The following items were the subject of a Form 12(b)-25 and are
included herein: Items 1, 2, 6, 7, 8, 9, 11, 13 and 14.
Securities and Exchange Commission
Washington, DC 20549
FORM 10-K/A No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to
__________________
Commission file number 1-10669
XCL Ltd.
- --------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0305643
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Rue Jean Lafitte
Lafayette, Louisiana 70508
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
318-237-0325
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value American Stock Exchange
____________________________ _______________________
Title of each class Name on each exchange
on which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the registrant on March 14, 1995, was
approximately $181,071,164.
237,420,181 shares Common Stock, $.01 par value were
outstanding on March 14, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
None
THE INDEX TO EXHIBITS IS LOCATED AT PAGE 81
TABLE OF CONTENTS
PART I
Page
----
Item 1. and Item 2. Business and Properties 3
General 3
The Zhao Dong Block 4
U.S. Exploration and Production Activities 8
Oil and Gas Reserves 9
Production, Sales and Cost Data 10
Oil and Gas Acreage 11
Drilling Activity 12
Well Data 12
Other Domestic Properties 12
Title to Properties 13
Markets 13
Competition. 14
Certain Factors Relating to the Company and
the Oil and Gas Industry 14
U.S. Regulation 17
Employees 18
Premises 19
PART II
Item 6. Selected Financial Data. 20
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 21
Item 8. Financial Statements and Supplemental Data. 27
Item 9. Changes in and Disagreements on Accounting
and Financial Disclosure 59
PART III
Item 11. Executive Compensation 60
Item 13. Certain Relationships and Related
Transactions 71
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. 73
Signatures 76
Glossary of Terms 98
PART I
------
Item 1. and Item 2. Business and Properties.
See the Glossary of Terms attached hereto for definitions of
certain commonly used industry terms. The Company operates
through several wholly owned subsidiaries. Accordingly, all
references herein to the Company or XCL include such
subsidiaries.
General
- -------
XCL Ltd. (the "Company" or "XCL") is engaged principally in
the exploration for and the development and production of crude
oil and natural gas. Based on the success of its first project in
The People's Republic of China, an exploration and production
joint venture on the Zhao Dong Block in the shallow-water sea
area of the Bohai Bay, the Company's growth strategy is to expand
its participation in the Chinese energy industry by continuing to
explore and develop the Zhao Dong Block and by selectively
entering into additional energy related joint ventures. This
strategy is the result of the Company's opinion that China (i)
has extensive undeveloped energy resources, (ii) is experiencing
and will continue for the foreseeable future to experience high
growth in demand for energy, and (iii) has a firm policy of
encouraging foreign participation in the development of its
energy resources. The Company believes, as evidenced by its own
experience in China, that Chinese policy offers opportunity for
participation by independent oil and gas companies in the
development of the Chinese energy business. Additionally, the
Company believes, because of its early success in China, that it
has an excellent relationship with the Chinese authorities in
charge of the development of China's energy resources and that
the Company can, therefore, be competitive in China.
The Company acquired the rights to the exploration,
development and production of the Zhao Dong Block effective May
1, 1993. During 1994 the Company drilled a discovery well in the
"C" area of the Zhao Dong Block which tested 2,160 barrels per
day. This discovery well was confirmed by an appraisal well
which tested 3,640 barrels per day. Development of the "C" area
is now proceeding with the drilling of additional wells to be
followed by the installation of production facilities.
Commencement of production is anticipated during the first half
of 1996 to allow time to secure Chinese government approvals.
Several additional prospects have been mapped on the Zhao Dong
Block, and the Company plans to drill at least two exploration
wells in 1995.
As part of the Company's objective of expanding its
involvement in the Chinese energy business and developing its
relationship with the Chinese authorities responsible for the
development of China's energy resources, on January 14, 1995, the
Company signed a letter of intent with CNPC United Lube Oil
Corporation subject to satisfaction of certain conditions, to
form a joint venture for the manufacture and sale of lubricating
oil in China and southeast Asian markets. The joint venture,
which is expected to have a 30 year life, requires a total
investment estimated at $12 million of which 40% shall be the
capital of the venture, (shared 51% to the China interest; 49% to
the Company's interest) and the remainder is expected to be
project financed as venture borrowings. The joint venture is to
assume ownership of an existing lubricating oil blending plant
located in LangFang, China (design capacity 20,000 metric tons
per annum) and is to evaluate constructing a second plant (design
capacity 40,000 metric tons per annum) at Tianjin Harbor, China.
Before 1993 the Company operated primarily in the Gulf Coast
area of the United States. The Company's principal producing oil
and gas interests are located onshore in the
Berry R. Cox Field gas producing area, including the Berry R.
Cox, Dan A Hughes, North Aviator's and South Aviator's Fields
(collectively, the "Cox Field") and the Mestena Grande and West
Coyote Fields (collectively, the "Mestena Grande Field"), both in
south Texas. Its U.S. undeveloped acreage is located onshore in
Texas, Louisiana and Mississippi.
XCL Ltd., formerly The Exploration Company of Louisiana,
Inc., is the successor to a Louisiana corporation of the same
name which was incorporated in 1981.
The Zhao Dong Block
- -------------------
Geology and Geophysics
----------------------
The Zhao Dong Block extends from the shoreline of the
Dagang Oil Field on Bohai Bay to water depths of approximately 5
meters and encompasses approximately 197 square kilometers
(approximately 48,677 acres). The Company believes that a
portion of the Zhao Dong Block represents the seaward extension
of the Dagang oil field complex. The Dagang oil field complex is
one of China's largest oil fields, with cumulative production in
excess of 650 million barrels of oil, according to information
provided by Chinese sources.
The geology of Bohai Bay is similar in many respects to the
U.S. Gulf Coast, with Tertiary formations contributing a major
portion of the production. The sediments in Bohai Bay are,
however, non-marine and oil prone as opposed to open marine and
gas and condensate prone sediments found in the U.S. Gulf Coast.
Interpretation of seismic and subsurface data appears to indicate
the presence of a thick structured sedimentary section in the
contract area with the possibility of excellent source rock
indicated by its close proximity to producing fields. The
Company has reprocessed over 850 kilometers of existing two
dimensional seismic data on and adjacent to the Zhao Dong Block
and has performed seismic operations over an additional 220
kilometers of data to assist it in determining the location of
the wells to be drilled.
Results of 1994 Drilling
------------------------
In June 1994, the Company announced the successful
testing of the first exploration well in the northeastern portion
of the Zhao Dong Block. The Zhao Dong C-1 well tested on pump at
a combined total rate of 2,160 barrels of oil per day from the
perforated intervals between 1,304 and 1,360 meters. The Zhao
Dong C-2 appraisal well was similarly tested in November 1994, at
a rate of 3,640 barrels of oil per day from perforated intervals
between 1,301 and 1,366 meters.
Several additional prospects have been mapped on the Zhao
Dong Block, and the Company plans to drill at least two
exploration wells in 1995.
Production Sharing Agreement Summary
- -------------------------------------
The Company acquired the rights to the
exploration,development and production of the Zhao Dong Block by
executing a Production Sharing Agreement with China National Oil
and Gas Exploration and Development Corporation ("CNODC") in
February 1993. Under the terms of the Production Sharing
Agreement the Company is responsible for all exploration costs.
If a commercial discovery is made, and CNODC exercises its option
to participate in the development of the field, all development
and operating costs and related oil and gas production will be
shared up to 51% by CNODC and the remainder by the Company and
its partner. In March 1994, the Company farmed out a one-third
interest in its contract rights for the Zhao Dong Block to Apache
Corporation. Apache Corporation is required to pay one-third of
costs allocated to the Company under the Production Sharing
Agreement as well as certain additional fees.
The Production Sharing Agreement includes the following
additional principal terms:
* The Production Sharing Agreement is basically divided into
three periods: the Exploration period, the Development period and
the Production period. Work to be performed and expenditures to
be incurred during the Exploration period, which consists of
three phases totaling seven years from May 1, 1993, are the
exclusive responsibility of the Contractor (the Company and
Apache as a group). The Contractor's obligations in the three
exploration phases are as follows:
1. During the first three years, the Contractor is
required to drill three wildcat wells, perform seismic data
acquisition and processing, and expend a minimum of $6 million
(The Contractor has drilled one wildcat well and has satisfied
the minimum expenditure requirement.);
2. During the next two years, the Contractor is required
to drill two wildcat wells, perform seismic data acquisition and
processing, and expend a minimum of $4 million;
3. During the last two years, the Contractor is required
to drill two wildcat wells and expend a minimum of $4 million;
and
4. Work performed and expenditures incurred in any
exploration phase in excess of the minimum requirements for such
phase will be credited against the minimum work and expenditure
requirements for the next phase.
* The Development period for any field discovered during the
Exploration period commences on the date of approval by the
Ministry of Energy of the development plan for an oil and/or gas
field. The Production period of any oil and/or gas field in the
area covered by the Production Sharing Agreement ("Contract
Area") shall be a period of 15 consecutive years (each of 12
months) commencing, for each field, on the date of commencement
of commercial production as determined under the Agreement.
Prior to the commencement of the Production period, during the
Development period, oil and gas may be produced and sold during a
long term testing period.
* After each of the first two phases of the Exploration
Period, two segments of the Contract Area (after deducting areas
in which development and production activities are being
undertaken) must be relinquished. Segments on which no wildcat
wells have been drilled shall be relinquished first. At the end
of the last phase of the Exploration period, the remaining
portions of the Contract Area (except for any development and
production areas) must be relinquished.
* The Production Sharing Agreement may be terminated by the
Contractor at the end of each phase of the Exploration period,
without further obligation.
* While the Production Sharing Agreement requires the
Contractor to pay all exploration costs, CNODC has the option to
participate for up to a 51% interest in the Development and
Production periods, paying its corresponding share of development
and operating costs and receiving the same percentage of oil and
gas production, subject to royalty payments, cost recovery and
other adjustments as set forth below.
* Operating costs for any given calendar year for an oil
and/or gas field shall be recovered by the parties in kind out of
production from the field during such year. Unrecovered costs are
carried forward to the next calendar year. Exploration costs in
any area in the Contract Area shall be recovered by the
Contractor, in kind, out of production from any field in the
Contract Area and development costs for any field, plus interest
at nine percent, shall, after recoupment of exploration costs, be
recovered in kind out of the production from such field.
* Annual gross production ("AGP") of each oil and gas field
in the Contract Area determined separately shall be allocated in
the following sequence and proportions:
1. 5% of AGP shall be used to pay the Chinese taxes.
2. Determined on a field by field basis, the Chinese
government shall receive a sliding scale royalty calculated as
follows:
Metric Tons of Annual
Crude Oil Production (1) Royalty Rate
------------------------ ------------
Up to 50,000 -
50,000 to 100,000 1%
100,000 to 150,000 2%
150,000 to 200,000 3%
200,000 to 300,000 4%
300,000 to 500,000 6%
500,000 to 750,000 8%
750,000 to 1,000,000 10%
Over 1,000,000 12.5%
___________________
(1) One metric ton is roughly equivalent to seven barrels of
crude oil.
3. 60% of AGP shall be deemed "cost recovery oil" and
shall be used to recover costs incurred by the parties, first for
the recovery of operating costs, and then for the recovery of
exploration and development costs, in that order. Such cost
recovery oil is not subject to the royalty due the Chinese
government.
4. The remaining amount of AGP shall be deemed
"remainder oil" and shall be further divided into "allocable
remainder oil" and "Chinese share oil." "Allocable remainder oil"
is calculated based upon a sliding scale formula relating to the
amount of production, and is shared by the parties in proportion
to their respective interests. All oil remaining after the above
allocations are effected is designated "Chinese share oil" and
shall be allocated to CNODC or other Chinese government designee.
* The Company is the operator for all operations in the
Contract Area during the Exploration period. The Production
Sharing Agreement is administered by a joint management committee
comprised of an equal number of representatives designated by the
Contractor (the Company and Apache as a group) and CNODC.
Disputes must first be resolved through negotiation and then
through arbitration. If the parties agree, arbitration will be
conducted by the China International Economic and Trade
Commission in accordance with its provisional rules. In the event
the parties fail to agree on such arbitration, the dispute shall
be arbitrated before a panel of three arbitrators, one each
appointed by each of the parties and the third appointed by the
two arbitrators so designated (or failing such appointment, by
the Arbitration Institute of the Stockholm Chamber of Commerce,
Sweden). The arbitration panel shall conduct the arbitration in
accordance with the rules of the United Nations Commission on
International Trade Law of 1976 (subject to the rules expressly
provided in the Contract). Any award shall be final and binding
on the parties.
* The Production Sharing Agreement is governed by Chinese law.
U.S. Exploration and Production Activities
- ------------------------------------------
The Cox Field
-------------
The Cox Field, initially discovered in 1986, is located in
Webb, Zapata and Jim Hogg Counties, Texas. Present production is
associated with numerous well-developed deltaic sands of Wilcox
age which were expanded across a large growth fault system,
resulting in a large rollover anticline. Numerous large fields
occur in similar settings along this trend in south Texas.
The Company currently participates in 20 productive wells
(13.08 net wells) within the field. To date only two non
productive wells have been drilled in the Cox Field. The Company
has an average working interest of approximately 65% in the
3,061acre (which is equivalent to 1,846 net acres) productive
area, and working interests ranging from 50% to 100% in an
additional 2,452 acres (1,423 net acres) on the flanks of the
producing field area.
Through seismic processing and interpretation, the Company
has identified what it believes to be significant reserve
potential deeper than, and lateral to, existing producing
reservoirs. This concept was successfully tested on the southern
flank of the Field by two wells drilled in 1993. In 1994 the
Hughes Lopez No. 4 well, in which the Company has a 50% working
interest, was drilled on the southern flank to a total depth of
15,727 feet and discovered three productive pay intervals. The
well was completed in November 1994 flowing 3,744 Mcf per day on
a 10/64 inch choke with 6,661 psig flowing tubing pressure. On
the northeast flank of the field the Company drilled and
completed the Armstrong Ranch No. 2 well in 1994. Various
mechanical problems delayed the fracture stimulation until
February 1995. This well, in which the Company has a 60% working
interest, was turned to sales, flowing 1,120 Mcf per day on a
10/64 inch choke with 3,125 psig flowing tubing pressure.
Mestena Grande Field
--------------------
The Mestena Grande Field, located in Jim Hogg County, Texas,
is an elongate, north-south trending faulted anticline which
produces primarily from the Eocene Queen City Sand interval. The
Company has working interests ranging from approximately 7% to
33% in 11,567 gross acres (1,586 net acres) and in 27 productive
wells (3.75 net wells) within the field. Since its discovery in
1981, gross production from the Company's wells in the field has
reached approximately 75 Bcf and 2.9 million barrels of oil.
Three development wells were drilled during 1994. The
Mestena Oil and Gas E No. 17 well, in which the Company owns a
20% working interest, was drilled to a total depth of 10,000
feet. The well was turned to sales during June 1994 at an
initial rate of 3,117 Mcfd plus 106 Bbls of oil per day on a
14/64 inch choke with 3,810 psig flowing tubing pressure. The
Mestena Oil and Gas E No. 18 well, in which the Company owns an
18.4% working interest, was drilled to 10,000 feet and was turned
to sales during May 1994, at an initial rate of 463 Mcfd plus 14
Bbls of oil per day on a 24/64 inch choke with 350 psig flowing
tubing pressure. The Flores No. 2 well, in which the Company owns
an 8.8% working interest, was drilled to 10,000 feet and was
turned to sales during June 1994, at an initial rate of 135 Mcfd
plus 5 Bbls of oil per day on a 28/64 inch choke with 370 psig
flowing tubing pressure.
The Company expects additional development wells to be
drilled in the Mestena Grande Field starting in the second
quarter of 1995.
Oil and Gas Reserves
- --------------------
Estimates of the Company's oil and gas reserves and future
net revenues as of December 31, 1994, as prepared by Company
petroleum engineers are set forth below. (See "Certain Factors
Relating to the Company and the Oil and Gas Industry Uncertainty
of Estimates of Reserves and Future Net Revenues".)
Net Proved Reserves and Revenues - By Reserve Category
10% P.V.
Oil Gas Future Net of Future Net
(Mbbls) (Mmcf) Revenues ($M) Revenues ($M)
------- ------ ------------- -----------
Proved Developed Producing 103.0 8,800.7 13,285.9 9,581.2
Proved Developed Non-Producing 23.3 25,989.7 31,275.7 20,422.0
Proved Undeveloped 167.3 39,417.2 50,115.6 30,244.6
----- -------- -------- --------
Total Proved 293.6 74,207.6 94,677.2 60,247.8
===== ======== ======== ========
The Company believes that, as a result of the existing tax basis in
properties and net operating loss carryforwards for tax purposes, no
provision for future income taxes is necessary.
Net Proved Oil and Gas Reserves - By Major Field
As of December 31, 1994
-------------------------
(MBbls) (Mmcf)
------------- --------------
Field Oil % Gas %
- --------------------- ------ ----- -------- ----
Cox Field 23.3 7.9 67,691.4 91.2
Mestena Grande Field 248.5 84.6 6,497.9 8.8
Other than as set forth above, no single field or well
accounted for more than 10% of the Company's year end proved oil
or gas reserves.
Estimates of reserves and of future net revenues, to the
extent they rely on certain assumptions which are subject to
numerous inherent uncertainties, are necessarily imprecise and
may vary substantially when prepared by different petroleum
engineers, or by the same engineers at different times.
Accordingly, reserve estimates are often different from the
quantities of oil and gas that are ultimately recovered.
Since December 31, 1990, as an operator of domestic oil and
gas properties, the Company has filed Department of Energy Form
EIA-23, "Annual Survey of Oil and Gas Reserves" as required by
Public Law 93-275. There are differences between the reserves as
reported on EIA-23 and as reported herein. The difference is
attributable to the fact that Form EIA-23 requires that an
operator report on the total reserves attributable to wells which
are operated by it, without regard to ownership (i.e., reserves
are reported on a gross operated basis, rather than on a net
interest basis). Production, Sales and Cost Data
The following table sets forth certain information regarding
the production volumes, revenues, average prices received and
average production costs associated with the Company's sale of
oil and gas for the periods indicated.
Year Ended December 31,
-------------------------
1994 1993 1992
---- ---- ----
Net Production: (a)
Gas (MMcf) 2,219 4,261 6,143
Oil (MBbl) 32 20 45
Gas equivalent (MMcfe) 2,414 4,381 6,413
Oil and gas sales ($ in 000's)(b)
Gas $3,664 $7,648 $9,292
Oil and other 672 851 1,259
Total oil and gas sales $4,336 $8,499 $10,551
Average sales price:
Gas ($ per Mcf) 1.65 1.79 1.51
Oil ($ per Bbl) 15.76 16.73 20.22
Gas equivalent($ per Mcfe) 1.80 1.94 1.65
Oil and gas costs ($ per Mcfe):
Production expenses and taxes 0.70 0.69 0.61
Depreciation, depletion and
amortization of oil and gas
properties 1.25 1.27 0.96
________________
(a) Excludes gas consumed in operations.
(b) Includes plant products recovered from treating and processing operations.
The following table shows the 1994 production of oil and natural gas
liquids and natural gas by major fields. Approximately 96% of the Company's
net gas production was attributable to the Cox and Mestena Grande Fields.
