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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-9204
EXCO RESOURCES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1492779
(State of incorporation) (I.R.S. Employer
Identification No.)
5735 PINELAND DR., SUITE 235
DALLAS, TEXAS 75231
(Address of principal executive offices) (Zip Code)
(214) 368-2084
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date.
Class: Common Stock, par value $0.02 per share
Outstanding at May 10, 1999: 6,687,696 shares
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EXCO RESOURCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited) ............................................................2
Condensed Consolidated Balance Sheets
December 31, 1998 and March 31, 1999.........................................................2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1999...................................................3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1999...................................................4
Notes to Condensed Consolidated Financial Statements.........................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................. 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................. 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 15
Item 5. Other Information.......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K............................................................16
Signatures....................................................................................................19
Exhibit Index.................................................................................................20
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
EXCO RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1998 1999
-------- --------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents .................................... $ 21,493 $ 21,924
Accounts receivable .......................................... 540 1,001
Other ........................................................ 124 148
-------- --------
Total current assets ................................ 22,157 23,073
Oil and natural gas properties (full cost accounting method):
Proved developed and undeveloped oil and natural
gas properties ........................................... 11,765 18,088
Allowance for depreciation, depletion and amortization ....... (4,211) (4,473)
-------- --------
Oil and natural gas properties, net .......................... 7,554 13,615
Office and field equipment, net ................................. 248 276
Deferred financing costs, net ................................... 49 37
Investment in Rio Grande, Inc. .................................. 6,539 --
Investment in EXCO Energy Investors, L.L.C....................... 341 352
Other assets .................................................... -- 264
-------- --------
Total assets ........................................ $ 36,888 $ 37,617
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 480 $ 1,058
Revenues and royalties payable ............................... 167 103
Current maturities of long-term debt ......................... 1 1
-------- --------
Total current liabilities ........................... 648 1,162
Long-term debt, less current maturities ......................... -- --
Other long-term liabilities ..................................... -- 376
Stockholders' equity:
Common Stock, $.02 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 6,687,696 at
December 31, 1998 and March 31, 1999 ..................... 134 134
Additional paid-in capital ................................... 46,241 46,241
Notes receivable-officers ................................... (825) (825)
Deficit eliminated ........................................... (8,799) (8,799)
Minority interest in limited partnership .................... -- (8)
Retained deficit, as adjusted for quasi-reorganization
at December 31, 1997 ..................................... (511) (664)
-------- --------
Total stockholder's equity .......................... 36,240 36,079
-------- --------
Total liabilities and stockholders' equity .......... $ 36,888 $ 37,617
======== ========
</TABLE>
See accompanying notes.
2
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EXCO RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1999
------- -------
<S> <C> <C>
REVENUES:
Oil and natural gas ........................ $ 173 $ 669
Other income ............................... 10 315
------- -------
Total revenues .................... 183 984
COSTS AND EXPENSES:
Oil and natural gas production ............. 95 368
Depreciation, depletion and amortization ... 36 294
General and administrative ................. 239 474
Interest ................................... 7 1
------- -------
Total costs and expenses .......... 377 1,137
------- -------
Income (loss) before income taxes ............. (194) (153)
Income tax expense (benefit) .................. -- --
------- -------
Net loss ...................................... $ (194) $ (153)
======= =======
Net loss per share ............................ $ (.38) $ (.02)
======= =======
Weighted average number of common and
common equivalent shares outstanding ....... 509 6,688
======= =======
</TABLE>
See accompanying notes.
3
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EXCO RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................... $ (194) $ (153)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization ............ 36 294
Effect of changes in:
Accounts receivable .............................. 44 (109)
Other current assets ............................. (17) 46
Accounts payable and other current liabilities ... 45 149
-------- --------
Net cash provided by (used in) operating activities .... (86) 227
INVESTING ACTIVITIES:
Additions to property and equipment ........................ (869) (237)
Investment in EXCO Energy Investors, L.L.C.................. -- (11)
Investment in Rio Grande, Inc. promissory note ............. -- 7,451
Acquisition of Rio Grande, Inc. ............................ -- (7,017)
Proceeds from disposition of property and equipment ........ 4 28
-------- --------
Net cash provided by (used in) investing activities .... (865) 214
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................... 600 --
Payments on long-term debt ................................. (4) (10)
Payments on note payable ................................... -- --
Proceeds from issuance of common stock ..................... -- --
Deferred financing costs ................................... (89) --
-------- --------
Net cash provided by (used in) financing activities .... 507 (10)
-------- --------
Net increase (decrease) in cash ............................ (444) 431
Cash at beginning of period ................................ 496 21,493
-------- --------
Cash at end of period ...................................... $ 52 $ 21,924
======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid .............................................. $ 7 $ 1
======== ========
Income taxes paid .......................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes.
