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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5735 Pineland Drive, Suite 235
Dallas, Texas 75231
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (214) 368-2084
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.02 PER SHARE
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The number of shares of Common Stock, par value $.02 per share, of the
Registrant outstanding on February 15, 1999, was 6,687,696. The aggregate market
value of the voting stock held by nonaffiliates (all directors, officers and 5%
or more shareholders are presumed to be affiliates) of the Registrant on
February 15, 1999, was $16,889,680 based on the average of the closing bid and
ask prices per share of the Common Stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual
Meeting of Shareholders, filed on March 16, 1999, are incorporated by reference
into Part III.
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TABLE OF CONTENTS
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PART I............................................................................................................ 1
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 21
Item 3. Legal Proceedings...................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.................................... 22
PART II........................................................................................................... 23
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters.............. 23
Item 6. Selected Financial Data................................................................ 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................ 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. 30
Item 8. Financial Statements and Supplementary Data............................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................. 50
PART III.......................................................................................................... 51
Item 10. Directors and Executive Officers of the Registrant..................................... 51
Item 11. Executive Compensation................................................................. 51
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 51
Item 13. Certain Relationships and Related Transactions......................................... 51
PART IV........................................................................................................... 52
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................... 52
INDEX TO EXHIBITS................................................................................................. 57
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EXCO RESOURCES, INC.
PART I
ITEM 1. BUSINESS
GENERAL
EXCO Resources, Inc. is an independent oil and natural gas company. We
have been engaged in the oil and natural gas business since 1955. We currently
conduct our primary operations in Texas and Louisiana. At the end of 1997 and
the beginning of 1998, new management bought a controlling interest in EXCO and
redirected its focus. We now focus on acquiring, developing and exploiting
properties which already produce oil or natural gas or are capable of producing
oil or natural gas.
Historically, we have financed our exploration, exploitation and
development expenditures primarily through cash flow from operations, bank
borrowings, equity capital from private sales of stock and promoted funds from
industry partners. With respect to our acquisition activities, we are shifting
our emphasis to larger scale acquisitions of producing properties with
additional development and exploitation potential. Initially, we plan to use a
combination of debt and equity financing to fund these larger acquisitions.
We prefer to act as operator of the oil and natural gas properties and
prospects in which we own an interest. The operator of an oil and natural gas
property:
o supervises production;
o maintains production records;
o employs field personnel to oversee the general operations of
the properties;
o performs other functions required for the production of oil
and natural gas; and
o monitors performance, both operating and financial, necessary
to optimize cash flows derived from the properties.
Industry Language
The oil and natural gas industry is characterized by the use of very
precise specialized language. The following is a brief explanation of certain
industry terms which we use in this annual report. We believe this explanation
will help you understand our operations, risks and strategies. (Certain other
technical terms are defined in a "Glossary" located at page 21.)
We use five different terms to describe the nature of our oil and
natural gas wells. A "development well" is a well drilled within a known oil and
natural gas reservoir with the intention of installing permanent equipment to
produce oil and natural gas. An "exploratory well" is a well drilled in an area
not known to be an oil and natural gas reservoir. A "producing well" (also
called a production well or a productive well) is a well that is currently
producing oil or natural gas or that is capable of production. A "dry hole" is
an exploratory or development well that is incapable of producing oil or natural
gas in sufficient quantities to justify completion of the well. Finally, a
"completed well" refers to a well in which permanent equipment for oil and
natural gas production has been installed, or in the case of a dry hole,
reporting the abandonment of the well to the appropriate agency.
When we count our wells, we use the terms gross wells and net wells. A
"gross well" is a well in which we own an interest that gives us the right to
drill, produce and conduct operating activities for the well and gives us the
right to a share of the oil and natural gas produced from the well. The interest
that gives us these rights is called a "working interest." Gross wells means the
total number of wells in which we own such an interest. A "net well" exists when
the sum of the fractional ownership interests in gross wells equals one. The
number of net wells we own equals the sum of the fractional working interests
owned in gross wells expressed as whole numbers or percentages.
When we describe the nature of our oil and natural gas properties, we
use the terms developed and undeveloped acreage. "Developed acreage" are those
acres assignable to producing wells. "Undeveloped acreage" are those acres on
which wells have not been drilled or completed to a point that permits the
production of
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commercial quantities of oil and natural gas. When we count the acres in which
we own a working interest we use the terms "gross acres" and "net acres." A
"gross acre" is an acre in which we own a right to drill, produce and conduct
operating activities on the property and to a share of the oil and natural gas
production. A "net acre" exists when the sum of such fractional working
interests in gross acres equals one. The total net acreage is the sum of the
fractional working interests owned in gross acres expressed in whole numbers or
percentages.
When we describe our oil or natural gas reservoirs within current
developed and undeveloped acreage we use the term "reserves." We obtain
geological and engineering information which we use to estimate the amount of
reserves contained in our developed and undeveloped acreage. These estimates are
known as "proved reserves." We use two terms to describe our proved reserves.
"Proved developed" reserves are proved reserves which may be recovered from
known oil and natural gas reservoirs under existing economic and operating
conditions. "Proved undeveloped" reserves are proved reserves which may be
recovered from existing wells but would require a relatively large expense to
develop or proved reserves in current undeveloped acreage.
DEVELOPMENTS DURING 1998
We Completed Acquisitions
On February 11, 1998, we acquired oil and natural gas working interests
from Osborne Oil Company, Gypsy Production Company and other sellers in the
Chittim/Barclay Ranch properties located in Maverick County, Texas. We paid
approximately $760,000 for the Maverick County properties. On May 8, 1998, we
acquired all of the outstanding common stock of Jacobi-Johnson Energy, Inc. We
paid approximately $1.5 million in cash and stock for Jacobi-Johnson Energy,
Inc. The acquisition was effective January 1, 1998. On June 30, 1998, we
completed the acquisition of properties from J. M. Hill, J. M. Hill, trustee,
Walter O. Hill, Stephen J. Devos, Humphrey Oil Interest, L.P. and other working
interest owners, in Dawson and Brazos counties, Texas. We paid approximately
$3.5 million for these properties. On December 21, 1998, we acquired properties
from Colony Petroleum, L.L.C. and Cumulus 2 Limited in Carter County, Oklahoma,
for a purchase price of approximately $706,000. The completion of these and
other smaller acquisitions during 1998 added 1,642 Mboe to our proved reserves.
We Succeeded in Raising Capital
On July 16, 1998, we commenced a rights offering to our existing
shareholders. Each shareholder received ten rights for each share of our common
stock held. Each right entitled the shareholder to purchase one share of our
common stock for $6.00 per share. The rights offering expired August 12, 1998.
We received net proceeds of $35.2 million from the rights offering. We have used
and intend to use the remaining proceeds of the rights offering for
acquisitions, development drilling and recompletions, the repayment of our bank
indebtedness, working capital and general corporate purposes.
We Moved to the Nasdaq National Market System
On September 16, 1998, trading of our common stock moved from the OTC
Bulletin Board to the Nasdaq National Market System. Our trading symbol remained
"EXCO".
We Formed an Acquisition Joint Venture
On October 9, 1998, we formed, EXCO Energy Investors, L.L.C., a $50
million joint venture with OCM Principal Opportunities Fund, L.P. to acquire oil
and natural gas related assets and securities. Under the terms of the joint
venture agreement, we are required to contribute 5% of any capital expenditures.
As of February 15, 1999, the joint venture has invested in various debt
securities in National Energy Group, Inc. Through February 15, 1999, our
investment in the joint venture has been approximately $341,000.
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We Acquired a Promissory Note That Will Consummate with an Acquisition
On November 2, 1998, we acquired a $13 million promissory note from a
Texas bank for $6.4 million which is secured by substantially all of the assets
of Rio Grande, Inc., its subsidiaries and affiliated entities. Rio Grande, Inc.
is an oil and natural gas producer with principal operations in Texas, Oklahoma,
Louisiana, and Mississippi. At the same time we purchased the note, we also
entered into an agreement with Rio Grande, Inc. and Rio Grande, Inc.'s sole
holder of preferred stock regarding plans for the ultimate satisfaction of Rio
Grande, Inc.'s debt, including the proposed acquisition of Rio Grande, Inc. or
its assets by us through a plan of reorganization in bankruptcy court.
On November 12, 1998, Rio Grande, Inc. announced that it had filed for
reorganization under Chapter 11 of the Bankruptcy Code. As the largest secured
creditor, we negotiated a plan for financial restructuring with Rio Grande, Inc.
and the holder of its preferred stock. On March 5, 1999, the court confirmed the
proposed plan. Pursuant to the terms of the plan, Rio Grande, Inc. has fully
repaid its trade creditors. The plan provides for the merger of several
subsidiaries or affiliates into Rio Grande, Inc. After the mergers, the
outstanding shares of Rio Grande, Inc.'s common and preferred stock will be
canceled. We will be issued new shares of Rio Grande, Inc. as settlement of Rio
Grande Inc's $13 million secured indebtedness owed to us. The new shares will
represent all of the outstanding capital stock of Rio Grande, Inc., and we will
be the owners of Rio Grande, Inc. effective on or about March 16, 1999.
We Expanded the Board of Directors
On August 18, 1998, we expanded our 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 our rights offering. The new members of the
board of directors are Jeff M. Moore, a representative of Ares Management, L.P.
and Jeffrey D. Benjamin, a representative of Oaktree Capital Management, L.L.C.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
Forward-Looking Statements
Before you invest in our common stock, you should be aware that there
are various risks associated with an investment, including the risks described
below and risks that we have highlighted in other sections of this annual
report. You should consider carefully these risk factors together with all of
the other information included in this annual report before you decide to
purchase shares of our common stock.
Some of the information in this annual report may contain
forward-looking statements. We use words such as "may," "will," "expect,"
"anticipate," "estimate," "believe," "continue," "intend" or other similar
words to identify forward-looking statements. You should read statements that
contain these words carefully because they: (1) discuss future expectations;
(2) contain projections of results of operations or of our financial
conditions; or (3) state other "forward-looking" information. We believe that
it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are unable to accurately
predict or over which we have no control. When considering our forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this annual report. The risk factors noted in this section and
other factors noted throughout this annual report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from those contained in any forward-looking statement.
Our Revenue Depends On Oil and Natural Gas Prices Which Are Currently
Low
Our future financial condition and results of operations depend upon
(1) the prices we receive for our oil and natural gas and (2) the costs of
acquiring, developing and producing oil and natural gas. Currently, U.S. oil and
natural gas prices are depressed. Historically, oil and natural gas prices have
been volatile and are subject to fluctuations in response to changes in supply
and demand, market uncertainty and a variety of additional factors that are also
beyond our control. Factors that affect the prices we receive for our oil and
natural gas include, without limitation:
o the level of domestic production;
o the availability of imported oil and natural gas;
o actions taken by foreign oil and natural gas producing nations;
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o the availability of transportation systems with adequate capacity;
o the availability of competitive fuels;
o fluctuating and seasonal demand for natural gas;
o conservation and the extent of governmental regulation of
production;
o weather;
o foreign and domestic government relations;
o the price of domestic and imported oil and natural gas; and
o the overall economic environment.
A substantial or extended decline in oil and/or natural gas prices may have a
material adverse effect on the estimated value of our natural gas and oil
reserves, and on our financial position, results of operations and access to
capital. Our ability to maintain or increase our borrowing capacity, to repay
current or future indebtedness and to obtain additional capital on attractive
terms is substantially dependent upon oil and natural gas prices.
Our Production Comes From a Small Number of Wells
Our existing proved oil and natural gas reserves and production are
highly concentrated in a small number of wells. Accordingly, to the extent that
we experience any operating difficulties with the wells, or to the extent our
actual proved reserves are less than those currently estimated to exist, we
may experience increased expenses and lower revenue.
We Have Incurred Losses in the Past
We had net losses of $326,000, $205,000 and $511,000 for the years
ended December 31, 1996, 1997, and 1998, respectively. We may continue to incur
net losses and these losses may be substantial. Consequently, our liquidity may
be reduced and we may be unable to raise capital. If our ability to raise
capital is impaired, then we may be unable to implement our current business
strategy.
We May Be Unable to Develop Additional Reserves
Our future success as an oil and natural gas producer, as is generally
the case in the industry, depends upon our ability to find, develop and acquire
additional oil and natural gas reserves that are profitable. If we are unable to
conduct successful development activities or acquire properties containing
proved reserves, our proved reserves will generally decline as reserves are
produced. We cannot assure you that we will be able to locate additional
reserves or that we will drill economically productive wells or acquire
properties containing proved reserves.
We May Not Identify All Acquisition Risks
Generally, it is not feasible for us to review in detail every
individual property involved in an acquisition. Our business strategy includes
focused acquisitions of producing oil and natural gas properties. Any future
acquisitions will require an assessment of recoverable reserves, future oil and
natural gas prices, operating costs, potential environmental and other
liabilities and other similar factors. Ordinarily, our review efforts are
focused on the higher-valued properties. However, even a detailed review of
these properties and records may not reveal existing or potential problems, nor
will it permit us to become sufficiently familiar with the properties to assess
fully their deficiencies and capabilities. We do not inspect every well.
Potential problems, such as mechanical integrity of equipment and environmental
conditions that may require significant remedial expenditures, are not
necessarily observable even when we do inspect a well. Even if we identify
problems, the seller may be unwilling or unable to provide effective contractual
protection against all or part of these problems. We cannot assure you that
newly acquired oil and natural gas properties will be successfully integrated
into our operations or will achieve desired profitability.
We May Incur Significant Debt in the Future Which We May Be Unable to
Repay
We have arranged a $150 million credit agreement with NationsBank,
N.A., as agent and lender. The pledge of substantially all of our assets as
collateral for the credit facility will make it difficult in the foreseeable
future for us to obtain financing on an unsecured basis or to obtain secured
financing other than certain "purchase money" indebtedness collateralized by the
acquired assets. Our credit limit may provide
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an additional source of capital to finance our acquisition, development and
exploitation strategy. Our level of indebtedness in the future may affect our
operations in the following ways:
o a substantial portion of our cash flow from operations may be
dedicated to the payment of interest and principal on our
indebtedness and will not be available for other purposes;
o the covenants contained in the credit facility which require us to
meet certain financial tests and other restrictions, will limit our
ability to borrow additional funds, to grant liens and to dispose
of assets and will affect our flexibility in planning for and
reacting to changes in our business, including possible acquisition
activities; and
o our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired.
Our ability to meet any future debt service obligations will be
dependent upon our future economic performance. Our future bank credit may not
be available in an amount sufficient to enable us to service our indebtedness or
make necessary expenditures. In that event, we would be required to obtain
financing from the sale of equity securities or other debt financing. Financing
may be unavailable on terms acceptable to us. Without sufficient capital, we may
be unable to continue to implement our business strategy.
We May Need Additional Financing for Growth
The growth of our business will require substantial capital on a
continuing basis. We may be unable to obtain additional capital on satisfactory
terms and conditions. Thus, we may lose opportunities to acquire oil and natural
gas properties and businesses. In addition, our pursuit of additional capital
may result in the incurrence of additional indebtedness or potentially dilutive
issuances of additional equity securities. We also may utilize the capital
currently expected to be available for our present operations. The amount and
timing of our future capital requirements, if any, will depend upon a number of
factors, including:
o drilling costs;
o transportation costs;
o equipment costs;
o marketing expenses;
o staffing levels and competitive conditions; and
o any purchases or dispositions of assets.
Our failure to obtain any required additional financing may have a material
adverse effect on our growth, cash flow and earnings.
We Will Encounter Risks While Drilling
Our drilling involves numerous risks, including the risk that we will
not encounter commercially productive oil or natural gas reservoirs. We must
incur significant expenditures to identify and acquire properties and to drill
and complete wells. The cost of drilling, completing and operating wells is
often uncertain, and drilling operations may be curtailed, delayed or canceled
as a result of a variety of factors, including unexpected drilling conditions,
pressure or irregularities in formations, equipment failures or accidents,
weather conditions and shortages or delays in the delivery of equipment. In
addition, we may use 3-dimensional seismic and other advanced technology to
explore for oil and natural gas which may require greater pre-drilling
expenditures than traditional drilling strategies. We may be unsuccessful in our
future drilling activities.
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Uncertainty of Our Estimates of Oil and Natural Gas Reserves
Numerous uncertainties are inherent in estimating quantities of proved
oil and natural gas reserves, including many factors beyond our control. This
annual report contains an estimate of our proved oil and natural gas reserves
and the estimated future net cash flows and revenue generated by the proved oil
and natural gas reserves. These estimates are based upon reports of our
independent petroleum engineers. These reports rely upon various assumptions,
including assumptions required by the Securities and Exchange Commission, as to
constant oil and natural gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. These reports should not be
construed as the current market value of our estimated proved reserves. The
process of estimating oil and natural gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
engineering and economic data for each reservoir. As a result, these estimates
are inherently an imprecise evaluation of reserve quantities and future net
revenue. Our actual future production, revenue, taxes, development expenditures,
operating expenses and quantities of recoverable oil and natural gas reserves
may vary substantially from those we have assumed in the estimate. Any
significant variance in our assumptions could materially affect the estimated
quantity and value of reserves set forth in this annual report. In addition, our
reserves may be subject to downward or upward revision, based upon production
history, results of future exploitation and development, prevailing oil and
natural gas prices and other factors.
Our Properties are Geographically Concentrated
Currently, most of our properties are located in Texas, Oklahoma, and
Louisiana. Because of this concentration, we will be impacted more adversely by
regional events that increase our costs or level of competition, reduce
availability of equipment or supplies, reduce demand or limit production, than
if we were geographically diversified.
We Are Exposed to Operating Hazards and Uninsured Risks
Our operations are subject to the risks inherent in the oil and natural
gas industry, including the risks of:
o fire, explosions, and blowouts;
o pipe failure;
o abnormally pressured formations; and
o environmental accidents such as oil spills, gas leaks, ruptures or
discharges of toxic gases, brine or well fluids into the environment
(including groundwater contamination).
These events may result in substantial losses to the Company from:
o injury or loss of life;
o severe damage to or destruction of property, natural resources and
equipment;
o pollution or other environmental damage;
o clean-up responsibilities;
o regulatory investigation; and
o penalties and suspension of operations.
In accordance with customary industry practice, we maintain insurance against
some, but not all, of the risks we have described above. We cannot assure you
that our insurance will be adequate to cover these losses or liabilities.
Further, we cannot predict the continued availability of insurance, or
availability of insurance at commercially acceptable premium levels. We do not
carry business interruption insurance. Losses and liabilities arising from
uninsured or under-insured events may have a material adverse effect on our
financial condition and operations.
From time to time, due primarily to contract terms, pipeline
interruptions or weather conditions, the producing wells in which we own an
interest have been subject to reduced or terminated production. These
curtailments may last from a few days to several months or longer.
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We are not currently experiencing any material curtailment on our production.
We May Writedown Our Asset Values
We may writedown the value of our oil and natural gas properties. This
may affect the Company's net worth which may result in a covenant violation
under our credit facility.
Our Stock Price May Be Volatile Due to Small Public Float
Because the number of shares of our common stock held by the public is
relatively small, the sale of a substantial number of shares of the common stock
in a short period of time may adversely affect the market price of the common
stock.
We Do Not Pay Dividends
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Our common stock is not a suitable investment for persons requiring current
income.
Our Articles of Incorporation or a Possible Issuance of Preferred Stock
May Prevent a Takeover Attempt
Provisions in our restated articles of incorporation effective
September 11, 1996 may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider to be in such shareholder's best
interest, including attempts that might result in a premium to be paid over the
market price for the stock held by shareholders. The articles of incorporation
permit the board to issue up to 10,000,000 shares of preferred stock and to
establish by resolution one or more series of preferred stock and to establish
the powers, designations, preferences and relative, participating, optional or
other special rights of each series of preferred stock. The preferred stock may
be issued on terms that are unfavorable to the holders of common stock,
including the grant of superior voting rights, the grant of preferences in
favor of preferred shareholders in the payment of dividends and upon
liquidation of the Company and the designation of conversion rights that
entitle holders of preferred stock to convert their shares into common stock on
terms that are dilutive. The issuance of preferred stock may make a takeover
or change in control of the Company more difficult. We do not intend to use the
provisions of the articles of incorporation to delay, defer or prevent a tender
offer or takeover attempt.
Our Business Depends on a Limited Number of Key Personnel
We are substantially dependent upon the skills of two key individuals
within our management, Mr. D. H. Miller and Mr. Eubank. Both individuals have
experience in restructuring oil and natural gas companies. Because we are
engaged in a new strategy, the loss of the services of either one of these
individuals may have a material adverse impact upon us.
We May Encounter Marketing Risks
Our future ability to market our oil and natural gas production will
depend upon the availability and capacity of natural gas gathering systems and
pipelines and other transportation facilities. We do not currently operate our
own pipelines or transportation facilities, thus we are dependent on third
parties to transport our products.
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BUSINESS STRATEGY
We intend to become a leading independent oil and natural gas
acquisition, exploitation and production company by implementing the following
business strategies:
o Financial Growth. We plan to achieve asset, revenue and cash
flow growth as a result of the acquisition and further
development of producing oil and natural gas properties.
o Acquire and Enhance Producing Oil and Natural Gas Properties.
We plan to take advantage of opportunities that currently
exist in the United States to acquire producing oil and
natural gas properties. We plan to continue to focus our
acquisition activities onshore in Texas, New Mexico, Oklahoma
and Louisiana in order to complement our existing properties
and operations; however, we plan to review potential
acquisitions in other regions of the United States if they
represent a significant concentration of energy-related
assets. We believe that numerous opportunities exist to
acquire additional energy assets and to enhance the value of
these assets through improved operating practices and by
aggressively developing reserve potential.
o Emphasize Exploitation and Development Activities. We plan to
exploit existing oil and natural gas properties and to conduct
development evaluation and drilling on our existing and future
oil and natural gas properties. We intend to concentrate on
enhancement opportunities from activities such as infill
drilling, recompletions, secondary recovery projects, repairs
and equipment changes. We may participate, from time to time,
in a limited number of exploratory wells.
o Corporate Efficiencies. We plan to maximize corporate
efficiencies through the development and operation of a larger
asset base with the potential to limit increases in overhead
in the future.
o Capital Management. We plan to maintain financial strength and
flexibility through effective management of debt and equity.
o Technology. We plan to increase exploitation efforts, focusing
on established geological trends where we can employ
geological, geophysical and engineering expertise. We are
considering the application of 3-D seismic and advanced
drilling technologies.
In 1998, we evaluated approximately 120 acquisition opportunities with
an aggregate estimated market value of over $1.9 billion. We made offers on
properties totaling more than $320 million and successfully completed the
purchase of approximately $6.8 million. Offers varied in amounts from less than
$100,000 to $92 million. We intend to pursue large acquisitions that will have
a significant impact on our growth and smaller projects that have the potential
for high levels of profitability. We plan to focus on properties in Texas,
Oklahoma, Louisiana, and New Mexico and prefer to acquire properties with
shallow production, which offer lower geologic and mechanical risk of
operations. In evaluating prospective acquisitions, we generally focus on
estimates of future cash flows, rates of return, and net present values
expected to be generated by the acquired properties.
RECENT DEVELOPMENTS SINCE DECEMBER 31, 1998
We Canceled the Merger with Gladstone
On May 1, 1998, the Company entered into an agreement and plan of
merger with Gladstone Resources, Inc. Under terms of the merger agreement,
Gladstone stockholders would have received approximately $1.4 million, or $.33
per share, in cash. The transaction was subject to customary conditions of
closing including review by the Securities and Exchange Commission of
Gladstone's proxy materials, approval by
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Gladstone's board of directors and stockholders, approval by our board of
directors and the completion of our due diligence inspection.
In addition to the merger agreement, on May 1, 1998, we entered into
a stock option agreement with one Gladstone stockholder, E. B. Brooks, Jr., 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. On May 1, 1998, we also
entered into a stockholder agreement whereby three Gladstone stockholders,
Deborah Brooks Garrett, Rebecca B. Feldt and Carol Brady, agreed to vote their
shares in favor of the merger. These stockholders owned 351,000 shares or
approximately 8.3% each of Gladstone's common stock.
After the date of the merger agreement and the stock option agreement,
the financial and oil and natural gas assets of Gladstone materially decreased.
As a result, on January 22, 1999 the merger agreement and stock option
agreements were canceled.
We Presented A Proposal To Acquire National Energy Group, Inc.
On February 24, 1999, we presented a restructuring plan to National
Energy Group, Inc.'s bondholders' committee. For the assets of National Energy,
we propose to issue shares of our common stock and approximately $58 million
cash. Our plan is subject to approval by numerous parties including the U. S.
Bankruptcy Court and our shareholders.
OUR EXPLOITATION AND DEVELOPMENT ACTIVITIES
We made exploitation and development expenditures of $17,000, $74,000,
and $257,000 during the years ended December 31, 1996, 1997, and 1998,
respectively. We made net acquisition expenditures of $1,000, $2,000, and $6.8
million during the years ended December 31, 1996, 1997, and 1998, respectively.
Our ability to continue to fund our exploitation and development activities
depends upon cash flow and our ability to secure the necessary financing for
these activities.
OUR OPERATING ACTIVITIES
As of December 31, 1998, we were the operator of 76 gross (36.5 net)
wells, which represented approximately 65.5% of the gross wells and 69.5% of the
net wells in which we had an interest on that date. The remainder of the wells
in which we had an interest on December 31, 1998 are operated by third party
operators. The wells that we operate are located in Texas and Louisiana.
Although we elect to operate and manage most of our properties and drilling
activities, our wells are drilled by independent drilling contractors.