1994 Net Production
-------------------
(MBbls) (Mmcf)
---------- ------------
Field Oil % Gas %
- ----------------- ---- ---- ----- ----
Cox Field -- -- 1,692 6.3
Mestena Grande 12 37.5 436 19.6
Other 20 62.5 91 4.1
Oil and Gas Acreage
- -------------------
The oil and gas acreage in which the Company had a leasehold
interest or other contractual interest at December 31, 1994 is
summarized in the following table. "Gross" acres are the total
number of acres in which the Company owns a working interest (or,
in the case of the Zhao Dong Block, the number of acres subject
to the Production Sharing Agreement). "Net" acres are gross
acres multiplied by the Company's fractional working interest
(or, in the case of the Zhao Dong Block, the Company's fractional
share of the costs of production before CNODC's reversionary
interest).
Developed Undeveloped
------------ ----------------
Gross Net Gross Net
----- --- ----- -----
The People's Republic
of China -- -- 48,677 32,451
====== ===== ====== ======
United States
Texas (1) 14,628 3,432 2,452 1,423
Mississippi (2) -- -- 19,762 13,116
Louisiana (2) -- -- 640 300
------ ----- ------ ------
Total U.S. 14,628 3,432 22,854 14,839
====== ===== ====== ======
____________
(1) Includes 1,846 and 1,586 net developed acres in the Cox
Field and Mestena Grande Field, respectively.
(2) Acreage in Mississippi represents interests in the Black
Warrior Basin. Acreage in Louisiana represents an interest in the
East Riceville Prospect. The Company has decided to forego
renewing these leases as they expire. Accordingly, all associated
costs have been included in the full cost pool. See "Certain
Factors Relating to the Company and the Oil and Gas Industry -
Reserve Value Ceiling Test."
Drilling Activity
- -----------------
The following tables sets forth wells drilled by the Company
in the periods indicated.
Year Ended December 31,
--------------------------------------
1994 1993 1992
------------- ----------- -----------
United States Gross Net Gross Net Gross Net
- ------------- ----- ------ ----- ---- ----- ----
Exploratory:
Productive 2 1.0375 1 .210 2 .754
Non-productive -- -- -- -- 1 .300
--- ------ --- ---- --- -----
Total 2 1.0375 1 .210 3 1.054
Development:
Productive 4 1.0731 1 .500 -- --
Non-productive -- -- 1 .644 -- --
--- ------ --- ----- --- -----
Total 4 1.0731 2 1.144 -- --
Year Ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- ----------The
People's
Republic of China Gross Net Gross Net Gross Net
- ------------------ ----- ---- ----- --- ------ --
Exploratory:
Productive 2 1.333 -- -- -- --
Non-productive -- -- -- -- -- --
--- ----- --- --- --- ---
Total 2 1.333 -- -- -- --
Development:
Productive -- -- -- -- -- --
Non-productive -- -- -- -- -- --
--- --- --- --- --- ---
Total -- -- -- -- -- --
Well Data
- ---------
At December 31, 1994, the Company had interests in 39
producing gas wells (12.298 net).
Other Domestic Properties
- -------------------------
The Company presently owns two large tracts of fee lands:
the "Lutcher Moore Tract" totaling approximately 62,500 acres of
wetlands along the Mississippi River in Louisiana and the
"Phoenix Lake Tract" totaling 11,700 gross acres (9,100 net
acres) of marsh lands in southwest Louisiana. On April 10, 1995,
the Company entered into a letter of intent pursuant to which it
will sell the Phoenix Lake Tract for approximately $2.4 million
with the Company retaining 75% of its interest in the minerals.
The Company has negotiated the terms of a proposed sale of the
Lutcher Moore Tract, which upon closing would result in net cash
proceeds of $8.6 million after payment of limited recourse debt.
The sale is subject to the execution of definitive agreements,
the purchaser securing financing and other customary conditions
to closing.
The Company also holds leasehold interests in Louisiana and
Mississippi. The Company has decided to forego renewing these
leases as they expire. Accordingly, all costs associated with
these leases have been included in the full cost pool. See
"Certain Factors Relating to the Company and the Oil and Gas
Industry - Reserve Value Ceiling Test."
Title to Properties
- -------------------
The Company believes that title to its properties is
generally acceptable in accordance with prevailing standards in
the oil and gas industry, subject to exceptions which do not
materially detract from the value of such properties. The
Company's properties are subject to royalty, overriding royalty,
carried and other similar interests and contractual arrangements
customary in the oil and gas industry, to liens incident to
operating agreements, to liens for current taxes not yet due and
other relatively minor encumbrances.
Substantially all of the Company's producing properties, as
well as the stock of its major subsidiaries have been pledged to
collateralize borrowings under its Credit Agreement with
Internationale Nederlanden (U.S.) Capital Corporation ("INCC").
Detailed title examinations have not been made on all of the
Company's undeveloped oil and gas leases. As is customary in the
oil and gas industry, only a perfunctory title examination is
conducted at the time undeveloped properties believed to be
suitable for drilling operations are acquired, and therefore,
undeveloped properties can be subject to various title defects.
Generally, however, prior to the commencement of domestic
drilling operations, a thorough title examination is conducted
and any significant, known defects remedied before operations are
commenced.
Markets
- -------
Substantially all of the Company's gas production from the
Cox Field is dedicated to MidCon Texas Pipeline Corp. ("MidCon")
under contracts dated May 1, 1991, as amended effective July 1,
1993. MidCon purchases the gas at the greater of a price fixed
under one of the contracts, or 93% of the Houston Ship Channel
delivery point price for gas. Availability of the fixed minimum
price is subject to certain minimum production quantities. The
Company does not expect to produce the required minimum quantity
until 1996. MidCon may, under certain circumstances, exercise its
contractual right to change the fixed minimum price to be paid
for Cox Field gas in any contract year, provided that the present
value of all Cox Field gas as of May 1, 1991 (discounted at 10%
per annum) cannot be less than $1.85 per Mcf. Should the Company
disagree with the revised pricing schedule, the Company must sell
and MidCon is obligated to purchase all of the Company's gas
production from the Cox Field up to a maximum of 30,000 Mcfd
until June 30, 1998, and 25,000 Mcfd for the five years
thereafter at 93% of the Houston Ship Channel delivery point
price for gas. For the year ended December 31, 1994,
approximately 61% of the Company's oil and gas revenues were
realized from sales under the MidCon contracts.
The Company believes that under present market conditions
this arrangement is favorable to the Company, and has been
favorable since May 1991. Under different market conditions the
Company may be deprived of entering into alternative contracts
and obtaining a higher price for its gas production. Should the
MidCon contracts be terminated, the Company would be required to
market its own gas under terms and conditions which currently
would be less favorable than its arrangement with MidCon. There
are other gas purchasers with facilities in the vicinity of the
Cox Field that the Company believes would take all of the
Company's production currently committed to MidCon.
The Company's gas produced from the Mestena Grande Field is
purchased by Williams Gas Marketing under a spot gas arrangement.
Condensate is sold under a similar arrangement to Enron Oil
Trading & Transportation. Plant products that are extracted from
the gas are sold to Valero Hydrocarbons.
During the past several years deliverability of gas in the
United States has exceeded demand. This oversupply was caused by
high deliverability from gas fields located in the Gulf of
Mexico, coal-bed methane gas produced from wells drilled
primarily to realize the substantial tax credits available under
federal law, Canadian gas carried to the west coast and
northeastern United States, and unseasonably mild weather
throughout the U.S.
Any significant decline in prices of natural gas received by
the Company for an extended period would have a material adverse
effect on the Company's financial condition and results of
operations, and would, under certain circumstances, result in a
reduction of funds available under the Company's bank credit
facilities and impair access to other sources of capital. All of
these factors are beyond the control of the Company. See "Certain
Factors Relating to the Company and the Oil and Gas Industry
Reserve Value Ceiling Test."
Competition
- -----------
The oil and gas industry is competitive in all phases, both
domestic and internationally. In pursuing its growth strategy of
expanding its participation in the Chinese energy industry, the
Company is in competition with the "major" integrated oil
companies, national oil companies and other independent oil
companies. Although many of these competitors have financial
resources greater than those of the Company, management believes
that the Company is positioned to compete effectively.
Certain Factors Relating to the Company and the Oil and Gas Industry
- --------------------------------------------------------------------
Nature of the Oil and Gas Business
- ----------------------------------
General Industry Risks. The Company's business is affected
by the general risks associated with the oil and gas industry.
The availability of a ready market for oil and gas purchased,
sold and produced by the Company depends upon numerous factors
beyond its control, the exact effects of which cannot be
accurately predicted. These factors include, among other things,
the level of domestic production and economic activity generally,
the availability of imported oil and gas, action taken by foreign
oil-producing nations, the availability of transportation
capacity, the availability and marketing of other competitive
fuels, fluctuating and seasonal demand for oil, 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. See "U.S.
Regulation." Accordingly, in view of the many uncertainties
affecting the supply and demand for crude oil, natural gas and
refined products, it is not possible to predict accurately either
the prices or marketability of oil and gas produced from any
property in which the Company has or may acquire an interest.
General Exploration and Production Risks. The Company's oil
and gas drilling and production activities involve a high degree
of risk. The ratio of dry holes to commercially productive oil
and gas wells is high for the industry as a whole. Hazards, such
as formations with unusual pressures, or other unforeseen
conditions are sometimes encountered in drilling wells which
could result in loss of a well and in substantial liabilities or
injuries to other persons or property. See "U.S. Regulation
Safety." In addition, the Company may encounter delays due to
adverse weather conditions and difficulties in securing supplies,
drilling and production equipment and access to trained
personnel. The Company seeks to minimize the risks of damage to
the environment, property, and persons present in its drilling
operations and obtains insurance coverage which it believes
prudent.
Foreign Operations
------------------
The Company's activities on the Zhao Dong Block are subject
to regulation under Chinese Law by the Ministry of Foreign Trade
and Economic Cooperation ("MOFTEC") and CNODC. Such regulation
covers a wide variety of matters comparable in scope to the type
of regulations the Company faces in its domestic operations,
including, without limitation, the drilling of wells, allowable
rates of production, prevention of waste, pollution and
protection of the environment, labor regulations and worker
safety. In addition, the Company's activities may be exposed to
the political and economic risks of operating in a foreign
country including loss of revenues, property and equipment from
such hazards as expropriation, nationalization, insurrection and
other political risks; risks of increases in taxes and
governmental royalties; and renegotiation of contracts with
governmental entities; as well as changes in laws and policies
governing operations of foreign based companies. Other risks
inherent in foreign operations include the possibility of
realizing economic currency exchange losses when transactions are
completed in currencies other than United States dollars and the
Company's inability to freely repatriate earnings under changes
in exchange control laws. To date, the Company's Chinese
operations have not been materially affected by these risks.
Concentration of Operations
---------------------------
The Company's current production and reserves are located
primarily in south Texas and the Company's exploratory drilling
activities are concentrated in the Zhao Dong Block. Because of
this concentration, any regional events which increase costs,
limit production or limit deliverability of oil or natural gas
would impact the Company more adversely than if the Company were
more geographically diversified.
Uncertainty of Estimates of Reserves and Future Net Revenues
- ------------------------------------------------------------
There are numerous uncertainties inherent in estimating
quantities of proved oil and gas reserves, including many factors
beyond the control of the Company. Estimates of proved
undeveloped reserves, which comprise a significant portion of the
Company's reserves, are by their nature less certain. These
estimates are based on various assumptions, including those
prescribed by the Securities and Exchange Commission ("SEC").
Actual future production, oil and gas prices, revenues, taxes,
capital expenditures, operating expenses, geologic success and
quantities of recoverable oil and gas reserves may vary
substantially from those assumed in the estimate, and could
materially affect the estimated quantity and value of reserves
set forth in the section entitled "Oil and Gas Reserves." In
addition, the Company's reserves may be subject to downward or
upward revision based upon production history, purchases or sales
of properties, results of future development, prevailing oil and
gas prices and other factors.
Reserve Value Ceiling Test
--------------------------
Under the SEC's full cost accounting rules, the Company
reviews the carrying value of its oil and gas properties each
quarter on a country-by-country basis. Under such rules,
capitalized costs of oil and gas properties may not exceed the
present value of estimated future net revenues from proved
reserves, discounted at 10%, plus the lower of cost or fair value
of unproved properties as adjusted for related tax effects and
deferred tax reserves. Application of this rule generally
requires pricing future production at the unescalated oil and gas
prices in effect at the end of each fiscal quarter and requires a
write-down if the "ceiling" is exceeded, even if prices declined
for only a short period of time. If a write-down is required, the
charge to earnings would not impact cash flow from operating
activities. The Company recorded a $25.9 million provision for
impairment of oil and gas properties during 1994, reflecting
lower gas prices, management's decision to forego renewing
certain domestic exploration leases in the Black Warrior Basin,
East Riceville and Milton prospects and the transfer of certain
Cox Field costs to the full cost pool. The costs of remaining
unproved and unevaluated properties at December 31, 1994 include
primarily leases located adjacent to the Cox Field producing
properties. As these unproved properties become evaluated, their
costs are reclassified to proved and evaluated properties, and
any associated future revenue is included in the calculation of
the present value of the Company's proved reserves.
Prospectively, any such costs in excess of the present value of
added reserves, or any material reductions in the net future
revenues from oil and gas reserves resulting from such factors as
lower prices or downward revisions in estimates of reserve
quantities would cause a charge for a full cost ceiling
impairment, absent offsetting improvements. Downward revisions
in estimates of reserve quantities may also adversely affect the
Company's borrowing base calculation under its credit facility
with INCC, which may then require prepayments of principal.
Additional Financing Required
-----------------------------
In light of the Company's working capital deficit,
outstanding indebtedness and the capital commitments associated
with its business activities in The People's Republic of China as
well as Cox Field, the Company projects that it will require
additional capital of $25 million to $35 million through 1995. Of
these amounts approximately $12.5 are non-discretionary
expenditures, of which $5 million represents payments on limited
recourse indebtedness. Such additional financing must be obtained
to meet contingencies as they arise. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
and Note 2 to the Consolidated Financial Statements.
U.S. Regulation
- ---------------
Marketing and Transportation
----------------------------
The domestic oil and gas industry is heavily regulated by
federal, state and local authorities. The Company cannot predict
the future course or effect upon the Company's domestic
operations of such governmental regulation of its business.
Of particular importance is Federal Energy Regulatory
Commission ("FERC") Order No. 636 (Pipeline Service Obligations
and Revisions to Regulations Governing SelfImplementing
Transportation Under Part 284 of the Commission's Regulations),
initially issued in 1992. This Order requires natural gas
pipelines to restructure their transportation rates and service
conditions to ensure that non-pipeline natural gas merchants are
treated on a parity with pipeline natural gas merchants. The
significance of this, coupled with other actions of FERC to
stimulate the traditional industrial and local distribution
company customers of the interstate pipelines to purchase their
gas supplies from alternative sources, has been at least
threefold. First, demands by industrial consumers, local
distribution companies, and marketers for direct access to gas in
the gas fields of the producing states, and for transportation by
the interstate pipelines of these volumes from the gas fields to
end-use markets, have increased. Second, interstate pipeline
demand for gas in the gas fields of the producing states has
diminished. Third, the pricing of natural gas at the wellhead
has become more responsive to fluctuations in the supply and
demand for gas. These fluctuations are subject to innumerable
variables outside the ability of the Company to control or
predict with certainty, such as weather conditions, economic
trends, acts of governmental authorities and international
political events.
Safety
------
The Company is subject to the requirements of the federal
Occupational Safety and Health Act ("OSHA") and comparable state
statutes. The Company believes that it is in substantial
compliance with OSHA requirements, including general industry
standards, record-keeping requirements and monitoring of
occupational exposure to benzene.
The OSHA hazard communication standard, the EPA community
right-to-know regulations under Title III of the Federal
Superfund Amendment and Reauthorization Act, and comparable state
statutes will require the Company to organize and disclose
information about the hazardous material used in its operations.
Certain parts of this information must be reported to employees,
state and local governmental authorities and local citizens upon
request. In general, the Company expects to increase its
expenditures during the next decade to comply with higher
industry and regulatory safety standards such as those described
above. Such expenditures cannot be accurately estimated at this
time, although they are not expected to have a material adverse
impact on the Company.
Environmental Matters
---------------------
The Company's domestic operating subsidiaries are subject to
existing federal, state and local laws and regulations governing
the discharge of materials into the environment or otherwise
relating to the protection of the environment. The Company
believes that its operations and facilities are in general
compliance with applicable environmental regulations.
Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Company anticipates that
there will be continuing changes. The clear trend in
environmental regulation is to place more restrictions and
limitations on activities that may impact the environment, such
as emissions of pollutants, generation and disposal of wastes and
use and handling of chemical substances. Increasingly strict
environmental restrictions and limitations have resulted in
increased operating costs throughout the United States, and it is
possible that the costs of compliance with environmental laws and
regulations will continue to increase. The Company will attempt
to anticipate future regulatory requirements that might be
imposed and to plan accordingly in order to remain in compliance
with changing environmental laws and regulations minimizing costs
of such compliance.
The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law,
requires payments for cleanup of certain abandoned waste disposal
sites, even though such waste disposal activities were undertaken
in compliance with regulations applicable at the time of
disposal. Under the Superfund legislation, one party may, under
certain circumstances, be required to bear more than its
proportional shares of cleanup costs at a site where it has
responsibility pursuant to the legislation, if payments cannot be
obtained from other potentially responsible parties ("PRPs").
States also have regulatory programs that can mandate waste
cleanup. CERCLA authorizes the Environmental Protection Agency
("EPA") and, in some cases, third parties to take action in
response to threats to the public health or the costs they incur.
The scope of financial liability under these laws involves
inherent uncertainties. The Company has entered into a De
Minimis Administrative Order on Consent with the EPA and other
PRPs with respect to the cleanup of one Superfund site resulting
in a minimum payment in settlement of the matter.
Employees
- ---------
The Company currently employs a total of 41 people
(including executive officers). Except for employment agreements
entered into with certain employees of XCL-China, Ltd., none of
the employees of the Company or its affiliates have employment
contracts or are represented by collective bargaining agreements.
The Company considers its relationship with employees to be
satisfactory.
Premises
- --------
The Company owns a two-story office building located at 110
Rue Jean Lafitte, Lafayette, Louisiana 70508. The building
contains approximately 19,000 square feet of gross space and was
constructed in 1981 on approximately one acre of land. The
building is wholly occupied by employees of the Company.
The building was originally purchased in 1988 from a
partnership comprised of Messrs. Marsden W. Miller, Jr. and John
T. Chandler, officers and directors of the Company, at its
appraised value of $1,150,000 through the assumption, and payment
of a portion of, the underlying mortgages in the aggregate amount
of $1,150,000. The holder of the first mortgage refused, however,
to release Mr. Miller from his personal guarantee of the
mortgage. The Company and Mr. Miller have agreed that $178,500 of
the security deposit previously paid by the Company when it was a
tenant, will remain outstanding until the Company secures release
of such guarantee. This amount (approximately one year's rent)
was reduced during 1989 to $151,000 as a result of subsequent
adjustments. In 1994, 1993 and 1992, the Company accrued interest
of approximately $14,000, $14,000 and $14,000, respectively, on
the outstanding amount, resulting in a balance of $247,000 at
year-end 1994. The outstanding balance of the underlying mortgage
as of December 31, 1994 was $705,000.
