<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-9204
EXCO RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1492779
(State of incorporation) (I.R.S. Employer
Identification No.)
5735 PINELAND DR., SUITE 235
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip Code)
(214) 368-2084
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the last practicable date.
Class: Common Stock, par value $0.02 per share
Outstanding at October 31, 1998: 6,687,696 shares
<PAGE>
EXCO RESOURCES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 2
Condensed Consolidated Balance Sheets
December 31, 1997 and September 30, 1998 (Unaudited)............. 2
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1997
and 1998 (Unaudited)............................................. 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1998 (Unaudited)........ 4
Notes to Condensed Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk........17
PART II. OTHER INFORMATION
Item 5. Other Information................................................18
Item 6. Exhibits and Reports on Form 8-K.................................18
Signatures.................................................................20
Exhibit Index..............................................................21
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCO RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 496 $ 29,266
Accounts receivable................................................ 226 564
Other.............................................................. 5 134
------------ -------------
Total current assets........................................... 727 29,964
Oil and natural gas properties (full cost accounting method):
Undeveloped oil and natural gas properties......................... 36 32
Proved developed oil and natural gas properties.................... 4,267 10,768
------------ -------------
4,303 10,800
Allowance for depreciation, depletion and amortization............. (3,830) (4,070)
------------ -------------
Oil and natural gas properties, net................................ 473 6,730
Office and field equipment, net..................................... 70 235
Deferred financing costs............................................ -- 60
------------ -------------
Total assets................................................... $ 1,270 $ 36,989
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 262 $ 492
Revenues and royalties payable..................................... 50 157
Current maturities of long-term debt............................... 16 1
------------ -------------
Total current liabilities...................................... 328 650
Long-term debt, less current maturities............................. 15 0
Stockholders' equity:
Common Stock, $.02 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 502,650 and 6,687,696 at
December 31, 1997 and September 30, 1998, respectively........... 10 134
Additional paid-in capital......................................... 9,716 45,443
Deficit eliminated................................................. (8,799) (8,799)
Retained earnings (deficit), as adjusted for quasi-reorganization
at December 31, 1997.............................................. -- (439)
------------ -------------
Total stockholders' equity..................................... 927 36,339
------------ -------------
Total liabilities and stockholders' equity..................... $ 1,270 $ 36,989
============ =============
</TABLE>
See accompanying notes.
2
<PAGE>
EXCO RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1998 1997 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUES:
Oil and natural gas........................ $ 133 $ 486 $ 517 $ 914
Other income............................... 9 264 26 291
-------- -------- ------- --------
Total revenues......................... 142 750 543 1,205
COSTS AND EXPENSES:
Oil and natural gas production............. 71 247 270 489
Depreciation, depletion and amortization... 19 172 71 276
General and administrative................. 106 230 341 787
Interest................................... 1 54 10 92
Loss on disposition of properties.......... -- -- 10 --
-------- -------- ------- --------
Total costs and expenses............... 197 703 702 1,644
-------- -------- ------- --------
Income (loss) before income taxes........... (55) 47 (159) (439)
Income tax expense (benefit)................ -- -- -- --
-------- -------- ------- --------
Net loss.................................... $ (55) $ 47 $ (159) $ (439)
======== ======== ======= ========
Basic and diluted earnings per share........ $ (.14) $ .01 $ (.39) $ (.28)
======== ======== ======= ========
Weighted average number of common and
common equivalent shares outstanding....... 403 3,655 403 1,584
======== ======== ======= ========
</TABLE>
See accompanying notes.
3
<PAGE>
EXCO RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................................. $ (159) $ (439)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization.......................... 71 276
Loss on disposition of property................................... 10 --
Effect of changes in:
Accounts receivable.............................................. 22 (281)
Other current assets............................................. 1 (121)
Accounts payable and other current liabilities................... (2) 289
------- -------
Net cash provided by (used in) operating activities.................... (57) (276)
INVESTING ACTIVITIES:
Payment for acquisitions, net of cash.................................. -- (943)
Additions to property and equipment.................................... (85) (5,226)
Proceeds from disposition of property and equipment.................... 302 4
------- -------
Net cash provided by (used in) investing activities.................... 217 (6,165)
FINANCING ACTIVITIES:
Proceeds from long-term debt........................................... -- 6,360
Payments on long-term debt............................................. (18) (6,390)
Payments on note payable............................................... (150) --
Proceeds from issuance of common stock................................. -- 35,735
Deferred financing costs............................................... -- (494)
------- -------
Net cash provided by (used in) financing activities.................... (168) 35,211
------- -------
Net increase (decrease) in cash........................................ (8) 28,770
Cash at beginning of period............................................ 46 496
------- -------
Cash at end of period.................................................. $ 38 $29,266
======= =======
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid.......................................................... $ 10 $ 92
======= =======
Income taxes paid...................................................... $ -- $ --
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
In management's opinion, the accompanying financial statements contain all
adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of EXCO Resources, Inc. ("EXCO") as of
December 31, 1997 and September 30, 1998, the results of operations for the
three month and nine month periods ended September 30, 1997 and 1998,
respectively, and the cash flows for the nine month periods ended September 30,
1997 and 1998.