OUR OIL AND NATURAL GAS PROPERTIES
The following table sets forth the fields in which we have significant
oil and natural gas properties, and information as of December 31, 1998, with
respect to each of the fields.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
WELLS PROVED RESERVES PERCENTAGE NET PRODUCTION
------------------------------------------------ OF ----------------------
OIL GAS EQUIVALENT OIL GAS
GROSS NET (BBLS) (MCF) RESERVES (BBLS) (MCF)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ackerly Field ........... 8 3.99 492,600 242,600 23.7% 27,700 13,000
Chittim Field ........... 9 7.42 3,000 2,734,000 20.4% 1,400 172,600
Logansport Field ........ 2 1.01 4,100 2,046,200 15.3% 100 22,900
Nine Mile Draw Field .... 1 .62 -- 1,463,500 10.8% -- 73,100
Other ................... 96 39.37 463,700 1,225,500 29.8% 23,500 130,500
--------- --------- --------- --------- --------- --------- ---------
Total ..... 116 52.41 963,400 7,711,800 100.0% 52,700 412,100
========= ========= ========= ========= ========= ========= =========
</TABLE>
- 9 -
<PAGE> 12
Ackerly Field
The Ackerly field is located in Dawson County, Texas. In 1998, we
acquired 8 gross (3.99 net) producing wells as the principal properties in the
Dawson County acquisition. These wells produce primarily oil from the Canyon
Reef and Dean formations at depths between 8,100 and 9,300 feet.
Chittim Field
The Chittim field is located in Maverick County, Texas. In 1998, we
acquired our interests in this field when we purchased the Chittim/Barclay Ranch
properties. Our wells produce natural gas from the Glen Rose Formation at depths
between 5,000 and 5,700 feet.
Logansport Field
We own working interests in two natural gas wells in the Logansport
field located in Desoto Parish, Louisiana. Our wells produce from a series of
low permeability reservoirs with long life natural gas reserves. Our reserves
are produced from the Hosston (Travis Peak) and Pettit formations from depths
between 6,000 and 7,500 feet.
Nine Mile Draw Field
The Nine Mile Draw field is located in Reeves County, Texas, and we
derive natural gas production from a low permeability fractured limestone
formation. Presently, we operate 1 gross (.62 net) well in the Fusselman
formation, which produces from depths between 13,700 and 14,400 feet.
Other
The other category consists of numerous unconcentrated fields located
in Texas, Oklahoma, Kansas and North Dakota.
TITLE TO OUR PROPERTIES
As is common industry practice, we conduct little or no investigation
of title at the time we acquire undeveloped properties, other than a preliminary
review of local mineral records. However, we do conduct title investigations
and, in most cases, obtain a title opinion of local counsel before we begin
drilling operations. We believe that the methods we utilize for investigating
title prior to acquiring any property are consistent with practices customary in
the oil and natural gas industry and that our practices are adequately designed
to enable us to acquire good title to properties. Some title risks, however,
cannot be avoided, despite the use of customary industry practices.
Our properties are generally subject to:
o customary royalty and overriding royalty interests;
o liens incident to operating agreements; and
o liens for current taxes and other burdens and minor encumbrances,
easements and restrictions.
We believe that none of these burdens either materially detract from the value
of our properties or materially interfere with their use in the operation of our
business. Substantially all of our properties are pledged as collateral under
our credit facility.
OUR OIL AND NATURAL GAS RESERVES
On December 31, 1998, our oil and natural gas reserves included direct
working interests in 116 wells in the states of Texas, Louisiana, North Dakota,
Kansas, and Oklahoma, as well as overriding royalties in an additional 10 wells
in Texas. We have no reserves offshore or outside of the United States. On
December 31, 1998, approximately 87.7% of the present value of the estimated
future net revenues attributable
- 10 -
<PAGE> 13
to our properties were attributable to proved developed reserves and
approximately 12.3% were attributable to proved undeveloped reserves. In
addition, approximately 42.8% of the proved reserves were attributable to oil
and approximately 57.2% were attributable to natural gas, on a Boe basis.
The following table summarizes our proved reserves on December 31,
1998, and was prepared in accordance with the rules and regulations of the
Securities and Exchange Commission:
PROVED RESERVES
On December 31, 1998
<TABLE>
<S> <C>
Oil and Liquids (Bbls)
Total Proved Developed ............................. 829,665
Proved Undeveloped ................................. 133,732
------------
Total ........................................ 963,397
============
Natural Gas (Mcf)
Total Proved Developed ............................. 5,774,998
Proved Undeveloped ................................. 1,936,759
------------
Total ........................................ 7,711,757
============
</TABLE>
A significant portion of the value of our proved undeveloped reserves
are in the Logansport and the Nine Mile Draw fields. We must incur costs and
undertake risks associated with drilling and workover operations to recover
these reserves.
The reserve estimates presented as of December 31, 1998 have been
prepared by Lee Keeling and Associates, Inc., independent petroleum engineers,
Tulsa, Oklahoma, and are a part of their report on our oil and natural gas
properties. Estimates of oil and natural gas reserves are, of necessity,
projections based on engineering data and, thus, are forward-looking in nature.
Moreover, because of the uncertainties inherent in the interpretation of this
data, we cannot ensure that the reserves set forth herein will ultimately be
realized. Our actual results could differ materially. See "Supplementary
Financial Data" included with our financial statements located elsewhere in
this annual report for additional information regarding our oil and natural gas
reserves, including the present value of future net revenues. Lee Keeling and
Associates, Inc. also prepared our reserve estimates as of December 31, 1996,
and December 31, 1997.
WE HAVE NOT REPORTED RESERVES TO OTHER AGENCIES
As of December 31, 1998 our estimates of oil and natural gas reserves
have not been filed with or included in reports to any federal authority or
agency other than the Securities and Exchange Commission.
- 11 -
<PAGE> 14
OUR PRODUCTION
The following table summarizes for the periods indicated, our revenues,
net production of oil (including condensate) and natural gas sold, the average
sales price per unit of oil (Bbl) and natural gas (Mcf) and costs and expenses
associated with the production of oil and natural gas:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
Oil:
Revenue .................................. $ 452,000 $ 283,000 $ 634,000
Production sold (Bbls) ................... 22,150 14,453 52,707
Average sales price per Bbl .............. $ 20.42 $ 19.56 $ 12.01
Natural Gas:
Revenue .................................. $ 420,000 $ 387,000 $ 751,000
Production sold (Mcf) .................... 224,024 181,091 412,124
Average sales price per Mcf .............. $ 1.87 $ 2.14 $ 1.82
Costs and Expenses:
Production costs per Boe .......................... $ 7.21 $ 7.21 $ 6.48
Depreciation, depletion and
amortization per Boe ........................... $ 1.46 $ 1.41 $ 3.17
</TABLE>
Our total oil and natural gas revenues for the year ended December 31,
1998 increased 107% from the prior year primarily due to increases in production
volumes resulting from acquisitions we completed during 1998. The effect of
these increased volumes outweighed the decreased sales prices for both oil and
natural gas. Our average sales price per barrel of oil decreased $7.55 or 39%,
and our average sales price per Mcf of natural gas decreased $.32, or 15%, from
prices for the year ended December 31, 1997.
Our total oil and natural gas revenues for the year ended December 31,
1997 decreased 23% from the period ended December 31, 1996 due to decreases in
our production volumes resulting from the sale of properties during 1997
and the normal depletion of our producing wells. Our average sales price per
barrel of oil decreased $.86, or 4% and our average sales price per Mcf of
natural gas increased $.27, or 14%, from our prices for the period ended
December 31, 1996.
The net production we reported in the preceding table only includes
revenue, production, production costs, and sales prices for our share of the oil
and natural gas after payment of royalties, if any. Our oil production for the
year ended December 31, 1998 was 265% higher and our natural gas production was
128% higher than for the year ended December 31, 1997. Our oil production for
the year ended December 31, 1997 was 35% lower and natural gas production was
19% lower than the period ended December 31, 1996. On a Boe basis, our total
production for the year ended December 31, 1998 increased 172% from the year
ended December 31, 1997 and our total production for the year ended December 31,
1997 decreased 25% from the period ended December 31, 1996.
- 12 -
<PAGE> 15
OUR INTEREST IN PRODUCTIVE WELLS
The following table sets forth our interest in productive wells
(producing wells and wells capable of production) on December 31, 1998. The
number of total gross oil and natural gas wells excludes any multiple
completions. On December 31, 1998, we did not own an interest in any well that
was being completed.
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS
--------------------------------- -----------------------------------
OIL GAS TOTAL OIL GAS TOTAL
----------- ----------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kansas...................................... -- 1 1 -- 0.08 0.08
Louisiana................................... -- 2 2 -- 1.01 1.01
North Dakota................................ 2 -- 2 0.07 -- 0.07
Oklahoma.................................... 16 1 17 13.52 0.02 13.54
Texas....................................... 57 37 94 20.31 17.40 37.71
----------- ----------- -------- ----------- ----------- -----------
Total....................................... 75 41 116 33.90 18.51 52.41
</TABLE>
OUR DRILLING ACTIVITIES
We intend to concentrate on lower risk, development-type properties by
drilling to reservoirs from which production is, or was, being obtained. In the
past, we have drilled higher risk, exploratory-type wells. The number and type
of wells we drill will vary depending on the amount of funds we have available
for drilling, the cost of each well, the size of the fractional working
interests we acquire in each well and the estimated recoverable reserves
attributable to each well.
The following table summarizes our approximate gross and net interests
in the exploratory and development wells drilled during the periods indicated
and refers to the number of wells (holes) completed at any time during a period,
regardless of when drilling was initiated:
<TABLE>
<CAPTION>
EXPLORATORY WELLS
--------------------------------------------------------------------------------
GROSS NET
------------------------------------- -------------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996............... -- -- -- -- -- --
Year ended December 31, 1997............... -- -- -- -- -- --
Year ended December 31, 1998............... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DEVELOPMENT WELLS
--------------------------------------------------------------------------------
GROSS NET
------------------------------------- -------------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996............... -- -- -- -- -- --
Year ended December 31, 1997............... 1 -- 1 .12 -- .12
Year ended December 31, 1998............... 1 -- 1 .49 -- .49
</TABLE>
We conducted all drilling activities referenced in the above tables in
the State of Texas. As of February 23, 1999, we were participating in drilling
one exploratory well. This 5,542 foot Glen Rose test in Maverick County, Texas
was dry in the primary objective. The cost to the Company was approximately
$120,000. At this time, we have no additional commitments to drill any wells.
- 13 -
<PAGE> 16
OUR INTEREST IN DEVELOPED AND UNDEVELOPED ACREAGE
The following table sets forth our interest in developed and
undeveloped acreage on December 31, 1998:
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
---------------------------- --------------------------
GROSS NET GROSS NET
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Kansas..................................... 160 12 640 50
Louisiana.................................. 1,280 616 -- --
North Dakota............................... 472 15 320 8
Oklahoma................................... 380 59 100 90
Texas...................................... 11,826 3,740 11,017 5,733
------------- -------------- ------------ -------------
Total............................. 14,118 4,442 12,077 5,881
</TABLE>
The primary terms of the oil and natural gas leases covering the
majority of our undeveloped acreage expire at various dates, generally ranging
from one to five years. We can retain our interest in undeveloped acreage by
drilling activity that establishes commercial reserves sufficient to maintain
the lease. Some of our undeveloped acreage in Texas is being "held by
production," meaning our lease is active as long as we produce oil and natural
gas from the acreage. Upon ceasing production, the lease will expire.
OUR PAST SALES OF PRODUCING PROPERTIES AND UNDERDEVELOPED ACREAGE
We evaluate properties on an ongoing basis to determine the economic
viability of the properties and whether these properties enhance objectives.
During the course of normal business, we may dispose of producing properties and
undeveloped acreage if we believe that it is in our best interest.
In the year ended December 31, 1998, we had no material sales of
producing properties. In the year ended December 31, 1997, we sold our interest
in three major groups of producing oil properties in Texas and Illinois for a
total of $270,000 which reduced the full cost pool accordingly. In the year
ended December 31, 1996, we exchanged our interest in four non-operated
producing wells for an interest in each of four operated producing wells.
OUR PRODUCTS, MARKETS AND REVENUES
We produce oil and natural gas. We do not refine or process the oil and
natural gas that we produce. We sell the oil we produce under short-term
contracts at market prices in the areas in which the producing properties are
located, generally at F.O.B. field prices posted by the principal purchaser of
oil in these areas.
We sell the natural gas we produce under both short-term and long-term
contracts. We sell the natural gas to transmission and utility companies that
have pipelines in the vicinity of our producing properties or to companies that
will construct pipelines to our properties. Our sales contracts are of a type
common within the industry, and we negotiate a separate contract for each
property. Typically, we negotiate sales contracts for terms ranging from
day-to-day up to six months.
The availability of a ready market for oil and natural gas and the
prices of oil and natural gas are dependent upon a number of factors that are
beyond our control. These factors include, among other things:
o the level of domestic production and economic activity generally;
o the availability of imported oil and natural gas, actions taken by
foreign oil producing nations;
o the availability of natural gas pipelines with adequate capacity and
other transportation facilities;
o the availability and marketing of other competitive fuels,
fluctuating and seasonal demand for oil, natural gas and refined
products; and
- 14 -
<PAGE> 17
o the extent of governmental regulation and taxation (under both
present and future legislation) of the production, refining,
transportation, pricing, use and allocation of oil, natural gas,
refined products and substitute fuels.
Accordingly, in view of the many uncertainties affecting the supply and demand
for oil, natural gas and refined petroleum products, we cannot predict
accurately the prices or marketability of the oil and natural gas from any
producing well in which we have or may acquire an interest.
Oil prices have been subject to significant fluctuations over the past
several decades. Levels of production maintained by the Organization of
Petroleum Exporting Countries member nations and other major oil producing
countries are expected to continue to be a major determinant of oil price
movements in the future. As a result, future oil price movements cannot be
predicted with any certainty. Similarly, during the past several years, the U.S.
market price for natural gas has been subject to significant fluctuations on a
monthly basis as well as from year to year. These frequent changes in the market
price make it impossible for us to predict natural gas price movements with any
certainty.
We cannot assure you that we will be able to market all the oil or
natural gas that we produce or, if our oil or natural gas can be marketed, that
we can negotiate favorable price and contractual terms. Changes in oil and
natural gas prices may significantly affect our revenues and cash flow and the
value of our oil and natural gas properties. Further, significant declines in
the prices of oil and natural gas may have a material adverse effect on our
business and financial condition.
We engage in oil and natural gas production activities in areas, where
from time to time the supply of oil and natural gas available for delivery
exceeds the demand. In this situation, companies purchasing oil and natural gas
in these areas reduce the amount of oil and natural gas that they will purchase
or "take." If we cannot locate buyers for newly discovered oil and natural gas
reserves, we may shut-in newly completed oil and natural gas wells for periods
of time. As a result, the over-supply of oil and natural gas in certain areas
may cause us to experience "take" problems or may adversely affect our ability
to obtain contracts to market oil and natural gas discovered in wells in which
we own an interest.
The following table sets forth the amount of our oil sales, natural gas
sales and the percent of sales to total oil and natural gas revenues for the
periods indicated:
<TABLE>
<CAPTION>
PERCENT OF
SALES TO TOTAL OIL
AND GAS REVENUES
-----------------------
NATURAL TOTAL OIL AND
PERIOD ENDED OIL SALES GAS SALES GAS SALES OIL GAS
- --------------------------------------------------- -------------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996...................... $ 452,000 $ 420,000 $ 872,000 52% 48%
Year ended December 31, 1997....................... $ 283,000 $ 387,000 $ 670,000 42% 58%
Year ended December 31, 1998....................... $ 634,000 $ 751,000 $ 1,385,000 46% 54%
</TABLE>
OUR CURRENT DELIVERY COMMITMENTS
We are not presently obligated to provide a fixed and determinable
quantity of oil or natural gas under any existing contract or agreement.
OUR PRINCIPAL CUSTOMERS
During the year ended December 31, 1998, sales of oil and natural gas
to two purchasers, EOTT Energy Operating Limited Partnership and Scurlock
Permian LLC accounted for 17% and 10%, respectively, of our total revenues.
During the year ended December 31, 1997, sales of oil and natural gas to three
purchasers, Scurlock Permian Corporation, Delhi Gas Pipeline Corporation, and
Aurora National Gas, L.L.C., accounted for 22%, 19%, and 14%, respectively, of
our total revenues. If we were to lose any one of our oil and natural gas
purchasers, then the loss could temporarily cease or delay our production and
sale of our oil and natural gas in the purchaser's particular service area. We
believe we would be able, under current economic circumstances, to
- 15 -
<PAGE> 18
contract with other purchasers for our oil and natural gas production if we were
to lose any one of our oil and natural gas purchasers.
WE ENCOUNTER STRONG COMPETITION
The oil and natural gas industry is highly competitive. We encounter
strong competition from other independent operators and from major oil companies
in acquiring properties, in contracting for drilling equipment and in securing
trained personnel. Many of these competitors have financial and technical
resources and staffs substantially larger than those available to us. As a
result, our competitors may be able to pay more for desirable leases and they
may pay more to evaluate, bid for and purchase a greater number of properties or
prospects than our financial or personnel resources will permit us.
We are also affected by competition for drilling rigs and the
availability of related equipment. While the oil and natural gas industry has
experienced shortages of drilling rigs and equipment, pipe and personnel, we are
not presently experiencing any shortages and do not foresee any shortages in the
near future. We are unable to predict how long current market conditions will
continue.
Competition for attractive oil and natural gas producing properties,
undeveloped leases and drilling rights is also strong, and we cannot assure you
that we will be able to compete satisfactorily in acquiring properties. Many
major oil companies have publicly indicated their decisions to concentrate on
overseas activities and have been actively marketing some of their existing
producing properties for sale to independent producers. We cannot assure you
that we will be successful in acquiring any of these properties.
WE ARE AFFECTED BY VARIOUS REGULATION
General
From time to time political developments and federal and state laws and
regulations affect our operations in varying degrees. Price control, tax and
other laws relating to the oil and natural gas industry, and changes in these
laws and regulations affect our oil and natural gas production, operations and
economics. There are currently no price controls on oil, condensate or natural
gas liquids. To the extent price controls remain applicable after the enactment
of the Natural Gas Wellhead Decontrol Act of 1989, we are of the opinion that
price controls will not have a significant impact on the prices we receive for
natural gas we produce in the near future.
We review legislation affecting the oil and natural gas industry for
amendments. The legislative review frequently increases our regulatory burden.
Also, numerous departments and agencies, both federal and state, are authorized
by statute to issue and have issued rules and regulations binding on the oil and
natural gas industry and its individual members, compliance with which is often
difficult and costly and some of which may carry substantial penalties if we
were to fail to comply. We cannot predict how existing regulations may be
interpreted by enforcement agencies or the courts, nor whether amendments or
additional regulations will be adopted, nor what effect such interpretations and
changes may have on our business or financial condition.
Matters subject to regulation include:
o discharge permits for drilling operations;
o drilling and abandonment bonds or other financial responsibility
requirements;
o reports concerning operations;
o the spacing of wells;
o unitization and pooling of properties; and
o taxation.
Natural Gas Regulation and the Effect on Marketing
Historically, interstate pipeline companies generally acted as
wholesale merchants by purchasing natural gas from producers and reselling the
natural gas to local distribution companies and large end users. Commencing in
late 1985, the Federal Energy Regulatory Commission issued a series of orders
that have had a
- 16 -
<PAGE> 19
major impact on interstate natural gas pipeline operations, services, and rates,
and thus have significantly altered the marketing and price of natural gas. The
FERC's key rule making action, Order No. 636, issued in April 1992, required
each interstate pipeline to, among other things, "unbundle" its traditional
bundled sales services and create and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and natural gas balancing services), and to adopt a new rate
making methodology to determine appropriate rates for those services. To the
extent the pipeline company or its sales affiliate makes natural gas sales as a
merchant in the future, it does so pursuant to private contracts in direct
competition with all other sellers, such as the Company; however, pipeline
companies and their affiliates were not required to remain "merchants" of
natural gas, and most of the interstate pipeline companies have become
"transporters only." In subsequent orders, the FERC largely affirmed the major
features of Order 636 and denied a stay of the implementation of the new rules
pending judicial review. By the end of 1994, the FERC had concluded the Order
636 restructuring proceedings, and, in general, accepted rate filings
implementing Order 636 on every major interstate pipeline. However, even through
the implementation of Order 636 on individual interstate pipelines is
essentially complete, many of the individual pipeline restructuring proceedings,
as well as Order 636 itself and the regulations promulgated thereunder, are
subject to pending appellate review and could possibly be changed as a result of
future court orders. We cannot predict for you whether the FERC's orders will be
affirmed on appeal or what the effects will be on our business.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include:
o a series of orders in individual pipeline proceedings articulating a
policy of generally approving the voluntary divestiture of interstate
pipeline owned gathering facilities by interstate pipelines to their
affiliates (the so-called "spin down" of previously regulated
gathering facilities to the pipeline's nonregulated affiliate);
o the completion of a rule making involving the regulation of pipelines
with marketing affiliates under Order No. 497;
o the FERC's ongoing efforts to promulgate standards for pipeline
electronic bulletin boards and electronic data exchange;
o a generic inquiry into the pricing of interstate pipeline capacity;
o efforts to refine the FERC's regulations controlling operation of the
secondary market for released pipeline capacity; and
o a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and storage
capacity.
Several of these initiatives are intended to enhance competition in natural gas
markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business to some in the industry as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost of doing business. As to all of these recent
FERC initiatives, the ongoing, or in some instances, preliminary nature of these
regulatory initiatives makes it impossible at this time for us to predict their
ultimate impact on our business.
We own, directly or indirectly, certain natural gas facilities that we
believe meet the traditional tests the FERC has used to establish a company's
status as a gatherer not subject to FERC jurisdiction under the Natural Gas Act
of 1938. Moreover, recent orders of the FERC have been more liberal in their
reliance upon or use of the traditional tests, such that in many instances, what
was once classified as "transmission" may now be classified as "gathering." We
transport our own natural gas through these facilities. We also transport a
portion of our natural gas through gathering facilities owned by others,
including interstate pipelines. With respect to the preceding paragraph, on May
27, 1994, the FERC issued orders in the context of the "spin off" or "spin down"
of interstate pipeline owned gathering facilities. A "spin off" is a FERC
approved sale of such facilities to a
- 17 -
<PAGE> 20
non-affiliate. A "spin down" is the transfer by the interstate pipeline of its
gathering facilities to an affiliate. A number of "spin offs" and "spin downs"
have been approved by the FERC and have been implemented. The FERC held that it
retains jurisdiction over gathering provided by interstate pipelines, but that
it generally does not have jurisdiction over pipeline gathering affiliates,
except in the event of affiliate abuse (such as actions by the affiliate
undermining open and nondiscriminatory access to the interstate pipeline). These
orders require nondiscriminatory access for all sources of supply, prohibit the
tying of pipeline transportation service to any service provided by the
pipeline's gathering affiliate, and require the new gathering company to submit
a "default" contract if a satisfactory contract cannot be mutually agreed upon
by the interstate pipeline and its existing customers. On November 30, 1994, the
FERC issued a series of rehearing orders largely affirming the May 27, 1994,
orders. The FERC clarified that "default" contracts are intended to serve only
as a transition mechanism to prevent arbitrary termination of gathering service
to existing customers. Also, the FERC now requires interstate pipelines to not
only seek authority under Section 7(b) of the Natural Gas Act to abandon
certificated facilities, but also to seek authority under Section 4 of the
Natural Gas Act to terminate service from both certificated and uncertificated
facilities. On December 31, 1994, an appeal was filed with the U.S. Court of
Appeals for the D.C. Circuit to overturn three of the FERC's November 30, 1994,
orders. We cannot predict what the ultimate effect of the FERC's orders
pertaining to gathering will have on our production and marketing, or whether
the Appellate Court will affirm the FERC's orders on these matters.
Federal Taxation
The federal government may propose tax initiatives that affect us. We
are unable to determine what effect, if any, future proposals would have on
product demand or our results of operations.
State Regulation
The various states in which we conduct activities regulate our
drilling, operation and production of oil and natural gas wells, including the
method of developing new fields, spacing of wells, the prevention and clean-up
of pollution, and maximum daily production allowables based on market demand and
conservation considerations.
Environmental Regulation
Our exploration, development and production of oil and natural gas,
including our operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. These
laws and regulations can increase the costs of planning, designing, installing
and operating oil and natural gas wells. Our domestic activities are subject to
a variety of environmental laws and regulations, including, but not limited to:
o the Oil Pollution Act of 1990;
o the Clean Water Act;
o the Comprehensive Environmental Response, Compensation and
Liability Act;
o the Resource Conservation and Recovery Act;
o the Clean Air Act; and
o the Safe Drinking Water Act,
as well as state regulations promulgated under comparable state statutes. These
laws and regulations:
o require the acquisition of a permit before drilling commences;
o restrict the types, quantities and concentration of various
substances that can be released into the environment in connection
with drilling and production activities;
o limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas; and
- 18 -
<PAGE> 21
o impose substantial liabilities for pollution which might result from
our operations.
We also are subject to regulations governing the handling, transportation,
storage and disposal of naturally occurring radioactive materials that are found
in our oil and natural gas operations. Civil and criminal fines and penalties
may be imposed for non-compliance with these environmental laws and regulations.
Additionally, these laws and regulations require the acquisition of permits or
other governmental authorizations before undertaking certain activities, limit
or prohibit other activities because of protected areas or species and impose
substantial liabilities for cleanup of pollution.
Under the Oil Pollution Act, a release of oil into water or other areas
designated by the statute could result in the Company being held responsible for
the costs of remediating a release, specified damages and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in the Company being held responsible under the Clear Water Act for the
cost of remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws,
can impose joint, several and retroactive liability, without regard to fault or
the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions and entities that arrange for the disposal or treatment of,
or transport of hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including, but not limited to, crude oil,
gas and natural gas liquids from the definition of hazardous substance, our
operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, we cannot assure
you that the exemption will be preserved in future amendments of the Act, if
any.
RCRA and comparable state and local requirements impose standards for
the management, including treatment, storage and disposal of both hazardous and
nonhazardous solid wastes. We generate hazardous and nonhazardous solid waste in
connection with our routine operations. From time to time, proposals have been
made that would reclassify certain oil and natural gas wastes, including wastes
generated during pipeline, drilling and production operations, as "hazardous
wastes" under RCRA which would make these solid wastes subject to much more
stringent handling, transportation, storage, disposal and clean-up requirements.
