<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
MARCH 17, 1999
(DATE OF REPORT) (DATE OF EARLIEST EVENT REPORTED)
EXCO RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-9204 74-1492779
(COMMISSION FILE NO.) (IRS EMPLOYER IDENTIFICATION NO.)
5735 PINELAND
SUITE 235
DALLAS, TEXAS 75231
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 368-2084
<PAGE> 2
The undersigned registrant hereby amends the following Item 7.
Financial Statements and Exhibits of its Form 8-K filed on April 1, 1999 dated
March 17, 1999 to include the following:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
Audited Financial Statements of Rio Grande, Inc. and Subsidiaries for
the years ended January 31, 1998 and January 31, 1999, together with reports of
independent auditors, KPMG LLP, and Ernst & Young LLP, respectively.
(b) Pro Forma Financial Information.
Pro Forma Financial Statements of EXCO Resources, Inc. for the
year ended December 31, 1998.
(c) Exhibits.
Number Document
2.1 First Amended Joint Chapter 11 Plan of Reorganization
of Rio Grande, Inc., Rio Grande Drilling Company, Rio
Grande Desert Oil Company, Rio Grande Offshore, Ltd.,
and Rio Grande GulfMex, Ltd., dated January 25, 1999
and modified March 4, 1999, previously filed as an
exhibit to RGI's Form 8-K/A filed March 23, 1999 and
incorporated by reference herein
2.2 Confirmation Order for the Plan of Reorganization,
dated March 4, 1999, previously filed as an exhibit
to RGI's Form 8-K/A filed March 23, 1999 and
incorporated by reference herein
2.3 Findings of Fact and Conclusions of Law regarding
Confirmation Order (which set forth the March 4, 1999
modifications to the Plan), previously filed as an
exhibit to RGI's Form 8-K/A filed March 23, 1999 and
incorporated by reference herein
99.1 Voting Agreement dated October 30, 1998 between Rio
Grande, Inc., Rio Grande Drilling Company, Rio Grande
Offshore, Ltd., Rio Grande Desert Oil Company and Rio
Grande GulfMex, Ltd. and EXCO Resources, Inc.
previously filed as an Exhibit to RGI's Form 8-K
dated November 12, 1998 and incorporated by reference
herein
-1-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
EXCO RESOURCES, INC.
By: /s/ T.W. EUBANK
--------------------------------
T.W. Eubank, President
Dated: June 1, 1999
-2-
<PAGE> 4
ITEM 7(a)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Rio Grande, Inc.:
We have audited the consolidated balance sheet of Rio Grande, Inc. and
Subsidiaries as of January 31, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
January 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rio Grande, Inc. and
Subsidiaries as of January 31, 1998, and the results of their operations and
their cash flows for the year ended January 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 5 to the
financial statements, the Company has suffered recurring losses from operations
and has net capital deficiencies. During 1998, the Company's primary lender
indicated it will undertake proceedings to obtain collection for bank loans. At
January 31, 1998, these circumstances raise substantial doubt about the entity's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 5. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
KPMG LLP
August 11, 1998
San Antonio, Texas
-3-
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
EXCO Resources, Inc.:
We have audited the accompanying balance sheet of Rio Grande, Inc. and
Subsidiaries (the "Company") as of January 31, 1999, and the related statements
of operations, shareholder's equity (deficit), and cash flows 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 audit 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 audit provides 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 the Company at January 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1, 2, and 5 to
the financial statements, recurring losses, an accumulated deficit and lack of
liquidity caused the Company to seek protection under the Federal Bankruptcy
Laws of 1998. These conditions raised substantial doubt about the Company's
ability to continue as a going concern. A Plan of Reorganization was
consummated on March 17, 1999 pursuant to which EXCO Resources, Inc. acquired
the Company. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
May 21, 1999
Dallas, Texas
-4-
<PAGE> 6
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 340,133 $ 563,758
Trade receivables 836,843 602,323
Prepaid expenses 16,854 47,332
---------------- ----------------
TOTAL CURRENT ASSETS 1,193,830 1,213,413
Property and equipment, at cost:
Oil and gas properties, successful efforts method 26,760,906 26,675,952
Transportation equipment 183,011 71,395
Other depreciable assets 411,055 399,920
---------------- ----------------
27,354,972 27,147,267
Less accumulated depreciation, depletion and amortization (18,307,996) (23,902,075)
---------------- ----------------
NET PROPERTY AND EQUIPMENT 9,046,976 3,245,193
Other assets:
Platform abandonment fund 363,618 363,678
Other assets, net 500,118 382,619
---------------- ----------------
TOTAL ASSETS $ 11,104,542 $ 5,204,903
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Liabilities not subject to compromise:
Accounts payable $ 1,012,444 $ 515,269
Accrued expenses 226,119 211,931
Long-term debt, reclassified as current 13,251,871 --
---------------- ----------------
TOTAL CURRENT LIABILITIES 14,490,434 727,200
Liabilities subject to compromise:
Long-term debt, reclassified as current -- 13,127,298
Accrued expenses -- 799,457
---------------- ----------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE -- 13,926,755
Other accrued expenses 491,982 526,575
Long-term debt -- 10,067
Minority interest in limited partnership 144,981 --
Redeemable preferred stock, $0.01 par value; $10
redemption value. Authorized 1,700,000 shares;
issued and outstanding 1,017,500 shares 10,668,199 11,230,258
Stockholders' equity (deficit):
Common stock of $0.01 par value. Authorized 10,000,000 shares; issued
and outstanding 6,177,471 and 6,177,500 shares at January 31, 1998
and 1999, respectively 61,774 61,774
Additional paid-in capital 292,327 --
Retained deficit (15,045,155) (21,277,726)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (14,691,054) (21,215,952)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 11,104,542 $ 5,204,903
================ ================
</TABLE>
See accompanying notes.
-5-
<PAGE> 7
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
1998 1999
-------------- ------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 7,144,241 $ 4,406,790
-------------- ------------
COSTS AND EXPENSES:
Lease operating and other production expense 3,449,429 2,059,807
Dry hole costs and lease abandonments 294,265 89,304
Depletion of oil and gas producing properties, including
provision for impairments 15,339,295 5,928,362
Depreciation and other amortization 229,872 168,593
Provisions for abandonment expense -- 48,100
General and administrative 1,614,783 1,337,190
-------------- ------------
TOTAL COSTS AND EXPENSES 20,927,644 9,631,356
-------------- ------------
LOSS FROM OPERATIONS (13,783,403) (5,224,566)
OTHER INCOME (EXPENSE):
Interest expense (contractual interest in 1999 (1,139,232) (938,763)
$1,266,408)
Interest income 84,769 16,796
Gain on sale of assets, net 708,257 333,358
Other, net 18,058 677
Minority interest in earnings of limited
partnership (12,798) 127,268
-------------- ------------
TOTAL OTHER INCOME (EXPENSE) (340,946) (460,664)
-------------- ------------
REORGANIZATION ITEMS:
Professional fees and other -- (13,119)
-------------- ------------
LOSS BEFORE INCOME TAXES (14,124,349) (5,698,349)
INCOME TAXES 4,351 9,523
-------------- ------------
NET LOSS (14,128,700) (5,707,872)
DIVIDENDS ON PREFERRED STOCK 855,700 817,026
-------------- ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (14,984,400) $ (6,524,898)
============== ============
LOSS PER SHARE,
BASIC AND DILUTED $ (2.54) $ (1.06)
============== ============
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 5,890,767 6,177,510
============== ============
</TABLE>
See accompanying notes.
