Company changed its fiscal year-end from March 31 to
December 31 effective December 31, 1995.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, the Company is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
during the reporting period. Actual results may differ from management's
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of 3 months
or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash and trade receivables. The Company
places its cash with high credit quality financial institutions. The Company
sells oil and gas to various customers. In addition, the Company participates
with other parties in the drilling, completion, and operation of oil and gas
wells. Substantially all of the Company's accounts receivable are due from
either purchasers of oil, natural gas, or natural gas liquids or participants in
oil and gas wells for which the Company
39
<PAGE> 42
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
serves as the operator. Generally, operators of oil and gas properties have the
right to offset future revenues against unpaid charges related to operated
wells. Oil and gas sales are generally unsecured. Credit losses are provided for
in the financial statements and have been within management's expectations. The
allowance for doubtful accounts receivable aggregated $20,000 and $18,000 at
December 31, 1996 and 1997, respectively.
OIL AND GAS PROPERTIES
Oil and gas properties are recorded at cost using the full cost method of
accounting, as prescribed by the Securities and Exchange Commission (the "SEC").
Under the full cost method, all costs associated with the acquisition,
exploration or development of oil and gas properties are capitalized as part of
the full cost pool.
Depreciation, depletion, and amortization of evaluated oil and gas properties
are provided using the unit-of-production method based on total proved reserves,
as determined by independent petroleum reservoir engineers.
Sales, dispositions, and other oil and gas property retirements are accounted
for as adjustments to the full cost pool, with no recognition of gain or loss
unless such disposition would significantly alter the amortization rate.
OVERHEAD REIMBURSEMENT FEES
Fees from overhead charges billed to working interest owners, including the
Company, of $115,000, $138,000, and $136,000 for the nine months ended December
31, 1995, and for the years ended December 31, 1996 and 1997, respectively, have
been classified as a reduction of general and administrative expenses in the
accompanying statements of operations. For the nine months ended December 31,
1995 and the year ended December 31, 1996, these amounts were previously shown
as revenues.
INCOME TAXES
Deferred income taxes are accounted for using the liability method in accounting
for income taxes.
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 128
requirements. The effect of the adoption of Statement No. 128 did not have a
material impact.
REVERSE STOCK SPLIT
At the Company's 1996 Annual Meeting of Shareholders (the "1996 Annual
Meeting"), the shareholders of the Company approved an amendment to the
Company's Articles of Incorporation (the "Articles of Incorporation"),
authorizing a one-for-five reverse stock split of the Company'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 split.
40
<PAGE> 43
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
PREFERRED STOCK
At the 1996 Annual Meeting, the shareholders also authorized the issuance of up
to 10,000,000 shares of preferred stock, $.01 par value per share (the
"Preferred Stock"), that the Board of Directors may issue from time to time in
one or more series. With respect to each series of Preferred Stock, the
amendment authorizes the Board to fix and determine by resolution the number of
shares of each series, the designation thereof and all rights and preferences
including voting, dividend, conversion, redemption and liquidation rights. The
Board of Directors deemed it in the best interest of the Company to provide for
corporate planning and to have shares available for future equity financings
through issuance to the general public, future acquisitions, stock dividends or
splits or for other corporate purposes for which the issuance of preferred
shares may be advisable.
2. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND GAS OPERATIONS
In the fourth quarter of 1997, the Company changed from the successful efforts
method to the full cost method of accounting for its oil and gas operations. All
prior year's financial statements presented herein have been restated to reflect
the change.
During the past ten years, the Company has incurred minimal exploration and
acquisition costs, has liquidated substantially all its properties and completed
"out of court" debt restructurings. Recently there was a change in control of
ownership of the Company and new management was appointed. New management views
the Company as a new company and believes the past operations are insignificant
and not relevant to the Company's future plans.
New management believes that the change in accounting for oil and gas properties
is to a preferable method because the full cost method will more appropriately
reflect the Company's future operations which will result from the significant
management changes at the Company. Further, new management does not believe that
the use of the successful efforts method of accounting is appropriate for a
small to medium size acquisition, development and exploitation company.