This development could have a significant impact on our operating costs. While
state laws vary on this issue, state initiatives to further regulate oil and
natural gas wastes may have a similar impact on our operations.
Because oil and natural gas exploration and production, and possibly
other activities, have been conducted at some of our properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, we have
agreed to indemnify the sellers of producing properties from whom we have
acquired reserves against certain liabilities for environmental claims
associated with the properties. While we do not believe the costs to be incurred
by us for compliance and remediating previously or currently owned or operated
properties will be material, we cannot guarantee that these potential costs will
not result in material expenditures.
Additionally, in the course of our routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and we may incur costs for waste handling and environmental
compliance associated with these leaks. Moreover, we are able to control
directly the operations of only those wells which we operate. Notwithstanding
our lack of control over wells owned by us but operated by others, the failure
of the operator to comply with applicable environmental regulations may be, in
certain circumstances, attributable to us.
It is not anticipated that we will be required in the near future to
expend amounts that are material in relation to our total capital expenditures
program by reason of environmental laws and regulations, but inasmuch as these
laws and regulations are frequently changed, we are unable to predict the
ultimate cost of compliance. More stringent laws and regulations protecting the
environment may be
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<PAGE> 22
adopted and we may be required to incur material expenses in connection with
environmental laws and regulations in the future.
Other Proposed Legislation
The recent trend toward stricter standards in environmental legislation
and regulation is likely to continue. For instance, legislation has been
proposed in the U.S. Congress from time to time that would reclassify certain
crude oil and natural gas exploitation and production wastes as "hazardous
wastes" which would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. If this legislation were to be
enacted, it may have a significant impact on our operating costs, as well as the
oil and natural gas industry in general. Initiatives to further regulate the
disposal of crude oil and natural gas wastes are also pending in various states,
and these various initiatives may have a similar impact on us. We may incur
substantial costs to comply with environmental laws and regulations. In addition
to compliance costs, government entities and other third parties may assert
substantial liabilities against owners and operators of oil and natural gas
properties for oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages, including damages caused by
previous property owners. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which may reduce or
eliminate the funds available for project investment or result in loss of our
properties. Although we maintain insurance coverage we consider to be customary
in the industry, we are not fully insured against all of these risks, either
because insurance is not available or because of high premium costs.
Accordingly, we may be subject to liability or may lose substantial portions of
properties due to hazards that cannot be insured against or have not been
insured against due to prohibitive premium costs or for other reasons. The
imposition of any of these liabilities on us may have a material adverse effect
on our financial condition and results of operations.
OUR EMPLOYEES
As of December 31, 1998, we employed nineteen persons of which two were
involved in field operations and seventeen were engaged in office and
administrative activities. None of our employees are represented by unions or
covered by collective bargaining agreements. To date, we have not experienced
any strikes or work stoppages due to labor problems and we consider our
relations with our employees to be good. We also utilize the services of
independent consultants on a contract basis.
OUR EXECUTIVE OFFICERS
DOUGLAS H. MILLER, 51, was elected Chairman and Chief Executive Officer
of EXCO in December 1997. Mr. Miller was Chairman of the Board and Chief
Executive Officer of Coda Energy, Inc., an independent oil and gas company, from
October 1989 until November 1997 and served as a director of Coda from 1987
until November 1997.
T. W. EUBANK, 56, was elected President, Treasurer and a director of
EXCO in December 1997. Mr. Eubank was a consultant to various private companies
from February 1996 to December 1997. Mr. Eubank served as President of Coda from
March 1985 until February 1996. He was a director of Coda from 1981 until
February 1996.
J. DOUGLAS RAMSEY, PH.D., 38, was elected a Vice President and Chief
Financial Officer of EXCO in December 1997. Dr. Ramsey has been a director of
EXCO since March 1998. Dr. Ramsey most recently was Financial Planning Manager
of Coda and has worked in various capacities for Coda from 1992 until 1997. Dr.
Ramsey also teaches finance at Southern Methodist University.
CHARLES R. EVANS, 45, joined EXCO in February 1998 and became a Vice
President in March 1998. Mr. Evans graduated from Oklahoma University with a
B.S. degree in Petroleum Engineering in 1976. After working for Sun Oil Co., he
joined TXO Production Corp. in 1979 and was elected Vice President of
Engineering and Evaluation in 1989 and Vice President of Engineering and Project
Development for Delhi Gas Pipeline Corporation, a natural gas gathering,
processing and marketing company, in 1990. Mr. Evans most recently was
Director-Environmental Affairs and Safety for Delhi until December 1997.
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<PAGE> 23
JOHN D. JACOBI, 44, became a Vice President of EXCO in February 1999.
Mr. Jacobi received his B.S. degree from West Texas State University. He founded
Jacobi-Johnson Energy, Inc., an independent oil and natural gas producer, in
1991 and was its President until January 1997. He then served as its Vice
President and Treasurer until May 8, 1998, when the company was sold to EXCO.
DANIEL A. JOHNSON, 47, became a Vice President of EXCO in February
1999. Mr. Johnson graduated from Texas A&M University with a B.S. degree in
Petroleum Engineering. In 1991, he founded Jacobi-Johnson Energy, Inc., an
independent oil and natural gas producer. He served as its President from
January 1997 until the company was sold to EXCO on May 8, 1998.
RICHARD E. MILLER, 44, became General Counsel and General Land Manager
and was elected Secretary of EXCO in December 1997. Mr. Miller was a senior
partner and head of the Energy Section of Gardere & Wynne, L.L.P., a Dallas
based law firm, from December 1991 to September 1994. Mr. Miller practiced law
as a sole practitioner from September 1994 to December 1997.
GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms
commonly used in the oil and natural gas industry and this annual report.
"BBL." One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
"BOE." Barrels oil equivalent. Calculated by converting 6 Mcf of
natural gas to 1 Bbl of oil.
"INFILL DRILLING." Drilling of a well between known producing wells to
better exploit the reservoir.
"MBOE." One thousand barrels oil equivalent.
"MCF." One thousand cubic feet of natural gas.
"OVERRIDING ROYALTY INTEREST." An interest in an oil and/or natural gas
property entitling the owner to a share of oil and natural gas production free
of costs of production.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES." The present value of
estimated future net revenues is an estimate of future net revenues from a
property at its acquisition date, at December 31, 1998, or as otherwise
indicated, after deducting production and ad valorem taxes, future capital costs
and operating expenses, but before deducting federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the net revenue stream and should not be construed as being the
fair market value of the properties. Estimates have been made using constant oil
and natural gas prices and operating costs at the acquisition date, at December
31, 1998, or as otherwise indicated. We believe that the present value of
estimated future net revenues before income taxes, while not in accordance with
generally accepted accounting principles, is an important financial measure used
by investors and independent oil and natural gas producers for evaluating the
relative significance of oil and natural gas properties and acquisitions.
ITEM 2. PROPERTIES
GENERAL
We lease approximately 7,144 square feet of office space in Dallas,
Texas, for our corporate offices. The lease expires December 31, 1999 and
requires a monthly rental payment of approximately $8,232. We consider this
space adequate for our present needs. We also have an office in Tyler, Texas.
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<PAGE> 24
OTHER
We have described our oil and natural gas properties, oil and gas
reserves, acreage, wells, production and drilling activity in Item 1 beginning
on page 1 of this annual report.
ITEM 3. LEGAL PROCEEDINGS
During 1998, we were not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last three months of the year ended December 31, 1998, we
did not submit any matter to a vote by our shareholders through the solicitation
of proxies or otherwise.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION FOR OUR COMMON STOCK
Our common stock is currently quoted on the Nasdaq NMS under the symbol
"EXCO", but there is limited trading in the common stock. The following table
sets forth the high and low bid prices from January 1, 1997 through December 31,
1998, based upon quotations periodically published on the Nasdaq NMS. The price
quotations below have been adjusted to estimate the effect of our one-for-two
reverse stock split of the common stock in the case of quotations for periods
prior to March 31, 1998, the effective date of the stock split. All price
quotations represent prices between dealers, without retail mark-ups, mark-downs
or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----------- ---------
<S> <C> <C>
Year ended December 31, 1997
First Quarter..................................................... $ 5.50 $ 5.00
Second Quarter.................................................... 5.50 5.00
Third Quarter..................................................... 5.50 5.00
Fourth Quarter.................................................... 6.25 5.50
Year ended December 31, 1998
First Quarter..................................................... $ 7.00 $ 6.00
Second Quarter.................................................... 6.50 6.50
Third Quarter..................................................... 7.50 6.00
Fourth Quarter.................................................... 7.88 7.00
</TABLE>
The bid price for our common stock was $6.50 on March 1, 1999.
OUR SHAREHOLDERS
According to the records of our transfer agent, there were 1,625
holders of record of our common stock on February 19, 1999 (including nominee
holders such as banks and brokerage firms who hold shares for beneficial
holders).
OUR DIVIDEND POLICY
We have not paid any cash dividends on our common stock, and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
In addition, our credit facility currently prohibits us from paying dividends.
We anticipate that any income generated in the foreseeable future will be
retained for the development and expansion of our business. Our future dividend
policy is subject to the discretion of the board of directors and will depend
upon a number of factors, including future earnings, debt service, capital
requirements, restrictions in our credit facility, business conditions, our
financial condition and other factors that the board of directors deems
relevant.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected historical financial data.
You should read this financial data in conjunction with our financial
statements, the notes to our financial statements and the other financial
information, including pro forma information, included in this annual report.
This information does not replace the financial statements. In our opinion, the
data we have presented reflects all adjustments we consider necessary for a fair
presentation of the results for such periods.
<TABLE>
<CAPTION>
NINE MONTH
FISCAL YEAR TRANSITION
ENDED PERIOD ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
----------- ------------- ----------------------------------------
1995(1) 1995(1) 1996(1) 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Oil and natural gas .............. $ 626 $ 560 $ 872 $ 670 $ 1,385
Other ............................ 105 76 39 28 690
---------- ---------- ---------- ---------- ----------
Total revenues .............. 731 636 911 698 2,075
Costs and expenses:
Oil and natural gas production ... 403 333 429 322 786
Depreciation, depletion and
amortization ................... 81 92 114 84 465
General and administrative ....... 371 366 373 486 1,231
Interest expense ................. 4 5 18 11 104
Other (2) ........................ -- -- 303 -- --
---------- ---------- ---------- ---------- ----------
Total expenses .............. 859 796 1,237 903 2,586
---------- ---------- ---------- ---------- ----------
Loss before income taxes ............ (128) (160) (326) (205) (511)
Income taxes ........................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss ............................ $ (128) $ (160) $ (326) $ (205) $ (511)
========== ========== ========== ========== ==========
Net loss per share (3)(4) ........... $ (.39) $ (.47) $ (.85) $ (.51) $ (.18)
========== ========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding ....... 328 338 383 403 2,871
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- ----------------------------------------------------
1995 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets ................... $ 577 $ 582 $ 373 $ 727 $ 22,157
Oil and gas properties, net ...... 785 820 749 473 7,554
Total assets ..................... 1,439 1,511 1,226 1,270 36,888
Current liabilities .............. 653 861 658 328 648
Long-term debt ................... 16 40 36 15 --
Stockholders' equity ............. 770 610 532 927 36,240
</TABLE>
- ------------------
(1) The data for all prior years has been restated to reflect the change in
our method of accounting for oil and natural gas operations to the
full cost method of accounting. See Note 2 to our Financial Statements.
As a result of the change in the accounting method, the net loss for
the fiscal year ended March 31, 1995, the nine month period ended
December 31, 1995 and the year ended December 31, 1996, has been
decreased by $40,000 ($0.12 per share), $184,000 ($0.54 per share)
and $3,000 ($0.01 per share), respectively.
(2) The $303,000 expense in 1996 represents the legal, accounting and other
expenses associated with our attempted acquisition of Taurus Energy
Corp.
(3) Per share data has been restated to reflect the one-for-five reverse
stock split effective July 19, 1996, and the one-for-two reverse stock
split effective March 31, 1998. The adoption of Financial Accounting
Standards Board No. 128, Earnings per Share, did not have a material
impact on earnings per share amounts.
(4) We have not declared nor paid any dividends during any of the periods
presented.
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<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OUR RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1997 and December 31, 1998
Revenues. Oil and natural gas sales increased $715,000, or 107%, to
$1.4 million for the year ended December 31, 1998 from $670,000 for the year
ended December 31, 1997. The increase was due primarily to the acquisition we
made in Maverick County, the Jacobi-Johnson Energy, Inc. acquisition, and the
acquisition we made in Dawson County.
We sold 52,707 Bbls of oil during the year ended December 31, 1998
versus 14,453 Bbls in the corresponding period of 1997, a 265% increase. We sold
412,124 Mcf of natural gas during the year ended December 31, 1998 versus
181,091 Mcf in the corresponding period of 1997, a 128% increase. The increases
in oil and natural gas volumes were also attributable to our acquisitions.
During 1998 we received an average oil price of $12.01 per Bbl versus
$19.56 per Bbl during 1997, a $7.55 per Bbl or 39% decrease. During 1998 we
received an average natural gas price of $1.82 per Mcf versus $2.14 per Mcf for
1997, a $.32 per Mcf or 15% decrease.
Our other income for the year ended December 31, 1998 was $690,000 as
compared to $28,000 for the year ended December 31, 1997. This income primarily
includes interest income, salt water disposal income, and well supervision fees.
Other income increased due primarily to a $591,000 increase in interest income
which we received from cash equivalent investments and an additional $64,000 in
income we received from our two salt water disposal wells. We have reclassified
amounts in the prior years' statements of operations to reflect a change in the
way we classify fees from overhead charges billed to working interest owners,
including ourselves. We previously recorded these overhead charges as management
fee revenue, and we now record them as a reduction in general and administrative
expenses.
Costs and Expenses. Our costs and expenses increased $1.7 million, or
186%, to $2.6 million for the year ended December 31, 1998 as compared to costs
and expenses of $903,000 for the year ended December 31, 1997. Our costs and
expenses primarily increased due to a $745,000 increase in general and
administrative costs. This increase reflects expenses associated with our
increased staffing and our new focus on reserve acquisitions. Our costs and
expenses also increased due to a $464,000 increase in oil and natural gas
production expenses and a $381,000 increase in depreciation, depletion and
amortization expenses, both increases due to our 1998 acquisitions. We also had
an increase of $93,000 in interest expense as a result of periodic borrowings
against our credit facility.
In 1997, we changed our method of accounting for oil and natural gas
properties from successful efforts to the full cost method of accounting. We
have restated prior years to reflect this change in accounting method as though
we had been using the full cost method for all periods we are comparing in this
annual report. Effective December 31, 1997, we effected a quasi-reorganization
by applying approximately $8.8 million of our additional paid-in capital account
to eliminate our accumulated deficit.
Net Loss. We had a net loss for the year ended December 31, 1998 of
$511,000, or $.18 per share, compared to a loss of $205,000, or $.51 per share,
for the year ended December 31, 1997. We have based our earnings per share
figures on restated weighted average shares outstanding after the retroactive
effect of the one-for-two reverse stock split approved at our shareholders'
meeting held on March 31, 1998.
Comparison of Year Ended December 31, 1996 and December 31, 1997
Revenues. Our oil and natural gas sales decreased $202,000, or 23%, to
$670,000 for the year ended December 31, 1997 from $872,000 for the year ended
December 31, 1996. During 1997, we sold various non-strategic oil and natural
gas properties which decreased our production volumes and oil and natural gas
sales. For 1997 our oil prices were 4% lower and our natural gas prices were 14%
higher than the same prices in 1996.
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<PAGE> 28
For 1997, our oil sales volume decreased 35% and our natural gas sales volume
decreased 19% from 1996. These decreases were caused by property sales and the
depletion of existing properties. Our other income for the year ended December
31, 1997 was $38,000 as compared to $39,000 for the year ended December 31,
1996. This income primarily includes well supervision fees and interest income.
Costs and Expenses. Our costs and expenses decreased $334,000, or 27%,
to $903,000 for the year ended December 31, 1997 from approximately $1.2 million
for the year ended December 31, 1996. This decrease was due primarily to
expenses of $303,000 incurred in 1996 in connection with our attempted
acquisition of Taurus Energy Corp. Our oil and natural gas production costs
decreased $107,000 to $322,000 for 1997 from $429,000 in 1996 as a result of the
property sales. Our general and administrative expenses increased $113,000 to
$486,000 in 1997 from $373,000 in 1996 due to increases in our office expenses
and a reduction in our billed salary reimbursement as a result of the
disposition of an oil property.
Net Loss. Our net loss decreased $121,000 for the year ended December
31, 1997 to $205,000, or $.51 per share, as compared to a loss of $326,000, or
$.85 per share, for the year ended December 31, 1996. This decrease was
primarily due to a reduction in revenues being partially offset by a decrease in
expenses as more fully described above.
1997 QUASI-REORGANIZATION
Effective December 31, 1997, we effected a quasi-reorganization by
applying approximately $8.8 million of our additional paid-in capital account to
eliminate our accumulated deficit. Our board of directors decided to effect this
quasi-reorganization given the change in management in December 1997, the
infusion of new equity capital during December 1997 and an expected increase in
acquisition, exploitation and development activities. Based on these factors and
the establishment of a strategic growth plan, our board of directors and
management believed reflecting prior losses on our balance sheet would not be
meaningful in presenting our financial position. Our accumulated deficit was
primarily related to past operations and properties that had been disposed of;
the accumulated deficit was not, in management's view, reflective of our
financial condition at that time. We did not adjust the historical carrying
values of our assets and liabilities in connection with the
quasi-reorganization.
WE CHANGED OUR METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, we changed from the successful efforts
method to the full cost method of accounting for our oil and natural gas
operations. We have restated all of the prior financial statements which we
present in this annual report to reflect the change.
During the ten years ending in December 1997, we incurred minimal
exploration and acquisition costs, liquidated substantially all our properties
and completed "out of court" debt structurings. The "out of court" debt
structurings were completed during 1987 and 1988. During the fourth quarter of
1997, we experienced a change in ownership control and we appointed new
management. Our management views us as a new company and believes our past
operations are insignificant and not relevant to our future plans.
Our new management changed the accounting method for oil and natural
gas properties because management believes the full cost method will more
appropriately reflect our change in focus for future
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<PAGE> 29
operations. Further, our new management does not believe that using the
successful efforts method of accounting is appropriate for a small to medium
size acquisition, development and exploitation company.
OUR LIQUIDITY AND CAPITAL RESOURCES
General
On December 31, 1998 we had working capital of $21.5 million compared
to $399,000 on December 31, 1997. The sale of common stock through a rights
offering in August 1998 for net proceeds of $35.2 million contributed to the
$21.1 million increase in our working capital. Our working capital on December
31, 1997 was $399,000 compared to a negative $285,000 on December 31, 1996. This
$684,000 increase in our working capital resulted from the sale of non-strategic
oil and natural gas properties in 1997. Our 1999 budget for capital expenditures
is approximately $2.4 million.
Deferred Income Taxes
In order to realize the benefit of our deferred tax asset, we must
generate enough income prior to the expiration of this asset. We believe there
is a risk, in light of current economic conditions in the oil and gas industry,
that our net operating loss carryforwards may expire unused. In accordance with
generally accepted accounting principles, we must reduce the value of the
deferred tax asset if we estimate that the asset will not be utilized in future
periods. Accordingly, we have established a valuation allowance of $457,000 in
1998 to reduce the value of the asset. As a result, it is likely that our
effective tax rate in 1999 will be minimal if we recognize a loss before income
taxes. If we recognize positive earnings before taxes, the effective tax rate
will be reduced based on limitations described in the tax code. Additional
discussion can be found in Item 8-Financial Statements and Supplementary Data,
Note 4 - Income Taxes.
Long-Term Debt
On December 31, 1998, we had no long-term debt.
Sale of Equity
On July 16, 1998, we commenced a rights offering to our existing
shareholders. Each shareholder received ten rights for each share of our common
stock held. Each right entitled the shareholder to purchase one share of our
common stock for $6.00 per share. The rights offering expired on August 12,
1998. We received net proceeds of approximately $35.2 million. 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. To date, we have used $6.4 million to repay our
indebtedness, $6.5 million for the acquisition of Rio Grande, Inc., $341,000 for
our share of capital contributions to EXCO Energy Investors, L.L.C. and $400,000
for general corporate purposes. We intend to use the remaining proceeds of the
rights offering for acquisitions, development drilling and recompletions, the
repayment of bank indebtedness, working capital and general corporate purposes.
New Credit Facility
On February 11, 1998, we entered into a credit facility with
NationsBank of Texas, N.A. The credit facility initially provided for borrowings
up to $50 million, subject to borrowing base limitations. On September 21, 1998,
we 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 million, subject to borrowing base
limitations. The bank has sole discretion to determine our borrowing base based
on its valuation of our reserves valued semi-annually.
The credit facility consists of a regular revolver which on December
31, 1998, had a borrowing base of approximately $5.5 million. On March 1, 1999,
we had approximately $5.5 million available for borrowing 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 our
oil and natural gas properties.
The credit facility provides that if our aggregate outstanding
indebtedness is less than $5 million, advances will bear interest at 1.5% over
the appropriate LIBOR rate. If our aggregate outstanding indebtedness is greater
than $5 million, then our 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 59-70%, 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 us to repay and reborrow amounts under the credit facility
without any penalty, thereby allowing us the flexibility to utilize any
available cash to reduce our outstanding indebtedness and thus, our costs of
borrowed funds.
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<PAGE> 30
Under the terms of the credit facility, we must not permit our current
ratio of consolidated current assets to our consolidated current liabilities to
be less than 1.0 to 1.0 at any time. Furthermore, we must not permit our
consolidated tangible net worth to be less than $500,000 at any time between
February 11, 1998 and March 31, 1999. In addition, by March 31, 1999, our
consolidated tangible net worth must increase by 50% of our consolidated net
income for the fiscal quarter then ended and for every fiscal quarter thereafter
must increase by 50% of our consolidated net income for the fiscal quarter then
ended. Our consolidated tangible net worth must increase on the date we issue
any equity securities after December 31, 1998, by an amount equal to 75% of the
net proceeds we receive from the issuance of these securities. On March 1,
1999, we were in compliance with both the consolidated tangible net worth
covenant and the current ratio covenant.
No principal amortization will be required during the term of the
credit facility as long as the aggregate principal balance does not exceed the
borrowing base then in effect. However, if a borrowing base deficiency were to
exist after giving effect to a redetermination, then we would have to do one of
the following:
o eliminate the borrowing base deficiency by making a single mandatory
prepayment of principal on the revolving loan in an amount equal to
the entire amount of the borrowing base deficiency on the first
monthly date following the date on which the borrowing base
deficiency is determined to exist;
o eliminate the deficiency by making six consecutive mandatory
prepayments of principal on the revolving loan each of which shall
be in the amount of one sixth (1/6th) of the amount of the borrowing
base deficiency commencing on the first monthly date following the
date on which the borrowing base deficiency is determined to exist
and continuing on each monthly date thereafter; or
o eliminate the borrowing base deficiency by submitting additional
mineral interests to the banks on the first monthly date following
the date on which the borrowing base deficiency is determined to
exist for evaluation as borrowing base properties which the banks,
in their sole discretion, determine have a value sufficient to
increase the borrowing base by at least the amount of the borrowing
base deficiency.
The credit facility matures on February 11, 2000. Our next borrowing
base redetermination is scheduled for no later than April 1, 1999, and
semi-annually thereafter. We may seek additional borrowing capacity at that time
for our development drilling program. However, we cannot assure you that our
current development program will result in increased collateral values or that
these values will enable us to borrow the funds we need to continue the program.
The credit facility contains a number of covenants affecting our
liquidity and capital resources, including restrictions on our ability to incur
indebtedness at any time in an amount exceeding $100,000 or to pledge assets
outside of the credit facility, our maintenance of a minimum net worth and
restrictions on the payment of dividends on our capital stock.
Need to Raise Additional Capital
The growth of our business will require substantial capital on a
continuing basis. For example, in order for us to consummate our proposal with
respect to acquiring National Energy Group, Inc., we will need to obtain
additional financing. We cannot assure you that additional funds we may require
will be available on satisfactory terms and conditions, if at all. We may
pursue, from time to time, opportunities to acquire oil and natural gas
properties and businesses that may utilize the capital we currently expect to be
available for our present operations. The amount and timing of our future
capital requirements, if any, will depend upon a number of factors, including
drilling costs, transportation costs, equipment costs, marketing expenses,
staffing levels, competitive conditions, and any purchases or dispositions of
assets. We do not control many of these factors. If we fail to obtain any
required additional financing, then our growth, cash flow and earnings may be
adversely affected. In addition, we may incur additional debt or engage in
potentially dilutive issuances of equity securities in our pursuit of additional
capital.
- 28 -
<PAGE> 31
EFFECT OF INFLATION AND CHANGING PRICES ON OUR BUSINESS
It is difficult for us to assess the impact of inflation on our
business. In 1998 and through the first quarter of 1999, we have experienced a
weakness in the prices we receive for our oil and natural gas production. We
cannot anticipate whether inflation will remain at its present level. However,
a sudden increase in inflation and/or an increase in our operating costs or
drilling costs coupled with a continuation of low oil prices could have an
adverse effect on our operations.
OUR YEAR 2000 COMPLIANCE
Project. We have placed a high priority on proactively resolving
computer or imbedded chip problems related to the "Year 2000" which may have
adverse material effects on our continuing operations or cash flow. This problem
would be caused by the inability of a component (software, hardware or equipment
with embedded microprocessors) to correctly process date data in and between the
20th and 21st centuries and therefore fail to properly perform its intended
functions, and/or to exchange correct date data with other components. This
problem would most typically be caused by erroneous date calculations, which
results from using two digits to signify a year (century implied), handling leap
years incorrectly or the use of "special" values that can be confused with
legitimate calendar dates. The scope of the Year 2000 project includes
conducting an inventory of our software, hardware and "embedded systems"
equipment, assessing potential for failure and the associated risk, prioritizing
the need for remediation, repairing or replacing significant noncompliant items,
and testing. In addition, we will take a similar approach to mitigating risks
associated with the Year 2000 readiness of material business partners (vendors,
suppliers, customers, etc.). The project will also identify contingency plans to
cope with unexpected events resulting from Year 2000 issues.