4
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EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
In management's opinion, the accompanying financial statements contain
all adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the financial position of EXCO Resources, Inc. as of December 31,
1998 and March 31, 1999, the results of operations for the three month periods
ended March 31, 1998 and 1999, and the cash flows for the three month periods
ended March 31, 1998 and 1999.
We have prepared the accompanying unaudited financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
We have omitted certain information and disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles pursuant to those rules and regulations, although we believe that the
disclosures we have made are adequate to make the information presented not
misleading. You should read these financial statements in conjunction with our
financial statements and notes included in our Annual Report on Form 10-K for
the year ended December 31, 1998. The accompanying condensed consolidated
financial statements include the financial statements of EXCO Resources, Inc.
and Rio Grande GulfMex, Ltd.
The results of operations for the three month period ended March 31,
1999, are not necessarily indicative of the results we expect for the full year.
Effective January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income includes net
income and other comprehensive income, which includes, but is not limited to,
unrealized gains from marketable securities and futures contracts, foreign
currency translation adjustments and minimum pension liability adjustments. For
the three months ended March 31, 1998 and 1999, our net loss and comprehensive
income were the same.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. Because of our
current minimum use of derivatives, at the present time we do not believe the
adoption of the new Statement will have a significant effect on our earnings or
our financial position.
2. 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 the increase in our activities. Our accumulated deficit was
primarily related to past operations and properties that have been
5
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EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
disposed of. We did not adjust the historical carrying values of our assets and
liabilities in connection with the quasi-reorganization.
3. 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. Because our financial statements
show a net loss, basic and diluted per share amounts are the same.
4. 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 splits.
5. 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 is provided using the unit-of-production method based on total
proved reserves, as determined by independent petroleum reservoir engineers.
Sales, dispositions, and other oil and 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.
6
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EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
6. 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 the proved mineral interests
we own. 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.
7
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EXCO RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
7. ACQUISITIONS
We have accounted for the following acquisitions in accordance with
Accounting Principles Board No. 16, "Business Combinations" where applicable.
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 March 31, 1999,
the joint venture has invested in various debt securities. Through March 31,
1999, our investment in the joint venture was approximately $352,000.
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 our
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 plan 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 was secured by substantially all of the assets of Rio
Grande, Inc., its subsidiaries and affiliated entities. Rio Grande, Inc. was 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.
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 had 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.
fully repaid its trade creditors. Several of the subsidiaries or affiliates were
merged into Rio Grande, Inc. Then, the outstanding shares of Rio Grande, Inc.'s
common and preferred stock were canceled. We were issued new shares of Rio
Grande, Inc. as settlement of Rio Grande Inc.'s $13 million secured indebtedness
owed to us. The new shares represented all of the outstanding capital stock of
Rio Grande, Inc., and we became the owners of Rio Grande, Inc. effective on
March 16, 1999. On March 30, 1999 Rio Grande, Inc. was merged into EXCO. As a
result, our financial statements for the three month period ended March 31, 1999
include Rio Grande, Inc.'s activity for the month of March 1999.
8
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Pro forma results of operations. The following table reflects the pro
forma results of operations as though the acquisition of Rio Grande, Inc. had
occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1999
--------- ---------
(In thousands, except per
share data)
(Unaudited)
<S> <C> <C>
Revenues .................... $ 1,760 $ 1,160
Net loss .................... $ (550) $ (195)
Net loss per share .......... $ (0.93) $ (0.03)
</TABLE>
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Before you invest in our common stock, you should be aware that there
are various risks associated with an investment. Some of the information in this
quarterly report may contain forward-looking statements. We use words such as
"may," "will," "expect," "anticipate," "estimate," "believe," "continue" 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 cautionary statements in
this quarterly report and the risk factors contained in our other public
filings.
The following discussion of the results of operations and financial
condition should be read in conjunction with the financial statements and
related notes included in this quarterly report.
OUR RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1998 and 1999
Revenues. Our total revenues for the three month period ended March 31,
1999 increased $801,000, or 438%, to $984,000 versus $183,000 for the
corresponding period of 1998. The increase in revenues was primarily due to the
Rio Grande acquisition, the Jacobi-Johnson acquisition, and the Dawson County
acquisition.