-6-
<PAGE> 8
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(14,128,700) $ (5,707,872)
Adjustments to reconcile loss from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and other amortization 229,872 168,593
Depletion of oil and gas producing properties,
including provisions for impairments 15,339,295 5,928,362
Provision for abandonment expense -- 48,100
Gain on sale of assets (708,257) (333,358)
Minority interest in earnings of limited partnership 12,798 (127,268)
Decrease (increase) in trade receivables 971,820 234,520
Decrease (increase) in prepaid expenses 19,965 (30,478)
Increase (decrease) in accounts payable
and accrued expenses 36,464 33,130
Increase (decrease) in other accrued expenses (558,724) (4,878)
------------ ------------
Net cash provided by operating activities 1,214,533 208,851
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of oil and gas producing properties (4,408,131) (517,824)
Additions to other property and equipment (75,595)
Net reductions in platform abandonment fund 638,345 (60)
Additions to (deletions from) other assets (22,863) 400
Proceeds from sale of property and equipment 2,150,824 673,107
------------ ------------
Net cash provided by (used in) investing activities (1,717,420) 155,623
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to other assets -- --
Proceeds from long-term debt 1,152,619 --
Repayment of long-term debt (1,262,057) (114,507)
Proceeds from issuance of common stock 124,934 --
Preferred stock dividends (220,377) --
Contributions from limited partners 95,570 --
Distributions to limited partners (93,000) (26,342)
------------ ------------
Net cash used in financing activities (202,311) (140,849)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (705,198) 223,625
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,045,331 340,133
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 340,133 $ 563,758
============ ============
</TABLE>
See accompanying notes.
-7-
<PAGE> 9
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY (DEFICIT)
------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 31, 1997 $ 55,528 $ 1,029,338 $ (916,455) $ 168,411
Net loss -- -- (14,128,700) (14,128,700)
Cash dividends on preferred stock -- (187,500) -- (187,500)
Dividends on Series B Preferred
Stock - accretion of Series C
Preferred Stock -- (68,949) -- (68,949)
Accrued dividends on Preferred
Stock - Series A -- (562,500) -- (562,500)
- Series C -- (36,750) -- (36,750)
Proceeds from exercise of
common stock warrants 6,246 118,688 -- 124,934
------------- -------------- ---------------- ----------------
BALANCES AT JANUARY 31, 1998 61,774 292,327 (15,045,155) (14,691,054)
Net loss -- -- (5,707,872) (5,707,872)
Dividends on Series B Preferred
Stock - accretion of Series C
Preferred Stock -- (75,407) (96,011) (171,418)
Accrued dividends on Preferred
Stock - Series A -- (216,920) (368,497) (585,417)
- Series C -- -- (60,191) (60,191)
------------- -------------- ---------------- ----------------
BALANCES AT JANUARY 31, 1999 $ 61,774 $ -- $ (21,277,726) $ (21,215,952)
============= ============== ================ ================
</TABLE>
-8-
<PAGE> 10
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The consolidated financial statements include the accounts of Rio
Grande, Inc. and its subsidiaries and majority-owned limited partnerships
(collectively, the "Company") as follows:
<TABLE>
<CAPTION>
OWNERSHIP
NAME STATUS INTEREST
---- ------ ---------
<S> <C> <C> <C>
Rio Grande Drilling Company Corporation Active 100%
("Drilling")
Rio Grande Desert Oil Company Corporation Active 100%
("RG-Desert")
Rio Grande Offshore, Ltd. Partnership Active 100%
("Offshore")
Rio Grande GulfMex, Ltd. Partnership Active 80%
("GulfMex")
</TABLE>
The Company was engaged in the contract drilling of oil and gas wells
since its incorporation in Texas in 1978 until May 1992.
In June 1992, Drilling formed a Texas limited partnership, Offshore, to
acquire certain non-operated oil and gas properties located offshore
Louisiana in the Gulf of Mexico and onshore properties located in
Louisiana, Texas, and Michigan. Offshore subsequently acquired additional
non-operated oil and gas properties in Texas, Oklahoma, and Wyoming.
In July 1994, Offshore acquired certain operated oil and gas properties
which are located primarily in Jack, Young, and Tom Green Counties, Texas.
Drilling assumed the operating responsibilities of the seller. As the
operator of the oil and gas wells, Drilling charges the other participating
working interest owners, including Offshore, for overhead based on the
Council of Petroleum Accountants Societies ("COPAS") monthly rates. COPAS
overhead rates are charged on an individual well basis to reimburse the
operator for general costs of executive and administrative functions
incurred at the home office. The COPAS overhead is normally adjusted on an
annual basis based on inflationary increases.
The business of acquiring producing oil and gas properties is an
inherently speculative activity that involves a high degree of business and
financial risk. Property acquisition decisions generally are based on
various assumptions and subjective judgments relating to achievable
production and price levels which are inherently uncertain and
unpredictable. Although available geological and geophysical information
can provide information on the potential for previously overlooked or
untested formations, it is impossible to determine accurately the ultimate
production potential, if any, of a particular well. Actual oil and gas
production may vary considerably from anticipated
-9-
<PAGE> 11
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
results. Moreover, the acquisition of a property or the successful
recompletion of an oil or gas well does not assure a profit on the
investment or return of the cost thereof. There can be no assurance that
the Company will succeed in its efforts to acquire additional older oil and
gas wells or in its development efforts aimed at increasing or restoring
production from either currently owned or acquired wells. If the Company
over-estimates the potential oil and gas reserves of a property to be
acquired, or if its subsequent operations on the property are unsuccessful,
the acquisition of the property could result in losses to the Company.
Except to the extent that the Company acquires additional recoverable
reserves or conducts successful exploration and development programs on its
existing properties, the proved reserves of the Company will decline over
time as they are produced. There can be no assurances that the Company will
be able to increase or replace reserves through acquisitions, exploration
and development.
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Prior to February 1, 1996, Drilling's ownership interest in the oil and
gas properties acquired by Offshore was 80%. Robert A. Buschman
("Buschman"), H. Wayne Hightower and H. Wayne Hightower, Jr. (the
"Hightowers") owned the remaining 20% interest. As a result of the
Company's 80% ownership interest, GulfMex's financial statements are
combined with the Company's financial statements prepared as of January 31,
1998. The minority interests of Buschman and the Hightowers are separately
set forth in the balance sheet and the statements of operations of the
Company.
Effective February 1, 1996, Buschman and the Hightowers agreed to
restructure Offshore whereby the aggregate 20% minority limited partnership
interests of Buschman and the Hightowers would be redeemed, and as a result
of in kind distributions, became proportionate working interest owners of
the onshore oil and gas properties previously held by Offshore. All
existing interests in the offshore oil and gas properties held by Offshore
at January 31, 1996 were conveyed to GulfMex, a newly formed Texas limited
partnership, which has the same proportionate ownership structure as that
of Offshore prior to the restructuring. Buschman and the Hightowers no
longer are limited partners of Offshore and are now 20% limited partners in
GulfMex. Subsequent to January 31, 1996, Offshore is 100% indirectly owned
by the Company and GulfMex is 80% indirectly owned by the Company which is
reflected in the consolidated financial statements prepared as of January
31, 1998 and 1999.
All intercompany balances and transactions have been eliminated in
consolidation.
PETITION FOR RELIEF UNDER CHAPTER 11
On November 12, 1998, Rio Grande, Inc., Drilling, RG-Desert, Offshore
and GulfMex filed voluntary petitions under Chapter 11 of the Bankruptcy
Act, in the United States Bankruptcy Court, Western District of Texas, San
Antonio Division. The consolidated financial statements of the Company have
been reported in accordance with the provisions of Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code." For more information regarding the Chapter 11 filing see
Note 2 - Petition for Relief Under Chapter 11 and Subsequent Consummation.
-10-
<PAGE> 12
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
are characterized as having high liquidity with little market risk and
include checking accounts and money market accounts.
