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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, 1996
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.)
9400 N. Central Exprwy., Suite 1209
Dallas, Texas 75231
(Address of principal executive offices) (Zip Code)
(214) 368-2084
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of class)
______________________________
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve (12)
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The number of shares of Common Stock, par value $.01 per
share, of the Registrant outstanding at December 31, 1996, was
805,300. The aggregate market value of the voting stock held by
nonaffiliates of the Registrant at December 31, 1996, was
$1,400,649 based on the average of the closing bid and asked prices
per share of the Common Stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
None
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EXCO RESOURCES, INC.
PART I
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND
ITEMS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT
COULD CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN THE FORWARD-
LOOKING STATEMENTS AND ARE SUMMARIZED IN "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS."
ITEM 1. BUSINESS
General
- -------
EXCO Resources, Inc., a Texas corporation (the "Company"), is
an independent oil and gas company that has engaged in the
acquisition of, exploration for and production of oil and natural
gas since 1955. In its property acquisition activities, the
Company has focused on producing properties with enhancement
opportunities from activities such as infill drilling,
recompletions, repairs and equipment changes. The Company typically
seeks properties it can operate, thus maintaining the maximum
control of enhancement activities. The Company generates drilling
prospects internally and acquires prospects from independent
geologists and geophysicists and other oil and gas operators.
Prospects generated by outside sources are usually subject to
overriding royalties or other retained interests and may require
the payment of cash consideration greater than that required for
prospects generated internally. The Company continually reviews and
evaluates potential oil and gas prospects. In evaluating prospects,
the Company sometimes obtains engineering and technical assistance
from independent consultants at prevailing industry rates.
The Company's acquisition, exploration, development and
production activities are conducted primarily in Texas, Louisiana
and Illinois. At December 31, 1996, the Company had 5.775 Bcfe
(one billion cubic feet equivalent) of proved reserves and owned
leasehold interests in a total of 21,482 gross acres (4,901 net
acres) of oil and gas properties, 77% of which were developed
acreage.
Exploration and Development Activities
- --------------------------------------
Historically, the Company has financed its acquisition,
exploration and development expenditures primarily through cash
flow from operations, bank borrowings, equity capital from private
sales of stock and promoted funds from industry partners. The
Company typically obtains industry partners to drill the prospect
or to enter into other types of sharing arrangements, such as joint
ventures and farmout arrangements, pursuant to which other parties
assume the majority or all of the costs of drilling. The
involvement of outside participants permits the Company to spread
its drilling funds over a larger number of prospects and to reduce
the potential amount of loss on any one prospect. Funds required to
be expended by the Company will generally be proportionately less
than the Company's interest in any production obtained from the
wells drilled. From time to time, the Company may sell interests
in, or enter into sharing arrangements with respect to, drilling
prospects in which the Company has an interest to or with
directors, officers, principal shareholders or other affiliates of
the Company, provided such transactions are on terms and conditions
substantially similar to those offered to nonaffiliated parties.
With respect to its acquisition activities, the Company intends to
shift its emphasis to larger scale acquisitions of producing
properties and/or companies and, initially, plans to use a
combination of debt and equity financing to fund these larger
acquisitions.
The Company made exploration and development expenditures of
$125,000, $112,000 and $18,000 during the fiscal year ended
March 31, 1995, the nine month transition period ended
December 31, 1995 and the fiscal year ended December 31, 1996,
respectively. The Company made net lease acquisition expenditures
of $83,000, $4,000 and $1,000 during the fiscal year ended March
31, 1995, the nine month transition period ended December 31, 1995
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and the fiscal year ended December 31, 1996, respectively. The
Company's ability to continue to fund its exploration and
development activities depends upon cash flow and its ability to
secure the necessary financing for such activities.
Operating Activities
- --------------------
Where possible, the Company prefers to act as operator of the
oil and gas prospects in which it owns an interest. The operator
of an oil and gas property supervises production, maintains
production records, employs field personnel and performs other
functions required in the production and administration of such
property. The fees for such services customarily vary from well to
well, depending on the nature, depth and location of the well being
operated. Generally, the operator of an oil and gas prospect is
determined by such factors as the size of the working interest held
by a participant in the prospect, a participant's knowledge and
experience in the geological area in which the prospect is located
and geographical considerations. At December 31, 1996, the Company
was the operator of 115 gross (84.99 net) wells, which represented
approximately 78% of the gross wells and 97% of the net wells in
which the Company had an interest at such date. The remainder of
the wells in which the Company had an interest at such date are
operated by third party operators. The wells that the Company
operates are located in Texas, Louisiana and Illinois. Although
the Company elects to operate and manage most of its properties and
drilling activities, its wells are drilled by independent drilling
contractors.
Sales of Developed and Undeveloped Acreage
- ------------------------------------------
The Company evaluates properties on an ongoing basis to
determine the economic viability of the property and whether such
property will enhance the objectives of the Company. During the
course of normal business, the Company may dispose of producing
properties and undeveloped acreage if the Company believes that
such disposition is in its best interests. In the fiscal year
ended December 31, 1996, the Company exchanged its interest in four
non-operated producing wells for an interest in each of four
operated producing wells. No gain or loss was recognized on this
transaction. In the nine month transition period ended December 31,
1995, the Company sold a portion of its interest in an undeveloped
lease, which reduced the Company's basis in the lease by $28,000.
In fiscal year ended March 31, 1995, the Company sold a portion of
its interest in an undeveloped lease generating a gain of $5,000.
Products, Markets and Revenues
- ------------------------------
Oil and natural gas are the principal products currently
produced by the Company. The Company does not refine or process
the oil and natural gas that it produces. The Company sells the
oil it produces under short-term contracts at market prices in the
areas in which the producing properties are located, generally at
F.O.B. field prices posted by the principal purchaser of oil in
such areas.
Natural gas produced from the Company's properties is sold
under both short-term and long-term contracts with transmission and
utility companies that have pipelines in the vicinity of the
producing properties or that will construct pipelines to such
properties. The contracts are of a type common within the
industry, and a separate contract is usually negotiated for each
property. Typically, the Company's contracts are made 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 the control of the Company. These factors
include, among other things, the level of domestic production and
economic activity generally, the availability of imported oil and
natural gas, actions taken by foreign oil producing nations, the
availability of natural gas pipelines with adequate capacity and
other transportation facilities, the availability and marketing of
other competitive fuels, fluctuating and seasonal demand for oil,
natural gas and refined products and the extent of governmental
regulation and taxation (under both present and future legislation)
of the production, refining, transportation, pricing, use and
allocation of oil, natural gas, refined products and substitute
fuels. Accordingly, in view of the many uncertainties affecting
the supply and demand for oil, natural gas and refined petroleum
products, it is not possible to predict accurately the prices or
marketability of the oil and natural gas from any producing well in
which the Company has or may acquire an interest.
-3-
Oil prices have been subject to significant fluctuations over
the past decade. Levels of production maintained by the
Organization of Petroleum Exporting Countries ("OPEC") member
nations and other major oil producing countries are expected to
continue to be a major determinant of oil price movements in the
future. As a result, future oil price movements cannot be
predicted with any certainty. Similarly, during the past several
years, the market price for natural gas has been subject to
significant fluctuations on a monthly basis as well as from year
to year. These frequent changes in the market price make it
impossible for the Company to predict natural gas price movements
with any certainty.
The Company cannot provide assurance that it will be able to
market all oil or natural gas that the Company produces or, if such
oil or gas can be marketed, that favorable price and contractual
terms can be negotiated. Changes in oil and natural gas prices may
significantly affect the revenues and cash flow of the Company and
the value of its oil and gas properties. Further, significant
declines in the prices of oil and natural gas may have a material
adverse effect on the business and financial condition of the
Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations."
In certain areas in which the Company engages in gas
exploration and production activities, the supply of natural gas
available for delivery from time to time exceeds the demand.
During such times, companies purchasing gas in such areas reduce
the amount of gas that they will purchase or "take." If buyers
cannot be readily located for newly discovered natural gas
reserves, newly completed natural gas wells may be shut-in for
various periods of time. As a result, the over-supply of natural
gas in certain areas may cause the Company to experience "take"
problems or may adversely affect the Company's ability to obtain
contracts to market natural gas discovered in wells in which the
Company owns an interest.
The following table sets forth the amount of the Company's oil
sales, natural gas sales and the percent of oil and natural gas
sales to total revenues for the periods indicated:
Percent of Oil/Gas Sales
to Total Revenues
Natural Total ------------------------
Period Ended Oil Sales Gas Sales Oil/Gas Sales Oil Gas
- ---------------------------------- ---------- ---------- ------------- ----------- -----------
Year Ended March 31, 1995 $ 324,000 $ 302,000 $ 626,000 37% 35%
Nine Month Transition Period Ended
December 31, 1995 306,000 254,000 560,000 41% 34%
Year Ended December 31, 1996 452,000 420,000 872,000 43% 40%
In February 1996, the Company changed its fiscal year from a
March 31 year end to a December 31 year end, resulting in a short
year of nine months for the transition period ended December 31,
1995. The comparability of most of the year to year comparisons in
this report is affected by the fact that the nine month transition
period ended December 31, 1995 is three months shorter than the
full fiscal years ended March 31, 1995 and December 31, 1996.
Delivery Commitments
- --------------------
The Company is not presently obligated to provide a fixed and
determinable quantity of oil or natural gas under any existing
contract or agreement.
Customers
- ---------
During the fiscal year ended December 31, 1996, sales of oil
and gas to two purchasers, Scurlock Permian Corporation and Delhi
Gas Marketing Corp., accounted for 23% and 13%, respectfully, of
the Company's total revenues. During the nine month transition
period ended December 31, 1995, sales of oil and natural gas to the
same two purchasers accounted for 17% and 11%, respectively, of the
Company's total revenues. During the fiscal year ended March 31,
1995, sales to Pride Pipeline Company and Delhi Gas Marketing Corp.
accounted for 15% and 14%, respectively, of the Company's total
revenues. Although the loss of any one of the Company's oil and
natural gas purchasers could temporarily cease or delay the
Company's production and sale of its oil and natural gas in the
-4-
purchasers' particular service area, the Company believes it would
be able, under current economic circumstances, to contract with
other purchasers for its oil and natural gas production.
Competition
- -----------
The oil and gas industry is highly competitive. The Company
encounters strong competition from other independent operators and
from major oil companies in acquiring properties suitable for
exploration, in contracting for drilling equipment and in securing
trained personnel. Many of these competitors have financial
resources and staffs substantially larger than those available to
the Company.
Exploration for and production of oil and gas is also affected
by competition for drilling rigs and the availability of tubular
goods and certain other equipment. While the oil and gas industry
has experienced shortages of drilling rigs and equipment, pipe and
personnel in the past, the Company is not presently experiencing
any shortages and does not foresee any such shortages in the near
future. The Company is unable to predict how long current market
conditions will continue.
Competition for attractive oil and gas producing properties,
undeveloped leases and drilling rights is also strong, and the
Company cannot provide assurance that it will be able to compete
satisfactorily in the acquisition of such properties. Many major
oil companies have publicly indicated their decisions to
concentrate on overseas activities and have been actively marketing
certain of their existing producing properties for sale to
independent producers.
Certain Risks
- -------------
The Company's operations are subject to all of the risks
normally incident to the exploration for, and production of, oil
and natural gas, including blowouts, cratering, pollution and
fires, each of which could result in damage to, or destruction of,
oil and gas wells or formations or production facilities or damage
to persons and property. As is common in the oil and gas industry,
the Company is not fully insured against these risks because either
insurance is not available or because the Company has elected not
to procure insurance due to prohibitive premium costs. The
occurrence of such an event not fully insured against could have a
material adverse effect on the Company's financial position.
The Company's oil and gas activities involve in part
exploratory drilling, which carries a significant risk that no
commercial oil or gas production will be obtained. The cost of
drilling, completing and operating wells is often uncertain.
Further, drilling may be curtailed or delayed as a result of many
factors, including title problems, weather conditions, delivery
delays, shortages of pipe and equipment and the unavailability of
drilling rigs.
Regulation
- ----------
GENERAL. The Company's operations are affected from time to
time in varying degrees by political developments and federal and
state laws and regulations. In particular, oil and natural gas
production operations and economics are or have been affected by
price control, tax and other laws relating to the oil and gas
industry, by changes in such laws and by changing administrative
regulations. 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, the Company is of the opinion that such
controls will not have a significant impact on the prices received
by the Company for natural gas produced in the near future.
Legislation affecting the oil and natural gas industry is
under constant review for amendment or expansion, frequently
increasing the regulatory burden. Also, numerous departments and
agencies, both federal and state, are authorized by statute to
issue and have issued rules and regulations binding on the oil and
gas industry and its individual members, compliance with which is
often difficult and costly and certain of which carry substantial
penalties for the failure to comply. The Company 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 changes may have on the
Company's business or financial condition.
-5-
FEDERAL TAXATION. The federal government is continually
proposing tax initiatives that may effect the oil and natural gas
industry, including the Company. Due to the preliminary nature of
these proposals, the Company is unable to determine what effect, if
any, the proposals would have on product demand or the Company's
results of operations.
STATE REGULATION. The various states in which the Company
conducts activities regulate the drilling, operation and production
of oil and gas wells, such as the method of developing new fields,
spacing of wells, the prevention and clean-up of pollution and
maximum daily production allowables based on market demand and
conservation considerations.
ENVIRONMENTAL REGULATION. Operations of the Company are
subject to numerous and constantly changing federal, state and
local laws and regulations governing the discharge of materials
into the environment or otherwise relating to the protection of
public health or the environment. These laws and regulations may
require the acquisition of certain permits, restrict or prohibit
the types, quantities and concentration of substances that can be
released into the environment, restrict or prohibit activities that
could impact wetlands, endangered or threatened species or other
protected natural resources and impose substantial liabilities for
pollution resulting from the Company's operations. Such laws and
regulations may substantially increase the cost of doing business
and may prevent or delay the commencement or continuation of a
given project.