The Company leases office space in Tianjin, China, under an
operating lease expiring in July 1995, from which it conducts its
China operations. Plans are underway to lease a representative
office in Tangu, China and a procurement office in Dagang, China.
PART II
-------
Item 6. Selected Financial Data.
The consolidated financial data for the Company presented
below should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations set
forth in Item 7 and the Consolidated Financial Statements set
forth in Item 8.
<TABLE>
<CAPTION>
(Expressed in Thousands Except Per Share Amounts)
Year Ended December 31
-------------------------------------------------
1994(a) 1993(b) 1992(c) 1991(d) 1990(e)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Oil and gas revenues $ 4,336 $ 8,499 $ 10,551 $ 11,217 $ 8,350
Net loss $(36,622) $(15,197) $(23,983) $(23,859) $ 1,270
Net loss attributable to common stock $(41,529) $(19,978) $(29,221) $(28,897) $ (1,086)
Net loss per common and common
equivalent share $ (.21) $ (.17) $ (.28) $ (.32) $ (.01)
Weighted average common shares
outstanding 198,303 118,996 103,543 89,672 86,974
Balance Sheet Data:
Total assets $149,803 $157,377 $148,533 $158,281 $168,413
Long-term debt, net $ 41,607(f) $ 53,965(f) $ 44,195 $ 44,952 $ 39,321
Total shareholders' equity $ 95,200 $ 84,609 $ 87,336 $ 97,846 $117,587
____________
(a) Includes provision for impairment of oil and gas properties
of $25.9 million and provision for write-down of other assets of
$2.2 million and an extraordinary loss of $1.7 million.
(b) Includes provision for impairment of oil and gas properties
of $8 million.
(c) Includes gain on sale of investment of $2.2 million, and
provision for impairment of oil and gas properties of $22.4 million.
(d) Includes gain on sale of investment of $1,316, provision for
writedown of investments and other assets of $6,938, and
provision for impairment of oil and gas properties of $14,600.
(e) Includes a gain on sale of subsidiary stock of $3,940 and a
loss on sale of investments of $1,436.
(f) Includes limited recourse debt of an aggregate $731 and
$3,708 as of December 31, 1994 and 1993, respectively, owed by
the Lutcher Moore Group of subsidiaries.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with the accompanying consolidated financial
statements, the notes thereto and the unaudited supplemental data
included in this Annual Report.
Cash Flow and Working Capital
- -----------------------------
At December 31, 1994, the Company had an operating cash
balance of $6.8 million and a working capital deficit of $4.4
million at December 31, 1994, including $5.3 million of debt
maturities due within the next 12 months.
Operating activities used $3.6 million in cash during 1994,
due to the decline in revenues at the Cox Field caused by the
limited development activities during 1992 and 1993. To obtain
funds for Cox Field development, Zhao Dong Block activities and
other corporate requirements for 1994, the Company raised
approximately $25 million from two transactions involving the
sale of equity securities in the first quarter. These equity
financings were supplemented by $3.3 million received during 1994
from the exercise of stock purchase warrants.
In conjunction with the first quarter equity offerings, the
Company refinanced its bank debt with a new lender, primarily to
obtain a more favorable loan repayment schedule based on expected
future cash flow. The new credit agreement, which is subject to
semiannual borrowing base reviews, was closed and funded with a
$29.2 million loan on February 1, 1994. Effective October 31,
1994, based on an agreement with its lending bank relating to the
application of principal prepayments no further additional
principal payments are required until January 1, 1996. However,
the borrowing base is determined, in part, by the value of the
Company's proved developed producing domestic oil and gas
reserves which decline with production but can be increased by
additional successful development drilling. If development
drilling is either materially delayed or is less successful than
expected, the lender could reduce the borrowing base and thus
require earlier principal reductions. The next borrowing base
determination is scheduled for September 30, 1995. To reduce its
near term U.S. drilling expenditures, the Company is considering
the sale or exchange of the Cox Field, which would also result in
retirement of the Company's bank debt.
During 1994, the Company farmed out a one third interest in
the Zhao Dong Block for a substantial cash payment. This
transfer also reduced the Company's future capital commitments
associated with the Zhao Dong Block by one-third.
The Company issued Common Stock to fully repay liabilities
incurred in connection with the final settlement of matters with
Sunrise Energy Services, Inc. ($1.3 million), retirement of its
Lease Notes issue ($6.4 million including principal and interest)
and the acquisition of a stock interest in Wolf Creek Resources,
Inc., owner of the Galvan Ranch property ($2.9 million).
The Company also simplified its capital structure by
eliminating its classes of Series C and D Preferred Stock. In
June 1994, the Company called for redemption of the Series C
Preferred Stock, and subsequent to June 30, the Series D
Preferred Stock. All of the holders of these securities
converted their shares of Preferred Stock into Common Stock, in
lieu of receiving cash in redemption of their shares. The
Company declared cash dividend payments on Series A and Series B
Preferred Stocks of approximately $2.6 million. The Company is
required to sell shares of its Common Stock to fund these
dividends and as of December 31, 1994, $965,000 of Common Stock
remained to be sold.
The Company's cumulative preferred stock dividend
requirements amount to approximately $2.3 million semiannually.
The Company's credit agreement restricts the payment of cash
dividends and insufficient liquidity exists currently to pay such
amounts. Management intends to pay future preferred stock
dividends in a similar manner to that in December.
Liquidity and Capital Resources
- -------------------------------
The Company's business objectives during 1995 include (I)
completing the first stage of development of the initial
discovery on the Zhao Dong Block, (ii) drilling at least two
additional exploration wells on the Zhao Dong Block and (iii)
absent a sale or exchange, further development drilling in the
Cox Field. To accomplish these objectives, the Company projects
that it will require additional capital of $25 million to $35
million through 1995. Of these amounts approximately $12.5 are
non-discretionary expenditures, of which $5 million represents
payments on limited recourse indebtedness. The Company is now
taking appropriate actions to arrange for adequate capital in
stages as required to accomplish the above described objectives.
These actions include and will include:
1. To develop the initial discovery on the Zhao Dong Block,
the Company is in discussions with a major banking group with
experience in debt financing in China, to provide project debt
financing for all development costs. The banking group has
indicated strong interest in providing such financing, and the
Company and the banking group are in the process of negotiating
the terms of the proposed financing. Another alternative
available to the Company to obtain development funds is to joint
venture with another oil company or financial group.
2. To provide for additional liquidity the Company has:
(i) Executed a letter of intent to sell the Phoenix Lake Tract
for $2.4 million, consisting of $1.8 million in cash and a $.6
million reduction of current liabilities.
(ii) Negotiated the terms of a proposed sale of the Lutcher Moore
Tract, which upon closing would result in net cash proceeds of
$8.6 million after payment of limited recourse debt. The sale is
subject to the execution of definitive agreements, the purchaser
securing financing and other customary conditions to closing.
Management is negotiating an extension of the maturity dates of
the mortgage debt burdening the property in the event the
purchaser cannot consummate the transaction.
3. To sell or exchange the Cox Field for proved reserves
requiring less development expenditures in the shortterm.
Management has historically had the ability to generate
funds through the sale of assets or securities. Management is
confident that it can timely realize sufficient cash resources to
adequately meet its obligations and its ongoing requirements. The
timing of receipts from the various sources of funds is not
entirely within the Company's control. Thus, the scheduling of
planned activities will continue to be dependent on such cash
receipts.
Longer term liquidity is dependent on the Company's
continuing access to capital markets, including its ability to
issue additional debt and equity securities, which in certain
cases may require the consent of INCC and holders of the
Company's Subordinated Debt and Preferred Stock.
Other General Considerations
- ----------------------------
The Company believes that inflation has had no material
impact on the Company's sales, revenues or income during the
reporting periods. Drilling costs and costs of other related
services during the relevant periods have remained stable.
The Company is subject to existing federal, state and local
laws and regulations governing environmental quality and
pollution control. Although management believes that such
operations are in general compliance with applicable
environmental regulations, risks of substantial costs and
liabilities are inherent in oil and gas operations, and there can
be no assurance that significant costs and liabilities will not
be incurred. See "U.S. Regulation - Environmental Matters."
New Accounting Pronouncement
- ----------------------------
In October 1994, the Financial Accounting Standards Board
issued Statement No. 119 "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments." This
standard is effective for fiscal years beginning after December
15, 1994. Adoption of this standard is not expected to have a
material effect on the financial position and results of
operations of the Company.
Results of Operations
- ---------------------
1994 compared to 1993
- ---------------------
The Company reported a net loss for 1994 of $36.6 million
before preferred dividends of $4.9 million or a total of $.21 per
share compared to a net loss for 1993 of $15.2 million before
preferred dividends of $4.8 million or $.17 per share. The net
loss for 1994 includes a $25.9 million noncash charge for the
provision for impairment of oil and gas properties reflecting
lower gas prices, the Company's decision to forego renewing
certain domestic exploration leases in the Black Warrior Basin,
East Riceville and Milton prospects and the transfer of certain
Cox Field costs to the full cost pool. During 1993, an $8 million
provision related to the impairment of oil and gas properties was
recorded. See "Certain Factors Related to the Company and the Oil
and Gas Related Industry - Reserve Value Ceiling Test."
Earnings in 1994 also reflect the effects of a $1.7 million
valuation reserve for the Lutcher Moore Tract which is one of the
Company's assets held for sale. The valuation reserve is based
upon the most recent offer of purchase for the tract.
Additionally, the Company incurred an extraordinary charge of
$1.7 million for the write-off of the deferred financing costs
relating to a credit facility which was retired during the year.
Earnings per common share are based on the weighted average
number of shares of common and common equivalent shares
outstanding for 1994 of 198,303,412 compared to 118,996,230 for
1993. The increase in the weighted average number of common and
common equivalent shares outstanding for 1994 primarily related
to the sale of 50 million shares of Common Stock in a January
1994 offering, approximately 25.8 million shares issued upon the
conversion of the Series C and Series D Preferred Stock and
approximately 5.4 million shares issued to repurchase the Lease
Note issue, all as set forth in the Consolidated Statements of
Shareholders' Equity. See Notes 6 and 7 to the Consolidated
Financial Statements.
Oil and gas revenues for 1994 were $4.3 million as compared
to $8.5 million in 1993. Revenues in 1994 were lower, due to
significantly reduced production volumes and decreases in gas
prices. Production on existing properties continues to be
affected by limited drilling in the Cox Field. As the Company
has not concluded significant development projects on its
domestic oil and gas properties, it does not anticipate a
material change in its short-term production volumes.
The following table reflects an analysis of variances in the
Company's oil and gas revenues between 1994 and 1993. Revenues
from gas production during 1994 comprised over 85 percent of
total oil and gas revenues:
(In Millions)
Oil and Gas Revenues - 1993 $ 8.5
Effect of decreases in average gas prices (.6)
Effect of decreases in volume of gas
production and sales (3.4)
Effect of lower oil revenues (.2)
-----
Oil and Gas Revenues - 1994 $ 4.3
=====
Average gas prices received by the Company declined slightly
between 1994 and 1993, with an average gas price of $1.65 in
1994 as compared to $1.79 in 1993. However, in the fourth quarter
of 1994 gas prices dropped significantly, to $1.27 per Mcf.
As the Company continues to focus its resources on
exploration and development of the Zhao Dong Block and other
China related projects, future oil and gas revenues will
initially be directly related to the degree of success
experienced on the Zhao Dong Block.
Net capitalized costs for the Company's oil and gas
properties at December 31, 1994, approximate the "ceilingtest"
limitation as prescribed by the SEC guidelines. Remaining
unproved and unevaluated properties at December 31, 1994, include
primarily the costs of leases located adjacent to the Cox Field
producing properties. The Company drilled two exploration wells
in 1994, and if the Cox Field is not sold, exploration operations
will continue in 1995. As these unproved properties become
evaluated, their costs are reclassified to proved and evaluated
properties, and any associated future revenue is included in the
calculation of the present value of the Company's proved
reserves. Prospectively, any such costs in excess of the present
value of added reserves, or any material reductions in the net
future revenues from oil and gas reserves resulting from such
factors as lower prices or downward revisions in estimates of
reserve quantities, would cause a charge for a full cost ceiling
impairment, absent offsetting improvements. Downward revisions
in estimates of reserve quantities may also adversely affect the
Company's borrowing base calculation under its credit facility
with INCC, which may then require prepayments of principal.
The standardized measure of discounted net cash flows
reflects a tight gas severance tax exemption as provided for in
Texas Railroad Commission Statewide Rule 105. This exemption
results in approximately $5 million of net present worth
discounted at 10 percent. The tight gas severance tax exemption
is a temporary exemption which expires on August 31, 2001. There
are no circumstances that must be met to keep the exemption in
place. Pricing for a significant portion of the Company's gas
reserves is subject to a price floor established by a long-term
gas purchase contract. The continued applicability of this price
floor is dependent upon the Company maintaining certain minimum
gas production volumes which are not expected to be achieved for
the current contract year ending April 30, 1995. The Company's
reserve estimates indicate that with sufficient development the
minimum volumes will be achieved for the contract year ending
April 30, 1996.
The depreciation, depletion and amortization rate for 1994
amounted to $1.25 per Mcf, compared to $1.26 per Mcf in the
corresponding period of 1993. General and administrative
expenses for the year ended December 31, 1994, increased to $4.6
million from $3.8 million for the same period in 1993, due to
increased legal, financial advisory and shareholder relations
costs, partially offset by a decrease in payroll and benefit
expenses. The 1993 operating costs include nonrecurring charges
totaling $.7 million related to severance payments and other
costs associated with a 20% reduction in staff and closing of the
Company's operations offices in Houston and Laredo which reduced
U.S. costs in 1994. Operating costs and general and
administrative costs are expected to remain relatively unchanged
unless oil and gas development activities increase significantly.
Interest expense increased in 1994 due primarily to reduced
capitalization of interest costs as the balance of qualifying
assets continued to decline. Additionally, interest rates
increased in 1994, increasing interest expense slightly. Net
interest charges are not expected to increase significantly in
1995, in part because of the Company's interest rate cap
agreement with INCC. Interest on the Company's subordinated debt
can be paid in shares of the Company's Common Stock.
The Company does not anticipate significant increases in its
oil and gas production in the short-term and expects operating
losses for the year.
1993 compared to 1992
- ----------------------
Results for 1993 reflect a net loss of $15.2 million,
compared to the net loss of $24.0 million in 1992. The results
for 1993 included a noncash charge for a provision related to
impairment of oil and gas properties of $8 million as compared to
$22.4 million in 1992. Approximately $3 million of the provision
was attributable to the disposition of non-core properties.
During 1993, charges for interest expense, net of amounts
capitalized, were $1.0 million higher primarily due to the
increased debt level, but the debt added principally bears
noncash interest. The results for 1993 also included charges
related to litigation settlement ($0.9 million) and severance
payments ($0.7 million) resulting from a twenty percent reduction
in staff. Additionally, 1993 results reflected $0.4 million of
costs associated with operations offices, including staff, which
were discontinued as part of actions taken pursuant to
management's plans to reduce U.S. costs.
Revenues from gas production during 1993 comprised over 90
percent of total oil and gas revenues. Effects on revenues are
summarized on the following table:
(In Millions)
Oil and Gas Revenues - 1992 $10.5
Effect of increases in average gas prices 1.2
Effect of changes in volume of gas
production and sales (2.7)
Effect of lower oil revenues (0.5)
-----
Oil and Gas Revenues - 1993 $ 8.5
=====
The recovery of gas prices from their low point in February
1992 was sustained during 1993. As a result, the Company
received higher average gas prices in 1993 as compared to 1992.
The Company realized an average gas price of $1.79 per Mcf for
1993, as compared to an average, $1.51 per Mcf for the year 1992.
Lower net gas production and sales during 1993 were
primarily a result of the deferral of development drilling during
the two-year period 1992-1993. Constraints imposed by the
Company's then-existing bank loan caused the deferral in
development drilling during the period. Direct oil and gas
operating expenses for 1993 were lower than a year ago in
proportion with lower production.
General and administrative expenses amounted to
approximately $3.8 million for 1993 and $2.8 million for 1992. In
1992, general and administrative expenses were reduced by a $0.5
million nonrecurring credit related to indemnification costs.
However, 1993 expenses included nonrecurring charges totaling
$0.7 million associated with employee severance payments and
other costs related to a 20 percent reduction in staff and
closing of certain Company offices that occurred as part of
management's plan to reduce U.S. costs.
Item 8. Financial Statements and Supplemental Data.
The Consolidated Financial Statements of XCL Ltd. and
Subsidiaries, together with the report thereon of Coopers &
Lybrand L.L.P. dated April 13, 1995, and the supplementary
financial data specified by Item 302 of Regulation S-K are set
forth on pages 28 through 58. See Item 14 for Index.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of XCL Ltd.
We have audited the consolidated financial statements and the
financial statement schedule of XCL Ltd. (formerly The
Exploration Company of Louisiana, Inc.) and Subsidiaries listed
in Item 14(a) of this Annual Report on Form 10-K. These financial
statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of XCL Ltd. and Subsidiaries as of December
31, 1994 and 1993, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information
required to be included therein. As discussed in Note 1,
effective January 1, 1993 the Company changed its method of
accounting for income taxes.
COOPERS & LYBRAND L.L.P.
New Orleans, Louisiana
April 13, 1995
XCL Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
December 31
-----------
Assets 1994 1993
------ ---- ----
Current assets:
Cash and cash equivalents $ 6,751 $ 1,646
Accounts receivable, net 1,720 1,516
Prepaid expenses 153 79
------ ------
Total current assets 8,624 3,241
------ ------
Property and equipment:
Oil and gas (full cost method):
Proved and evaluated properties 158,634 134,457
Unproved and unevaluated properties:
Domestic 37,856 51,260
Foreign 17,696 6,926
------- -------
55,552 58,186
Land, at cost 135 4,148
Other 3,018 2,884
------- -------
217,339 199,675
Accumulated depreciation, depletion
and amortization (100,079) (70,925)
------- -------
117,260 128,750
------- -------
Restricted time deposits - 970
Investments and assets held for sale 20,876 19,206
Deferred charges and other assets 3,043 5,210
------- -------
Total assets $ 149,803 $ 157,377
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 6,449 $ 8,808
Royalty and production taxes payable 286 670
Dividends payable 965 -
Current maturities of limited recourse debt 5,267 6,858
Other current maturities 29 2,467
------- -------
Total current liabilities 12,996 18,803
------- ------
Long-term debt, net of current maturities 41,607 53,965
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock-$1.00 par value;
authorized 1,200,000 shares;issued shares
of 649,244 at December 31, 1994 and
729,024 in 1993 - liquidation preference
of $50.4 million at December 31, 1994 649 729
Common stock-$.01 par value; authorized
325 million shares at December 31, 1994
and; 250 million shares at December 31,
1993; issued shares of 237,184,410 at
December 31, 1994 and 132,681,193 at
December 31, 1993 2,372 1,327
Common stock held in treasury - $.01 par
value; 3,500,000 shares at December 31,
1994 and 7,000,000 at December 31, 1993 (35) (70)
Additional paid-in capital 206,241 155,121
Accumulated deficit (114,027) (72,498)
-------- -------
Total shareholders' equity 95,200 84,609
-------- --------
Total liabilities and
shareholders' equity $ 149,803 $ 157,377
======== ========
The accompanying notes are an integral part of these financial
statements.
