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
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.
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:
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
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.
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
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.
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.
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,
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.
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.
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:
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.
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:
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
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:
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.
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.
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.
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
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.
ITEM 6.
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.
ITEM 7.
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.
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.
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
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
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.
ITEM 8.
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.
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
See accompanying notes to financial statements.
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)
See accompanying notes to financial statements.
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)
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.
See accompanying notes to financial statements.
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.
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.
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:
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.
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
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:
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.
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):
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):
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.
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
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)
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES (UNAUDITED) (in thousands)
MINERAL DEVELOPMENT, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors - ---------
The directors of the Company at April 10, 1997, were as follows:
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
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.
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.
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
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
(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.
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.
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
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.
ITEM 12.
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.