41
<PAGE> 44
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
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 nine months ended December 31, 1995 and the year ended December 31, 1996
are as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
STATEMENTS OF OPERATIONS:
Net loss as previously reported ................................................ $(344) $(329)
Adjustment for effect of a change in accounting principle
that is applied retroactively ............................................ 184 3
----- -----
Net loss as adjusted ........................................................... $(160) $(326)
===== =====
PER SHARE AMOUNTS:
Net loss as previously reported ................................................ $(.51) $(.43)
Adjustment for effect of a change in accounting principle
that is applied retroactively ............................................ .27 --
----- -----
Net loss as adjusted ........................................................... $(.24) $(.43)
===== =====
Common shares used in per share calculation .................................... 675 765
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY:
Balance at beginning of period as previously reported .......................... $ 974
Add adjustment to retained earning (deficit) for the cumulative
effect on prior years of applying retroactively the full cost method ...... (204)
-----
Balance at beginning of period, as adjusted .................................... 770 $ 610
Net loss ....................................................................... (160) (326)
Shares issued upon exercise of stock options ................................... -- 225
Common stock issued ............................................................ -- 23
----- -----
Balance at end of year ......................................................... $ 610 $ 532
===== =====
</TABLE>
3. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---- ----
<S> <C> <C>
Notes payable ......... $ 66 $ 31
Less current maturities (30) (16)
---- ----
Long-term debt ........ $ 36 $ 15
==== ====
</TABLE>
NATIONSBANK CREDIT AGREEMENT
On February 11, 1998, the Company entered into a credit agreement with
NationsBank of Texas, N.A., ("NationsBank") (the "Credit Agreement"). The Credit
Agreement has a notional amount to $50 million, subject to borrowing base
limitations, based on the value of the Company's oil and gas properties, as
determined by the lenders from time to time. Under the Credit Agreement, the
Company is required to pay a fee equal to .25% on any accepted increase in the
borrowing base in excess of the previously determined borrowing base and a
commitment fee of .30%
42
<PAGE> 45
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
to .425% based on the ratio of outstanding credit to the borrowing base. The
maturity date of the Credit Agreement is February 11, 2000.
The Credit Agreement provides that if the Company's outstanding credit is less
than $5 million, then the Company's interest rate would be LIBOR plus 1.5%. If
the Company's outstanding credit is greater than $5 million, then the Credit
Agreement provides that the Company's interest rate would range from
NationsBank's prime rate to LIBOR plus between 1% and 1.75% based on the ratio
of outstanding credit to the borrowing base.
There are no scheduled principal payments due on the Credit Agreement until
maturity. However, the borrowing base will be redetermined on or around April 1
and October 1 of each year. A borrowing base deficiency is created in the event
that the outstanding loan balances exceed the borrowing base, as determined by
the lenders in their sole discretion. Upon such event the borrowing base
deficiency must be repaid by (i) mandatory reductions of the deficiency over a
period of not more than 6 months; (ii) making a lump sum payment equal to the
deficiency; or (iii) providing additional collateral acceptable to lenders in
their sole discretion sufficient to increase the borrowing base and eliminate
the deficiency.
Borrowings under the Credit Agreement are secured by first and prior liens
covering 90% of the recognized value of all proved mineral interests owned by
the Company. The Credit Agreement contains various restrictive covenants,
including limitations on the granting of liens, restrictions on the issuance of
additional debt, requirements to maintain a net worth of at least $.5 million
and to maintain a current ratio of not less than 1.0 to 1.0, and currently
prohibits the payment of dividends on the Company's capital stock.
4. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards ("NOLs")
for income tax purposes that expire beginning in 1998. Utilization of the NOLs
is significantly restricted because of a change in ownership, as defined by the
Tax Reform Act of 1986, of the Company, which occurred December 19, 1997, as
described in Note 1. The Company estimates that approximately $1.9 million of
the NOLs will become available in the future at the rate of approximately
$127,000 per year through 2012. The Company also has available statutory
depletion carryforwards of approximately $927,000. For financial reporting
purposes, a valuation allowance has been recognized to offset the deferred tax
assets related to carryforwards prior to the Company's quasi-reorganization.
When realized, the tax benefit for those carryforwards will be credited to
additional paid-in capital.
43
<PAGE> 46
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------ ------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Book basis of oil and gas properties in excess of tax basis 136 189
------ ------
Total deferred tax liabilities ........................ 136 189
DEFERRED TAX ASSETS:
Net operating loss carryforwards .......................... 2,375 649
Credit carryforwards ...................................... 122 36
Statutory depletion carryforwards ......................... 315 315
Other ..................................................... 7 6
Valuation allowance for deferred tax assets ............... (2,683) (817)
------ ------
Net deferred tax assets ................................... 136 189
Net deferred tax liabilities .............................. -- --
====== ======
</TABLE>
The following is a reconciliation, stated as a percentage of pretax income
(loss) taxable at the corporate level, of the U.S. statutory federal income tax
rate to the Company's effective tax rate:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate .......... 34% 34% 34%
Adjustments to the valuation allowance (34%) (34%) (34%)
--- --- ---
Effective tax rate ................... -- -- --
=== === ===
</TABLE>
5. COMMON STOCK OPTIONS
The Company applies Accounting Principles Board Opinion 25 in accounting for its
fixed and performance-based stock compensation plans and disclosure requirements
of SFAS 123. Accordingly, no compensation costs have been recognized for either
of the plans.
During the nine month period ended December 31, 1995, the Company issued 120,000
options to purchase EXCO Common Stock at $1.875 per share. These options were
exercised in 1996. In December 1997, as part of the change in control described
in Note 1, all outstanding options under the Company's stock option plan and
directors option plan were canceled.
6. RELATED PARTY TRANSACTIONS
In the past, certain directors of the Company, and the companies with which they
are affiliated, participated in oil and gas joint ventures with the Company upon
the same terms and conditions as unrelated parties. In addition, the Company had
purchased certain oil and gas prospects as well as drilling services and oil
field supplies and services in the normal course of business from companies in
which certain directors have financial interest. No significant purchases were
made during the nine month period ended December 31, 1995, and the years ended
December 31, 1996 and 1997.