OIL AND GAS PROPERTIES
The Company utilizes the successful efforts method of accounting for
its oil and gas properties. Under this method, the acquisition costs of oil
and gas properties acquired with proven reserves are capitalized and
amortized on the unit-of-production method as produced. Development costs
or exploratory costs are capitalized and amortized on the
unit-of-production method if proved reserves are discovered, or expensed if
the well is a dry hole.
Capitalized costs of proved properties are periodically reviewed for
impairment on a property-by-property basis, and, if necessary, an
impairment provision is recognized to reduce the net carrying amount of
such properties to their estimated fair values. Fair values for the
properties are based on future net cash flows as reflected on the year end
reserve report. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company recognized
a non-cash pre-tax charge against earnings of approximately $8,615,000 and
$4,289,000 for the fiscal years ended January 31, 1998 and 1999,
respectively, related to its oil and gas properties.
OTHER PROPERTY AND EQUIPMENT
Depreciation on other property and equipment is provided using the
straight-line method over their estimated useful lives. Maintenance and
repairs are expensed as incurred.
FEDERAL INCOME TAXES
The Company utilizes the liability method to account for income taxes
as prescribed by SFAS No. 109. Under this method, deferred income tax
assets and liabilities are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates expected to apply in
future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The Company files a consolidated Federal income tax return with its
subsidiaries, including the operations from certain partnerships.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial
-11-
<PAGE> 13
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earnings per share. This standard, effective for
financial statements issued for periods ending after December 15, 1997,
replaces the presentation of primary earnings per share with a presentation
of basic earnings per share. This standard requires dual presentation of
basic and diluted earnings per share on the face of the statement of
operations.
Basic net earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by assuming the
issuance of common shares for all dilutive potential common shares
outstanding.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Because of the financial condition of the Company the fair value of the
Company's financial instruments were not determinable.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," allows a
Company to adopt a fair value based method of accounting for stock-based
employee compensation plans or to continue to use the intrinsic-value based
method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to account for stock-based compensation under the intrinsic-value
method under the provisions of APB Opinion 25 and related interpretations.
Under this method, compensation expense is recognized for stock options
when the exercise price of the options is less than the value attributed to
the stock on the date of grant. The impact of SFAS No. 123 had no material
effect on the Company's consolidated results of operations or financial
condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which established standards of
accounting and reporting for derivative instruments and for hedging
activities. It requires that all derivatives be recognized as either assets
or liabilities in the statement of financial position and measures these
instruments at fair value. This statement is effective for financial
statements for periods beginning June 15, 1999. The Company has not
estimated the impact on its financial statements of the adoption of SFAS
No. 133.
HEDGING TRANSACTIONS
The Company may enter into commodity derivative contracts for non-
trading purposes as a
-12-
<PAGE> 14
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
hedging strategy to manage commodity prices associated with certain oil and
gas sales and to reduce the impact of price fluctuations. The Company
primarily uses collar arrangements for production on properties. While
derivative financial instruments are intended to reduce the Company's
exposure to declines in the market price of oil and natural gas, the
derivative financial instruments may limit the Company's gain from
increases in the market price of oil and natural gas. Income and costs
related to these hedging activities are recognized in oil and gas revenues
when the commodities are produced.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern.
(2) PETITION FOR RELIEF UNDER CHAPTER 11 AND SUBSEQUENT CONSUMMATION
On November 2, 1998, EXCO Resources, Inc., a Texas corporation ("EXCO")
acquired from Comerica Bank - Texas (the "Bank") a Promissory Note ("Note")
dated January 15, 1997, which was executed by RGI and Drilling as co-makers
in favor of the Bank. EXCO paid approximately $6.4 million for the purchase
price of the Note with available cash on hand. The Note, in the original
face amount of $50,000,000, had a principal amount outstanding of
$13,127,666 and related accrued interest payable of $486,227 on November 2,
1998. Repayment of the Note was secured by a first lien deed of trust,
mortgage and security interest in substantially all of RGI's and certain of
its subsidiaries' and/or affiliates' assets, primarily oil and gas
leasehold interests and tangible well equipment (the "Collateral
Properties"). The sum of the outstanding principal and accrued interest on
the Note was significantly in excess of what RGI believed to be the current
market value of the Collateral Properties. Pursuant to an agreement between
Comerica and EXCO relating to the purchase by EXCO of the Note, EXCO
acquired all of Comerica's rights pursuant to the Note and the related Loan
Agreement and associated collateral documents. In connection with EXCO's
purchase of the Note, Comerica agreed to dismiss litigation it had
initiated against RGI and its directors seeking to collect amounts due
under the Note.
Contemporaneously with EXCO's purchase of the Note, RGI, EXCO and Koch,
the holder of RGI's preferred stock, entered into a Voting Agreement (the
"Agreement") providing for a Financial Restructuring (as defined in the
Agreement) with regards to the Note, the Preferred Stock Interests (as
defined in the Agreement) of Koch and other claims against RGI. The
proposed Financial Restructuring provided that RGI and certain of its
subsidiaries and/or affiliates would commence cases under Chapter 11 of the
Bankruptcy Code and would seek to obtain approval of a joint plan of
reorganization pursuant to the terms of the Financial Restructuring (the
"Proposed Plan"). The description of the Agreement set forth herein is
expressly qualified by and made subject to the terms of the Agreement, a
copy of which was previously filed. The Proposed Plan provided for
distributions to claimants in a manner substantially similar to the Plan
(as hereinafter defined) ultimately confirmed by the bankruptcy court.
In accordance with the Agreement, RGI filed a voluntary petition on
November 12, 1998 under Chapter 11 of the Bankruptcy Act, Case No.
98-55619-C in the United Stated Bankruptcy Court,
-13-
<PAGE> 15
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Western District of Texas, San Antonio Division, Judge Leif M. Clark
presiding (the "Court"). RGI, as Debtor-in-Possession, operated and
managed its affairs during the bankruptcy proceedings. The case was
consolidated and jointly administered with the Chapter 11 cases
simultaneously filed by the following affiliates of RGI (collectively with
RGI, the "RGI Group"): Drilling, a Texas corporation and wholly-owned
subsidiary of Rio Grande, Inc.; RG-Desert, a Nevada corporation and
wholly-owned subsidiary of Drilling; Offshore, a Texas limited
partnership, the sole general partner of which was Drilling and the sole
limited partner of which was Desert; and GulfMex, a Texas limited
partnership, the sole general partner of which was Offshore, which owns an
80% interest in GulfMex. The case was styled "In re: Rio Grande, Inc., Rio
Grande Drilling Company, Rio Grande Desert Oil Company, Rio Grande
Offshore, Ltd., and Rio Grande GulfMex, Ltd.," (Case Nos. 98-55619-C,
98-55620-C, 98-55621-K, 98-55622-C and 98-55623-C, respectively, jointly
administered under Case No. 98-55619-C).
On January 25, 1999, that certain First Amended Disclosure Statement to
First Amended Joint Plan of Reorganization, dated January 25, 1999, was
filed and approved by the Court. That certain First Amended Joint Chapter
11 Plan of Reorganization, dated January 25, 1999 as modified March 4,
1999, (the "Plan"), was filed with the Court and confirmed pursuant to that
certain Confirmation Order entered March 5, 1999 (the "Confirmation
Order"). Capitalized terms used but not defined herein shall have the
meanings given to them in the Plan.
The Plan provided for certain class ("Class") definitions for each group
of creditors or parties that may have had claims against a member of the
RGI Group. The Class definitions were:
<TABLE>
<S> <C>
Class 1 The Allowed Secured Claim in respect of the Note.
Class 2 Any Allowed Secured Claims against any of the RGI Group
other than the Allowed Secured Claim in Class 1.