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to those rules and regulations, although EXCO believes that the
disclosures made are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with EXCO's financial
statements and notes thereto included in EXCO's Annual Report on Form 10-K for
the year ended December 31, 1997. The accompanying condensed consolidated
financial statements include the financial statements of EXCO Resources, Inc.
and Jacobi-Johnson Energy, Inc.
The results of operations for the three month and nine month periods ended
September 30, 1998, are not necessarily indicative of the results expected for
the full year.
Effective January 1, 1998, EXCO adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income includes net
income and other comprehensive income, which includes, but is not limited to,
unrealized gains for marketable securities and futures contracts, foreign
currency translation adjustments and minimum pension liability adjustments.
Currently, adoption of FAS 130 has had no effect on earnings or the financial
position of EXCO.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is required
to be adopted in years beginning after June 15, 1999. Because of EXCO's current
minimum use of derivatives, at the present time management does not believe the
adoption of the new Statement will have a significant effect on earnings or the
financial position of EXCO.
5
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
2. QUASI-REORGANIZATION
Effective December 31, 1997, EXCO effected a quasi-reorganization through the
application of $8,799,000 of its additional paid-in capital account to eliminate
its accumulated deficit. EXCO's Board of Directors decided to effect a quasi-
reorganization given the change in management, the infusion of new equity
capital and an increase in activities. EXCO's accumulated deficit was primarily
related to past operations and properties that have been disposed of. The
historical carrying values of the assets and liabilities of EXCO did not need to
be adjusted in connection with the quasi-reorganization.
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated, to conform to the Statement No. 128
requirements. The effect of the adoption of Statement No. 128 did not have a
material impact.
4. REVERSE STOCK SPLITS
At EXCO's 1998 Annual Meeting of Shareholders, the shareholders of EXCO approved
an amendment to EXCO's Restated Articles of Incorporation, authorizing a one-
for-two reverse stock split of EXCO's common stock, which became effective March
31, 1998. At EXCO's 1996 Annual Meeting of Shareholders, the shareholders of
EXCO approved an amendment to EXCO's Articles of Incorporation (as then in
effect), authorizing a one-for-five reverse stock split of EXCO's common stock,
which became effective July 19, 1996. All share and per share numbers contained
herein have been retroactively adjusted to record the effects of the reverse
stock splits.
5. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, EXCO changed from the successful efforts method
to the full cost method of accounting for its oil and natural gas operations.
All prior year's financial statements presented herein have been restated to
reflect the change.
6
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
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 September 30, 1997 are as follows (in thousands except
per share amounts):
<TABLE>
<CAPTION>
ADJUSTMENT FOR
EFFECT OF CHANGE IN
PREVIOUSLY ACCOUNTING AS
REPORTED PRINCIPAL ADJUSTED
---------- ------------------- --------
<S> <C> <C> <C>
Net Income (Loss).... $ (22) $(137) $(159)
Per Share Amounts.... $(.05) $(.34) $(.39)
</TABLE>
6. NATIONSBANK CREDIT AGREEMENT
On February 11, 1998, EXCO entered into a credit facility (and as subsequently
amended, the "Credit Facility") with NationsBank of Texas, N.A. ("NationsBank").
The Credit Facility provided for borrowings up to $50,000,000, subject to
borrowing base limitations. On September 21, 1998, EXCO entered into an
amendment to the Credit Facility with NationsBank, N.A. (successor by merger to
NationsBank of Texas, N.A.). The amended Credit Facility provides for
borrowings up to $150,000,000, subject to borrowing base limitations.
The Credit Facility consists of a regular revolver which on October 31, 1998,
had a borrowing base of approximately $5,500,000. On October 31, 1998,
approximately $5,500,000 was available to be borrowed under the Credit Facility.
A portion of the borrowing base is available for the issuance of letters of
credit. All borrowings under the Credit Facility are secured by a first lien
deed of trust providing a security interest in tangible and intangible assets
representing at least 90% of the assessed present value of EXCO's oil and
natural gas properties.