Beginning in mid 1998, we began an assessment of our core financial and
operational software systems. We identified three critical systems with date
sensitivities: oil and gas financial accounting, production accounting and
land/lease administration. We currently use a Year 2000 ready release of an oil
and gas financial accounting package. We also use a Year 2000 ready production
accounting system. The land/lease administration package we use is also Year
2000 ready. All of these packages will be updated for any releases of new
versions of the vendors' software as it becomes available. We expect to receive
the respective vendors' support and to take advantage of additional features and
performance enhancements. We rely on vendors' representations that our software
is Year 2000 ready and we do not intend to test it. Assessments continue for
lower priority software systems.
In addition, we use a Year 2000 ready AS/400 on which our accounting
software resides.
Other activities which we have started or scheduled to start during the
balance of 1999 include testing of desktop PC's, assessment of material business
partners, and an inventory of embedded systems in field locations. We have
engaged an outside consultant to assist in reviewing equipment used in our oil
and natural gas producing operations. We are also seeking written verification
from our major operators, suppliers and customers that they will be Year 2000
compliant. We anticipate that the costs of seeking verification will be minimal.
We believe that it is not practical to independently verify the responses we
receive because we do not believe we will be given access to carry out
verification or that the cost will be affordable. The cost of replacing
non-compliant or non-responsive operators, suppliers and customers will not be
determined until the review has progressed. The following table summarizes the
current overall status of the project with anticipated completion dates:
- 29 -
<PAGE> 32
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PHASE
- -----------------------------------------------------------------------------------------------------------------------
COMPONENT INVENTORY ASSESSMENT/PRIORITIZATION REMEDIATION/CONTINGENCY
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Software Complete April 30, 1999 June 30, 1999
Hardware Complete April 30, 1999 June 30, 1999
Business Partners March 31, 1999 April 30, 1999 June 30, 1999
Embedded Systems March 31, 1999 April 30, 1999 June 30, 1999
(Non-IT Systems)
</TABLE>
In addition to the above, during the second quarter of 1999 we will
develop an overall contingency plan designed to provide for continued operations
which will include precautionary measures.
Cost. As of February 28, 1999, we have incurred no consulting costs for
Year 2000 project planning and scope definition. All software packages requiring
an upgrade which have been identified will be upgraded and may require
additional out-of-pocket expenses which are expected to be minimal. An accurate
cost cannot be determined prior to the conclusion of the
Assessment/Prioritization phase, but it is expected that our total project
expenditures including the use of outside consultants, if any, should not exceed
$20,000 paid from our working capital. This excludes any costs which may
be assessed by joint venture partners on properties not operated by us.
Risks/Contingency. The failure to remediate critical systems (software,
hardware or embedded systems), or the failure of a material business partner to
resolve critical Year 2000 issues could have a serious adverse impact on our
ability to continue operations and meet obligations. Any Year 2000 problems that
do occur will likely manifest themselves in reduced production through equipment
shut down or impaired liquidity through an inability of our customers to take
delivery or to process payment. At the current time, we believe that any
interruption in operation will be minor and short-lived and will pose no safety
or environmental risks. However, until all assessment phases have been completed
it is impossible to accurately identify the risks, quantify potential impacts or
establish a contingency plan. We have not yet clearly identified the most likely
worst case scenario if we and our material business partners do not achieve Year
2000 readiness on a timely basis. We currently intend to complete our
contingency planning by June 30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
- 30 -
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXCO RESOURCES, INC.
FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1997, and 1998
CONTENTS
<TABLE>
<S> <C>
Audited Financial Statements
Reports of Independent Auditors.................................... 32
Balance Sheets..................................................... 34
Statements of Operations........................................... 35
Statements of Cash Flows........................................... 36
Statements of Changes in Stockholders' Equity...................... 37
Notes to Financial Statements...................................... 38
</TABLE>
- 31 -
<PAGE> 34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EXCO Resources, Inc.
We have audited the accompanying balance sheets of EXCO Resources, Inc., as of
December 31, 1997 and 1998, and the related statements of operations, cash
flows, and changes in stockholders' equity for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EXCO Resources, Inc., at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As explained in Note 2 to the financial statements, EXCO Resources, Inc. has
given retroactive effect to the change in accounting for oil and natural gas
properties from the successful efforts method to the full cost method.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
February 26, 1999
- 32 -
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EXCO Resources, Inc.
We have audited the accompanying statements of operations, cash flows and
changes in stockholders' equity for the year ended December 31, 1996 of EXCO
Resources, Inc. 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 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 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 results of operations and cash flows of EXCO
Resources, Inc. for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
As explained in Note 2 to the financial statements, EXCO Resources, Inc. has
given retroactive effect to the change in accounting for all oil and natural gas
properties from the successful efforts method to the full cost method.
/s/ BELEW AVERITT LLP
BELEW AVERITT LLP
Dallas, Texas
March 13, 1997, except Note 2, as to
which the date is February 11, 1998 and
Note 1, Reverse Stock Split-1998, as to
which the date is March 31, 1998
- 33 -
<PAGE> 36
EXCO RESOURCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1998
--------------- ---------------
(In thousands, except per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 496 $ 21,493
Accounts receivables:
Oil and gas sales ................................................ 71 257
Joint interest ................................................... 155 283
Other ................................................................ 5 124
--------------- ---------------
Total current assets ........................................ 727 22,157
Oil and gas properties (full cost accounting method):
Proved developed and undeveloped oil and gas properties .............. 4,303 11,765
Allowance for depreciation, depletion and amortization ............... (3,830) (4,211)
--------------- ---------------
Oil and gas properties, net .......................................... 473 7,554
Office and field equipment, net ........................................... 70 248
Deferred financing costs .................................................. -- 49
Investment in Rio Grande, Inc. promissory note ............................ -- 6,539
Investment in EXCO Energy Investors, L.L.C. ............................... -- 341
--------------- ---------------
Total assets ................................................ $ 1,270 $ 36,888
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 262 $ 480
Revenues and royalties payable ....................................... 50 167
Current maturities of long-term debt ................................. 16 1
--------------- ---------------
Total current liabilities ................................... 328 648
Long-term debt, less current maturities ................................... 15 --
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Outstanding shares - None ........................................ -- --
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 1998, respectively ...................... 10 134
Additional paid-in capital ........................................... 9,716 46,241
Notes receivable-officers ............................................ -- (825)
Deficit eliminated ................................................... (8,799) (8,799)
Retained earnings (deficit), as adjusted for quasi-reorganization
at December 31, 1997 ............................................. -- (511)
--------------- ---------------
Total stockholders' equity .................................. 927 36,240
--------------- ---------------
Total liabilities and stockholders' equity .................. $ 1,270 $ 36,888
=============== ===============
</TABLE>
See accompanying notes.
- 34 -
<PAGE> 37
EXCO RESOURCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES:
Oil and natural gas ................................... $ 872 $ 670 $ 1,385
Other income .......................................... 39 28 690
------------ ------------ ------------
Total revenues ............................... 911 698 2,075
COST AND EXPENSES:
Oil and gas production ................................ 429 322 786
Depreciation, depletion and amortization .............. 114 84 465
General and administrative ............................ 373 486 1,231
Abandoned acquisition ................................. 303 -- --
Interest .............................................. 18 11 104
------------ ------------ ------------
Total cost and expenses ...................... 1,237 903 2,586
------------ ------------ ------------
Loss before income taxes ................................... (326) (205) (511)
Income tax expense (benefit) ............................... -- -- --
------------ ------------ ------------
Net loss ................................................... $ (326) $ (205) $ (511)
============ ============ ============
Basic and diluted earnings per share ....................... $ (.85) $ (.51) $ (.18)
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding ..................... 383 403 2,871
============ ============ ============
</TABLE>
See accompanying notes.
- 35 -
<PAGE> 38
EXCO RESOURCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (326) $ (205) $ (511)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation, depletion and amortization .............. 114 84 465
Stock compensation expense ............................ 23 -- --
Loss on disposition and abandonment of
equipment ........................................... 2 10 --
Effect of changes in:
Accounts receivable ............................... 34 100 (257)
Other current assets .............................. -- (4) (111)
Accounts payable and other current liabilities .... (155) (166) 287
---------- ---------- ----------
Net cash used in operating activities ...................... (308) (181) (127)
INVESTING ACTIVITIES:
Payment for oil and gas acquisitions, net of cash .......... -- -- (6,146)
Other additions to property and equipment .................. (27) (100) (1,039)
Investment in EXCO Energy Investors, L.L.C. ................ -- -- (341)
Investment in Rio Grande, Inc. promissory note ............. -- -- (6,539)
Proceeds from disposition of property and equipment ........ 3 304 5
---------- ---------- ----------
Net cash provided by (used in) investing activities ........ (24) 204 (14,060)
FINANCING ACTIVITIES:
Proceeds from note payable and long-term debt .............. 150 -- 6,360
Payments on long-term debt ................................. (18) (23) (6,390)
Payments on note payable ................................... (200) (150) --
Proceeds from issuance of common stock ..................... 225 600 35,214
---------- ---------- ----------
Net cash provided by financing activities .................. 157 427 35,184
---------- ---------- ----------
Net increase (decrease) in cash ............................ (175) 450 20,997
Cash at beginning of year .................................. 221 46 496
---------- ---------- ----------
Cash at end of year ........................................ $ 46 $ 496 $ 21,493
========== ========== ==========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid .............................................. $ 18 $ 11 $ 104
========== ========== ==========
Income taxes paid .......................................... $ -- $ -- $ --
========== ========== ==========
</TABLE>
- 36 -
<PAGE> 39
EXCO RESOURCES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
NUMBER ADDITIONAL NOTES DEFICIT RETAINED TOTAL
OF PAID-IN RECEIVABLE- ELIMIN- EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL OFFICERS ATED (DEFICIT) EQUITY
---------- ---------- ---------- ---------- ---------- ---------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance on December 31, 1995 ............ 338 $ 7 $ 8,871 $ -- $ -- $ (8,268) $ 610
Exercise of options ................ 60 1 224 -- -- -- 225
Common stock issued ................ 5 0 23 -- -- -- 23
Net loss ........................... -- -- -- -- -- (326) (326)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance on December 31, 1996 ............ 403 8 9,118 -- -- (8,594) 532
Common stock issued ................ 100 2 598 -- -- -- 600
Net loss ........................... -- -- -- -- -- (205) (205)
Adjustment for quasi-
reorganization
as of December 31, 1997 .......... -- -- -- -- (8,799) 8,799 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance on December 31, 1997 ............ 503 10 9,716 -- (8,799) -- 927
Purchase of oil and gas assets ..... 6 0 37 -- -- -- 37
Purchase of Jacobi-Johnson
Energy, Inc. ..................... 85 2 511 -- -- -- 513
Shares issued for rights offering .. 5,944 119 35,080 -- -- -- 35,199
Exercise of options ................ 150 3 897 -- -- -- 900
Notes issued by officers ........... -- -- -- (825) -- -- (825)
Net loss ........................... -- -- -- -- -- (511) (511)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance on December 31, 1998 ............ 6,688 $ 134 $ 46,241 $ (825) $ (8,799) $ (511) $ 36,240
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
- 37 -
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
EXCO Resources, Inc., (the Company), a Texas corporation, was formed in
1955. Our operations consist primarily of acquiring interests in producing oil
and natural gas properties located in the continental United States. We also act
as the operator on some of these properties and receive overhead reimbursement
fees as a result.
QUASI-REORGANIZATION
Effective December 31, 1997, we effected a quasi-reorganization by applying
approximately $8.8 million of our additional paid-in capital account to
eliminate our accumulated deficit. Our 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. Our accumulated deficit was primarily
related to past operations and properties that have been disposed of. We did not
adjust the historical carrying values of our assets and liabilities in
connection with the quasi-reorganization.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, we are required to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses during
the reporting period. Actual results may differ from management's estimates.
CASH EQUIVALENTS
We consider all highly liquid investments with maturities of three months or
less when purchased, to be cash equivalents.
CONCENTRATION OF CREDIT RISK AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject us to a concentration of
credit risk consist principally of cash and trade receivables. We place our cash
with high credit quality financial institutions. We sell oil and natural gas to
various customers. In addition, we participate with other parties in the
drilling, completion, and operation of oil and natural gas wells. Substantially
all of our accounts receivable are due from either purchasers of oil, natural
gas, or natural gas liquids or participants in oil and natural gas wells for
which we serve as the operator. Generally, operators of oil and natural gas
properties have the right to offset future revenues against unpaid charges
related to operated wells. Oil and natural gas sales are generally unsecured. We
have provided for credit losses in the financial statements and these losses
have been within management's expectations. The allowance for doubtful accounts
receivable aggregated $18,000 and $9,000 at December 31, 1997 and 1998,
respectively.
OIL AND NATURAL GAS PROPERTIES
We have recorded oil and natural gas properties at cost using the full cost
method of accounting, as prescribed by the Securities and Exchange Commission.
Under the full cost method, all costs associated with the acquisition,
exploration or development of oil and natural gas properties are capitalized as
part of the full cost pool. Capitalized costs are limited to the aggregate of
the present value of future net reserves plus the lower of cost or fair market
value of unproved properties.
Depreciation, depletion, and amortization of evaluated oil and natural gas
properties are provided using the unit-of-production method based on total
proved reserves, as determined by independent petroleum reservoir engineers.
- 38 -
<PAGE> 41
Sales, dispositions, and other oil and natural gas property retirements are
accounted for as adjustments to the full cost pool, with no recognition of gain
or loss unless the disposition would significantly alter the amortization rate.
OFFICE AND FIELD EQUIPMENT
Office and field equipment are capitalized at cost and depreciated on a
straight line basis over their estimated useful lives.
REVENUE RECOGNITION
We use the sales method of accounting for oil and natural gas revenues.
Under the sales method, revenues are recognized based on actual volumes of oil
and natural gas sold to purchasers.
OVERHEAD REIMBURSEMENT FEES
We have classified fees from overhead charges billed to working interest
owners, including us, of $138,000, $136,000, and $278,000 for the years ended
December 31, 1996, 1997, and 1998, respectively, as a reduction of general and
administrative expenses in the accompanying statements of operations. For the
year ended December 31, 1996, this amount was previously shown as revenue.
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings per Share,
which became effective in 1997, requires presentation of two calculations of
earnings per common share. Basic earnings per common share equals net income
divided by weighted average common shares outstanding during the period. Diluted
earnings per common share equals net income divided by the sum of weighted
average common shares outstanding during the period plus any dilutive shares
assumed to be issued. Common stock equivalents are shares assumed to be issued
if outstanding stock options were exercised. We have restated all prior period
amounts, where appropriate, to reflect these calculations. We were not
materially impacted when we adopted Statement No.128.
REVERSE STOCK SPLITS
At our 1996 annual meeting of shareholders, our shareholders approved an
amendment to our articles of incorporation, authorizing a one-for-five reverse
stock split of our common stock, which became effective July 19, 1996. At our
1998 annual meeting of shareholders, our shareholders approved an amendment to
our articles of incorporation, authorizing a one-for-two reverse stock split of
our common stock, which became effective March 31, 1998. We have adjusted all
share and per share numbers retroactively to record the effects of the reverse
stock split.
PREFERRED STOCK
At the 1996 annual meeting, our shareholders also authorized the issuance of
up to 10,000,000 shares of preferred stock, $.01 par value per share, that the
board of directors may issue from time to time in one or more series. With
respect to each series of preferred stock, the amendment authorizes the board to
fix and determine by resolution the number of shares of each series, the
designation thereof and all rights and preferences including voting, dividend,
conversion, redemption and liquidation rights. To date no shares have been
issued. The board of directors deemed it in our best interest to provide for
corporate planning and to have shares available for future equity financings
through issuance to the general public, future acquisitions, stock dividends or
splits or for other corporate purposes for which the issuance of preferred
shares may be advisable.
- 39 -
<PAGE> 42
2. CHANGE IN METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, we changed from the successful efforts method
to the full cost method of accounting for our oil and natural gas operations.
All prior year's financial statements presented in this annual report have been
restated to reflect the change.
During the past ten years ending in 1997, we incurred minimal exploration
and acquisition costs which resulted in the liquidation of substantially all of
our properties. During 1987 and 1988 we completed "out of court" debt
restructurings. During the fourth quarter of 1997 we experienced a change in
control of ownership and new management was appointed. New management views us
as a new company and believes our past operations are insignificant and not
relevant to our future plans.
New management believes that the change in accounting for oil and natural
gas properties is proper because the full cost method will more appropriately
reflect our future operations which will result from our significant management
changes. Further, new management does not believe that the use of the successful
efforts method of accounting is appropriate for a small to medium size
acquisition, development and exploitation company.
We have restated the financial statements to apply the new accounting method
retroactively. The effect of the change in accounting principle on our 1997 net
loss and earnings per share data was immaterial due to our relative inactivity
in exploration and development activities. The effect of the accounting change
on the results of operations for the year ended December 31, 1996 is as follows
(in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
STATEMENTS OF OPERATIONS:
Net loss as previously reported ................................. $ (329)
Adjustment for effect of a change in accounting principle
that is applied retroactively .............................. 3
----------------
Net loss as adjusted ............................................ $ (326)
================
PER SHARE AMOUNTS:
Net loss as previously reported ................................. $ (.85)
Adjustment for effect of a change in accounting principle
that is applied retroactively .............................. --
----------------
Net loss as adjusted ............................................ $ (.85)
================
Common shares used in per share calculation ..................... 383
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY:
Balance at beginning of period, as adjusted ..................... $ 610
Net loss ........................................................ (326)
Shares issued upon exercise of stock options .................... 225
Common stock issued ............................................. 23
----------------
Balance at end of year .......................................... $ 532
================
</TABLE>
- 40 -
<PAGE> 43
3. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
------------ ---------
<S> <C> <C>
Notes payable................................................. $ 31 $ 1
Less current maturities....................................... 16 1
------------ ---------
Long-term debt................................................ $ 15 $ 0
============ =========
</TABLE>
NATIONSBANK CREDIT AGREEMENT
On February 11, 1998, we entered into a credit facility with NationsBank of
Texas, N.A. The credit facility provided for borrowings up to $50 million,
subject to borrowing base limitations. On September 21, 1998, we 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 million, subject to borrowing base limitations, as determined by the
lenders from time to time. Under the credit facility, we are required to pay a
fee equal to .25% on any accepted increase in the borrowing base in excess of
the previously determined borrowing base and a commitment fee of .30% to .425%
based on the ratio of outstanding credit to the borrowing base. The maturity
date of the credit facility is February 11, 2000.
The credit facility provides that if our outstanding credit is less than $5
million, then our interest rate will be LIBOR plus 1.5%. If our outstanding
credit is greater than $5 million, then the credit facility provides that our
interest rate will be either NationsBank's prime rate or LIBOR plus between 1%
and 1.75% based on the ratio of outstanding credit to the borrowing base.
There are no scheduled principal payments due on the credit facility until
maturity. However, the borrowing base will be redetermined on or around April
1st and October 1st of each year. A borrowing base deficiency is created in the
event that the outstanding loan balances exceed the borrowing base, as
determined by the lenders in their sole discretion. Upon such event the
borrowing base deficiency must be repaid by:
(1) mandatory reductions of the deficiency over a period of not more
than 6 months;
(2) making a lump sum payment equal to the deficiency; or
(3) providing additional collateral acceptable to lenders in their
sole discretion sufficient to increase the borrowing base and
eliminate the deficiency.
Borrowings under the credit facility are secured by first and prior liens
covering 90% of the recognized value of all proved mineral interests owned by
us. The credit facility contains various restrictive covenants, including
limitations on the granting of liens, restrictions on the issuance of additional
debt, requirements to maintain a net worth of at least $500,000 and to maintain
a current ratio of not less than 1.0 to 1.0, and currently prohibits the payment
of dividends on our capital stock.
4. INCOME TAXES
At December 31, 1998, we had net operating loss carryforwards (NOLs) for
income tax purposes that expire beginning in 1998. Our ability to use the NOLs
is significantly restricted because of a change in our ownership, as defined by
the Tax Reform Act of 1986, which occurred December 19, 1997, as described in
Note 1. We estimate that approximately $2.6 million of the NOLs will become
available in the future at the rate of approximately $127,000 per year through
2018. We also have available statutory depletion carryforwards of approximately
$16,000. For financial reporting purposes, a valuation allowance has been
recognized to offset the deferred tax assets related to carryforwards prior to
our quasi-reorganization. When realized, the tax benefit for those
carryforwards will be credited to additional paid-in capital.
- 41 -
<PAGE> 44
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
our deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
---------- ----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Book basis of oil and gas properties in excess of tax basis ..... $ 189 $ 457
---------- ----------
Total deferred tax liabilities .............................. 189 457
DEFERRED TAX ASSETS:
Net operating loss carryforwards ................................ 649 902
Credit carryforwards ............................................ 36 29
Statutory depletion carryforwards ............................... 315 16
Other ........................................................... 6 4
Valuation allowance for deferred tax assets ..................... (817) (494)
---------- ----------
Total deferred tax assets ................................... 189 457
---------- ----------
Net deferred tax liabilities .................................... $ -- $ --
========== ==========
</TABLE>
The following is a reconciliation, stated as a percentage of pretax income
(loss) taxable at the corporate level, of the U.S. statutory federal income tax
rate to our effective tax rate:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
U.S. federal statutory rate ...................... 34% 34% 34%
Adjustments to the valuation allowance ........... (34%) (34%) (34%)
---------- ---------- ----------
Effective tax rate ............................... -- -- --
========== ========== ==========
</TABLE>
- 42 -
<PAGE> 45
5. STOCK TRANSACTIONS
ISSUANCE OF COMMON STOCK
On March 5, 1998 we issued 6,250 shares of common stock as
consideration for the acquisition of working interests from J. Michael
Muckleroy, an outside director. On May 8, 1998 we issued 85,436 shares of common
stock as partial consideration for the Jacobi-Johnson Energy, Inc. acquisition.
On July 16, 1998 the Securities and Exchange Commission declared our
registration statement effective authorizing the commencement of a rights
offering to our existing shareholders. Each shareholder received ten rights for
each share of our common stock held. Each right entitled the shareholder to
purchase one share of our common stock for $6.00 per share. The rights offering
expired on August 12, 1998. We received net proceeds of approximately $35.2
million and issued approximately 5.9 million shares. On September 15, 1998
several of our directors and executive officers exercised stock options covering
150,000 shares of common stock at a strike price of $6.00 per share. Of the
$900,000 in aggregate proceeds, these directors and executive officers paid
$75,000 in cash with $825,000 being borrowed from us.
The following table summarizes our stock option activity:
<TABLE>
<CAPTION>
EXERCISE
PRICE
STOCK PER
OPTIONS SHARE
---------- ----------
<S> <C> <C>
Outstanding at December 31, 1995 ................. 60,000 $ 3.75
Granted ..................................... --
Expired or canceled ......................... --
Exercised ................................... (60,000) $ 3.75
----------
Outstanding at December 31, 1996 ................. --
Granted ..................................... 125,000 $ 5.50
Expired or canceled ......................... (125,000) $ 5.50
Exercised ................................... --
----------
Outstanding at December 31, 1997 ................. --
Granted ..................................... 1,072,500 $ 6.00
Expired or canceled ......................... --
Exercised ................................... (150,000) $ 6.00
----------
Options outstanding at December 31, 1998 ......... 922,500 $ 6.00
==========
Options exercisable at December 31, 1998 ......... 118,125 $ 6.00
==========
</TABLE>
In October 1995, the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for employee stock compensation plans, but allows for the
continuation of the intrinsic value based method of accounting to measure
compensation cost prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). For companies electing
not to change their accounting, SFAS 123 requires pro-forma disclosures of
earnings and earnings per share as if the change in accounting provision of SFAS
123 has been adopted.
We have elected to continue to utilize the accounting method prescribed
by APB 25, under which no compensation cost has been recognized, and adopt the
disclosure requirements of SFAS 123. As a result, SFAS 123 has no effect on our
financial condition or our results of operations at December 31, 1996, 1997 and
1998.
Had compensation costs for these plans been determined consistent with
SFAS 123, our net income and earnings per share would have been adjusted to the
following pro-forma amounts.
- 43 -
<PAGE> 46
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Loss................................. As Reported..... (326,000) (205,000) (511,000)
Pro Forma....... (326,000) (205,000) (711,000)
Basic and Diluted EPS.................... As Reported..... (.85) (.51) (.18)
Pro Forma....... (.85) (.51) (.25)
</TABLE>
The present value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model. The following assumptions
were used: fair market value of stock at date of grant of $6.00; option exercise
price of $6.00; option term of 10 years; risk-free rate of return is based on
10-year U.S. Treasury Notes; company stock volatility is based on prior 20 month
stock prices; company dividend yield of 0%; and calculated Black-Scholes value
of $2.54 per option.
6. RELATED PARTY TRANSACTIONS
In the past, certain of our directors, and the companies with which
they are affiliated, participated in oil and natural gas joint ventures with us
upon the same terms and conditions as unrelated parties. In addition, we have
purchased certain oil and natural gas prospects as well as drilling services and
oil field supplies and services in the normal course of business from directors
or from companies in which certain directors have financial interest. We made no
significant purchases during the year ended December 31, 1997. During the year
ended December 31, 1998, we purchased working interests from an outside
director, in exchange for 6,250 shares of our common stock.
7. COMMITMENTS AND CONTINGENCIES
We lease our offices and certain equipment. Our rental expenses were
approximately $41,000, $63,000, and $84,000 for 1996, 1997 and 1998,
respectively. Our future minimum rental payments under operating leases with
remaining noncancellable lease terms in excess of one year at December 31, 1998
are as follows (in thousands):
<TABLE>
<S> <C>
1999............................. $ 124
2000............................. 25
2001............................. 23
2002............................. 5
Thereafter....................... --
--------------
$ 177
==============
</TABLE>
8. ENVIRONMENTAL REGULATION
Various federal, state and local laws and regulations covering
discharge of materials into the environment, or otherwise relating to the
protection of the environment, may affect our operations and the costs of our
oil and natural gas exploitation, development and production operations. We do
not anticipate that we will be required in the near future to expend amounts
material in relation to the financial statements taken as a whole by reason of
environmental laws and regulations. Because these laws and regulations are
constantly being changed, we are unable to predict the conditions and other
factors, over which we do not exercise control, that may give rise to
environment liabilities affecting us.