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
(Thousands of Dollars, Except Per Share Amounts)
Year Ended December 31
------------------------
1994 1993 1992
------- ------- -----
Oil and gas revenues $ 4,336 $ 8,499 $10,551
Costs and gas operating expenses:
Operating (including marketing) 1,341 2,449 2,837
Depreciation, depletion and amortization 3,292 5,788 6,443
Provision for impairment of oil
and gas properties 25,900 8,000 22,400
Writedown of other assets 2,230 - -
General and administrative costs 4,553 3,840 2,802
Taxes, other than income 895 940 1,274
------ ------ ------
38,211 21,017 35,756
------ ------ ------
Operating loss (33,875) (12,518) (25,205)
Other income (expense):
Interest expense, net of
amounts capitalized (1,831) (1,329) (293)
Gain on sale of investments 443 - 2,210
Equity in income (loss) of affiliates (220) (183) (302)
Settlement of litigation - (917) -
Other, net 603 (250) (393)
------ ------ ------
(1,005) (2,679) 1,222
------ ------ ------
Loss before extraordinary item (34,880) (15,197) (23,983)
Extraordinary charge for early
extinguishment of debt (1,742) - -
Net loss (36,622) (15,197) (23,983)
Preferred stock dividends (4,907) (4,781) (5,238)
Net loss attributable to
common stock $(41,529) (19,978)$(29,221)
======= ======= =======
Loss per common and common equivalent share:
Net loss before extraordinary item $ (.20) $ (.17)$ (.28)
Extraordinary item (.01) - -
------- ------- ------
Net loss per common and common
equivalent share $ (.21) $ (.17)$ (.28)
======= ======= =======
Average number of common and common
equivalent shares outstanding 198,303 118,996 103,543
======= ======= =======
The accompanying notes are an integral part of these financial
statements.
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Thousands of Dollars)
Year Ended December 31
----------------------
1994 1993 1992
------ ------ -----
Preferred stock
Balance January 1 $ 729 $ 649 $ 650
Conversion of preferred
stock to common stock (105) - (1)
Preferred stock dividend 2 - -
Issuance of preferred stock 23 80 -
------ ------ -----
Balance December 31 649 729 649
------ ------ -----
Common stock
Balance January 1 1,327 1,136 907
Preferred stock scrip dividend 86 38 76
Issuance of common stock with respect
to acquisitions/investments 40 12 55
Common stock issued/sold for
settlement of liabilities 23 71 98
Common stock issued as collateral
for limited recourse debt - 70 -
Conversion of 8% Subordinated
Convertible Notes 25 - -
Conversion of preferred stock 258 - -
Exercise of warrants 35 - -
Common stock issued in equity offering 500 - -
Common stock issued for settlement of
principal and interest on debt 78 - -
----- ---- -----
Balance December 31 2,372 1,327 1,136
----- ----- -----
Common stock held in treasury
at December 31 (35) (70) -
Additional paid-in capital
Balance January 1 155,121 138,071 119,532
Exercise of warrants and options 6,933 - -
Issuance of common stock with
respect to acquisitions/investments 4,279 1,026 4,128
Issuance of preferred stock 1,570 7,880 -
Conversion of 8% Subordinated
Convertible Notes to common stock 2,225 - -
Common stock distributed or to be
distributed as preferred
stock dividends 2,948 4,456 5,192
Preferred stock distributed
or to be distributed as
preferred stock dividends - 220 -
Common stock issued/sold for
settlement of liabilities 413 4,372 9,166
Common stock issued for settlement
of principal and interest on debt 8,999 - -
Purchase cost adjustment of
the Lutcher Moore Tract - (1,361) -
Common stock issued in equity
offering 22,495 - -
Other 1,258 457 53
------- ------- -------
Balance December 31 206,241 155,121 138,071
------- ------- -------
Accumulated deficit
Balance January 1 (72,498) (52,520) (23,299)
Net loss (36,622) (15,197) (23,983)
Preferred stock dividends (4,907) (4,781) (5,238)
------- ------ ------
Balance December 31 (114,027) (72,498) (52,520)
------- ------ ------
Total shareholders' equity $ 95,200 $84,609 $87,336
======= ====== ======
The accompanying notes are an integral part of these financial
statements.
<TABLE>
<CAPTION>
XCL Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
Year Ended December 31
-------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(36,622) $(15,197) $(23,983)
------- ------- -------
Adjustments to reconcile net loss to net cash
provided by (used in)operating activities:
Depreciation, depletion and amortization 3,292 5,788 6,443
Provision for impairment of oil and gas properties 25,900 8,000 22,400
Extraordinary charge for early extinguishment
of debt 1,742 - -
Gain on sale of investments (443) - (2,210)
Writedown of other assets 2,230 - -
Equity in loss of affiliates 220 183 302
Change in assets and liabilities:
Accounts receivable (187) 1,401 (149)
Prepaid expenses (73) 157 261
Accounts payable and accrued expenses 168 431 (3,606)
Royalty and production taxes payable (385) (817) (93)
Other, net 557 32 848
Total adjustments 33,021 15,175 24,196
Net cash provided by (used in) operating
activities (3,601) (22) 213
Cash flows from investing activities:
Capital expenditures (19,547) (16,302) (15,098)
Investments and restricted time deposits (1,350) (791) (410)
(Increase) decrease in restricted cash - 3,176 (2,176)
Proceeds from sales of assets and investments 3,759 1,046 5,567
Other 2,052 (43) (510)
------- ------ ------
Net cash used in investing activities (15,086) (12,914) (12,627)
Cash flows from financing activities:
Proceeds from sales of common stock 31,696 1,677 7,350
Proceeds from issuance of preferred stock 1,600 7,978 -
Loan proceeds 29,200 18,500 10,500
Payment of amounts due to related parties - - (2,500)
Payment of long-term debt (37,564) (15,238) (2,804)
Proceeds from exercise of warrants and options 3,279 - -
Payment of preferred stock dividends (1,388) - -
Stock issuance costs and other (3,031) (441) (1,341)
------- ------- -------
Net cash provided by financing activities 23,792 12,476 11,205
------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,105 (460) (1,209)
Cash and cash equivalents at beginning of year 1,646 2,106 3,315
------ ------ ------
Cash and cash equivalents at end of year $ 6,751 $ 1,646 $ 2,106
====== ====== ======
Supplemental information:
Cash paid for interest, net of amounts capitalized $ 2,610 $ 2,295 $ 293
====== ====== ======
Cash paid for income taxes $ - $ - $ 14
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
XCL Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts
of XCL Ltd. and its wholly owned subsidiaries ("XCL" or the
"Company") after the elimination of all significant intercompany
accounts and transactions. Investments in 20 percent to 50
percent owned affiliates are accounted for by the equity method.
Certain reclassifications have been made to prior year financial
statements to conform to current year presentation. These
reclassifications had no effect on net loss or shareholders'
equity.
Cash and Cash Equivalents:
For purposes of the consolidated financial statements, the
Company considers deposits which can be redeemed on demand and
investments which have original maturities of less than three
months to be cash equivalents. As of December 31, 1994, the
Company's cash and cash equivalents were deposited primarily in
three financial institutions.
Fair Value of Financial Instruments:
For the purposes of disclosure requirements pursuant to
Statement of Financial Accounting Standards No. 107 "Disclosures
About Fair Market Value of Financial Instruments," fair value of
current assets and liabilities approximate carrying value, due to
the short-term nature of these items. The Company believes that
fair value of longterm debt approximates carrying value. The fair
value of the Series A Preferred Stock at December 31, 1994, is
approximately $25 million based upon share trading on the London
Stock Exchange with British Pound Sterling converted to U.S.
Dollars. Based on such valuation the estimated fair value of
Series B Preferred Stock at December 31, 1994 approximates $2
million. Fair value of such financial instruments is not
necessarily representative of the amount that could be realized
or settled.
Property and Equipment:
The Company accounts for its oil and gas exploration and
production activities under the full cost method of accounting
for oil and gas properties. Accordingly, all costs associated
with acquisition, exploration, and development of oil and gas
reserves, including appropriate related costs, are capitalized.
The Company capitalizes internal costs that can be directly
identified with its acquisition, exploration and development
activities and does not capitalize any costs related to
production, general corporate overhead or similar activities.
All capitalized costs of oil and gas properties, including
the estimated future costs to develop proved reserves, are
amortized on the unit-of-production method based on estimates of
proved oil and gas reserves. The Company's oil and gas reserves
were estimated by Company engineers in 1994 and independent
petroleum engineers in 1993. Investments in unproved properties
and major development projects are not amortized until proved
reserves associated with the projects can be determined or until
impairment occurs. If the results of an assessment indicate that
properties are impaired, the amount of the impairment is added to
the capitalized costs to be depleted. The Company capitalizes
interest on expenditures made in connection with exploration and
development projects that are not subject to current
amortization. Interest is capitalized for the period that
activities are in progress to bring these projects to their
intended use.
The Company reviews the carrying value of its oil and gas
properties each quarter on a country-by-country basis, and limits
capitalized costs of oil and gas properties to the present value
of estimated future net revenues from proved reserves, discounted
at 10%, plus the lower of cost or fair value of unproved
properties as adjusted for related tax effects and deferred tax
reserves. If capitalized costs exceed this limit, the excess is
charged to DD&A expense. Net capitalized costs for the Company's
oil and gas properties at December 31, 1994 approximate the
"ceiling-test" limitation as prescribed by the Securities and
Exchange Commission guidelines. The Company recorded a $25.9
million provision for impairment of oil and gas properties during
1994, reflecting lower gas prices, management's decision to
forego renewing certain domestic exploration leases in the Black
Warrior Basin, East Riceville and Milton prospects and the
transfer of certain Cox Field costs to the full cost pool.
Remaining unproved and unevaluated properties at December 31,
1994 include primarily the costs of leases located adjacent to
the Cox Field producing properties. As these unproved properties
become evaluated, their costs are reclassified to proved and
evaluated properties, and any associated future revenue is
included in the calculation of the present value of the Company's
proved reserves. Prospectively, any such costs in excess of the
present value of added reserves, or any material reductions in
the net future revenues from oil and gas reserves resulting from
such factors as lower prices or downward revisions in estimates
of reserve quantities would cause a charge for a full cost
ceiling impairment, absent offsetting improvements. Downward
revisions in estimates of reserve quantities may also adversely
affect the Company's borrowing base calculation under its credit
facility with INCC, which may then require prepayments of
principal. Pricing for a significant portion of the Company's
gas reserves is subject to a floor in a long-term contract with
MidCon. The floor price is subject to the Company's ability to
deliver minimum quantities of production. As a result of
estimated production shortfalls the Company is not expected to
receive the contractual price for the contract year ending April
30, 1995. The Company's reserve report indicates sufficient
production in subsequent contract years, which is in part
dependent upon successful development drilling in the Company's
Berry R. Cox Field.
Proceeds from the sale of proved and unproved properties are
accounted for as reductions to capitalized costs with no gain or
loss recognized unless such sales would significantly alter the
relationship between capitalized costs and proved reserves of oil
and gas. Abandonments of properties are accounted for as
adjustments of capitalized costs with no loss recognized.
The Company accounts for site restoration, dismantlement and
abandonment costs in its estimated future costs of proved
reserves. Accordingly, such costs are amortized on a unit of
production basis and reflected with accumulated depreciation,
depletion and amortization. The Company identifies and estimates
such costs based upon its assessment of applicable regulatory
requirements, its operating experience and oil and gas industry
practice in the areas within which its properties are located. To
date the Company has not been required to expend any material
amounts to satisfy such obligations. The Company does not expect
that future costs will have a material adverse effect on the
Company's operations or financial condition. As is set forth
above, the standardized measure of discounted future net cash
flows includes a deduction for any such costs.
Other Property and Equipment:
Other property and equipment primarily consists of an
office building, furniture and fixtures, equipment and software.
Major renewals and betterments are capitalized while the costs of
repairs and maintenance are charged to expense as incurred. The
costs of assets retired or otherwise disposed of and the
applicable accumulated depreciation are removed from the
accounts, and the resulting gain or loss is reflected in
operations. Other property and equipment costs are depreciated
using the straight-line method over the estimated useful lives of
the assets, which range from 3 to 30 years.
Capitalized Interest and Amortized Debt Costs:
During fiscal 1994, 1993 and 1992, interest and associated
costs of approximately $5.3 million, $6.7 million and $3.4
million, respectively were capitalized on significant investments
in unproved properties that are not being currently depreciated,
depleted, or amortized and on which exploration or development
activities are in progress. Deferred debt issue costs are
amortized on the straight-line basis over the term of the related
debt agreement.
Concentration of Credit Risk:
The Company operates exclusively in the oil and gas
industry. The Company's joint interest billings and oil and gas
sales receivable represent substantially all of the balance
included in trade accounts receivable in the accompanying balance
sheets. The trade receivables are due from several customers.
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash
equivalents/short-term investments and trade receivables. The
Company believes that no single short-term investment exposes the
Company to significant credit risk. Additionally,
creditworthiness of its counterparties, which are major financial
institutions are monitored. The Company has substantial cash in
financial institutions in excess of the insured amounts,
including U.S. dollars held in a foreign financial institution.
Income Taxes:
Effective January 1, 1993, the Company changed its method of
accounting for income taxes to comply with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109) "Accounting for
Income Taxes". Requirements by this standard include recognition
of future tax benefits, measured by enacted tax rates,
attributable to: deductible temporary differences between
financial statement and income tax bases of assets and
liabilities; and, net operating loss carryforwards. Recognition
of such tax assets are limited to the extent that realization of
such benefits is able to be reasonably anticipated.
The Company previously used the liability method pursuant to
Statement of Financial Accounting Standards No. 96.
Revenue Recognition:
Oil and gas revenues are recognized using the accrual method
at the price realized as production and delivery occurs. Amounts
which are contingently receivable are not recognized until
realized.
Loss Per Common and Common Equivalent Share:
Loss per common and common equivalent share has been
computed by dividing net income (loss) attributable to common
stock by the weighted average number of common and common share
equivalents outstanding. Primary earnings per share are presented
for financial reporting purposes due to the antidilutive effect
of convertible notes, preferred stock, warrants and stock
options.
(2) Liquidity and Management's Plans
As of December 31, 1994, the Company's working capital
deficit amounted to $4.4 million including $5.3 million of
current maturities of Lutcher Moore Group Limited Recourse Debt
(see Note 6 to the Consolidated Financial Statements). The
Company has amended its credit agreement to reschedule principal
payments and covenant requirements.
Management's plans include:
1. To develop the initial discovery on the Zhao Dong Block,
the company is in detailed discussions with a major banking group
with experience in debt financing in China, to provide project
debt financing for all development costs. The banking group has
indicated strong interest in providing such financing, and the
Company and the banking group are in the process of negotiating
the terms of the proposed financing. Another alternative
available to the Company to obtain development funds is to joint
venture with another oil company or financial group.
2. To provide funds for the other objectives of the
Company,the Company has taken the following actions:
(i) Executed a letter of intent to sell the Phoenix Lake Tract
for $2.4 million, consisting of $1.8 million in cash and a $.6
million reduction of current liabilities.
(ii) Negotiated the terms of a proposed sale of the Lutcher Moore
Tract, which upon closing would result in net cash proceeds of
$8.6 million after payment of limited recourse debt. The sale is
subject to the execution of definitive agreements, the purchaser
securing financing and other customary conditions to closing.
Management is negotiating an extension of the maturity dates of
the mortgage debt burdening the property in the event the
purchaser cannot consummate the transaction.
3. To sell or exchange the Cox Field for proved reserves
requiring less development expenditures in the shortterm.
Management has historically had the ability to generate
funds through the sale of equity securities or other assets and
expects to achieve its goals in 1995. Management is confident
that it can timely realize cash resources to adequately meet its
obligations.
(3) Supplemental Cash Flow Information
The Company completed certain noncash transactions in 1994
and prior years in order to conserve cash for use in its core
activities and to meet other obligations while honoring
restrictions on cash use imposed by its bank agreement. Such
transactions not reported elsewhere herein are as follows:
1994
- ----
The Company conveyed certain land holdings (fair market
value of $320,000) in payment of a two-year consulting agreement
which expired in 1994.
1993
- ----
The Company issued 250,000 shares of Common Stock with a
fair market value of $125,000, to the shareholders of Independent
Energy Corporation ("IEC") in partial payment of the option to
acquire a 12.5% working interest in certain exploration leases
comprising the Black Warrior Basin.
1992
- ----
The Company issued 2.6 million shares of Common Stock to
effect payment of certain of its trade accounts payable in the
amount of $1.8 million.
(4) Accounts Receivable
Accounts receivable consists of the following (000's):
1994 1993
---- ----
Trade $ 1,355 $ 1,309
Other, net of allowance for
doubtful accounts 365 207
------ ------
$ 1,720 $ 1,516
====== ======
The Company's accounts receivable at December 31, 1994,
arise primarily from business transactions with entities in the
oil and gas industry, mostly located in Texas. An oil and gas
purchaser with which the Company has contractual arrangements,
MidCon Texas Pipeline Corp., accounted for approximately 61
percent of oil and gas revenues in 1994, 77 percent in 1993, 71
percent in 1992. In addition, in 1994 one other purchaser
accounted for approximately 27% of oil and gas revenues.
(5) Investments and Assets Held for Sale
Terrenex Ventures Inc.
At December 31, 1993, the Company held an approximate 25%
interest in Terrenex Ventures, Inc. ("Terrenex") and warrants to
purchase additional shares. In 1994, the Company purchased an
additional 1,350,000 shares of stock for approximately $.35
million (U.S.) cash and 1.2 million shares of Common Stock. In
1992, the Company had increased its initial interest in Terrenex
by issuing 1.36 million shares of Common Stock with a fair market
value of $1.3 million.
During October 1994, the Company sold its entire
shareholding in Terrenex for $3.7 million (U.S.), resulting in a
gain of approximately $.44 million. At December 31, 1994, the
Company continues to hold warrants to purchase 700,000 shares of
Terrenex stock at $1.50 (Cdn.), expiring August 1995. The
Company has not attributed any cost to these warrants.
Sunrise Energy Services, Inc. - Jefferson Gas Systems, Inc.
In 1990, the Company acquired an approximate 42 percent
ownership in Sunrise Energy Services, Inc. ("Sunrise"). In 1992,
the Company sold this investment for $8 million, subject to
certain adjustments up to a maximum of $2 million which were to
be made with shares of Common Stock and certain shares of Sunrise
held in an escrow account. The purchase price was paid in cash
($5 million), a promissory note ($2 million due in 1993) and an
approximate 5 percent equity interest in a privately held
Delaware corporation. The Company recognized a gain on sale of
investments of $2.2 million and deferred approximately $0.8
million pending resolution of the adjustments. As of December 31,
1993, $1.2 million remained outstanding on the promissory note.
In May 1994, the Company and the purchaser of the Sunrise
shares settled and paid all remaining amounts due among and
between themselves including release to the purchaser of the
Common Stock and Sunrise shares held in escrow and payment by the
purchaser of $1.25 million to a Company account collateralizing
the Company's Lease Notes.
Phoenix Lake Tract
The Company owns a 77.78% fee interest in 11,700 acres
comprising the Phoenix Lake Tract in southwestern Louisiana. On
April 10, 1995, the Company signed a letter of intent to sell the
Phoenix Lake Tract for approximately $2.4 million, retaining 75%
of its mineral interest. The purchase price is to be comprised
of approximately $1.8 million in cash and a $.6 million reduction
in obligations owed by the Company to
the purchaser. No gain or loss is expected to be recognized.