Class 3 Any Allowed Claims against any of the RGI Group that are
unsecured claims entitled to priority pursuant to the
Bankruptcy Code, other than Priority Claims specified in
sections 507(a)(1), 507(a)(2), and 507(a)(8) of the
Bankruptcy Code.
Class 4 Any Allowed, Nonpriority Unsecured Claims against any of
the RGI Group not classified elsewhere including any
Deficiency Claim under the Note.
Class 5 Allowed Preferred Stock Interests in RGI, and all rights to
dividends and any other rights associated therewith, held by
Koch Exploration Company.
Class 6 Allowed Limited Partnership Interests in GulfMex.
Class 7 Allowed RGI Common Stock interests, and any options,
warrants, or other rights or Claims in respect of such
Common Stock, and all other equity interests of the RGI
Group, excluding those equity interests classified in
Classes 5 and 6.
Class 8 Intercompany claims.
</TABLE>
-14-
<PAGE> 16
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Plan provided for treatment of the Classes in the following manner:
Administrative and Priority Tax Claims were unclassified under the
Bankruptcy Code and were paid in full. Class 1 claims were allowed in full
and were satisfied by delivery of all the Reorganized RGI Common Stock.
Classes 2, 3, and 4 claims were paid in full and the legal rights of the
claimants were unaltered. Class 5 claims were canceled in exchange for a
30-day option to acquire up to 24.5% of the working interest owned by the
RGI Group in the Righthand Creek Properties for $698,250. The Class 6 legal
interests remain outstanding, unaltered. The Class 7 and 8 claims were
extinguished in full.
The Plan provided for its implementation through (1) merging of
Drilling, Offshore and Desert with and into RGI, (2) paying cash to
unclassified claims and Classes 2, 3, and 4, (3) restating and amending the
Reorganized RGI charter to comply with section 1123(a)(6) of the Bankruptcy
Code by, inter alia, providing for restrictions on issuance of non-voting
equity securities and (4) canceling all shares of Common Stock and
Preferred Stock and reissuing Reorganized RGI Common Stock to Class 1.
The Plan also provided for limitation of liability on Exculpated Persons
with respect to good faith attempts to implement and consummate the Plan.
The Plan provided for the assumption of generally all executory
contracts and unexpired leases but for the rejection of any pre-petition
employment agreements effective upon the last day of the calendar month in
which substantial confirmation of the Plan occurred.
The Plan was confirmed by the Court on March 4, 1999 and consummation of
the Plan began on March 16, 1999. On March 17, 1999, EXCO completed the
acquisition of RGI, including the completion of a series of mergers which
effected the merger of Desert, Offshore and Drilling into RGI pursuant to
the terms of the Plan. On March 30, 1999 RGI was merged into EXCO.
(3) SALES CONTRACT
Effective February 1, 1997, Offshore's contract marketing agent entered
into a one year sales contract with an independent oil purchaser to deliver
up to an average of 650 barrels of crude oil daily in Righthand Creek. The
sales contract provides for a floor price of $20 per barrel and a ceiling
price of $23.45 per barrel of crude oil delivered from Righthand Creek. The
price determination for the crude oil is based on the posted price of
Louisiana Sweet Crude at St. James, Louisiana ("LLS") plus a posting bonus
of $1.50 per barrel ("Bonus"). Under the terms of the sales contract, there
is no penalty for under delivery of oil from Righthand Creek unless the LLS
plus Bonus exceeds $23.45 per barrel. If the penalty clause is invoked, the
amount of penalty due would be computed as follows: the sum of 650 barrels
of daily crude oil contracted times the number of days in the month less
the actual barrels delivered times the difference between LLS plus Bonus
less $23.45. Although the Righthand Creek wells are currently producing
less than the 650 barrels of daily crude oil requirement, the LLS plus
Bonus has been less than $23.45 per barrel.
In August 1997, the Company, on behalf of Offshore, entered into a
commodity futures oil swap
-15-
<PAGE> 17
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement ("Oil Swap Agreement") with Koch Oil Company. That Oil Swap
Agreement was made pursuant to an existing Master Commodity Swap Agreement
between the Company and Koch, at no current cost to the Company, and is
termed a "Costless Put/Call Collar Option," covering the period between
February 1, 1998 and January 31, 1999. The Oil Swap Agreement is based upon
400 barrels of oil per day and establishes settlement dates on the last day
of each calendar month during the contract period. It sets a floating price
equal to Koch Oil Company's monthly average LLS posting plus $1.50, and
strike prices of $18.20 for put options and $19.97 for call options. On any
settlement date, if the floating price is less than the put option strike
price, then Koch must pay the Company the price difference, multiplied by
the determination quantity for the month. On any settlement date, if the
floating price exceeds the call option strike price, the Company must pay
Koch the difference, multiplied by the determination quantity for the
month.
Except as described above, the Company is not obligated to provide a
fixed or determinable quantity of oil and gas in the future under any
existing contracts, agreements, hedge or swap arrangements.
(4) PLATFORM ABANDONMENT FUND
The existing oil and gas properties which are located in federal waters
offshore Louisiana consist of a series of platforms for each "OCS" lease,
each of which accommodate one or more producing oil and gas wells. Federal
regulations mandate strict rules for the plugging and abandonment of the
offshore wells and platforms. Due to the offshore locations, the costs
related with such plugging and abandonment can be substantial; therefore,
the operator of the offshore oil and gas properties has scheduled monthly
deductions from production proceeds of the working interest owners of
certain properties to fund the total estimated liability at the completion
of the productive life of the wells and platform. The amount deducted each
month is based upon a ratio of that month's production to the estimated
remaining proved producing reserves of each property. GulfMex's estimated
ultimate plugging and abandonment requirements may increase due to
inflation or other circumstances, or may decrease as a result of a sale of
the platform with the buyer assuming plugging and abandonment liabilities.
During the fiscal year ended January 31, 1998, Eugene Island Block 343's
wells and platform were plugged and abandoned. GulfMex funded approximately
$64,000 in excess of its abandonment escrow for its portion of the
abandonment liability for that platform. No offshore platforms were
abandoned during the fiscal year ended January 31, 1999. The operators
estimate the total plugging and abandonment liability for the remaining
platforms in which GulfMex or Offshore own interests and wells to be
approximately $835,000 of which $535,000 has been accrued. GulfMex's
abandonment escrow account as of January 31, 1999 is approximately
$364,000.
-16-
<PAGE> 18
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LONG-TERM DEBT AND GOING CONCERN
<TABLE>
<CAPTION>
JANUARY 31
--------------------------------------------
1998 1999
------------------- ------------------
<S> <C> <C>
Long-term debt consists of the following:
Senior indebtedness ("Senior Credit Facility") $ 13,178,002 $ 13,127,298
Vehicle loans 73,870 10,067
Less long-term debt reclassified as current (13,178,002) (13,127,298)
------------------- ------------------
$ 73,870 $ 10,067
=================== ==================
</TABLE>
Effective January 16, 1997, the Company and Drilling executed the First
Amendment to the Senior Credit Facility ("First Amendment") with Comerica
Bank - Texas (the "Bank") which provided for the increase of the Senior
Credit Facility to $50 million and the increase of the Borrowing Base to
approximately $17 million on that date. The Borrowing Base was initially
subject to monthly reductions of $333,000 beginning April 1, 1997 to
continue until the next determination of the Borrowing Base on February 1,
1998. The First Amendment also provided for extending the maturity date of
the Senior Credit Facility to February 1, 2000.