The Credit Facility provides that if EXCO's aggregate outstanding indebtedness
is less than $5,000,000, advances will bear interest at 1.5% over the
appropriate LIBOR rate. If the aggregate outstanding indebtedness is greater
than $5,000,000, then advances will bear interest at 1.0% over LIBOR if the
borrowing base usage is less than 50%, 1.25% over LIBOR if the borrowing base
usage is between 50-70%, 1.5% over LIBOR if the borrowing base usage is between
70-90%, and 1.75% over LIBOR if the borrowing base usage exceeds 90%. The
Credit Facility also permits EXCO to repay and reborrow amounts under the Credit
Facility without any penalty, thereby allowing EXCO the flexibility to utilize
any available cash to reduce its outstanding indebtedness and thus, its costs of
borrowed funds.
7
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
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. EXCO's Consolidated Tangible Net Worth must increase on the date of any
issuance of EXCO's equity securities after December 31, 1998, by an amount equal
to 75% of the net proceeds received by EXCO from the issuance of such
securities. On September 30, 1998, EXCO was in compliance with both the
Consolidated Tangible Net Worth covenant and the Current Ratio covenant.
7. ACQUISITIONS
Maverick County Acquisition. On February 11, 1998, EXCO acquired certain
properties from Osborne Oil Company and Gypsy Production Company and certain
other sellers (the "Maverick County Acquisition") in the Chittim/Barclay Ranch
Properties located in Maverick County, Texas (the "Maverick County Properties").
As of December 31, 1997, the Maverick County Properties were estimated to
contain 415,975 barrels of oil equivalent (1 barrel to 6 thousand cubic feet) of
proved reserves, 98% of which were classified as natural gas, and owned
leasehold interests in a total of 3,744 gross acres (3,123 net acres) of oil and
natural gas properties, 9.6% of which were developed acres. The aggregate
purchase price for the Maverick County Properties was $760,200.
Jacobi-Johnson Acquisition. On May 8, 1998, EXCO acquired all of the
outstanding common stock (the "Jacobi-Johnson Acquisition") of Jacobi-Johnson
Energy, Inc. ("Jacobi-Johnson"). Jacobi-Johnson owns oil and natural gas working
interests in Polk, Nacogdoches, Navarro, Smith and Wood Counties, Texas
(collectively, the "Jacobi-Johnson Properties"). The Jacobi-Johnson Properties
include 34 gross producing (14.3 net producing) wells with current net
production of approximately 52.9 barrels ("Bbls") of oil and 159 thousand cubic
feet ("Mcf") of natural gas per day. In addition to the producing wells, the
Jacobi-Johnson Properties include working interests in two saltwater disposal
wells. As of December 31, 1997, the Jacobi-Johnson Properties are estimated to
contain proved reserves of 234,985 Bbls of oil and 597,880 Mcf of natural gas.
Approximately 100% of the estimated proved reserves of the Jacobi-Johnson
Properties are classified as developed.
The aggregate purchase price paid for the stock was $1,476,451. The acquisition
was effective January 1, 1998. The amount of consideration was determined
through arm's length negotiations
8
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
taking into account estimates of recoverable reserves, current oil and natural
gas prices, the fair market value of other property and equipment, the amount of
cash and cash equivalents on hand, the collectibility and estimated payment
timing of accounts receivable and the amount of current and long-term
liabilities. The consideration consisted of $703,035 cash, 85,436 shares of EXCO
common stock and the assumption by EXCO of approximately $260,800 of Jacobi-
Johnson's indebtedness. EXCO obtained the cash for the purchase price under the
Credit Facility with NationsBank. The Jacobi-Johnson Properties have been
mortgaged under the Credit Facility.
Gladstone Merger. EXCO entered into an Agreement and Plan of Merger (the
"Merger Agreement") on May 1, 1998 with Gladstone Resources, Inc. ("Gladstone").
Gladstone is a Dallas, Texas based oil and natural gas production company with
properties in Kent, Stonewall, Schleicher, Pecos and Madison Counties, Texas,
and San Juan County, New Mexico. Under terms of the Merger Agreement, Gladstone
stockholders would receive approximately $1.4 million, or $.33 per share, in
cash. EXCO intends to fund this transaction from the net cash proceeds from the
Rights Offering. The transaction is subject to customary conditions of closing
including review by the Securities and Exchange Commission of Gladstone's proxy
materials, approval by Gladstone's board of directors and stockholders, approval
by EXCO's board of directors and due diligence inspection by EXCO.