The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law,
imposes liability, without regard to fault or the legality of the
original conduct, on certain classes of persons that are considered
to have contributed to the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the
disposal site or site where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances
found at the site. Persons who are or were responsible for releases
of hazardous substances under CERCLA may be subject to joint and
several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the
hazardous substances released into the environment. The Company has
no material commitments for capital expenditures to comply with
existing environmental requirements.
The discharge of oil, natural gas or other pollutants into the
air, soil or water may give rise to claims against the Company
brought by either the government or third parties requiring the
Company to incur costs to remediate the discharge. Pollution and
similar environmental risks generally are not fully insurable. The
Company does not believe that its environmental risks are
materially different from those of comparable companies in the oil
and gas industry. Inasmuch as such laws and regulations are
constantly revised, the Company is unable to predict the ultimate
cost it may incur as a result of compliance with present and future
environmental laws and regulations.
In the opinion of the Company's management, the Company is in
substantial compliance with current applicable environmental laws
and regulations, and the cost of compliance with such laws and
regulations has not been material and is not expected to be
material during the next fiscal year. However, changes in existing
environmental laws and regulations or in interpretations thereof
could have a significant impact on the operating costs of the
Company, as well as the oil and natural gas industry in general.
OTHER PROPOSED LEGISLATION. In the past, Congress has been
very active in the area of natural gas regulation. Legislative
proposals are pending in various states which, if enacted, could
significantly affect the petroleum industry. The Company cannot
predict which proposals, if any, may actually be enacted by
Congress or any of the state legislatures, and what impact, if any,
such proposals may have on the Company's operations.
Employees
- ---------
As of March 15, 1997, the Company employed five persons of
which two were involved in field operations and three were engaged
in office and administrative activities. None of the Company's
employees are represented by unions or covered by collective
bargaining agreements. To date, the Company has not experienced
any strikes or work
-6-
stoppages due to labor problems and considers its relations with
its employees to be good. The Company also utilizes the services
of independent consultants on a contract basis.
ITEM 2. PROPERTIES
General
- -------
The Company leases approximately 3,485 square feet of office
space in Dallas, Texas, for its corporate offices. The lease is on
a month-to-month basis, and requires a monthly rental payment of
approximately $4,574 plus the reimbursement of certain expenses.
The Company considers this space adequate for its present needs.
The Company also has a small field office and yard in Pecos County,
Texas.
Oil and Gas Properties
- ----------------------
The following table sets forth the fields in which the Company
has its principal oil and gas properties, and certain information
as of December 31, 1996, with respect to each of such fields.
Fiscal Year Ended
December 31, 1996
Proved Reserves Percentage Net Production
Wells ------------------- of -----------------
--------------- Oil Gas Equivalent Oil Gas
Gross Net (Bbls) (Mcf) Reserves (Bbls) (Mcf)
----- ----- ------- --------- --------- ------ -------
Logansport, Louisiana 2 .96 4,700 2,387,000 41.8% 200 32,000
Nine Mile Draw, Texas 1 .61 0 1,768,000 30.6 0 86,000
Chapel Hill Field, Texas 10 1.07 4,800 136,000 2.9 800 28,000
Southern Pine Field, Texas 1 .12 0 147,000 2.5 0 18,000
Other 133 84.52 159,400 324,000 22.2 21,000 60,000
--- ----- ------- --------- ------- ------ -------
Total 147 87.28 168,900 4,762,000 100.0% 22,000 224,000
=== ===== ======= ========= ======= ====== =======
LOGANSPORT FIELD. In 1995, the Company acquired an additional
48% working interest in, and became the operator of, an existing
natural gas well (the "acquired well") in the Logansport field
located in DeSoto Parish, Louisiana. As a result of the
acquisition, the Company owns a 51% working interest in the
acquired well and related acreage. The Logansport field produces
from a series of low permeability reservoirs with long life natural
gas reserves. The Company's reserves are produced in the Hosston
(Travis Peak) and Pettit formations from depths between 6,000 and
7,200 feet. The field is developed with 640 and 320 acre spacing,
and wells in the field are expected to have a production life
exceeding 30 years.
The Company has identified, in the acquired well, proved
developed nonproducing reserves in the Hosston and Pettit
reservoirs with approximately 1,100,000 Mcf of net natural gas and
approximately 1,500 Bbls of net oil reserves. The Company plans to
recomplete this well at an estimated net cost to the Company of
approximately $64,000. In addition, the Company has identified one
development well location in the Logansport field with
approximately 1,145,000 Mcf of net proved undeveloped natural gas
reserves, which the Company plans to drill at an estimated net cost
to the Company of approximately $386,000. Reserve estimates
indicate that the present value of the estimated future net
revenues, discounted at 10% per annum, attributable to the
Company's interest in its two current and one planned well in the
Logansport field is approximately $4,101,000. All of this value is
classified as proved reserves, with 8% attributable to proved
producing reserves and 92% to proved nonproducing reserves. See "--
Oil and Gas Reserves" below.
NINE MILE DRAW FIELD. The Nine Mile Draw field is located in
Reeves County, Texas, and production is derived from a low
permeability fractured limestone formation. Presently, the Company
operates one well in the Fusselman formation, which produces from
depths between 13,700 and 14,400 feet and is estimated to have a
remaining reserve life of 20 years. In addition, the Company has
identified a potential re-entry well in the field with
approximately 1,133,000 Mcf of net proved undeveloped natural gas
reserves with an estimated cost of re-entry of approximately
$303,000. Reserve estimates indicate that the present value of the
estimated future net revenues,
-7-
discounted at 10% per annum, attributable to the Company's interest
in the re-entry well is approximately $1,393,000. Total reserves
for the Nine Mile Draw field are estimated to have future net
revenues, discounted at 10% per annum, of approximately $2,091,000
of which 33% is attributable to proved producing reserves and 67%
is attributable to proved undeveloped reserves.
CHAPEL HILL FIELD. The Chapel Hill field is located in Smith
County, Texas. The Company owns nonoperated interests in ten gross
(1.07 net) wells and leasehold interests in approximately 820 gross
(88 net) acres. The Company's wells in this field are operated by
Louis Dreyfus Natural Gas Corp. and Roosth & Genecov Production Co.
The Chapel Hill field is characterized by the production of both
oil and natural gas from the Rodessa and Travis Peak formations
from depths between 7,600 to 8,700 feet. Reserve estimates indicate
that the present value of the estimated future net revenues,
discounted at 10% per annum, attributable to the Company's interest
is approximately $193,000.
SOUTHERN PINE FIELD. The Company owns a nonoperated interest
in one gross (.12 net) well in Cherokee County, Texas. Production
is derived from the Travis Peak formation, which has estimated net
reserves of approximately 147,000 Mcf of natural gas. Reserve
estimates indicate that the present value of estimated future net
reserves, discounted at 10% per annum, attributable to the
Company's interest is approximately $168,000.
Title to Properties
- -------------------
As is common industry practice, little or no investigation
of title is made at the time of acquisition of undeveloped
properties, other than a preliminary review of local mineral
records. Title investigations are made, and in most cases, a
title opinion of local counsel is obtained before commencement of
drilling operations. The Company believes that the methods it
utilizes for investigating title prior to the acquisition of any
properties are consistent with practices customary in the oil and
gas industry and that such practices are adequately designed to
enable the Company to acquire good title to such properties. Some
title risks, however, cannot be avoided, despite the use of
customary industry practices.
The Company's properties are generally subject to customary
royalty and overriding royalty interests, liens incident to
operating agreements, liens for current taxes and other burdens
and minor encumbrances, easements and restrictions, and may be
mortgaged to secure indebtedness of the Company. The Company
believes that none of these burdens either materially detract
from the value of such properties or materially interfere with
their use in the operation of the Company's business.
Oil and Gas Reserves
- --------------------
At December 31, 1996, the Company's oil and natural gas
reserves included direct working interests in 147 wells in the
states of Texas, Louisiana, Illinois, North Dakota, Kansas and
Oklahoma, as well as overriding royalties in an additional 11
wells in Texas. The Company has no reserves offshore or outside
of the United States. At December 31, 1996, approximately 60% of
the present value of the estimated future net revenues
attributable to the Company's properties were attributable to
proved developed reserves and approximately 40% was attributable
to proved undeveloped reserves. In addition, approximately 18%
of the proved reserves were attributable to oil and approximately
82% were attributable to natural gas, based on six mcf of gas
being equivalent to one barrel of oil.
-8-
The following table summarizes the Company's proved reserves
at December 31, 1996, and was prepared in accordance with the
rules and regulations of the Securities and Exchange Commission:
PROVED RESERVES
At December 31, 1996
Oil and Liquids (Bbls)
Proved Producing............................ 126,746
Proved Behind-Pipe.......................... 35,362
-------
Total Proved Developed.................. 162,108
Proved Undeveloped.......................... 6,778
-------
Total............................... 168,886
=======
Natural Gas (Mcf)
Proved Producing............................ 1,383,587
Proved Behind-Pipe.......................... 1,099,730
---------
Total Proved Developed.................. 2,483,317
Proved Undeveloped.......................... 2,278,374
---------
Total............................... 4,761,691
=========
A significant portion of the value of the proved
nonproducing reserves are in the Logansport and the Nine Mile
Draw fields. The Logansport field represents 85% of total proved
behind-pipe reserves and 50% of total proved undeveloped
reserves. An aggregate of 49% of the total proved undeveloped
reserves is attributed to the Nine Mile Draw field. There are
risks associated with recovery of reserves in the nonproducing
category. In addition, the Company must incur certain costs and
undertake certain risks associated with drilling and workover
operations to recover these reserves.
The reserve estimates presented as of December 31, 1996 and
1995, have been prepared by Lee Keeling and Associates, Inc.,
independent petroleum engineers, Tulsa, Oklahoma. Estimates of
oil and natural gas reserves are, of necessity, projections based
on engineering data and thus, are forward-looking in nature.
However, because of the uncertainties inherent in the
interpretation of such data, the Company cannot ensure that the
reserves set forth herein will ultimately be realized and the
actual results could differ materially. See "Supplementary Oil
and Gas Disclosures" included with the Company's financial
statements included elsewhere herein for additional information
regarding the Company's oil and gas reserves, including the
present value of future net revenues. Previous reserve estimates
as of March 31, 1995 were prepared by Milmac Operating Company,
independent petroleum engineers, Lubbock, Texas.
Reserves Reported to Other Agencies
- -----------------------------------
Estimates of oil and gas reserves have not been filed with
or included in reports to any federal authority or agency other
than the Commission.
-9-
Production
- ----------
The following table summarizes for the periods indicated,
the Company's revenues, net production of oil (including
condensate) and natural gas sold, the average sales price per
unit of oil (Bbl) and natural gas (Mcf) and costs and expenses
associated with the production of oil and natural gas:
Fiscal Year Ended Nine Months Ended Fiscal Year Ended
March 31, 1995 December 31, 1995 December 31, 1996
----------------- ----------------- -----------------
Sales:
Oil and Condensate:
Revenue..................................... $ 324,000 $ 306,000 $ 452,000
Production sold (Bbls)...................... 21,000 19,000 22,000
Average sales price per Bbl................. $ 15.64 $ 16.49 $ 20.42
Natural Gas:
Revenue..................................... $ 302,000 $ 254,000 $ 420,000
Production sold (Mcf)....................... 211,000 181,000 224,000
Average sales price per Mcf................. $ 1.43 $ 1.40 $ 1.87
Costs and Expenses:
Production costs per Mcfe................... $ 1.20 $ 1.13 $ 1.21
Depreciation, depletion and amortization
per Mcfe................................ $ .31 $ .79 $ .33
Total oil and gas revenues for the fiscal year ended
December 31, 1996 increased 56% from the nine month transition
period ended December 31, 1995 due to both an increase in oil and
gas prices and an increase in production volumes, resulting
largely from the three month longer time period of fiscal 1996.
The average sales price per barrel of oil increased $3.93, or 24%
and the average sales price per mcf of natural gas increased
$.47, or 34%, from such prices for the nine month transition
period ended December 31, 1995. Total oil and gas revenues for
the nine month transition period ended December 31, 1995
decreased 11% over the prior fiscal year due to decreased
production of oil and gas (due largely to the three month longer
time period of the prior year) and, to a lesser extent, a 5%
increase in the price of oil being offset by a 6% decrease in the
price of natural gas.
The Company's net production reported in the preceding table
only includes production that is owned by the Company and
produced to its oil and gas interest, less royalties. Oil
production for the fiscal year ended December 31, 1996 was 16%
higher and natural gas production was 24% higher than the nine
month transition period ended December 31, 1995. Oil production
for the nine month transition period ended December 31, 1995 was
10% lower than the prior fiscal year and gas production was 14%
lower due to the three month shorter transition period. On the
basis of 6 mcf of gas being equivalent to 1 barrel of oil, total
production for the fiscal year ended December 31, 1996 increased
21% from the nine month transition period ended December 31,
1995.
Productive Wells
- ----------------
The following table sets forth the Company's interest in
productive wells (producing wells and wells capable of
production) at December 31, 1996. The total gross oil and gas
wells does not include any multiple completions. At December 31,
1996, the Company did not own an interest in any well that was
being completed.
Gross Wells(1) Net Wells(2)
--------------------------- ---------------------------
(Oil) (Gas) (Total) (Oil) (Gas) (Total)
Illinois 13 0 13 4.11 0 4.11
Kansas 0 1 1 0 .08 .08
Louisiana 0 2 2 0 .96 .96
North Dakota 2 0 2 .07 0 .07
Oklahoma 1 2 3 .02 .08 .10
Texas 108 18 126 76.60 5.36 81.96
--- --- ---- ----- ---- ------
Total 124 23 147 80.80 6.48 87.28
=== === ==== ===== ==== ======
-10-
__________________
(1) A gross well is a well in which a working interest is owned.
The number of gross wells is the total number of wells in which a
working interest is owned. Wells in which only an overriding
royalty interest is owned are excluded from this presentation.
(2) A net well is deemed to exist when the sum of fractional
ownership working interests in gross wells equals one. The
number of net wells is the sum of the fractional working
interests owned in gross wells expressed as whole numbers and
fractions thereof.