44
<PAGE> 47
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
7. COMMITMENTS AND CONTINGENCIES
The Company leased office space under an operating lease that expired in
November, 1996. Rent expense was approximately $32,000, $41,000 and $63,000 for
the nine months ended December 31, 1995, and the years ended December 31, 1996
and 1997, respectively. As of December 31, 1997, the Company moved its offices
to a new location under an operating lease that expires in December, 1999. The
rent under the new lease is $6,440 per month plus a CPI increase in year two.
The Company had entered into an employment agreement with Mr. Charles Gleeson
for the position of President and Chief Executive Officer of the Company. The
agreement provided for a minimum annual salary, adjusted for incentives, as
determined by the Board of Directors for the period June 1, 1996 through June 1,
1999. The Company had thought to terminate the employment agreement if the
Company was unsuccessful in raising a minimum of $9,000,000 in a registered
public offering. Mr. Gleeson's employment agreement was terminated in December
1997, as a result of the change in control described in Note 1.
8. ENVIRONMENTAL REGULATION
Various Federal, state and local laws and regulations covering discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect the Company's operations and costs of oil and gas
exploitation, development and production operations. It is not anticipated that
the Company will be required in the near future to expend amounts material in
relation to its total capital expenditure program by reason of environmental
laws and regulations. Because such laws and regulations are constantly being
changed, the Company is unable to predict the conditions and other factors, over
which the Company does not exercise control, that may give rise to environment
liabilities.
9. ABANDONED ACQUISITION
In September 1996, the Company entered into a stock purchase agreement to
acquire Taurus Energy Corp. ("Taurus"), a processor and marketer of natural gas.
In addition, the Company initiated a public stock offering to raise the
$35,000,000 necessary to complete the acquisition.
In connection with these activities, the Company incurred and capitalized
approximately $303,000 of legal, accounting and other costs. In the fourth
quarter of 1996, the Company recognized the abandonment of the proposed Taurus
acquisition and canceled its planned public offering. As a result, the Company
expensed the costs associated with these actions.
10. SUBSEQUENT EVENTS
In addition to the financing agreement described in Note 3, on February 11,
1998, the Company acquired from Osborne Oil Company, Gypsy Production Company,
and other working interest owners, certain oil and gas properties in Maverick
County, Texas (the "Maverick County Properties"). The Maverick County Properties
include 9 gross (7.0 net) producing wells and 2 gross (1.87 net) non-producing
wells which may require recompletions, workovers or abandonment. The Maverick
County Properties include 360 gross (280 net) developed acres and 3,384 gross
(2,843 net) undeveloped acres. The purchase price consisted of cash of
approximately $760,200. Operating revenues for the acquired properties for
1997 were $279,000.
45
<PAGE> 48
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
11. OIL AND GAS PRODUCING ACTIVITIES
The results of operations from the Company's oil and gas producing activities
are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------------------
1995 1996 1997
-------------------------------------------------------
<S> <C> <C> <C>
Oil and natural gas sales ................... $ 560 $ 872 $ 670
Production costs ............................ (333) (429) (322)
Depreciation, depletion and amortization .... (75) (87) (63)
Income tax expense .......................... -- -- --
----- ----- -----
$ 152 $ 356 $ 285
----- ----- -----
</TABLE>
Costs incurred in oil and gas producing activities are as follows (in thousands,
except per equivalent barrel amounts):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ -------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Property acquisition costs ............ $ 56 $ 2 $ 2
Development costs ..................... 71 17 74
Exploration costs ..................... 37 -- --
Production costs ...................... 333 429 322
Depreciation, depletion and
amortization per equivalent barrel... 1.54 1.46 1.41
</TABLE>
All of the Company's oil and gas revenues are from proved developed properties
located in the United States.
The Company's oil and gas production is sold to various purchasers. During the
nine months ended December 31, 1995, sales of oil and gas to 3 purchasers
accounted for 20%, 13% and 10% of consolidated gross revenues, respectively.
During the year ended December 31, 1996, sales of oil and gas to 2 purchasers
accounted for 26% and 15% of consolidated gross revenues, respectively. During
the year ended December 31, 1997, sales of oil and gas to 3 purchasers accounted
for 22%, 19% and 14% of consolidated gross revenues, respectively. Management
believes that the loss of these purchasers would not have a material impact on
the Company's consolidated financial condition or results of operations.
In an effort to reduce the effects of the volatility of the price of crude oil
and natural gas on the Company's operations, management has adopted a policy of
hedging oil and gas prices whenever such prices are in excess of the prices
anticipated in the Company's operating budget and profit plan through the use of
commodity futures, options, and swap agreements. Hedging transactions require
the approval of the Board of Directors. There were no outstanding contracts at
December 31, 1997.
12. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
(UNAUDITED)
The Company retains independent engineering firms to provide annual year-end
estimates of the Company's future net recoverable oil, gas, and natural gas
liquids reserves. Estimated proved net recoverable reserves as shown below
include only those quantities that can be expected to be commercially
recoverable at prices and costs in effect at the
46
<PAGE> 49
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
balance sheet dates under existing regulatory practices and with conventional
equipment and operating methods. Proved developed reserves represent only those
reserves to be recovered through existing wells. Proved undeveloped reserves
include those reserves expected to be recovered from new wells on undrilled
acreage or from existing wells on which a relatively major expenditure is
required for recompletion.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL (Bbl) GAS (Mcf) BOE*
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
MARCH 31, 1995 .............................. 237 2,851 712
Purchase of reserves in place ........... 8 2,152 367
New discoveries and extensions .......... 13 118 32
Revisions of previous estimates ......... (91) 16 (88)
Production .............................. (19) (180) (49)
Sales of reserves in place .............. -- -- --
------ ------ ------
DECEMBER 31, 1995 ........................... 148 4,957 974
Purchase of reserves in place ........... 2 263 46
New discoveries and extensions .......... 3 -- 3
Revisions of previous estimates ......... 63 (222) 26
Production .............................. (22) (224) (59)
Sales of reserves in place .............. (25) (12) (27)
------ ------ ------
DECEMBER 31, 1996 ........................... 169 4,762 963
Purchase of reserves in place ........... -- -- --
New discoveries and extensions .......... -- -- --
Revisions of previous estimates ......... (16) (255) (59)
Production .............................. (14) (181) (44)
Sales of reserves in place .............. (81) -- (81)
------ ------ ------
DECEMBER 31, 1997 ........................... 58 4,326 779
====== ====== ======
</TABLE>
ESTIMATED QUANTITIES OF PROVED DEVELOPED RESERVES
<TABLE>
<CAPTION>
OIL (Bbl) GAS (Mcf) BOE*
----------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
December 31, 1995................................................. 141 2,818 611
December 31, 1996................................................. 162 2,483 576
December 31, 1997................................................. 57 2,341 447
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of natural
gas to 1 Bbl of oil.
The following is a summary of a standardized measure of discounted net cash
flows related to the Company's proved oil, gas, and natural gas liquids
reserves. The information presented is based on a valuation of proved reserves
using discounted cash flows based on year-end prices, costs, and economic
conditions and a 10% discount rate. The additions to proved reserves from new
discoveries and extensions could vary significantly from year to year;
additionally, the impact of changes to reflect current prices and costs of
reserves proved in prior years could also
47
<PAGE> 50
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
be significant. Accordingly, the information presented below should not be
viewed as an estimate of the fair value of the Company's oil and gas properties,
nor should it be considered indicative of any trends.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
-------- --------
(In thousands)
<S> <C> <C>
Future cash inflows ........................................ $20,296 $10,115
Future production and development costs .................... 5,650 3,130
------- -------
Future net cash flows before income taxes .................. 14,646 6,985
Discount of future net cash flows at 10% per annum ......... 6,327 2,957
------- -------
Discounted future net cash flows before income taxes ....... 8,319 4,028
Future income taxes, net of discount at 10% per annum ...... -- 163
------- -------
Discounted future net cash flows after income taxes ........ $ 8,319 $ 3,865
======= =======
</TABLE>
During recent years, there have been significant fluctuations in the prices paid
for crude oil in the world markets. This situation has had a destabilizing
effect on crude oil's posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The weighted average
prices of oil and gas at December 31, 1996 and 1997, used in the above table,
were $24.29 and $16.74 per Bbl, respectively, and $3.40 and $2.11 per Mcf,
respectively.
The following are the principal sources of change in the standardized measure of
discounted future net cash flows:
CHANGES IN STANDARDIZED MEASURE
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------
1995 1996 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Sales and transfers of oil and gas produced, net of production costs ........... $ (227) $ (443) $ (348)
Net changes in prices and production costs ..................................... 136 3,980 (3,398)
Extensions and discoveries, net of future development and production costs ..... 194 47 --
Development costs during the period ............................................ -- -- 45
Revisions of previous quantity estimates ....................................... (887) 319 (845)
Sales of reserves in place ..................................................... -- (131) (577)
Purchases of reserves in place ................................................. 1,437 142 --
Accretion of discount before income taxes ...................................... 234 400 832
Net change in income taxes ..................................................... -- -- (163)
------- ------- -------
Net change ..................................................................... $ 887 $ 4,314 $(4,454)
======= ======= =======
</TABLE>
48
<PAGE> 51
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On February 11, 1998, EXCO Resources, Inc. (the "Company") acquired from Osborne
Oil Company, Gypsy Production Company, and other working interest owners,
certain oil and gas properties in Maverick County, Texas (the "Maverick County
Properties"). The Maverick County Properties include 9 gross (7.0 net) producing
wells, 2 gross (1.87 net) non-producing wells which may require recompletions,
workovers or abandonment. The Maverick County Properties include 360 gross (280
net) developed acres and 3,384 gross (2,843 net) undeveloped acres. The purchase
price consisted of cash of approximately $760,200.
The acquisition was funded through borrowings made under the Company's credit
facility with NationsBank (the "Borrowings"), and cash from working capital.
The accompanying pro forma combined condensed financial statements are based on
the historical financial statements of the Company for the year ended December
31, 1997, included elsewhere herein. The pro forma combined condensed financial
statements are also based, in part, on the historical statements of operating
revenues and direct operating expenses of the Maverick County Properties. Such
statements of operating revenues and direct operating expenses are included
elsewhere herein.