- 44 -
<PAGE> 47
9. TERMINATED ACQUISITION
In September 1996, we entered into a stock purchase agreement to
acquire Taurus Energy Corp., a processor and marketer of natural gas. In
addition, we initiated a public stock offering to raise the $35.0 million
necessary to complete the acquisition.
In connection with these activities, we incurred and capitalized
approximately $303,000 of legal, accounting and other costs. In 1996, we
terminated the proposed Taurus acquisition and canceled our planned public
offering. As a result, we expensed the costs associated with these actions.
10. OIL AND NATURAL GAS PRODUCING ACTIVITIES
The results of operations from our oil and natural gas producing
activities are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Oil and natural gas sales ........................ $ 872 $ 670 $ 1,385
Production costs ................................. $ (429) $ (322) $ (786)
Depreciation, depletion and amortization ......... $ (87) $ (63) $ (385)
Income tax expense ............................... $ -- $ -- $ --
</TABLE>
Costs incurred in oil and natural gas producing activities are as
follows (in thousands, except per equivalent barrel amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs ....................... $ 2 $ 2 $ 6,820
Development costs ................................ $ 17 $ 74 $ 257
Exploration costs ................................ $ -- $ -- $ --
Production costs ................................. $ 429 $ 322 $ 786
Depreciation, depletion and amortization
per equivalent barrel ....................... $ 1.46 $ 1.41 $ 3.17
</TABLE>
Most of our oil and natural gas revenues are produced from a limited number of
wells or properties located in the United States.
Our oil and natural gas production is sold to various purchasers.
During the year ended December 31, 1996, sales of oil and natural gas to two
purchasers accounted for 26% and 15% of gross revenues, respectively. During the
year ended December 31, 1997, sales of oil and natural gas to three purchasers
accounted for 22%, 19% and 14% of gross revenues, respectively. During the year
ended December 31, 1998, sales of oil and natural gas to two purchasers
accounted for 17% and 10%, respectively, of our total revenues. Management
believes that the loss of these purchasers would not have a material impact on
our financial condition or results of operations.
In an effort to reduce the effects of the volatility of the price of
crude oil and natural gas on our operations, management has adopted a policy of
hedging oil and natural gas prices whenever such prices are in excess of the
prices anticipated in our operating budget and profit plan through the use of
commodity futures, options, and swap agreements. Hedging transactions require
the approval of the board of directors. We had no outstanding hedging agreements
at December 31, 1998.
- 45 -
<PAGE> 48
11. SUPPLEMENTAL OIL AND NATURAL GAS RESERVE AND STANDARDIZED MEASURE
INFORMATION (UNAUDITED)
We retain independent engineering firms to provide annual year-end
estimates of our future net recoverable oil, natural gas, and natural gas
liquids reserves. Estimated proved net recoverable reserves we have shown below
include only those quantities that you can expect to be commercially recoverable
at prices and costs in effect at the balance sheet dates under existing
regulatory practices and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves that we may recover
through existing wells. Proved undeveloped reserves include those reserves that
we may recover from new wells on undrilled acreage or from existing wells on
which we must make a relatively major expenditure for recompletion or secondary
recovery operations.
ESTIMATED QUANTITIES OF PROVED RESERVES
<TABLE>
<CAPTION>
OIL (Bbl) Gas (Mcf) Boe*
------------------------------------------
(In thousands)
<S> <C> <C> <C>
DECEMBER 31, 1995 ................................ 148 4,957 974
Purchase of reserves in place ........... 2 263 46
New discoveries and extensions .......... 3 -- 3
Revisions of previous estimates ......... 63 (222) 26
Production .............................. (22) (224) (59)
Sales of reserves in place .............. (25) (12) (27)
---------- ---------- ----------
DECEMBER 31, 1996 ................................ 169 4,762 963
Purchase of reserves in place ........... -- -- --
New discoveries and extensions .......... -- -- --
Revisions of previous estimates ......... (16) (255) (59)
Production .............................. (14) (181) (44)
Sales of reserves in place .............. (81) -- (81)
---------- ---------- ----------
DECEMBER 31, 1997 ................................ 58 4,326 779
Purchase of reserves in place ........... 972 4,019 1,642
New discoveries and extensions .......... -- -- --
Revisions of previous estimates ......... (14) (221) (51)
Production .............................. (53) (412) (121)
Sales of reserves in place .............. -- -- --
---------- ---------- ----------
DECEMBER 31, 1998 ................................ 963 7,712 2,249
========== ========== ==========
</TABLE>
ESTIMATED QUANTITIES OF PROVED DEVELOPED RESERVES
<TABLE>
<CAPTION>
OIL (Bbl) Gas (Mcf) Boe*
------------------------------------------
(In thousands)
<S> <C> <C> <C>
December 31, 1996 ................................ 162 2,483 576
December 31, 1997 ................................ 57 2,341 447
December 31, 1998 ................................ 830 5,775 1,792
</TABLE>
* Boe - Barrels of oil equivalent calculated by converting 6 Mcf of natural gas
to 1 Bbl of oil.
We have summarized the standardized measure of discounted net cash
flows related to our proved oil, gas, and natural gas liquids reserves. We have
based the following summary on a valuation of proved reserves using discounted
cash flows based on year-end prices, costs, and economic conditions and a 10%
discount rate. The additions to proved reserves from new discoveries and
extensions could vary significantly from year to year; additionally, the impact
of changes to reflect current prices and costs of reserves proved in prior years
could also be significant. Accordingly, you should not view the information
presented below as an estimate of the fair value of our oil and natural gas
properties, nor should you consider the information indicative of any trends.
- 46 -
<PAGE> 49
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1996 1997 1998
------------------------------------------
(In thousands)
<S> <C> <C> <C>
Future cash inflows....................................................... $ 20,296 $ 10,115 $ 23,407
Future production and development costs................................... 5,650 3,130 9,028
---------- ---------- ----------
Future net cash flows before income taxes................................. 14,646 6,985 14,379
Discount of future net cash flows at 10% per annum........................ 6,327 2,957 6,415
---------- ---------- ----------
Discounted future net cash flows before income taxes...................... 8,319 4,028 7,964
Future income taxes, net of discount at 10% per annum..................... -- 163 11
---------- ---------- ----------
Discounted future net cash flows after income taxes....................... $ 8,319 $ 3,865 $ 7,953
========== ========== ==========
</TABLE>
During recent years, prices paid for oil in the world markets have
fluctuated significantly. This situation has had a destabilizing effect on the
posted prices of oil in the United States, including the posted prices paid by
purchasers of our oil. The weighted average prices of oil and natural gas at
December 31, 1996, 1997 and 1998, used in the above table, were $24.29, $16.74
and $10.41 per Bbl, respectively, and $3.40, $2.11 and $1.74 per Mcf,
respectively.
The following are the principal sources of change in the standardized measure of
discounted future net cash flows:
CHANGES IN STANDARDIZED MEASURE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
------------------------------------------
(In thousands)
<S> <C> <C> <C>
Sales and transfers of oil and gas produced, net of production costs ........... $ (443) $ (348) $ (599)
Net changes in prices and production costs ..................................... 3,980 (3,398) (1,548)
Extensions and discoveries, net of future development and production costs ..... 47 -- --
Development costs during the period ............................................ -- 45 --
Revisions of previous quantity estimates ....................................... 319 (845) (264)
Sales of reserves in place ..................................................... (131) (577) --
Purchases of reserves in place ................................................. 142 -- 5,944
Accretion of discount before income taxes ...................................... 400 832 403
Net change in income taxes ..................................................... -- (163) 152
---------- ---------- ----------
Net change ..................................................................... $ 4,314 $ (4,454) $ 4,088
========== ========== ==========
</TABLE>
12. ACQUISITIONS
We have accounted for the following acquisitions in accordance with
Accounting Principles Board No. 16, "Business Combinations" where applicable.
On February 11, 1998, we acquired from Osborne Oil Company, Gypsy
Production Company, and other working interest owners oil and natural gas
properties in Maverick County, Texas. The purchase price consisted of
approximately $760,000 cash partially paid for using funds available under the
credit facility.
On May 8, 1998, we acquired all of the outstanding common stock of
Jacobi-Johnson Energy, Inc. from its four stockholders. Jacobi-Johnson, owns oil
and natural gas working interests in Polk, Nacogdoches, Navarro, Smith and Wood
Counties of Texas. We paid approximately $1.5 million for the stock which
consisted of $703,000 cash and 85,436 shares of our common stock with a value of
$513,000. In addition, we assumed approximately $261,000 of Jacobi-Johnson
indebtedness. We obtained the cash for the purchase price under our credit
facility with NationsBank, N.A. The Jacobi-Johnson properties have been
mortgaged under the credit facility.
- 47 -
<PAGE> 50
On June 30, 1998 we acquired oil and natural gas 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 purchase price consisted of approximately $3.5 million cash
paid for using funds available under our credit facility.
On December 21, 1998, we acquired properties from Colony Petroleum,
L.L.C. and Cumulus 2 Limited in Carter County, Oklahoma. The purchase price
consisted of approximately $706,000 cash paid from proceeds of our rights
offering.
Pro forma results of operations. The following table reflects the pro
forma results of operations as though the acquisitions of the Maverick County
properties, Jacobi-Johnson Energy, Inc., and the Dawson County properties had
occurred on January 1, 1997. The pro forma results of operations of the Carter
County acquisition are not presented as they are not material to our
consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998
-----------------------------------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C>
Revenues........................................................... $ 2,653 $ 2,734
Income (loss) before extraordinary item............................ $ 168 $ (415)
Income (loss) per share before extraordinary item.................. $ 0.34 $ (0.14)
</TABLE>
On October 9, 1998, we formed a $50 million joint venture with an
institutional investor to acquire oil and natural gas related assets and
securities. Under the terms of the joint venture agreement, we are required to
contribute 5% of the joint venture's capital expenditures. As of February 15,
1999, the joint venture has invested in various
- 48 -
<PAGE> 51
debt securities. Through February 15, 1999, our investment in the joint venture
was approximately $341,000.
Related to an investment made by the joint venture, we presented a
restructuring plan to National Energy Group, Inc.'s bondholders' committee on
February 24, 1999. The proposal consists of a combination of shares of EXCO
common stock and approximately $58 million cash to satisfy all secured and
unsecured liabilities and to acquire the assets of National Energy. The plan
anticipates no consideration for the preferred or common equity of National
Energy.
The proposal is subject to conditions which include approval by (1) EXCO's
board of directors; (2) EXCO's shareholders; (3) EXCO's bank lenders; (4) due
diligence and (5) the U. S. Bankruptcy Court. We cannot assure you that this
proposal will be acceptable to National Energy, its creditors' constituencies or
the U. S. Bankruptcy Court or that any transaction will be completed.
On November 2, 1998, we acquired a promissory note from a Texas bank for
$6.4 million which is secured by substantially all of the assets of Rio Grande,
Inc., its subsidiaries and affiliated entities. Rio Grande, Inc. is an oil and
natural gas producer with principal operations in Texas, Oklahoma, Louisiana,
and Mississippi. At the same time we purchased the note, we also entered into an
agreement with Rio Grande, Inc. and Rio Grande, Inc.'s sole holder of preferred
stock, regarding plans for the ultimate satisfaction of Rio Grande, Inc.'s debt,
including the proposed acquisition of Rio Grande, Inc. or its assets by us. We
believe that historical cost equates to the fair market value on these
securities.
On November 12, 1998, Rio Grande, Inc. announced that it had filed for
reorganization under Chapter 11 of the Bankruptcy Code. As the largest secured
creditor, we have negotiated a plan for financial restructuring with Rio Grande,
Inc. and the holder of its preferred stock. On March 5, 1999, the court is
scheduled to confirm the proposed plan. Pursuant to the terms of the plan, Rio
Grande, Inc. will fully repay its trade creditors. The plan provides for the
merger of several subsidiaries or affiliates into Rio Grande, Inc. Then, the
outstanding shares of Rio Grande, Inc.'s common and preferred stock will be
canceled. We will be issued new shares of Rio Grande, Inc. as settlement of Rio
Grande Inc.'s $13 million secured indebtedness owed to us. The new shares will
represent all of the outstanding capital stock of Rio Grande, Inc., and we will
be the owners of Rio Grande, Inc. effective on or about March 16, 1999.
- 49 -
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 14, 1998, we dismissed Belew Averitt LLP as our independent
auditors and on January 14, 1998, we retained Ernst & Young LLP as our
independent auditors to perform the audit of our financial statements for the
year ended December 31, 1997. Our board of directors and shareholders approved
the decision to engage Ernst & Young LLP and to dismiss Belew Averitt LLP.
Belew Averitt's reports on our financial statements for the year ended
December 31, 1996, did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles.
We did not disagree with Belew Averitt LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Belew
Averitt LLP, would have caused them to make reference to the subject matter of
the disagreement in connection with their report.
- 50 -
<PAGE> 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the captions
"Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," "Certain Relationships Between the Company and Directors, Officers
or Shareholders," and "Directors and Executive Officers" of our proxy statement
for our 1999 annual meeting of shareholders which was filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934 and is incorporated herein by reference. The proxy statement was
filed on March 16, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" in Appendix E of our proxy statement which was filed
with the Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in Appendix B under the
caption "Shareholders" of our proxy statement which was filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Certain Relationships Between the Company and Directors, Officers or
Shareholders" of our proxy statement which was filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 and is incorporated herein by reference.
- 51 -
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page 31 to this annual report.
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is not required under
the related instructions or is inapplicable or because the information
is included in the Financial Statements or related Notes.
3. EXHIBITS
3.1 Restated Articles of Incorporation of EXCO filed as an Exhibit
to EXCO's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated by reference herein
3.2 Bylaws of EXCO, as amended filed as an Exhibit to EXCO's
Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated by reference herein
4.1 Restated Articles of Incorporation of EXCO filed as an Exhibit
to EXCO's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated by reference herein
4.2 Restated Bylaws of EXCO, as amended filed as an Exhibit to
EXCO's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated by reference herein
4.3 Specimen Stock Certificate for the Common Stock of EXCO filed
as an Exhibit to EXCO's Pre-Effective Amendment No. 1 to Form
S-2 filed on June 2, 1998 and incorporated by reference herein
10.1 Standby Purchase Commitment between EXCO Resources, Inc. on
the one hand and Ares Management, L.P. on behalf of Ares
Leveraged Investment Fund, L.P. on the other hand dated July
16, 1998 filed as an Exhibit to EXCO's Form 8-K filed August
25, 1998 and incorporated by reference herein
10.2 Standby Purchase Commitment between EXCO Resources, Inc. on
the one hand and Oaktree Capital Management, LLC on behalf of
OCM Principal Opportunities Fund, L.P. on the other hand,
dated July 16, 1998 filed as an Exhibit to EXCO's Form 8-K
filed August 25, 1998 and incorporated by reference herein
10.3 Credit Agreement among EXCO Resources, Inc., as borrower, and
NationsBank of Texas, N.A., as agent, and financial
institutions listed on Schedule I, dated February 11, 1998
filed as an Exhibit to EXCO's Form 8-K filed February 25, 1998
and incorporated by reference herein
10.4 First Amendment to Credit Agreement among EXCO Resources,
Inc., as borrower, NationsBank, N.A. (successor by merger to
NationsBank of Texas, N.A.), as agent, and financial
institutions listed on Schedule I, dated September 21, 1998,
filed as an Exhibit to EXCO's Form 8-K filed September 28,
1998 and incorporated by reference herein
10.5 Purchase and Sale Agreement among EXCO Resources, Inc. and
Osborne Oil Company, et al., dated January 27, 1998 filed as
an Exhibit to EXCO's Form 8-K filed August 25, 1998 and
incorporated by reference herein
10.6 EXCO Energy Investors, L.L.C. Operating Agreement (filed
herewith)
- 52 -
<PAGE> 55
10.7 Purchase and Sale Agreement among EXCO Resources, Inc. and
Osborne Oil Company, et al., dated January 27, 1998, filed as
an Exhibit to EXCO's Form 8-K dated February 25, 1998 and
incorporated by reference herein
10.8 Stock Purchase Agreement between EXCO Resources, Inc. and
Jacobi-Johnson Energy, Inc., dated May 1, 1998, filed as an
Exhibit to EXCO's Form 8-K dated May 1, 1998 and incorporated
by reference herein
10.9 EXCO Resources, Inc. 1998 Stock Option Plan, filed as Appendix
A to EXCO's Proxy Statement dated May 17, 1998 and
incorporated by reference herein
10.10 Purchase and Sale Agreement dated June 24, 1998, by and
between Humphrey Oil Interests, L.P. on the one hand and EXCO
Resources, Inc. on the other, filed as an exhibit to EXCO's
Form 8-K dated June 30, 1998 and incorporated by reference
herein
10.11 Purchase and Sale Agreement dated June 24, 1998, by and
between J. M. Hill, Individually and as Trustee, Walter O.
Hill, and Steven J. Devos on the one hand and EXCO Resources,
Inc. on the other, filed as an exhibit to EXCO's Form 8-K
dated June 30, 1998 and incorporated by reference herein
16.1 Letter from Belew Averitt LLP regarding change in certifying
accountant dated January 20, 1998 filed as an Exhibit to
EXCO's Form 8-K filed January 21, 1998 and incorporated by
reference herein
18.1 Letter from Ernst & Young LLP regarding change in accounting
principles dated February 11, 1998 filed as an Exhibit to
EXCO's Annual Report on Form 10-K for the year ended December
31, 1997 and incorporated by reference herein
23.1 Consent of Independent Auditors, Belew Averitt LLP (filed
herewith)
23.2 Consent of Independent Auditors, Ernst & Young LLP (filed
herewith)
23.3 Consent of Lee Keeling and Associates, Inc. (filed herewith)
27.1 Financial Data Schedule (filed herewith)
------------------
- 53 -
<PAGE> 56
4. REPORTS ON FORM 8-K
During the last quarter of the year ended December 31, 1998, we did not
file any current reports on Form 8-K.
- 54 -
<PAGE> 57
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized in the City of Dallas,
Texas on the 17th of March, 1999.
EXCO RESOURCES, INC.
By: /s/ DOUGLAS H. MILLER
----------------------------------
Douglas H. Miller
Chairman of the Board of Directors
And Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 17, 1999 /s/ DOUGLAS H. MILLER
----------------------------------
Douglas H. Miller
Chairman of the Board of Directors
And Chief Executive Officer
March 17, 1999 /s/ T.W. EUBANK
----------------------------------
T. W. Eubank
Director, President and Treasurer
March 17, 1999 /s/ J. DOUGLAS RAMSEY
----------------------------------
J. Douglas Ramsey, Ph.D.
Director, Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
March 17, 1999 /s/ JEFFREY D. BENJAMIN
----------------------------------
Jeffrey D. Benjamin
Director
March 17, 1999 /s/ EARL E. ELLIS
----------------------------------
Earl E. Ellis
Director
March 17, 1999 /s/ JEFF M. MOORE
----------------------------------
Jeff M. Moore
Director
- 55 -
<PAGE> 58
March 17, 1999 /s/ J. MICHAEL MUCKLEROY
----------------------------------
J. Michael Muckleroy
Director
March 17, 1999 /s/ BOONE PICKENS
----------------------------------
Boone Pickens
Director
March 17, 1999 /s/ STEPHEN F. SMITH
----------------------------------
Stephen F. Smith
Director
- 56 -
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Restated Articles of Incorporation of EXCO filed as an Exhibit to
EXCO's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated by reference herein
3.2 Bylaws of EXCO, as amended filed as an Exhibit to EXCO's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated by reference herein
4.1 Restated Articles of Incorporation of EXCO filed as an Exhibit to
EXCO's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated by reference herein
4.2 Restated Bylaws of EXCO, as amended filed as an Exhibit to EXCO's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated by reference herein
4.3 Specimen Stock Certificate for the Common Stock of EXCO filed as an
Exhibit to EXCO's Pre-Effective Amendment No. 1 to Form S-2 filed on
June 2, 1998 and incorporated by reference herein
10.1 Standby Purchase Commitment between EXCO Resources, Inc. on the one
hand and Ares Management, L.P. on behalf of Ares Leveraged Investment
Fund, L.P. on the other hand dated July 16, 1998 filed as an Exhibit
to EXCO's Form 8-K filed August 25, 1998 and incorporated by
reference herein
10.2 Standby Purchase Commitment between EXCO Resources, Inc. on the one
hand and Oaktree Capital Management, LLC on behalf of OCM Principal
Opportunities Fund, L.P. on the other hand, dated July 16, 1998 filed
as an Exhibit to EXCO's Form 8-K filed August 25, 1998 and
incorporated by reference herein
10.3 Credit Agreement among EXCO Resources, Inc., as borrower, and
NationsBank of Texas, N.A., as agent, and financial institutions
listed on Schedule I, dated February 11, 1998 filed as an Exhibit to
EXCO's Form 8-K filed February 25, 1998 and incorporated by reference
herein
10.4 First Amendment to Credit Agreement among EXCO Resources, Inc., as
borrower, NationsBank, N.A. (successor by merger to NationsBank of
Texas, N.A.), as agent, and financial institutions listed on Schedule
I, dated September 21, 1998, filed as an Exhibit to EXCO's Form 8-K
filed September 28, 1998 and incorporated by reference herein
10.5 Purchase and Sale Agreement among EXCO Resources, Inc. and Osborne
Oil Company, et al., dated January 27, 1998 filed as an Exhibit to
EXCO's Form 8-K filed August 25, 1998 and incorporated by reference
herein
10.6 EXCO Energy Investors, L.L.C. Operating Agreement (filed herewith)
</TABLE>
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<PAGE> 60
<TABLE>
<S> <C>
10.7 Purchase and Sale Agreement among EXCO Resources, Inc. and Osborne
Oil Company, et al., dated January 27, 1998, filed as an Exhibit to
EXCO's Form 8-K dated February 25, 1998 and incorporated by reference
herein
10.8 Stock Purchase Agreement between EXCO Resources, Inc. and
Jacobi-Johnson Energy, Inc., dated May 1, 1998, filed as an Exhibit
to EXCO's Form 8-K dated May 1, 1998 and incorporated by reference
herein
10.9 EXCO Resources, Inc. 1998 Stock Option Plan, filed as Appendix A to
EXCO's Proxy Statement dated May 17, 1998 and incorporated by
reference herein
10.10 Purchase and Sale Agreement dated June 24, 1998, by and between
Humphrey Oil Interests, L.P. on the one hand and EXCO Resources, Inc.
on the other, filed as an exhibit to EXCO's Form 8-K dated June 30,
1998 and incorporated by reference herein
10.11 Purchase and Sale Agreement dated June 24, 1998, by and between
J. M. Hill, Individually and as Trustee, Walter O. Hill, and Steven
J. Devos on the one hand and EXCO Resources, Inc. on the other, filed
as an exhibit to EXCO's Form 8-K dated June 30, 1998 and incorporated
by reference herein
16.1 Letter from Belew Averitt LLP regarding change in certifying
accountant dated January 20, 1998 filed as an Exhibit to EXCO's Form
8-K filed January 21, 1998 and incorporated by reference herein
18.1 Letter from Ernst & Young LLP regarding change in accounting
principles dated February 11, 1998 filed as an Exhibit to EXCO's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated by reference herein
23.1 Consent of Independent Auditors, Belew Averitt LLP (filed herewith)
23.2 Consent of Independent Auditors, Ernst & Young LLP (filed herewith)
23.3 Consent of Lee Keeling and Associates, Inc. (filed herewith)
27.1 Financial Data Schedule (filed herewith)
</TABLE>
------------------
- 58 -
<PAGE> 1
EXHIBIT 10.6
-----------------------------------------------------------------
EXCO ENERGY INVESTORS, L.L.C.
(a Delaware limited liability company)
LIMITED LIABILITY COMPANY AGREEMENT
--------------------
THE SECURITIES EVIDENCED BY THIS LIMITED LIABILITY COMPANY AGREEMENT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACT. NO
TRANSFER OF ANY SECURITIES MENTIONED HEREIN SHALL BE PERMITTED UNTIL THE
TRANSFEROR SHALL HAVE COMPLIED WITH ALL RESTRICTIONS ON TRANSFER SET FORTH
HEREIN AND SUCH SECURITIES HAVE BEEN REGISTERED UNDER SUCH ACTS OR UNTIL THE
BOARD OF MANAGERS OF THE COMPANY SHALL HAVE RECEIVED A FAVORABLE OPINION FROM
THE COMPANY'S LEGAL COUNSEL, OR FROM LEGAL COUNSEL ACCEPTABLE TO THE BOARD OF
MANAGERS, TO THE EFFECT THAT SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER
SUCH ACTS.
-----------------------------------------------------------------
<PAGE> 2
EXCO ENERGY INVESTORS, L.L.C.