Drilling Activities
- -------------------
With respect to its drilling operations, the Company plans
to concentrate on lower risk, development-type properties,
generally consisting of drilling to reservoirs from which
production is or formerly was being obtained. The drilling of
development wells is subject to the normal risk of dry holes, or
a failure to produce oil and natural gas in commercial
quantities. The degree of risk varies depending, among other
things, on the distance between the well and the nearest
producing well, other available geological information and the
geological features of the area. In the past, the Company has
drilled higher risk, exploratory-type wells, primarily in
geological basins with relatively high levels of drilling density
and where adequate subsurface information in the form of well
logs and seismic data was generally available to evaluate
potential hydrocarbon accumulations. All drilling activities are
subject to the risk of encountering unusual or unexpected
formations and pressures and other conditions that may result in
financial losses or liabilities to third parties or governmental
entities, many of which may not be covered by insurance. The
number and type of wells drilled by the Company will vary
depending on the amount of funds available for drilling, the cost
of each well, the size of the fractional working interests
acquired by the Company in each well and the estimated
recoverable reserves attributable to each well.
The following table summarizes the Company's approximate
gross and net interests in the exploratory and development wells
drilled during the periods indicated which refers to the number
of wells (holes) completed at any time during a period,
regardless of when drilling was initiated:
EXPLORATORY WELLS
-----------------------------------------------------------------
Gross Net
------------------------------- ------------------------------
Productive Dry Total Productive Dry Total
---------- --- ----- ---------- --- -----
Year Ended March 31, 1995 0 1 1 .00 .10 .10
Nine Month Transition Period
Ended December 31, 1995 0 2 2 .00 .13 .13
Year Ended December 31, 1996 0 0 0 .00 .00 .00
DEVELOPMENT WELLS
-----------------------------------------------------------------
Gross Net
------------------------------ ------------------------------
Productive Dry Total Productive Dry Total
Year Ended March 31, 1995 2 0 2 .26 .00 .26
Nine Month Transition Period
Ended December 31, 1995 1 0 1 .11 .00 .11
Year Ended December 31, 1996 0 0 0 .00 .00 .00
For purposes of the foregoing table, a dry well (hole) is an
exploratory or development well found to be incapable of
producing either oil or gas in sufficient quantities to justify
completion of an oil or gas well. A productive well is an
exploratory or a development well that is not a dry hole. The
number of wells drilled refers to the number of wells (holes)
completed at any time during the fiscal year, regardless of when
drilling was initiated. The term "completed" refers to the
installation of permanent equipment for the production of oil or
gas, or, in the case of a dry hole, to the reporting of
abandonment to the appropriate agency. All drilling activities
referenced in the above tables
-11-
were conducted in the State of Texas. At March 31, 1997, the
Company was not participating in the drilling of any development
or exploratory wells.
Acreage
- -------
The following table sets forth the Company's interest in
developed acreage and undeveloped acreage at December 31, 1996:
Developed Acreage Undeveloped Acreage
-------------------- ------------------------
Gross(1) Net(2) Gross(1) Net(2)
-------- ------- -------- ------
Illinois............ 630 98 412 156
Kansas.............. 640 50 0 0
Louisiana........... 1,280 616 0 0
North Dakota........ 320 11 0 0
Oklahoma............ 1,440 32 0 0
Texas............... 11,653 2,980 5,107 958
-------- ------ ------- ------
Total 15,963 3,787 5,519 1,114
======== ====== ======= ======
______________
(1) A gross acre is an acre in which a working interest is
owned.
(2) A net acre is deemed to exist when the sum of fractional
ownership working interests in gross acres equals one. The total
of net acres is the sum of the fractional working interests owned
in gross acres expressed as whole numbers and fractions thereof.
The primary terms of the oil and gas leases covering the
majority of the Company's undeveloped acreage expire at various
dates, generally ranging from one to five years. The Company can
retain its interest in undeveloped acreage by drilling activity
that establishes commercial reserves sufficient to maintain the
lease. Certain of the Company's undeveloped acreage in Illinois
and Texas is being "held by production," for which expiration
will not occur until production ceases from all wells on the
particular leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently party to, nor is any of its
property the subject of, any material pending legal proceedings
other than routine litigation incidental to the Company's
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last three months of the fiscal year ended
December 31, 1996, no matter was submitted by the Company to a
vote of its shareholders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Market Information
- ------------------
The Company's Common Stock is currently quoted on the OTC
under the symbol "EXCO," but there is limited trading in the
Common Stock. The following table sets forth the high and low bid
prices from January 1, 1995 through April 10, 1997, based upon
quotations periodically published on the OTC. The price
quotations below have been adjusted to estimate the effect of the
one-for-five reverse stock split of the Common Stock in the case
of quotations for periods prior to July 19, 1996, the effective
date of the stock split. All price quotations represent
-12-
prices between dealers, without retail mark-ups, mark-downs or
commissions and may not represent actual transactions.
High Low
----- -----
Calendar Year Ended December 31, 1995
First Quarter............................ $3.13 $1.88
Second Quarter........................... 3.13 1.25
Third Quarter............................ 2.50 1.25
Fourth Quarter........................... 2.50 1.56
Calendar year Ended December 31, 1996
First Quarter............................ $2.50 $1.56
Second Quarter........................... 2.50 1.56
Third Quarter............................ 2.75 2.00
Fourth Quarter........................... 2.75 2.75
Calendar Year Ended December 31, 1997
First Quarter............................ $2.75 $2.75
Second Quarter (through April 10, 1997).. 2.75 2.75
The bid price for the Common Stock was $2.75 on April 10,
1997. The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
The Company is attempting to comply with certain listing
criteria, including minimum equity, share price, public float and
market maker requirements and intends to apply for inclusion of
its Common Stock on The Nasdaq Stock Market' National Market
("Nasdaq National Market") or Small Cap Market when the Company
is able to satisfy such requirements. The Company cannot insure
that it will be successful in any application to have the Common
Stock quoted on The Nasdaq National Market or Small Cap Market.
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources."
Shareholders
- ------------
According to the records of the Company's transfer agent,
there were 1,723 holders of record of the Common Stock at April
1, 1997.
Dividends
- ---------
The Company has not paid any cash dividends on its Common
Stock, and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. In addition, the
Company's credit agreement currently prohibits it from paying
dividends. The Company anticipates that any income generated in
the foreseeable future will be retained for the development and
expansion of its business. Future dividend policy is subject to
the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, debt service,
capital requirements, restrictions in the Company's credit
agreement, business conditions, the financial condition of the
Company and other factors that the Board of Directors deems
relevant.
-13-
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share
data)
The following table presents selected historical financial
data for the Company. The financial data should be read in
conjunction with the Company's financial statements, the notes
thereto and the other financial information, including pro forma
information, included elsewhere herein. In the opinion of
management of the Company, the data presented reflect all
adjustments considered necessary for a fair presentation of the
results for such periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere herein.
Nine Month
Transition Fiscal Year
Fiscal Year Ended March 31, Period Ended Ended
---------------------------- December 31, December 31,
1993 1994 1995 1995 1996
------- ------ -------- ------------ ------------
(in thousands)
Statement of Operations Data:
Revenues:
Oil and gas sales............................. $ 830 $ 715 $ 626 $ 560 $ 872
Management fees............................... 303 296 233 191 177
Other......................................... 9 30 7 0 0
------- ------- -------- ------- -------
Total revenues..................... 1,142 1,041 866 751 1,049
Costs and expenses:
Oil and gas production costs.................. 450 459 404 333 429
General and administrative.................... 343 377 499 481 511
Depreciation, depletion and amortization...... 141 110 106 234 116
Dry hole and abandonment costs and impairment. 36 44 21 42 1
Interest expense.............................. 2 5 4 5 18
Other (1).................................... 0 0 0 0 303
------- ------- -------- ------- -------
Total expenses...................... 972 995 1,034 1,095 1,378
------- ------- -------- ------- -------
Income (loss) before income taxes and
extraordinary item............................. 170 46 (168) (344) (329)
Income taxes........................................ 50 0 0 0 0
------- ------- -------- ------- -------
Income (loss) before extraordinary item............. 120 46 (168) (344) (329)
Extraordinary item(2)............................... 50 0 0 0 0
------- ------- -------- ------- -------
Net income (loss)................................... $ 170 $ 46 $ (168) $ (344) $ (329)
======= ======= ======== ======= =======
Net income (loss) per share before
extraordinary item(3).......................... $ .21 $ .08 $ (.26) $ (.51) $ (.43)
======= ======= ======== ======= =======
Extraordinary item per share(2)(3).................. $ .09 $ .00 $ .00 $ .00 $ .00
======= ======= ======== ======= =======
Net income (loss) per share(3)(4)................... $ .30 $ .08 $ (.26) $ (.51) $ (.43)
======= ======= ======== ======= =======
Weighted average common and common
equivalent shares outstanding................. 575 585 655 675 765
At March 31, At At
---------------------------- December 31, December 31,
1993 1994 1995 1995 1996
------- ------- -------- ------------ ------------
(in thousands)
Balance Sheet Data:
Current assets................................ $ 419 $ 456 $ 577 $ 582 $ 373
Property and equipment, net................... 848 998 1,065 949 870
Total assets.................................. 1,267 1,454 1,642 1,531 1,243
Current liabilities........................... 364 418 652 861 658
Long-term debt................................ 18 19 16 40 36
Stockholders' equity.......................... 885 1,017 974 630 549
__________________
(1) The $303,000 expense in fiscal 1996 represents the legal,
accounting and other expenses associated with the attempted
acquisition by the Company of Taurus Energy Corp.
(2) The extraordinary gain in fiscal 1993 represents an
extraordinary gain of $50,000, due to the utilization of the
Company's net operating loss carryforward.
(3) Per share data has been restated to reflect the one-for-five
reverse stock split effective July 19, 1996.
(4) The Company has not declared nor paid any dividends during
any of the periods presented.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
COMPARISON OF NINE MONTH TRANSITION PERIOD ENDED DECEMBER 31,
1995 AND THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMPARATIVE PERIODS. On February 13, 1996, the Company
changed its fiscal year end from March 31 to December 31. As a
result, the following comparison is between the fiscal year ended
December 31, 1996 and the nine month transition period ended
December 31, 1995.
REVENUES. Oil and natural gas sales increased $312,000, or
56%, to $872,000 for the fiscal year ended December 31, 1996 from
$560,000 for the nine month transition period ended December 31,
1995. The increase in oil and natural gas sales was primarily
attributable to higher oil and natural gas prices in fiscal 1996
as well as increased production volumes. Oil and natural gas
prices for the fiscal year ended December 31, 1996, were 24%
higher and 34% higher, respectively, than such prices in the nine
month transition period ended December 31, 1995. Oil and natural
gas production for the fiscal year ended December 31, 1996,
increased 16% and 24%, respectively, from the nine month
transition period ended December 31, 1995. These increases were
primarily attributable to the production from several successful
workovers and newly completed wells overshadowing the continued
depletion of existing properties.
Management fees and other income decreased $14,000, or 7%,
to $177,000 for the fiscal year ended December 31, 1996 from
$191,000 in the nine month transition period ended December 31,
1995. Management fees and other income primarily include
overhead fees, well supervision fees and interest income. The
decrease was due primarily to a lower level of operated drilling
and maintenance activities.
COSTS AND EXPENSES. The Company's costs and expenses
increased $283,000, or 26%, to $1,378,000 for the fiscal year
ended December 31, 1996 from $1,095,000 for the nine month
transition period ended December 31, 1995. This increase was due
primarily to the costs, including financing and acquisition
costs, incurred in connection with the abandonment of the
Company's proposed acquisition of Taurus Energy Corp.
NET INCOME (LOSS). Net loss for the fiscal year ended
December 31, 1996 was $329,000, or $.43 per share, compared to a
loss of $344,000, or $0.51 per share, for the nine month
transition period ended December 31, 1995. This $15,000 decrease
was primarily the result of an increase in revenues being
partially offset by an increase in expenses as more fully
described above.
COMPARISON OF NINE MONTH PERIODS ENDED DECEMBER 31, 1994
(UNAUDITED) AND 1995.
COMPARATIVE PERIODS. On February 13, 1996, the Company
changed its fiscal year end from March 31 to December 31.
Accordingly, the following comparison is for the nine month
transition period ended December 31, 1995 and the nine month
period ended December 31, 1994.
REVENUES. Oil and natural gas sales increased $68,000, or
14%, to $560,000 for the nine month period ended December 31,
1995 from $492,000 in the prior nine month period. The increase
in oil and natural gas sales was primarily attributable to
increases in production. Oil production and natural gas
production for the nine month period ended December 31, 1995
increased 15% and 10%, respectively, from the prior nine month
period. These increases were primarily attributable to the
production from several successful workovers and newly completed
wells overshadowing the continued depletion of existing
properties. Also contributing to increased oil and natural gas
sales was higher oil prices, which were partially offset by lower
prices for natural gas. Oil prices and natural gas prices for the
nine month period ended December 31, 1995 were 8% higher and 6%
lower, respectively, than such prices in the comparable prior
nine month period.
-15-
Management fees and other income increased $14,000, or 8%,
to $191,000 for the nine month period ended December 31, 1995
versus $177,000 in the nine months ended December 31, 1994. The
increase was due to a slightly higher level of operated drilling
and maintenance activities.
COSTS AND EXPENSES. The Company's costs and expenses
increased $355,000, or 48%, to $1,095,000 for the nine month
period ended December 31, 1995 from $740,000 for the nine month
period ended December 31, 1994. This increase was primarily
attributable to a $167,000 increase in depreciation, depletion
and amortization expenses, and to a $130,000 increase in general
and administrative expenses. Depreciation, depletion and
amortization expenses were $234,000 and $67,000, respectively,
for the nine month periods ended December 31, 1995 and 1994. This
249% increase was attributable to the significant depletion
expense taken on nonproducing reserves. General and
administrative expenses were $481,000 and $351,000, respectively,
for the nine month periods ended December 31, 1995 and 1994. The
37% increase between the nine month periods was the result of the
current period including nine months of expenses related to the
employment of a new Chairman of the Board, President and Chief
Executive Officer versus only four months of expenses reflected
in the previous nine month period.