In addition to the Merger Agreement, on May 1, 1998, EXCO entered into a Stock
Option Agreement with one Gladstone stockholder, E.B. Brooks, Jr. ("Mr.
Brooks"), to acquire 1,910,000 shares, or approximately 44.8%, of Gladstone's
issued and outstanding common stock at a price of $.33 per share. Mr. Brooks is
Chairman and President of Gladstone. On May 1, 1998, EXCO also entered into a
Stockholder Agreement whereby three Gladstone stockholders, Deborah Brooks
Garrett, Rebecca B. Feldt and Carol Brady, have agreed to vote their shares in
favor of the merger with EXCO. These stockholders own 351,000 shares or
approximately 8.3% each of Gladstone's common stock.
Since the date of the Merger Agreement and the Stock Option Agreement, the
financial and oil and natural gas assets of Gladstone have materially decreased.
EXCO can offer no assurance that the merger will be approved or that the
transaction will be completed under the terms and conditions of the Merger
Agreement.
Dawson County Acquisition. On June 30, 1998, EXCO completed the acquisition of
certain properties from J.M. Hill, J.M. Hill, Trustee, Walter O. Hill, Steven J.
Devos, Humphrey Oil Interests, L.P. and other working interest owners, in Dawson
and Brazos Counties, Texas (the "Dawson County Properties").
9
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
The Dawson County Properties include 11 gross (5.3 net) producing wells and 4
gross (1.5 net) salt water disposal and non-producing wells which may require
recompletions, workovers or abandonment. The Dawson County Properties include
645 gross (327 net) developed acres and 627 gross (279 net) undeveloped acres.
The purchase price was approximately $3,500,000 cash.
The following pro forma data presents the results of EXCO for the nine months
ended September 30, 1997 and 1998, as if the Maverick County Acquisition, the
Jacobi-Johnson Acquisition, the Gladstone Merger and the Dawson County
Acquisition had occurred on January 1, 1997. The pro forma results of
operations are presented for comparative purposes only and are not necessarily
indicative of the results which would have been obtained had the acquisitions
been consummated as presented. The following data reflect pro forma adjustments
for oil and gas revenues, production costs, depreciation and depletion related
to the properties and businesses acquired, interest on borrowed funds and
related income tax effects (in thousands, except per share amounts).
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1998
-------- -------
<S> <C> <C>
Total Revenues......................... $2,376 $2,073
Income (loss).......................... 154 (432)
Basic and diluted earnings per share... .32 (.27)
</TABLE>
8. RIGHTS OFFERING
On July 16, 1998, EXCO's registration statement was declared effective by the
Securities and Exchange Commission authorizing the commencement of a rights
offering to its existing shareholders (the "Rights Offering"). Each shareholder
received 10 rights for each share of EXCO's common stock held. Each right
entitled the shareholder to purchase one share of EXCO common stock for $6.00
per share. The Rights Offering expired on August 12, 1998. EXCO received net
proceeds of approximately $35,500,000. The exercise of the rights by some
existing shareholders or their assignees has resulted in the dilution of the
shares of common stock held by those shareholders who did not exercise their
rights. EXCO has used some of and intends to use the remaining proceeds of the
Rights Offering for acquisitions, development drilling and recompletions, the
repayment of its bank indebtedness, working capital and general corporate
purposes.
10
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
9. BOARD OF DIRECTORS
On August 18, 1998, EXCO expanded its Board of Directors from seven to nine
members, and two new Board members were elected to fill the newly created Board
positions in conjunction with EXCO's Rights Offering. The new members of the
Board of Directors are Jeff M. Moore and Jeffrey D. Benjamin, representatives of
Ares Management, L.P., and Oaktree Capital Management, LLC, respectively.
10. NASDAQ NATIONAL MARKET SYSTEM
On September 16, 1998, trading of EXCO's common stock moved from the OTC
Bulletin Board to the Nasdaq National Market System. EXCO's trading symbol
remains "EXCO".
11. SUBSEQUENT EVENTS
ACQUISITION JOINT VENTURE
On October 9, 1998, EXCO formed a $50,000,000 joint venture with an
institutional investor to acquire oil and gas related assets and securities.
Under the terms of the Limited Liablity Company Agreement, EXCO is required to
contribute 5% of any capital expenditures. As of October 31, 1998, the joint
venture has invested in various debt securities. Through October 31, 1998,
EXCO's investment in the joint venture has been approximately $320,000.