LIMITED LIABILITY COMPANY AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. DEFINITIONS............................................................................................1
1.1 DEFINITIONS..............................................................................................1
1.2 CONSTRUCTION.............................................................................................4
ARTICLE II. ORGANIZATION..........................................................................................4
2.1 FORMATION................................................................................................4
2.2 NAME.....................................................................................................4
2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL OFFICE IN THE UNITED STATES; OTHER OFFICES...............4
2.4 PURPOSES.................................................................................................5
2.5 FOREIGN QUALIFICATION....................................................................................5
2.6 TERM.....................................................................................................5
2.7 NO STATE-LAW PARTNERSHIP.................................................................................6
2.8 MERGERS AND EXCHANGES....................................................................................6
ARTICLE III. MEMBERSHIP, DISPOSITIONS OF INTERESTS................................................................6
3.1 MEMBERS..................................................................................................6
3.2 RESTRICTIONS ON THE DISPOSITION OF AN INTEREST...........................................................6
3.3 ADDITIONAL MEMBERS.......................................................................................8
3.4 INFORMATION..............................................................................................8
3.5 LIABILITY TO THIRD PARTIES...............................................................................9
3.6 WITHDRAWAL...............................................................................................9
3.7 LACK OF AUTHORITY........................................................................................9
ARTICLE IV. CAPITAL CONTRIBUTIONS.................................................................................9
4.1 CAPITAL CONTRIBUTIONS....................................................................................9
4.2 RETURN OF CONTRIBUTIONS.................................................................................10
4.3 ADVANCES BY MEMBERS.....................................................................................10
4.4 CAPITAL ACCOUNTS........................................................................................11
ARTICLE V. ALLOCATIONS AND DISTRIBUTIONS.........................................................................11
5.1 ALLOCATIONS.............................................................................................11
5.2 TIME OF ALLOCATION......................................................................................12
5.3 DISTRIBUTIONS...........................................................................................12
5.4 WITHHOLDING.............................................................................................14
ARTICLE VI. BOARD OF MANAGERS....................................................................................14
6.1 MANAGEMENT..............................................................................................14
6.2 NUMBER AND QUALIFICATIONS...............................................................................15
6.3 ELECTION AND TERM.......................................................................................15
6.4 DESIGNATION OF MEMBERS OF THE BOARD OF MANAGERS.........................................................15
6.5 VACANCY.................................................................................................15
6.6 REMOVAL.................................................................................................15
6.7 PLACE OF MEETINGS.......................................................................................15
6.8 ANNUAL MEETINGS OF MANAGERS.............................................................................15
6.9 SPECIAL MEETINGS OF THE BOARD OF MANAGERS...............................................................16
6.10 QUORUM..................................................................................................16
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
6.11 ATTENDANCE AND WAIVER OF NOTICE.........................................................................16
6.12 COMPENSATION OF MANAGERS................................................................................16
6.13 STANDARDS AND CONFLICTS. ..............................................................................16
6.14 AGENTS, OFFICERS AND EMPLOYEES..........................................................................17
6.15 RELIANCE................................................................................................17
6.16 COMMITTEE OF MANAGERS...................................................................................17
6.17 OTHER COMMITTEES........................................................................................17
6.18 ACTIONS WITHOUT A MEETING AND TELEPHONIC MEETINGS.......................................................17
ARTICLE VII. MEETING OF MEMBERS..................................................................................18
7.1 MEETINGS................................................................................................18
7.2 APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS BY MEMBERS................................................18
7.3 ACTIONS WITHOUT A MEETING AND TELEPHONIC MEETINGS.......................................................19
ARTICLE VIII. INDEMNIFICATION....................................................................................19
8.1 INDEMNIFICATION.........................................................................................19
8.2 ADVANCE PAYMENT.........................................................................................20
8.3 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS.......................................................20
8.4 APPEARANCE AS A WITNESS.................................................................................20
8.5 NONEXCLUSIVITY OF RIGHTS................................................................................20
8.6 INSURANCE...............................................................................................20
8.7 MEMBER NOTIFICATION.....................................................................................21
8.8 SAVINGS CLAUSE..........................................................................................21
ARTICLE IX. TAXES................................................................................................21
9.1 TAX MANAGER.............................................................................................21
9.2 TAX RETURNS.............................................................................................21
9.3 TAX ELECTIONS...........................................................................................21
ARTICLE X. BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS............................................................22
10.1 MAINTENANCE OF BOOKS....................................................................................22
10.2 REPORTS.................................................................................................22
10.3 ACCOUNTS................................................................................................22
ARTICLE XI. BANKRUPTCY OF A MEMBER...............................................................................22
11.1 BANKRUPT MEMBERS........................................................................................22
ARTICLE XII. DISSOLUTION, LIQUIDATION, AND TERMINATION...........................................................23
12.1 DISSOLUTION.............................................................................................23
12.2 LIQUIDATION AND TERMINATION.............................................................................23
12.3 DEFICIT CAPITAL ACCOUNTS................................................................................24
12.4 CERTIFICATE OF CANCELLATION.............................................................................24
12.5 RETURN OF CONTRIBUTION NON-RECOURSE TO OTHER MEMBERS....................................................24
ARTICLE XIII. GENERAL PROVISIONS.................................................................................24
13.1 OFFSET..................................................................................................24
13.2 NOTICES.................................................................................................24
13.3 ENTIRE AGREEMENT; SUPERSEDURE...........................................................................25
13.4 EFFECT OF WAIVER OR CONSENT.............................................................................25
13.5 AMENDMENT OR MODIFICATION...............................................................................25
13.6 BINDING EFFECT..........................................................................................25
13.7 ARBITRATION.............................................................................................25
13.8 GOVERNING LAW; VENUE; SEVERABILITY......................................................................26
13.9 FURTHER ASSURANCES......................................................................................26
13.10 WAIVER OF CERTAIN RIGHTS................................................................................27
13.11 NOTICE TO MEMBERS OF PROVISIONS OF THIS AGREEMENT.......................................................27
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
13.12 COUNTERPARTS............................................................................................27
EXHIBIT A - Names, Addresses, Commitments and Sharing Ratios of Initial Members
EXHIBIT B - Counsel Designees
</TABLE>
iii
<PAGE> 5
EXCO ENERGY INVESTORS, L.L.C.
LIMITED LIABILITY COMPANY AGREEMENT
This LIMITED LIABILITY COMPANY AGREEMENT OF EXCO ENERGY
INVESTORS, L.L.C. (the "Company"), dated as of October 9, 1998 (this
"Agreement"), is made and entered into by and among those persons constituting
the Class A Members and those persons constituting the Class B Members, each as
set forth on Exhibit "A" hereto and is executed by an authorized representative
of each such Member to accept the rights and obligations as a Member hereunder.
ARTICLE I.
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following
terms have the following meanings:
"AFFILIATE" means a specified Person that directly, or
indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the Person specified.
For purposes of this definition, "control" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"AGREEMENT" means this Limited Liability Company Agreement, as
the same may be amended from time to time hereafter.
"BANKRUPTCY" or "BANKRUPT" means, in respect of any Person,
the occurrence of any of the following with respect to such Person:
1. such Person shall (i) voluntarily consent to an order for
relief by filing a petition for relief under the laws of the United
States codified as Title 11 of the United States Code, (ii) seek,
consent to, or not contest the appointment of a receiver, custodian, or
trustee for itself or for all or any part of its property, (iii) file a
petition seeking relief under the bankruptcy, arrangement,
reorganization, or other debtor relief laws of any state or other
competent jurisdiction, or (iv) make a general assignment for the
benefit of its creditors; or
2. (i) a petition is filed against such Person seeking an
order for relief under the laws of the United States codified as Title
11 of the United States Code, or seeking relief under the bankruptcy,
arrangement, reorganization, or other debtor relief laws of the United
States or any state or other competent jurisdiction, or (ii) a court of
competent jurisdiction enters an order, judgment or decree appointing,
without the consent of such Person, a receiver, custodian, or trustee
for it, or for all or any part of its property, and such petition,
order, judgment or decree shall not be and remain discharged or stayed
within sixty (60) days after its entry.
1
<PAGE> 6
"BOARD OF MANAGERS" means a board comprised of two Managers
elected by the Class A Members and one Manager elected by the Class B
Members, which, as of the date hereof, shall be comprised of Stephen A.
Kaplan and Vincent J. Cebula and Douglas H. Miller, respectively. The
Board of Managers shall also include any other Persons who are elected
to act as additional members of the Board of Managers as provided
herein. Action may be taken or approval given by the Board of Managers
(as provided in this Agreement or otherwise) at any given time upon the
approval of a majority of the members of the Board of Managers then in
office.
"CAPITAL ACCOUNT" has the meaning assigned to such term in
Section 4.4 of this Agreement.
"CAPITAL CONTRIBUTION" means any contribution by a Member to
the capital of the Company including, without limitation, monies and
the Contribution Value of any securities contributed in kind
contributed by such Member to the Company in connection with costs,
expenses, fees and any other funds requested by the Company.
"CERTIFICATE" has the meaning given that term in Section 2.1.
"CLASS A MEMBER" means those Members on "Exhibit A" hereto
listed as Class A Members.
"CLASS B MEMBER" means those Members on "Exhibit A" hereto
listed as Class B Members.
"CODE" means the Internal Revenue Code of 1986 and any
successor statute, as amended from time to time.
"COMPANY" means EXCO Energy Investors, L.L.C., a Delaware
limited liability company.
"CONTRIBUTION DUE DATE" has the meaning assigned to such term
in Section 4.1(b) of this Agreement.
"CONTRIBUTION VALUE" has the meaning assigned to such term in
Section 4.1(b) of this Agreement.
"DELAWARE ACT" means the Delaware Limited Liability Company
Act, and any successor statute, as amended from time to time.
"DISPOSE," "DISPOSING" or "DISPOSITION" means a sale,
assignment, transfer, exchange, mortgage, pledge, grant of a security
interest, or other disposition or encumbrance (including, without
limitation, by operation of law), or the acts thereof.
"EXCO" means EXCO Resources, Inc., a Texas corporation.
"FISCAL YEAR" means the Company's fiscal year, which shall be
the calendar year, unless subsequently changed by the Board of
Managers.
2
<PAGE> 7
"GENERAL INTEREST RATE" means a varying rate per annum that is
equal to the interest rate publicly quoted by Bank of America National
Trust and Savings Association, from time to time as its prime
commercial or similar reference interest rate, with adjustments in that
varying rate to be made on the same date as any change in that rate.
"MANAGER" means a Person appointed by the Members in
accordance with this Agreement to the Board of Managers at any given
time.
"MEMBER" means all Persons listed on Exhibit "A" hereto,
whether Class A Members or Class B Members or otherwise, who have
executed this Agreement as of the date of this Agreement as a member of
the Company or any Person who hereafter is admitted to the Company as a
member as provided in this Agreement, but does not include any Person
who has ceased to be a member in the Company.
"MEMBERSHIP INTEREST" means the interest of a Member in the
Company, at any particular time, including, without limitation, rights
to distributions (liquidating or otherwise), allocations, information,
and to consent or approve.
"OCM" means OCM Principal Opportunities Fund, L.P. and any of
its Affiliate successors.
"OPERATING EXPENSE" means the costs, expenses or charges
incurred by the Company in owning and holding its assets and operating
the business of the Company, including without limitation, taxes,
interest and third-party debt amortization, insurance premiums,
repairs, maintenance, salaries or other compensation, professional
fees, wages, utility costs and all other expenses incurred in the
day-to-day operation of the Company's business.
"PERMITTED TRANSFEREE" means (a) with respect to EXCO and its
direct or indirect wholly-owned subsidiaries, a direct or indirect
wholly-owned subsidiary of EXCO, but only for so long as such Person
continues to be a direct or indirect wholly-owned subsidiary of EXCO,
(b) with respect to OCM and its Affiliates, any Person, including, but
not limited to, any Affiliate of OCM (including limited partners
thereof), and (c) with respect to any Member other than EXCO and its
wholly-owned direct or indirect subsidiaries or OCM and its Affiliates,
a direct or indirect wholly-owned subsidiary of such Member.
"PERSON" means an individual, partnership, limited liability
company, corporation, joint venture, trust, employee benefit plan,
unincorporated association, or other entity or association.
"PROFITS" and "LOSSES" means, for each Fiscal Year or other
period, an amount equal to the Company's taxable income or loss for
such year or period, determined in accordance with Code Section 703(a)
(for this purpose, all items of income, gain, loss or deduction
required to be stated separately pursuant to Code Section 703(a)(1)
shall be included in taxable income or loss), with the following
adjustments:
3
<PAGE> 8
(i) Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits or
Losses shall be added to taxable income or loss;
(ii) Any expenditures of the Company described in Section
705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B)
expenditures pursuant to Section 1.704-1(b)(2)(iv)(1) of the Treasury
Regulations, and not otherwise taken into account either in computing
Profits or Losses or under clause (iii) below shall be subtracted from
such taxable income or loss; and
(iii) Any income, gain, fees and expenses specially allocated
pursuant to Section 5.1(b) and (e) and Section 5.4 shall not be taken
into account in computing Profits or Losses.
"SECURITIES ACT" means the United States Securities Act of
1933, as amended.
"SHARING RATIO" with respect to any Member that holds
Membership Interests, means the applicable percentage stated opposite
such Member's name on Exhibit "A" (except as adjusted pursuant to
Sections 3.3 and 3.6). Reference in this Agreement to a Member's
Sharing Ratio shall mean such Member's Sharing Ratio at the time of
determination.
"TAX MANAGER" has the meaning given that term in Section 9.1
of this Agreement.
Other terms defined herein have the meanings so given them.
1.2 Construction. Whenever the context requires, the gender of
all words used in this Agreement includes the masculine, feminine, and neuter.
All references to Certificate and Sections refer to articles and sections of
this Agreement, and all references to Exhibits are to Exhibits attached hereto,
each of which is made a part hereof for all purposes.
ARTICLE II.
ORGANIZATION
2.1 Formation. The Company has been organized as a Delaware
limited liability company by the filing, as of October 9, 1998, of a Certificate
of Formation (the "CERTIFICATE") under and pursuant to the Delaware Act.
2.2 Name. The name of the Company is "EXCO Energy Investors,
L.L.C." and all Company business must be conducted in that name or such other
names that comply with applicable law as the Board of Managers may select from
time to time.
2.3 Registered Office; Registered Agent; Principal Office in
the United States; Other Offices. The registered office of the Company required
by the Delaware Act to be maintained in the State of Delaware shall be the
office of the initial registered agent named in the Certificate or such other
office (which need not be a place of business of the Company) as the Board of
Managers may designate from time to time in the manner provided by law. The
4
<PAGE> 9
registered agent of the Company in the State of Delaware shall be the initial
registered agent named in the Certificate or such other Person or Persons as the
Board of Managers may designate from time to time in the manner provided by law.
The principal office of the Company in the United States shall be at such place
as the Board of Managers may designate from time to time, which need not be in
the State of Delaware. The initial principal office of the Company shall be at
550 S. Hope Street, Suite 2200, Los Angeles, CA 90071. The Company may have such
other offices as the Board of Managers may designate from time to time.
2.4 Purposes. The purposes of the Company is to (a) invest in
the purchase of assets, bonds, notes, bank debt, royalty interests and equity
securities of companies or other businesses engaged in the exploration,
development, production, distribution, marketing or refining of oil or natural
gas in North America; (b) engage in any other business or activity that now or
hereafter may be necessary, incidental, proper, advisable, or convenient to
accomplish the foregoing purposes and that is not forbidden by the law of the
jurisdiction in which the Company engages in that business; and (c) to carry on
any other lawful business, purpose or activity; provided, however, that all
investments must be approved by the Board of Managers. The Company shall have
any and all powers necessary or desirable to carry out the purposes and business
of the Company, to the maximum extent permitted by applicable law and may engage
in such purposes or business directly or through one or more branch offices or
other business entities as the Board of Managers deems necessary or desirable to
do business in the designated jurisdiction.
2.5 Foreign Qualification. Prior to the Company's conducting
business in any jurisdiction other than Delaware, the Board of Managers shall
cause the Company to comply, to the extent procedures are available and those
matters are reasonably within the control of the Board of Managers, with all
requirements necessary to qualify the Company as a foreign limited liability
company in that jurisdiction. At the request of the Board of Managers, each
Member shall execute, acknowledge, swear to, and deliver all certificates and
other instruments conforming with this Agreement that are necessary or
appropriate to qualify, continue, and terminate the Company as a foreign limited
liability company in all such jurisdictions in which the Company may conduct
business.
2.6 Term. The Company commenced on the date of the filing of
the Certificate with the Secretary of State of the State of Delaware and shall
continue in full force and effect until the first to occur of (a) September 30,
1999, (b) the date upon which Douglas H. Miller ceases to be the Chief Executive
Officer of EXCO or (c) a Change of Control of EXCO. Notwithstanding the
foregoing, OCM shall have the option to extend the term of existence of the
Company for successive three (3) month-periods until September 30, 2001.
For purposes of this Section 2.6, a "Change of Control" shall have occurred (a)
if any Person or group (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended, and the rules promulgated thereunder) other
than Douglas H. Miller (together with his Affiliates) or OCM (together with its
Affiliates) owns more than 35% of the common stock or 35% of the voting
securities of EXCO, (b) if during any consecutive 12-month period, individuals
at the beginning of any such 12-month period who constituted the Board of
Directors of EXCO (together with any new directors whose election by the Board
of Directors of EXCO or whose nomination for election by the directors of EXCO
was approved by a vote
5
<PAGE> 10
of a majority of the directors of EXCO then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute at least
66-2/3% of the directors of EXCO then in office, (c) if Douglas H. Miller ceases
to own at least 400,000 shares of EXCO common stock (as such number may be
further adjusted for stock splits, divisions or combinations) or (d) upon
Bankruptcy of EXCO.
2.7 No State-Law Partnership. The Members intend that the
Company not be a partnership (including, without limitation, a limited
partnership) or joint venture, and that no Member be a partner or joint
venturer of any other Member, for any purposes other than federal and state tax
purposes, and this Agreement may not be construed to suggest otherwise. This
Section 2.7, however, does not prohibit a Member, in his or its individual or
independent capacity, from being associated with another Member in another
partnership, venture or entity.
2.8 Mergers and Exchanges. The Company may be a party to a
merger or consolidation as described in Section 18-209 of the Delaware Act;
provided however, that all Members shall vote as a single class for such
purposes and shall not be deemed to be part of separate classes or groups.
ARTICLE III.
MEMBERSHIP, DISPOSITIONS OF INTERESTS
3.1 Members. The Members of the Company are the Persons
executing this Agreement as of the date of this Agreement as Members as set
forth on "Exhibit A" hereto, each of which is admitted to the Company as a
Member or whose prior admission as a Member is reconfirmed effective
contemporaneously with the execution by such Person of this Agreement.
3.2 Restrictions on the Disposition of an Interest. (a) Except
as specifically provided in this Section 3.2, a Disposition of a Membership
Interest by a Member may not be effected. Any attempted Disposition by a Person
of a Membership Interest, or any part thereof, in or in respect of the Company
other than in accordance with this Section 3.2 shall be, and is hereby declared,
null and void ab initio.
(b) Notwithstanding the provisions of Section 3.2(a) but
subject to the other provisions of this Section 3.2, the interest of any Member
in the Company may be transferred without the consent of the Board of Managers
or any of the Members if the transferee is a Permitted Transferee.
(c) The Company may not recognize for any purpose any
purported Disposition of all or part of a Membership Interest unless and until
the other applicable provisions of this Section 3.2 have been satisfied and the
Board of Managers has received, on behalf of the Company, a document (i)
executed by both the Member effecting the Disposition (or if the transfer is on
account of the death, incapacity, or liquidation of the transferor, its
representative) and the Person to which the Membership Interest or part thereof
is Disposed, (ii) including the notice address of any Person to be admitted to
the Company as a Member and its agreement to be bound by this Agreement in
respect of the Membership Interest or part thereof being obtained, (iii)
setting forth the Sharing Ratios after the Disposition of the Member effecting
the
6
<PAGE> 11
Disposition and the Person to which the Membership Interest or part thereof is
Disposed (which together must total the Sharing Ratio of the Member effecting
the Disposition before the Disposition), and (iv) containing a representation
and warranty that the Disposition was made in accordance with all applicable
laws and regulations (including securities laws) and, if the Person to which
the Membership Interest or part thereof is Disposed is to be admitted to the
Company, such representations and warranties with respect to that Person as the
Board of Managers reasonably requests. Each Disposition and, if applicable,
admission complying with the provisions of this Section 3.2(c) is effective as
of the first day of the calendar month immediately succeeding the month in
which the Board of Managers receives the notification of Disposition and the
other requirements of this Section 3.2 have been met.
(d) For a Member to Dispose of a Membership Interest or any
part thereof, or of any Person to be admitted to the Company in connection
therewith, to exist or be exercised, (i) either: (A) the Membership Interest or
part thereof subject to the Disposition or admission must be registered under
the Securities Act of 1933, as amended, and any applicable state securities laws
or (B) the Company must receive a favorable opinion of the Company's legal
counsel or of other legal counsel acceptable to the Board of Managers to the
effect that the Disposition or admission is exempt from registration under those
laws, and (ii) the Company must receive a favorable opinion of the Company's
legal counsel or of other legal counsel acceptable to the Board of Managers to
the effect that the Disposition or admission, when added to the total of all
other sales, assignments, or other Dispositions within the preceding 12 months,
would not (y) result in the Company's being considered to have terminated within
the meaning of the Code or (z) cause the Company to be treated as a publicly
traded partnership within the meaning of Section 7704 of the Code. The Board of
Managers, however, may waive the requirements of this Section 3.2(d).
(e) The Member effecting a Disposition and any Person admitted
to the Company in connection therewith shall pay, or reimburse the Company for,
all costs incurred by the Company in connection with the Disposition or
admission (including, without limitation, the legal fees incurred in connection
with the legal opinions referred to in Section 3.2(d)) on or before the tenth
day after the receipt by that Person of the Company's invoice for the amount
due.
(f) Notwithstanding any of the other provisions of this
Agreement, if a transferee or assignee of an interest in the Company is not
admitted as a Member of the Company for any reason, such transferee or assignee
is only entitled to receive the share of profits and distributions that the
transferor or assignor would have otherwise been entitled. Additionally, such
transferee or assignee that is not admitted as a member shall have no right to
participate in the management of the Company.
(g) The personal representative (or other
successor-in-interest) of a deceased Member shall succeed to the deceased
Member's interest in the Company. However, such personal representative (or
other successor in interest) shall not be entitled to be admitted as a Member
without the consent of each other Member in its sole discretion.
7
<PAGE> 12
(h) A Member that is not a natural person may not cause or
permit an interest, direct or indirect, in itself to be Disposed if, after the
Disposition, the Company would be considered to have terminated within the
meaning of Section 708 of the Code.
3.3 Additional Members. Additional Persons may be admitted to
the Company as Members and Membership Interests may be created and issued to
those Persons and to existing Members on such terms and conditions as may be
approved by the Board of Managers prior to such admissions. The terms of
admission or issuance must specify the Sharing Ratios applicable thereto and may
provide for the creation of different classes or groups of Members and having
different rights, powers, and duties, and further providing for appropriate
adjustments, if any, in the Members' Capital Accounts and to the definition of
"Profits and Losses" in this Agreement. The Members shall reflect the creation
of any new class or group in an amendment to this Agreement indicating the
different rights, powers, and duties, and such an amendment need be executed
only by a majority of the Board of Managers. Any such admission also must comply
with the provisions of Sections 3.2(c) and is effective only after the new
Member has executed and delivered to the Board of Managers a document including
the new Member's notice address and its agreement to be bound by this Agreement.
The provisions of this Section 3.3 shall not apply to Dispositions of Membership
Interests.
3.4 Information. (a) In addition to the other rights
specifically set forth in this Agreement each Member is entitled to all
information to which that Member is entitled to have access pursuant to Section
18-305 of the Delaware Act under the circumstances and subject to the conditions
therein stated; provided however, that to the extent not prohibited by the
Delaware Act all such rights shall terminate immediately upon such Members'
termination as a Member with respect to all such information regardless of the
time period to which it relates.
(a) The Members acknowledge that, from time to time, they may
receive information from or concerning the Company in the nature of trade
secrets or that otherwise is confidential, the release of which may damage the
Company or Persons with which it does business. Each Member shall hold in strict
confidence any information that it receives concerning the Company that is
identified as being confidential (and if that information is provided in
writing, that is marked "confidential") and may not disclose it to any person
other than another Member, except for disclosures (i) compelled by law (but the
Member must notify the other Members promptly of any request for that
information before such disclosure if permitted by law), (ii) to advisers or
representatives of the Member or Persons to whom that Member's Membership
Interest may be Disposed as permitted by this Agreement, but only if the
recipients have agreed to be bound by the terms of this Section 3.4(b), or (iii)
of information that the Member also has received from a source independent of
the Company that the Member reasonably believes obtained that information
without breach of any obligation of confidentiality. The Members acknowledge
that breach of the provisions of this Section 3.4(b) may cause irreparable
injury to the Company for which monetary damages are inadequate, difficult to
compute, or both. Accordingly, the Members agree that the provisions of this
Section 3.4(b) may be enforced by specific performance.
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<PAGE> 13
3.5 Liability to Third Parties. None of the Board of Managers,
the Managers or any Member shall be liable for the debts, obligations or
liabilities of the Company or of any other Member, including under a judgment
decree or order of a court.
3.6 Withdrawal. No Member may retire, resign or withdraw from
the Company.
3.7 Lack of Authority. No Member, acting in its capacity as a
Member, has the authority or power to act for or on behalf of the Company, to do
any act that would be binding on the Company, or to incur any expenditures on
behalf of the Company.
ARTICLE IV.
CAPITAL CONTRIBUTIONS
4.1 Capital Contributions. (a) Initial Capital Contributions.
Prior to the execution of this Agreement, each Member has contributed cash to
the Company in the following amounts (as to each, "INITIAL CAPITAL
CONTRIBUTION"), and on the execution of this Agreement, each Member shall
receive its Membership Interests in the corresponding amounts:
<TABLE>
<CAPTION>
Member Contribution Initial Membership Interest
------ ------------ ---------------------------
<S> <C> <C>
OCM $657,596.59 95%
EXCO $ 34,610.35 5%
</TABLE>
(b) Additional Capital Contributions. If the Board of Managers
determine that the amounts contributed to the Company by the Members with regard
to the Initial Capital Contributions are insufficient to carry out the purposes
of the Company, then on approval of and within three (3) days of receipt of
notice (the "CONTRIBUTION DUE DATE") provided by the Board of Managers, the
Members shall make additional Capital Contributions (for which each Member shall
be responsible for its pro rata share thereof) to the Company, not to exceed an
aggregate total of $50,000,000 (including the Initial Capital Contributions of
the Members), unless a higher total is otherwise approved unanimously by the
members of the Board of Managers of the Company. A Member may contribute to the
Company in satisfaction of all or a part of its additional Capital
Contributions, if consistent with the purposes of this Company and approved by
Board of Managers, securities purchased by such Member on behalf of the Company,
the value of which (the "CONTRIBUTION VALUE") shall be equal to the price paid
to purchase such securities, plus (i) any commissions or expenses (legal or
otherwise) incurred by such Member in connection with such purchase or transfer
of such securities to the Company and (ii) interest on the price paid to
purchase the securities, inclusive of funds paid in respect of accrued interest
or dividends thereon (and on any expenses incurred or commissions paid in
connection with such purchase), computed at a 15% annual rate (net of any
liabilities actually assumed by the Company and liabilities to which such
contributed property is subject).