All of the Company's interests (direct or indirect) in existing oil and
gas properties, miscellaneous assets, and future oil and gas property
acquisitions serve as collateral for the Senior Credit Facility. The Senior
Credit Facility contains various restrictions including, but not limited
to, restrictions on payments of dividends or distributions other than those
capital distributions to Buschman and the Hightowers in GulfMex,
maintenance of positive working capital, and no change in the ownership
control or the President of the Company.
The interest rate options available to the Company are based either on a
prime rate determination or a Eurodollar rate determination. The
outstanding principal balance under the Borrowing Base will be subject to
the senior lender's prime rate plus 0.5% calculated on actual days of a
year consisting of 365 days unless written notice is provided to the bank
to elect an amount to be converted to a Eurodollar rate determination. The
Company can select any amount of the outstanding principal under the
Borrowing Base to be converted into recurring terms of 30, 60, 90 or 180
day periods. The interest rate is based on the time period selected plus an
incremental margin payable to the senior lender equivalent to 2.25%.
Interest under the Eurodollar rate is determined on actual days of a year
consisting of 360 days. For any unused portion of the Borrowing Base, a
commitment fee of 3/8ths of one percent per annum will be charged to the
Company. The outstanding principal balance of the Senior Credit Facility
was approximately $13,127,000 at January 31, 1999.
The Company received a Borrowing Base Redetermination Notice in January
1998 advising the Company that effective February 1, 1998, the Company's
Borrowing Base had been redetermined to be $6,500,000. The balance of the
Company's outstanding indebtedness with the Bank, approximately
$13,127,000, exceeded the Borrowing Base by approximately $6,627,000 (the
"Deficiency"). Under the terms of the Senior Credit Facility, the Bank gave
notice to the Company
-17-
<PAGE> 19
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to either provide the Bank with additional collateral to increase the
Borrowing Base, or reduce the outstanding balance of the Company's
indebtedness to an amount less than or equal to the redetermined Borrowing
Base.
The Company entered into a subsequent letter agreement with the Bank in
March 1998 which extended to the close of business on Friday, April 3,
1998, the time by which the Company must eliminate the Deficiency in the
manner set forth above or reach other accommodation with the Bank. For and
in consideration of the extension to April 3, 1998, the Company agreed to
execute certain supplemental documents pertaining to collateral properties;
pay an extension fee of $25,000 on or before April 3, 1998; terminate its
ability to utilize the Eurodollar Rate Option under the Loan Agreement;
increase the applicable interest rate to prime rate plus three percent;
execute a letter waiving compliance with the working capital covenant for
the month of November 1997; pay the Bank specified legal and engineering
expenses and furnish the Bank with copies of any agreements related to any
proposed refinancing.
The Company received from the Bank, a "Notice of Defaults and Events of
Default" whereby the Bank declared the entire outstanding principal balance
of the Senior Credit Facility and all interest accrued thereon to be
immediately due and payable. In addition, the Bank advised the Company that
it intended to pursue all remedies that are available in law and in equity,
including but not limited to, foreclosure proceedings in order to collect
all amounts due.
The Bank also submitted "Letters in Lieu of Transfer Order and Division
Order" to certain purchasers and marketing entities of the Company's oil
and gas products. The Letters in Lieu direct such purchasers to make
payments for the settlement of purchased products directly to the Bank.
On August 11, 1998, the Company was notified that the Bank initiated
foreclosure proceedings with regard to the Company's Texas properties by
posting the properties for foreclosure. As described in Note 2 - Petition
for Relief Under Chapter 11 and Subsequent Consummation, EXCO purchased the
Note from the Bank.
Interest expense paid during the years ended January 31, 1998 and 1999,
was approximately $1,139,000 and $394,000, respectively. As of January 31,
1999, accrued interest expense not paid was approximately $544,000. The
Company stopped accruing interest on November 12, 1998 as the debt was
undersecured. The average interest rate for the years ended January 31,
1998 and 1999 was approximately 8.2% and 11.7%, respectively.
(6) INCOME TAXES
The Company utilizes the liability method to account for income taxes as
prescribed by Statement of Financial Accounting Standards No. 109. Under
this method, deferred income tax assets or liabilities are recognized for
the tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities.
-18-
<PAGE> 20
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There was no federal income tax expense for the years ended January 31,
1998 and 1999 as a result of the operating losses incurred. State income
tax for the years ended January 31, 1998 and 1999 was approximately $4,350
and $9,520, respectively.
The Company has significant tax carryforwards available to reduce its
future tax liability. The following table summarizes the Company's tax
carryforwards at January 31, 1999:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT EXPIRATION DATE
----------- ------ ---------------
<S> <C> <C>
Federal net operating losses $ 26,050,000 2000 through 2014
State net operating losses 7,530,000 Various
Alternative minimum tax credits 15,000 None
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at January
31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Property, plant and equipment,
principally due to difference in
depreciation, depletion and
amortization $ 2,478,000 $ 4,745,000
Net operating loss carryforwards 10,368,000 10,250,000
Alternative minimum tax credit
carryforwards 15,000 15,000
Deferred abandonment costs and
other 140,000 159,000
------------ ------------
Total gross deferred tax assets 13,001,000 15,169,000
------------ ------------
Total net deferred tax assets 13,001,000 15,169,000
Less valuation allowance (13,001,000) (15,169,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
A valuation allowance has been established to decrease total gross
deferred tax assets to the amount of the total gross deferred tax
liabilities due to the uncertainties involved in the ultimate realization
of the deferred tax assets. The valuation allowance increased by
approximately $2,168,000 in 1999 and increased approximately $6,669,000 in
1998 due to the change in the corresponding gross deferred tax assets.
No federal income taxes were paid during the years ended January 31,
1998 and 1999.
(7) REDEEMABLE PREFERRED STOCK
Pursuant to the Plan described in Note 2, all of the Preferred Stock was
-19-
<PAGE> 21
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
canceled on March 16, 1999.
On January 15, 1997, the Company filed a Certificate of Designation,
Preferences and Rights of Series A Preferred Stock, Series B Preferred
Stock, and Series C Preferred Stock ("Certificate") with the Secretary of
State, Delaware. The Certificate amended the Company's Certificate of
Incorporation to establish three new series of preferred stock consisting
of 700,000 shares of Series A Preferred Stock, 500,000 shares of Series B
Preferred Stock, and 500,000 shares of Series C Preferred Stock, each
having a par value of $.01 per share. The remaining 1,300,000 preferred
shares of the Company's 3,000,000 total shares of authorized preferred
stock remain undesignated. The Certificate provides for the rights,
preferences, powers, restrictions and limitations of the respective series
of preferred stock, and the summary of the rights, preferences and other
terms of the respective series of preferred stock.
On January 16, 1997, the Company and Koch Exploration Company ("Koch"),
an affiliate of Koch Industries, Inc., concluded a $10 million private
placement for the designated preferred stock as described above. Koch
acquired 500,000 shares of Series A Preferred Stock for $5 million and
500,000 shares of Series B Preferred Stock for $5 million. The Koch Private
Placement provides Koch the right and option to purchase up to an
additional 200,000 shares of Series A Preferred Stock at the face value of
$10 per share of Series A Preferred Stock at any time after January 16,
1999 but on or before January 16, 2000.
SERIES A PREFERRED STOCK. Pursuant to the Koch Private Placement,
500,000 shares of Series A Preferred Stock were initially issued by the
Company at $10 per share. Holders of the Series A Preferred Stock, which
has a face value of $10, are entitled to receive, out of funds legally
available, cumulative dividends at the rate of 15% of the face value
payable on the first day of February, May, August and November of each
year. The first dividend payment of $220,377 was paid May 1, 1997, and
included pro-rata dividends from the date of issuance on January 16, 1997
to May 1, 1997. The Company's Board of Directors declared dividends be paid
for the August 1, 1997 dividend payment date; however, due to the Company's
inadequate working capital, the dividend was not paid. Dividends on the
Series A Preferred Stock have not been declared for the November 1997
through November 1998 dividend payment dates. As of January 31, 1999,
accrued dividends for holders of Series A Preferred Stock is approximately
$938,000 which has been added to the redeemable preferred stock capital
account.