We sold 38,033 Bbls of crude oil during the three months ended March
31, 1999 versus 2,816 Bbls in the corresponding three months of 1998, a 1,251%
increase. We sold 151,309 Mcf of natural gas during the current three months
versus 72,525 Mcf in the first quarter of 1998, a 109% increase. The increases
in oil and gas volumes were attributable to the Rio Grande acquisition, the
Jacobi-Johnson acquisition, and the Dawson County acquisition.
The average oil price received during the three months ended March 31,
1999 was $11.64 versus $13.66 for the three months ended March 31, 1998, a $2.02
per barrel or 15% decrease. The average natural gas price received during the
current three months was $1.49 versus $1.86 for the corresponding three months
of the prior year, a $.37 per Mcf or 20% decrease.
Costs and Expenses. Costs and expenses for the three month period ended
March 31, 1999 increased by $760,000, or 202%, to $1.14 million as compared to
$377,000 for the corresponding period of 1998. This increase reflects our
increased staffing and new focus on reserve acquisitions, as well as higher
expenses due to several acquisitions.
Net Loss. We had a net loss for the three months ended March 31, 1999
of $153,000 compared to a net loss of $194,000 for the corresponding three
months of 1998, representing $.02 and $.38 per share, respectively. Earnings per
share figures are based on restated weighted
10
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average shares outstanding after the retroactive effect of the one-for-two
reverse stock split approved at our annual meeting of stockholders held on March
31, 1998.
OUR LIQUIDITY AND CAPITAL RESOURCES
General
Consistent with our strategy of acquiring and developing reserves, we
have an objective of maintaining financing flexibility. We cannot assure you
that cash from operations will be sufficient in the future to meet our stated
strategy. Low oil prices may impact our general strategy. In the past, we have
utilized a variety of sources of capital to fund our acquisition, development
and exploitation programs, and fund our operations.
Our general financial strategy is to use cash from operations, bank
financing and the issuance of equity securities to service interest when we have
outstanding indebtedness, to pay ongoing operating expenses, and to contribute
limited amounts toward further development of our existing proved reserves as
well as additional acquisitions. We cannot assure you that cash from operations
will be sufficient in the future to cover all of these purposes.
We have planned development and exploitation activities for our major
operating areas. In addition, we are continuing to evaluate oil and natural gas
properties for future acquisition. Historically, we have used the proceeds from
the issuance of equity securities and borrowings under the credit facility to
raise cash to fund acquisitions. However, we cannot assure you that funds will
be available to us in the future to meet our budgeted capital spending.
Furthermore, our ability to borrow other than under the credit facility is
subject to restrictions imposed by our credit facility. If we cannot secure
additional funds for our planned development and exploitation activities, then
we will be required to delay or reduce substantially both of these activities.
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 March 31,
1999, had a borrowing base of approximately $5.5 million. On March 31, 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%
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over LIBOR if the borrowing base usage is less than 50%, 1.25% over LIBOR if the
borrowing base usage is between 50-70%, 1.5% over LIBOR if the borrowing base
usage is between 70- 90%, and 1.75% over LIBOR if the borrowing base usage
exceeds 90%. The credit facility also permits 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.
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. In addition, for each fiscal quarter
beginning January 1, 1999, our consolidated tangible net worth 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 31, 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 October 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.
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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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PHASE
- --------------------------------------------------------------------------------------------------------------------
COMPONENT INVENTORY ASSESSMENT/PRIORITIZATION REMEDIATION/CONTINGENCY
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Software Complete May 31, 1999 June 15, 1999
Hardware Complete May 31, 1999 June 15, 1999
Business Partners May 31, 1999 June 30, 1999 July 31, 1999
Embedded Systems May 31, 1999 June 30, 1999 July 31, 1999
(Non-IT Systems)
</TABLE>
13
<PAGE> 15
In addition to the above, during the second and third quarters of 1999
we will develop an overall contingency plan designed to provide for continued
operations which will include precautionary measures.