NET INCOME. The net loss for the nine month period ended
December 31, 1995 was $344,000, or $.51 per share, compared to a
net loss of $60,000, or $.09 per share, in the prior nine month
period. This difference of $284,000 was primarily the result of
an increase in expenses, as discussed above.
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 1995 AND NINE MONTH
TRANSITION PERIOD ENDED DECEMBER 31, 1995.
COMPARATIVE PERIODS. On February 13, 1996, the Company
changed its fiscal year end from March 31 to December 31.
Accordingly, the following comparison is between the nine month
transition period ended December 31, 1995 and the fiscal year
ended March 31, 1995.
REVENUES. Oil and natural gas sales decreased $66,000, or
11%, to $560,000 for the nine month transition period ended
December 31, 1995 from $626,000 for the twelve month period ended
March 31, 1995. This decrease was primarily attributable to
lower production volumes. Oil and natural gas volumes for the
nine month transition period ended December 31, 1995 decreased
10% and 14%, respectively, and oil and natural gas prices were 5%
higher and 2% lower, respectively, than such volumes and prices
in the fiscal year ended March 31, 1995.
Management fees and other income decreased $42,000, or 18%,
to $191,000 for the nine month transition period ended December
31, 1995 from $233,000 in the fiscal year ended March 31, 1995.
This decrease was due to less operated drilling and maintenance
activities for the nine month transition period.
COSTS AND EXPENSES. The Company's costs and expenses
increased $61,000, or 6%, to $1,095,000 for the nine month
transition period ended December 31, 1995 from $1,034,000 for the
fiscal year ended March 31, 1995. This increase was due
primarily to a $128,000 increase in depreciation, depletion and
amortization, and to a $71,000 decrease in oil and gas production
costs. Depreciation, depletion and amortization expenses were
$234,000 and $106,000, respectively, for the nine month
transition period ended December 31, 1995 and the twelve month
period ended March 31, 1995. This 121% increase was attributable
to the significant depletion expenses taken on nonproducing
reserves. Oil and gas production costs were $333,000 and
$404,000, respectively, for the nine month transition period
ended December 31, 1995 and the twelve month period ended March
31, 1995. This 18% decrease was primarily a result of the
difference in length of the two periods involved.
NET INCOME (LOSS). The net loss for the nine month
transition period ended December 31, 1995 was $344,000, or $.51
per share, compared to a loss of $168,000, or $.26 per share, for
the fiscal year ended March 31, 1995. This $176,000 increase was
primarily the result of a decrease in revenues as well as an
increase in expenses as more fully described above.
-16-
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at December 31, 1996 was a
negative $285,000 compared to a negative $279,000 at December 31,
1995. This $6,000 decrease in working capital resulted from the
utilization of Company funds for the costs associated with the
attempted acquisition of Taurus Energy Corp. being partially
offset by the capital received upon the exercise of a stock
option to purchase 120,000 shares of Common Stock by a director
of the Company during the first quarter of 1996. The option
exercise resulted in $225,000 in cash for the Company. This
addition to working capital was utilized primarily to pay off the
Company's short-term note payable in the second quarter of 1996.
The Company's working capital deficit at December 31, 1995
was $279,000 as compared to a $75,000 at March 31, 1995. This
$204,000 increase in the working capital deficit resulted from
the utilization of Company funds for property acquisitions, well
workovers and capital expenditures on new wells and also from
increased general and administrative expenses as discussed above.
Historically, the Company has funded its oil and gas activities
through cash flow from operations, bank borrowings, equity
capital from private sales of stock and agreements with industry
participants.
At December 31, 1996, the Company had long-term debt
(excluding current portion) of approximately $36,000. The
Company's $200,000 note payable at December 31, 1995, was paid in
full in the second quarter of 1996, through proceeds received
upon the exercise of an outstanding stock option described above.
In June 1996, the Company acquired a short-term $200,000 credit
facility with a bank to fund the costs associated with the
attempted acquisition of Taurus Energy Corp. At December 31,
1996, the outstanding balance on this short-term note was
$150,000. The principal amount of the note was reduced by $25,000
subsequent to year end. The outstanding principal amount of the
loan bears interest at the prime rate plus 2%, and interest is
payable monthly. The loan is secured by the pledge of certain of
the Company's oil and natural gas properties. The loan restricts
the Company's ability to borrow additional funds or to guarantee
other indebtedness and requires the maintenance of a positive
working capital, as defined. At December 31, 1996, the Company
was not in compliance with the positive working capital covenant.
The bank granted the Company a waiver of compliance with this
covenant through maturity. The facility matured on
February 27, 1997, and the Company is negotiating a 90 day
extension with the lender.
On March 29, 1996, William R. Granberry, a director of the
Company and former Chairman of the Board, President and Chief
Executive Officer, exercised his stock option and purchased
120,000 shares of the Company's Common Stock at $1.875 per share,
thus generating $225,000 in cash for the Company. Proceeds were
primarily used to pay off the short-term bank note mentioned
above.
Management is of the opinion that the Company's cash flow
and funds from the sale of additional equity capital will be
adequate to meet its current obligations as well as fund small
property acquisitions, new projects, and generation and/or
participation in new drilling and recompletion work.
Inflation and Changing Prices
- -----------------------------
The impact of inflation, as always, is difficult to assess.
Except for a small escalation in prices at year end 1996, the
Company has experienced continued weakness in demand and in
prices received for its oil and gas production. The general
softening of the market has, however, also reduced the cost of
labor, materials, contract services and other operating costs.
The Company cannot anticipate whether the present trend of low
inflation will remain, however, a sudden increase in inflation
and/or an increase in operating costs coupled with a continuation
of low oil prices could have an adverse effect on the operations
of the Company.
Forward-Looking Information - Cautionary Statements
- ---------------------------------------------------
Other than the historical and factual matters set forth
herein, the matters and items set forth in this report are
forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ materially
-17-
from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences
include, but are not limited to, the following:
CERTAIN INDUSTRY AND MARKETING RISKS. The Company's
operations are subject to the risks and uncertainties associated
with drilling for, and production and transport of, oil and
natural gas. The Company must incur significant expenditures for
the identification and acquisition of properties and for the
drilling and completion of wells. Drilling activities are
subject to numerous risks, including the risk that no commercial
productive oil or gas reservoirs will be encountered. The
Company's operations may be materially curtailed, delayed or
canceled as a result of numerous factors, including the presence
of unanticipated pressure or irregularities in formations,
accidents, title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery
of equipment. The Company's prospects for future growth and
profitability will depend predominately on its ability to replace
present reserves through acquisition as well as its ability to
successfully develop additional reserves. The Company's ability
to market its oil and gas production is dependent upon the
availability and capacity of oil and gas gathering systems and
pipelines. Federal and state regulation of oil and gas
production and transportation, general economic conditions,
changes in supply and in demand all could materially adversely
affect the Company's ability to market its oil and gas
production.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES. Numerous
uncertainties are inherent in estimating quantities of proved oil
and gas reserves, including many factors beyond the control of
the Company. This report contains an estimate of the Company's
proved oil and gas reserves and the estimated future net revenue
therefrom based upon reports of the Company's independent
petroleum engineers. Such reports rely upon various assumptions,
including assumptions required by the Commission as to constant
gas and oil prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. The process of
estimating gas and oil reserves is complex, requiring significant
decisions and assumptions in the evaluation of available
geological, engineering and economic data for each reservoir. As
a result, such estimates are inherently an imprecise evaluation
of reserve quantities or the future net revenue therefrom.
Actual future production, revenue, taxes, development
expenditures, operating expenses and quantities of recoverable
gas and oil reserves may vary substantially from those assumed in
the estimate. Any significant variance in these assumptions
could materially affect the estimated quantity and value of
reserves set forth in this report. In addition, the Company's
reserves may be subject to downward or upward revision, based
upon production history, results of future exploration and
development, prevailing oil and gas prices and other factors.
INABILITY TO DEVELOP ADDITIONAL RESERVES. The Company's
future success as an oil and natural gas producer, as is
generally the case in the industry, depends upon its ability to
find, develop and acquire additional oil and gas reserves that
are economically recoverable. Except to the extent that the
Company conducts successful development activities or acquires
properties containing proved reserves, the Company's proved
reserves will generally decline as reserves are produced. There
can be no assurance that the Company will be able to locate
additional reserves or that the Company will drill economically
productive wells or acquire properties containing proved
reserves.
EFFECTS OF CHANGING OIL AND GAS PRICES. The future
financial condition and results of operations of the Company
depend upon the prices it receives for its oil and natural gas
production and the costs of acquiring, developing and producing
oil and natural gas. Oil and natural gas prices have
historically been volatile and are subject to fluctuations in
response to changes in supply, market uncertainty and a variety
of additional factors that are also beyond the control of the
Company. These factors include, without limitation, the level of
domestic production, the availability of imported oil and natural
gas, actions taken by foreign oil and natural gas producing
nations, the availability of transportation systems with adequate
capacity, the availability of competitive fuels, fluctuating and
seasonal demand for oil and natural gas, conservation and the
extent of governmental regulation of production and general
economic conditions. A substantial or extended decline in oil or
natural gas prices could have a material adverse effect on the
estimated value of the Company's oil and gas reserves, and on its
financial position, results of operations and access to capital.
OPERATING HAZARDS AND UNINSURED RISKS. The Company's
operations are subject to the risks inherent in the oil and gas
industry, including the risks of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental
accidents such as oil spills, gas leaks, ruptures or discharges
of toxic gases. The occurrence of any of these risks could result
in substantial losses to the Company due to injury or loss of
life, severe damage to or destruction
-18-
of property, natural resources and equipment, pollution or other
environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. In
accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks
described above. There can be no assurance that any insurance
will be adequate to cover any losses or liabilities. Further,
the Company cannot predict the continued availability of
insurance, or availability at commercially acceptable premium
levels.
GOVERNMENT REGULATION. Oil and gas operations are subject
to certain federal, state and local laws and regulations that may
be changed from time to time in response to economic and
political conditions. Such laws and regulations have generally
become more stringent in recent years, often imposing greater
environmental operating requirements on an increasing number of
parties. Because the requirements imposed by such laws and
regulations are frequently changed, the Company is unable to
predict the effect or cost of compliance with such requirements
or their effects on oil and natural gas usage or prices. In
addition, a number of legislative proposals have been introduced
in Congress and state legislatures which, if enacted, would
significantly affect the oil and gas industry. In view of the
many uncertainties which exist with respect to any legislative
proposals, the Company cannot predict the effect on the Company
of any legislation which might be enacted.
ENVIRONMENTAL LIABILITIES. The Company's operations could
result in liability for oil spills, discharge of hazardous
materials and other environmental damages. In addition, the
Company may be liable for environmental damages caused by
previous owners of property purchased by the Company. As a
result, substantial liabilities to third parties or governmental
entities may be incurred, the payment of which could reduce or
eliminate the funds available for project investment or result in
loss of the Company's properties. Although the Company maintains
insurance coverage it considers to be customary in the industry,
it is not fully insured against certain of these risks, either
because such insurance is not available or because of high
premium costs. Accordingly, the Company 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.
SUBSTANTIAL COMPETITION. The oil and gas industry is highly
competitive and there are many other companies engaged in the oil
and gas business. Many of the companies with which the Company
competes have substantially greater financial, technical and
other resources and may have greater experience in the oil and
gas business than the Company.
NEED FOR ADDITIONAL CAPITAL. The Company's ability to
acquire and exploit oil and gas properties is dependent upon its
ability to obtain necessary outside funding or to generate cash
flow from operations. There is no assurance that any such
required additional funds would be available on satisfactory
terms and conditions, if at all. The amount and timing of the
Company's future capital requirements, if any, will depend upon a
number of factors, including drilling costs, transportation
costs, equipment costs, marketing expenses, staffing levels and
competitive conditions, and any purchases or disposition of
assets, many of which are not within the Company's control.
Failure to obtain any required additional financing could
materially adversely affect the growth, cash flow and earnings,
of the Company. In addition, the Company's pursuit of additional
capital could result in the incurrence of additional debt or
potentially dilutive issuances of additional equity securities.
-19-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
INDEPENDENT AUDITOR'S REPORT..............................21
FINANCIAL STATEMENTS
Balance sheets at December 31, 1995 and 1996..............22
Statements of operations for the fiscal year
ended March 31, 1995, the nine months ended
December 31, 1994 and 1995 and the fiscal year
ended December 31, 1996...................................23
Statements of cash flows for the fiscal year
ended March 31, 1995, the nine months ended
December 31, 1994 and 1995 and the fiscal year
ended December 31, 1996...................................24
Statements of changes in stockholders' equity
for the fiscal year ended March 31, 1995, the
nine months ended December 31, 1995 and the
fiscal year ended December 31, 1996.......................25
Notes to financial statements.............................26
SUPPLEMENTARY OIL AND GAS DISCLOSURES (UNAUDITED).........32
FINANCIAL STATEMENT SCHEDULE FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996, THE NINE MONTHS
ENDED DECEMBER 31, 1995 AND YEAR ENDED
MARCH 31, 1995
Valuation and qualifying accounts and reserves
(Schedule "II")...........................................35
All other schedules and historical financial information are
omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
-20-
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
EXCO Resources, Inc.
We have audited the accompanying balance sheets of EXCO
Resources, Inc. (f/k/a Mineral Development, Inc.) as of December
31, 1995 and 1996, and the related statements of operations, cash
flows and changes in stockholders' equity for the year ended
March 31, 1995, nine months ended December 31, 1995 and year
ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of EXCO Resources, Inc. as of December 31, 1995 and 1996, and the
results of its operations and its cash flows for the year ended
March 31, 1995, nine months ended December 31, 1995 and year
ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. Schedule II,
as listed in the index to the financial statements, is presented
for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial
statements and in our opinion fairly states, in all material
respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
BELEW AVERITT LLP
Dallas, Texas
March 13, 1997
-21-
EXCO RESOURCES, INC.