The Pro Forma Combined Condensed Balance Sheet as of December 31, 1997, assumes
the acquisition of the Maverick County Properties and the Borrowings had been
consummated on that date. The Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 1997, has been prepared assuming the
acquisition of the Maverick County Properties and the Borrowings had been
consummated on January 1, 1997.
The pro forma adjustments are based upon available information and assumptions
that management of the Company believes are reasonable. The pro forma combined
condensed financial statements do not purport to represent the financial
position or results of operations of the Company which would have occurred had
such transactions been consummated on the dates indicated or the Company's
financial position or results of operations for any future date or period. These
pro forma combined condensed financial statements and notes thereto should be
read in conjunction with the historical financial statements and notes thereto
described above.
49
<PAGE> 52
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMPANY PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------------- -------------------- ----------------
(In thousands, except per share data)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ................................................ $ 496 $ 600 (1) $ 336
(760) (2)
Accounts receivable and other assets ................ 231 -- 231
------- ------- -------
Total current assets ............................ 727 (160) 567
Net property and equipment .............................. 543 760 (2) 1,303
------- ------- -------
$ 1,270 $ 600 $ 1,870
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............ $ 312 $ -- $ 312
Current maturities of long-term debt ................ 16 -- 16
------- ------- -------
Total current liabilities ....................... 328 328
Long-term debt, less current maturities ................. 15 600 (1) 615
------- ------- -------
Total liabilities ....................................... 343 600 943
------- ------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value .................... -- -- --
Common stock, $.01 par value ....................... 10 -- 10
Additional paid-in capital ......................... 917 -- 917
Retained earnings .................................. -- -- --
------- ------- -------
Total stockholders' equity ...................... 927 -- 927
------- ------- -------
$ 1,270 $ 600 $ 1,870
======= ======= =======
Shares of Common Stock outstanding ...................... 1,005 -- 1,005
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
50
<PAGE> 53
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MAVERICK
COUNTY
COMPANY PROPERTIES PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------------- --------------- --------------- ----- --------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Oil and natural gas ........................ $ 670 $ 279 $ -- $ 949
Other ...................................... 28 -- -- 28
------- ------- ------- -------
698 279 -- 977
EXPENSES:
Oil and gas production ..................... 322 170 -- 492
Depletion, depreciation and amortization ... 84 -- 56 (3) 140
General and administrative ................. 486 -- -- 486
Interest and other ......................... 11 -- 44 (4) 55
------- ------- ------- -------
Income (loss) before income taxes .......... $ (205) $ 109 $ (100) $ (196)
======= ======= ======= =======
Basic and diluted EPS ...................... $ (.25) $ (.24)
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding ........... 806 -- -- 806
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
51
<PAGE> 54
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
A. PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF THE MAVERICK COUNTY
PROPERTIES
The accompanying Pro Forma Combined Condensed Balance Sheet has been prepared as
if the acquisition of the Maverick County Properties and the Borrowings had been
consummated on December 31, 1997, and reflects the following adjustments:
(1) To record the Company's borrowing of $600,000 under the NationsBank
credit facility.
(2) To record the acquisition of the Maverick County Properties in exchange
for consideration of approximately $760,200 in cash.
The accompanying Pro Forma Combined Condensed Statement of Operations has been
prepared as if the acquisition of the Maverick County Properties and the
Borrowings had been consummated on January 1, 1997 and reflects the following
adjustments:
(3) To record incremental depletion expense as a result of the acquisition
of the Maverick County Properties.
(4) To record interest expense on the Borrowings, based on a 7.30% interest
rate. An increase of 1/8 of 1% in the interest rate would increase
annual interest expense on the borrowings by $750.
52
<PAGE> 55
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
B. PRO FORMA COMBINED SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED
MEASURE INFORMATION
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of the pro forma combined
proved oil and gas reserves of the Company after giving effect to the
acquisition of the Maverick County Properties, as of December 31, 1997. All
reserves are located in the United States. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly, the
estimates are expected to change as future information becomes available. The
estimates have been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL (Bbls) GAS (Mcf) BOE*
---------- --------- ---------
<S> <C> <C> <C>
Proved reserves ................... 66,126 6,773,990 1,195,124
========= ========= =========
Proved developed reserves ......... 56,656 3,987,494 721,238
========= ========= =========
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of natural
gas to 1 Bbl of oil.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.
The Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of the Company's oil and gas reserves. An estimate of
fair value would also take into account, among other things, the recovery of
reserves not presently classified as proved, the value of unproved properties,
and consideration of expected future economic and operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash inflows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine pre-tax cash inflows. Future
income taxes are computed by applying the statutory rate (based on the current
tax law adjusted for permanent differences and tax credits) to the excess of
pre-tax net cash flows over the Company's income tax basis of its oil and gas
properties. Future net cash flows are discounted using a 10% annual discount
rate to arrive at the Standardized Measure.