Cost. As of April 30, 1999, we have incurred $3,750 in 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. Because of the acquisition of Rio Grande,
Inc., we currently intend to complete our contingency planning by July 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
14
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1999, we did not submit any matter
to a vote by our shareholders through the solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on April 20, 1999, at which
the shareholders considered the following:
(1) the election of nine directors to hold office until the next Annual
Meeting of Shareholders or until their successors have been duly
qualified and elected,
(2) an amendment to the EXCO 1998 Stock Option Plan to increase the
number of shares of common stock authorized for option grants from
1,000,000 to 1,600,000 shares and to ratify and confirm options
previously granted by the Board of Directors, and
(3) the adoption of the EXCO 1998 Director Compensation Plan.
Douglas H. Miller was elected as a director and received 4,561,429
votes for his election, with 7,715 votes withheld. T. W. Eubank was elected as a
director and received 4,567,929 votes for his election, with 1,215 votes
withheld. J. Douglas Ramsey was elected as a director and received 4,567,929
votes for his election, with 1,215 votes withheld. Jeffrey D. Benjamin was
elected as a director and received 4,567,729 votes for his election, with 1,415
votes withheld. Earl E. Ellis was elected as a director and received 4,567,729
votes for his election, with 1,415 votes withheld. Jeff M. Moore was elected as
a director and received 4,567,729 votes for his election, with 1,415 votes
withheld. J. Michael Muckleroy was elected as a director and received 4,566,729
votes for his election, with 2,415 votes withheld. Boone Pickens was elected as
a director and received 4,558,790 votes for his election, with 10,354 votes
withheld. Stephen F. Smith was elected as a director and received 4,567,729
votes for his election, with 1,415 votes withheld. The proposal to amend the
EXCO Resources, Inc. 1998 Stock Option Plan to increase the number of shares of
common stock authorized for option grants from 1,000,000 to 1,600,000 shares and
to ratify and confirm options previously granted by the Board of Directors was
approved with 2,441,071 votes in favor of approval, 676,976 votes against and
26,336 votes abstaining. The proposal to adopt the EXCO Resources, Inc. 1998
Director Compensation Plan was approved with 3,097,474 votes in favor of
approval, 46,590 votes against and 1,258 votes abstaining.
15
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
No. Description of Exhibit
2.1 First Amended Joint Chapter 11 Plan of Reorganization
of Rio Grande, Inc., Rio Grande Drilling Company, Rio
Grande Desert Oil Company, Rio Grande Offshore, Ltd.,
and Rio Grande GulfMex, Ltd., dated January 25, 1999
and modified March 4, 1999, previously filed as an
exhibit to Rio Grande, Inc.'s Form 8-K/A filed March
23, 1999 and incorporated by reference herein
2.2 Confirmation Order for the Plan of Reorganization,
dated March 4, 1999, previously filed as an exhibit
to Rio Grande, Inc.'s Form 8-K/A filed March 23, 1999
and incorporated by reference herein
2.3 Findings of Fact and Conclusions of Law regarding
Confirmation Order (which set forth the March 4, 1999
modifications to the Plan), previously filed as an
exhibit to Rio Grande, Inc.'s Form 8-K/A filed March
23, 1999 and incorporated by reference herein
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
16
<PAGE> 18
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,
dated October 9, 1998, filed as an Exhibit to EXCO's
Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated by reference
herein
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 filed May 15,
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 March 17,
1998 and incorporated by reference herein
10.10 Amendment No. 1 to the EXCO Resources, Inc. 1998
Stock Option Plan (filed herewith)
10.11 EXCO Resources, Inc. 1998 Director Compensation Plan
filed as Appendix D to EXCO's Proxy Statement dated
March 16, 1999 and incorporated by reference herein
10.12 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
17
<PAGE> 19
10.13 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
27.1 Financial Data Schedule (filed herewith)
99.1 Voting Agreement dated October 30, 1998 between Rio
Grande, Inc., Rio Grande Drilling Company, Rio Grande
Offshore, Ltd., Rio Grande Desert Oil Company and Rio
Grande GulfMex, Ltd. and EXCO Resources, Inc.
previously filed as an Exhibit to Rio Grande, Inc.'s
Form 8-K dated November 12, 1998 and incorporated by
reference herein
(b) Reports on Form 8-K:
Current Report on Form 8-K dated March 17, 1999 filed April 1,
1999 pursuant to Item 2 and containing Rio Grande, Inc.
Financial Statements to be filed by amendment no later than
May 31, 1999
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCO RESOURCES, INC.