BALANCE SHEETS
December 31, 1995 and 1996
(in thousands, except share and per share data)
ASSETS
December 31, December 31,
1995 1996
------------ ------------
Current assets:
Cash...................................................... $ 221 $ 46
Accounts receivable -- trade (net of allowance for
doubtful accounts of $37 and $20, respectively)....... 360 326
Other..................................................... 1 1
------------ ------------
Total current assets 582 373
Property and equipment, at cost (Note 3):
Undeveloped oil and gas properties........................ 69 55
Proved developed oil and gas properties, based on the
successful efforts method.............................. 5,488 5,243
Office and field equipment................................ 372 375
------------ ------------
5,929 5,673
Allowance for depreciation, depletion and amortization.... (4,980) (4,803)
------------ ------------
949 870
------------ ------------
$ 1,531 $ 1,243
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 476 $ 352
Joint interest prepayments................................ 69 31
Revenues and royalties payable............................ 88 95
Note payable (Note 2)..................................... 200 150
Current portion of long-term debt (Note 3)................ 28 30
------------ ------------
Total current liabilities......................... 861 658
Long-term debt, less current portion (Note 3)............... 40 36
Commitments and contingencies (Note 7)
Stockholders' equity (Note 5):
Preferred stock, $.01 par value; 10,000,000 shares
authorized, no shares outstanding...................... 0 0
Common stock, $.01 par value; 25,000,000 shares
authorized, 675,300 shares and 805,300
shares issued and outstanding, respectively............ 7 8
Capital in excess of par value............................ 8,871 9,118
Deficit................................................... (8,248) (8,577)
------------ ------------
Total stockholders' equity........................ 630 549
------------ ------------
$ 1,531 $ 1,243
============ ============
See accompanying notes to financial statements.
-22-
EXCO RESOURCES, INC.
STATEMENTS OF OPERATIONS
Year Ended March 31, 1995
Nine Months Ended December 31, 1994 and 1995
and Year Ended December 31, 1996
(in thousands, except per share data)
Nine Months
Year Ended Ended December 31, Year Ended
March 31 ------------------------ December
1995 1994 1995 1996
---------- --------- --------- ----------
(Unaudited)
Revenues:
Oil and gas (Note 8)..................... $ 626 $ 492 $ 560 $ 872
Management fees and other income......... 233 177 191 177
Gain on disposition of property..........
and equipment 7 11 0 0
-------- -------- -------- --------
866 680 751 1,049
Costs and expenses:
Oil and gas production costs............. 404 302 333 429
Dry hole and abandonment costs........... 21 17 42 1
Depreciation, depletion and amortization. 106 67 234 116
General and administrative............... 499 351 481 511
Costs of abandoned acquisition (Note 10). 0 0 0 303
Interest................................. 4 3 5 18
-------- -------- -------- --------
1,034 740 1,095 1,378
-------- -------- -------- --------
Loss before income taxes................... (168) (60) (344) (329)
Income taxes (Note 4)...................... 0 0 0 0
Net loss................................... $ (168) $ (60) $ (344) $ (329)
======== ======== ======== ========
Net loss per share......................... $ (.26) $ (.09) $ (.51) $ (.43)
======== ======== ======== ========
See accompanying notes to financial statements.
-23-
EXCO RESOURCES, INC.
STATEMENTS OF CASH FLOWS
Year Ended March 31, 1995
Nine Months Ended December 31, 1994 and 1995 and
Year Ended December 31, 1996
(in thousands)
Nine Months Ended
Year Ended December 31, Year Ended
March 31, ------------------- December 31,
1995 1994 1995 1996
---------- ------- -------- ------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (168) $ (60) $ (344) $ (329)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation, depletion and amortization 106 67 234 116
Stock compensation expense 0 0 0 23
Loss (gain) on disposition of property and equipment (7) (11) 0 2
Loss (gain) on abandonment of property and equipment 0 0 36 0
(Increase) decrease in:
Accounts receivable (62) 143 71 34
Other current assets 3 0 0 0
Increase (decrease) in accounts payable and
other current liabilities 243 (166) (1) (155)
------- ------- -------- -------
Net cash provided (used) by operating activities 115 (27) (4) (309)
------- ------- -------- -------
Cash flows from investing activities:
Additions to property and equipment (190) (138) (141) (26)
Proceeds from disposition of property and equipment 31 18 39 3
------- ------- -------- -------
Net cash used by investing activities (159) (120) (102) (23)
------- ------- -------- -------
Cash flows from financing activities:
Proceeds from note payable and long-term debt 9 0 300 150
Payments on long-term debt (27) (21) (119) (18)
Payments on note payable 0 0 0 (200)
Proceeds from issuance of common stock 125 125 0 225
------- ------- -------- -------
Net cash provided by financing activities 107 104 181 157
------- ------- -------- -------
Net increase (decrease) in cash 63 (43) 75 (175)
Cash at beginning of period 83 83 146 221
------- ------- -------- -------
Cash at end of period $ 146 $ 40 $ 221 $ 46
======= ======= ======== =======
Supplemental information:
Interest paid $ 4 $ 3 $ 5 $ 18
======= ======= ======== =======
Income taxes paid $ 0 $ 0 $ 0 $ 0
======= ======= ======== =======
Noncash activities --
The Company acquired property and equipment for debt
as follows:
Assets acquired $ 23 $ 23 $ 82 $ 79
Book value of assets traded-in 0 0 (29) (63)
------- ------- -------- -------
Debt incurred $ 23 $ 23 $ 53 $ 16
======= ======= ======== =======
During the year ended March 31, 1995, the Company incurred a
casualty loss relating to one of its vehicles. The
insurance proceeds of $17 received for the loss were used to
directly repay the related note payable.
During the year ended December 31, 1996, the Company had a
1 for 5 reverse stock split.
See accompanying notes to financial statements.
-24-
EXCO RESOURCES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 1994 and 1995,
Nine Months Ended December 31, 1995 and
Year Ended December 31, 1996
(in thousands, except number of shares)
Common Stock
----------------- Capital in
Number of excess of
Shares Amount par value Deficit Total
------- ------- --------- --------- -------
Balance at March 31, 1994 615,300 $ 6 $ 8,747 $ (7,736) $ 1,017
Issuance of common stock 60,000 1 124 0 125
Net loss 0 0 0 (168) (168)
------- ---- ------- -------- -------
Balance at March 31, 1995 675,300 7 8,871 (7,904) 974
Net loss 0 0 0 (344) (344)
------- ---- ------- -------- -------
Balance at December 31, 1995 675,300 7 8,871 (8,248) 630
Exercise of stock options (Note 5) 120,000 1 224 0 225
Issuance of common stock 10,000 0 23 0 23
Net loss 0 0 0 (329) (329)
------- ---- ------- -------- -------
Balance at December 31, 1996 805,300 $ 8 $ 9,118 $ (8,577) $ 549
======= ==== ======= ======== =======
See accompanying notes to financial statements.
-25-
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION. EXCO Resources, Inc. (f/k/a Mineral Development,
Inc.) (the "Company"), a Texas corporation, was formed in 1955.
The Company's operations consist primarily of acquiring interests
in producing oil and gas properties located in the continental
United States. The Company also acts as the operator on certain
of these properties and receives management fee income.
YEAR-END CHANGE. On February 13, 1996, the Company changed its
fiscal year-end from March 31 to December 31 effective December
31, 1995.
MANAGEMENT ESTIMATES. In preparing financial statements in
conformity with generally accepted accounting principles, the
Company is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses during the reporting period. Actual results may differ
from management's estimates.
CASH EQUIVALENTS. The Company considers time deposits with
original maturities of three months or less to be components of
cash.
PROPERTY AND EQUIPMENT. The Company accounts for oil and gas
properties in accordance with the successful efforts method.
Accordingly, costs to acquire mineral interests in oil and gas
properties, to drill exploratory wells that find proved reserves
and to drill and equip development wells, are capitalized.
Geological and geophysical costs and costs to drill exploratory
wells that do not find proved reserves are expensed.
Depletion of proved oil and gas properties is computed on the
basis of current gross production in relation to estimated future
production of proved oil and gas reserves, based on current
economic and operating conditions.
Upon sale or retirement of depreciable property, the cost and
related accumulated depreciation, depletion and amortization are
removed and gain or loss is recognized. Maintenance and repairs
are expensed as incurred; renewals and replacements that improve
or extend the life of existing properties are capitalized.
Upon determination that an oil or gas property is not
commercially productive, the well is plugged and abandoned. Costs
associated with plugging a well, including restoration and
dismantlement costs, are expensed.
Allowances are provided for the impairment of value associated
with unproved oil and gas leases and for proved oil and gas
properties when the carrying value of the properties exceeds the
total discounted future net value of oil and gas reserves.
Depreciation of office and field equipment is provided by the
straight-line method over an estimated useful life of five years.
INCOME (LOSS) PER SHARE. Income (loss) per share is based on
the weighted average number of common shares and common share
equivalents outstanding March 31, 1995 -- 655,144; December 31,
1994 -- 641,811; December 31, 1995 -- 675,144; and December 31,
1996 -- 765,300. The effects of common stock equivalents (Note 5)
are antidilutive.
FEDERAL INCOME TAX. The Company utilizes the asset and
liability method of computing deferred income taxes. In the event
differences between the financial reporting bases and the tax
bases of the Company's assets and liabilities result in deferred
tax assets, an evaluation of the probability of being able to
realize the future benefits indicated by such assets is
considered necessary. A valuation allowance is provided for a
portion or all of the deferred tax assets when it is more likely
than not that such portion, or all of such deferred tax assets,
will not be realized.
-26-
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS - - (continued)
CONCENTRATION OF CREDIT RISK. Financial instruments that
potentially subject the Company to concentration of credit risk
consist principally of cash and trade receivables. The Company
places its cash with high credit quality financial institutions.
The Company has the right to offset certain of its trade
receivables with payables related to properties it operates on
behalf of joint interest owners. Consequently, management does
not anticipate significant credit losses from such financial
instruments.
ADVERTISING. The Company expenses the production costs of
advertising and promotion expenditures as incurred. Advertising
expense was not significant for the year ended March 31, 1995,
the nine months ended December 31, 1994 and 1995 and the year
ended December 31, 1996.
REVERSE STOCK SPLIT. At the Company's 1996 Annual Meeting of
Shareholders (the "Annual Meeting"), the shareholders of the
Company approved an amendment to the Company's Articles of
Incorporation (the "Articles of Incorporation"), authorizing a
one-for-five reverse stock split of the Company's common stock,
which became effective July 19, 1996. All share and per share
numbers contained herein have been retroactively adjusted to
record the effects of the reverse stock split.
PREFERRED STOCK. At the Annual Meeting, the shareholders also
authorized the issuance of up to 10,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"), that the
Board of Directors may issue from time to time in one or more
series. With respect to each series of Preferred Stock, the
amendment authorizes the Board to fix and determine by resolution
the number of shares of each series, the designation thereof and
all rights and preferences including voting, dividend,
conversion, redemption and liquidation rights. The Board of
Directors deemed it in the best interest of the Company to
provide for a series of Preferred Stock in order to provide
flexibility 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.
NOTE 2. NOTE PAYABLE
At December 31, 1996, the Company had a $200,000 demand note
payable to a bank, of which $150,000 was outstanding. The note
bears interest at the bank's prime lending rate plus 2% and
matured February 27, 1997. The note is collateralized by certain
oil and gas properties of the Company. The Company received a
waiver through February 27, 1997, regarding noncompliance with a
loan covenant that requires the Company to maintain positive
working capital, as defined in the loan agreement. The Company
is negotiating a 90-day extension of this note.
-27-
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS - - (continued)
NOTE 3. LONG-TERM DEBT
Long-term debt at December 31, 1995 and December 31, 1996
consisted of the following:
December 31, December 31,
1995 1996
------------ ------------
Notes payable to a finance company; monthly
principal and interest payments of $1,423;
interest at 9.9%; collateralized by equipment......... $ 40,000 $ 26,000
Note payable to a finance company; monthly
principal and interest payments of $762;
interest at 10.9%; collateralized by equipment........ 16,000 0
Note payable to a vendor, monthly principal
and interest payments of $410, interest at
14%; unsecured......................................... 9,000 6,000
Note payable to a finance company; monthly
principal and interest payments of $375;
interest at 8.9%; collateralized by equipment.......... 3,000 0
Note payable to a finance company; monthly
principal and interest payments of $705;
interest at 8.75%; collateralized by equipment........ 0 22,000
Note payable to a finance company; monthly
principal and interest payments of $414,
interest at 10.2%; collateralized by equipment........ 0 12,000
------------ ------------
68,000 66,000
Less current portion................................... (28,000) (30,000)
------------ ------------
$ 40,000 $ 36,000
============ ============
Maturities of long-term debt at December 31, 1996 consisted of
the following:
Year ending December 31,
1997........................... 30,000
1998........................... 25,000
1999........................... 11,000
-------
$66,000
=======
NOTE 4. INCOME TAXES
No tax provision was required for the periods ended March 31,
1995, December 31, 1994, December 31, 1995 and December 31, 1996
as the Company incurred a loss or was able to utilize a net
operating loss carryforward.
-28-
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS - - (continued)
Deferred taxes resulted from differences between financial
statement and tax bases of assets and liabilities as well as
unused tax losses and credit carryforwards. Temporary differences
and carryforwards that comprise deferred taxes were approximately
as follows:
December 31, December 31,
1995 1996
------------ ------------
Depreciation, depletion and
amortization, including percentage
depletion carryforwards.............. $ 94,000 $ 179,000
Allowance for doubtful accounts....... 13,000 7,000
Net operating loss carryforward....... 2,336,000 2,375,000
Investment tax credit carryforward.... 135,000 122,000
----------- -----------
2,578,000 2,683,000
Less: Valuation allowance............. (2,578,000) (2,683,000)
----------- -----------
$ 0 $ 0
=========== ===========
At December 31, 1996, the Company had net operating loss
carryforwards and investment tax credit carryforwards of
approximately $6,986,000 and $122,000, respectively, which may be
applied against future taxable income. If unused, such
carryforwards expire in varying amounts from 1997 to 2011. Due
to the uncertainty of utilizing such carryforwards in future
years, all of the deferred tax assets resulting from such
carryforwards have been included in the valuation allowance.