Lutcher Moore Tract
During 1993, the Company completed the acquisition of a
group of corporations which together owned 100% of a 62,500 acre
tract in southeastern Louisiana (the "Lutcher Moore Tract").
Total consideration of $15.4 million included the assumption of
$9.9 million of limited recourse debt (see Note 6 to the
Consolidated Financial Statements), $2.7 million in cash, the
issuance of 3,616,667 shares of Common Stock and warrants to
purchase an additional 4,166,667 shares of Common Stock at $1.00
per share. In connection with the purchase the Company
capitalized acquisition related costs of $.9 million.
The Company has negotiated the terms of a proposed sale of
the Lutcher Moore Tract, which upon closing would result in net
cash proceeds of $8.6 million after repayment of limited recourse
debt. The sale is subject to the execution of definitive
agreements, the purchaser securing financing and other customary
conditions to closing. Accordingly, the Company has recorded a
valuation reserve of $1.7 million.
Wolf Creek Resources, Inc.
The Company, during 1994, executed and delivered an
agreement which satisfied an October 1992 commitment to acquire
an equity interest in Wolf Creek Resources, Inc. and certain oil
and gas interests in the Galvan Ranch, a 72,000acre ranch in
south Texas, from an entity affiliated with a former director. To
satisfy the acquisition price of $3.7 million, the Company paid
$1.0 million in cash and on October 17, 1994, issued 2.75 million
shares of Common Stock for the balance.
(6) Debt
Long-term debt consists of the following (000's):
December 31
--------------
1994 1993
---- ----
Collateralized credit facility (1) $25,200 $29,392
Subordinated debt 15,000 15,000
Notes payable, net of debt discount -- 5,352
Office building mortgage loan 705 730
8% Subordinated Convertible Notes -- 2,250
------ ------
40,905 52,724
Lutcher Moore Group Limited
Recourse Debt 5,998 10,566
------ ------
46,903 63,290
Less current maturities:
Lutcher Moore Group Limited
Recourse Debt (5,267) (6,858)
Other current maturities (29) (2,467)
------ ------
$ 41,607 $53,965
======= ======
_____________
(1) 1993 amount reflects balances due under the Company's prior
credit agreement which was replaced with a new bank credit
facility effective February 1, 1994, as further described below.
Substantially all of the Company's assets collateralize
these borrowings. Accounts payable and accrued expenses include
interest accrued at December 31, 1994 and 1993 of $1,012,000 and
$1,130,000, respectively.
As of December 31, 1994, scheduled maturities of longterm
debt are as follows (000's):
Due Amount
---- ------
1995 $ 5,296
1996 7,639
1997 7,143
1998 6,500
1999 5,000
Thereafter 15,325
------
$46,903
======
Collateralized Credit Facility
XCL-Texas, Inc. ("Borrower"), a wholly owned subsidiary of
the Company, borrowed $29.2 million from Internationale
Nederlanden (U.S.) Capital Corporation ("INCC") under a $35
million credit agreement dated January 31, 1994 (the "INCC
Agreement"). The proceeds of the borrowing were used to retire
the loan balance of a prior bank credit facility. The Company
recognized a charge for early extinguishment of debt in the
approximate amount of $1.7 million as a result of this
refinancing in 1994.
Loans under the INCC agreement are guaranteed by the
Company, parent of XCL-Texas, Inc., and certain other
subsidiaries of the Company and bear interest at a rate
approximating INCC's prime rate plus one percent or an
alternative market adjusted rate based upon LIBOR plus 2.75
percent, at the Borrower's option. The Company pays a commitment
fee equal to 0.5 percent per annum calculated on the daily amount
of the unused portion of the facility availability, payable
quarterly. Substantially all of the Company's oil and gas
properties located in Texas, and the stock of certain
subsidiaries of the Company collateralize this credit facility.
Additionally, INCC received warrants to purchase 2.5 million
shares of Common Stock with an exercise price of $1.00, subject
to adjustment, expiring in January 2004. The value of such
warrants was not material.
The INCC Agreement provides for scheduled semiannual
borrowing base determinations by INCC based on a review of
reserve estimates and other factors, with the initial borrowing
base set at $29.2 million. Effective October 31, 1994, the
borrowing base was set at $25.2 million. The Company had already
reduced the loan principal balance by $4 million to $25.2 million
in October 1994, primarily from the proceeds of the sale of
Terrenex stock. Therefore, no additional principal payments were
required. The next borrowing base review is scheduled for
September 30, 1995. The next scheduled principal payment is due
January 1, 1996, with quarterly payments thereafter.
Under the INCC Agreement, the Company is required to
maintain minimum levels of tangible net worth, working capital
and fixed charge coverage, and expend a minimum amount on
domestic development drilling. Additionally, the Borrower must
maintain a minimum net worth. Further, the INCC Agreement
contains certain restrictions pertaining to debt, mergers,
issuances of securities, investments, sales of property, cash
dividends and redemptions and payments related to subordinated
debt. Subsequent to year-end 1994 the INCC Agreement was amended
to modify certain covenant requirements. The Borrower may not
advance funds to its parent, or any other subsidiary of its
parent, without INCC's prior approval. The Company may use for
its general corporate purposes the net proceeds from the sales of
equity plus any cash realized by XCL-China Ltd. and proceeds from
the sale of other assets.
During 1994, the Company entered into two Master Interest
Rate and Currency Exchange Agreements (the Agreements) with INCC
which expire in 1996. The Company paid $151,946 to limit the
maximum interest rate for up to approximately two-thirds of its
maximum outstanding INCC debt to 9-3/4% per annum from April,
1995 to January, 1996 and to 10-3/4% per annum from January 1996
to July, 1996. The Company is amortizing the payment over the
life of the Agreements. During 1994, the Company incurred
approximately $1.85 million of interest costs related to this
debt.
Subordinated Debt
During April 1993, the Company issued in a private
placement, $15 million of Secured Subordinated Note Units (the
"Subordinated Debt"). Each of these 40 units consisted of a
$375,000 note payable, warrants to acquire 100,000 shares of the
Company's Common Stock at $.90 per share (which were previously
issued to a group of banks in a prior credit facility), a net
profits interest in certain exploration leases and a contractual
interest in the net revenues of XCLChina, Ltd., a wholly owned
subsidiary of the Company ("XCLChina"), under the Production
Sharing Agreement relating to the Zhao Dong Block, which was not
material. This borrowing bears interest at 12 percent, if paid
with cash, or 14 percent, if the Company elects to use Common
Stock. It is collateralized by a second mortgage on all the
Company's producing properties. The proceeds were used to retire
$13.2 million of the bank indebtedness, with the remainder
available for working capital and the payment of issuance
expenses.
Concurrently with the closing of the INCC Agreement,
maturities of the Company's Subordinated Debt were rescheduled to
April 2000; the expiration date of the related warrants was
extended to April 2000; the exercise price of related warrants
was reduced to $.625 per share (fair market value of the Common
Stock at that date); and a subordinated lien was granted on
certain assets of the Company.
The Company issued approximately 1.9 million and 2.0 million
shares of Common Stock in payment of $2.1 million and $1.0
million of interest due on the Subordinated Debt in 1994 and
1993, respectively.
Lease Notes Payable
On June 30, 1992, the Company issued, through a private
placement offering, 70 Lease Note Units for gross proceeds of
approximately $7 million. Each Unit consists of: a $100,000
limited recourse collateralized promissory note due July 1, 1997
(the "Lease Note") with interest at 10 percent; warrants
to purchase 14,286 shares of the Company's Common Stock at $1.00
per share which were to expire July 1, 1994; and a .02857 percent
net profits overriding royalty interest in certain of the
Company's exploration prospects, which was not material. As of
December 31, 1993, the Lease Notes were collateralized by cash of
$1 million, which is reflected as long-term restricted time
deposits in the financial statements, and by other assets in the
amount of $1 million. Concurrently with the closing of the INCC
Agreement the Lease Note holders executed and delivered a new and
revised subordination agreement in consideration of which the
exercise price of the warrants was reduced to $.65 per share
(fair market value at that date).
In June 1994, the Company repurchased the Lease Notes at
face value plus accrued interest (approximately $6.4 million) for
approximately 5.4 million shares of Common Stock and extended the
maturity of the warrants to June 30, 1995.
Other Long-Term Debt
Building Mortgage Loan
----------------------
Payment of the building mortgage loan is guaranteed by the
Chairman of the Board.
8% Subordinated Convertible Notes
---------------------------------
The holders of the 8% Subordinated Convertible Notes
converted the remaining $2.25 million in principal amount into
2.5 million shares of Common Stock in May 1994. During 1993, the
maturity date of the debt had been rescheduled from a due date of
June 30, 1993 in exchange for an extension fee of $325,000 which
was paid by the issuance of 250,000 shares of Common Stock.
Lutcher Moore Group Limited Recourse Debt
As of December 31, 1994 and 1993, Lutcher Moore Group
Limited Recourse Debt consisted of the following:
1994 1993
---- ----
Mortgage and Seller Notes $ 5,998 $ 7,066
Monroe-Tesson Notes - 3,500
------ ------
5,998 10,566
Less Current Maturities (5,267) (6,858)
------ ------
$ 731 $ 3,708
====== ======
Mortgage and Seller Notes
- -------------------------
At December 31, 1994 and 1993, approximately $2.8
million and $3.1 million of Mortgage Notes (net of amounts
escrowed for payment) and $3.2 million and $4.0 million of Seller
Notes were outstanding. Mortgage Notes bear interest of 9% and
mature in May 1995. Seller Notes bear interest of 8% and mature
June 1996. The Company is negotiating an extension of the
maturity dates of the Mortgage and Seller Notes. In May 1994, in
consideration for certain amendments to the terms of the Seller
Notes the Company issued to the holders of the Seller Notes
warrants to acquire up to 250,000 shares of Common Stock at $1.25
per share exercisable for a period up to 90 days after the full
repayment of the Seller Notes. No material value was ascribed to
such warrants. Additionally, the Company issued approximately 1.1
million and 1.0 million shares of Common Stock to pay $.9
million and $.7 million in principal and interest on the Seller
Notes in 1994 and 1993 respectively. The noteholders sole
recourse is limited by a second lien on the Lutcher Moore Tract.
Monroe-Tesson Notes
-------------------
The Monroe-Tesson Notes, which bore interest at 12%, were
collateralized by the stock of certain subsidiaries which had
direct or indirect ownership in the Lutcher Moore Tract, and by 7
million shares of Common Stock held by a subsidiary which are
recorded as treasury stock. In September 1993, in consideration
for an extension of the Notes' original maturity, the subsidiary
granted the lenders an option to purchase 3.5 million shares
of the Common Stock pledged as collateral. In April 1994, the
subsidiary sold 3,890,000 shares of this pledged stock and used
the proceeds to repay the Monroe-Tesson Notes in their entirety.
In September 1994, the Company issued an additional 390,000
shares of Common Stock to the subsidiary to fulfill its
obligation requiring 3.5 million shares to be pledged for
exercise of the option described above. The option expired
unexercised on December 31, 1994.
(7) Shareholders' Equity
Preferred Stock
As of December 31, 1994 and 1993, the Company had the
following shares of Preferred Stock issued and outstanding:
Shares Preference in
------ Liquidation at
1994 1993 December 31, 1994
---- ---- ------------------
Series A 599,244 599,244 $45,378,000 (1)
Series B 50,000 50,000 5,000,000
Series C -- 64,700 --
Series D -- 15,000 --
______________
(1) 50 pounds sterling per share (1 U.K. pound sterling = U.S. $1.5145 at
December 31, 1994).
Series A Preferred Stock
------------------------
During 1990, the Company completed a rights offering of
600,000 units at 50 per pounds sterling (U.K.) per "unit," each unit
consisting of 1 share of Series A, Cumulative Convertible Preferred Stock, par
value $1.00 per share ("Series A Preferred Stock") and 10 Warrants
which expired unexercised pursuant to their terms.
The Series A Preferred Stock is listed on The London Stock
Exchange, and: ranks senior to Common Stock and pari passu with
the Company's Series B Preferred Stock (as hereinafter defined)
with respect to the payment of dividends and distributions on
liquidation; has a liquidation preference of 50 pounds sterling (U.K.) per
share plus accrued and unpaid dividends; is not redeemable except in
certain limited circumstances; is nonvoting as a class, except in
certain circumstances; is convertible, at the holder's option, on
the basis of 21 shares of Common Stock for every one share of
Series A Preferred Stock, subject to adjustment; and bears a
cumulative dividend fixed at an annual rate of 4.50 pounds sterling (U.K.) per
share, payable semiannually in cash, or, at the Company's
election, through the semiannual dividend payment due June 30,
1994, in shares of Common Stock.
Series B Preferred Stock
------------------------
In May 1991, the Company sold 50,000 shares Series B,
Cumulative Preferred Stock, par value $1.00 per share ("Series B
Preferred Stock"), with warrants expiring at various times to
purchase 5 million shares of Common Stock at prices ranging from
$2.00 per share to $2.75 per share.
The Series B Preferred Stock bears a cumulative fixed
dividend at an annual rate of $10 per share, payable
semiannually, and is entitled to 50 votes per share on all
matters on which Common Stockholders are entitled to vote and
separately as a class on certain matters; and ranks senior to the
Common Stock and pari passu with the Series A Preferred Stock of
the Company with respect to the payment of dividends and
distributions on liquidation; has a liquidation preference of
$100 per share plus accumulated dividends. The Company had the
option through May 1994 to pay the dividend in shares of Common
Stock, in which case the annual dividend rate was $12 per share,
with the holder being entitled to require the Company to use its
best efforts to sell such shares on their behalf and to reimburse
such holder for the difference, if any, between such net proceeds
and $11 per share per annum. The Company is currently entitled to
pay the redemption price of the Series B Preferred Stock in
shares of Common Stock.
Effective June 30, 1994, the terms of the Series B Preferred
Stock were amended to permit the Company to issue shares of
Common Stock in lieu of cash dividends for so long as the Series
B Preferred Stock remains outstanding. In consideration for this
amendment the Series B Preferred Stock was further amended: (i)
to reduce the exercise price of the remaining 2.5 million
warrants outstanding from $2.00 to $1.50 per share and to
increase the number of shares of Common Stock covered by such
warrants to 3.325 million shares; and (ii) to extend the option
of the holders to redeem their shares of Series B Preferred
Stock, which were only redeemable on the third, fourth and fifth
anniversaries of the dates of their issuance and automatically
upon exercise of the remaining warrants, upon ninety days notice
to the Company, at any time and from time to time, after August
31, 1994, with the Company retaining the right to pay the
redemption price in Common Stock.
Series C Preferred Stock
------------------------
In September 1993, the Company completed a private placement
of an aggregate of 64,780 shares of Series C, Cumulative
Convertible Preferred Stock, par value $1.00 per share ("Series C
Preferred Stock") resulting in aggregate proceeds of $6.5 million
before expenses of the offering.
In June 1994, the Company issued a redemption notice to the
holders of the Series C Preferred Stock pursuant to which the
Company would redeem their shares for $110 per share plus accrued
dividends, in cash and all such holders elected to convert their
shares of Series C Preferred Stock into Common Stock at a
conversion price of $.463 per share. The Company issued
16,793,153 shares of Common Stock in respect of such conversion
during 1994.
Series D Preferred Stock
------------------------
In December 1993, the Company completed a private placement
of an aggregate of 15 Series D Preferred Stock Units, each unit
comprised of 1,000 shares of Series D, Cumulative Convertible
Preferred Stock, par value $1.00 per share ("Series D Preferred
Stock") and a .015 percent contractual interest in XCL-China's
net revenues under the Production Sharing Agreement relating to
the Zhao Dong Block, which was not material. The Company
realized aggregate proceeds of $1.5 million before expenses of
the offering.
In February 1994, an additional 32 Series D Preferred Stock
Units were issued, each unit comprised of 500 shares of Series D
Preferred Stock and a .0075 percent contractual interest in
XCLChina's net revenues under the Production Sharing Agreement
relating to the Zhao Dong Block which was not material, resulting
in net proceeds of $1.6 million before expenses of the offering.
In July 1994, the Company notified the holders of the Series
D Preferred Stock of its intention to redeem the stock on August
1, 1994, for $110 per share plus accrued dividends, in cash and
all such holders elected to convert their shares of Series D
Preferred Stock into Common Stock at a conversion price of $.463
per share. The Company issued 9,007,162 shares of Common Stock
in respect of such conversion during the third quarter of 1994.
Dividends
The Company issued 5,843,028, 3,597,436, and 6,805,080
shares of Common Stock in payment of dividends on its Series A
Preferred Stock in 1994, 1993 and 1992. On November 30, 1994, the
Company declared a dividend on its Series A Preferred Stock
totaling $2.1 million payable in cash. The Company issued
1,538,390, 210,000, and 844,898 in payment of dividends on its
Series B Preferred Stock in 1994, 1993 and 1992. On November 30,
1994, the Company declared a dividend on its Series B Preferred
Stock totaling $.25 million payable in cash. During 1994 the
Company issued 2,119 shares of Series C Preferred Stock in
payment of Series C Preferred Stock dividend for December 1993
and June 1994. During 1994, the Company issued 20 shares of
Series D Preferred Stock in payment of the Series D dividend.
The Company's ability to pay future cash dividends is
restricted by the INCC Agreement.
Common Stock
The Company issued 104,513,217, 19,112,611 and 22,912,704
shares of Common Stock during 1994, 1993 and 1992, respectively.
The Company had 237,184,410, 132,681,193 and 113,568,582 shares
of Common Stock issued and outstanding at December 31, 1994, 1993
and 1992, respectively.
Included in the shares issued during 1994 are 50 million
shares of Common Stock sold at $.50 per share in a registered
public offering during January 1994.
Common Stock Warrants
As of December 31, 1994, outstanding warrants to purchase
the Company's Common Stock are as follows:
Common
Stock
Issuable Warrant
Upon Exercise Proceeds if
Exercise Price Exercised
-------- -------------- -----------
Total Warrants Expiring in 1995 3,165,104 $.65 to $2.00 $ 3,107,082
Total Warrants Expiring in 1996 4,125,000 $1.00 to $1.50 5,006,250
Total Warrants Expiring after 1996 17,143,900 $.625 to $1.50 19,136,125
---------- -------------- ----------
Total Warrants 24,434,004 $.625 to $2.00 $27,249,457
========== ============== ==========
(8) Income Taxes
As discussed in Note 1 the Company has adopted SFAS No. 109.
The cumulative effect of this change was not material.
The Company has significant loss carryforwards which have
been recorded as deferred tax assets. Due to realization of such
amounts being deemed uncertain with respect to the provisions of
SFAS No. 109, a valuation allowance has been recorded for this
amount. There was no change to the amount of deferred tax
liability at January 1, 1993, as a result of the change of
accounting method. There was no material effect on the Company's
results of operations from the implementation of the new
accounting standard for income taxes or the increase in the
federal corporate tax rates.