SERIES B PREFERRED STOCK. Pursuant to the Koch Private Placement,
500,000 shares of Series B Preferred Stock were issued by the Company for
consideration of $10 per share. Holders of the Series B Preferred Stock,
which has a face value of $10 per share, are entitled to receive, out of
funds legally available, cumulative dividends at the rate of .035 shares of
Series C Preferred Stock per quarter per share of Series B Preferred Stock,
which also has a face value of $10 per share. The dividend payment date for
the Series B Preferred Stock is the first day of February, May, August and
November of each year. Dividends on the Series C Preferred Stock are
payable in preference and priority to payment of dividends on the Series B
Preferred Stock.
On the first dividend payment date of May 1, 1997, 17,500 shares of
Series C Preferred Stock were issued to Koch as a dividend on the Series B
Preferred Stock. The Company's Board of
-20-
<PAGE> 22
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Directors declared a dividend on the Series B Preferred Stock for the
August 1, 1997 dividend payment date; however, the 17,500 shares of Series
C Preferred Stock have not been issued to Koch. Dividends due on the Series
B Preferred Stock have not been declared for the dividend payment dates of
November 1997 through November 1998. The Series B Preferred Stock dividends
are payable in shares of Series C Preferred Stock which have a liquidation
value of $10 per share at maturity on January 16, 2002. The liquidation
value of each share of Series C Preferred Stock is accreted, as accrued
dividends, from the date of issue to maturity. The accrued dividends
attributable to such accretion value are approximately $86,000 as of
January 31, 1999, which have been added to the redeemable preferred stock
capital account.
VOTING RIGHTS - SERIES B PREFERRED STOCK. Holders of all the issued and
outstanding 500,000 shares of Series B Preferred Stock collectively are
eligible to cast votes equivalent to 24% of the then issued and outstanding
shares of common stock on all matters submitted to the stockholders for
vote at any annual or special stockholders meeting. If at any time the
Company is in arrears in whole or in part with regard to quarterly
dividends and such nonpayment remains in effect for three consecutive
dividend payment dates, the holders of the Series B Preferred Stock may
notify the Company of their election to exercise rights to cast votes
equivalent to 51% of the then issued and outstanding shares of common
stock. At any time that the holders hold less than 500,000 shares of Series
B Preferred Stock, the voting percentage of either 24% or 51% is reduced on
a pro-rata basis.
The Company is currently in arrears on 6 consecutive dividend payments
on the Series A, Series B and Series C Preferred Stock. Koch has not given
notice to the Company of their election to exercise rights to cast votes
equivalent to 51% of the current outstanding shares of common stock of the
Company. As more fully described below, Koch also has the right to convene
a special meeting of the stockholders at which Koch would have the right to
elect a majority of the number of directors constituting the Company's
Board of Directors. Koch has not invoked such rights.
BOARD OF DIRECTORS. The holders of Series B Preferred Stock shall have
the right to nominate and elect to the Company's Board of Directors
nominees representing not less than one-third of the number of members
constituting the Board of Directors so long as there are more than 200,000
shares of Series B Preferred Stock issued and outstanding.
SERIES C PREFERRED STOCK. The holders of Series C Preferred Stock, which
has a face value of $10, are entitled to receive cumulative dividends, out
of funds legally available, at the rate of 14% of the face value payable on
the first day of February, May, August and November of each year. No shares
of Series C Preferred Stock were initially issued in connection with
consummation of the sale of the Series A and Series B Preferred Stock
pursuant to the Koch Private Placement. On May 1, 1997, 17,500 shares of
Series C Preferred Stock were issued as dividends on the Series B Preferred
Stock. The Company's Board declared a dividend payment of $6,125 on the
Series C Preferred Stock effective August 1, 1997; however, due to the
Company's inadequate working capital, the cash dividend payment due on
August 1, 1997 was not made. No subsequent dividends have been declared or
paid for the Series C Preferred Stock. As of January 31, 1999, accrued
dividends of $92,000 has been added to the redeemable preferred stock
capital account.
-21-
<PAGE> 23
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) COMMON STOCK
Pursuant to the Plan described in Note 2, all of the common stock of the
Company was canceled in full on March 16, 1999, then new Company common
stock was issued to EXCO.
As discussed in Note 1, the Company has elected to account for
stock-based compensation under the intrinsic-value method under the
provisions of APB Opinion 25. SFAS No. 123 had no impact on the Company's
consolidated results of operations or financial condition.
COMMON STOCK OPTIONS
As of January 31, 1999, options for a total of 270,000 shares of common
stock at exercise prices (not less than fair market value at the time the
options were issued) of $0.385 to $0.40 per share granted, pursuant to the
1986 Non-Qualified Stock Option Plan and 1986 Incentive Stock Option Plan
(collectively the "86 Plans") remained outstanding. All outstanding options
under the 86 Plans shall remain in effect until they have been exercised or
have expired.
On June 1, 1995, the Company adopted the 1995 Non-Qualified Stock Option
Plan and 1995 Incentive Stock Option Plan to replace the 86 Plans, under
which a total of 1,025,000 shares of common stock has been reserved. As of
January 31, 1999, options for a total of 170,000 shares of common stock at
an exercise price (not less than fair market value at the time the options
were issued) of $0.34 to $0.45 per share have been granted, of which none
have been exercised. All outstanding options were exercisable at January
31, 1999.
COMMON STOCK WARRANTS
On September 27, 1995, the purchasers of 11.50% Subordinated Notes
("Holders") were issued warrants which provide for the purchase of up to
1,388,160 shares of Class A Common Stock, par value $0.01 per share at an
exercise price of $0.40 per share, subject to adjustment under certain
circumstances. The exercise price of the warrants was reduced from the
initial $0.40 per share to $0.20 per share in connection with the
amendments and modifications necessary to finalize the Senior Credit
Facility. The warrants expire September 30, 2002. During the fiscal year
ended January 31, 1998, 624,672 warrants to purchase common stock were
exercised at $0.20 per share for total consideration of $124,934. A total
of 763,488 warrants remains outstanding at January 31, 1999.
(9) RELATED PARTY TRANSACTIONS
One of the limited partners in GulfMex is Robert A. Buschman, Chairman
of the Board of the Company. Buschman has made capital contributions
equivalent to his ten percent (10%) ownership interest in GulfMex.
The Company obtained the consent of the Holders to restructure Offshore
in order to permit the Company to realize certain efficiencies through the
proportionate allocation of working interest expenses and overhead to the
minority limited partners of GulfMex. As a result of the restructuring,
-22-
<PAGE> 24
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Buschman and the Hightowers became proportionate individual working
interest owners of the onshore oil and gas properties previously owned by
them through their proportionate limited partnership interests in Offshore.
The offshore oil and gas properties held by Offshore were conveyed to
GulfMex, a newly formed Texas limited partnership, which holds the same
beneficial ownership in the offshore oil and gas properties as Offshore
held prior to the restructure. Offshore is the sole general partner of
GulfMex. The limited partnership agreement for GulfMex is substantially the
same as the existing Offshore limited partnership agreement.
As a result of the restructuring, Buschman and the Hightowers directly
own (1) 20% of the onshore leasehold working interests formerly owned by
them through Offshore; and (2) a 20% limited partnership interest in
GulfMex. Buschman and the Hightowers no longer are limited partners in
Offshore; however, the reorganized Offshore remains in existence as a Texas
limited partnership with Drilling as the general partner with a 1.25%
partnership interest and Desert with a 98.75% limited partnership interest.