NOTE 5. COMMON STOCK OPTIONS
The Company applies APB opinion 25 in accounting for its fixed
and performance-based stock compensation plans and disclosure
requirements of SFAS 123. Accordingly, no compensation costs
have been recognized for either of the plans.
In August, 1994, the Company approved a stock option plan
("Plan"), whereby options may be granted to selected employees to
purchase an aggregate of 400,000 shares of the Company's
authorized common stock. Under the Plan, options to purchase
shares will be granted at a price determined by the Company's
stock option committee, but in no event will it be less than one
hundred percent of the fair market value per share at the time of
grant. The Plan terminates in August, 2004.
In August, 1994, options to purchase 80,000 and 40,000 shares
of common stock were granted to an officer/director under a non-
qualified stock option agreement and an incentive stock option
agreement, respectively. Under both of these agreements, the
option price was $1.875 per share. Because the Plan and the
related incentive stock option grant was not approved within one
year of the Plan's adoption, the incentive stock option grant
became a non-qualified option grant. These options were exercised
in 1996 for $225,000. At December 31, 1996, options for 280,000
shares remained available for grant.
In June 1996, the Company executed an employment agreement,
which provided for the future grant of options to purchase an
aggregate of 100,000 shares of common stock to an
officer/director under a non-qualified stock option agreement.
Under this agreement, as amended, the option price is $2.75 per
share. This shares subject to this option will not vest until
the Company is successful in raising a minimum of $9,000,000 in a
registered public offering or is sold or acquired. The options
would have a ten year term and would be exercisable in whole at
any time beginning on the date of grant of the options.
In July 1996, the Company approved an option plan for directors
to receive options to purchase 100,000 shares each of common
stock on the date that such directors were initially elected or
appointed. Subsequent to December 31, 1996, such option plan was
terminated without granting any options. In lieu of this plan,
the Board granted each director an option to purchase 25,000
shares at an option price of $2.75 per share, the fair market
value of the
-29-
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS - - (continued)
common stock at the date of grant. Options totaling 125,000
shares were granted to the Company's directors. The options
automatically terminate 3 months after the optionee ceases to be
a director, 12 months if due to permanent disability, 15 months
after death or ten years after the option if granted.
The following table sets forth stock option transactions for
the year ended March 31, 1995, the nine months ended December 31,
1995 and the year ended December 31, 1996:
Option Price
Number of --------------------
Shares Per share Total
--------- ---------- --------
Outstanding at March 31, 1994........................... 0 $ 0
Granted................................................. 120,000 $ 1.875 225,000
-------- --------
Outstanding at March 31, 1995 and December 31, 1995..... 120,000 225,000
Exercised............................................... (120,000) (225,000)
-------- --------
Outstanding at December 31, 1996........................ 0 $ 0
======== ========
NOTE 6. RELATED PARTY TRANSACTIONS
Certain directors of the Company, and the companies with which
they are affiliated, participate in oil and gas joint ventures
with the Company upon substantially the same terms and conditions
as unrelated parties. In addition, the Company has purchased
certain oil and gas prospects as well as drilling services and
oil field supplies and services in the normal course of business
from companies in which certain directors have financial
interests. No significant purchases were made during the periods
ended March 31, 1995, December 31, 1994, December 31, 1995 or
December 31, 1996.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease that
expired in November, 1996. Rent expense was approximately
$36,000, $27,000, $32,000 and $41,000 for the year ended March
31, 1995, the nine months ended December 31, 1994 and December
31, 1995, and the year ended December 31, 1996, respectively. As
of December 31, 1996, the Company leases office space on a month
to month basis.
The Company has entered into an employment agreement with Mr.
Charles Gleeson for the position of President and Chief Executive
Officer of the Company. The agreement provides for a minimum
annual salary, adjusted for incentives, as determined by the
Board of Directors for the period June 1, 1996 through June 1,
1999. The Company may terminate the employment agreement if the
Company is unsuccessful in raising a minimum of $9,000,000 in a
registered public offering.
NOTE 8. SIGNIFICANT CUSTOMERS
The Company sells a portion of its oil and gas production to
what is considered significant customers. During the periods
ended March 31, 1995, December 31, 1994, December 31, 1995 and
December 31, 1996, sales to significant customers accounted for
29%, 30%, 28% and 36%, respectively, of the Company's revenues.
-30-
EXCO RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS - - (continued)
NOTE 9. ENVIRONMENTAL REGULATION
Various Federal, state and local laws and regulations covering
discharge of materials into the environment, or otherwise
relating to the protection of the environment, may affect the
Company's operations and costs of oil and gas exploration,
development and production operations. It is not anticipated that
the Company will be required in the near future to expend amounts
material in relation to its total capital expenditure program by
reason of environmental laws and regulations. Because such laws
and regulations are constantly being changed, the Company is
unable to predict the conditions and other factors, over which
the Company does not exercise control, that may give rise to
environmental liabilities.
NOTE 10. ABANDONED ACQUISITION AND FOURTH QUARTER ADJUSTMENTS
In September 1996, the Company entered into a stock purchase
agreement to acquire Taurus Energy Corp. (Taurus), a processor
and marketer of natural gas. In addition, the Company initiated
a public stock offering to raise the $35,000,000 necessary to
complete the acquisition.
In connection with these activities, the Company incurred and
capitalized approximately $303,000 of legal, accounting and other
costs. In the fourth quarter of 1996, the Company recognized
the abandonment of the proposed Taurus acquisition and the
Company canceled its planned public offering. As a result, the
Company expensed the costs associated with the abandoned
acquisition.
NOTE 11. OIL AND GAS COSTS
CAPITALIZED COST
The Company's net investment in oil and gas producing
properties was as follows (in thousands):
March 31, December 31, December 31,
1995 1995 1996
------------ ------------ ------------
Capitalized cost of proved properties $ 5,444 $ 5,488 $ 5,243
Accumulated depreciation, depletion and
amortization (4,576) (4,717) (4,532)
------------ ------------ ------------
Net capitalized costs $ 868 $ 771 $ 711
============ ============ ============
COST INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION
AND DEVELOPMENT ACTIVITIES
The following table sets forth costs incurred in oil and gas
property acquisition, exploration and development activities,
including capital expenditures, for each of the respective
periods (in thousands):
Nine
Year Ended Months Ended Year Ended
March 31, December 31, December 31,
1995 1995 1996
------------ ------------ ------------
Inproved property acquisition $ 83 $ 4 $ 1
Proved property acquisition 65 52 1
Exploration 12 37 0
Development 30 71 17
------------ ------------ ------------
$ 190 $ 164 $ 19
============ ============ ============
-31-
SUPPLEMENTARY OIL AND GAS DISCLOSURES
OIL AND GAS RESERVE QUANTITIES (UNAUDITED)
The following unaudited information summarizes the Company's
net ownership interests in proved oil and gas reserves and
related data. Estimates of oil and gas reserves are made annually
by the Company's independent petroleum engineers. The
determination of these reserves is a complex and highly
interpretive process subject to continual revision as additional
information becomes available. In most cases, a relatively
accurate determination of reserves may not be possible for
several years due to the time needed for development, drilling,
testing and studies of the reservoirs.
The quantities of proved crude oil and natural gas reserves
presented below include only those amounts which the Company
reasonably expects to recover in the future from known oil and
gas reservoirs under the existing economic and operating
conditions and which are located entirely in the United States.
Therefore, proved reserves are limited to those quantities that
are recoverable commercially at current prices and costs under
existing regulatory practices and with existing technology.
Accordingly, any changes in future prices, costs, regulations,
technology and other factors could significantly increase or
decrease valuation estimates.
Crude Oil and Condensate (Barrels) Natural Gas (Mcf)
------------------------------------------ ----------------------------------------
Nine Months Year Nine Months Year
Year ended ended ended Year ended ended ended
March 31, December 31, December 31, March 31, December 31, December 31,
1995 1995 1996 1995 1995 1996
---------- ------------ ------------ ---------- ------------ ------------
(in thousands) (in thousands)
Proved developed and undeveloped
reserves at beginning of year...... 225 237 148 2,187 2,851 4,957
Sale of proved reserves.............. 0 0 (25) 0 0 (12)
Purchase of proved reserves.......... 0 8 2 682 2,152 263
Revisions of previous estimates...... 26 (91) 63 193 16 (222)
New discoveries and extensions....... 7 13 3 0 118 0
Production........................... (21) (19) (22) (211) (180) (224)
----- ---- --- ----- ----- -----
Proved developed and undeveloped
reserves at end of year............ 237 148 169 2,851 4,957 4,762
===== ==== === ===== ===== =====
Proved developed reserves at end
of year........................... 216 141 162 1,515 2,818 2,483
===== ==== ==== ===== ===== =====
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING
TO PROVED RESERVES (UNAUDITED)
Certain assumptions used in computing the standardized measure
and their inherent limitations are discussed below. The Company
believes this discussion is essential for a proper understanding
and assessment of the data presented.
The tables below present the standardized measure of future net
cash flows relating to proved reserves and the changes therein
computed in accordance with the methodology prescribed by the
Financial Accounting Standards Board (FASB). The FASB requires the
following specified assumptions be followed when computing the
standardized measure:
Proved reserves: Only "proved" reserves are included in the
valuation. The FASB adopted the Securities and Exchange
Commission and Department of Energy definition of proved
reserves. Excluded from the definition are estimates of
potential or possible reserves associated with existing proved
or unproved properties, which often are a significant factor
in the Company's investment decision-making process.
Current prices: Expected revenues are based on oil and gas
prices representative of actual prices existing at year-end.
Expected increases because of inflation or anticipated Federal
regulatory changes and actual price changes since year-end are
not considered until actually in effect.
Current costs: Production and development costs related to
future production of proved reserves are based on cost levels
existing at the end of the year for which those estimates were
made and assume continuation of
-32-
existing economic conditions. Therefore, adjustments for
inflation or other anticipated cost changes are not included
in these forecasts until the actual cost changes are realized.
Income taxes: Because it is estimated that the Company will
not pay a significant amount of taxes in the foreseeable
future, no income tax provision has been made for any year
presented.
Ten percent (10%) discount: Future net cash flows from oil and
gas production for March 31, 1995, December 31, 1995 and
December 31, 1996, have been discounted at ten percent (10%).
The assumptions used to compute the standardized measure are
those required by the FASB and, as such, do not necessarily reflect
the Company's expectations of actual revenues to be derived from
those reserves nor their present worth.
The limitations inherent in the reserve quantity estimation
process previously described are equally applicable herein because
these estimates are the basis for the valuation process. Assigning
monetary values to such quantity estimates does not reduce the
subjective and ever-changing nature of such reserve estimates.
Additional subjectivity occurs when determining present values
because the rate of producing the reserves must be estimated. In
addition to errors inherent in predicting the future, variations
from the expected production rate could also result directly or
indirectly from factors outside of the Company's control, such as
unintentional delays in development, environmental concerns,
changes in prices and regulatory controls.
The standardized measure does not necessarily reflect the amounts
that would be incurred to obtain an equivalent amount of oil and
gas reserves, nor would the Company necessarily be willing to sell
the existing reserves for those amounts. Numerous other factors in
addition to those used in the valuation must be considered by the
Company when allocating funds to the exploration and development of
known and prospective oil and gas reserves.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED RESERVES (UNAUDITED)
(in thousands)
March 31, December 31, December 31,
1995 1995 1996
--------- ------------ ------------
Future estimated cash inflows......... $ 8,002 $ 11,572 $ 20,296
Future estimated production and
development costs................... 3,349 4,693 5,650
--------- --------- ---------
Future estimated net cash flows....... 4,653 6,879 14,646
Discount to reduce estimated
net cash flows to present value..... 1,535 2,874 6,327
--------- --------- ---------
Standardized measure of discounted
future net cash flows relating to
proved reserves...................... $ 3,118 $ 4,005 $ 8,319
========= ========= =========
-33-
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS RELATING
TO PROVED RESERVES (UNAUDITED)
(in thousands)
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1995 1995 1996
---------- ------------ ------------
Changes in discounted net cash flows:
Increases (decreases):
Additions to proved reserves resulting from
extensions and discoveries less related costs......... $ 75 $ 194 $ 47
Purchases of proved reserves........................... 349 1,437 142
Accretion of discount.................................. 296 234 400
Sales of oil and gas, net of production costs
of $404, $333, and $429, respectively.............. (222) (227) (443)
Revisions of previous estimates:
Changes in prices and production costs.............. (537) 136 3,980
Changes in quantities............................... 196 (887) 319
Sales of proved reserves............................... 0 0 (131)
Other.................................................. 0 0 0
-------- --------- ---------
Net increase............................................. 157 887 4,314
Beginning of year........................................ 2,961 3,118 4,005
-------- --------- ---------
End of year.............................................. $ 3,118 $ 4,005 $ 8,319
======== ========= =========
-34-
MINERAL DEVELOPMENT, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
Balance at charged to Balance
beginning costs and Other at end
Description of year expenses changes of year
- ---------------------------------------- ----------- ----------- ---------- -----------
Year ended March 31, 1995:
Allowance for doubtful accounts $ 31,830 $ - $ - $ 31,830
=========== =========== =========== ===========
Reserve for deferred tax assets $ 2,400,000 $ 76,000 $ - $ 2,476,000
=========== =========== =========== ===========
Nine months ended December 31, 1995:
Allowance for doubtful accounts $ 31,830 $ 6,500 $ (1,274)* $ 37,056
=========== =========== =========== ===========
Reserve for deferred tax assets $ 2,476,000 $ 102,000 $ - $ 2,578,000
=========== =========== =========== ===========
Year ended December 31, 1996:
Allowance for doubtful accounts $ 37,056 $ 1,961 $ (19,126)* $ 19,891
=========== =========== =========== ===========
Reserve for deferred tax assets $ 2,578,000 $ 105,000 $ - $ 2,683,000
=========== =========== =========== ===========
* Doubtful accounts written-off.