ACQUISITION OF PROMISSORY NOTE
On November 2, 1998, EXCO acquired a promissory note from a Texas bank for
$6,400,000 which is secured by substantially all of the assets of Rio Grande,
Inc., its subsidiaries and affiliated entities (collectively "Rio Grande,
Inc."). Rio Grande, Inc. is an oil and gas producer with principal operations
in Texas, Oklahoma, Louisiana, and Mississippi. Simultaneously therewith, EXCO
entered into an agreement with Rio Grande, Inc. and Rio Grande, Inc.'s sole
holder of preferred stock (the "Preferred Holder"), regarding plans for the
ultimate satisfaction of the debt, including the proposed acquisition of Rio
Grande, Inc. or its assets by EXCO.
Rio Grande, Inc. at January 31, 1998 had a standardized measure of discounted
future net cash flows of $14,595,400, total assets of $11,104,542, proved oil
reserves of 1,544,118 barrels, and proved gas reserves of 4,982,000 Mcf.
On November 12, 1998, Rio Grande, Inc. announced that it had filed for
reorganization under Chapter 11 of the Bankruptcy Code. A plan for a financial
restructuring (the "Plan") has been negotiated between EXCO, which is Rio
Grande, Inc.'s largest secured creditor, and the Preferred Holder in conjunction
with the filing under Chapter 11. Rio Grande, Inc. will seek court
11
<PAGE>
EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
approval of the proposed Plan. Pursuant to the terms of the Plan, Rio Grande,
Inc. intends to fully repay its trade creditors. The Plan provides that Rio
Grande Drilling Company, Rio Grande Offshore, Ltd., and Rio Grande Desert Oil
Company, all subsidiaries or affiliates of Rio Grande, Inc. (the
"Subsidiaries"), shall merge into Rio Grande, Inc. The outstanding shares of Rio
Grande, Inc.'s common and preferred stock would be canceled. EXCO, as the
secured creditor of Rio Grande, Inc. in respect of the note acquired by EXCO
will be issued new shares of common stock of Rio Grande, Inc., representing all
of the then outstanding capital stock of Rio Grande, Inc. in settlement of Rio
Grande, Inc.'s $13 million secured indebtedness owed to EXCO. Additionally, the
proposed Plan would provide that the Preferred Holder would be afforded the
opportunity to acquire a 24.5% working interest in the Righthand Creek field,
the Company's principal property. Rio Grande GulfMex, Ltd., an entity of which
the Company is an 80% general partner, has also filed Chapter 11 under the
proposed plan. Its creditors are likewise expected to be repaid in full.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which can be identified by the use of forward-
looking terminology such as, "may," "believe," "expect," "intend," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. All statements other than statements of historical fact
included in this Form 10-Q, are forward-looking statements. Although EXCO
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from EXCO's expectations ("Cautionary Statements")
are disclosed in this Form 10-Q, including, without limitation, in conjunction
with the forward-looking statements included in this Form 10-Q, and in EXCO's
Annual Report on Form 10-K for the year ended December 31, 1997. Important
factors that could cause actual results to differ materially from those in the
forward-looking statements herein include, but are not limited to, the timing
and extent of changes in commodity prices for oil and natural gas, the need to
develop and replace reserves, environmental risks, drilling and operating risks,
risks related to exploitation and development, uncertainties about the estimates
of reserves, competition, government regulation and the ability of EXCO to meet
its stated business goals. All subsequent written and oral forward-looking
statements attributable to EXCO or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
The following discussion of the results of operations and financial condition
should be read in conjunction with the Financial Statements and related Notes
thereto included herein.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1997 and 1998
Revenues. EXCO's total revenues for the three month period ended September
30, 1998 increased $608,000, or 428%, to $750,000 versus $142,000 for the
corresponding period of 1997. The increase in revenues was primarily due to the
Maverick County Acquisition, the Jacobi-Johnson Acquisition, and the Dawson
County Acquisition.
EXCO sold 23,738 Bbls of crude oil during the three months ended September
30, 1998 versus 2,432 Bbls in the corresponding three months of 1997, an 876%
increase. EXCO sold 109,346 Mcf of natural gas during the current three months
versus 46,931 Mcf in the third quarter of 1997, a 133% increase. The increases
in oil and gas volumes were attributable to the Maverick County Acquisition, the
Jacobi-Johnson Acquisition, and the Dawson County Acquisition.
13
<PAGE>
The average oil price received during the three months ended September 30,
1998 was $12.43 versus $18.42 for the three months ended September 30, 1997, a
$5.99 per barrel or 33% decrease. The average gas price received during the
current three months was $1.74 versus $1.89 for the corresponding three months
of the prior year, a $0.15 per Mcf or 8% decrease.