(c) Remedies for Failure to Fund Additional Capital
Contributions. If the Board of Managers calls for additional Capital
Contributions in accordance with Section 4.1(b) above and one or more Members
fail to make their required additional Capital Contribution within
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<PAGE> 14
three (3) days after delivery of notice to such party(ies), then the following
shall occur (unless waived in writing by the non-defaulting Members):
(i) if one but not all of the Class A Members fails to so fund
its additional Capital Contribution, then the Class B Member(s) shall
permit the other Class A Members to fund such defaulting Class A
Member's portion (with such proportionate adjustments to the applicable
Membership Interests and Sharing Ratios as determined by the Class A
Members); if the Class A Members collectively continue to fail to
fulfill their additional Capital Contribution(s) past the Contribution
Due Date, then the defaulting Class A Member shall pay interest to the
Company on the amount of such additional Capital Contribution equal to
the greater of 10% or the General Interest Rate per annum from the
Contribution Due Date until such deficit amount is paid in full; and
(ii) if any of the Class B Members fail to so fund their
additional Capital Contribution within fifteen (15) days from its
Contribution Due Date and each of the Class A Members have funded their
additional Capital Contribution(s) by the Contribution Due Date, then,
until such date as the defaulting Class B Member funds its additional
Capital Contribution, the Class A Members shall be entitled to purchase
from such defaulting Class B Member such Member's Membership Interests
for consideration equal to the lesser of the actual price paid by such
Class B Member for its Membership Interests (less any distributions
made to such Class B Member on such interest) or the fair market value
of such Class B Member's Membership Interest. For purposes of this
subsection, "fair market value" shall mean the value of cash and
securities together that would be distributed to such Member upon
liquidation as set forth in Section 12.2(a)(iii) and (b) of this
Agreement; and
(iii) if any Class B Member fails to so fund its additional
Capital Contribution by its Contribution Due Date (unless such Class B
Member's Membership Interest is purchased pursuant to paragraph (ii)
above), then such defaulting Member shall pay interest to the Company
on the amount of such additional Capital Contribution equal to the
greater of 10% or the General Interest Rate per annum from the
Contribution Due Date until such deficit amounts are paid in full.
4.2 Return of Contributions. A Member is not entitled to the
return of any part of its Capital Contributions or to be paid interest in
respect of either its Capital Account or its Capital Contributions. An unrepaid
Capital Contribution is not a liability of the Company or of any Member. A
Member is not required to contribute or to lend any cash or property to the
Company to enable the Company to return any Member's Capital Contributions.
4.3 Advances by Members. If the Company does not have
sufficient cash to pay its obligations, any Member(s) that may agree to do so
with the Board of Managers' consent may advance all or part of the needed funds
to or on behalf of the Company. An advance described in this Section 4.3 shall
constitute a loan from the Member to the Company, shall bear interest at a rate
equal to the greater of (a) 10% or (b) the General Interest Rate, in either case
from the date of the advance until the date of payment, is not a Capital
Contribution and shall be subject to such other terms and conditions as may be
agreed upon between such Member and the Company.
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<PAGE> 15
4.4 Capital Accounts. (a) A Capital Account ("CAPITAL
ACCOUNT") shall be established for each Member and shall equal the Capital
Contribution of the Member, as adjusted for any allocations of Profit made to
the Member pursuant to Section 5.1 and any special allocations of income and
gain, minus all cash and the value on the date of distribution of other assets
distributed to the Member (net of any liabilities actually assumed by such
Member and liabilities to which such distributed property is subject) and minus
any allocation of Losses made to the Member pursuant to Section 5.1 and any
special allocation of expenses.
(b) The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Treasury Regulation Section 1.704-1(b) and shall be interpreted and applied
in a manner consistent with such Treasury Regulation, except that no such
interpretation or application shall adversely affect the economic interest of
any Member. In the event the Member shall determine that it is prudent to modify
the manner in which the Capital Accounts, or any debits or credits thereto, are
computed or any item entering the definition of Profit or Loss is allocated in
order to comply with such Treasury Regulation, the Tax Manager may make such
modification, or amend this Agreement, if and to the extent that the amendment
or modification does not materially adversely affect the economic interests of
any Member. If unanticipated events might otherwise cause this Agreement not to
comply with such Treasury Regulation, the Tax Manager may amend this Agreement
or otherwise modify the procedures employed by the Tax Manager without the
approval of any Member if and to the extent that the amendment or other
modification does not materially adversely affect the economic interests of any
Member.
ARTICLE V.
ALLOCATIONS AND DISTRIBUTIONS
5.1 Allocations. The Profits and Losses of the Company, as the
case may be, and each item of income, loss and deduction or credit entering into
the computation thereof, for each Fiscal Year shall be allocated as follows:
(a) After effecting the allocations provided for in
subparagraphs (b), (d) and (f) below, Profits and Losses as computed for book
accounting purposes for any Fiscal year shall be allocated among the Member in
such manner that, as of the end of such Fiscal Year, the sum of (i) the Capital
Account of each Member, (ii) such Member's share of "minimum gain" (as
determined according to Treasury Regulation Sections 1.704-2(g)) and (iii) such
Member's "partner nonrecourse debt minimum gain" (as defined in Treasury
Regulation Section 1.704-2(i)(3)) shall be equal to the respective net amount,
positive or negative, that would be distributed to such Partner or for which
such Partner would be liable to the Partnership under this Agreement, determined
as if the Partnership were to (x) liquidate the assets for an amount equal to
their book value (i.e., an amount that generated no further Profits or Losses),
(y) pay the liabilities of the Partnership from the proceeds of such liquidation
and (z) distribute the remaining proceeds of such liquidation pursuant to
Section 5.3.
(b) Prior to making the allocations provided for in subsection
(a), the Board of Managers may make such allocations as it believes reasonably
necessary to comply with Treasury Regulations Section 1.704-1(b) and 1.704-2
(including, without limitation, the "minimum gain chargeback," "partner
nonrecourse debt" and "qualified income offset"
11
<PAGE> 16
provisions of such regulations). If the Board of Managers makes any allocations
pursuant to this subsection (b), the Board of Managers may make offsetting
allocations so that the net allocations to any Member shall, to the extent
possible, be the same as the allocations that would have been made pursuant to
subsection (a) without regard to this subsection (b).
(c) Subject to Code Section 704(c), all items of taxable
income, gain, loss and deduction or credit shall be allocated to the Partners in
accordance with the corresponding allocations of Profit, Loss, income and
expense made pursuant to this Section 5.1.
(d) If any asset is distributed in kind, the difference
between its fair market value (determined in accordance with Section 5.3(a)) and
the value at which it is carried on the Partnership's books at the time of such
distribution shall, for the purpose of maintaining Capital Accounts, be treated
as an item of Profit or Loss and allocated pursuant to the terms of Section 5.1.
(e) Items of tax expense payable by the Company, or withheld
on income received by the Company, shall be allocated to the Members in the same
proportion that the income with respect to which such expense is incurred is
allocated; provided however, that (i) when an item of tax expense payable by the
Company or when a withholding tax on income received by the Company, is
calculated, under applicable law, with respect to income allocable to some (but
not all) of the Members, or, (ii) to the extent income allocable to some of the
Members is exempt from tax in the hands of the Company, such tax expense or
withholding tax shall be allocated, as reasonably determined by the Board of
Managers, only to such Members to whom allocations of income are subject to tax
in the hands of the Company. If income earned by the Company is subject to tax
in the hands of the Company with respect to income allocable to some, but not
all, of the Members, the Board of Managers shall either (i) distribute on a
current basis to Members whose allocable shares of income from the Company are
not subject to tax in the hands of the Company, such reduction in tax payable by
the Company, or (ii) make other appropriate adjustments to distributions to the
Members.
5.2 Time of Allocation. The allocations in Section 5.1 shall
be made as of the end of each Fiscal Year of the Company, and any other date the
Board of Managers believes is necessary to correctly reflect the economic
relations of the Board of Managers. The Board of Managers shall use reasonable
efforts to determine and allocate all Profits and all Losses of the Company with
respect to each Fiscal Year within 90 days after the end of each Fiscal Year.
5.3 Distributions. (a) From time to time (but at least once
each calendar year), the Board of Managers shall determine in its judgment to
what extent (if any) the Company's cash on hand or other property exceeds its
current and anticipated needs, including, without limitation, for Operating
Expenses, debt service, acquisitions, and a contingency reserve. If such an
excess exists, the Board of Managers shall cause the Company to distribute an
amount of cash equal to such excess to those Members who have made all Capital
Contributions properly requested by the Board of Managers in accordance with
Section 4.1 hereof in the following priorities:
First, until Class A Members realize a IRR (as defined below)
of 15%, distributions from the Company shall be allocated 95%
to the Class A Members and 5% to Class B Members;
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<PAGE> 17
Second, after Class A Members have realized a IRR of 15%, and
until Class A Members realize a IRR of 25%, distributions from
the Company shall be allocated 80% to Class A Members and 20%
to Class B Members; and
Third, after Class A Members have realized a 25% IRR, all
distributions shall be allocated 75% to Class A Members and
25% to Class B Members.
No Member shall be entitled to receive any distributions from the Company unless
such Member has made all Capital Contributions properly requested by the Board
of Managers in accordance with Section 4.1 hereof. For purposes of this Section
5.3(a), "IRR" for a Member shall mean the nominal internal rate of return
calculated on a daily basis over the period from the date of the initial Capital
Contribution by such Member to the date in question. IRR shall be determined
based upon cash or property contributed by the Class A Members to the Company
(valued at their Contribution Value as of the date of such contribution) and
cash or property distributed by the Company to the Class A Members (valued as of
the date of distribution); provided, however, that if distributions other than
cash are made to the Members, such distributions shall be valued at the time of
distribution as follows, unless the Board of Managers reasonably determines in
good faith that the result derived from the following formulae differs
materially from the fair market value (as determined by unanimous vote of the
Managers of the Company appointed by OCM and EXCO or, if such Managers are
unable to collectively make such determination, by an independent
nationally-recognized appraiser appointed by the Managers) of such security or
property as of the date of distribution:
<TABLE>
<S> <C>
(i) Debt (if such debt has been 95% of the quoted market price
traded within the preceding ten of such debt on the last day
trading days): such debt was traded prior to
the date of determination,
together with accrued interest
owing thereon;
(ii) Debt (if such debt is 95% of the face amount of the
nonpublic bank debt or secured debt, together with accrued
debt that has not been traded interest owing thereon;
within the preceding ten trading
days, but is current as to
interest payments and is not
otherwise in default):
</TABLE>
13
<PAGE> 18
<TABLE>
<S> <C>
(iii) Registered equity securities: 85% of the quoted market price
on the last day on which such
securities were traded; and
(iv) Unregistered equity At the fair market value
securities or other securities (determined in accordance with the
or assets preceding paragraph), giving
effect to illiquidity and
transferability discounts.
</TABLE>
(a) No distribution shall be declared and paid unless after
the distribution is made, the assets of the Company are in excess of all
liabilities of the Company (as determined in accordance with accounting
principles applied on a consistent basis), except liabilities to Members on
account of their Capital Contributions.
5.4 Withholding. The Tax Manager is hereby authorized to
withhold, out of any distributions that would otherwise be made to any Member,
an amount equal to the amount of foreign or United States federal, state or
local payments, that the Tax Manager determines the Company or the Tax Manager
is required to withhold or to pay to a taxing authority with respect to or on
behalf of such Member, and to file all necessary reports relating to such
withholding or payment as may be required by law; provided however, that the Tax
Manager shall actually distribute such amounts to the extent there is a
subsequent determination that the amount withheld (and not yet remitted) is not
owed to any taxing authority. Any amounts so withheld or paid shall be deemed
actually distributed to such Member for all purposes of this Agreement.
Notwithstanding the foregoing, if any such amounts are deemed for tax purposes
to be a Company deduction or expense, the amount of any such deduction or
expense shall be specially allocated to the pertinent Member. If at any time (x)
the amount required to be withheld or paid by the Company or the Tax Manager
with respect to or on behalf of any such Member shall exceed (y) the amounts
that are then available for distribution to such Member, the Tax Manager shall
notify such Member of the amount of such excess, and such Member (whether or not
it is then a Member) shall promptly pay over to the Tax Manager cash equal to
such amount. Each Member shall indemnify the Company and the Tax Manager and
their respective affiliates and members and hold each of them harmless from any
liability with respect to any taxes, penalties or interest required to be
withheld or paid to any taxing authority by the Company or the Tax Manager for
or on behalf of such Member or with respect to such Member. If any entity
taxable as a partnership in which the Company invests requires the Company to
make any payments or reduces distributions to the Company because of such
entity's withholding obligations, the Company may reduce distributions to or
request reimbursement from such of its Members as were indirectly responsible
for the payment to or the withholding by such entity, taking into account the
extent to which the withholding was affected by special characteristics (such as
nationality) of such Members.
ARTICLE VI.
BOARD OF MANAGERS
6.1 Management. Except for situations in which the approval of
the Members is required under this Agreement, the Delaware Act or otherwise by
applicable law,
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<PAGE> 19
(a) the powers of the Company shall be exercised by or under the authority of,
and the business and affairs of the Company shall be wholly managed under the
direction of, the Board of Managers; and (b) the Board of Managers may make all
decisions and take all actions for the Company not otherwise provided for in
this Agreement. In managing the business and affairs of the Company and
exercising its powers, the Board of Managers shall act (x) collectively through
meetings or written consents, (y) through committees pursuant to Section 6.16 or
(z) through a Manager or Managers to whom authority and duties have been
delegated to such Person as the Board of Managers may deem advisable.
6.2 Number and Qualifications. The number of Managers
appointed to the Board of Managers shall not be less than one nor more than
five, as the Members holding a majority of the Membership Interests may
determine from time to time, but no decrease in the number of Managers shall
shorten the term of an incumbent Manager. Managers need not be Members or
residents of the State of Delaware. The Managers may elect a chairman of the
Board of Managers who shall preside at meetings of the Board of Managers.
6.3 Election and Term. At the first annual meeting of the
Members, and at each annual meeting thereafter, the Members shall elect the
Managers to serve on the Board of Managers in accordance with the terms of this
Agreement. Unless removed in accordance with this Agreement, the Managers shall
hold office until their successors are elected or appointed and qualified, or
until their earlier death, resignation or removal. Each Manager shall hold
office until resignation or removal in accordance with this Agreement. A Manager
may resign at any time by giving notice to the Members. Such resignation shall
be made in writing and shall take effect at the time specified therein, or if no
time be specified, at the time of its receipt by the last Member to receive such
resignation.
6.4 Designation of Members of the Board of Managers. The Class
A Members hereby designate and appoint Vincent J. Cebula and Stephen A. Kaplan
to the Board of Managers. The Class B Members hereby designate and appoint
Douglas H. Miller to the Board of Managers.
6.5 Vacancy. Any vacancy occurring for any reason in the
number of Managers comprising the Board of Managers shall be filled by the
approval of a majority of the Members or otherwise in accordance with the
Delaware Act (but in each case in accordance with the terms of this Agreement
providing for Class A Members to elect two Managers and Class B Members to elect
one Manager to the Board of Managers). A Manager elected to fill a vacancy shall
be elected for the unexpired term of the predecessor in office.
6.6 Removal. At a meeting called expressly for the purpose,
all or any lesser number of Managers may be removed at any time, with or without
cause, by the approval of a majority of the class of Members (e.g., Class A
Members) electing such Manager.
6.7 Place of Meetings. All meetings of the Board of Managers
may be held either within or without the State of Delaware.
6.8 Annual Meetings of Managers. The annual meeting of
Managers shall be held, without further notice, immediately following the annual
meeting of Members, and at the
15
<PAGE> 20
same place, or at such other time and place as shall be fixed by Members holding
a majority of the Membership Interests.
6.9 Special Meetings of the Board of Managers. Special
meetings of the Board of Managers may be held at any time upon one day's notice
at a time and place as is from time to time determined by Members holding a
majority of Membership Interests or by any Manager then in office.
6.10 Quorum. At all meetings of the Board of Managers, the
presence of a majority of the Managers shall be necessary and sufficient to
constitute a quorum for the transaction of business unless a greater number is
required by applicable law. Subject in all events to the limitation on actions
that may be taken by the Board of Managers, the act of a majority of the
Managers present at a meeting at which a quorum is present shall be the act of
the Board of Managers, except as otherwise provided by applicable law, the
Certificate or this Agreement. If a quorum is not present at any meeting of the
Board of Managers, the Managers present at the meeting may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum is present.
6.11 Attendance and Waiver of Notice. Attendance of a Manager
at any meeting constitutes a waiver of notice of the meeting, except where a
Manager attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any meeting of the Board of Managers need be specified in the notice or
waiver of notice of a meeting.
6.12 Compensation of Managers. Managers, as members of the
Board of Managers, shall not receive any stated salary for their services, but
shall receive such compensation for their services as may be from time to time
approved by Members holding a majority of the Membership Interests. In addition,
a fixed sum and expenses of attendance, if any, may be allowed for attendance at
each meeting of the Board of Managers. This Agreement shall not be construed to
preclude any Manager from serving the Company in any other capacity and
receiving compensation for such service. In addition, the Managers shall be
entitled to be reimbursed for out-of-pocket costs and expenses incurred in the
course of their service hereunder, excluding any portion of their overheard
allocable to Company activities.
6.13 Standards and Conflicts. (a) Each Manager shall be liable
for errors or omissions in performing his or her duties with respect to the
Company only in the case of bad faith, gross negligence, or breach of the
provisions of this Agreement but not otherwise. The Managers shall devote such
time and effort to the Company business and operations as is necessary to
promote fully the interests of the Company; however, neither any Manager nor any
Member must devote full time to Company business.
(a) Subject to the other express provisions of this Agreement,
the Managers, each Member and each officer of the Company at any time and from
time to time may engage in and possess interests in other business ventures of
any and every type and description, independently or with others with no
obligation to offer to the Company or any Member or officer of the Company the
right to participate therein.
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<PAGE> 21
(b) The Company may transact business with any Managers, any
Member, or officer or Affiliate thereof, provided the terms of those
transactions are no less favorable than those the Company could obtain from
unrelated third parties and the terms of those transactions are approved by the
Board of Managers; and provided, further, that to the extent that it is
commercially reasonable to explore transactions (of any kind) between EXCO and
the Company (other than as specifically contemplated by this Agreement), the
Board of Managers will consider such a transaction, although neither EXCO, OCM
or the Company shall be required to effectuate such a transaction without
approval of each of EXCO, OCM and the Company.
6.14 Agents, Officers and Employees. The Board of Managers
may, from time to time, designate one or more Persons to be agents or officers
of the Company and may hire other employees for the Company. No agent, officer
or employee need be a resident of the State of Delaware, a Member or a Manager.
Any agents or officers so designated shall have such authority and perform such
duties as the Board of Managers may, from time to time, delegate to them. The
Board of Managers may assign titles to particular agents and officers. The
agents and officers shall not be entitled to compensation for their services as
such, but the agents, officers and other employees shall be entitled to be
reimbursed for out-of-pocket costs and expenses incurred in the course of their
service to the Company and shall be entitled to salaries as employees of the
Company.
6.15 Reliance. Any Person dealing with the Company, other than
a Member, may rely on the authority of any two Managers or agents thereof in
taking any action in the name of the Company without inquiry into the provisions
of this Agreement or compliance herewith, regardless of whether that action
actually is taken in accordance with the provisions of this Agreement.
6.16 Committee of Managers. The Managers may, by resolution,
designate from among the Managers one or more committees, each of which shall be
comprised of one or more Managers, and may designate one or more of the Managers
as alternate members of any committee, who may, subject to any limitations
imposed by the Board of Managers, replace absent or disqualified Managers at any
meeting of that committee. Such committee shall have and may exercise all of the
authority of the Board of Managers, subject to the limitations set forth in the
Delaware Act or in the establishment of the committee by the Board of Managers.
Any members thereof may be removed at any time by majority of the Managers.
6.17 Other Committees. Other committees having and exercising
the authority of the Board of Managers in the management of the Company may be
designated by a resolution adopted by a majority of the Managers. Except as
otherwise provided in such resolution, members of each such committee shall be
appointed by the Board of Managers. Any members thereof may be removed by a
majority of the Board of Managers whenever in its judgment the best interests of
the Company shall be served by such removal.
6.18 Actions Without a Meeting and Telephonic Meetings.
Notwithstanding any other provision contained in this Article, all actions of
the Board of Managers may be taken by written consent without a meeting so long
as such consent is then delivered to all Managers, or any meeting thereof may be
held by means of a conference telephone, provided that the
17
<PAGE> 22
requisite number of Managers consents thereto or participates therein and notice
of the actions taken is provided to any Managers not in attendance.
ARTICLE VII.
MEETING OF MEMBERS
7.1 Meetings. All meetings of the Members shall be held at the
principal offices of the Company designated in Section 2.3 of this Agreement, or
at such other place within or without the State of Delaware as set forth in the
respective notice or waivers of notice of the meeting.
(a) Annual Meeting of Members. The annual meeting of
Members for the election of Managers and the transaction of other business that
properly comes before the meeting, shall be held at the time and date designated
by the Board of Managers from time to time and stated in the notice of the
meeting. The annual meeting shall be called in the same manner as provided in
this Agreement for special meetings of the Members, except that the purposes of
the meeting need be enumerated in the notice of the meeting only to the extent
required by applicable law.
(a) Special Meetings of Members. Special meetings of Members
may be called by any Manager or by Members holding a majority of the Membership
Interests of the Company.
(b) Notice of Meetings. Written or printed notice stating the
place, day and time of the meeting and, in the case of special meetings, the
purpose of the meeting shall be delivered to each of the Members no later than
five (5) days prior to the meeting date. If mailed, the notice shall be deemed
to be delivered five (5) business days after having been deposited in the United
States mail, addressed to the Member at the Member's address as it appears on
the records of the Company. Failure by a Member to receive such notice shall
have no bearing on the binding nature of actions taking at any meeting so long
as a quorum was present at such meeting.
(c) Quorum. The presence at a meeting of those Members that
hold a majority of Membership Interests constitutes a quorum, but only for those
matters for which the a higher quorum is not required by applicable law. The
Members may not act on matters at a meeting for which a greater affirmative vote
of such Members is required than is present. Once a quorum is present, the
withdrawal from the meeting before adjournment, or the refusal to vote, shall
not affect the presence of a quorum at the meeting. If, or to the extent that, a
quorum is not present at any meeting, then the Members entitled to vote at the
meeting may adjourn or recess the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present.
(d) Member Voting. Each outstanding Membership Interest shall
be entitled to one vote on each matter submitted to a vote for approval by the
Members unless otherwise provided by law.
7.2 Approval or Ratification of Acts or Contracts by Members.
The Board of Managers, in its discretion or as required by the terms of this
Agreement, may submit any act or
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<PAGE> 23
contract for approval or ratification at any annual meeting of the Members, or
at any special meeting of the Members called for the purpose of considering any
such act or contract, and any act or contract that shall be approved or be
ratified by Members holding a majority of the Membership Interests of the
Company shall be as valid and as binding upon the Company and upon all the
Members as if it shall have been approved or ratified by every Member of the
Company. Notice of the next Members' meeting shall be furnished to Members at
least five days before such meeting, provided that any such notice may be waived
by any Member who does not receive such notice and such waiver shall be deemed
given by a Member with respect to any meeting attended by such Member; provided
further that any action that may be taken at an annual or special meeting of the
Members, may be taken without a meeting, without prior notice and without a
vote, if a written consent, setting forth the action so taken, is signed by
Members holding a majority of the Membership Interests.
7.3 Actions Without a Meeting and Telephonic Meetings.
Notwithstanding any other provision contained in this Article, all actions of
the Members provided for herein may be taken by written consent without a
meeting, or any meeting thereof may be held by means of a conference telephone,
provided that the requisite number of Members consent thereto or participates
therein in accordance with the Delaware Act.
ARTICLE VIII.
INDEMNIFICATION
8.1 Indemnification. Subject to the limitations and conditions
as provided in this Article VIII, each person who was or is made a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative (hereinafter a "PROCEEDING"), or any appeal in such
a Proceeding or any inquiry or investigation that could lead to such a
Proceeding, by reason of the fact that he or she, or a Person of whom he or she
is the legal representative, is or was a Manager or Member of the Company or
while a Manager or Member of the Company is or was serving at the request of the
Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic limited
liability company, corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise shall be indemnified by the
Company to the fullest extent permitted by the Delaware Act, as the same exist
or may hereafter be amended (but in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment) against judgments, penalties (including excise and similar taxes
and punitive damages), fines, settlements and reasonable expenses (including,
without limitation, attorneys' fees) actually incurred by such Person in
connection with such Proceeding, and indemnification under this Article VIII
shall continue as to a Person who has ceased to serve in the capacity which
initially entitled such Person to indemnity hereunder. The rights granted
pursuant to this Article VIII shall be deemed contract rights, and no amendment,
modification or repeal of this Article VIII shall have the effect of limiting or
denying any such rights with respect to actions taken or Proceedings arising
prior to any such amendment, modification or repeal. It is expressly
acknowledged that the indemnification provided in this Article VIII could
involve indemnification for negligence or under theories of strict liability.