-35-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
- ---------
The directors of the Company at April 10, 1997, were as
follows:
Year First
Name Age Current Offices(s) Held Elected Director
------------------- --- ----------------------- ----------------
David N. Fitzgerald 74 Chairman of the Board (1) 1993(2)
Charles W. Gleeson 55 President, Chief Executive Officer and Director 1996
Glenn L. Seitz 40 Treasurer and Director 1988
Richard D. Collins 64 Secretary and Director(1) 1993(3)
William R. Granberry 55 Director 1994
_______________
(1) Member of Stock Option Committee.
(2) Mr. Fitzgerald served as a Director of the Company from 1977
to 1985.
(3) Mr. Collins served as a Director of the Company from 1976 to
1985.
Mr. Fitzgerald has been Chairman of the Board since January
1996. From January 1996 until May 1996, Mr. Fitzgerald was also
Chief Executive Officer and President of the Company. Mr.
Fitzgerald was Chairman of the Board of Directors of the Company
from October 1993 to August 1994. Mr. Fitzgerald is President of
Dave Fitzgerald, Inc. and Exit Oilfield Equipment, Inc. and until
1991 was President of Oil Patch Sales and Rentals, Inc., all
privately held oilfield investment and equipment companies. He is
currently also a director of TMBR/Sharp Drilling, Inc., an
independent drilling company.
Mr. Gleeson has been President and Chief Executive Officer of
the Company since June 1996, and has been a director of the Company
since July 1996. Mr. Gleeson was an independent oil and gas
consultant from 1995 to May 1996. From 1991 to 1995, Mr. Gleeson
held various executive positions with Parker & Parsley Petroleum
Co. ("P&P"), an independent oil and gas company, including Senior
Vice President, Vice President -- Gas Processing, President of
Parker & Parsley Gas Processing Co., Managing Director of Bridge
Oil Ltd. (P&P's Australian subsidiary) and Senior Vice President --
Permian Production Region. Mr. Gleeson was Vice President --
Production of Damson Oil Company, an independent oil and gas
company, from 1983 to 1991. Mr. Gleeson is a Registered Petroleum
Engineer in the states of California, New Mexico, Oklahoma and
Texas. He has served as a Director of the Society of Petroleum
Engineers and the Gas Processors Association.
Mr. Seitz is Treasurer and a Director of the Company. Mr.
Seitz was President of the Company from January 1989 to October
1994. Mr. Seitz was employed by Newport Petroleums, Inc.
("Newport") from 1982 to 1986, when Newport was merged with and
into the Company. He became a Director of the Company in May 1988.
Mr. Seitz became Treasurer of the Company in October 1994 and was
Treasurer of the Company from April 1988 to May 1994.
Mr. Collins has been a Director of the Company since October
1993 and Secretary of the Company since May 1994. Mr. Collins was
Treasurer of the Company from May 1994 to October 1994. Mr.
Collins has been an independent financial consultant for the last
nine years as well as an investor in several private companies.
Since February 1994, Mr. Collins has been a director of
International Star Resources, Ltd., a company listed on the
-36-
Vancouver Stock Exchange. From 1976 to 1984, he served as
President, Chief Financial Officer and Director of the Company.
Mr. Collins is a certified public accountant.
Mr. Granberry joined the Company in August 1994 as Chairman of
the Board and Chief Executive Officer of the Company, positions he
held until December 1995 at which time he resigned to become
President of Tom Brown, Inc., a publicly traded oil and gas
exploration and production company in Midland, Texas. Mr.
Granberry remains a Director of the Company. Mr. Granberry was
President of the Company from October 1994 December 1995.
Previously, he was Vice President of PG&E Resources Company, an
independent oil and gas company, from May 1989 to July 1994. From
September 1985 to May 1989, Mr. Granberry was a General Manager for
John H. Hill, an independent oil operator, and from August 1981 to
August 1985 he was Vice President of Production for Tom Brown,
Inc., an independent oil and gas company. Mr. Granberry held
various positions with Amoco Production Company from 1966 to 1981,
and concluded his employment as Division Production Manager. In
January 1995, Mr. Granberry became a director of Tom Brown, Inc.
Executive Officers
The executive officers of the Company at April 10, 1997, were
as follows:
Name Age Current Offices(s) Held
- ------------------ --- -----------------------------
Charles W. Gleeson 55 President and Chief Executive
Officer
Glenn L. Seitz 40 Treasurer
Richard D. Collins 64 Secretary
The term of each director and executive officer expires at the
annual meeting of shareholders and directors, respectively, or at
such times as their respective successors are duly elected and
qualified. If a director should be disqualified or is unable to
serve as a director, the vacancy so arising may be filled by the
Board of Directors for the unexpired portion of the term.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The table below includes compensation paid by the Company for
services rendered during the fiscal year ended December 31, 1996,
the nine month transition period ended December 31, 1995 and the
fiscal year ended March 31, 1995 to the named individuals. None of
the other executive officers of the Company had total salary and
bonus in excess of $100,000 during the any such period.
Long Term
Compensation Awards
------------------------------
Annual Securities Restricted
Compensation Underlying Stock
Name and Principal Position Period Ended Salary ($) Options (#) Awards(#)
- ------------------------------- ------------ ------------ ----------- ----------
Charles W. Gleeson,
President and Chief Executive
Officer (1) December 31, 1996 $ 81,667(2) 0 2,000(3)
William R. Granberry,
Chairman of the Board and December 31, 1995(5) $ 117,000 0 0
Chief Executive Officer (4) March 31, 1995 92,696 120,000 0
________________
(1) Mr. Gleeson was elected to these positions in June 1996.
(2) Represents seven months of compensation.
-37-
(3) Represents shares granted under Director Plan in payment of
Annual Director Fee for the last two fiscal quarters of 1996.
(4) Mr. Granberry held these positions from August 1994 to May
1996.
(5) Represents nine month transition period.
Director Plan
- -------------
GENERAL. On May 17, 1996, the Board of Directors adopted, and
on July 11, 1996, the shareholders approved and ratified, the
Company's 1996 Director Plan (the "Director Plan"). The purpose of
the Director Plan is to attract and retain qualified and competent
directors upon whose efforts and judgment the success of the
Company is largely dependent, and to stimulate the active interest
of these persons in the development and financial success of the
Company by providing for stock ownership in the Company. In
furtherance of this purpose, the Director Plan provided for the
payment of an Annual Director Fee (as defined below) and the grant
of nonincentive stock options ("Director Options") to purchase
Common Stock to all of the directors of the Company. Under the
Director Plan, the maximum number of shares of Common Stock that
may be issued in consideration of the Common Stock component of the
Annual Director Fee or subject to Director Options is 1,000,000
shares. If any Director Option granted terminates, expires or is
canceled or surrendered as to any shares of Common Stock, such
shares will thereafter be available for the payment of the Common
Stock component of the Annual Director Fee and for the granting of
Director Options.
ADMINISTRATION. To the extent any administration is required,
the Director Plan will be administered by the Board. The Director
Plan grants the Board authority to adopt any rules or regulations
deemed necessary for carrying out the purpose of the Director Plan.
ANNUAL DIRECTOR FEE. As initially adopted, the Director Plan
provided that each director would receive an annual director fee of
$12,000 to be paid 50% in cash and 50% in Common Stock (the "Annual
Director Fee"). The Annual Director Fee was to be payable in four
equal quarterly amounts on the first business day following the end
of each fiscal quarter beginning with the fiscal quarter ended
September 30, 1996. For purposes of payment of the Common Stock
component of the Annual Director Fee, the value of the Common Stock
is the fair market value of the Common Stock on the first business
day following the end of each fiscal quarter. In November 1996,
the Board amended the Director Plan to provide that the Annual
Director Fee would be paid in stock and that it would only be paid
for the last two quarters of fiscal 1996. No other Annual Director
Fees will be payable with the Director Plan.
TERMS OF OPTION. The Director Plan initially provided that a
Director Option to purchase 100,000 shares of Common Stock would
automatically be granted to each director on a nondiscriminatory
basis on the date the director is initially elected or appointed as
a director of the Company. Each Director Option was to vest in four
equal amounts of 25,000 shares per year over four years, provided
that no shares subject to a Director Option would vest in any
fiscal year in which the director attended less than 75% of the
Board meetings held for that fiscal year. In the event a director
ceased to serve as such for any reason, the unvested shares subject
to the Director Option would not accelerate, and the Director
Option would be exercisable only for the number of shares that
vested prior to the director ceasing to serve as a director of the
Company. A Director Option would automatically expire on the tenth
anniversary of the date of grant. The option price per share for
all Director Options was required to be equal to 100% of the fair
market value per share of the Common Stock on the date of grant.
TERMINATION OF DIRECTOR PLAN/OPTION GRANTS. In April 1997,
the Directors terminated the Director Plan without the granting of
any automatic options thereunder. In lieu of the Director Plan
automatic grants, the Board granted each Director an option to
purchase 25,000 shares at an option exercise price of $2.75 per
share, the fair market of the Common Stock on the date of grant.
Options to purchase an aggregate of 125,000 shares were granted to
the Company's directors. These options are not assignable or
transferable other than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order.
During the lifetime of an optionee, the options are exercisable
only by the optionee, his guardian or legal representative. In the
event that the number of issued and outstanding shares of Common
Stock are increased or decreased as a result of a stock dividend,
stock split or any other recapitalization, appropriate adjustments
will be made to the number of shares and the option price of any
outstanding options. In the event of a merger, consolidation or any
other reorganization of
-38-
the Company, appropriate substitution will be made for the stock
subject to each option then outstanding. The unexpired portion of
each option will terminate automatically and without notice on the
date of the earliest to occur of the following: (i) three months
after the date that the optionee ceases to be a director, except
for reason of death or permanent disability, (ii) fifteen months
after the date the director ceases to be a director by reason of
death or six months after the director dies if such death occurred
during the three month period described in (i), (iii) twelve months
after the date the director ceases to be a director by reason of
permanent disability, or (iv) ten years from the date of grant of
the option.
Stock Option Plan
- -----------------
GENERAL. On August 28, 1994, the Board of Directors of the
Company adopted, and on July 11, 1996, the shareholders approved
and ratified, the Company's Stock Option Plan (the "Stock Option
Plan"). The purpose of the Stock Option Plan is to promote the
interests of the Company and its shareholders by attracting,
retaining and stimulating the performance of selected employees and
giving such employees the opportunity to acquire a proprietary
interest in the Company and an increased personal interest in the
Company's continued success and progress. The Stock Option Plan
provides for the grant of incentive stock options ("ISOs"), under
Section 422 of the Code, and the grant of nonqualified stock
options that do not qualify under Section 422 of the Code
("NQSOs"). Under the terms of the Stock Option Plan, 400,000 shares
of Common Stock were reserved for the granting of options under the
Stock Option Plan. At December 31, 1996, options to purchase
280,000 shares remained available for granting under the Stock
Option Plan. Stock issued under the Stock Option Plan may be newly
issued or treasury shares. If any option granted under the Stock
Option Plan expires or terminates for any reason without having
been exercised in full, new options may thereafter be granted
covering such shares.
ADMINISTRATION. The Stock Option Plan is administered by a
committee (the "Option Plan Committee") of two outside members
of the Board, David N. Fitzgerald and Richard D. Collins. The
Stock Option Plan grants broad authority to the Option Plan Committee
to grant options to any regular salaried officer or key employee
of the Company and its affiliates, to determine the number of
shares subject to options and the exercise price of the options
and to provide for other option features such as the date of
grant, the appropriate exercise periods and methods of exercise
and requirements regarding the vesting of options.
TERMS OF OPTIONS. The option price per share with respect to ISOs
is determined by the Option Plan Committee, but shall in no instance
be less than 100% of the fair market value of the Common Stock on
the date of grant, or 110% of the fair market value with respect to
any ISO issued to a holder of 10% or more of the Company's shares.
There is no price requirement for NQSOs, other than the option price
must exceed the par value of the Common Stock. The Option Plan Committee
specifies the methods of exercise of options, with attention being given to
compliance with appropriate securities laws and regulations. The
Stock Option Plan permits the use of already owned Common Stock as
payment for the exercise price of options. The duration of options
granted under the Stock Option Plan cannot exceed ten years (five
years with respect to a holder of 10% or more of the Company's shares
in the case of an ISO). Options granted under the Stock Option Plan
are not assignable or transferable, other than by will or by the
laws of descent and distribution or pursuant to a qualified domestic
relations order. During the lifetime of an optionee, the options
granted under the Stock Option Plan are exercisable only by the
optionee or his or her guardian or legal representative.
ADJUSTMENTS. The Option Plan Committee may make such adjustments
in the option price and the number of shares covered by outstanding
options that are required to prevent any dilution or enlargement of
the rights of the holders of such options that would otherwise result
from any reorganization, recapitalization, stock split, stock dividend,
combination of shares, merger, consolidation, issuance of rights or
any other change in the capital structure of the Company. The Option
Plan Committee may also make such adjustments in the aggregate number
of shares subject to options that are appropriate to reflect any
transaction or event described in the preceding sentence.
AMENDMENT AND TERMINATION. The Board of Directors may at any time
suspend or terminate the Stock Option Plan or may amend it from
time to time in such respects as the Board of Directors may deem
advisable in order that the options granted thereunder may conform
to any changes in the law or in any other respect that the Board of
Directors may deem to be in the best interests of the Company;
provided, however, that without approval by the shareholders of the
Company voting the proper percentage of its voting power, no such
amendment shall make any change in the Stock Option Plan for which
shareholder approval is required of the Company in order to comply
with
-39-
(i) Rule 16b-3, as amended, promulgated under the Exchange Act,
(ii) the Code or regulatory provisions dealing with ISOs, or (iii)
any other applicable rule or law. Unless sooner terminated, the
Stock Option Plan shall terminate on August 29, 2004. Except in
connection with satisfaction of withholding requirements of any
federal, state or local withholding tax, no amendment, suspension
or termination of the Stock Option Plan shall, without an
optionee's consent, impair or negate any of the rights or
obligations under any option theretofore granted to such optionee
under the Stock Option Plan.
Stock Option Grants
- -------------------
STOCK OPTION GRANTS. The following table provides information
related to options granted to the named individuals during the
fiscal year ended December 31, 1996.