The significant components of the net deferred tax expense
(benefit) for 1994 and 1993, were as follows (000's):
1994 1993
---- ----
Current year tax net operating loss $ (6,529) $ -
Tax/book depreciation, depletion and
amortization difference (6,005) 405
Oil and gas property expenditures
treated as expense for income tax purposes 2,740 3,534
Other accruals (2,763) (160)
Reserve for investments (601) -
Increase (decrease) in valuation allowance 13,158 (3,779)
------ ------
$ - $ -
====== ======
The components of the Company's deferred tax assets and
liabilities as of December 31, 1994 and 1993, were as follows (in
000's):
1994 1993
----- ----
Deferred tax assets:
Net operating loss carryforwards $ 48,128 $ 41,540
Other liabilities and reserves 1,051 535
Valuation allowance (41,464) (28,306)
------ ------
Total deferred tax assets $ 7,715 $ 13,769
======= =======
Deferred tax liabilities:
Property and equipment, net $ (7,715) $(13,769)
------- -------
Total deferred tax liabilities $ (7,715) $(13,769)
======= =======
Net deferred tax asset (liability) $ - $ -
======= =======
At December 31, 1994, the Company had net operating loss
carryforwards for tax purposes in the approximate amount of $138
million which are scheduled to expire by the year 2008.
Additionally, the Company has available acquired net operating
loss carryforwards in the approximate amount of $9 million which
are scheduled to expire by the year 2000, and which are available
to offset taxable income of an acquired subsidiary.
At December 31, 1994, the Company had alternative minimum
tax carryforwards in the approximate amount of $73 million which
are scheduled to expire by the year 2008. Additionally, the
Company has acquired alternative minimum tax loss carryforwards
in the approximate amount of $12 million which are scheduled to
expire by the year 2000, and which are available for use by an
acquired subsidiary. The Company also has $1 million of general
business credit carryforwards which are available until the year
2000 to offset future tax liabilities of an acquired subsidiary.
(9) Stock Option Plans
The Company's stock option plans provide for the issuance of
incentive and nonqualified stock options. Under these plans the
Company is authorized to grant options to selected employees,
directors and consultants to purchase shares of the Company's
Common Stock at an exercise price (for the Company's incentive
stock options) of not less than the market value at the time such
options are granted. In June 1992, the shareholders of the
Company approved the adoption of the Company's Long-Term Stock
Incentive Plan ("LTSIP") under which the Company is authorized to
issue an aggregate of 16.5 million shares of Common Stock
pursuant to future awards granted thereunder. The Company's
prior stock option plans will be consolidated into the LTSIP by
replacing options granted under the existing stock option plans
with comparable options granted under the LTSIP for an equivalent
number of shares.
A summary of the stock option plans activity for the years
ended December 31, 1994, 1993 and 1992 is as follows:
Non-
Incentive Qualified
Total Options Options
--------- --------- ---------
Balance outstanding at January 1, 1992 8,121,134 3,205,738 4,915,396
Options granted in 1992 at prices ranging
from $1.35 to $2.106 per share 2,612,690 1,091,001 1,521,689
Options canceled during year (1,279,534) (417,444) (862,090)
--------- --------- ---------
Balance outstanding at December 31, 1992 9,454,290 3,879,295 5,574,995
Options granted in 1993 at prices ranging
from $0.9375 to $1.25 per share 600,000 100,000 500,000
Options canceled during year (1,145,600) (887,822) (257,778)
--------- --------- ---------
Balance outstanding at December 31, 1993 8,908,690 3,091,473 5,817,217
Options granted in 1994 at $1.25 4,896,683 2,077,500 2,819,183
Options canceled during year (1,200,200) (1,100,200) (100,000)
Options exercised during year (140,000) - (140,000)
---------- --------- ---------
Balance outstanding at December 31, 1994 12,465,173 4,068,773 8,396,400
========== ========= =========
Shares exercisable at December 31, 1992 6,930,931 2,643,560 4,287,371
========== ========= =========
Shares exercisable at December 31, 1993 8,422,022 2,805,413 5,616,609
========= ========= =========
Shares exercisable at December 31, 1994 9,586,828
=========
Shares available for future grant under
the plans at December 31, 1994 4,034,827
=========
(10) Employee Benefit and Incentive Compensation Plans
In 1989, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code, for the benefit of
employees meeting certain eligibility requirements. The Company
has received a favorable determination letter from the Internal
Revenue Service regarding the tax favored status of the 401(k)
plan. Employees can contribute up to 10 percent of their
compensation and the Company matches, subject to certain
limitations, up to 75 percent of contributions by each
participant. The Company made contributions to the plan of
$90,375 in 1991. The Company intends to make contributions
aggregating approximately $150,000 for years 1992, 1993 and 1994.
The Management Incentive Plan provided for annual incentive
compensation awards to all eligible management employees based
upon the successful accomplishment of performance objectives for
reserves and cash flow growth as determined by the Board of
Directors at the beginning of each year. This plan was formally
canceled on March 30, 1994.
Prior to April 1, 1994, the Company was obligated through
employment agreements with ten executives to provide salary and
health benefits, in certain instances for periods ranging up to
thirty months and upon retirement from the Company at age 65. The
Company determined that it was in its best interests to seek
cancellation of these potential obligations and adopted a plan
offering grants of five-year stock purchase warrants in return
for the Company being relieved of such obligations, all subject
to approval of shareholders for additional authorized shares of
Common Stock.
During April, 1994, grants were made of five-year stock
purchase warrants priced at $1.25 per share in return for
cancellation of such obligations. Such grants became effective
with the July 1, 1994 approval by shareholders of additional
authorized shares of Common Stock. No expense was required to be
recognized.
(11) Other Commitments and Contingencies
Other commitments, contingencies and subsequent events
include:
* Under the Production Sharing Agreement effective May
1993, pursuant to which the Company acquired exploration,
development and production rights to the Zhao Dong Block, the
Company remains obligated to drill two additional exploratory
wells by May 1996. In 1994, the Company farmed out one-third of
its interest in the concession, accordingly the costs of the
remaining exploratory wells will be shared twothirds by the
Company and one-third by the partner.
* During 1992, the Company received notice, and
amendment thereto, of a proposed assessment for state income and
franchise taxes. During December 1993, the Company and two of its
wholly owned subsidiaries, XCL-Texas, Inc. and XCL Acquisitions,
Inc. were sued in separate law suits entitled Ralph Slaughter,
Secretary of the Department of Revenue and Taxation, State of
Louisiana vs. Exploration Company of Louisiana, Inc. (15th
Judicial District, Parish of Lafayette, Louisiana, Docket No.
935449); Ralph Slaughter, Secretary of the Department of Revenue
and Taxation, State of Louisiana vs. XCL-Texas, Incorporated
(15th Judicial District, Parish of Lafayette, Louisiana, Docket
No. 93-5450); and Ralph Slaughter, Secretary of the Department of
Revenue and Taxation, State of Louisiana vs. XCL Acquisitions,
Inc. (15th Judicial District, Parish of Lafayette, Louisiana,
Docket No. 93-5337) by the Louisiana Department of Revenue for
Louisiana State corporate franchise and income taxes. The claims
relate to assessments for the 1987 through 1991 fiscal years. The
aggregate amount of the assessments, including penalties and
interest, is approximately $2.25 million as of the original due
date excluding extensions for filing of the respective returns.
The Company believes that this contingency has been adequately
provided for in the consolidated financial statements. The law
suits are all in their initial stages. The Company has filed
answers to each of these suits and intends to defend them
vigorously. The Company believes it has meritorious defenses and
had instructed its counsel to contest these claims.
In connection with a lawsuit entitled The Elia G.
Gonzalez Mineral Trust, et al vs. Edwin L. Cox, et al which was
settled and dismissed on December 31, 1993, two groups of non-
participating royalty owners filed interventions. The court
ordered the interventions stricken. During 1994, the first group
appealed and the second group filed a new lawsuit. The Company
settled the new lawsuit filed by the second group with its share
of the settlement being $20,000. During December 1994, the
appellate court affirmed the trial court's decision to deny the
intervention to the first group. The Company, in March 1995, was
named as a third party defendant by the original lessor who had
been previously sued by the nonparticipating royalty owners
comprising the first group. Management believes that the outcome
of the lawsuit will not have a material adverse effect on the
Company's liquidity or results of operations. The Company
intends to defend vigorously all claims asserted by the first
group in its lawsuit.
* During April 1994, the Company was sued in an action
entitled Kathy M. McIlhenny vs. The Exploration Company of
Louisiana, Inc. (15th Judicial District Court, Parish of
Lafayette, Louisiana, Docket No. 941845). Kathy McIlhenny, wife
of an officer and director of the Company, has asserted a claim
in the aggregate amount of approximately $.5 million in respect
of compensation for certain services alleged to have been
performed on behalf of the Company and under an alleged verbal
employment agreement and, by amendment, asserted a claim for
payments arising from purported rights to mineral interests. The
Company believes that such claim is without merit and rejects the
existence of any such alleged agreement.
* The Company is subject to other legal proceedings
which arise in the ordinary course of its business. In the
opinion of Management, the amount of ultimate liability with
respect to these actions will not materially affect the financial
position of the Company or results of operations of the Company.
(12) Other Related Party Transactions
The Company had transactions with certain officers and
affiliates not disclosed elsewhere, as follows:
* In connection with the scrip dividend payments on the
Company's Series A Preferred Stock (see Note 7 to the
Consolidated Financial Statements) and certain financings, an
entity in which a former director of the Company is employed
received approximately $13,475, in 1994 in advisory fees and
administrative services. The parent company of the entity, acted
as an escrow agent in the Company's registered public offering
completed in January 1194 and received $45,000 in payment for
such service. This entity also owns $2.25 million in principal
amount of the Company's Secured Subordinated Notes due April 5,
2000 and in 1994 received 292,335 shares of Common Stock in
respect of interest due thereon. In connection with the Net
Revenue Interest acquired as a result of the Subordinated Debt
investment this entity received $733. During 1994, another
affiliated entity, from time to time, acted on behalf of the
Company as a placing agent for sales of the Company's securities
in the United Kingdom and provided financial consulting services
for the Company for which it received an aggregate of $1,169,925
in such capacities. Additionally, this entity was issued 417,566
shares of Common Stock with a fair market value of $417,566 in
lieu of a cash payment for services rendered and to be rendered
in connection with an introduction of the Company to the Hong
Kong Stock Exchange and other corporate advisory services related
to the Company's activities in the Far East.
* A director of the Company who was also a holder of one
Lease Note unit received 77,231 shares of Common Stock upon
tender of his Lease Note ($91,712 principal and accrued
interest). Additionally such director received cash payments
totaling $690 under net revenue interests held on certain of the
Company's domestic producing properties. Such net revenue
interests were assigned as a portion of the Lease Note unit. In
1992, the director received approximately $217,000 in payment of
commission fees and consulting services.
* In 1994, the Company purchased from a company
affiliated with a former director a 72,000-acre ranch in south
Texas by issuance of Common Stock (see Note 5 to the Consolidated
Financial Statements).
* In 1993, the Company issued 250,000 shares of Common
Stock and made a cash payment of $37,500 and in 1994 another cash
payment of $37,500 to an entity partially owned by an officer of
the Company. Such stock issuance and cash payments were made in
settlement of an option to acquire certain interests in oil and
gas leases.
(13) Oil and Gas Producing Activities
The following supplementary information is presented in
accordance with the requirements of Statement of Financial
Accounting Standards No. 69 - "Disclosures About Oil and Gas
Producing Activities."
Results of Operations from Oil and Gas Producing Activities
The results of operations from oil and gas producing
activities for the three years ended December 31, 1994 are as
follows (000's):
Year Ended December 31
----------------------
1994 1993 1992
---- ---- -----
Revenues from oil and gas
producing activities:
Sales to unaffiliated parties(a) $ 4,336 $ 8,499 $ 10,551
------ ------ -------
Production (lifting) costs:
Operating costs (including marketing) 1,341 2,449 2,837
State production taxes and other 356 573 1,068
------ ------ ------
Production costs 1,697 3,022 3,905
Depletion and amortization 3,059 5,562 6,131
Provision for impairment of oil
and gas properties 25,900 8,000 22,400
------ ------ ------
Total expenses 30,656 16,584 32,436
------ ------ ------
Pre-tax loss from producing activities (26,320) (8,085) (21,885)
Income tax expense - - -
------- ------ ------
Results of oil and gas producing
activities (excluding corporate
overhead and interest costs) $(26,320) $(8,085) $(21,885)
======= ====== =======
_____________
(a) Includes sales to Sunrise of $8 and $556 during 1993 and
1992 , respectively.
The depreciation, depletion and amortization (DD&A) rate
averaged $1.25, $1.27 and $.96 per equivalent Mcf in 1994, 1993
and 1992, respectively.
Capitalized Costs
Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's proved and unproved
oil and gas properties, are as follows (000's):
December 31
-----------------
1994 1993
---- ----
Proved properties $ 158,634 $ 134,457
Domestic unproved properties 37,856 51,260
Foreign unproved properties 17,696 6,926
------- -------
Total 214,186 192,643
Accumulated depreciation, depletion
and amortization, and valuation
allowances (98,388) (69,429)
-------- --------
Total net capitalized costs $ 115,798 $ 123,214
======== ========
The capitalized costs for the foreign properties represent
cumulative expenditures related to the Zhao Dong Block of the
Bohai Bay, People's Republic of China Production Sharing
Agreement.
The Company's investment in oil and gas properties as of
December 31, 1994, includes $55.6 million in unevaluated
properties which have been excluded from amortization. Such
costs will be evaluated in future periods based on management's
assessment of exploration activities, expiration dates of
licenses, permits and concessions, changes in economic conditions
and other factors. Such costs were incurred as follows:
Costs for unproved properties were incurred as follows
(000's):
Year Ended December 31
-----------------------------------
1991 and
Total 1994(a) 1993(a) 1992(a) Prior
----- ------- ------- ------- --------
Property acquisition costs $43,736 $10,668 $5,464 $2,256 $25,348
Capitalized interest costs 11,816 4,592 3,836 1,846 1,542
------ ------ ----- ----- -----
Total unproved properties $55,552 $15,260 $9,300 $4,102 $26,890
====== ====== ===== ===== ======
_____________
(a) Includes Zhao Dong Block expenditures net of partner
reimbursements of $8,978, $4,787 and $1,397 in 1994, 1993 and
1992, respectively for property acquisition costs and capitalized
interest of $1,792 and $742 in 1994 and 1993, respectively.
Domestic unproved properties as of December 31, 1994,
consist of leases located adjacent to the Cox Field producing
properties. As these properties become evaluated, their cost and
related estimated future revenue will be included in the
calculation of the DD&A rate.
Capitalized Costs Incurred
Total capitalized costs incurred by the Company with respect
to its oil and gas producing activities were as follows (000's):
Year Ended December 31
-------------------------
1994(a) 1993(a) 1992(a)
------- ------- -------
Costs incurred:
Unproved properties acquired $ 9,458 $ 6,329 $ 5,473
Capitalized internal costs 660 1,246 1,197
Capitalized interest and amortized
debt costs 5,239 6,171 3,968
Exploration 2,181 2,256 437
Development 3,798 2,395 5,383
------ ------ ------
Total costs incurred $21,336 $18,397 $16,458
====== ====== ======
___________
(a) Includes Zhao Dong Block expenditures net of partner
reimbursements of $8,978, $4,787 and $1,397 in 1994, 1993 and
1992, respectively for property acquisition costs and capitalized
interest of $1,792 and $742 in 1994 and 1993, respectively.
Proved Oil and Gas Reserves (Unaudited)
The following table sets forth estimates of the Company's
net interests in proved and proved developed reserves of oil and
gas and changes in estimates of proved reserves. The Company's
net interests are located in the United States.
Crude Oil (Mbbls)
------------------
1994 1993 1992
---- ---- ----
Beginning of year 395 402 652
Revisions of previous estimates (66) 20 (201)
Extensions and discoveries -- -- 12
Production (31) (38) (48)
Purchases (sales) of minerals in place (4) 11 (13)
--- --- ---
End of year 294 395 402
=== === ===
Proved developed reserves -
Beginning of year 153 153 208
=== === ===
End of year 126 153 153
=== === ===
Natural Gas (Mmcf)
------------------
1994 1993 1992
---- ---- ----
Beginning of year 77,886 92,431 126,322
Revisions of previous estimates (9,547) (9,942) (27,907)
Extensions and discoveries 8,227 2,616 217
Production (2,218) (4,397) (6,143)
Purchases (sales) of minerals in place (140) (2,822) (58)
------ ------ ------
End of year 74,208 77,886 92,431
====== ====== ======
Proved developed reserves -
Beginning of year 38,161 50,185 63,795
====== ====== ======
End of year 34,792 38,161 50,185
====== ====== ======
As presented above, at December 31, 1994, approximately 47
percent of the Company's proved reserve quantities are classified
as undeveloped. Future costs for development of the proved
reserves classified as undeveloped aggregate nearly $26 million
undiscounted, as determined in accordance with rules prescribed
by the FASB. The revisions in the Company's estimated quantities
of gas and oil are attributable to revised estimates by Company
engineers in 1994 and independent petroleum engineers in fiscal
1992 and 1993. For fiscal 1993 and 1994 significant downward
revisions were attributed to the Company's interest in the Cox
Field in Texas due largely to performance of producing wells. In
fiscal 1992, a downward revision of 11,674 MMcf gas and 175 MBbl
oil was attributable to unsuccessful drilling in the East
Riceville Field in Louisiana. Also in that year, a downward
revision of 9,946 MMcf gas was attributable to the Cox Field in
Texas due to performance of producing wells.
Supplementary Information (Unaudited)
The supplementary information set forth below presents
estimates of discounted future net cash flows from proved oil and
gas reserves and changes in such estimates. This information has
been prepared in accordance with requirements prescribed by the
Financial Accounting Standards Board (FASB). Inherent in the
underlying calculations of such data are many variables and
assumptions, the most significant of which are briefly described
below:
Future cash flows from proved oil and gas reserves were
computed on the basis of (a) contractual prices for oil and gas
including escalations for gas - in effect at yearend, or (b) in
the case of properties being commercially developed but not
covered by contracts, the estimated market price for gas and the
posted price for oil in effect at yearend. Probable and possible
reserves - a portion of which, experience has indicated,
generally become proved once further development work has been
conducted - are not considered. Additionally, estimated future
cash flows are dependent upon the assumed quantities of oil and
gas delivered and purchased from the Company. Such deliverability
estimates are highly complex and are not only based on the
physical characteristics of a property but also include
assumptions relative to purchaser demand. Future prices actually
received may differ from the estimates in the standardized
measure.
Future net cash flows have been reduced by applicable
estimated operating costs, production taxes and future
development costs, all of which are based on current costs.
Future net cash flows are further reduced by future income
taxes which are calculated by applying the statutory federal
income tax rate to pre-tax future net cash flows after
utilization of available tax carryforwards.
To reflect the estimated timing of future net cash flows,
such amounts have been discounted by the FASB prescribed annual
rate of 10 percent.
In view of the uncertainties inherent in developing this
supplementary information, it is emphasized that the information
represents approximate amounts which may be imprecise and extreme
caution should accompany its use and interpretation.