19
<PAGE> 24
8.2 Advance Payment. The right to indemnification conferred in
this Article VIII shall include the right to be paid or reimbursed by the
Company the reasonable expenses incurred by a Person of the type entitled to be
indemnified under Section 8.1 who was, is or is threatened to be made a named
defendant or respondent in a proceeding in advance of the final disposition of
the Proceeding and without any determination as to the Person's ultimate
entitlement to indemnification; provided, however, that the payment of such
expenses incurred by any such Person in advance of the final disposition of a
Proceeding, shall be made only upon delivery to the Company of a written
affirmation by such Manager or Member of his or her good faith belief that he
has met the standard of conduct necessary for indemnification under this Article
VIII and a written undertaking, by or on behalf of such Person, to repay all
amounts so advanced if it shall ultimately be determined that such indemnified
Person is not entitled to be indemnified under this Article VIII or otherwise.
8.3 Indemnification of Officers, Employees and Agents. The
Company, by adoption of a resolution of the Members, may indemnify and advance
expenses to officers, employees or agents of the Company to the same extent and
subject to the same conditions under which it may indemnify and advance expenses
to a Manager or a Member under this Article VIII; and the Company may indemnify
and advance expenses to Persons who are not or were not a Manager, a Member,
employees or agents of the Company but who are or were serving at the request of
the Company as a, director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic limited
liability company, corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise against any liability asserted
against them and incurred by them in such a capacity or arising out of their
status as such Persons to the same extent that it may indemnify and advance
expenses to a Manager or Members under this Article VIII.
8.4 Appearance as a Witness. Notwithstanding any other
provision of this Article VIII, the Company may pay or reimburse expenses
incurred by a Manager in connection with his appearance as a witness or other
participation in a Proceeding at a time when such Manager is not named defendant
or respondent in the Proceeding.
8.5 Nonexclusivity of Rights. The right to indemnification and
the advancement and payment of expenses conferred in this Article VIII shall not
be exclusive of any other right which a Manager or other Person indemnified
pursuant to Section 8.3 may have or hereafter acquire under any law (common or
statutory), provision of the Certificate or this Agreement, other agreement,
vote of Members or otherwise.
8.6 Insurance. The Company may purchase and maintain
insurance, at its expense, to protect itself and any Person who is or was
serving as a Manager, employee or agent of the Company or is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another foreign
or domestic limited liability company, corporation, partnership, joint venture,
sole proprietorship, trust, employee benefit plan or other enterprise against
any expense, liability or loss, whether or not the Company would have the power
to indemnity such Person against such expense, liability or loss under this
Article VIII.
20
<PAGE> 25
8.7 Member Notification. Any indemnification of or advance of
expenses to a Manager or Member in accordance with this Article VIII shall be
reported in writing to the Members with or before the notice or waiver of notice
of the next Members' meeting or with or before the next submission to Members of
a consent to action without a meeting and, in any case, within the 12-month
period immediately following the date of the indemnification or advance.
8.8 Savings Clause. If this Article VIII or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Company shall nevertheless indemnify and hold harmless any Manager or any
other Person indemnified pursuant to this Article VIII as to costs, charges and
expenses (including, without limitation, attorneys' fees and expenses),
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative to the
full extent permitted by applicable law.
ARTICLE IX.
TAXES
9.1 Tax Manager. OCM is hereby designated the "tax matters
partner" (the "TAX MANAGER") for purposes of Section 6231(a) of the Code (and
regulations thereunder).
9.2 Tax Returns. The Tax Manager shall cause to be prepared
and filed all necessary federal, state and foreign income tax returns for the
Company, including making the elections described in Section
9.3. Each Member shall furnish to the Tax Manager all
pertinent information in its possession relating to Company operations that is
necessary to enable the Company's income tax returns to be prepared and filed.
9.3 Tax Elections. The Tax Manager, on behalf of the Company,
shall make the following elections on the appropriate tax returns:
(a) to adopt the calendar year as the Company's fiscal
year (unless otherwise modified by approval of the Board of Managers),
(a) to adopt the cash method of accounting if permitted by the
Code and to keep the Company's books and records on the income-tax method;
(b) if a distribution of Company property as described in
section 734 of the Code occurs or if a transfer of a Membership Interest as
described in section 743 of the Code occurs, on written request of any Member,
to elect, pursuant to section 754 of the Code, to adjust the basis of Company
properties;
(c) to elect to amortize the organizational expenses of the
Company and the startup expenditures of the Company under section 195 of the
Code ratably over a period of 60 months as permitted by section 709(b) of the
Code; and
(d) any other election the Board of Managers may deem
appropriate and in the best interests of the Members.
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Neither the Company nor the Board of Managers nor a Member may make an election
for the Company to be taxed as a corporation or excluded from the application of
the provisions of subchapter K of chapter 1 of subtitle A of the Code or any
similar provisions of applicable state law, and no provision of this Agreement
shall be construed to sanction or approve such an election. If a distribution or
transfer event described in clause (c) above occurs, the Member requesting an
adjustment of the basis of Company properties shall bear and pay any and all
appraisal costs incurred by the Company in connection with such adjustment.
ARTICLE X.
BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS
10.1 Maintenance of Books. The Company shall keep books and
records of accounts. The books of account for the Company shall be maintained on
a cash basis if permitted by the Code in accordance with the terms of this
Agreement. The calendar year shall be the accounting year of the Company.
10.2 Reports. On or before the 120th day following the end of
each fiscal year during the term of the Company, the Board of Managers shall
cause each Member to be furnished with a balance sheet, an income statement, a
statement of changes in Members' capital of the Company, and a statement of cash
flow for, or as of the end of, that year. These financial statements shall be
prepared using the cash basis of accounting (if the Company then utilizes the
cash-basis of accounting) in accordance with accounting practices followed for
United States federal income tax reporting purposes, and also prepared pursuant
to generally accepted accounting principles. The Board of Managers shall select
and retain an independent accounting firm to audit the annual financial
statements and books of the Company, at the cost of the Company. The Board of
Managers shall also furnish unaudited financial statements for the Company for
each of the first three quarters of each fiscal year during the term of the
Company. The Board of Managers also may cause to be prepared or delivered such
other reports as it may deem appropriate. The Company shall bear the costs of
all such reports.
10.3 Accounts. The Board of Managers shall establish and
maintain one or more separate bank and investment accounts and arrangements for
funds of the Company, which accounts shall be in the name of the Company, and
opened with financial institutions that the Board of Managers determines. The
Board of Managers may not commingle the Company's funds with the funds of the
Members or their affiliates.
ARTICLE XI.
BANKRUPTCY OF A MEMBER
11.1 Bankrupt Members. If any Member becomes Bankrupt
("BANKRUPT MEMBER"), the Company shall have the option, exercisable by notice
from the Board of Managers to the Bankrupt Member (or its representative) at any
time prior to the 180th day after receipt of notice of the occurrence of the
event causing it to become a Bankrupt Member, to buy, and on the exercise of
this option the Bankrupt Member or its representative shall sell, its Membership
Interest. The purchase price shall be an amount equal to the fair market value
thereof determined by agreement by the Bankrupt Member (or its representative)
and the Board of Managers; however, if those Persons do not agree on the fair
market value on or before the
22
<PAGE> 27
30th day following the exercise of the option, either such Person, by notice to
the other, may require the determination of fair market value to be made by an
independent nationally-recognized appraiser specified in that notice. If the
Person receiving that notice objects on or before the tenth day following
receipt to the independent appraiser designated in that notice, and those
Persons otherwise fail to agree on an independent appraiser, such Person may
designate another independent nationally-recognized appraiser who, with the
initial appraiser, will then together select a third nationally-recognized
independent appraiser to determine the fair market value of the Bankrupt
Member's interest. The determination by such final chosen appraiser shall be
binding on the Members.
ARTICLE XII.
DISSOLUTION, LIQUIDATION, AND TERMINATION
12.1 Dissolution.
(a) The Company shall dissolve and its affairs shall be wound
up on the written consent of the Board of Managers and the consent of a majority
of the Members or otherwise in accordance with the Delaware Act.
(b) As soon as possible following the occurrence of the vote
specified in Section 12.1(a) effecting the dissolution of the Company, the Board
of Managers of the Company shall execute a statement of intent to dissolve in
such form as shall be presented by the Delaware Secretary of State and file same
with the Delaware Secretary of State's office.
12.2 Liquidation and Termination. (a) On dissolution of the
Company, the Board of Managers shall act as liquidator or may appoint one or
more Members as liquidator, or, if the Board of Managers is unavailable for
reasons of death, retirement, resignation, Bankruptcy or any other reason, the
majority of Members may appoint such liquidator. The liquidator shall proceed
diligently to wind up the affairs of the Company and make final distributions as
provided herein and in the Delaware Act. The costs of liquidation shall be borne
as a Company expense. Until final distribution, the liquidator shall continue to
operate the Company properties with all of the power and authority of the Board
of Managers. The steps to be accomplished by the liquidator are as follows:
(i) as promptly as possible after dissolution and again after
final liquidation, the liquidator shall cause a proper accounting to be
made by a recognized firm of independent public accountants of the
Company's assets, liabilities, and operations through the last day of
the calendar month in which the dissolution occurs or the final
liquidation is completed, as applicable;
(ii) the liquidator shall pay, satisfy or discharge from
Company funds all of the debts, liabilities and obligations of the
Company (including, without limitation, all expenses incurred in
liquidation and any advances described in Section 4.3) or otherwise
make adequate provision for payment and discharge thereof (including,
without limitation, the establishment of a cash escrow fund for
contingent liabilities in such amount and for such term as the
liquidator may reasonably determine); and
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<PAGE> 28
(iii) all remaining assets of the Company shall be distributed
in accordance with the Members' Capital Account balances (after
adjusting such Capital Accounts for all Profits and Losses of the
Company for the year of liquidation, including all Profits and Losses
related to liquidation and to distributions in kind pursuant to Section
5.1(d).
(b) All distributions in kind to the Members shall be made
subject to the liability of each distributee for costs, expenses, and
liabilities theretofore incurred or for which the Company has committed prior to
the date of termination and those costs, expenses, and liabilities shall be
allocated to the distributee pursuant to this Section 12.2. The distribution of
cash and/or property to a Member in accordance with the provisions of this
Section 12.2 constitutes a complete return to the Member of its Capital
Contributions and a complete distribution to the Member of its Membership
Interest and all the Company's property and constitutes a compromise to which
all Members have consented. To the extent that a Member returns funds to the
Company, it has no claim against any other Member for those funds.
12.3 Deficit Capital Accounts. Notwithstanding anything to the
contrary contained in this Agreement, and notwithstanding any custom or rule of
law to the contrary, to the extent that the deficit, if any, in the capital
account of any Member results from or is attributable to deductions and losses
of the Company (including non-cash items such as depreciation), or distributions
of money pursuant to this Agreement to all Members in proportion to their
respective Sharing Ratios, upon dissolution of the Company such deficit shall
not be an asset of the Company and such Members shall not be obligated to
contribute such amount to the Company to bring the balance of such Member's
capital account to zero.
12.4 Certificate of Cancellation. On completion of the
distribution of Company assets as provided herein, the Company is terminated,
and the Board of Managers (or such other Person or Persons as the Delaware Act
may require or permit) shall file a certificate of cancellation with the
Secretary of State of Delaware, cancel any other filings made pursuant to
Section 2.5, and take such other actions as may be necessary to terminate the
Company.
12.5 Return of Contribution Non-recourse to Other Members.
Except as provided by law, upon dissolution, each Member shall look solely to
the assets of the Company for the return of such Member's Capital Contribution.
If the Company property remaining after the payment or discharge of the debts
and liabilities of the Company is insufficient to return the cash or other
property contribution of one or more Members, such Member or Members shall have
no recourse against any other Member.
ARTICLE XIII.
GENERAL PROVISIONS
13.1 Offset. Whenever the Company is to pay any sum to any
Member, any amounts that Member owes the Company may be deducted from that sum
before payment.
13.2 Notices. Except as expressly set forth to the contrary in
this Agreement, any notices, requests, or consents provided for or permitted to
be given under this Agreement must be in writing and must be given either by
depositing that writing in the United States mail, addressed to the recipient,
postage paid, and registered or certified with return receipt requested
24
<PAGE> 29
or by delivering that writing to the recipient in person, by courier, or by
facsimile transmission; and a notice, request, or consent given under this
Agreement is effective on receipt by the Person to receive it. All notices,
requests, and consents to be sent to a Member must be sent to or made at the
addresses given for that Member on Exhibit A or such other address as that
Member may specify by notice to the other Members. A copy of any notice shall
simultaneously be provided (in accordance with the foregoing means) to counsel
designated by each of the Members on Exhibit B herefor or subsequently
designated in writing by a Member to the Board of Managers. Any notice, request,
or consent to the Company or the Board of Managers must be given to the Board of
Managers at the following address: 550 South Hope Street, Suite 2200, Los
Angeles, CA 90071. Whenever any notice is required to be given by law, the
Certificate or this Agreement, a written waiver thereof signed by the Person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to the giving of such notice.
13.3 Entire Agreement; Supersedure. This Agreement constitutes
the entire agreement of the Members and their Affiliates relating to the Company
and supersedes all prior contracts or agreements with respect to the Company,
whether oral or written.
13.4 Effect of Waiver or Consent. A waiver or consent, express
or implied, to or of any breach or default by any Person in the performance by
that Person of its obligations with respect to the Company is not a consent or
waiver to or of any other breach or default in the performance by that Person of
the same or any other obligations of that Person with respect to the Company.
Failure on the part of a Person to complain of any act of any Person or to
declare any Person in default with respect to the Company, irrespective of how
long that failure continues, does not constitute a waiver by that Person of its
rights with respect to that default until the applicable statute of limitations
period has run.
13.5 Amendment or Modification. This Agreement may be amended
or modified from time to time only by a written instrument executed and agreed
to by each of (i) the Members holding a majority of Membership Interests, (ii)
OCM and (iii) EXCO.
13.6 Binding Effect. This Agreement is binding on and inures
to the benefit of the Members and their respective heirs, legal representatives,
successors, and assigns.
13.7 Arbitration.
(a) Submission Requirement. Before the institution of
litigation between any persons relating to any aspect of the Company or this
Agreement, a party seeking redress hereunder or the interpretation of any
provision hereof shall submit the claim or issue for interpretation to binding
arbitration. The party submitting the claim or issue shall notify in writing the
party or other persons against whom redress is sought or who would be affected
by the interpretation, to offer those parties an opportunity to participate in
the proceeding. The notice shall describe the nature of the claim or issue
submitted, the provision or provisions of this Agreement which is or are the
basis of the claim or issue submitted, and the material facts surrounding the
claim or issue for interpretation. On delivery of the notice, the claim or issue
shall be deemed to have been submitted to arbitration.
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<PAGE> 30
(b) Appointment of Arbitrators. Each party shall appoint one
arbitrator to arbitrate the subject issue. The arbitrators shall be appointed
within fifteen (15) days of the date of the foregoing described notice. If one
party fails or refuses to appoint an arbitrator, then the first arbitrator
appointed shall appoint a second arbitrator. Within thirty (30) days of the last
of those appointments, the two arbitrators shall appoint a third arbitrator. If
the two arbitrators are not able to agree on the appointment of a third
arbitrator, then the third arbitrator shall be appointed by a justice of a court
of competent jurisdiction in Los Angeles County, California. Each party
appointing an arbitrator or for whom an arbitrator is appointed shall bear all
costs and expenses associated with that arbitrator, and the cost and expenses
associated with the third arbitrator (or the appointment of the third
arbitrator) shall be borne equally by the parties.
(c) Arbitration Proceeding. Within thirty (30) days after the
appointment of the foregoing described arbitrators, the parties shall hold an
arbitration proceeding before the arbitrators at a time and place selected by
the parties. If the parties cannot agree on a time and place for the arbitration
proceeding, the rules of the American Arbitration Association shall govern.
(d) Binding Decision. Within ten (10) days after the
conclusion of the arbitration proceeding the arbitrators shall render a written
decision of the arbitration. The arbitrators may award costs, including
attorney's fees, to the prevailing party. The decision of the arbitrators is
binding on the parties, and after the completion of the arbitration, a party to
the arbitration may not institute litigation to reverse the decision of the
arbitrators. It may, however, institute litigation in Los Angeles County,
California, to enforce the claim or issue determined by the arbitration
proceeding. Once a claim or issue is submitted to arbitration, neither party may
institute litigation regarding the claim or issue submitted, except to enforce
that arbitration decision.
13.8 Governing Law; Venue; Severability. THIS AGREEMENT IS
GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF
DELAWARE, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE
GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER
JURISDICTION. In the event of a direct conflict between the provisions of this
Agreement and (a) any provision of the Certificate, or (b) any mandatory
provision of the Delaware Act, the applicable provision of the Certificate or
the Delaware Act shall control. If any provision of this Agreement or the
application thereof to any Person or circumstance is held invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of that provision to other Persons or circumstances is not affected thereby and
that provision shall be enforced to the greatest extent permitted by law. Each
of the Members hereby consents to be subject to the nonexclusive jurisdiction of
the courts of the State of California located in the county of Los Angeles, and
to arbitration located exclusively in the county of Los Angeles, California.
13.9 Further Assurances. In connection with this Agreement and
the transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.
26
<PAGE> 31
13.10 Waiver of Certain Rights. Each Member irrevocably waives
any right it may have to maintain any action for dissolution of the Company or
for partition of the property of the Company.
13.11 Notice to Members of Provisions of this Agreement. By
executing this Agreement each Member acknowledges that it has actual notice of
(a) all of the provisions of this Agreement, including, without limitation, the
restrictions on the transfer of Membership Interests set forth in Article III,
and (b) all of the provisions of the Certificate. Each Member hereby agrees that
this Agreement constitutes adequate notice of all such provisions, including,
without limitation, any notice requirement under Chapter 8 of the Delaware
Uniform Commercial Code, and each Member hereby waives any requirement that any
further notice thereunder be given.
13.12 Counterparts. This Agreement may be executed in any
number of counterparts with the same effect as if all signing parties had signed
the same document. All counterparts shall be construed together and constitute
the same instrument.
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the undersigned, being all of the Members
of the Company, have executed this Agreement as of the date first set forth
above.
MEMBERS:
EXCO Resources, Inc., a Texas corporation
By: /s/ DOUGLAS H. MILLER
-----------------------------------------
Douglas H. Miller
Chief Executive Officer
OCM Principal Opportunities Fund, L.P.
By: Oaktree Capital Management, LLC, its
general partner
By: /s/ STEPHEN A. KAPLAN
-----------------------------------------
Stephen A. Kaplan
Principal
By: /s/ VINCENT J. CEBULA
-----------------------------------------
Vincent J. Cebula
Managing Director
28
<PAGE> 33
EXHIBIT A
MEMBERS
<TABLE>
<CAPTION>
Name & Address of Members Initial Contribution Sharing Ratio
- ------------------------- -------------------- -------------
<S> <C> <C>
CLASS A MEMBER(S):
OCM Principal Opportunities Fund, L.P. $657,596.59 95%
550 S. Hope Street,
Suite 2200
Los Angeles, CA 90071
Attn: Vincent J. Cebula
CLASS B MEMBER(S):
EXCO Resources, Inc. $34,610.35 5%
5735 Pineland Drive, Suite 235
Dallas, TX 75231
Attn: Douglas H. Miller
</TABLE>
A - 1
<PAGE> 34
EXHIBIT B
COUNSEL DESIGNEES
<TABLE>
<S> <C>
If to OCM: Milbank, Tweed, Hadley & McCloy
601 South Figueroa Street, 30th Floor
Los Angeles, CA 90017
Facsimile: (213) 629-5063
Attention: Eric H. Schunk, Esq.
If to EXCO, a copy to: EXCO Resources, Inc.
5735 Pineland Drive, Suite 235
Dallas, TX 75231
Facsimile: (214) 368-2087
Attention: Richard E. Miller, Esq.,
Secretary and General Counsel
</TABLE>
B - 1
<PAGE> 35
OCM PRINCIPAL OPPORTUNITIES FUND, L.P.
c/o Oaktree Capital Management, L.L.C.
550 S. Hope Street, 22nd Floor
Los Angeles, California 90071
October 9, 1998
EXCO Resources, Inc.
5735 Pineland Drive, Suite 235
Dallas, Texas 75231
Re: EXCO Energy Investors, L.L.C. Operating Agreement
Gentlemen:
As the two original Members of EXCO Energy Investors, L.L.C.,
a Delaware limited liability company (the "Company"), OCM Principal
Opportunities Fund, L.P. ("OCM") and EXCO Resources, Inc. ("EXCO") have entered
into a Limited Liability Company Agreement dated as of October 9, 1998 (the
"Operating Agreement") providing for the governance of the Company. In order to
establish certain additional terms that shall govern the management of the
Company (such terms being unique to the relationship between OCM and EXCO in
their capacities as the initial Members of the Company), we would like you to
confirm your agreement with the following additional provisions that shall
govern OCM and EXCO's management of the Company. Capitalized terms not otherwise
defined in this letter shall have the meaning assigned to such terms in the
Operating Agreement.
1. Irrespective of the provisions regarding approval by the Board
of Managers set forth in the Operating Agreement, the Managers
appointed to the Company's Board of Managers by OCM (the "OCM
Managers") hereby agree to obtain the prior consent of the
Manager appointed to the Company's Board of Managers by EXCO
(the "EXCO Manager"), prior to the Company's making of any
investment set forth in Section 2.4(a) of the Operating
Agreement, including any investment by the Company in any
asset, bond, note, bank debt, royalty interest or equity
securities.
2. If (x) the Company has cash in hand or on deposit in excess of
$2.5 million at any time for more than five (5) business days;
(y) the EXCO Manager requests that the Company distribute all
or a portion of such cash to the Members (the "Proposed
Distribution"); and (z) the OCM Managers reasonably determine
that sufficient cash will be retained by the Company following
such Proposed Distribution to fund anticipated operating
expenses, liabilities, reserves or capital requirements of the
Company and provided further that such Proposed Distribution
is then permitted by applicable law, then, as soon as
practicable thereafter, the Board of Managers shall vote on
whether to make such Proposed Distribution to the Members. In
connection with such vote, OCM hereby agrees to cause the OCM
Managers to vote in favor of the Proposed Distribution.
Notwithstanding the foregoing, nothing contained in this
paragraph shall in any way limit the right of OCM or the OCM
Managers to call a meeting of the Board of Managers or to
otherwise effect
<PAGE> 36
distributions or cash or property at other times or of other
amounts without the consent or approval of EXCO or the EXCO
Manager. If any distribution is approved in accordance with
the foregoing sentences, then the Company shall be required
to distribute such cash or property to the Members in
accordance with Section 5.3 of the Operating Agreement.
3. Any additional Capital Contributions to be made by OCM and
EXCO shall remain proportional to each Member's Membership
Interest (for example, immediately following receipt of the
Initial Capital Contributions of both initial Members, OCM
shall fund 95% of all additional Capital Contributions and
EXCO shall fund 5% of all additional Capital Contributions,
until such time as such Members' Percentage Interests may be
adjusted from time to time in accordance with the terms of the
Operating Agreement), regardless of any change in the
percentages of distributions to be paid to the Members
pursuant to Section 5.3 of the Operating Agreement.
Notwithstanding the foregoing, the IRR realized by the Class A
Members shall be recalculated to give effect to such
additional Capital Contribution, and, if required by such
calculation, the priorities with respect to distributions set
forth in Section 5.3 of the Operating Agreement shall be
readjusted upon each such additional Capital Contribution to
give effect to such contribution.
[Signature page follows]
-2-
<PAGE> 37
Please confirm the foregoing understanding by signing and
returning the enclosed copy of this letter agreement.
Sincerely,
OCM Principal Opportunities Fund, L.P.
By: Oaktree Capital Management, LLC
Its: General Partner
By: /s/ STEPHEN A. KAPLAN
--------------------------------------------
Stephen A. Kaplan
Principal
By: /s/ VINCENT J. CEBULA
--------------------------------------------
Vincent J. Cebula
Managing Director
Agreed and accepted as of the
date first set forth above:
EXCO RESOURCES, INC.
By: /s/ DOUGLAS H. MILLER
-------------------------------
Douglas H. Miller
Chief Executive Officer
-3-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in, i) the Registration Statement
(Form S-8 No. 333-64331) pertaining to the 1998 Stock Option Plan of EXCO
Resources, Inc. and ii) the Registration Statement (Form S-2/A on Form S-3 No.
333-49135) pertaining to the Resale of Securities of EXCO Resources, Inc., of
our report dated March 13, 1997, except Note 2, as to which the date is
February 11, 1998 and Note 1, Reverse Stock Split -- 1998, as to which the date
is March 31, 1998, with respect to the financial statements of EXCO Resources,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1998, filed with the Securities and Exchange Commission.
/s/ BELEW AVERITT LLP
Dallas, Texas
March 15, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in i) the Registration Statement
(Form S-8 No. 333-64331) pertaining to the 1998 Stock Option Plan of EXCO
Resources, Inc. and ii) the Registration Statement (Form S-2/A on Form S-3 No.
333-49135) pertaining to the Resale of Securities of our report dated February
26, 1999, with respect to the financial statements of EXCO Resources, Inc.
included in the Annual Report on Form 10-K for the year ended December 31,
1998.
/s/ Ernst & Young LLP
Dallas, Texas
March 15, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
Lee Keeling and Associates, Inc. ("Lee Keeling") hereby consents to
references to Lee Keeling as expert and to its reserve reports and to
information depicted in the Annual Report on Form 10-K for the year ended
December 31, 1998 for EXCO Resources, Inc., a Texas corporation, that was
derived from our reserve reports, incorporated by reference in (i) the
Prospectus constituting a part of the Registration Statement on Post-Effective
Amendment No. 1 to Form S-3 and the Registration Statement on Post-Effective
Amendment No. 1 to Form S-3 filed with the Securities and Exchange Commission
on September 30, 1998 and (ii) the Prospectus constituting a part of the
Registration Statement on Form S-8 and the Registration Statement on Form S-8
filed with the Securities and Exchange Commission on September 25, 1998.
LEE KEELING AND ASSOCIATES, INC.
By: /s/ KENNETH RENBERG
-------------------------------
Kenneth Renberg Vice President
Tulsa, Oklahoma
March 12, 1999
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