As additional consideration for the restructuring, Buschman and the
Hightowers retained the right to participate in acquisitions of oil and gas
properties in those areas where Offshore had properties as of the effective
date of the restructuring. The effective date of the restructuring was
February 1, 1996. Any participation in the subsequent acquisition of oil
and gas properties in those areas of mutual interest will be on a basis
proportionate to the percentage interests of Buschman and the Hightowers in
Offshore prior to the restructuring and would provide for sharing of
economic benefits and burdens in accordance with the relative ownership
interests.
(10) COMMITMENTS AND CONTINGENCIES
Rental expense under an operating lease for office space, with an
initial term ending July 31, 1998 and continuing on a month-to-month basis
thereafter, was approximately $122,000, for the year ended January 31,
1998. Beginning August 1, 1998, office rent was paid on a month-to-month
basis at a rate of approximately $16,000 per month. As a result of the
consummation of the Plan as described in Note 2 - Petition for Relief Under
Chapter 11 and Consummation, the month-to-month rental agreement was
terminated effective April 7, 1999.
The Company is a party to a lawsuit styled State of Louisiana, Robert
Cormier v. Rio Grande Drilling Company and ABC Insurance Company. A proof
of claim was filed by Mr. Cormier while the Company was in Chapter 11. The
Company filed an objection to this claim. The claim is for an undetermined
amount. In the opinion of management, the Company is adequately insured
against such claim, and any ultimate liability will not have a material
adverse effect on the financial condition, cash flow or operations of the
Company.
(11) MAJOR CUSTOMERS
The Company had two purchasers that accounted for approximately
$1,534,000 and $1,675,000 of production revenue for the year ended January
31, 1999 and accounted for 36% of the trade receivables balance at January
31, 1999. The Company had two purchasers that accounted for approximately
$6,523,072 and $372,249 of production revenue for the year ended January
31, 1998
-23-
<PAGE> 25
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and accounted for 79% of the trade receivables balance at January 31, 1998.
(12) OIL AND GAS ACTIVITIES (UNAUDITED)
CAPITALIZED COSTS INCURRED RELATING TO OIL AND GAS PRODUCING ACTIVITIES
The following tables set forth the aggregate capitalized costs and
accumulated depreciation, depletion, and amortization for oil and gas
properties, all of which are proved, at January 31, 1998 and 1999.
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Capitalized costs of proved
properties $ 26,760,906 $ 26,675,952
Accumulated depreciation,
depletion and amortization (17,914,860) (23,522,448)
------------ ------------
Net capitalized costs 8,846,046 3,153,504
Less minority interest of
limited partner 128,837 16,678
------------ ------------
Net to Company $ 8,717,209 $ 3,136,826
============ ============
</TABLE>
For the year ended January 31, 1998 and 1999, the following capitalized costs
were incurred:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Producing properties $ 4,089,276 $ 517,824
Exploratory properties 318,855 --
------------ ------------
Total $ 4,408,131 $ 517,824
============ ============
</TABLE>
-24-
<PAGE> 26
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following tables set forth the results of operations for oil and gas
producing activities in the aggregate for the years ended January 31, 1998
and 1999. All of the Company's oil and gas producing properties are located
in the United States.
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Oil and gas sales $ 7,144,241 $ 4,406,790
Lease operating expenses (3,449,429) (2,059,807)
Dry hole costs and lease abandonments (294,265) (89,304)
Provision for abandonment -- (48,100)
Depletion and impairment (15,339,295) (5,928,362)
------------ ------------
Pretax results of operations (11,938,748) (3,718,783)
Income tax expense (benefit) 4,351 9,523
------------ ------------
Results of operations from oil and gas
producing activities (excluding
corporate overhead and interest costs) $(11,943,099) $ (3,846,051)
============= =============
</TABLE>
-25-
<PAGE> 27
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The following table represents the Company's estimate of its proved oil
and gas reserves, developed and undeveloped, as of January 31, 1998 and
1999. The reserve estimates have been prepared by independent petroleum
reserve engineers. Reserve estimates for producing oil and gas properties
are inherently imprecise. Even more imprecise are reserve estimates for new
discoveries.
<TABLE>
<CAPTION>
--------------- ------------
OIL/CONDENSATES GAS
--------------- ------------
(BBLS) (MMCF)
<S> <C> <C>
Proved Reserves:
Balance at January 31, 1997 4,185,177 10,216
Acquisition 38,662 291
Production (230,444) (1,039)
Revisions of previous
estimates (2,449,277) (4,486)
------------ ----------
Balance at January 31, 1998 1,544,118 4,982
Acquisition -- --
Production (177,403) (658)
Revisions of previous
estimates (417,189) 1,680
Sale of reserves in place (156,447) (659)
------------ ----------
Balance at January 31, 1999 793,079 5,345
============ ==========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED RESERVES
The following table sets forth the computation of the standardized
measure of discounted future net cash flows relating to proved reserves for
1998 and 1999. The standardized measure is the estimated excess future cash
inflows from proved reserves less estimated future production and
development costs, estimated future income taxes and a discount factor.
Future cash inflows represent expected revenues from production of year-end
quantities of proved reserves based on year-end prices and fixed and
determinable future escalation provided by contractual arrangements in
existence at year-end. Escalation based on inflation, federal regulatory
changes, and supply and demand are not considered. Estimated future
production costs related to year-end reserves are based on year-end costs.
Such costs include, but are not limited to, production taxes and direct
operating costs. Inflation and other anticipatory costs are not considered
until the actual cost change takes effect. Estimated future income tax
expenses are computed using the appropriate year-end statutory tax rates.
Consideration is given for the effects of operating loss carryforwards,
permanent differences, tax credits and allowances. A discount rate of 10%
is applied to the annual future net cash flows after income taxes.
-26-
<PAGE> 28
RIO GRANDE, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The methodology and assumptions used in calculating the standardized
measure are those required by Statement of Financial Accounting Standards
No. 69. It is not intended to be representative of the fair market value of
the Company's proved reserves. The valuations of revenues and costs do not
necessarily reflect the amounts to be received or expended by the Company.
In addition to the valuations used, numerous other factors are considered
in evaluating known and prospective oil and gas reserves.
<TABLE>
<CAPTION>
1998 1999
------------------- -------------------
<S> <C> <C>
Future cash inflows $ 37,065,200 $ 15,665,400
Future production costs (12,496,800) (6,322,000)
Future development costs (3,260,700) (1,456,200)
Future provision for abandonment in
excess of revenue deductions (146,500) (171,500)
------------------- -------------------
Future net cash flows before income tax
expense 21,161,200 7,715,700
Future income tax expense, after
consideration of the effect of net
operating loss carryforwards -- --
------------------- -------------------
Future net cash flows 21,161,200 7,715,700
Future net cash flows 10% annual
discount to reflect timing of net cash
flows (6,565,800) (2,261,900)
------------------- -------------------
Standardized measure of discounted
future net cash flows relating to proved
reserves $ 14,595,400 $ 5,453,800
=================== ===================
CHANGES IN DISCOUNTED NET CASH FLOWS:
Beginning of year $ 62,555,600 $ 14,595,400
Increase (decrease):
Purchase of minerals in place -- --
Additions to proved reserves 2,523,200 --
Sales of reserves in place -- (1,693,200)
Accretion of discount and other 14,367,200 1,459,500
Sales of oil and gas net of production
costs (3,694,800) (2,347,000)
Revisions of previous estimates:
Changes in prices (27,800,400) (4,923,300)
Changes in quantities (30,370,800) (1,637,600)
Changes in estimated income taxes (2,984,600) --
------------------- -------------------
Net increase (decrease) (47,960,200) (9,141,600)
------------------- -------------------
End of year $ 14,595,400 $ 5,453,800
=================== ===================
</TABLE>
-27-
<PAGE> 29
ITEM 7(b)
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As discussed in Item 2. Acquisition or Disposition of Assets, of EXCO's
Form 8-K filed on April 1, 1999 dated March 17, 1999, EXCO substantially
completed the acquisition of Rio Grande, Inc. ("RGI") on March 17, 1999,
and RGI was merged into EXCO on March 30, 1999.