Costs and Expenses. Costs and expenses for the three month period ended
September 30, 1998 increased by $506,000, or 257%, to $703,000 as compared to
$197,000 for the corresponding period of 1997. This increase reflects EXCO's
increased staffing and new focus on reserve acquisitions.
Net Income. EXCO had net income for the three months ended September 30,
1998 of $47,000 compared to a net loss of $55,000 for the corresponding three
months of 1997, representing $.01 and ($.14) per share, respectively. Earnings
per share figures are based on restated weighted average shares outstanding
after the retroactive effect of the one-for-two reverse stock split approved at
EXCO's shareholders' meeting held on March 31, 1998.
Comparison of Nine Months Ended September 30, 1997 and 1998
Revenues. EXCO's total revenues for the nine month period ended September
30, 1998 increased $662,000, or 122%, to $1,205,000 versus $543,000 for the
corresponding period of 1997. The increase in revenues was primarily due to the
Maverick County Acquisition, the Jacobi-Johnson Acquisition, and the Dawson
County Acquisition.
EXCO sold 31,361 Bbls of crude oil during the nine months ended September
30, 1998 versus 12,364 Bbls in the corresponding nine months of 1997, a 154%
increase. EXCO sold 282,104 Mcf of natural gas during the current nine months
versus 133,531 Mcf in the first nine months of 1997, a 111% increase. The
increases in oil and gas volumes were attributable to the Maverick County
Acquisition, the Jacobi-Johnson Acquisition, and the Dawson County Acquisition.
The average oil price received during the nine months ended September 30,
1998 was $12.57 versus $19.72 for the nine months ended September 30, 1997, a
$7.15 per barrel or 36% decrease. The average gas price received during the
current nine months was $1.84 versus $2.05 for the corresponding nine months of
the prior year, a $0.21 per Mcf or 10% decrease.
Costs and Expenses. Costs and expenses for the nine month period ended
September 30, 1998 increased by $942,000, or 134%, to $1,644,000 as compared to
$702,000 for the corresponding period of 1997. This was primarily due to a
$446,000 increase in general and administrative costs in the current nine
months. This increase reflects EXCO's increased staffing and new focus on
reserve acquisitions. The increase was also due to a $219,000 increase in oil
and natural gas production expenses and a $205,000 increase in depreciation,
depletion and amortization expenses both due to the Maverick County Acquisition,
the Jacobi-Johnson Acquisition, and the Dawson County Acquisition.
Net Loss. EXCO had a net loss for the nine months ended September 30, 1998
of $439,000 compared to a net loss of $159,000 for the corresponding nine months
of 1997,
14
<PAGE>
representing $.28 and $.39 per share, respectively. Earnings per share figures
are based on restated weighted average shares outstanding after the retroactive
effect of the one-for-two reverse stock split approved at EXCO's shareholders'
meeting held on March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
Consistent with EXCO's strategy of acquiring and developing reserves, EXCO
has an objective of maintaining financing flexibility. There can be no assurance
that cash from operations will be sufficient in the future to meet its stated
strategy. Continuing low oil prices may impact EXCO's general strategy. Since
EXCO commenced its oil and natural gas operations, EXCO has utilized a variety
of sources of capital to fund its acquisition, development and exploitation
programs, and to fund its operations.
EXCO's general financial strategy is to use cash from operations, bank
financing and the issuance of equity securities to service interest when EXCO
has outstanding indebtedness, to pay ongoing operating expenses, and to
contribute limited amounts toward further development of EXCO's existing proved
reserves as well as additional acquisitions. There can be no assurance that
cash from operations will be sufficient in the future to cover all of those
purposes.
EXCO has planned development and exploitation activities for its major
operating areas. In addition, EXCO is continuing to evaluate oil and natural gas
properties for future acquisition. Historically, EXCO has used the proceeds from
the issuance of equity securities and borrowings under the Credit Facility to
raise cash to fund acquisitions. However, there can be no assurance that such
funds will be available to EXCO, in the future, to meet its budgeted capital
spending. Furthermore, EXCO's ability to borrow other than under the Credit
Facility is subject to restrictions imposed by the Credit Facility. If EXCO
cannot secure additional funds for its planned development and exploitation
activities, then EXCO will be required to delay or reduce substantially both of
these activities.
Credit Facility
On February 11, 1998, EXCO entered into the Credit Facility. The Credit
Facility provided for borrowings up to $50,000,000, subject to borrowing base
limitations. On September 21, 1998, EXCO entered into an amendment to the Credit
Facility with NationsBank, N.A. (successor by merger to NationsBank of Texas,
N.A.). The amended Credit Facility provides for borrowings up to $150,000,000,
subject to borrowing base limitations.