(Registrant)
Date: May 17, 1999 By: /s/ J. DOUGLAS RAMSEY
----------------------------------------------
J. Douglas Ramsey
Vice President and Chief Financial Officer
19
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION OF EXHIBITS
--- ------------------------
<S> <C>
2.1 First Amended Joint Chapter 11 Plan of Reorganization of Rio
Grande, Inc., Rio Grande Drilling Company, Rio Grande Desert
Oil Company, Rio Grande Offshore, Ltd., and Rio Grande
GulfMex, Ltd., dated January 25, 1999 and modified March 4,
1999, previously filed as an exhibit to Rio Grande, Inc.'s
Form 8-K/A filed March 23, 1999 and incorporated by reference
herein
2.2 Confirmation Order for the Plan of Reorganization, dated March
4, 1999, previously filed as an exhibit to Rio Grande, Inc.'s
Form 8-K/A filed March 23, 1999 and incorporated by reference
herein
2.3 Findings of Fact and Conclusions of Law regarding Confirmation
Order (which set forth the March 4, 1999 modifications to the
Plan), previously filed as an exhibit to Rio Grande, Inc.'s
Form 8-K/A filed March 23, 1999 and incorporated by reference
herein
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
</TABLE>
20
<PAGE> 22
<TABLE>
<S> <C>
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, dated
October 9, 1998, filed as an Exhibit to EXCO's Annual Report
on Form 10-K for the year ended December 31, 1998 and
incorporated by reference herein
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 filed May 15, 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 March 17, 1998 and
incorporated by reference herein
10.10 Amendment No. 1 to the EXCO Resources, Inc. 1998 Stock Option
Plan (filed herewith)
10.11 EXCO Resources, Inc. 1998 Director Compensation Plan filed as
Appendix D to EXCO's Proxy Statement dated March 16, 1999 and
incorporated by reference herein
10.12 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
10.13 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
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C>
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
27.1 Financial Data Schedule (filed herewith)
99.1 Voting Agreement dated October 30, 1998 between Rio Grande,
Inc., Rio Grande Drilling Company, Rio Grande Offshore, Ltd.,
Rio Grande Desert Oil Company and Rio Grande GulfMex, Ltd. and
EXCO Resources, Inc. previously filed as an Exhibit to Rio
Grande, Inc.'s Form 8-K dated November 12, 1998 and
incorporated by reference herein
</TABLE>
22
<PAGE> 1
EXHIBIT 10.10
AMENDMENT NO. 1
TO
EXCO RESOURCES, INC. 1998 STOCK OPTION PLAN
1. Article Five of the EXCO Resources, Inc. 1998 Stock Option Plan is
hereby amended to read in its entirety as follows:
"SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Articles 13 and 14,
the maximum number of Common Stock that may be delivered pursuant to
Awards granted under the Plan is (a) one million, six hundred thousand
(1,600,000) shares; plus (b) shares of Common Stock previously subject
to Awards which are forfeited, terminated, or expired unexercised; plus
(c) without duplication for shares counted under the immediately
preceding clause, a number of shares of Common Stock equal to the
number of shares repurchased by the Company in the open market or
otherwise and having an aggregate repurchase price no greater than the
amount of cash proceeds received by the Company from the sale of shares
of Common Stock under the Plan; plus (d) any shares of Common Stock
surrendered to the Company in payment of the exercise price of options
issued under the Plan.
Shares to be issued may be made available from authorized
but unissued Common Stock, Common Stock held by the Company in its
treasury, or Common Stock purchased by the Company on the open market
or otherwise. During the term of this Plan, the Company will at all
times reserve and keep available the number of shares of Common Stock
that shall be sufficient to satisfy the requirements of this Plan."
2. No other term or provision of the EXCO Resources, Inc. 1998 Stock
Option Plan shall be affected by this Amendment.
This Amendment was approved by the EXCO Resources, Inc. Board of
Directors to be effective on April 20, 1999. The Shareholders of EXCO Resources,
Inc. approved this Amendment on April 20, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 21,924,000
<SECURITIES> 0
<RECEIVABLES> 1,001,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,073,000
<PP&E> 18,364,000
<DEPRECIATION> 4,473,000
<TOTAL-ASSETS> 37,617,000
<CURRENT-LIABILITIES> 1,162,000
<BONDS> 0
0
0
<COMMON> 134,000
<OTHER-SE> 35,945,000
<TOTAL-LIABILITY-AND-EQUITY> 37,617,000
<SALES> 669,000
<TOTAL-REVENUES> 984,000
<CGS> 368,000
<TOTAL-COSTS> 1,137,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> (153,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (153,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (153,000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