Individual Grants
------------------------------
Number of % of
Securities Total Exercise
Underlying Options or Base
Options Granted to Price Expiration
Name Period Ended Granted Employees ($/Sh) Date
- ------------------ ----------------- ---------- ---------- -------- -----------
Charles W. Gleeson December 31, 1996 0 N/A N/A N/A
_______________
(1) Represents nine month transition period.
STOCK OPTION EXERCISED AND FISCAL YEAR END STOCK OPTION
VALUES. The following table provides certain information
concerning the number and value of shares of Common Stock acquired
upon the exercise of stock options by the named individuals during
the fiscal year ended December 31, 1996 and value of stock options
held during at the end of such period.
Number of Securities Value of Unexercised
Shares Securities Underlying In-the Money-
Acquired Unexercised Options(#) Options($)(1)
Upon Value ---------------------------- ----------------------------
Name Period Ended Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ------------ ----------- ----------- ----------- ------------- ----------- -------------
Charles W. Gleeson 12/31/96 0 N/A 0 0 N/A N/A
____________________
(1) Market value of the underlying Common Stock at December 31,
1996, minus exercise price.
Employment Contracts
- ---------------------
On August 23, 1994, the Company entered into an employment
agreement with William R. Granberry for Mr. Granberry to serve as
Chairman of the Board, President and Chief Executive Officer of the
Company for a two-year term. The employment agreement provided,
among other things, for an annual base salary of $156,000 and the
grant of stock options under the Company's Stock Option Plan to
purchase up to 120,000 shares of Common Stock. The employment
agreement grants certain transferable piggyback registration rights
with respect to all shares of Common Stock that Mr. Granberry or
certain transferees from time to time beneficially own even after
termination of Mr. Granberry's employment. All costs of
registration rights will be borne by the Company, and the Company
agreed to indemnify Mr. Granberry with respect to certain losses,
claims, damages and liabilities arising from such registration.
During the term of the employment agreement and thereafter without
limitation of time, the Company is required to indemnify and
advance expenses to Mr. Granberry to the fullest extent permitted
by the laws of the State of Texas from time to time in effect. Mr.
Granberry resigned as Chairman of the Board, President and Chief
Executive Officer of the Company effective December 31, 1995. Mr.
Granberry still serves as a director.
In April 1996, the Company entered into an employment
agreement with Charles W. Gleeson to serve as President and Chief
Executive Officer of the Company. The agreement provides for a
three-year term, subject to
-40-
extension upon mutual agreement of the parties; provided, however,
the employment agreement originally provided that it would not
become effective until the Company was successful in raising at
least $9,000,000 of capital in a registered public offering (the
"Funding Condition"). Beginning with the 1996 Annual Meeting and
during the employment term, the Company is required to cause Mr.
Gleeson to be nominated for election as a director at each annual
or applicable special meeting of shareholders of the Company, and
the Company is required to use its best efforts, consistent with
its fiduciary responsibilities to the shareholders, to cause the
election of Mr. Gleeson as a director. The employment agreement has
been amended to provide that it is effective, but that the Board
may terminate it at any time if the Company has not satisfied the
Funding Condition. The employment agreement is subject to early
termination as provided therein, including termination by the
Company for "cause" (as defined in the employment agreement) or
termination by Mr. Gleeson for "good reason upon change of control"
(as defined in the employment agreement). The employment agreement
provides for an annual base salary of $140,000 and such bonuses or
other discretionary compensation as the Board may determine. In
addition, the employment agreement provides, among other things,
for expense reimbursement and, as amended, the grant of stock
options to purchase up to 100,000 shares of Common Stock for an
exercise price of $2.75 per share. This stock option has a ten year
term, but will only vest upon the satisfaction of the Funding
Condition or upon the sale of the Company.
The employment agreement provides that if at any time within
twelve months of a change of control, the Company terminates the
employment agreement without cause or if Mr. Gleeson resigns for
"good reason upon change of control," Mr. Gleeson will be entitled
to, within 45 days of the severance of employment, a lump-sum
payment equal to his base salary for the unexpired term of his
employment agreement. A "change of control" is deemed to have
occurred if (i) more than 30% of the combined voting power of the
Company's then outstanding securities is acquired, directly or
indirectly, by any person or entity, or (ii) at any time during the
24-month period commencing after a tender offer, merger,
consolidation, sale of assets or contested election, or any
combination of such transactions, individuals who at the beginning
of each period constitute at least a majority of the Company's
Board of Directors cease to be "continuing directors" (meaning
directors of the Company who either were directors prior to such
transaction or who subsequently became directors and whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least two-thirds of the directors then
still in office who were directors prior to such transaction),
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
a merger or consolidation that would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at
least 60% of the total voting power represented by the voting
securities of the Company or such surviving entity which are
outstanding immediately after such merger or consolidation, or (iv)
the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement of sale or disposition
by the Company of all or substantially all of the Company's assets.
Certain Transactions
- --------------------
During August 1994, the Company sold an aggregate of 20,000
shares of its Common Stock to David N. Fitzgerald, a director, for
a price of $2.50 per share and 40,000 shares of its Common Stock to
William Granberry, former Chairman of the Board, Chief Executive
Officer and President, for a price of $1.875 per share.
In October 1995, the Company borrowed, in the form of a short-
term note, $100,000 from William Granberry, then Chairman of the
Board and President, at an interest rate of 8.75%. The Company
pledged certain oil and gas properties to Mr. Granberry to receive
this loan. Subsequently, the Company borrowed $200,000 from a bank
in the form of a demand note and repaid the loan from Mr. Granberry
with the proceeds, at which time the security interest in the
Company's oil and gas properties was released. Mr. Granberry
pledged certain assets as collateral for the bank note and, in
addition, Mr. Granberry personally guaranteed the note. This note
was repaid by the Company in April 1996 through proceeds received
from Mr. Granberry upon the exercise of his outstanding stock
options.
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ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
HOLDERS
The following table and notes thereto set forth certain
information as of April 10, 1997 with respect to the shares of
Common Stock beneficially owned by (i) each person known by the
Company to own beneficially more than 5% of the Company's Common
Stock, (ii) each director and (iii) all current directors and
executive officers of the Company as a group.
Shares of Common Stock
Beneficially Owned(1)
------------------------
Name and Address of Beneficial Owner Number Percent(2)
------------------------------------ --------- ---------
Richard D. Collins 60,199(3) 7.3%
4406 Airport Freeway
Fort Worth, Texas 76117
David N. Fitzgerald 170,479(4) 20.5%
3105 Seaboard
Midland, Texas 79705
Charles W. Gleeson 27,000(5) 3.3%
9400 N. Central Expressway, Suite 1209
Dallas, Texas 75231
William R. Granberry 107,000(6) 12.9%
508 W. Wall, Suite 500
Midland, Texas 79702
Glenn L. Seitz 123,739(7) 14.5%
9400 N. Central Expressway, Suite 1209
Dallas, Texas 75231
All current directors and executive officers
as a group (5 persons) 488,417(8) 51.1%
______________
(1) Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 under the Exchange
Act. Unless as otherwise indicated, all shares are owned
directly, and each person has sole voting and investment power
with respect to the shares reported.
(2) The percentage of Common Stock indicated is based on 805,300
shares of Common Stock issued and outstanding at April 10,
1997.
(3) Includes 25,000 shares that Mr. Collins can acquire within 60
days upon exercise of a stock option.
(4) Includes 25,000 shares that Mr. Fitzgerald can acquire within
60 days upon exercise of a stock option. Also includes 9,125
shares held by Frances Fitzgerald, Mr. Fitzgerald's wife,
20,425 shares held by Dave Fitzgerald, Inc., a company of
which Mr. Fitzgerald is president, and 4,612 shares held by
Sunsuzli, Ltd., a limited partnership of which Mr. Fitzgerald
is the general partner.
(5) Includes 25,000 shares that Mr. Gleeson can acquire within 60
days upon exercise of a stock option. Does not include
100,000 shares that Mr. Gleeson may be able to acquire if and
when an option granted pursuant to his Employment Agreement
vests. See "Executive Compensation - Employment Contracts."
(6) Includes 25,000 shares that Mr. Granberry can acquire within
60 days upon exercise of a stock option.
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(7) Includes 50,000 shares that Mr. Seitz can acquire within 60
days upon exercise of an option.
(8) Includes 150,000 shares that the directors and officer can
acquire within 60 days upon exercise of an option. Does not
include 100,000 shares that Mr. Gleeson may be able to acquire
if and when an option granted pursuant to his Employment
Agreement vests. See "Executive Compensation - Employment
Contracts."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Section 16(a) Reporting
- -----------------------
Paragraph Section 16(a) of the Exchange Act, requires the
Company's directors and executive officers, and persons who own
more than 10% of the Company's Common Stock, to file with the
Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than 10% shareholders are
required by Commission regulation to furnish the Company with
copies of all Section 16(a) reports they file. To the Company's
knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations, except for
Charles W. Gleeson who filed one late report consisting of his
initial Form 3, during the fiscal year ended December 31, 1996, all
Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than 10% beneficial owners were
complied with.
-43-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A) DOCUMENTS FILED AS PART OF REPORT
1. Financial Statements Page
(included in Item 8 at the page indicated) ----
Independent Auditor's Report...................................21
Balance sheets at December 31, 1996 and 1995
and March 31, 1995.............................................22
Statements of operations for the fiscal year
ended December 31, 1996, the nine months ended
December 31, 1995 and the fiscal year ended
March 31, 1995.................................................23
Statements of changes in stockholders' equity
for the fiscal year ended December 31, 1996,
the nine months ended December 31, 1995 and
the fiscal year ended March 31, 1995...........................24
Statements of cash flows for the fiscal year
ended December 31, 1996, the nine months ended
December 31, 1995 and the fiscal year ended
March 31, 1995.................................................25
Notes to financial statements..................................26
Supplementary Oil and Gas Disclosures (unaudited)..............32
2. Financial Statement Schedules
The following financial statement schedule is included in
this report at the page indicated. All other schedules for
which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have
been omitted because such schedules are not required under
the related instructions or are inapplicable or because the
information required is included in the Financial Statements
or notes thereto.
Valuation and qualifying accounts and
reserves ("Schedule II").......................................35
3. Exhibits:
3.1 Restated Articles of Incorporation of the Company
(filed herewith)
3.2 Bylaws of the Company, as amended (filed herewith)
10.1 Loan Agreement, dated August 27, 1996, by and
between the Company and Comerica Bank - Texas and
related Demand Note (filed herewith)
10.2 Mineral Development, Inc. Stock Option Plan
(Exhibit 10.2)*; First Amendment to Mineral
Development, Inc. Stock Option Plan (Exhibit
10.2)**
10.3 Incentive Stock Option Agreement, dated August 29,
1994, by and between the Company and William R.
Granberry (Exhibit 10.3)*
10.4 Nonqualified Stock Option Agreement, dated August
29, 1994, by and between the Company and William R.
Granberry (Exhibit 10.4)*
10.5 Employment Agreement, dated as of August 23, 1994,
by and between the Company and William R. Granberry
(Exhibit 10.5)*
-44-
10.6 Employment Agreement, dated as of April 17, 1996,
by and between the Company and Charles W. Gleeson
(Exhibit 10.6)**
10.7 EXCO Resources, Inc. 1996 Director Plan (Exhibit
10.3)*** as amended November 15, 1996 (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
* Filed as the Exhibit shown in parenthesis to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1995.
** Filed as the Exhibit shown in parentheses to the Company's
Annual Report on Form 10-K for the nine month transition
period ended December 31, 1995.
*** Filed as the Exhibit shown in parentheses to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1996.
(b) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31,
1996 and the Company's first quarter ended March 31, 1997, the
Company filed one Current Report on Form 8-K, dated January 15,
1997, relating to the abandonment of the proposed acquisition of
Taurus Energy Corp.
-45-
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Dallas, Texas on the 15th
of April, 1997.
EXCO RESOURCES, INC.
By: /s/ Charles W. Gleeson
-------------------------
Charles W. Gleeson,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
April 15, 1997 /s/ David N. Fitzgerald
------------------------------
David N. Fitzgerald
Chairman of the Board
April 15, 1997 /s/ Charles W. Gleeson
------------------------------
Charles W. Gleeson
President, Chief Executive
Officer and Director
(Chief Executive Officer)
April 15, 1997 /s/ Glenn L. Seitz
------------------------------
Glenn L. Seitz
Treasurer and Director
(Chief Financial and Accounting
Officer)
April 15, 1997 /s/ Richard D. Collins
------------------------------
Richard D. Collins
Secretary and Director
April 15, 1997 /s/ W.R. Granberry
------------------------------
W. R. Granberry,
Director
-46-
INDEX TO EXHIBITS
Exhibit
No. Item
- --------- ----
3.1 Restated Articles of Incorporation of the Company
(filed herewith)
3.2 Bylaws of the Company, as amended (filed herewith)
10.1 Loan Agreement, dated August 27, 1996, by and
between the Company and Comerica Bank - Texas and
related Demand Note (filed herewith)
10.2 Mineral Development, Inc. Stock Option Plan
(Exhibit 10.2)*; First Amendment to Mineral
Development, Inc. Stock Option Plan (Exhibit
10.2)**
10.3 Incentive Stock Option Agreement, dated August 29,
1994, by and between the Company and William R.
Granberry (Exhibit 10.3)*
10.4 Nonqualified Stock Option Agreement, dated August
29, 1994, by and between the Company and William R.
Granberry (Exhibit 10.4)*
10.5 Employment Agreement, dated as of August 23, 1994,
by and between the Company and William R. Granberry
(Exhibit 10.5)*
10.6 Employment Agreement, dated as of April 17, 1996,
by and between the Company and Charles W. Gleeson
(Exhibit 10.6)**
10.7 EXCO Resources, Inc. 1996 Director Plan (Exhibit
10.3)*** as amended November 15, 1996 (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
- -----------------------
* Filed as the Exhibit shown in parenthesis to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1995.
** Filed as the Exhibit shown in parentheses to the Company's
Annual Report on Form 10-K for the nine month transition
period ended December 31, 1995.
*** Filed as the Exhibit shown in parentheses to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1996.