The pro forma Standardized Measure of discounted future net cash flows relating
to the Company's proved oil and gas reserves at December 31, 1997, follows (in
thousands):
<TABLE>
<S> <C>
Future cash inflows.............................................................................. $ 14,812
Future production and development costs.......................................................... 5,363
---------------
Future net cash flows before income taxes........................................................ 9,449
Discount of future net cash flows at 10% per annum............................................... 3,874
---------------
Discounted future net cash flows before income taxes............................................. 5,575
Future income taxes, net of discount at 10% per annum............................................ 329
Pro forma discounted future net cash flows after income taxes.................................... 5,246
===============
</TABLE>
53
<PAGE> 56
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The future cash flows shown above include amounts attributable to proved
undeveloped reserves requiring approximately $1,054,172 of future development
costs. If these reserves are not developed, the standardized measure of
discounted future net cash flows as of December 31, 1997, shown above would be
reduced significantly.
Estimates of economically recoverable oil and gas reserves and of future net
revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of oil and gas may differ materially from the amounts
estimated.
The weighted average prices of oil and gas at December 31, 1997, used in the
calculation of the pro forma Standardized Measure were $16.77 barrel and $2.02
per Mcf, respectively.
54
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
EXCO Resources, Inc.
We have audited the accompanying statements of operating revenues and direct
operating expenses of the Maverick County Properties (as defined in Note 1 to
the accompanying statements) for the years ended December 31, 1996 and 1997.
These statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of operating revenues and
direct operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operating revenues and direct operating expenses. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of operating revenues and direct operating expenses
were prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of revenues and expenses of the Maverick County Properties.
In our opinion, the statements of operating revenues and direct operating
expenses referred to above present fairly, in all material respects, the
operating revenues and direct operating expenses of Maverick County Properties
for the years ended December 31, 1996 and 1997 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
-------------------------
ERNST & YOUNG LLP
Dallas, Texas
February 11, 1998
55
<PAGE> 58
MAVERICK COUNTY PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
STATEMENTS OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
------- ---------
(In thousands)
<S> <C> <C>
Oil and natural gas sales ....................... $397 $279
Direct operating expenses ....................... 206 170
---- ----
Excess of revenues over direct operating expenses $191 $109
==== ====
</TABLE>
See accompanying notes to statements of operating revenues and direct operating
expenses.
56
<PAGE> 59
MAVERICK COUNTY PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION
On February 11, 1998, EXCO Resources, Inc. (the "Company") acquired from Osborne
Oil Company, Gypsy Production Company, and other working interest owners,
certain oil and gas properties in Maverick County, Texas (the "Maverick County
Properties"). The Maverick County Properties include 9 gross (7.0 net) producing
wells and 2 gross (1.87 net) non-producing wells which may require
recompletions, workovers or abandonment. The Maverick County Properties include
360 gross (280 net) developed acres and 3,384 gross (2,843 net) undeveloped
acres. The purchase price consisted of cash of approximately $760,200.
The acquisition was funded through borrowings made under the Company's credit
facility with NationsBank, and cash from working capital.
The accompanying financial statements present the operating revenues and direct
operating expenses of the Maverick County Properties. The operating revenues and
direct operating expenses presented herein relate only to the interests in the
producing oil and gas properties acquired and do not represent all of the oil
and gas operations of the sellers. Direct operating expenses include the actual
costs of maintaining the producing properties and their production, but do not
include charges for depletion, depreciation, and amortization; federal and state
income taxes; interest; or general and administrative expenses. Presentation of
complete historical financial statements for the years ended December 31, 1996
and 1997 is not practicable because the Maverick County Properties were not
accounted for as a separate entity; and therefore, such statements are not
available. The operating revenues and direct operating expenses for the periods
presented may not be representative of future operations.
Revenues in the accompanying statements of operating revenues and direct
operating expenses are recognized on the sales method. Direct operating expenses
are recognized on an accrual basis.
2. SUPPLEMENTAL OIL AND GAS RESERVE AND STANDARDIZED MEASURE INFORMATION
RESERVE QUANTITY INFORMATION
The following table presents the Company's estimate of the proved oil and gas
reserves of the Maverick County Properties, all of which are located in the
United States, as of December 31, 1997. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries are
more imprecise than those of producing oil and gas properties. Accordingly, the
estimates are expected to change as future information becomes available. The
estimates have been prepared by independent petroleum reservoir engineers.
<TABLE>
<CAPTION>
OIL (Bbls) GAS (Mcf) BOE*
----------- ---------- -----------
<S> <C> <C> <C>
Proved reserves ................... 8,011 2,447,785 415,975
========= ========= =========
Proved developed reserves ......... 0 1,646,710 274,452
========= ========= =========
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of
natural gas to 1 Bbl of oil.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under
Statement of Financial Accounting Standards No. 69.
57
<PAGE> 60
MAVERICK COUNTY PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
The Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of the oil and gas reserves of the Maverick County
Properties. An estimate of fair value would also take into account, among other
things, the recovery of reserves not presently classified as proved, the value
of unproved properties, and consideration of expected future economic and
operating conditions.