Standardized Measure of Discounted Future Net Cash
Flows Related to Proved Oil and Gas Reserves (Unaudited)
The standardized measure of discounted future net cash flows
from proved oil and gas reserves, determined in accordance with
rules prescribed by the FASB, is summarized as follows:
Year Ended December 31
------------------------
1994 1993 1992
---- ---- ----
(Thousands of Dollars)
Future cash inflows $ 159,666 $181,684 $200,277
Future costs:
Production, including taxes (30,455) (33,012) (36,702)
Development (34,534) (33,850) (37,377)
-------- ------- -------
Future net inflows before
income taxes 94,677 114,822 126,198
Future income taxes - - -
------- ------- -------
Future net cash flows 94,677 114,822 126,198
10% discount factor (34,429) (49,634) (54,952)
------- ------- -------
Standardized measure of
discounted net cash flows $ 60,248 $ 65,188 $ 71,246
======== ======= =======
The standardized measure of discounted net cash flows
reflects a tight gas severance tax exemption as provided for in
Texas Railroad Commission Statewide Rule 105. This exemption
results in approximately $5 million of net present worth
discounted at 10 percent. The tight gas severance tax exemption
is a temporary exemption which expires on August 31, 2001. There
are no circumstances that must be met to keep the exemption in
place.
Net capitalized costs for the Company's oil and gas
properties at December 31, 1994 approximate the "ceilingtest"
limitation as prescribed by the Securities and Exchange
Commission guidelines. The Company recorded a $25.9 million
provision for impairment of oil and gas properties during 1994,
reflecting lower gas prices, management's decision to forego
renewing certain domestic exploration leases in the Black Warrior
Basin, East Riceville and Milton prospects and the transfer of
certain Cox Field costs to the full cost pool. Remaining
unproved and unevaluated properties at December 31, 1994 include
primarily the costs of leases located adjacent to the Cox Field
producing properties. As these unproved properties become
evaluated, their costs are reclassified to proved and evaluated
properties, and any associated future revenue is included in the
calculation of the present value of the Company's proved
reserves. Prospectively, any such costs in excess of the present
value of added reserves, or any material reductions in the net
future revenues from oil and gas reserves resulting from such
factors as lower prices or downward revisions in estimates of
reserve quantities would cause a charge for a full cost ceiling
impairment, absent offsetting improvements and may adversely
affect the Company's borrowing base calculation under its credit
facility with INCC which may then require prepayments of
principal. Pricing for a significant portion of the Company's
gas reserves is subject to a floor in a long-term contract with
MidCon. The floor price is subject to the Company's ability to
deliver minimum quantities of production. As a result of
estimated production shortfalls in 1994, the Company is not
expected to receive the contractual price for the contract year
ending April 30, 1995. The Company's reserve report indicates
sufficient production in subsequent contract years to receive the
maximum price, which is in part dependent upon successful
development drilling in the Company's Berry R. Cox Field.
Changes in Standardized Measure of Discounted Future Net
Cash Flow From Proven Reserve Quantities (Unaudited)
1994 1993 1992
---- ---- ----
(Thousands of Dollars)
Standardized measure-beginning of year $65,188 $ 71,246 $103,621
Increases (decreases):
Sales and transfers, net of production costs (2,639) (5,477) (6,646)
Net change in sales and transfer
prices, net of production costs (3,458) 5,384 9,231
Extensions, discoveries and improved
recovery, net of future costs 8,664 1,245 265
Changes in estimated future development costs (526) 1,657 (6,209)
Revisions of quantity estimates (14,695) (10,572) (35,057)
Accretion of discount 6,519 7,125 10,362
Net change in income tax - - -
Purchase (sales) of reserves in place (157) (3,071) (73)
Changes in production rates (timing) and other 1,352 (2,349) (4,248)
------ ------ ------
Standardized measure-end of year $60,248 $65,188 $71,246
(14) Supplemental Financial Information (Unaudited)
<TABLE>
<CAPTION>
Quarterly Results of Operations
Quarter Year
---------------------------------- -------
First Second Third Fourth
------- -------- ------- --------
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
1994
- ----
Oil and gas revenues $ 1,338 $ 1,209 $ 1,118 $ 671 $ 4,336
Loss from operations (a) (1,162) (11,009) (8,791) (12,913) (33,875)
Loss before extraordinary item (1,592) (11,415) (9,720) (12,153) (34,880)
Net loss (a) (3,334) (11,415) (9,720) (12,153) (36,622)
Net loss per share (a) (.02) (.07) (.05) (.06) (.21)
1993
- ----
Oil and gas revenues $ 2,324 $ 2,506 $ 2,111 $ 1,558 $ 8,499
Loss from operations (a) $(1,182) $ (918) $(1,797) $ (8,621) $(12,518)
Net loss (a) $(1,272) $ (1,134) $(2,384) $(10,407) $(15,197)
Net loss per share (a) $ (.01) $ (.03) $ (.02) $ (.10) $ (.17)
_______________
(a) 1994 and 1993 results include a provision for impairment of
oil and gas properties of $25,900 and $8,000, respectively.
</TABLE>
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure.
There have been no changes in and there are no disagreements
with the Company's accountants on accounting and financial
disclosure.
PART III
--------
Item 11. Executive Compensation.
The following table sets forth information regarding the
total compensation of the Chief Executive Officer and each of the
four most highly compensated executive officers of the Company at
the end of 1994, as well as the total compensation paid to each
such individual for the Company's two previous fiscal years. Each
of the named individuals has held his/her respective office
throughout the entire fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
--------------------------- ---------------- ----------------
(1) (2) (3) (4) (5) (6) (7)
Other Restricted All
Annual Stock Options/ LTIP Other
Name and Salary Bonus Compen- Awards SARs Payout Compen-
Principal Position Year ($) ($) sation($) ($) (#) ($) sation($)
<S> <C> <C> <S> <C> <S>
Marsden W. Miller, Jr.
Chairman and Chief
Executive Officer 1994 150,000 -- -- -- 1,625,000 -- --
1,875,000
525,000
1993 168,750 -- -- -- -- -- --
1992 175,000 -- 546,000 -- 400,000 -- --
John T. Chandler (7)
President; Chairman of
XCL-China Ltd. 1994 150,000 -- -- -- 470,000 -- --
1,025,000
100,000
1993 168,750 -- -- -- -- -- --
1992 175,000 -- -- -- 60,000 -- --
David A. Melman
Executive Vice President,
General Counsel and
Secretary 1994 150,000 -- -- -- 470,000 -- --
1,025,000
100,000
1993 168,750 -- -- -- -- -- --
1992 175,000 -- -- -- 60,000 -- --
R. Thomas Fetters, Jr. (7)
Vice President-Exploration;
President of XCL-China Ltd. 1994 135,000 -- -- -- 163,500 -- --
875,000
65,500
1993 152,250 -- -- -- -- -- --
1992 158,000 -- -- -- 34,000 -- --
Pamela G. Shanks (8)
Vice President-Finance,
Chief Financial Officer
and Treasurer 1994 128,600 -- -- -- 500,000 -- --
21,400
1993 144,050 -- -- -- -- -- --
1992 34,586 -- -- -- 360,000 -- --
</TABLE>
(1) Prior to April 1, 1994, each executive was employed under an
agreement with the Company which provided that if his/her
employment was terminated prior to the agreement's termination
under certain circumstances he/she would receive compensation for
thirty months. Such employment agreements were surrendered,
effective April 1, 1994, in exchange for stock purchase warrants
(see "Employment Agreements" below).
(2) Annual bonus amounts earned under the Management
Incentive Plan are accrued during the fiscal years
indicated, and paid subsequent to the end of each fiscal year
(see "Management Incentive Plan" below). Effective March 30,
1994, the Management Incentive Plan was terminated.
(3) Excludes the cost to the Company of other compensation that,
with respect to any above named individual, does not exceed the
lesser of $50,000 or 10 percent of such individual's salary and
bonus. Mr. Miller was reimbursed certain legal costs incurred in
defending proceedings pursuant to the terms of an indemnification
agreement approved by shareholders on December 4, 1987.
(4) Although the Company's Long Term Stock Incentive Plan
permits grants of restricted stock and stock appreciation rights,
no grants of those incentive awards have been made.
(5) The first amount represents awards of stock options granted
under the Company's Long Term Stock Incentive Plan. The second
amount represents the number of fiveyear stock purchase warrants,
received upon surrender of an employment agreement with the
Company, determined based upon a formula whereby each of the
individuals were to be offered a warrant, based upon the length
of time of employment with the Company, for a maximum of two
shares of Common Stock for each dollar of compensation remaining
to be paid to such individual under his or her agreement (based
upon the product of his or her highest monthly base salary and
the number of months remaining under his or her contract), at an
exercise price of $1.25 per share. The third number represents
five-year stock purchase warrants, received for each dollar of
salary reduction for the fifteenmonth period commencing January
1, 1993 through March 31, 1994, determined based on the same
formula and at the same exercise price used in the granting of
warrants upon surrender of the employment agreements. (See
"Employment Agreements" below.)
(6) No payments have been made in respect of the Company's
Shareholder Value Performance Plan. The measurement period for
compensation under such plan ended on December 31, 1993, and the
Plan was terminated pursuant to its terms.
(7) XCL-China Ltd. is a wholly owned subsidiary of the Company
which manages the Company's operations in the People's Republic
of China.
(8) Ms. Shanks commenced employment on October 8, 1992. As part
of her employment package she was awarded 360,000 options.
Stock Options
- -------------
The Company currently maintains seven stock option plans
which were adopted by shareholders at various times commencing in
1985. All of the plans are administered by the Compensation
Committee and provide for the granting of options to purchase
shares of Common Stock to key employees and directors of the
Company, and certain other persons who are not employees of the
Company but who from time to time provide substantial advice or
other assistance or services to the Company.
The most recent stock option plan was adopted on June 2,
1992, by shareholders who approved the Long Term Stock Incentive
Plan ("LTSIP"). The LTSIP was adopted with the view of conforming
the Company's plans to certain regulatory changes adopted by the
SEC and affording holders of previously granted options the
opportunity to exchange their options for equivalent options
under the LTSIP.
The LTSIP authorizes the Compensation Committee to grant
stock options intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986 as amended
("ISOs"), options which do not qualify under such tax provision
("NSOs"), "ROs" (i.e., the granting of additional options, where
an employee exercises an option with previously owned stock,
covering the number of shares tendered as part of the exercise
price), "RSAs" (i.e., stock awarded to an employee that is
subject to forfeiture in the event of a premature termination of
employment, failure of the Company to meet certain performance
objectives or other conditions), "PUs" (i.e., share-denominated
units credited to the employee's account for delivery or cash-out
at some future date based upon performance criteria to be
determined by the Compensation Committee) and "tax withholding"
(i.e., where the employee has the option of having the Company
withhold shares on exercise of an award to satisfy tax
withholding requirements).
The LTSIP also formally incorporates resolutions previously
adopted by the Board regarding one-time grants of NSOs covering
100,000 shares to each new non-employee director upon his taking
office.
The Compensation Committee develops administration
guidelines from time to time which define specific eligibility
criteria, the types of awards to be employed, and the value of
such awards. Specific terms of each award, including minimum
performance criteria which must be met to receive payment, are
provided in individual award agreements granted each award
recipient. Key employees and other individuals who the Committee
deems may provide a valuable contribution to the success of the
Company and its affiliates will be eligible to participate under
the Plan. Award agreements generally contain change-in-control
provisions.
Under the LTSIP, the Compensation Committee determines the
option price of all NSOs and ISOs; provided, however, in the case
of ISOs, the option price shall not be less than the fair market
value of the Common Stock on the date of grant. Such "fair market
value" is the average of the high and low prices of a share of
Common Stock traded on the relevant date, as reported on the
American Stock Exchange, or other national securities exchange or
an automated quotation system.
On July 1, 1994, the shareholders approved amendments to the
LTSIP to increase the number of shares reserved for issuance
under the Plan by an additional 1,500,000 shares to an aggregate
of 16.5 million and corresponding amendment to the Plan
increasing the limitation on the total number of shares subject
to options that can be granted to directors to 13,200,000 of
which 3,300,000 shares may be granted to nonemployee directors.
At the same time, shareholders ratified the conditional grant of
options to acquire 3,076,500 shares, made by the Board of
Directors on March 30, 1994, to various executive officers and
directors. In 1994, additional options totaling 1,820,183 were
awarded to non-executive officers, employees and consultants of
the Company.
The closing price of the Company's Common Stock on the
American Stock Exchange on April 11, 1995 was $.8125 per share.
The following tables set forth, for those persons named in
the "Summary Compensation Table" information on stock options
granted during 1994 and all stock options outstanding as of
December 31, 1994.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term (4)
---------------------------------------------- -------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/
SARs
Granted to
Options/ Employees in Exercise or
SARs Fiscal Base Price Expiration
Name Granted(#) Year(3) ($/Share) Date 0% ($) 5% ($) 10% ($)
- ---------------------- ------------ ------- ---------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. 1,625,000(1) 33% 1.25 03/29/04 203,125 1,608,311 3,764,143
2,400,000(2) 1.25 03/31/99 300,000 1,211,729 2,314,683
John T. Chandler 470,000(1) 13% 1.25 03/29/04 58,750 465,173 1,088,706
1,125,000(2) 1.25 03/31/99 140,625 567,998 1,085,008
David A. Melman 470,000(1) 13% 1.25 03/29/04 58,750 465,173 1,088,706
1,125,000(2) 1.25 03/31/99 140,625 567,998 1,085,008
R. Thomas Fetters, Jr. 163,500(1) 9% 1.25 03/31/04 20,438 161,821 378,731
940,500(2) 1.25 03/31/99 117,925 474,846 907,066
Pamela G. Shanks -(1) 4% - - - - -
521,400(2) 1.25 03/31/99 65,175 263,248 502,865
__________________
(1) Represents options granted under the Company's Long Term
Stock Incentive Plan during 1994.
(2) Represents the aggregate number of five-year stock purchase
warrants, received (a) upon surrender of an employment agreement
with the Company, determined based upon a formula whereby each of
the individuals were to be offered a warrant, based upon the
length of time of employment with the Company, for a maximum of
two shares of Common Stock for each dollar of compensation
remaining to be paid to such individual under his or her
agreement (based upon the product of his or her highest monthly
base salary and the number of months remaining under his or her
contract) at an exercise price of $1.25 per share, and (b) for
each dollar of salary reduction for the fifteen-month period
commencing January 1, 1993 through March 31, 1994, determined
based on the same formula and at the same exercise price used in
the granting of warrants upon surrender of the employment
agreements. (See "Employment Agreements" below.)
(3) Represents the percentage of all options and warrants
granted to employees in the fiscal year.
(4) The options and warrants, while originally granted on March
31, 1994, became effective on July 1, 1994, with the approval by
shareholders of an increase in the authorized capital of the
Company. Accordingly, the market price of the Common Stock on
July 1, 1994 of $1.375 was used in calculating the above
potential realizable values. On March 31, 1994, the market price
of the Common Stock was $1.125.
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises In Last Fiscal Year
---------------------------------------------------
and Fiscal Year-End Option/SAR Values
-------------------------------------
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Underlying Unexercised in-the-Money
Acquired Options/SARs at Options/SARs at
0n Value Fiscal Year End (#) Fiscal Year End ($)(3)
Exercise Realized --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ------- --------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Marsden W. Miller, Jr. - - 3,941,666(1) 1,083,334 - -
- - 2,400,000(2) - - -
John T. Chandler - - 696,666(1) 433,334 - -
- - 1,125,000(2) - - -
David A. Melman - - 696,666(1) 433,334 - -
- - 1,125,000(2) - - -
R. Thomas Fetters, Jr. - - 448,500(1) 109,000 - -
- - 940,500(2) - - -
Pamela G. Shanks - - 360,000(1) - - -
- - 521,400(2) - - - -
___________
(1) Represents options exercisable under the Company's Long Term
Stock Incentive Plan at December 31, 1994.
(2) Represents the aggregate number of five-year stock purchase
warrants, received (a) upon surrender of an employment agreement
with the Company, determined based upon a formula whereby each of
the individuals were to be offered a warrant, based upon the
length of time of employment the Company, for a maximum of two
shares of Common Stock for each dollar of compensation remaining
to be paid to such individual under his or her agreement (based
upon the product of his or her highest monthly base salary and
the number of months remaining under his or her contract), at an
exercise price of $1.25 per share, and (b) for each dollar of
salary reduction for the fifteen-month period commencing January
1, 1993 through March 31, 1994, determined based on the same
formula and at the same exercise price used in the granting of
warrants upon surrender of the employment agreements. (See
"Employment Agreements" below.)
(3) At December 31, 1994, the Company's Common Stock price was
lower than the option exercise price.
These options were all awarded under the Company's Stock Option
Plans described above.
</TABLE>
Section 401(k) Plan
- -------------------
In 1989, the Company adopted an employee benefit plan
under Section 401(k) of the Internal Revenue Code for the benefit
of employees meeting certain eligibility requirements. Employees
can contribute up to 10 percent of their compensation (as
defined) to the plan on a pre-tax basis, and the Company matches
up to 75 percent of deferred contributions allocable to each
participant subject to certain limitations. The Company intends
to make contributions aggregating approximately $150,000 for
years 1992, 1993 and 1994. The Company made no matching
contributions in 1992, 1993 or 1994. Administrative costs of the
plan have been paid by the Company. The Company has obtained a
favorable determination from the Internal Revenue Service
regarding the tax favored status of the 401(k) plan. For the year
ended December 31, 1994, Mr. Miller contributed $9,240 to his
account and Messrs. Chandler and Melman each contributed to their
account $7,500. Mr. Fetters and Ms. Shanks did not participate in
the 401(k) plan in 1994.
Management Incentive Plan
- -------------------------
In 1989, the Company adopted the Management Incentive Plan
that provides for annual incentive compensation awards to all
eligible management employees based upon the successful
accomplishment of performance objectives as determined by the
Board of Directors at the beginning of each year. No bonuses were
awarded under this plan in 1992, 1993 or 1994 and the Plan was
formally canceled upon recommendation of the Compensation
Committee effective March 30, 1994.
Compensation of Directors and Other Arrangements
- ------------------------------------------------
The Company reimburses its directors for their travel and
lodging expenses incurred in attending meetings of the Board of
Directors. Effective January 1, 1990, directors (other than
Messrs. Hummel and Palliser and those directors who are officers
of the Company) were paid an annual retainer of $18,000 plus a
fee of $1,000 for each Board meeting attended. In addition, such
directors were paid a fee of $1,000 for each committee meeting
attended.
In April 1994, the Company entered into separate consulting
agreements with two directors of the Company, upon their becoming
directors. Each of the agreements is terminable by each of the
parties thereto upon written notice and provides that the
individuals will render consulting services to the Company in
their respective areas of expertise. Pursuant to the terms of
the agreements, each of the directors will be entitled to receive
compensation at the rate of $50,000 per annum, which includes the
compensation they would otherwise be entitled to receive as
directors and for attending meetings of the Board. In addition,
pursuant to the terms of the LTSIP, each were granted stock
options for 100,000 shares of Common Stock exercisable at $1.25
per share.
During 1994 all regular employees were provided health
insurance, a portion of the premium for which is paid by the
Company, and life and disability insurance based upon a factor of
the employee's base salary.
Employment Agreements
- ---------------------
Effective April 1, 1994, Messrs. M.W. Miller, Jr., J.T.