The Credit Facility consists of a regular revolver which on October 31,
1998, had a borrowing base of approximately $5,500,000. On October 31, 1998,
approximately $5,500,000 was available to be borrowed under the Credit Facility.
A portion of the borrowing base is available for the issuance of letters of
credit. All borrowings under the Credit Facility are secured by a first lien
deed of trust providing a security interest in tangible and intangible assets
representing at least 90% of the assessed present value of EXCO's oil and
natural gas properties.
15
<PAGE>
The Credit Facility provides that if EXCO's aggregate outstanding
indebtedness is less than $5,000,000, advances will bear interest at 1.5% over
the appropriate LIBOR rate. If the aggregate outstanding indebtedness is
greater than $5,000,000, then advances will bear interest at 1.0% over LIBOR if
the borrowing base usage is less than 50%, 1.25% over LIBOR if the borrowing
base usage is between 50-70%, 1.5% over LIBOR if the borrowing base usage is
between 70-90%, and 1.75% over LIBOR if the borrowing base usage exceeds 90%.
The Credit Facility also permits EXCO to repay and reborrow amounts under the
Credit Facility without any penalty, thereby allowing EXCO the flexibility to
utilize any available cash to reduce its outstanding indebtedness and thus, its
costs of borrowed funds.
Under the terms of the Credit Facility, EXCO must not permit its Current
Ratio (as defined) of Consolidated Current Assets (as defined) to its
Consolidated Current Liabilities (as defined) to be less than 1.0 to 1.0 at any
time. Furthermore, EXCO must not permit its Consolidated Tangible Net Worth (as
defined) to be less than $500,000 at any time between February 11, 1998 and
March 31, 1999. In addition, by March 31, 1999, EXCO's Consolidated Tangible
Net Worth must increase by 50% of EXCO's Consolidated Net Income (as defined)
for the fiscal quarter then ended and for every fiscal quarter thereafter must
increase by 50% of EXCO's Consolidated Net Income for the fiscal quarter then
ended. EXCO's Consolidated Tangible Net Worth must increase on the date of any
issuance of EXCO's equity securities after December 31, 1998, by an amount equal
to 75% of the net proceeds received by EXCO from the issuance of such
securities. On September 30, 1998, EXCO was in compliance with both the
Consolidated Tangible Net Worth covenant and the Current Ratio covenant.
The Rights Offering
On July 16, 1998, EXCO's registration statement was declared effective by
the Securities and Exchange Commission authorizing the commencement of the
Rights Offering. Each shareholder received 10 rights for each share of EXCO's
common stock held. Each right entitled the shareholder to purchase one share of
EXCO common stock for $6.00 per share. The Rights Offering expired on August
12, 1998. EXCO received net proceeds of approximately $35,500,000 from the
Rights Offering. The exercise of the rights by some existing shareholders or
their assignees has resulted in the dilution of the shares of common stock held
by those shareholders who did not exercise their rights. EXCO has used
$6,400,000 of the proceeds to acquire the Rio Grande, Inc. promissory note,
applied approximately $5,700,000 against outstanding borrowings against the
Credit Facility, and purchased approximately $320,000 in debt securities in
conjunction with the acquisition joint venture and intends to use the remaining
proceeds for acquisitions, development drilling and recompletions, the repayment
of its bank indebtedness, working capital and general corporate purposes.
Acquisition Joint Venture
On October 9, 1998, EXCO formed a $50,000,000 joint venture with an
institutional investor to acquire oil and gas related assets and securities.
Under the terms of the Limited Liablity Company Agreement, EXCO is required to
contribute 5% of any capital expenditures. As of October 31, 1998, the joint
venture has invested in various debt securities. Through October 31, 1998,
EXCO's investment in the joint venture has been approximately $320,000.
16
<PAGE>
YEAR 2000 COMPLIANCE
EXCO's management has conducted a review of its information systems and
related data-processing activities to assess its exposure to the Year 2000
issue. As a result, EXCO purchased an oil and gas based software system which
is Year 2000 compliant. The Year 2000 compliant version of this software is
currently in use at other oil and gas companies. This software is now being
used by EXCO.
EXCO currently uses Year 2000 compliant engineering evaluation software for
acquisition analysis, as well as internal engineering applications. EXCO's
spreadsheet and word processing software is also Year 2000 compliant.