Under the Standardized Measure, future cash flows are estimated by applying
year-end prices, adjusted for fixed and determinable escalations, to the
estimated future production of year-end proved reserves. Future cash flows are
reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Maverick
County Properties are not a separate tax paying entity. Accordingly, the
Standardized Measure for the Maverick County Properties is presented before
deduction of income taxes. Future net cash flows are discounted using a 10%
annual discount rate to arrive at the Standardized Measure.
The Standardized Measure of discounted future net cash flows relating to proved
oil and gas reserves of the Maverick County Properties at December 31, 1997
follows (in thousands):
<TABLE>
<S> <C>
Future cash inflows................................................................................ 4,697
Future production and development costs............................................................ 2,232
-------------
Future net cash flows before income taxes.......................................................... 2,465
Discount of future net cash flows at 10% per annum................................................. 918
-------------
Discounted future net cash flows before income taxes............................................... 1,547
Future income taxes, net of discount at 10% per annum.............................................. 173
-------------
Pro forma discounted future net cash flows after income taxes...................................... 1,374
=============
</TABLE>
Estimates of economically recoverable oil and gas reserves and of future net
revenues are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. The reserve data are
estimates only, are subject to many uncertainties and are based on data gained
from production histories and on assumptions as to geologic formations and other
matters. Actual quantities of gas and oil may differ materially from the amounts
estimated.
The weighted average prices of oil and gas at December 31, 1997 used in the
calculation of the Standardized Measure were $17.00 per barrel and $1.86 per
Mcf, respectively.
58
<PAGE> 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On January 14, 1998, EXCO dismissed Belew Averitt LLP ("Belew") as its
independent auditors and on January 14, 1998 EXCO retained Ernst & Young LLP
("E&Y") as its independent auditors.
Belew's reports on EXCO's financial statements for the fiscal year
ended December 31, 1996, the nine months ended December 31, 1995 and fiscal year
ended March 31, 1995 did not contain an adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles.
The decision to engage E&Y as set forth above and to dismiss Belew was
approved by the Board of Directors of EXCO.
In connection with the audits of the financial statements of EXCO for
the fiscal year ended December 31, 1996, the nine months ended December 31, 1995
and fiscal year ended March 31, 1995, there were no disagreements with Belew on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements, if not
resolved to the satisfaction of Belew, would have caused them to make reference
to the subject matter of the disagreement in connection with their report.
59
<PAGE> 62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the
captions "Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Executive Officers" of EXCO's proxy statement for its 1998
Annual Meeting of Shareholders (the "Proxy Statement") which will be filed with
the Commission pursuant to Regulation 14A under the Exchange Act and is
incorporated herein by reference. The Proxy Statement is expected to be filed
prior to April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" of EXCO's Proxy Statement which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" of EXCO's Proxy
Statement which will be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Executive Compensation -- Director Compensation" and "Certain Relationships and
Related Party Transactions" of EXCO's Proxy Statement which will be filed with
the Commission pursuant to Regulation 14A under the Exchange Act and is
incorporated herein by reference.
60
<PAGE> 63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page 32 to this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is not required under
the related instructions or is inapplicable or because the information
is included in the Financial Statements or related Notes.
3. EXHIBITS
3.1* Restated Articles of Incorporation of EXCO (Exhibit 3.1)
3.2* Bylaws of EXCO, as amended (Exhibit 3.2)
4.1* Restated Articles of Incorporation of EXCO (Exhibit 3.1)
4.2* Bylaws of EXCO, as amended (Exhibit 3.2)
10.1** Credit Agreement among EXCO Resources, Inc., as borrower,
and NationsBank of Texas, N.A., as agent, and financial
institutions listed on Schedule I, dated February 11, 1998
10.3 ** Purchase and Sale Agreement among EXCO Resources, Inc.
and Osborne Oil Company, et al., dated January 27, 1998
(Exhibit 4.1)
16.1*** Letter from Belew Averitt LLP regarding change in
certifying accountant dated January 20, 1998 (Exhibit 16)
18.1 Letter from Ernst & Young LLP regarding change in
accounting principles dated February 11, 1998 (filed
herewith).
23.1 Report of Independent Auditors, Belew Averitt LLP,
contained in Part III on page 34 of this Form 10-K.
23.2 Report of Independent Auditors, Ernst & Young LLP,
contained in Part III on page 33 of this Form 10-K.
23.3 Report of Independent Auditors, Ernst & Young LLP,
contained in Part III on page 55 of this Form 10-K.
27.1 Financial Data Schedule (filed herewith).
------------------
* Filed as the Exhibit shown in parenthesis to EXCO's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996.
** Filed as the Exhibit shown in parentheses to EXCO's Form 8-K
filed February 25, 1998.
*** Filed as the Exhibit shown in parenthesis to EXCO's Form 8-K
filed January 21, 1998.
61
<PAGE> 64
4. REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1997,
EXCO filed the following reports:
(i) A Current Report on Form 8-K, dated December 9, 1997, pursuant
to Item 5 and relating to the execution of a stock option
agreement;
(ii) A Current Report on Form 8-K, dated December 19, 1997,
pursuant to Item 1 and relating to the exercise of the stock
option agreement and a stock purchase agreement leading to a
change of control;
(iii) A Current Report on Form 8-K, dated December 31, 1997,
pursuant to Item 5 and relating to the private placement of
200,000 shares of EXCO's Common Stock.