Chandler, D.A. Melman, D.M. Dobbs, R.T. Fetters, Jr., R.C. Cline,
P.L. Dragon, and Ms. P.G. Shanks, in their capacities as
executive and administrative officers of the Company and its
various subsidiaries agreed to surrender their employment
agreements in consideration of the issuance of five year warrants
to purchase Common Stock at an exercise price of $1.25 per share,
subject to customary anti-dilution adjustments. The number of
warrants issued to such individuals was determined based upon a
formula whereby each of the individuals was offered a warrant to
purchase, based upon the length of time of employment with the
Company, a maximum of two shares of Common Stock for each dollar
of compensation remaining to be paid to such individual under his
or her agreement (based upon the product of his or her highest
monthly base salary and the number of months remaining under his
or her agreement). Accordingly, Mr. Miller received warrants to
purchase 1,875,000 shares; Mr. Chandler, 1,025,000 shares; Mr.
Melman, 1,025,000 shares; Mr. Fetters, 875,000 shares; Mr. Dobbs,
575,000 shares; Mr. Dragon, 315,000 shares; Mr. Cline, 250,000
shares; and Ms. Shanks, 500,000 shares.
Mr. Roy F.C. Chase, General Manager of XCL-China retained
his employment agreement which extends for an initial period of
24 months expiring on May 1, 1995.
Report on Repricing of Options/SARs
- -----------------------------------
During the fiscal year ended December 31, 1994, there were
no repricings of stock options awarded to any of the named
executive officers.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
From September 23, 1993, through July 1, 1994, the
following nonexecutive directors of the Company, served as
members of the Compensation Committee of the Board of Directors:
Messrs. F. Hofheinz (Chairman), R.W. Brittain and A.D. Steel.
Effective July 1, 1994, Messrs. Brittain and Steel resigned as
directors of the Company and members of its Compensation
Committee. On that same date, Messrs. M. Palliser (Chairman),
A.W. Hummel, Jr., F. Hofheinz and F.J. Reinhardt, Jr. were
elected as members of the Compensation Committee. None of the
members of the Compensation Committee were formerly, nor are any
members currently, officers or employees of the Company or any of
its subsidiaries.
Compensation Committee Report on Executive Compensation
-------------------------------------------------------
The Compensation Committee of the Board of Directors
("Committee") establishes the general compensation policies of
the Company, establishes the compensation plans and specific
compensation levels for executive officers and certain other
manages and administers the Stock Option Plans and Long Term
Stock Incentive Plan. The Committee currently consists of four
independent, non-employee directors Messrs. M. Palliser,, who
serves as Chairman, Fred Hofheinz, Arthur W. Hummel, Jr. and
Francis J. Reinhardt, Jr..
Compensation Policies and Philosophy
- ------------------------------------
The Committee has determined that the compensation program
of the Company should not only be adequate to attract, motivate
and retain executives, key employees and other individuals who
the Company believes may make significant contribution to the
Company's results, but should also be linked to the value
delivered to shareholders as reflected in the price of the
Company's Common Stock.
The Committee believes that the cash compensation of
executive officers, as well as other key employees, should be
competitive with other similarly situated companies while, within
the Company, being fair and discriminating on the basis of
personal performance. In general, in establishing total cash
compensation for its executives, the Committee has taken into
account the median cash compensation of executives employed by
competitors including some of the companies reflected in the peer
group identified in the Performance Graph found on page 71, which
the Committee believes represent the Company's most direct
competition for executive talent. The Committee receives
recommendations from management as to executive compensation and,
in light of the Company's performance and the economic conditions
facing the Company, determines appropriate compensation levels
for recommendation to the Board of Directors. The Committee does
not assign relative weights to individual factors and criteria
used in determining executive compensation and does not use
quantifiable targets in determining compensation. For 1994, the
Company did not retain the services of a compensation consulting
firm.
In order to cause an overall reduction to general and
administrative expenses of the Company in fiscal 1992, the
Committee, upon consultation with the executive management,
requested that salaries of essentially all officers and employees
be reduced as of January 1, 1992. As described in a Proxy
Statement dated August 20, 1993, the Committee, to compensate
such individuals for the salary reductions (amounting to $350,000
in total for 1992), awarded effective January 1, 1992, to all
individuals participating in the salary reduction program a stock
option exercisable from January 1, 1993 to December 31, 1994, to
purchase at $1.50 per share, two shares of Common Stock for each
dollar of salary reduction for that year. During 1994, the
Committee extended the expiration of these warrants by two years
to December 31, 1996. The reduced salary levels were continued in
1993 and, effective October 1, 1993, members of senior management
and certain other employees took further salary reductions in
order to again reduce general and administrative expenses. To
compensate for such continued, and for those certain individuals,
further reductions, on March 30, 1994, the Committee granted to
employees without employment agreements who participated in the
salary reduction programs, a five-year stock option to purchase
at $1.25 per share, two shares of Common Stock for each dollar of
salary reduction for the fifteen month period commencing January
1, 1993 and terminating March 31, 1999 (total stock options were
issued to acquire 229,183 shares). For those officers and
employees to which the Company was obligated under employment
agreements, the Committee authorized the issuance of a five-year
warrant to purchase at $1.25 per share two shares of Common Stock
for each dollar of salary reduction for the fifteen month period
commencing January 1, 1993 and terminating March 31, 1999 (total
stock purchase warrants were issued to acquire 878,900 shares).
One employee, upon becoming an officer, received a minimal
increase in cash salary during 1993.
As previously discussed in the section entitled "Employment
Agreements," the Committee, at the meeting held on March 30,
1994, after consultation with executive management of the
Company, adopted a plan offering each officer holding an
employment agreement the option of surrendering such agreement
and relieving the Company of all obligations thereunder in return
for the grant of a five-year stock purchase warrant pursuant to
which such employee would be granted the right to acquire, based
upon the term of employment with the Company, at $1.25 per share,
a maximum of two shares of Common Stock for each dollar of
"contract value." "Contract value" is defined as the contractual
monthly base salary (at the highest level prior to the above
referenced salary reductions) multiplied by the number of months
remaining on such employment agreement after April 1, 1994.
Effective April 1, 1994, Messrs. Miller, Chandler, Melman, Dobbs,
Fetters, Cline, Dragon and Ms. Shanks surrendered their
employment agreements in consideration for such warrants. The
Committee determined that it was in the best interests of the
Company to seek cancellation of the employment agreements in
order to remove a total future contractual financial burden of
approximately $3.4 million from the Company, and to provide the
Company with greater flexibility in personnel matters.
Awards of stock options are intended both to retain
executives, key employees and other individuals who the Company
believes may make significant contributions to the Company's
results and to motivate them to improve long-term stock market
performance. Options are granted at or above the prevailing
market price and will have value only if the price of the
Company's Common Stock increases. Generally, options have a term
of ten years and vest one-third six months after grant, one-third
one year after grant and the remaining onethird two years after
grant.
Effective January 1, 1994, Section 162(m) of the Internal
Revenue Code of 1986 (the "Code") generally denies a tax
deduction to any publicly-held corporation for compensation that
exceeds $1 million paid to certain senior executives in a taxable
year, subject to an exception for "performancebased compensation"
as defined in the Code and subject to certain transition
provisions. Gains on the exercise of nonqualified stock options
granted through December 31, 1994, will be tax deductible under
the transition rules. Restricted stock awards by definition
granted after February 17, 1993, are not deductible. At present
the Committee does not intend to recommend amendment to the Stock
Option Plans to meet the restrictive requirements of the Code.
The Committee believes that annual incentive awards should
be commensurate with performance. It further believes that in
order to meet this objective it needs to have the ability to
exercise its judgment or discretion to evaluate performance
against qualitative criteria. It is the Committee's opinion that
the benefits to the Company of the use of a qualitative approach
to the compensation of senior executives such as the Chairman
outweigh the non-material loss of a portion of the deductions
associated with that compensation.
On March 14, 1995, the Committee reviewed the Company's 1994
financial goals (consisting of completing the registered Common
Stock offering, refinancing its bank debt, reducing total
indebtedness by more than $15 million and simplifying the equity
profile of the Company by eliminating two classes of preferred
stock) and 1994 non-financial goals (consisting of development of
the Zhao Dong Block by drilling two successful wells and
positioning the Company to expand its participation in the
Chinese energy industry resulting in the January 1995 agreement
to participate in a lubricating oil joint venture) and determined
that the Company had met each objective in all significant
respects.
Company Performance and Chief Executive Officer Compensation
- ------------------------------------------------------------
The Committee, in connection with determining the
appropriate compensation for Marsden W. Miller, Jr. as Chief
Executive Officer ("CEO"), took into account the financial
condition of the Company, including its liquidity requirements,
and the Company's performance in 1994 in meeting its financial
and non-financial goals. It determined that the CEO had been
instrumental in causing the Company to meet the goals established
early in 1994. Taking into consideration the current cash
position and near-term requirements, the Committee determined
that cash was unavailable for either salary increase or bonus.
Therefore, the Committee authorized a two-year extension of the
Chairman's stock options scheduled to expire in July 1997 with
the exercise price increased from $1.07 to $1.25 for the
extension period.
Compensation of Other Executive Officers
- ----------------------------------------
The Committee, in consultation with the CEO, applied the
information and other factors outlined above in reviewing and
approving the compensation of the Company's other executive
officers.
March 14, 1995 COMPENSATION COMMITTEE
Michael Palliser, Chairman
Arthur W. Hummel
Fred Hofheinz
Francis J. Reinhardt, Jr.
Shareholder Return Performance Presentation
- -------------------------------------------
Set forth below is a line graph comparing the percentage
change in the cumulative total shareholder return on the
Company's Common Stock against the total return of the NASDAQ
Composite Index (for the year 1990) and the AMEX Market Value
Index for the years 1991 through 1994, with a peer group selected
by the Company for the past five fiscal years. The peer group
consists of the same independent oil and gas exploration and
production companies used in last year's comparison, with the
exception of Alta Energy Corporation which was acquired by Devon
Energy Corporation and Geodyne Resources, Inc. which was merged
with Samson Investment Company, namely: American Exploration
Company; Bellwether Exploration Company; Brock Exploration
Corporation; Tom Brown, Inc.; Caspen Oil, Inc.; Cobb Resources
Corporation; Coda Energy, Inc.; Comstock Resources, Inc.; Crystal
Oil Company; DeKalb Energy Company; Edisto Resources Company;
Energen Corporation; First Mississippi Corporation; Forest Oil
Corporation; Global Natural Resources, Inc.; Hallador Pete
Company; Hondo Oil & Gas Company; Kelley Oil & Gas Partners;
Magellan Petroleum Corporation; Maynard Oil Company; McFarland
Energy, Inc.; MSR Exploration Limited; Numac Energy, Inc.;
Pacific Enterprises; Patrick Petroleum Company; Penn Virginia
Corporation; Plains Resources, Inc.; Presidio Oil; Wainoco Oil
Corporation; Wichita River Oil; Wiser Oil Company; and Wolverine
Exploration Company. The relevant information with respect to
the peer group was furnished by Standard & Poors Compustat
Service. The graph assumes that the value of the investment in
the Company's Common Stock and the peer group stocks were $100 on
January 1, 1990 and that all dividends were reinvested.
1990 1991 1992 1993 1994
Return Return Return Return Return
------ ------ ------ ------ ------
XCL 39.39 13.64 27.27 13.64 19.70
Peer Group 76.60 60.77 48.85 59.53 59.34
NASDAQ/AMEX 82.20 105.38 106.50 127.29 115.75
Item 13. Certain Relationships and Related Transactions.
n Energy Services Limited ("GMES"), of which
Mr. R.W. Brittain, a former director of the Company, is Managing
Director was paid $16,042 in 1994 for financial consulting
services provided to the Company. An affiliate of GMES, Guinness
d ("GM&Co"), acted as an escrow agent in the
Company's registered public offering completed in January 1994
and received $13,475 in payment therefor. GM&Co. owns $2.25
million in principal amount of the Company's Secured Subordinated
Notes due April 5, 2000 and in 1994 received 292,335 shares of
Common Stock in respect of interest due thereon. In respect of
the Net Revenue Interest acquired as a result of the Subordinated
Debt GM&Co. was paid $733. Another affiliate of GMES, Henderson
Crosthwaite Institutional Brokers Limited ("HCIB") has, from time
to time, acted on behalf of the Company as a placing agent for
sales of the Company's securities in the United Kingdom and
provided financial consulting services for the Company. HCIB
earned fees totaling $1,169,925 in such capacities. Also in
1994, HCIB was issued 417,566 shares of Common Stock in lieu of a
cash payment for fees and expenses for services rendered and to
be rendered in connection with an introduction to the Hong Kong
Stock Exchange and other corporate advisory services related to
the Company's activities in the Far East. All such arrangements
during Mr. Brittain's tenure were approved by the Board of
Directors of the Company with Mr. Brittain abstaining.
Mr. Francis J. Reinhardt, Jr., a director of the Company, is
a holder of net profits interests on certain properties of the
Company received in connection with his purchase of one Lease
Note Unit. During 1994 Mr. Reinhardt received cash payments
totaling $690 as a consequence of such net profit interests. Mr.
Reinhardt further received 77,231 shares of Common Stock for the
principal and accrued interest ($91,712) upon tender of his Lease
Note to the Company.
During October 1992, the Company executed an assignment
agreement with Independent Investment Company Plc, an affiliate
of Ivory & Sime PLC, an investment management firm in which Mr.
Andrew D. Steel, a former director of the Company, is employed.
The agreement covers a 72,000-acre ranch in south Texas whereby
the Company obtained certain property rights and other interests,
the consideration for the acquisition to be satisfied by issuance
of shares of Common Stock so as to fulfill a dollar denominated
obligation of $3.7 million. Mr. Steel disclaims any beneficial
interest in Independent Investment Company Plc. In connection
with an extension of terms for repayment in April 1994, the
Company granted to Ivory & Sime Enterprise Capital PLC, an
affiliate of the above-mentioned entities, a two-year warrant to
acquire 375,000 shares of Common Stock. During October 1994, the
Company issued 2.75 million shares of Common Stock in
satisfaction of this obligation.
During 1994, the Company was sued in an action entitled
Kathy M. McIlhenny vs. The Exploration Company of Louisiana, Inc.
(15th Judicial District Court, Parish of Lafayette, Louisiana,
Docket No. 941845). Kathy McIlhenny, wife of an officer and
director of the Company, has asserted a claim in the aggregate
amount of approximately $.5 million in respect of compensation
for certain services alleged to have been performed on behalf of
the Company and under an alleged verbal employment agreement and,
by amendment, asserted a claim for payments arising from
purported rights to mineral interests. The Company believes that
such claim is without merit and rejects the existence of any such
alleged agreement.
As a matter of policy the Company approves all transactions
involving insiders through the majority vote of disinterested
directors.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) The following documents are filed as a part of this report.
Financial Statements
- --------------------
The following documents are included in Part II, Item 8 of
this report:
Page
----
Report of Independent Accountants.....................28
Consolidated Balance Sheet as of
December 31, 1994 and December 31, 1993..............29
Consolidated Statement of Operations for
each of the three years in the period
ended December 31, 1994..............................30
Consolidated Statement of Shareholders' Equity for
each of the three years in the period ended
December 31, 1994....................................31
Consolidated Statement of
Cash Flows for each of the three
years in the period ended December 31, 1994..........32
Notes to Consolidated Financial Statements............33
Financial Statement Schedules
- -----------------------------
Certain financial statement schedules are omitted because of
the absence of the conditions under which they are required.
Schedule VIII-Valuation and Qualifying Accounts.......75
Executive Compensation Plans and Arrangements
- ---------------------------------------------
Form of Indemnification Agreement by and between the Company and
various officers and directors - See Appendix II to Proxy
Statement dated November 13, 1987.
Stock Option Agreement by and between the Company and Marsden W.
Miller, Jr. dated July 11, 1987 - See Appendix VIII to Proxy
Statement dated November 13, 1987.
Amended and Restated 1985 Incentive Stock Option and Stock Option
Plans - See Exhibit 2 to Current Report on Form 8-K filed
February 10, 1989.
Amended and Restated 1986 Incentive Stock Option and Stock Option
Plans - See Exhibit 3 to Current Report on Form 8-K filed
February 10, 1989.
Amended and Restated 1987 Incentive Stock Option and Stock Option
Plans - See Exhibit 4 to Current Report on Form 8-K filed
February 10, 1989.
Consulting Agreement dated November 15, 1993, between the Company
and Mr. K. Craig Shephard - See Exhibit 10.12 to Annual Report on
Form 10-K/A No. 1 filed on April 15, 1994.
Long Term Stock Incentive Plan between the Company and certain
employees - See Exhibit A to Proxy Statement dated May 11, 1992.
Employment Agreement by and between a subsidiary of the Company
and Mr. Roy F.C. Chase dated May 1, 1993 - See Exhibit 10.36
to Annual Report on Form 10-K/A No. 1 filed on
April 15, 1994.
Consulting Agreement by and between the Company and Sir Michael
Palliser dated May 1, 1994. - See Exhibit 10.22 hereto.
Consulting Agreement by and between the Company and Mr. Arthur W.
Hummel. Jr. dated May l, 1994. - See Exhibit 10.23 hereto.
(b) Reports on Form 8-K
A current report on Form 8-K was filed on July 14, 1994, to
announce the results of voting at the Company's Annual Meeting of
Shareholders.
A current report on Form 8-K was filed on November 14, 1994,
to announce the results of the Company's Zhao Dong C-2 Well
drilled on the Zhao Dong Block, China.
(c) Exhibits required by Item 601 of Regulation S-K
A list of the exhibits required by Item 601 of Regulation SK
and filed as part of this report is set forth in the Index to
Exhibits on sequentially numbered page 81, which immediately
precedes such exhibits.
<TABLE>
<CAPTION>
XCL Ltd. and Subsidiaries
Schedule VIII-Valuation and Qualifying Accounts
For the Years Ended December 31, 1994, 1993 and 1992
(thousands of dollars)
Additions
-----------------------
Balance at Charged Charges Balance at
Beginning of to costs to other End of
Description Year and expenses accounts Deduction Year
------------- ------------ ------------ -------- --------- ----------
<S> <C> <C> <C> <C> <C>
1994:
Allowance for doubtful trade
accounts receivable $ 163 $ - $ - $ 50 $ 113
1993:
Allowance for doubtful trade
accounts receivable $ 63 $ 100 $ - $ - $ 163
1992:
Allowance for doubtful trade
accounts receivable $ 63 $ - $ - $ - $ 63
</TABLE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
XCL LTD.
/s/ Marsden W. Miller, Jr.
April 13, 1995 By:___________________________
Marsden W. Miller, Jr.
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
---------- ------ -----
/s/ Marsden W. Miller, Jr.
__________________________ Chairman of the Board April 13, 1995
Marsden W. Miller, Jr. and Chief Executive
Officer
/s/ Pamela G. Shanks
_________________________ Vice President-Finance April 13, 1995
Pamela G. Shanks and Chief Financial
Officer and Principal
Accounting Officer
/s/ John T. Chandler
_________________________ Director April 13, 1995
John T. Chandler
/s/ David A. Melman
_________________________ Director April 13, 1995
David A. Melman
/s/ Edmund McIlhenny, Jr.
_________________________ Director April 13, 1995
Edmund McIlhenny, Jr.
/s/ Fred Hofheinz
_________________________ Director April 13, 1995
Fred Hofheinz
/s/ Arthur W. Hummel, Jr.
_________________________ Director April 13, 1995
Arthur W. Hummel, Jr.
/s/ Michael Palliser
_________________________ Director April 13, 1995
Michael Palliser
/s/ Francis J. Reinhardt
_________________________ Director April 13, 1995
Francis J. Reinhardt, Jr.