The Pro Forma Combined Condensed Balance Sheet as of December 31, 1998,
assumes the acquisition of RGI had been consummated on that date. The Pro
Forma Combined Condensed Statement of Operations for the year ended
December 31, 1998, have been prepared assuming the acquisition of RGI, had
been consummated on January 1, 1998.
The pro forma adjustments are based upon available information and
assumptions that management of EXCO believes are reasonable. The pro forma
combined condensed financial statements do not purport to represent the
financial position or results of operations of EXCO which would have
occurred had such transactions been consummated on the dates indicated or
EXCO's financial position or results of operations for any future date or
period.
-28-
<PAGE> 30
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
EXCO RIO GRANDE FOR THE PRO FORMA
HISTORICAL HISTORICAL ACQUISITION COMBINED
-------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 21,493,000 $ 563,758 $ -- $ 22,056,758
Accounts receivable
and other assets 64,000 649,655 -- 1,313,655
-------------- --------------- --------------- ----------------
Total current assets 22,157,000 1,213,413 -- 23,370,413
Net property and
equipment 7,802,000 3,245,193 2,957,735 (2) 14,004,928
Other assets 49,000 746,297 (359,863) (1) 435,434
Investments 6,880,000 -- (6,539,000) (1) 341,000
-------------- --------------- --------------- ----------------
$ 36,888,000 $ 5,204,903 $ (3,941,128) $ 38,151,775
============== =============== =============== ================
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable
and accrued
liabilities $ 647,000 1,526,657 (799,457) (1) $ 1,374,200
Current maturities of
long-term debt 1,000 13,137,365 (13,127,365) (1) 11,000
-------------- --------------- --------------- ----------------
Total current
liabilities 648,000 14,664,022 (13,926,822) 1,385,200
-------------- --------------- --------------- ----------------
Other accrued expenses -- 526,575 -- 526,575
STOCKHOLDERS' EQUITY:
Preferred stock -- 11,230,258 (11,230,258) (1) --
Common stock 134,000 61,774 (61,774) (1) 134,000
Additional paid-in
capital 36,617,000 -- -- 36,617,000
Retained earnings (511,000) (21,277,726) 21,277,726 (1)(2) (511,000)
-------------- --------------- --------------- ----------------
Total stockholders'
equity 36,250,000 (9,985,694) 9,985,694 36,240,000
-------------- --------------- --------------- ----------------
$ 36,888,000 $ 5,204,903 $ (3,941,128) $ 38,151,775
============== =============== =============== ================
</TABLE>
-29-
<PAGE> 31
EXCO RESOURCES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
EXCO RIO GRANDE FOR THE PRO FORMA
HISTORICAL HISTORICAL ACQUISITION COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and natural gas $ 1,385,000 $ 4,406,790 $ -- $ 5,791,790
Other 690,000 350,831 -- 1,040,831
----------- ----------- ----------- -----------
2,075,000 4,757,621 -- 6,832,621
EXPENSES:
Oil and natural gas
production 786,000 2,059,807 -- 2,845,807
Abandonment costs -- 137,404 -- 137,404
Depletion, depreciation and
amortization 465,000 6,096,955 -- 6,561,955
General and administrative 1,231,000 1,350,309 -- 2,581,309
Interest and other 104,000 938,763 (938,763) (3) 104,000
Minority interest in limited
partnership -- (127,268) -- (127,268)
----------- ----------- ----------- -----------
Income (loss) before income
taxes (511,000) (5,698,349) 938,763 (5,270,586)
Income taxes -- 9,523 -- 9,523
----------- ----------- ----------- -----------
Net income (loss) (511,000) (5,707,872) 938,763 (5,280,109)
Dividends on preferred stock -- (817,024) 817,024 (3) --
----------- ----------- ----------- -----------
Net loss applicable to
common stock $ (511,000) $(6,524,896) $ 1,755,787 $(5,280,109)
=========== =========== =========== ===========
Basic and diluted earnings
(loss) per share $ (0.18) $ -- $ -- $ (1.84)
=========== =========== =========== ===========
Weighted average number of
common and common
equivalent shares outstanding 2,871,000 -- -- 2,871,000
=========== =========== =========== ===========
</TABLE>
-30-
<PAGE> 32
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
A. PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF RGI
The accompanying unaudited Pro Forma Combined Condensed Balance Sheet has
been prepared as if the acquisition of RGI had been consummated on December 31,
1998, and reflects the following adjustments:
(1) To eliminate EXCO's investment in the Rio Grande, Inc. promissory
note, the Rio Grande, Inc. promissory note and accrued interest on the
Note, accrued dividends on the preferred stock, deferred costs
associated with the issuance of the Note and the preferred stock, and
Rio Grande Inc.'s preferred and common stock.
(2) To record the adjustment of oil and gas properties to fair market
value based on the purchase price.
The accompanying unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 1998 has been prepared as if the
acquisition of RGI had been consummated on January 1, 1998 and reflects the
following adjustment:
(3) To eliminate the accrued interest on the Note and the accrued
preferred stock dividends.
PRO FORMA RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH, 31, 1999
The following table reflects the pro forma results of operations for the
three months ended March 31, 1999 as though the acquisition of Rio Grande, Inc.
had occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
MARCH 31, 1999
------------------------------
<S> <C>
Revenue $ 1,160,000
Net loss $ (195,000)
Net loss per share $ (0.03)
</TABLE>
-31-
<PAGE> 33
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
B. PRO FORMA COMBINED SUPPLEMENTAL OIL AND NATURAL GAS RESERVE AND
STANDARDIZED MEASURE INFORMATION
RESERVE QUANTITY INFORMATION
The following table presents EXCO's estimate of the pro forma combined
proved oil and natural gas reserves of EXCO after giving effect to the
acquisition of Rio Grande, Inc. as of December 31, 1998. All reserves are
located in the United States. EXCO emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and natural 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 1,756 13,057 3,932
============ ============ ============
Proved developed reserves 1,561 10,747 3,352
============ ============ ============
</TABLE>
- -----------------
* Boe - Barrels of oil equivalent 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 NATURAL GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Natural 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 EXCO's oil and natural 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 EXCO's income tax basis of its oil and natural gas
properties. Future net cash flows are discounted using a 10% annual discount
rate to arrive at the Standardized Measure.
-32-
<PAGE> 34
EXCO RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The pro forma Standardized Measure of discounted future net cash flows
relating to EXCO's proved oil and natural gas reserves at December 31, 1998,
follows:
<TABLE>
<S> <C>
Future cash inflows $ 40,355,090
Future production costs 15,173,096
Future development costs 2,918,633
Future income taxes 5,523,151
------------------
Future net cash flows 16,740,210
Discount of future net cash flows at 10% per annum 3,324,404
------------------
Pro forma Standardized Measure of discounted future net
cash flows $ 13,415,806
==================
</TABLE>
The future cash flows shown above include amounts attributable to
non-producing reserves requiring approximately $2,919,000 of future development
costs. If these reserves are not developed, the Standardized Measure of
discounted future net cash flows as of December 31, 1998, shown above would be
reduced significantly.
Estimates of economically recoverable oil and natural gas reserves and of
future net reserves 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 natural gas may differ materially from the
amounts estimated.
-33-