62
<PAGE> 65
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Dallas, Texas on the
13th of March, 1998.
EXCO RESOURCES, INC.
By: /s/ DOUGLAS H. MILLER
-----------------------------------------------
Douglas H. Miller
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
March 13, 1998 /s/ DOUGLAS H. MILLER
------------------------------------------------
Douglas H. Miller
Chairman of the Board of Directors
and Chief Executive Officer
March 13, 1998 /s/ T.W. EUBANK
------------------------------------------------
T.W. Eubank
President, Director and Treasurer
March 13, 1998 /s/ CHARLES W. GLEESON
------------------------------------------------
Charles W. Gleeson
Director
March 13, 1998 /s/ DAVID N. FITZGERALD
------------------------------------------------
David N. Fitzgerald
Director
March 13, 1998 /s/ J. DOUGLAS RAMSEY
------------------------------------------------
J. Douglas Ramsey
Chief Financial Officer and Vice President
(Principal Financial and Accounting Officer)
63
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Item
----------- ----
<S> <C>
3.1* Restated Articles of Incorporation of EXCO (Exhibit 3.1)
3.2* Bylaws of EXCO, as amended (Exhibit 3.2)
4.1* Restated Articles of Incorporation of EXCO (Exhibit 3.1)
4.2* Bylaws of EXCO, as amended (Exhibit 3.2)
10.1** Credit Agreement among EXCO Resources, Inc., as borrower,
and NationsBank of Texas, N.A., as agent, and financial
institutions listed on Schedule I, dated February 11, 1998
10.3** Purchase and Sale Agreement among EXCO Resources, Inc.
and Osborne Oil Company, et al., dated January 27, 1998
(Exhibit 4.1)
16.1*** Letter from Belew Averitt LLP regarding change in
certifying accountant dated January 20, 1998 (Exhibit 16)
18.1 Letter from Ernst & Young LLP regarding change in
accounting principles dated February 11, 1998 (filed
herewith).
23.1 Report of Independent Auditors, Belew Averitt LLP,
contained in Part III on page 34 of this Form 10-K.
23.2 Report of Independent Auditors, Ernst & Young LLP,
contained in Part III on page 33 of this Form 10-K.
23.3 Report of Independent Auditors, Ernst & Young LLP,
contained in Part III on page 55 of this Form 10-K.
27.1 Financial Data Schedule (filed herewith).
</TABLE>
------------------
* Filed as the Exhibit shown in parenthesis to EXCO's Annual
Report on Form 10-K for the fiscal year ended December 31,
1996.
** Filed as the Exhibit shown in parentheses to EXCO's Form 8-K
filed February 25, 1998.
*** Filed as the Exhibit shown in parenthesis to EXCO's Form 8-K
filed January 21, 1998.
64
<PAGE> 1
EXHIBIT 18.1
February 11, 1998
Mr. Douglas H. Miller, CEO
EXCO Resources, Inc.
5735 Pineland Drive, Suite 235
Dallas, Texas 75231
Dear Mr. Miller:
The financial statements of EXCO Resources, Inc. ("EXCO") at December 31, 1997
and for the year then ended included in its 1997 Form 10-K describes a change in
the method of accounting for oil and gas properties from the successful efforts
to the full cost method.
You have advised us that such change in the method of accounting for oil and gas
properties is based on the following factors:
During the past ten years, EXCO has incurred minimal oil exploration
and acquisition costs, has liquidated substantially all its properties
and completed "out of court" debt restructurings. Recently there was a
change in control of ownership of the Company, and new management was
appointed. New management views EXCO as a new company and believes the
past operations are insignificant and not relevant to EXCO's future
plans.
You have advised us that you believe that the change in accounting for
oil and gas properties is to a preferable method in your circumstances
because the full cost method will more appropriately reflect the
Company's future operations which will result from the significant
management changes at EXCO. Further, new management does not believe
that the use of the successful efforts method of accounting is
appropriate for a small to medium size acquisition, development and
exploitation company in that such method, in these circumstances, does
not fairly present the Company's financial condition or results of
operations.
There are no authoritative criteria for determining a preferable accounting
method for oil and gas properties based on the particular circumstances;
however, we conclude that the change in the method of accounting for oil and gas
properties is to an acceptable alternative method which, bases on your business
judgment to make this change for the reasons cited above, is preferable in your
circumstances.
Very truly yours,
/s/ ERNST & YOUNG LLP
-------------------------
ERNST & YOUNG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 496,000
<SECURITIES> 0
<RECEIVABLES> 226,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 727,000
<PP&E> 4,303,000
<DEPRECIATION> 3,830,000
<TOTAL-ASSETS> 1,270,000
<CURRENT-LIABILITIES> 328,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 917,000
<TOTAL-LIABILITY-AND-EQUITY> 1,270,000
<SALES> 670,000
<TOTAL-REVENUES> 698,000
<CGS> 0
<TOTAL-COSTS> 903,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,000
<INCOME-PRETAX> (205,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (205,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (205,000)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