EXCO has potential Year 2000 exposure with regard to its third party
relationships and services including its bank and bank accounts, payroll
processing which is outsourced, and other vendor and/or service providers who
utilize computers. Though EXCO has no control over Year 2000 compliance
implementation by these parties, EXCO has inquired and been assured that all of
EXCO's service providers are currently or will be Year 2000 compliant. EXCO
believes that it will not be practical to independently verify the third party
responses because it does not believe that EXCO would be given access to carry
out such verification or that the costs of doing so would be affordable. At
this time, the cost of replacing non-compliant or non-responsive third parties
will not be possible to determine. EXCO plans to establish contingency plans
once the risks have been more fully quantified.
EXCO does not currently anticipate that it will incur material
expenditures, if any at all, to complete modifications for the Year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ACQUISITION OF PROMISSORY NOTE
On November 2, 1998, EXCO acquired a promissory note from a bank for
$6,400,000 which is secured by substantially all of the assets of Rio Grande,
Inc., its subsidiaries and affiliated entities (collectively "Rio Grande,
Inc."). Rio Grande, Inc. is an oil and gas producer with principal operations
in Texas, Oklahoma, Louisiana, and Mississippi. Simultaneously therewith, EXCO
entered into an agreement with Rio Grande, Inc. and Rio Grande, Inc.'s sole
holder of preferred stock (the "Preferred Holder"), regarding plans for the
ultimate satisfaction of the debt, including the proposed acquisition of Rio
Grande, Inc. or its assets by EXCO.
Rio Grande, Inc. at January 31, 1998 had a standardized measure of
discounted future net cash flows of $14,595,400, total assets of $11,104,542,
proved oil reserves of 1,544,118 barrels, and proved gas reserves of 4,982,000
Mcf.
On November 12, 1998, Rio Grande, Inc. announced that it had filed for
reorganization under Chapter 11 of the Bankruptcy Code. A plan for a financial
restructuring (the "Plan") has been negotiated between EXCO, which is Rio
Grande, Inc.'s largest secured creditor, and the Preferred Holder in conjunction
with the filing under Chapter 11. Rio Grande, Inc. will seek court approval of
the proposed Plan. Pursuant to the terms of the Plan, Rio Grande, Inc. intends
to fully repay its trade creditors. The Plan provides that Rio Grande Drilling
Company, Rio Grande Offshore, Ltd., and Rio Grande Desert Oil Company, all
subsidiaries or affiliates of Rio Grande, Inc. (the "Subsidiaries"), shall merge
into Rio Grande, Inc. The outstanding shares of Rio Grande, Inc.'s common and
preferred stock would be canceled. EXCO, as the secured creditor of Rio Grande,
Inc. in respect of the note acquired by EXCO, will be issued new shares of
common stock of Rio Grande, Inc., representing all of the then outstanding
capital stock of Rio Grande, Inc. in settlement of Rio Grande, Inc.'s
$13,000,000 secured indebtedness owed to EXCO. Additionally, the proposed Plan
would provide that the Preferred Holder would be afforded the opportunity to
acquire a 24.5% working interest in the Righthand Creek field, the Company's
principal property. Rio Grande GulfMex, Ltd., an entity of which the Company is
an 80% general partner, has also filed Chapter 11 under the proposed plan. Its
creditors are likewise expected to be repaid in full.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
No. Description of Exhibit
--- ----------------------
27 Financial Data Schedule
18
<PAGE>
(b) Current Reports on Form 8-K:
1. Current Report on Form 8-K dated June 30, 1998 pursuant to Item 2
and Item 7.
2. Current Report on Form 8-K dated August 13, 1998 pursuant to
Item 1.
3. Current Report on Form 8-K dated September 21, 1998 pursuant to
Item 5.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
EXCO RESOURCES, INC.
(Registrant)
Date: November 16, 1998 By: /s/ J. Douglas Ramsey
--------------------------------------------
J. Douglas Ramsey
Chief Financial Officer and Vice President
20
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION OF EXHIBIT
--- --------------------------------------------------
27 Financial Data Schedule
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,266,000
<SECURITIES> 0
<RECEIVABLES> 564,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,964,000
<PP&E> 10,800,000
<DEPRECIATION> 4,070,000
<TOTAL-ASSETS> 36,989,000
<CURRENT-LIABILITIES> 650,000
<BONDS> 0
0
0
<COMMON> 134,000
<OTHER-SE> 36,205,000
<TOTAL-LIABILITY-AND-EQUITY> 36,989,000
<SALES> 914,000
<TOTAL-REVENUES> 1,205,000
<CGS> 0
<TOTAL-COSTS> 1,644,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,000
<INCOME-PRETAX> (439,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (439,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (439,000)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
